Views on improving the integrity of global capital markets
14 June 2017

Role of External Factors in Ethical Behavior: Need for Clarity

The investment management industry is flush with regulations that contain protections for investors. If the industry looks solely to regulations to define the actions and services provided to clients, it will falter in providing what clients expect when it comes to commitments of trust on behalf of the investment professional.

Often investment professionals understand what is expected of them both legally and professionally, but they still find themselves in situations that present challenges. Research into why people, who are otherwise viewed as ethical and trustworthy, can be influenced to make improper decisions is not a new area of study. Academia has been conducting experiments on personal behaviors for decades.

Muel Kaptein, professor in business ethics at the Rotterdam School of Management of Erasmus University Rotterdam, published Why Good People Sometime Do Bad Things: 52 Reflections on Ethics at Work. Kaptein reviews the results of numerous “classic and recent experiments” looking at human behavior and allocates the results under seven factors. Each factor indicates where outside considerations, either positive or negative, influenced someone’s actions. Although the experiments were not explicitly conducted for the investment industry, the outcomes certainly apply.

The following are Kaptein’s seven factors:

  1. Clarity for directors, managers, and employees as to what constitutes desirable and undesirable behavior: The clearer the expectations, the better people know what they must do and the more likely they are to do it.
  2. Role-modeling among administrators, management, or immediate supervisors: The better the examples given in an organization, the better people behave, while the worse the example, the worse the behavior.
  3. Achievability of goals, tasks, and responsibilities set: The better equipped people in an organization are, the better they are able to do what is expected of them.
  4. Commitment on the part of directors, managers, and employees in the organization: The more the organization treats its people with respect and involves them in the organization, the more these people will try to serve the interests of the organization.
  5. Transparency of behavior: The better people observe their own and others’ behavior, and its effects, the more they take this into account and the better they are able to control and adjust their behavior to the expectations of others.
  6. Openness to discussion of viewpoints, emotions, dilemmas, and transgressions: The more room people within the organization have to talk about moral issues, the more they do this, and the more they learn from one another.
  7. Enforcement of behavior, such as appreciation or even reward for desirable behavior, sanctioning of undesirable behavior, and the extent to which people learn from mistakes, near misses, incidents, and accidents: The better the enforcement, the more people tend towards what will be rewarded and avoid what will be punished.

(Note: This list is taken directly from Kaptein’s book, pages 7–8.)

Kaptein states, “In a recently published article in an international journal, I show, on the basis of a survey of managers and employees, that the more prominent these factors are, the less unethical behavior takes place at work.” By recognizing factors of influence, a firm can seek to instill the ethical culture it wants from his employees.

His analysis of the concepts tested provides tips for incorporating ethical behaviors into a firm’s culture and daily activities. Through a series of blog posts, I will highlight key takeaways from the paper. I will begin with a review of Factor 1: Clarity.

Priming Proper Practices

In Chapter 10 of Kaptein’s book, he presents the research of Nina Mazar and colleagues on how cognitive stimulation can influence positive behaviors. The study asked participants to solve simple math problems for a set amount of time. Half of the participants graded themselves and the others were graded by a host. This study additionally had half of each group (self or host graded) write down either the last 10 book they read or the 10 biblical commandments.

The results came back as you likely suspected.

Format Average Number Correct
10 Books & Host Graded 3
10 Books & Self Graded 4
10 Commandments & Host Graded 3
10 Commandments & Self Graded 3


Those primed by writing the 10 commandments and self-grading had the same opportunity as similarly graded participants that listed the books they read. However, this positive influence led to results that indicate no inflation of the number of correct answers.

Environmental Impact

In Chapter 14, Kaptein presents research from Robert Cialdini and colleagues on the impact of the physical environment on establishing normal behaviors. The study observed how people reacted when they found a flyer promoting a fictitious “automotive safety week.” The study parameters were the cleanliness of the parking environment.

Drivers that found the parking area littered with other trash threw out the flyers at a rate twice as high as those in the clean parking area (32% and 14%, respectively.) The drivers observed normative cues from the litter in the area in determining what to do with the unsolicited flyers.

Along with the other six chapters, Kaptein highlights the importance of setting and demonstrating clear messages within the workplace. If you want employees to work with respect and integrity, then reinforce that message consistently. Refresher trainings and consistent communications leads to an environment of professionalism.

In the next entry of this series, I will review Factors 2 and 3: Role-Modeling and Achievability.

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Photo Credit: ©Getty Images/Olivier Le Moal

About the Author(s)
Glenn Doggett, CFA

Glenn Doggett, CFA, was a director of professional standards for CFA Institute. His responsibilities included providing member guidance in applying the ethics and standards of practice policies, supporting related educational and public awareness activities, and working with the Standards of Practice Council of CFA Institute on its initiatives. He was a co-host of the free, live, interactive webinars used by CFA Institute to promote ethical decision making and global best practices. Previously, Mr. Doggett, as a member of the CFA Institute Financial Reporting Policy Group, represented membership interests regarding reporting and disclosures initiatives, including XBRL. Prior to joining CFA Institute, he worked in the financial information sector with SNL Financial, where he focused on the real estate and energy industries, directing the development and maintenance of a financial data storage system. Mr. Doggett holds a BA in economics from the University of Virginia. He was awarded the CFA charter in 2006 and is a member of CFA Society Virginia.

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