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13
ETHICS
Ronald F. Duska
What Was the Situation Before?
In one sense ethics doesn’t change. Lying has always been lying, cheating has always been cheating, and scamming customers has always been scamming. New technologies and products may create new opportunities for cheating and increase the asymmetry of knowledge, thus making it easier for an agent to manipulate the behavior of a client, but such behavior violates the Golden Rule, "Do unto others as you would have them do unto you," which still reigns in ethics, along with the requirements for avoiding harm, doing good, and being fair and honest. However, with the media blitz criticizing financial services, cultures, and practices, and the immense amount of litigation directed against those in the financial services industry, a new consciousness of the necessity to do the right thing (or at least the legal thing) has been forced on the members of the financial services professions.
In the last several years a number of companies in the financial and insurance sectors have been accused of unethical practices. In some cases, companies driven by profit, with a single-minded focus on increased productivity, set up instruments and incentive and reward systems that contributed to their agents’ forgetting that the primary focus of a financial services professional should be the needs of the client. In other cases, greedy agents convinced unsuspecting customers to replace policies that weren’t in need of replacing, in effect skimming their clients’ cash value to pay the commission on the new policies. The scandals and lawsuits that have arisen as a result of such questionable market behavior made the industry and the individuals in the industry reexamine the ethics of their practices and institute compliance programs to help avoid such missteps in the future. Hence a sense of complacency about ethics and compliance has turned into a sense of urgency with respect to determining what is right and encouraging right behavior. In this regard we should take note of four trends.
What Is the Nature of the Change?
1. Going Beyond Compliance. In the past there was a tendency to reduce ethics to mere legality. If what I was doing was legal it was acceptable, and all that was required was to follow the law. What has been recognized though is that it is important to do more than just obey the letter of the law. It is important to follow the spirit of the law. This is clear when one reflects on what the law is. The law generally is an ordinance of reason promulgated by one in authority for the common good. The law and regulations generally are not needed if the society is functioning well. But if individuals begin to harm others with their behavior or take advantage of them, violating their moral rights, the law will step in to protect those rights. The law adds public promulgation and sanctions to morality. So the law is the servant of morality, and behind any good law is a moral spirit. Ethics demands following the spirit of the law and not mere compliance with the letter of the law. For example, certain marketing practices may meet legal requirements, but if they take advantage of the customers by not fully disclosing what is necessary to make an informed decision, they are unethical.
There are, according to Lynn Sharpe Paine, two distinct approaches to ethical situations, or two solutions to correcting unethical practices—a compliance-based approach and an ethical-based approach. Since compliance means obeying the rules, in a compliance-based approach the control of the behavior comes from the rules, which are externally imposed. Conversely, in an ethics-based approach the rules are internalized and control is from within. In this case, the person is self-governed. The purposes of the two approaches are also different. While the purpose of compliance is to avoid legal violations and sanctions, the purpose of ethics is to generate responsible action. Since compliance is informed by the law it is most efficiently directed by attorneys, while ethical approaches are initiated and directed by managers. Compliance is established and enforced by education, threats, and reduced discretion, while ethical behavior is established by education, self-control, and accountability. The desired organizational result from a compliance perspective is to remain legal, while the desired result from an ethical point of view is productivity spurred on in accordance with lived ethical values.
In the long run a compliance approach "encourages indifference to the moral legitimacy of choices," and appears to be "stability insurance" for top managers. Such an approach is "unlikely to release much moral imagination, rarely addresses the root cause of misconduct, and usually doesn’t seek to inspire moral commitment."
In a compliance-oriented culture we are treating the symptoms but haven’t gotten to the cause of the disease. As Paine says, "Managers who define ethics as legal compliance are implicitly endorsing a code of moral mediocrity." So one of the newer lessons in ethics is to emphasize that we need to go beyond a mere compliance mentality.
2. Virtue Ethics. A second significant change is in the shift from looking at ethics as merely a set of rules, a set of do’s and don’ts, to looking at ethics as a guide to how to be. In this latter view the goal is living well, or excellence in activity, which involves character development. The popular name for this approach to ethics is called virtue ethics. Instead of trying to create an ultimate set of do’s and don’ts, ethicists have come to recognize that it may be more important to concentrate on the development of character traits that are dispositions to do the right thing, called virtues, as opposed to character traits that are dispositions to do the wrong thing, called vices. In this way the rules can become internalized so that rather than simply having the rule to be honest, there will be a development of the character trait of honesty. Rather than simply having the rule to look out for the best interest of one’s client, there will be the character traits of fidelity, loyalty, and dedication.
But with all this emphasis on virtues and character traits, one needs to inquire, what roots of character traits are necessary? There are a variety of lists. One such list is found in the International Association of Financial Planners Code of conduct, which stresses integrity, objectivity, fairness, and confidentiality.
We will look at this list briefly. While one important aspect of integrity is honesty, and honesty is an essential character trait for being an ethical person, there is a meaning of integrity that goes beyond honesty and signifies wholeness. In colloquial speech we recognize such a character trait when we say people "have their act together." The earliest of philosophers and religious ethicists would have taken integrity to mean a combination of the essential virtues or character traits of prudence, justice, temperance, and courage, which were the foundational virtues, often called the "cardinal" virtues. Prudence is the first and involves knowing what is right and good as well as desiring it. Temperance is the virtue necessary for pursuing the good and right we recognize by controlling the desires and passions that tend to lead us away from that good or right. Courage is the trait that gives us the willpower to overcome the fears that keep us from pursuing the good and right. Justice gives us a necessary concern for the good of others, the virtue of being able to temper our self-interest for the sake of another. Such a virtue or character excellence feeds into the second IAFP virtue of objectivity.
Objectivity demands the ability to get out of oneself and put oneself in the place of another with compassion. (The Golden Rule requires objectivity.) Without the capacity to empathize with others, to see the world as others see it, ethics would be virtually impossible. Such objectivity leads to the next IAFP virtue, the virtue of fairness.
Fairness demands that we treat all people the same way unless there is some relevant reason for not doing so. It is obvious, of course, that fairness is almost the same as justice, the virtue that insists on treating others as they ought to be treated.
Confidentiality is not so much a character trait as a state that requires one to respect another’s right to privacy, and fidelity to the good of one’s client. Confidentiality means one must not only honor the client’s right to privacy, but also must safeguard it, and never use information about a client in any way that would harm that client.
3. Professionalism. Beyond the virtues described in the IAFP code, we add a third concern to the ethics of financial planning: professionalism. The general argument for professionalism is that professionals have a special obligation to their clients. What are the characteristics of a professional? According to most accounts, a professional is a person working in a field that requires specialized knowledge, and that has entry and behavior requirements that are policed by the profession. Because of the professional’s specialized knowledge his or her client is in a dependent position, having to trust the advice of the professional. Hence the professional has the welfare of the client in his or her hands, and an altruistic dedication to the best interest of the client is required to avoid using the client as a means to the professional’s ends. In the words of Solomon Huebner, the founder of The American College:
"In the application of that knowledge, the professional should abandon the strictly selfish commercial view and ever keep in mind the advantage of the client."
This looking out for the best interest of the client is the ultimate ethical concern.
4. Corporate Culture. There is one more important trend in the state of the art, and that is the attempt to wrestle with the question, "Why do good people do bad things?" The latest studies try to answer this question by citing the influence of the corporate culture. Here organizational behavior studies blend with ethical concerns to try to determine ways of altering behavior. It should be noted that all living things, from plants to humans, are affected by their environment, and that just as a tomato depends on good soil and enough, but not too much, sun and water if it is to flourish, so human beings depend on a good environment if they are to flourish in the aspect of their character. One of the environmental factors that has significant influence in the financial services industry is the matter of incentives. If a corporate culture rewards only productivity and takes no account of ethical behavior, it will inadvertently encourage behavior that is solely bottom-line oriented. In the financial services industry, then, this leads to the reexamination of the commission structures, the evaluation of leadership, and the emphasis on ethical training of the new agent.
What Should Be Done?
To overcome the selfish commercial view, we must cease using others merely as a means to our own ends. "Do unto others as you would have them do unto you" is still the basis of ethics. But additionally we need certain other things:
1. A well articulated sense of what is important. If companies keep pushing profit over the emphasis on the Golden Rule or a concern for the client, then the level of ethical behavior will not rise.
2. An emphasis on professionalism.
3. Leadership that "walks the talk."
4. A watchful eye on potential trouble spots.
5. Ethics-based policies, culture, and rewards and sanctions, rather than compliance-based policies and culture.
6. Commission structures need to be examined. We need to recognize that incentive programs lead people to behave in certain ways.
7. Adequate recruiting and training programs. We need to help trainees understand why certain things are unacceptable. We need role models and mentoring. Those who have succeeded by dint of hard work and honesty must show the way.
Where Can I Find Out More?
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