John Rogers, CFA 19 October 2011

1. John Rogers, CFA 19 October 2011

2. PRINCIPLES TO LIVE BY • Clients come first • Functioning capital markets depend on trust • Ethics are fundamental to market integrity • Clients demand ethical conduct from managers – not just good performance

3. EFFECTIVE THINKING BEGINS WITH: • Becoming more conscious about your thoughts and behaviors, to increase the likelihood that you will notice and act on ethical issues before they become destructive. • Recognizing that ethical dilemmas are a normal and predictable part of most jobs. • Discussing approaches for dealing with ethical issues.

4. THE SITUATION VS. DISPOSITIONAL • Situational influences have more to do with unethical behavior than a person’s character. • “Under the right conditions good people can be induced, seduced, and initiated to act unethically.” • Philip Zimbardo, Professor Emeritus, Stanford University 4

5. Behavioral Finance & Ethical Decision Making • Both focus on cognitive biases that can influence our ability to make rational and ethical decisions. • Behavioral Finance: representativeness, anchoring, loss aversion. • Ethical Decision Making: obedience to authority, conformity, incrementalism, group think, overconfidence

6. OBEDIENCE TO AUTHORITY • We are less likely to take part in unethical actions on our own than when requested by a supervisor. • We want to please authority • this may lead us to carry out instructions without thinking about the ethical implications • Supervisors rarely directly ask us to perform unethical activities, instead they infer it based on incentives. • Rationalizations: • “I want to be a team player, I want to be loyal.” • “I was just following orders.”

7. CONFORMITY • We often take our cues from our “reference group” about the proper way to act. • We become acculturated to behavior and we assume that this behavior is normal and acceptable. • We conform our judgments to the judgments of our reference group. • Rationalizations: • “Everybody else does it, so it must be okay.” • “It’s how you succeed around here.”

8. INCREMENTALISM – THE SLIPPERY SLOPE • Unethical behavior often occurs when we subconsciously lower our standards over time through small changes in our behavior. • Rationalizations: • “Everybody else does it, so it must be okay.” • “It doesn’t really hurt anyone.” • “It’s not a big deal.”

9. GROUP THINK VS. INDEPENDENT THINKING • Being in a group lessens our individual feelings of accountability and responsibility. • Our moral doubts are assuaged by the group’s concurrence. • Rationalizations: • “We are a good and wise group.” • “If we do not do it, someone else will.” • “This is the way it has always been done.”

10. OVERCONFIDENCE • We tend to believe that we are more honest and fair minded than our peers and competitors. • This often leads us to make decisions that have ethical implications without engaging in serious reflection. • Rationalization: • “I am more ethical than they are, it won’t happen to me.”

11. FRAMING • Objectives are often framed to focus on one factor (AUM, bonuses, stock price). • we often overlook or justify behavior if it leads to the achievement of that goal or objective. • Rationalizations: • “That is the way they do it at Firm X, so it must be okay.” • “If we do not do it, someone else will.” • “Smart people created the incentive structure, I’m just responding to it”.

12. WEBB • Webb, the assistant to Dunn, a Vice President at FB Inc. is responsible for submitting Dunn’s travel and entertainment expense reports. Webb has encountered problems collecting some of the receipts to support Dunn’s expenses. Because the missing receipts are usually for small amounts, Webb has learned to “override” the accounting system when he submits Dunn’s expense reports. Recently Dunn returned from a business trip with some large expenses that he does not have receipts for. When Webb inquires about the receipts, Dunn responds “I paid cash for these expenses and I don’t know where I put the receipts. Just override the system, like you usually do.” Webb submits Dunn’s expense report without the missing receipts. Webb’s actions are: • OK, because he is following Dunn’s instructions. • Probably OK, because Dunn has often lost receipts before. • Probably not OK, because he is “overriding” the accounting system. • Not OK.

13. THE FILES • Your boss, who hired you and has mentored you for the past three years is being “let go.” A week before he is scheduled to leave, he places a stack of files on your desk and asks you to copy them, because he will need them in his job search. The files contain research reports that he wrote, marketing presentations containing his performance record, and spread sheets that he created. What should you do? • Copy the files. • Refuse to copy the files. • Dispose of the files. • Only copy certain files.

14. THE GAME • You accompany your boss on trip to visit institutional clients. You are both football fans and your favorite teams are in a “playoff game” in the city you are currently visiting. Although it is against company policy to charge sports tickets on the company’s credit card, your boss tells you to purchase the tickets on your credit card, and he will approve the charge when you submit your expense report. What should you do? • Refuse to go to the game. • Pay for the tickets yourself. • Charge the tickets on your company credit card. • Tell your boss to pay for his own ticket.

15. CREATING AN ETHICAL CULTURE • Research has found that: • The finance profession tends to attract individuals with narcissistic tendencies. This personality profile has a higher propensity toward bending the rules in order to get ahead. • Organizations which are more democratic are associated with an increase in ethical behavior and a greater willingness of employees to take responsibility for their behavior. • When ethical behaviors are reinforced in an organization, these behaviors increase; and vice versa

16. CODE OF ETHICS www.cfainstitute.org