Views on the integrity of global capital markets
06 October 2017

Ethics in Practice: Developing Your Ethical Decision-Making Skills

Analysis of the case is now available below. Check it out!

If the headline above sparked your interest, you are one of the thousands of honest, ethical, and well-meaning investment professionals who want to do the right thing when it comes to fulfilling your professional responsibilities. But sometimes the proper course of action is not always straightforward and obvious. To help with those situations, CFA Institute provides guidance through its Code of Ethics and Standards of Professional Conduct (Code and Standards) as well as an Ethical Decision-Making Framework. But just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. To promote “ethical exercise,” we are excited to introduce Ethics in Practice.

Each week, we will post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions (see below). We then encourage you to assess the case through the lens of the Ethical Decision-Making Framework and the Code and Standards and let us know which of the choices you believe is the right thing to do and why. If you are not a CFA Institute member, you can post your choice and reasoning in the comments section. For CFA Institute members, we would like you to join the conversation in our new Member App and post your responses there.

Later in the week, we will post an analysis of the case and you can see how your response compares! Stay tuned!

CFA Institute Member App

The Member App gives our members access to a content from multiple CFA Institute publications, including these weekly Ethics in Practice posts. Best of all, the app allows in-app submission of Continuing Education credits, which members can earn by reading and participating in the conversation for each case. (0.25 CE, 0.25 SER). The app is available in the Apple and Google Play stores. After downloading, simply log in using your CFA Institute website credentials (e.g., john.doe@cfainstitute.org + password).
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Have an idea for a case for us to feature? Send it to us at ethics@cfainstitute.org.

Case 1

David, an analyst for an asset management firm, attends a presentation for securities analysts at the headquarters of a manufacturing company. The analysts are very impressed with the presentation and ask the CEO many questions. After the meeting, the Head of Investor Relations invites all analysts to a club house for dinner and karaoke. Most of other analysts accept the invitation. Of the choices below, what do you believe David should do?

Answer Choices

  1. Accept the invitation.
  2. Accept the dinner but not karaoke.
  3. Accept the invitation but disclose the invitation to his supervisor.
  4. Reject the invitation.

Analysis

The ethical principle at issue in this case is independence and objectivity.  The question turns on whether David compromises his independence and objectivity as an analyst by accepting an invitation to dinner and karaoke from representatives of the manufacturing company that he is researching. CFA Institute professional conduct Standard I(B) states that CFA Institute members “must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities” and must not “accept any gift, benefit…or consideration that reasonably could be expected to compromise their…independence and objectivity.” So, would dinner and a night of karaoke reasonably be expected to compromise David’s independence and objectivity? The appropriate course of action turns on how extravagant the benefit might be.  Modest gifts and entertainment in the ordinary course of sociable business interaction may be unlikely to sway an analyst’s opinion.

Choice A assumes that the dinner and karaoke is not extravagant and would have no impact on David’s opinion of the company. But we need more facts to ensure that is the case. Cultural context should also be considered when making a decision. Dinner and karaoke may be modest and tame in some cultures but more extensive and extravagant in other settings. Awareness of cultural sensitivities and expectations are very important, especially for those who may be working outside of their familiar home region. Choice B attempts to steer a middle ground by having David only accept part of the entertainment, which may lessen the threat of a compromised analysis by reducing the benefit. In practice, this may be awkward to do and the dinner itself could still be extravagant. Choice C also attempts to compromise by suggesting David could accept the dinner/entertainment as long as the gift/benefit is disclosed to the employer, seemingly mitigating the potentially problematic conflict of interest. But for disclosure to be effective it must be adequate. There is no indication that David will disclose the benefit to the clients who will read David’s research report. They will therefore have no indication that the analyst writing the report was given a nice dinner and potentially fun-filled night on the town by the subject of the report. Best practice would suggest that David reject the invitation (Choice D) to avoid any question about his honesty and integrity.

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Image Credit: ©CFA Institute

About the Author(s)
Jon Stokes

Jon Stokes is the director of ethics education at CFA Institute. He is responsible for development and maintenance of the CFA Institute Code and Standards, as well as the design and management of the CFA Institute Ethical Decision Making training programs. Stokes holds a JD degree.

5 thoughts on “Ethics in Practice: Developing Your Ethical Decision-Making Skills”

  1. EVINA says:

    Answers C.

  2. Sharon says:

    I agree with the answer C. This does not appear to be something expensive and there is no obligation implied by accepting the invitation. But it should be disclosed.

  3. howard harmatz says:

    Instead of a dinner, suppose the presentation takes place with a great sideboard of delectable treats. Should David abstain or follow course of action “C”?

  4. Jon Stokes says:

    Thanks for you comment. The case turns on the expense and extravagance of the benefit, not necessarily the nature of the meal. There could be some pretty delectable treats on the sideboard! Best practice is to avoid the perceived challenge to independence and objectivity when one could reasonably assume that the expense/extravagance of the benefit could sway your course of action.

    1. Victor Comé says:

      Jones, would you be more clear in your comments in regarding our position.

      My option on this is also C.

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