1. ETHICS IN FINANCE Doing the right thing is the best thing.
Senior Seminar in Finance

2. Ethics in Finance Ethics Integrity
A set of principles of right conduct
Integrity
Doing the right thing according to your ethical
standards
Senior Seminar in Finance

3. Ethics in Finance Ethical issues permeate most financial activities
Ethical behavior is everybody’s concern
Senior Seminar in Finance

4. Ethics in Finance Vulnerable person One typical path to problems
Job stress and/or insecurity
No prior consideration of ethical issues
Existing conflicts of interest
Failure to consider implications of situations and their consequences
Failure to be aware of organization’s ethics
policies and practice; haven’t identified the person
to “talk to” if problems arise
Senior Seminar in Finance

5. One typical path to problems
Ethics in Finance
One typical path to problems
Vulnerable organization
No real ethics code or practice in place
Poor risk management controls
Culture of aggressive growth in sales and profits
Very high short term pay incentives linked to stock
price, sales, or profits
High levels of debt
Market downturns reveal “cracks”
Senior Seminar in Finance

6. Ethics in Finance The “slippery slope” One typical path to problems
Vulnerable people or organizations encounter a cascade of unanticipated problems requiring the handling of bad news.
In a world of grey, decisions are made to “bend”
the rules to eliminate or minimize the bad news.
This decision is made to “get by” until circumstances change to make current situation better.
Senior Seminar in Finance

7. Ethics in Finance Consider this question:
One typical path to problems
Consider this question:
If faced with the following options, which
would you choose?
a sure gain of $2,500
a 25% chance of gaining $10,000, but
a 75% chance of no gain
Senior Seminar in Finance

8. Ethics in Finance Now consider this question:
One typical path to problems
Now consider this question:
If faced with the following options, which
would you choose?
a sure loss of $7,500
a 75% chance of a $10,000 loss, but
a 25% chance of losing nothing
Senior Seminar in Finance

9. Ethics in Finance The “slippery slope” One typical path to problems
The resulting situation either gets better or worse.
If the situation improves, then the breach may go undetected (until problems arise again).
If the situation deteriorates, another round of
decisions is required: do we continue to “bend”?
Senior Seminar in Finance

10. Ethics in Finance The “slippery slope” One typical path to problems
At some point, the “bending” of rules becomes
clear violations of standards and a “lie”.
At some point, the situation is detected by
management or the public, requiring a response.
Once public, a decision is required: lie/spin or tell
the truth?
Senior Seminar in Finance

11. Ethics in Finance The “slippery slope” One typical path to problems
Once lying is detected, consequences usually
occur:
loss of confidence in person or organization
loss of employment; career damage
legal or regulatory sanctions
Senior Seminar in Finance

12. Ethics in Finance Creates sustainable business
Why be ethical?
Creates sustainable business
Creates trust in individual and organization
Builds teams and leadership
Builds reputation, career, conscience
Senior Seminar in Finance

13. Ethics in Finance
Ethical decisions consider long term consequences
over the short term
Emphasis on short term financial goals may create problems in the longer term
Proper management pay and incentives can
help address this problem
Senior Seminar in Finance

14. Ethics in Finance Ethical decisions consider financial risk taken
Financial leverage can enhance shareholder returns and competitiveness
Tendency is to “leverage up” with debt during expansionary periods, making firm too risky when market downturns occur
Proper financial policies can help prevent
undue risk to be taken
Senior Seminar in Finance

15. Ethics in Finance Who is affected by a business decision?
Ethical decisions consider all stakeholders
Who is affected by a business decision?
Shareholders, lenders, and management
Employees
Community
Suppliers
Customers
How will actions and decisions affect each group? What are the consequences?
Senior Seminar in Finance

16. Ethics in Finance The “triple bottom line” versus focus only on profit
Emerging “social” ethics in Finance
The “triple bottom line” versus focus only on profit
Maximizing firm value focuses on creating a long
term, sustainable enterprise through focus on:
Environmental issues (“planet”)
Social issues (“people”)
Economic results (“profit”)
Senior Seminar in Finance

17. Ethics in Finance Improper revenue recognition
Typical financial/accounting problem areas
Improper revenue recognition
Mis-classing expenses or accruals
Hiding debt
Greatly overestimating expected revenue
Greatly underestimated expected expenses
Senior Seminar in Finance

18. Ethics in Finance Investment related
A list of ethical issues in Finance
Investment related
“Churning”
“Front running” trades
Insider trading
Socially responsible investing (SRI)
Senior Seminar in Finance

19. Ethics in Finance Labor Deceptive sales practices Lending
A list of ethical issues in Finance
Labor
Outsourcing, workplace safety, worker rights
Deceptive sales practices
Lending
Overcharging, discrimination
International
Kickbacks, bribes
Senior Seminar in Finance

20. Ethics in Finance Executive compensation
A list of ethical issues in Finance
Executive compensation
Compensation levels
Short term incentives versus long term
performance
Backdating stock incentive options
Golden parachutes
Senior Seminar in Finance