Ethics in Finance - Week 1 (Introduction)

7/21/2019 Ethics in Finance - Week 1 (Introduction)

http://slidepdf.com/reader/full/ethics-in-finance-week-1-introduction 1/11

W1 (28/07) - Introduction

Texts:

- TB:o Ch1 and Ch2 (end at ethics of rms)

- AFR – Hurtlin to!ards a moral conundrum- "ltimate #arainin ame – limits of rational #eha$iour

- %aul &ellerman 'h '&ood* +anaers ma,e Bad thical Choices*- Theor of +oral %entiments – Adam %mith (does not deal !ith dis.arit in !ealth)-

Cases

- Case 1/1 – +erc, 0io (slo! !ithdra!al of dru that increased ris, of heart attac,)- Case 1/2 – Tos R "s (#uin com.etitors .roducts) and Home e.ot (!ood sellin

durin hurricane .eriod)

What is ethics in fnance?

- 3t is the res.onsi#le and sustaina#le decision ma,in in #usiness and nance/- +oral4ethics – descri#es !hat*s riht or !ron (ethics is the stud and im.lementation

of moralit ./25 of %ith edition)o +oralit – socioloical .henomenon6 eistence of rules4standards6 s.ecic to

culture7 time7 .laceo thics – rules and norms of s.ecic ,inds of conduct (# rou.) or .hiloso.hical

stud of moralit6 considers rihts and 8ustices of noneconomic $alueso +oral dimension is usuall su..lanted # economic $ie!.oint of .rot ma and

e9cienco +oral $ie!.oint usuall underlies C%R

- thics can #eo escri.ti$e – em.irical inuir into actual rules4standards of a .articular rou.7

or could consist of understandin the ethical reasonin .rocesso ;ormati$e – 8ustication and !hat !e ouht to do throuh moral

reasonin4arument

Moral reasonin

- +R reuires !illinness to see, out and act on reasons6 #e im.artial- Conseuentialist moral reasonin – riht thin is #ased on the conseuences of our

actions/ e locate moralit in the conseuences of an act (!hat is the state of realitafter such actions)

- Cateorical moral reasonin – the intrinsic ualit of an act (it is <cateoricall=

immoral)- >ersonal ris, – !hen familiarit !ith a situation #ecomes non-intuiti$e or counter-

intuiti$e6 !hen a .ro#lem .resents ra areas in decision ma,in

!usiness decision "a#in

- 5 le$elso 3ndi$idual – self-disco$er of dilemma7 relies on o!n moral stds7 8udments and

$alues to decideo ?ranisation – manaerial le$el disco$er7 relies on .rocedure4.olic to dri$e

decision



o Business sstem – industr !ide disco$er7 relies on industr code of ethics7

.ea, #od rules7 o$ res7 economic reforms to dri$e decision to sol$e sstemic

issues (e// enerall acce.ted #usiness .ractices or economic .ro#lemso thical dis.lacement can occur !here solution to .ro#lem is on di@erent le$el to

!here .ro#lem !as disco$ered4occurred- 2 distinuishin factors of #usiness: #usiness are economic relations in mar,ets and

orso conomic character (tradin is hard #arainin)6 ethics .rohi#its uestiona#le

sellin .ractices6 em.loment is a s.ecial rshi.6 ethics of #usiness is the ethics

of economic acti$ito Business ta,es .lace in ors6 not the indi$idual $alue sstem alone that is

crucial6 hierarchical sstem of functionall dened .ositions6 reconcilin ethical

reasonin4.ri$ate morals !ith commercial realities4#usiness im.erati$es- e ,ee. in clear distinction se.arate rules in di@erent circumstances (social7

.rofessional7 etc)

Context o$ ethics in la%& econo"ics and "anae"ent

conomic – the rm as an economic unit of .roduction4$alue addin in mar,et see,in ma

.rots7 #ut it is also a distinct entit

- 3ncrease shareholder*s !ealth i$en acce.ta#le #usiness .ractice- conomic choices dri$en # utilit ma (!ith limits on theft and fraud) – economic

reasonin as an e.lanation for consumer4su..lier #eha$iour can #e seen as moral

reasonin in that economic actors ouht to ma,e utilit-maimisin choices (i/e/ the

economic normati$e of maimisin utilit is .redicated on moral rounds) – ealth of

;ations (thouh assumes ordered7 ci$il societ !ith hih le$el of interit and $irtues)- ustication – com.etiti$e free-mar,et #enets societ #ut onl on condition of:

o ?#ser$ance of minimal moral restraints

o

Full com.etiti$e mar,ets (i/e/ lo! #arriers to entr4eit7 minimal asmmetr ininfo7 .rices reect all costs of .roduction includin eternalities)

- Conditions o$erseen # o$- reasons econ .ers.ecti$e alone cannot ser$e as #asis for +

o 1/ +ar,et sstem .er se has ethical 8ustication

o 2/ thics reuired # mar,ets

o 5/ Rules of ame cannot #e set # o$ alone – need for a culture7 self-

reulation4restrainto D/ thics inuences economic #eha$iour (e// .eo.le moti$ated in their

#eha$iour # .erce.tion of fairness – hence limits .rot see,in #eha$iour)o / >u#lic .olic utilises non-economic $alues

Ea! – conductin #usiness !ithin leal limits is enouh

- Theor 1 – leal rules a..l to .u#lic life !hereas ethics are a .ri$ate matter6 la!

re.resents a minimal le$el of e.ected conduct that is im.erati$e7 !hereas ethics is a

hih-le$el and o.tional- Theor 2 – la! as a social control !hich em#odies ethics of #usiness !ith clear7 detailed

and enforcea#le rules7 thus .ro$idin a le$el .lain eld- Eimitations – la! does not etend to e$erthin (e// ta,in credit for other*s !or,7

unreasona#le demand)6 la! is slo! and las #ehind de$elo.ment as it is .rimaril

reacti$e6 can #e $aue and o.en to inter.retation such as 'reasona#le*7 'ood faith*7

'fair dealin*7 'due care* (hence there*s a #usiness in litiation fundin)6 inconsistenc#et!een 8urisdictions6 and can #e ine9cient/

o Courts of euit ha$e eisted in the Australian 8urisdiction as !ell as man

Common!ealth 8urisdictions7 !hich see, to redress !rondoins # euita#le



remedies/ // contracts ma #e rescinded or rendered ino.erati$e if there !as a

reliance on some re.resentation that !as false/

thical mmt/ $s mmt/ ethics

- thical manaement – doin riht thin6 ho!e$er there is a distinction #et!een

ordinar7 .ri$ate ethics and commercial ethics- +anaement of ethics – actin e@ecti$el as a manaer in reconisin and resol$in

ethical .ro#lems (e// mission statements7 .olicies7 .rocedures7 rules)6 it includesainin acce.tance of such .olicies throuh .erce.tions of fairness and commitment #

manaement- +anaers o.erate #oth as #usiness aents and leaders6 thus the are reuired to ha$e

a #od of ,no!lede7 hih deree of oranisation and self-reulationo Cf hih-le$el mmt/ !ho must de$elo. and sustain an ethical culture inside the

com.an- Gno!lede needs to #e #road to o$erloo, their area of res.onsi#ilit and #eond

includin: a) ,no!lede to reconise and resol$e ethical issues7 #) understand

moti$ation of indi$iduals7 c) ,no!lede of res4la!7 d) a#ilit to de$elo. loical and

defensi#le ethical aruments to .ersuade others throuh moral imagination; all the

!hile maintain commercial $ia#ilit

'oles o$ "anaers

thics in roles

- ach role has its set of relationshi.s and accom.anin rihts and o#liations7 !ith a

set of uniue res.onsi#ilities to $arious rou.s4interests- ell dened roles #ased on functions #etter cater to ser$in societ (di$ision of la#our)

throuh increase in .roducti$it (i/e/ s.ecialisation increases s.ecicit of

res.onsi#ilities and o#liations)6 oin u. the commercial .e,in order reuires

su#sumin increasin amount of roles – !hich increases .ro#a#ilit of conicts of

interests7 res.onsi#ilities and o#liations #et!een each role/

0arious t.es of manaerial roles

- conomic actorso >rimaril economic factors !ith underlin dri$er #ein success of end oals

(usuall .rota#ilit)o To !eih !hich ris,s to ta,e and acti$el manae ris,s

o nsure com.an sur$i$al7 then maimise .rots

- Com.an leaderso ntrusted !ith assets and to manae them .rudentl6 e.ected to meet

leitimate e.ectations of all sta,eholders- Communit leaders

o ;eed to leitimise their eertion of enormous .o!er

o &reat clout o$er societ as a !hole (their constituencies etend out to the .u#lic

s.here due to eternalities !hich are endemic to all com.anies)

?ranisation theor

- + in commercial settin is a colla#orati$e e.erience !hich is su#8ect to dnamic

forces that is not !holl understood4reconise # an one entit/

- Collecti$e actions are the com#ination of multi.le indi$idual actions (!ho is thenres.onsi#le for an inad$ertent nal outcome)

- rondoin in ors more li,el due to inadeuate o$ersiht on .articular .olicies7

.rocedures7 etc



o // !or, en$ironments that lac, .olicies that .ro$ide uidance for #eha$iour or

deal !ith conictin sinals6 there is an 'o.erational a.* #et!een !hat is

instructed # mmt/ and ho!4!hat is achie$ed/

Interated aroach to ethical ie%oints

3nteration

- "tilit cannot #e sim.l the onl ardstic, in delineatin moral actions- o !e7 and ho! do !e7 assin !eihts to di@erent oals- ecisions must #e economicall satisfactor7 fulllin leal o#liations !hile ethicall

defensi#le

!ias& heuristics and rationalisations

- Roue aents can:o +a,e danerous rationalisations (&ellerman)

Belief that acti$it is !ithin reasona#le ethical4leal limits (no real harm is

done) Belief that acti$it is in indi$idual*s or C*s #est interest

.ected to 8ust do it or someone else !ould do it

+anaement usuall distance themsel$es from su#ordinates*

tactical decisions as .reem.ti$e of thins oin #ad Belief that acti$it is safe #ecause it !on*t #e found out (disco$er)

Belief that acti$it hel.s the com.an7 that C !ill condone it and .rotect

the actoro Am#iuous7 ill-dened situations are a hot#ed for rationalisin immoral

#eha$iour (!hat isn*t la#elled !ron should #e o,a)o +a,e errors of 8udment4coniti$e #iases

loss a$ersion #ias4Iero ris, #ias – tend to !eih losses more hea$il than

ains framin e@ect – ho! framin of choices a@ects decisions

conrmation #ias – tendenc to see, out information !hich conrms

eistin #eliefs coniti$e dissonance – tendenc to dismiss information that !ould disru.t

eistin #eliefs sun, costs – resources are committed – .ersist in that course of action

(inertia) hindsiht #ias – tendenc to #elief e$ents more .redicta#le than reall are

(#lac, s!ans) causation #ias and illusion of control – nd causal .atterns in random

e$ents leadin to o$erestimatin a#ilit to control future ?$ercondence – undul condent of o!n ,no!lede4a#ilities

self-interest #ias – estimations of fairness s,e!ed to fa$our onself

ris, .erce.tion #ias – o$erestimatin ris,s and discountin others (inore

lo!-.ro#a#ilit e$ents and .reference for certain seeminl certain

conseuences) #lind-s.ot #ias – #ein una!are of our o!n #ias in a situation

choice-su..orti$e #ias – tendenc to $alidate choices !e*$e made to the

eclusion of all others clusterin illusion – tendenc to create .atterns out of random e$ents due

to re.etition (e// red on roulette as it*s 'hot*) conser$atism #ias – .reference for eistent or esta#lished e$idence o$er

emerin4ne! e$idence that .ro$es to the contrar (e// earth is round)6

challenes our #eliefs sstem (need for certaint)





thics o$ "ar#ets

- thics that a..l !hen conditions for .erfect mar,ets do not o#tain can #e cateorised

aso ?#ser$in arm*s lenth areements4contracts

Breaches # non-.erformance or misre.resentation

Contracts ha$e terms4conditions4!arranties4eclusions !hich ma #e

$aue or non-e.licit due to need for ei#ilit7 minimise

riidit4com.leit7 a$oid ecessi$e lealism – e.osed to $iolation !ith

im.unit Eac, remedies for #reaches

o A$oidin force4fraud

Fraud ( elements)– material7 misre.resentation7 !ith intent to decei$e7

causes re.resentee to rel on it7 to their detriment4harmo ;ot inictin !ronful harms

es.ite no dut to other .art-in-ehane*s interest7 o#liation of #asic

moralit eists Tort la! deals !ith !ronful harms outside of commercial realm – it

de.ends on !hat the .arties consent to7 and hence to u.hold duties tothat consent6 #ut also duties to u.hold !hat is not consented to (e//

commission of nelience7 omission !hen dut of care eists or a$oid

intentional harms such as $iolation of rihts !hich is a !ronful harm)o Actiin res.onsi#l in case of mar,et failures

- ustications for mar,etso elfare enhancin (in$isi#le hand)

Rihts-#ased utilitarianism – increase societ*s !elfare throuh economic

e9cienc !hich is .ossi#le throuh a mar,et mechanism !hich .romotes

the hihest $olume of echanes Benet to societ as a !hole is due to the .ursuit of self-interest rather

than reard for the !ell-#ein of otherso %ecures rihts and li#ert (Hae, and Austrians) throuh s.ontaneous order

?..ortunit4riht to trade (as a riht intrinsic to .ro.ert o!nershi. of

control4dis.osal4do as ou .lease) is an eercise of li#ert # ad$ancin

self-interests Cf .lanned econom – !hich is .rimiti$e # com.arison in terms of order

of com.leit reuired to eecute an econom that increases !elfare

throuh free mar,et echanes (!here e$erone can .artici.ate and

contri#ute to the econom)o "tilises all a$ail info (.rice disco$er sstem)

As e9cient economic decision ma,in reuires an inordinate amount ofinformation (that is dnamic) for frictionless echanes7 the mar,et

sstem .ro$ides the #est mechanisms throuh .rice disco$er on a listed7

#ut reulated7 mar,et- Features of mar,et sstem

o >ri$ate o!nershi.s7 $oluntar (usuall mutuall ad$antaeous) echane7 .rot

moti$e to ad$ance one*s interests- Failures

o 3m.erfect mar,ets lead to #reaches of areements4contract6 fraudulent acti$it6

!ronful harms and irres.onsi#le actors Cf &authier*s assertion that .erfectl com.etiti$e mar,ets are moral-free

Iones (i/e/ mar,ets reuire consent and coo.eration of others due todnamics of a successful transaction – hence no moral !rons .ossi#le)

o Reasons (D)

;o .erfect com.



• Barriers to entr4eit

• ;on-eistence of homoenous oods (su#stituta#le) (i/e/ stron

di@erentiation)

• 3nformation asmmetries

• Transaction costs

;o .erfect rationalit (#ounded # resources to information atherin) and

utilit is not maimised

•

Firms #eha$e in a 'satiscin* !a (sacrice and satisf) to achie$einternal e9cienc (rather than satisf the eternal e9cienc of the

mar,et.lace) istence of eternalities

• &o$ernments reulate eternalities throuh $arious means: res7

mar,et mechanisms (e// car#on T%) Collecti$e choice .ro#lem

• Areatin indi$idual choices to nd total societal choice reuires

assum.tion that indi$idual decisions are rational (maimise o!n

!elfare4utilit) – .risoner*s dilemma is a .arado of this conce.t –

ta,in ad$antae of another*s coo.eration !ithout .ain a

.remium6 an assurance .ro#lem sol$a#le # forced coo.eration

(o$ reulation) or # mutual ,no!lede of each other*s

trust!orthiness

• coercion7 .aradoicall7 ena#les $oluntar4consentin #eha$iour

o >u#lic oods

cluda#le and ri$al oods

>ri$ate oods (ecluda#le and ma #e ri$al4non-ri$al) $s .u#lic oods

(non-ecluda#le and ma #e ri$al4non-ri$al) Free-ridin .ro#lem

o Traed of the commons

- ?utcomeso Return is a function of ris, ta,en

o ;oIic, – mar,et outcomes are 8ust7 not matter ho! uneual7 8ust to $oluntar

transactions (the action of consentin is morall 8ustied)- Ra!ls – mar,et needs ad8ustment if outcomes leads to un8ust le$els of ineualit

of outcome

.iduciaries (thics o$ roles and relationshis)

- Assumin a role #inds the .erson to a code of .rofessional ethics6 some .rofessions

render the .erson a duciar or aent to another (e// la!ers or doctors)o

Remo$al of .erson from mar,et and into the ethical realm of aenc !here self-interest is su#ordinated to ser$in #est interests of a #eneciar4.rinci.alo m.lo their s,ills for #est interest of .rinci.al as if .rinci.al had those s,ills

themsel$es (i/e/ aent #ecomes etension of the .rinci.al7 in >*s shoes7 !ith a

dut to use a#ilities for >*s #enet)- lements

o Candour – disclosure all info that B !ould consider rele$ant

o Care – entrustment of assets reuire due care (reasona#le7 .rudent .erson !ould

eercise)o Eoalt – act in interest of B and a$oid .ersonal conicts of interest

- h .rofessionals are usuall .rescri#ed duciar duties

o %.ecialised #od of ,no!ledeo Hih deree of oranisation4self reulation

o Commitment to .u#lic ser$ice in echane for inde.endence

- Aenc theor - .ro#lems



ie%s o$ the fr" (econo"ic s socioloical) (c$ W1 thics o$ "ar#ets)

- conomic $ie!o Firm as a natural entit com.risin a com#ination of mar,ets relationshi.s

o conomic .roduction also ta,es .lace in rms (and not onl mar,ets) #ecause of

hierarchical relationshi.s ield reater e9cienc (Coase*s conce.t of the rm)o Business ethics conssits of #oth mar,ets ethics (i/e/ transactions) and ethics in

rm (roles and relationsi.s)

- %ocioloical $ie!o Firm J oranisation (as a unit of analsis)

o Communit .ers.ecti$e – common oal4.ur.ose7 structure of roles4rshi.s and +

.rocesso lements

istinct or ethical climates (i/e/ culture) !hich inuences reconisin

moral + .rocess ?ranisational 8ustice – decisions made must #e acce.ted as 8ust or !ide

?ranisational harms – attri#ution of !rons committed to !hole of rm

(i/e/ ethics of indi$iduals is sha.ed # forces of the rm includin culture7

.rocedures7 sstems)

uestions,

- hat is a ca.italist econom- hat are .ro#lems that occur in im.erfect mar,ets

o hat can some of these .ro#lems

- hat is the economic #asis for free mar,etso +ar,et sstems and 8ustications

- Fraud

M



?ther frame!or,s (. DK-1)

- thical reasonin reuires 3 ethical conce.ts and .rinci.les6 !illinness to see, out

and act on reasons6 #e im.artial- Boatriht frame!or, in$ol$es 3 .rinci.les of !elfare7 dut7 rihts7 fairness7 honest7

dinit7 interit- +ar,,ula frame!or,

o reconise ethical issue (!hat is #ein contested)6

o o#tain facts (!hat – rele$ant facts and !hat 3 don*t ,no!6 !ho – !ho has a sta,e

ho*s concern is more im.ortant6 ho! – e$aluate alternati$e actions4o.tions

includin least harm .rinci.le (utilitarian) or res.ect of rihts (rihts a..roach) or

euita#le treatment (8ustice a..roach) or ser$es communit as !hole (commonood a..roach) or leads to actions !hich 3 $alue ($irtue a..roach))6

o ma,e decision and test (!hich is the #est o.tion for situation7 ho! !ould an

outsider $ie! m actions)o act and reect on outcome (ho! to im.lement decision !ith consideration .aid

to all sta,eholders7 !hat !as the outcome $s e.ectations)- Alan +eder frame!or, (CFA uses it) reuires

o Hih standards

o >rofessional trainin

o Assess interit of rou. settins and indi$iduals

o Act !hen interit #reaches are o#ser$ed

- "nderlin themeso Consider #enet4harm to all sta,eholders

o Res.ect humanit of others

o Treat others !ith eualit7 fairness and 8ustice

o Care of other .ersons in !a to nurture that rshi.



Case studies,

+erc,*s 0io

- Facts:o ell res.ect com.an

o Founder4C?7 <+edicine is for the .eo.le/ 3t is not for the .rots/=

o 0io a..ro$ed 1LLL and #estseller

o 2 million users7 M2/#n annual re$enue (11N of Co*s re$enue)o Com.etition from enerics

o 03&?R stud uestioned dru*s e9cac in treatin !hat it !as ad$ertised to

treato 0io on-la#el chaned 2KK2 (indicated increased ris,)

o 0 !ithdra!n in %e. 2KKD due to une.ected ris,s

o +edication found to increase ris, of heart attac,s

o +erc, claimed !ithdre! drus in e.edient manner7 critics claimed other!ise

- Eessonso Culture of stron $alues

o amae to re.utation7 trust and #rand due to decision to ,ee. 0 on mar,et

des.ite studies sho!in ris,s- Challene

o >ursue hihest ethical standard !hile #ein com.etiti$e

Tos R "s

- Facts:o TR" em.ees !ent underco$er to mass #u Child orld in$entor that !ere

hea$il discounted (near cost)o >roducts !ere lo! marin oods !hich also .ro$ided ift certicates for .urchase

o Tot turno$er !as M1/m7 M5O, ift certicates

Home e.ot

- Facts:o Hurricane o$er +iami

o Home im.ro$ement store H decided to sell hih demand reco$er su..lies at

costo &ood #usiness decision from shareholders >?0 thicall sound

Bous A..le uice

- Facts:o uice made from concentrate (no natural inredients)

o Aressi$e sales cam.ain o$erseas

o False ad$ertisin

G>+&

- Facts:o Creati$e ta ad$ice to hih net!orth clients – .ur.ose to e$ade ta throuh

o@shore shelters7 .hantom losses in o@shore #an,so G>+& .rotected itself throuh sined statement

o

;etted itself M11Km in fees throuh M2/#n in ta !rite o@s

H>

- Facts:



o Cartrides !ith smart chi.s under a cam.ain for automated rell su..l

(consuma#les re.resented o$er half re$enue !ith .rot marins of K-PKNo Class action led to settlement – eCredits (essentiall $ouchers) for customers to

use for .rintin needs

Documents

Ethics in Finance - Week 1 (Introduction)