What is Ethics in Business?
Ethics is not a subject of moral discussions alone, but one that has implications in how businesses are run. Unethical behavior has far reaching consequences not just to the person involved but their colleagues, their employers and customers.
Ask Enron, Barings Bank, Satyam Computers or Lehman Brothers.
For customers to rely on investment companies the key factors are expertise and trust. By trust, we mean companies must behave responsibly, have transparent business practices and have ethical practices in place. Ethical behavior goes beyond the purview of rules and regulations. The investment manager will often come across situations where ethical conundrums arise and there are no stated rules or laws to fall back on. A clear understanding of ethical behavior will help in such cases.
To understand what ethical behavior is we must first understand that our actions have consequences on several ‘stakeholders’. They could be individuals or organisations. In the investment industry professionals include customers, colleagues, employers and the communities we work with. All groups may or may not benefit from our decisions but it is important to be fair and transparent with all. One cannot for example fudge investment reports to present a rosy picture to clients. This behavior would fall under the ambit of unethical, since it is a hiding of the true nature of facts, which forms the basis of the client’s decision to make or not make a certain investment with the hope of a certain level of returns.
Ethics is drawn from the Greek word ‘ethos’ which means character and a set of beliefs that define a group. Ethical principles help us demarcate the good from the bad or good choices from bad choices. They are usually shared beliefs; in our case it would mean our company or the investment industry.
Ethics help us create a balance between self-interest and consequences. Presenting accurate earning reports of investments to clients is ethical behavior, which helps the company. Clients trust investment companies that are transparent in their reports even though they may not be up to expectations. They trust the company more.
Honesty, fairness or justice, diligence, and respect for the rights of others are characteristics of ethical behavior.
Governments, the Securities Exchange Commission, Trade bodies all formulate codes of conduct so that participants play fair. They will often come out with a code of conduct that details how members should conduct themselves during business. This helps the community adhere to a certain common standard.
When violations occur members are censured or disbarred. This is because an individual endangers the trust and relationships the organization(s) has built over a period of time. The CFA is a good example of a community with a code of ethics. These beliefs are presented in the Code of Ethics and Standards of Professional Conduct (Code and Standards), which are included in the CFA Institute Standards of Practice Handbook. For instance, the Code states that members and candidates “place the integrity of the investment profession and the interests of clients above their own personal interests.”
The Code of Conduct is taken very seriously and the CFA has made it mandatory for members to re-affirm their commitment to ethical practices every year. It also expects members to submit a Professional Conduct Statement every year, for any violation. The CFA Institute initiates disciplinary action against any such violation.