Ethics and Decision Making

Ethics and Decision Making

• Ethics and Morality can be used as synonyms
• Ethics involves principles, values, and beliefs guiding human behavior and choices
• Business ethics are moral principles for individuals' and organizations' conduct
• Ethics offers a framework to evaluate morality in actions and decisions
• Ethics significantly shapes existing and new laws and regulations

Ethical Considerations

• Ethical behavior is needed for the:
  • Success of investment industry
  • Investor confidence
  • Integrity of investment profession and financial markets
  • Fairness and efficiency of markets
  • Public and client trust

Benefits of Ethical Conduct

• Ethical standards increase the stability of the financial system
• Ethical standards complement legal obligations and standards of professional conduct
• Ethical behavior from investment employees increases investors' trust
• Increased trust leads to greater market participation and efficiency
• Market participation provides increased liquidity and quicker price adjustments
• Increased market participation promotes public awareness and understanding

Consequences of Unethical Conduct

• For the Industry and Economy:

  • Can cause changes in market participant behavior
  • Can cause financial contagion which may be dangerous to interconnected companies and the economy

• For Clients:

  • Clients may be exposed to excessive risks and unsuitable assets
  • Clients may see inflated investment service costs
  • Clients can lose trust in financial markets due to things like insider trading

• For Employers:

  • Can see a loss of reputation and shareholder value
  • Can cause legal liabilities and greater regulatory scrutiny

• For Individuals:

  • May cause significant legal, professional, personal, and economic ramifications

Accounting Ethics

• Accountants must uphold integrity, competence, and objectivity.
• SAICA has adopted the International Code of Ethics for Professional Accountants.
• International Ethics Standards Board for Accountants (IESBA) releases International Independence Standards.
• The code outlines ethics principles for accountants.
• Ethical duties apply to oneself, colleagues, and their organizations.

SAICA's Code of Conduct

• Integrity: Honesty, fairness, and truthfulness in professional relationships
• Objectivity: Avoidance of bias, conflicts of interest, and undue influence
• Professional Competence: Diligence, knowledge, and adherence to standards
• Confidentiality: Non-disclosure of client/employer information unless legally required
• Professional Behavior: Compliance with laws and avoidance of discrediting actions

CFA Code of Ethics

• Chartered Financial Analyst (CFA) Institute maintains high public trust.
• Members must act with integrity, competence, and professionalism.
• Client and profession interests come before personal gain.
• One should maintain and enhance professional competence.

CFA Standards

• Professionalism: Includes law compliance, objectivity, and avoiding misrepresentation
• Integrity of Capital Markets: Avoid insider trading and market manipulation
• Duties to Clients: Acting in the client's best interest while maintaining confidentiality
• Duties to Employers: Avoiding conflicts of interest and maintaining confidentiality
• Analysis and Recommendations: Using thorough research and disclosing risks
• Conflicts of Interest: Disclose any potential biases
• Responsibilities: Maintain the reputation of the CFA designation

Ethical Frameworks

• Utilitarianism:

  • Maximizes overall happiness or utility of society
  • Uses consequences to judge ethical actions
  • Guides decision-making by maximizing social welfare

• Deontology:

  • Involves evaluating if an action adheres to ethical principles
  • Is consistent with ethical codes even without the greatest benefit
  • Provides clear guidelines based on moral principles

• Virtue Ethics:

  • Focuses on developing personal character traits to guide decisions
  • Sees ethics as necessary and vital
  • Applied by individuals/organizations acting responsibly and sustainably

Ethical Decision Making

• Ethical decisions build trust, fairness, responsibility, and care.
• Ethical decision making requires reviewing options and eliminating unethical views.
• Sound choices should be both effective and ethical.
• Effective choices fulfill their intended purpose.
• Thinking about short-term vs. long-term objectives is imperative to making sound choices
• Ethical decision-making requires issue sensitivity and a structured method

Ethical Decision-Making Framework

• In order to promote sound decisions, one can utilize a framework
• One example framework has 4 major steps:
  • Identify
  • Consider
  • Act
  • Reflect

Ethical Decision-Making Framework Stages

• Identify:

  • Determine ethical principles at issue
  • Determine one's duties to others
  • Define key facts and needed information
  • Identify conflicts of interest

• Consider:

  • Analyze situational and internal influences
  • Brainstorm alternative actions
  • Seek additional guidance

• Act:

  • Make and implement a decision specific to the situation
  • Escalate the issue as needed

• Reflect:

  • Evaluate the lessons learned
  • Know your strengths and weaknesses