Second Of Two Parts.
A federal jury in Manhattan rejected the Securities and Exchange Commission’s claim that Bruce Bent … defrauded investors when his flagship fund failed in September 2008, sowing panic among ordinary investors. [However,] the S.E.C. did convince the jury that the younger Mr. Bent’s statements were negligent, and that the parent company had made fraudulent statements.
— Nathaniel Popper and Jessica Silver-Greenberg, The New York Times (November 12, 2012)
In my last article, I discussed how the effort to reform regulation of the financial system remains unfinished. This also holds true, even more so, for efforts to create some kind of ethical center for the financial services industry.
Examples of financial services firms failing to live up to expectations continue to arise every few weeks, w ith a constant drumbeat of multimillion dollar fines, allegations and convictions. As one industry insider put it, “We’re one or two scandals from being like the tobacco industry.”
Clearly more needs to be done.
Without our ethical bedrock—without what Wall Street Journal columnist Francesco Guerrera recently referred to as “a reason for being” in "a new ‘era of regulation’"—lasting reform of the financial sector will remain ineffective and incomplete.
The way to do this isn’t necessarily to prosecute more of the bad actors who allegedly contributed to the financial crisis—although that’s what many in the media focus on and that’s what Attorney General Eric Holder recently announced the Justice Department intends to do in “a series of significant matters that [the department will] be bringing.”
Illegal activity is only a subset of immoral activity. And immoral activity is itself merely a subset of activity that violates the finance industry’s corporate social compact. This is the basket of expectations society has for financial institutions and markets and the role they should play in the world’s economy.
There are emerging green shoots of promise—signs that the financial services industry gets it.
Doug Hodge, COO of Pimco, said at the Securities Industry and Financial Markets Association’s (Sifma) annual meeting last year, “We have a trust deficit. We have to quit screwing up [and] hold ourselves to higher standards of conduct.… The role of finance is to serve broader interests of society,” according to MarketWatch.
John Rogers, CEO of the CFA Institute, wrote on The Huffington Post, “[It] falls to leaders in my profession, those working in the investment and financial service sector, to restore trust and confidence in the marketplace. Reform of the sector must come from within, and not simply be left to regulators, governments and the wider public to take action. It is the employees and executives working at private sector firms around the world who have the power and ability to shape a more trustworthy financial services industry that better serves society.”
Donald Trone, a longtime advocate of fiduciary standards, has developed a leadership training program that uses leadership, stewardship and fiduciary principles to “teach leaders to be better stewards” of their organizations.
Sifma has created a Trust and Confidence Committee, has endorsed a universal fiduciary standard of care for professionals offering advice about securities to individual investors, and is in the process of developing an “Investors Bill of Rights.”
Lest we minimize the importance of efforts like these, consider this advice from Neil Hamilton, who runs the Holloran Center for the Teaching of Ethical Leadership in the Professions: “While we can’t teach another adult to be ethical… we can engage another adult to join us in a journey. We help each other grow ethically over their lifetimes by asking questions and telling stories.”
Five years after the Reserve Primary Fund “broke the buck,” the financial services industry is indeed on a journey. It remains to be seen whether we will find, build, create, rediscover and connect with the ethical underpinnings of what we do.
But one thing is clear: Broader society has a stake in our ability to succeed.
Only when we restore investor faith and public confidence in our financial system will we have a shot at restoring economic growth to precrisis levels—something this country and the world so desperately needs.
John G. Taft is CEO of RBC Wealth Management – U.S. and author of Stewardship: Lessons Learned from the Lost Culture of Wall Street (Wiley, 2012).
