Why Ethics Codes Don't Work

Making codes of ethics work in the financial services industry requires defining self-interest in terms of the code's values. The recent stock market downturn brought to light numerous legal and ethical transgressions committed during the euphoria of the 1990s market boom. Various government and judicial authorities are investigating the behavior of investment bankers, securities analysts, and other individuals engaged in the finance industry.All this attention being paid to the finance profession is clearly not flattering. Although some of the allegations may prove unfounded, the evidence already brought to light is sufficient cause for concern. The behavior of some finance professionals, whether acting as individuals or under the auspices of an organization, appears to have fallen well short of what would generally be regarded as professional conduct.Ironically, at the same time, ethical guidelines and codes of conduct have never been more widespread in the financial services industry. Professional certifications, such as the Chartered Financial Analyst (CFA) and the Certified Financial Planner (CFP) designations, involve a significant ethics component. Few contemporary financial services professionals, therefore, can have escaped some exposure to guidelines on ethics and professional responsibility. So, why have some individuals ignored even the most basic precepts of these guidelines?My answer involves acculturation—that is, implicit education into a certain moral value system. Individuals become acculturated by the day-to-day behavior they see around them because they assume such behavior is what is rational and acceptable in their field. In the financial services industry, the implied moral education comes through exposure to the value systems displayed in their educational institutions, the industry, and their firms, particularly by the senior managers of a person's firm. For most individuals, acculturation begins, however, with the values espoused in business schools. There, students are persistently taught neoclassical economic rationality—a narrow, utilitarian notion of what constitutes rational, and thus reasonable, behavior.Neoclassical economic rationality focuses on a narrow notion of self-interest. It promotes the idea that the only conceivable justification for individual behavior is the persistent, atomistic, exclusive, and endless pursuit of personal material wealth. In financial economic theory, rational agents are always assumed to be material opportunists who will readily jettison honesty and integrity in favor of guile and deceit whenever the latter are more likely to maximize some payoff function; indeed, to act other than opportunistically is, by definition, irrational. Used out of context in an educational setting, this construct inculcates business students and professional trainees with an implicit moral agenda that is very different from that espoused by professional codes of conduct.For codes of ethics to work, therefore, finance professionals must be acculturated into the realization that premising behavior on honesty or integrity is in no way irrational; it is not contrary to their self-interest once self-interest is correctly defined in terms of pursuing goals set forth in the code of ethics. To place the values of honesty and integrity above all others is as rational as to place the value of material opportunism above all others. This equivalent rationality is the essence of any sound code of ethics, and it is a lesson that sorely needs to be taught to many in the financial services industry.To imbue finance professionals with a morally sound notion of professionalism requires—first and foremost—that the inconsistency in rationality concepts be addressed. The behavior espoused by professional codes of conduct must be reconciled with the economic rationality implicit in organizational culture.