Teaching Ethics in Finance Curricula: Personal and Institutional Virtues in Financial Markets
Ignacio Ferrero
University of Navarra
Marta Rocchi
University of Navarra and Markets, Culture and Ethics Research Centre
Introduction
This chapter is aimed at describing how ethics can be integrated in finance curricula. Ethics is a rational approach to human action searching for moral truth. It analyzes the moral quality of human action in order to pursue excellence and happiness (individual ethics) and the good of society (institutional ethics). Finance Ethics, therefore, moves along these two main lines: on the one hand, the individual side of ethical analysis in finance, as it relates to individual choices and behaviors of financial operators (private investors, brokers, traders, CEOs, boards of directors) and their personal virtues, and on the other hand, there is the inquiry about the contribution of financial activity to the common good of society.
This chapter helps in linking the technical method of teaching finance with a broader view of the ethical discipline: enlarging the traditional normative approach to ethics, which reduces ethics itself to personal or corporate codes of conduct, providing a guide to acting well, and helping managers “to harmonize doing good and doing well.”1 We propose to apply the virtue ethics approach, integrated by the goods–norms–virtues triad, to the whole field of finance. In order to make this approach more useful, the chapter describes the material to be used in class. We provide two cases, Margin Call 2 and the case entitled Holders, for the study of individual ethics in financial decision making. We also suggest using the documentary Inside Job to analyze the effect—both benefits and possible damage—that the financial sector has on society.
The Finance Discipline and Ethics
The financial sector plays an important role in the economy as it channels savings toward investment, through managing risk and facilitating payments. Thanks to finance, most of society (individuals and companies) has access to credit enabling them to produce, invest, and consume at higher levels than current resources allow. Its relevance is confirmed by the close relationship between the degree of development of the financial sector and the GDP per capita.3 The development of new financial products and new ways of leveraging has favored enormous economic growth and has brought about a more bearable dispersion of risk.
However, the recent financial crisis, which has become a global crisis, has caused the financial sector to come under suspicion and scrutiny. The causes that have led to this crisis are many and intertwined and many stakeholders have played a part in its culmination including monetary authorities with their expansive and contractionary policies; regulators and supervisors who acted with little diligence; financial engineers who created the mortgage-backed securities and other highly complex products without properly analyzing their potential impact; rating agencies, whose professionalism has been questioned; debtors who insisted on and executed unsustainable debt recovery practices; real estate companies that did not accurately calculate the risks they were taking; security agencies who forgot their guarantor role; and above all the banks, who granted mortgages and loans without assessing the risk, while some of them went as far as understating debts in their balance sheets to avoid regulatory limits.
These questionable practices have brought the dimension of financial activity to the forefront of debates and discussions.
The crucial question is how it is possible to conduct an exhaustive ethical analysis of the financial landscape. Among the ethical models that can be applied to banking and financial activity, we consider the so-called “virtue ethics” the most appropriate framework in which these activities can be analyzed and assessed from an ethical perspective. In this manner, we join a strong and increasing current proposing virtue ethics as the method for teaching business ethics.4
Virtue ethics considers the triad of goods–norms–virtues derived from the Aristotelian–Thomistic approach to anthropology and ethics. Relying on just one of the cited elements leads to a system that could either be utilitarian (prevalence of goods), idealistic/strictly normative (prevalence of norms and rights), or perfectionist (prevalence of virtues). The deontological school (rights- and norms-based) focuses exclusively on codes and compliance, considering behavior exclusively in its conformity with universal rules of justice and rights without reference to context or results, while the consequentialist school or utilitarianism only judges action by way of a cost–benefit analysis of consequences for the greatest number. Deontology has prevailed in theory, while utilitarianism, with hardly any regard for norms or values, has been dominant in practice.5
Virtue ethics, on the contrary, integrates the advantages of both deontology and utilitarianism. Like deontology, it subscribes to universal principles (norms), and like utilitarianism, it considers overall results (goods). But unlike deontology, virtue ethics pays attention to the particulars of agents (motives, intentions, relationships) and actions (circumstances, community); and unlike utilitarianism, it maintains that exception-less prohibitions do exist. Quite distinctively, virtue ethics establishes a two-way causal relation between what the agent does and who that agent becomes, emphasizing habits (virtues) and character development. We believe that these combined features make virtue ethics a more balanced and nuanced framework than either deontology or utilitarianism from which to evaluate human action,6 and consequently, it is a valid and excellent option for finance ethics.
The traditional approach to finance ethics is deontologist (norms-based), which focuses exclusively on codes and compliance. It assesses behaviors exclusively in their conformity with codes of conduct or ethical standards. Most prevalently cited in literature on finance ethics is the Standard of Practices of the Chartered Financial Analyst (CFA) Institute,7 which is an ultimate learning subsidiary for the teaching of ethics in finance curricula, and the series Integrity at Work.8 A good example is the work of Boatright,9 an author who has systematized the field of finance ethics into four main macroareas: retail-consumer, investment, financial markets, and financial management. References include Melé10 for a synthesis of mainstream ethical theories and Koslowski11 for a synthesis about the necessity of an ethics based on goods–norms–virtues.
Typical Ethical Issues—With Examples
Typical Ethical Issues–Personal Level
From the point of view of personal ethics, virtue ethics considers the exercise and development of virtues in financial activity, which is not different, in general terms, from the exercise of virtues in other spheres.
We begin with the definition of virtue and the four main virtues of the Aristotelian–Thomistic tradition (prudence, justice, courage, and temperance).
Virtue
A virtue can be defined as “a freely acquired habitual disposition or trait of character that enables one to perceive, deliberate, decide, act, and experience emotions in a proper way (i.e., in accordance with reason–practical wisdom, in particular situations). Although virtue is not the only element, it is considered the controlling factor to attain eudaimonía (human flourishing).”12 In this definition, we understand some details to be particularly relevant, primarily, happiness as the sought-after end of human existence. Secondly, moral life as a place of development of choices made in order to reach the goal of being happy.13
Main Virtues
We analyze the four virtues14 considered as the fundamentals for a good human life.15 For each of these virtues we will give a general description and an exemplified but not exhaustive list of the ethical themes associated with the exercise of that virtue. For brief descriptions of each virtue, delineated according to the language of business, we make reference to Melé.16
Prudence
Prudence, or practical wisdom, is the virtue that enables us to judge between possible actions that are appropriate at a given time and place, choosing the adequate means to realize them.17
Ethical questions linked to the exercise of prudence:
Management of information: respect the confidentiality of clients, colleagues, and organizations. In the world of finance, managing an investor’s portfolio could involve dealing with a variety of personal issues of the client.
Lending credits: suitability, balancing the trade-off between risk and safety. It is interesting to consider the recent mortgage lending process.18
Conflict of interests: maintaining the right balance between the interest of clients and of the company (see case study Holders). Among the possible examples, the functioning of credit rating agencies and the related issues of payments, rating shopping, and so on.19
Form of investment: not only “how” to invest, but also “why” and “for whom.”
Securitization-related issues: balancing the elements of the investment pool, ethics of risk transfer, asset quality, CDOs and opacity, and so on.20
Decision-making process: the virtue of prudence guides all the processes necessary to make decisions (see case study Margin Call ).
Temperance
Temperance is the virtue of moderation or voluntary self-restraint.
Regarding individual ethics in finance, temperance helps individuals to restrain the quest for money, responding adequately to the question “how much is enough?,” and to exercise moderation when undertaking risks. The last financial crisis has placed the irrational exposure to some excessively high risk products under the spotlight. It is crucial to the financial system to equalize the trade-off between risk and safety in the search of profits (see Inside Job).
Ethical questions linked to the exercise of temperance:
Assumption of risk: temperance manages the level of risk according to the risk profile of investors (risk-lovers, risk-averse, and risk-neutral). On this point see Ebert and Wiesen.21
Risk management: identification, assessment, mitigation and management of different kind of risks: strategic, reputational, operational, financial, or compliance related risks; the management of the investment portfolio; diversification.
Requirement for a reasonable amount of credit: issues related to the exercise of temperance are similar to issues related to the exercise of prudence. As for the amount of credit, this is an issue of temperance on the client side: How much is enough?
Fees and commissions. This is a broader issue that is closely related with justice: the right amount of compensation and the right method reflect both an attitude of equilibrium (as for the quantity) and an observance to what is right (as for the chosen method). Usually, a portfolio manager’s earnings are commensurate with the portfolio’s performance—the more the portfolio gains, the more he or she earns. Even though such compensation might seem fair, a commission-based system could give rise to phenomena such as “churning” (defined in the section about justice).
Incentives: how managers assume long term risks, being their performance based on short-term results.
Courage
Courage is the requisite to act firmly and immovably in the search for the good in the midst of difficulties. In the world of finance this means knowing how to confront moments of crisis without taking preemptive shortcuts that are not always morally good. Sometimes crisis justifies weakness, but the virtue of courage strives for perseverance in the pursuit of the good, though it is by no means of the easiest route.
Ethical questions linked to the exercise of fortitude:
Managing crisis.
Managing bankruptcy.
Reorganizing structures in the period following the crisis.
Corporate governance.
Corporate identity and everyday choices.
Investment in start-up companies: This is a particularly strong aspect of entrepreneurship.
Herd behavior and investment: About management behavior, this would mean managers follow investment of their peers in other companies, having a smaller compensation, but saving their reputation.22
Justice
Justice consists of the constant and perennial will to give each person what is due to him or her (ST II-II, q. 58, a.1 c).23
The violation of justice is known as abuse: the appropriation of the goods that belong to others through theft or fraud. Theft consists in the subtraction of a good, while fraud consists in the subtraction of a good by means of deception. Cheating falls under the category of fraud. Other cases of injustice include abuse of power, corruption, and extortion.
In the study of justice, we also insert the use of language: calumny or defamation, stealing from a person his reputation or honor (contumely). Moreover, we should consider the issues regarding truth, since lies are contrary to justice. There is also the violation of secrets in the professional field, along with rash judgment: The act of judging someone to be guilty without enough information to judge.
All of these violations against justice although grave, are reparable. Restitution of a good taken or compensation for damages made are examples of reparation in the sense of justice.
Ethical issues linked to the exercise of justice:
Truth and transparency of information.
Diffusion of reserved information.
Insider trading and management of material nonpublic information: who has information not publicly available and that could affect the value of an investment “must not act or cause others to act on the information.”24
Sales practices: relations with clients, proposal of products, concealment of relevant information.
Short selling.25
Compensations: both executive compensation (in general;26 on executive stock option27) and employee.28
Deception: “A person is deceived when that person holds a false belief as a result of some claim made by another.”29
Churning: “Excessive or inappropriate trading for a client’s account by a broker who has control over the account, with the intent to generate commissions rather than to benefit the client.”30
Twisting: “A practice by insurance agents of persuading a policy-holder to replace an older policy with a newer one that provides little if any additional benefit, but generates a commission for the agent.”31
Flipping: same practice of twisting, but in consumer loan business.
Money laundering: Transformation of monetary gains derived by an illegal activity into a legal asset.
Taxation (tax heavens, tax evasion).
Late trading:32 Trading after 4.00 p.m. in order to take advantage of new information. It is quasi-legal but many funds practice it.
Personal trading: A manager investing in a fund managed by himself. A good signal for investors on one hand, a different and privileged perspective on information on the other.
Typical Ethical Issues—Institutional Level
This part of ethics deals with the way in which the financial markets are structured and products are distributed. While individual ethics tends toward the happiness of the agent, social ethics concerns the betterment of society. To analyze the role of financial markets in the pursuit of a good society, the book “Finance and the Good Society” by Nobel Prize winner, Robert Shiller33 is particularly insightful since he takes into consideration, figure-by-figure, the operators of the financial world. In the second part of the book, Shiller provides a systematic framework that synthesizes interactions between technical and human elements. The author individuates the good of finance in the rediscovery of its original ends, and treats its contracts and products as means to these ends, not as ends in themselves.
From the point of view of social ethics, the most interesting analysis of human conduct is under the virtue of justice. Justice has many implications in the personal lives of the operators of the financial market, but this also begs questions about the reasons for financial activity and how they came about.
Besides, this part of the subject can be amplified with other issues such as finance and inequality, determination of the interest rate level, speculation, hostile takeovers, debt, propriety, opportunity, and philanthropy among others.
A Teaching Strategy for Ethics
The teaching strategy is a “Level 3 integration.”34 Dobson develops a threetier approach for teaching ethics in finance curricula. The first level consists of making the students aware of the behavioral assumptions behind finance (e.g., the axioms of rationality and financial models).35 Applying a “Level 2 integration” means to take time during finance classes to discuss appropriate cases about ethical dilemmas in finance. “Level 3 integration” means bringing an ethical reasoning into the discussion, in this case virtue ethics, which provides arguments to solve the dilemmas. This step will become the starting point to launch a specific course on Finance Ethics.
The teaching tools provided in the present chapter are meant to develop both Level 2 and Level 3 integration. The professor could choose not to modify his or her syllabus, and arrange the schedule in order to add case study discussions. The provided framework about personal and institutional ethics could be expanded to become the structure for the syllabus of a course in Finance Ethics.
It is important to highlight one of MacIntyre’s latest contributions to teaching ethics in finance curricula, artfully entitled The Irrelevance of Ethics: “we have no good reason to believe that the teaching of ethics through academic courses can be effective in bringing about moral transformations”; as a second conclusion he claims that “an effective education into the virtues would in fact disqualify one for a successful career in the financial sector”; and his third conclusion is that “the present content of even an ethics of the virtues is such and the ways in which we think about money are such that we are generally at a loss when we try to connect them.” His question at the end is: “How are we to make ethics relevant?”36 This is the valuable effort of the whole handbook and of this chapter in particular: To respond to MacIntyre to demonstrate that there is goodness in financial activity in its original formulation, so the relevance of ethics could be reaffirmed by the education of financial agents in the restoration of this goodness by developing personal virtues and helping in building more just financial institutions. In this way, acting virtuously will be rewarded. Moreover, in the words of Khurana: “These institutions gain legitimacy through a commitment to serve society and the common good.”37
Advice for Teachers
The most important advice for teachers is to make the subject lively. We do not study ethics in order to know what the good is, but to become good,38 hence the study of ethics could not remain in the theoretical field. It should address real cases. In this sense, the case study method is really effective (see literature indicated in the following list). In particular, in this chapter we encourage teachers to use movies and testimonials: The abundance of details in the description of characters and situations helps to bring the situations to life. Using movies in class also stimulates the relationship between the reality as shown by the news and the theory taught in class. It would be very convenient to include the testimonial of a practitioner, testifying that doing good and doing well in finance is possible.
In addition to the proposed cases at the end of the chapter, here we provide some references for:
Efficacy of narrative or case study in teaching ethics: Hosmer and Steneck (1989), Champoux (1999), and Huczynski (2004).
Contributions of using movies as pedagogical resource in class: Belden (1992) on Wall Street; Chan, Weber, and Johnson (1995) on Other People’s Money; Van Es (2003) on The Insider; Cox, Friedman, and Edwards (2009) on Enron: The Smartest Guy in the Room; Biktimirov and Cyr (2013) on Inside Job; and Werner (2014) on Margin Call.
(We would like to emphasize that these references do not deal with a virtue ethics approach.)
Developing Versus Developed Country Perspectives
The main ethical issues previously raised are common to the whole financial system: globalization and financialization are advancing in the same direction, so each financial phenomenon is potentially replicable everywhere. Thus, the indicated teaching tools are useful for both developing and developed country domains. However, substantial differences cannot be ignored. The perspective of developing countries is different in the sense that there is more than one issue of justice related to the use of resources. For example, the ethical aspect of financial outflow, estimated at 10 percent of GDP (data from the Griffiths report)39 has to be explored. Among these outflows, we have to consider illicit financial outflows defined as “illegal movements of money or capital from one country to another that are illegally earned, transferred, and utilized. These illicit flows can come from corporate tax evasion, criminal activity like drugs or human trafficking, or corrupt public officials siphoning off government funds for personal use.”40
We would suggest that ethics researchers and teachers start to document cases on this particular issue since the literature is not yet well developed in this area.
Summary and Conclusion
This chapter offers essentially two contributions: an outline of the personal and social ethical issues in finance addressed from a virtue ethics perspective and a narrative on learning instruments to tackle ethical issues in finance. The theoretical frame on personal and systemic virtues permits the classification of the themes that emerge from cases and collocates these within the discipline of ethics: the study of prudence, temperance, courage, and justice according to their definition constitutes the guideline for the study of ethical dilemmas in the financial sector. The unavoidable question posed by the philosopher MacIntyre about the (ir)relevance of ethics in the financial setting helps in the inquiry about the goodness of financial activities and stimulates the debate on the interaction between personal virtues and the institutional framework. This theoretical approach along with the use of cases makes effective the teaching of ethics in a finance course, in such that the students are called to engage first-hand, identifying with and taking positions with respect to concrete situations.
Suggested Exercises/Projects
Following on from the classification we made into two specific domains, individual and institutional or social, we can suggest some exercises to study the issues related to each domain.
We think the financial crisis and its consequences on the real economy is the perfect frame for a rigorous analysis of the ethical implications of finance and banking and the role to be played in achieving the common good of society.41 A realistic portrait of the crisis is given by the documentary Inside Job,42 with its correlated “Official Teacher’s Guide,”43 and other articles appeared about its effectiveness as a teaching tool.44
Therefore, the institutional or social issues can be addressed through the documentary Inside Job, or other similar movies or programs.
To undertake the individual dimension of the ethics of finance, we provide a case study on the movie Margin Call. The case study Holders leads the discussion about a conflict of interests in sales practices.
Margin Call: John Tuld in the Overnight Meeting
Margin Call is a film depicting the high-tension 32 hours of an investment bank that discovers that its financial holdings are essentially worthless because it has become highly overexposed in the risky trading of mortgage-backed securities and the entire market is set to implode, triggering what the bank leaders know will become a global financial crisis. In a 10-minute overnight meeting, the CEO, John Tuld, must make a difficult choice for the firm and for himself.
We suggest showing the 10-minute excerpt of the overnight board meeting in class. The teacher should contextualize the meeting in the atmosphere of the movie: Read carefully the Werner (2014) paper on Margin Call and watch the movie in order to understand the big picture. Then, use the following questions to highlight the moral features involved in the meeting. In particular, the proposed questions are about the CEO John Tuld.
Synthesis
Peter Sullivan, a young risk analyst, discovers that the bank’s portfolio of assets had become excessively overexposed to subprime mortgages that have been repackaged into tranches of securitized instruments. Without this analysis, these assets appeared to be very valuable, while they are actually utterly worthless. After the explanation of the situation, John Tuld draws the conclusion that the bank should sell all its junk assets. Tuld asks Sam, head of the trading floor, to simulate the actuation of his strategy. He describes an early morning session with everyone left on the trading floor team, with the goal of selling the entire portfolio of MBS in the bank’s holdings. They know that not only are they violating the standard norms of business, but also that their actions could invite the intervention of federal agents.
John Tuld—Class Exercise
Provide a list of John Tuld’s characteristics.
What does his speech on “music” mean? What are John Tuld’s main competencies?
What is John Tuld’s purpose?
Compare the list of John Tuld with the description of the parts of prudence.
The following table shows the parts of prudence as reported by Aquinas in his Summa Theologiae. The second column contains the description of each part of prudence, and the third column gives their application to Tuld’s behavior.
The exercise is about understanding that even if Tuld appears to develop in his decision-making process all the parts associated with prudence, he is not a prudent man, but rather astute. This means that the purpose of his pursuit is not good: His objective is to sell a valueless product.
Parts of prudence |
Description |
Parts of prudence in John Tuld |
Memory |
Knowledge of the past |
The knowledge of the past in the case of John Tuld relates to the data about the past (volatility index and historical series). This is the knowledge that Peter Sullivan has and shares. |
Reason |
Way of using the knowledge acquired |
Tuld applies what he knows to what he chooses to do. |
Understanding |
Knowledge of the present |
The acquisition of present knowledge for Tuld is achieved thanks to Peter Sullivan’s explanation. He has related the data to what he knows happened in the Investment Division. |
Docility |
Capability of knowing through the counsel and experience of the others |
Tuld can be seen as “docile” when he asks Peter to explain the situation “as you might to a young child or a golden retriever.” |
Shrewdness |
Capability of discovery through personal research |
His presence in the overnight meeting shows Tuld’s will to be personally informed and his way of using the truth that he has obtained in order to achieve his desired ends. |
Foresight |
Capability of proportioning present means to the future purpose |
In the world of finance this virtue could be translated as not investing more than one has, or more than it is reasonably possible to loan. The technical instrument to guarantee foresight in financial markets is margin. In the case of Tuld, what is possible to notice is the proportionality of the decision he makes to the future purpose he has in mind, which is to do whatever is needed to minimize the loss of money. |
Circumspection |
observation of circumstances in linking means and ends |
This could be viewed as being conscious of the state of the market. Tuld’s circumspection consists in him availing himself of the data he acquires about the present situation so as to achieve his desired end. |
Caution |
Capability of avoiding obstacles |
Put in the vocabulary of the financial market, this would represent the capacity to minimize the impact of financial crises. In this sense, Tuld finds himself in the middle of an inner financial crisis. His caution is manifested in his strategy to avoid the obstacles to achieve the desired outcome of minimizing losses. Obstacles: limited time, market functioning, loss of reputation, potential “arrival of the Feds,” and the future of the institution. |
Conclusion
Even if technically smart or legally allowed, the object of an action defines the moral feature of the action itself. In this case this means that even if John Tuld is acting in an astute way, he is still asking his traders to sell valueless products. To better understand this point, it is possible to say that someone is a good thief, because he can pass unobserved and silent, and be precise; but it is not morally acceptable to steal.
Holders
Case Study
Javier has recently been promoted as director of a bank branch for his brilliance, even though he has only had a short career at Bank Holders. Sitting in his new office, he looks back with satisfaction at the work he has done so far. Apparently there is not a single blemish on his record, but he knows that one exists. Nobody knows it, but there is something he is ashamed of. It happened more than 2 years ago, in September 2007, and he cannot forget it.
A few years ago, Luz, a retired lady and regular customer of the bank, asked some advice on how to invest €25,000—almost all her savings—in something that could give her a good return. She was planning to give all the money to her only daughter, but she wanted to benefit from the interest so that she could buy a wedding gift for her granddaughter, who was about to get married in the near future.
Javier is an honest person, but Luz’s request came to him during a difficult time in his life. Just some weeks earlier, the representative of the board had urged (almost intimidatingly) all the employees of the office to support a certain company on the stock market, because the bank had a vested interest in increasing the value of the company.
Based on his boss’ behaviors, Javier knew that such an urgent recommendation reflected the company’s weak financial situation, perhaps temporary, and that it suited the interests of the bank to promote a capital injection by small shareholders. From the rest of the data, he could conclude that profit would be made only if the company goes further, but that the risk was higher than the usual risk in these cases. Without making further inquiries, partly due to lack of time and because the amount invested was not very high, he advised her to invest €25,000 in that company. He knew that it was all her savings. As Luz did not know anything about this kind of business, she took his advice.
A year later the company went bankrupt, and Luz lost about €20,000 in this investment, although she was able to get something back a few years later. Javier was embarrassed for having recommended the investment. He knew he did it for personal reasons, because he wanted to have more prestige at the bank following the directive of the board in this high-risk operation. In addition, at a certain point, he told Luz that the investment was safe, without disclosing the significant risks of the operation.
Javier is a little anxious and, although he has tried to forget what has happened, he feels responsible for the losses that Luz has suffered.
Questions
How do you see Javier’s ethical and professional approach?
Does Javier have the obligation to give the money back or try to repair the damage done to Luz? (see MiFID—Markets in Financial Instruments Directive).
Which concepts and ethical dilemmas are linked to this case?
Does the bank have any obligation to help Luz?
Teaching Note
Aim: Establishing arguments about ethical dilemmas in advisory activities, such as conflicts of interests, privileged information use, and nature of contracts.
How do you see Javier’s ethical and professional approach?
The first thing that appears evident is Javier’s conflict of interest between the professional prestige he yearns for following the directive of his directors and the proper investment advice given to Luz.
Dilemmas of a financial adviser:
Obedience to the entity in its objective to maximize benefits.
Customer consulting.
You can discuss the different positions of “caveat emptor” (exclusive responsibility of the customer) or “paternalism.” Neither one nor the other is good, but facing the dilemma about which information must be given to the customer, the answer is that the information should be complete and relevant. Obviously the degree of relevance will depend on the type of customer. As there have been many abuses in these advisory activities that take advantage of customer ignorance, the MiFID was created in 2004.
This standard measures the customer profile and based on their knowledge, as measured by a test, the adviser must provide more or less information or use more or less paternalism in his or her capacity as adviser.
Luz is clearly a retail customer, so we can say that Javier has engaged in improper professional and perhaps unethical conduct.
Javier suspected that it was a very risky operation, which could have been interpreted as speculative rather than a proper financial investment with its corresponding returns. He should have asked the representative at the board meeting for further information about the company’s financial situation and outlook, so that he could have adequately informed his customers by making the appropriate inquiries. Lack of time or the size of the investment (which is always relative, for Luz it was not a small amount of money) does not justify irresponsible behavior. He did not inform Luz of the attendant risks of the investment—which Javier only suspected without studying it properly.
Fidelity to the bank, which implies that the employee tries to do everything that benefits the company and avoids what might harm it, does not justify that Javier had to follow the bank’s directive without any exceptions. He should have raised the conflict he faced and any concerns he had with his superiors. He should have been aware that he was responsible for his actions, and not rely on the insistence of the bank’s governing board as an excuse to shirk this responsibility.
Since the case study takes place in Spain, Javier also breached the code of the European Financial Planning Association (EFPA [www.efpa-eu.org]), which Holders undersigned, specifically Articles 1 (integrity), 2 (transparency), and 3 (primacy of the customer).
From a moral point of view we should analyze the objective, purpose, and circumstances:
Objective: “Investment advice.” It seems morally irrelevant.
Aim: It seems to earn points for Javier’s personal career while at the same time it clearly prejudices Luz’s position.
Circumstances: They are aggravating, because Luz is trying to invest all her savings.
Does this advice imply the obligation to give the money back? There is a responsibility to repay the money. It was a voluntary act in terms of the cause, which means that even if the consequence was not desired, it was possible to foresee it, and hence the action was avoidable. There is a responsibility party for the caused harm.
The problem is to understand and assess the probability that the operation was going to be successful. Chance has its part in this game, but this was neither a fraudulent act nor one of clear deception. Hence, money has to be returned, but it is up to Javier to decide how much. Legally, there is no such obligation even if it was argued that the contract was invalid, since the suspicion of deception is difficult to prove.
The responsibility of the bank is mitigated because the one who acted was the adviser, Javier, who was supposed to interpret the bank’s instructions. Still, it is clear that the bank’s practices are dubious.
If the case had taken place after the promulgation of the MiFID’s regulatory standards, there would have been a legal obligation for the bank to repay the money with interest.
The relationship between the Javier–Luz case and CFA standards.
Conflict of obedience:
Obedience and loyalty to the company (CFA Standard IV).
Advice to client. Obligation with the client (Standard III).
__________________
3 Kedrosky and Stangler (2011).
4 Dyck and Kleysen (2001); Furman (1990); Hartman (2006, 2008); Horvath (1995); Koehn (1995); Macdonald and Beck-Dudley (1994); Mintz (1996); Roca (2008); Shaw (1996); Williams and Murphy (1990); and many others. For a complete guide to virtue ethics in business and management, see Sison, Beabout, and Ferrero (2017).
8 Securities and Investment Institute (2007).
13 This definition of virtue and the description of the tendency toward the good that fuel human existence, have their nucleus in the Aristotelian production, particularly in Nicomachean Ethics. Some centuries later, Thomas Aquinas resumed the Aristotelian thought contemplating and integrating it into the Christian perspective. More recently, the Scottish philosopher, MacIntyre resumed and reviewed the Aristotelian–Thomistic tradition putting at the center of his work the community as a place of human development made complete and harmonious by virtues.
15 They can already be found in Plato, Aristotle, and in the Bible.
17 It is considered by the ancient Greeks and later on by Christian philosophers, to be the auriga virtutum or the charioteer of the virtues, because it has a directive capacity, lighting the way and measuring the arena for their exercise.
18 See Inside Job, Ferguson (2010).
20 See Inside Job (2010), Buchanan (2015).
22 Scharfstein and Stein (1990).
23 There are three elements that connote the virtue of justice: otherness, debt, and equality. Otherness means that the virtue of justice develops in relation to another person; debt indicates the fact that each one must be granted that which is legitimately his or hers; equality is that toward which a relationship of justice tends (in the sense that a just act restores equality). See Colom and Luño (2014).
26 Kolb (2006); McCall (2010).
40 See Kar and Spanjers (2014).
41 The Economist (2013); Fox (2013).
44 For example, Biktimirov and Cyr (2013).
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