19 December 2018 by Anthony Hilton
A lack of personal ethics could enhance the likelihood of professional misconduct
The Chairman of Barclays, John McFarlane, discovered his CEO Jess Staley had tried to uncover the identity of a whistle blower. This was against Barclay’s way of doing things, and the FCA’s. But in the end Staley kept his job.
The then CEO of Aviva, Andrew Moss, left his wife, and formed a relationship with an executive in the same company. Shareholders did not show any concern, though some of the other staff did. He did not get fired for this, though he was subsequently ousted for poor performance.
Sir Martin Sorrell of WPP was alleged to have visited a prostitute – which he denies. He subsequently left the company but he was not fired by the chairmen or anyone else. He left of his own volition.
In general people in the UK do not interfere in personal ethics. They worry about the corporate side but leave people alone with the personal stuff provided it does not interfere with business.
But according to an academic study in the United States, it should be highly relevant. In Do personal ethics influence corporate ethics? by John Griffin, Samuel Kruger and Gonzalo Maturana, the authors claim that someone who has a record of marriage infidelity was far more likely also to indulge in corporate misconduct. Investors should therefore be aware that according to this survey these people are potentially less trustworthy.
The data for infidelity comes from Ashley Madison, the dating website which advertises ‘discreet encounters’ for married people. It turned out to be not so discreet after all when a computer hacker put a vast treasure trove of names on-line in 2015.
The researchers trawled though the names and matched these with corporate information series like Lexis Nexis, or other sources where those hacked had covered their tracks by using a different name or credit card but were still identifiable.
They then matched some of them to the Financial Industry Regulatory Authority BrokerCheck which had sourced 1,319 male financial advisers who had a record of serious misconduct. They discovered that their sample was more than twice as likely as the mainstream group to have committed such an offence.
“In general people in the UK do not interfere in personal ethics”
They also collected SEC information from 2010 to 2015 with regard to insider trading, Ponzi schemes, pump and dump operations and other fraud. Again the data shows that this sample is two to three times as likely as other executives of similar age and geographic location to engage in misconduct. Finally they examined chief executives, financial directors and other top executives who were known Ashley Madison users, who were also part of a firm which had a class action law suit or was engaged in some sort of financial misstatement.They found that CEOs and CFOs were twice as likely to commit corporate infractions than other users.
In summary the authors say that this new dimension of unethical behavior would seem to involve trust and dishonesty elsewhere too. They also say that there is a body of literature which shows that CEOs influence the others in the firm, and also that the other employees perform better if they think the top management is trustworthy and ethical. That obviously means the CEOs lack of integrity rubs off on other people.
The FCA’s Andrew Bailey looked at this area in a speech at St Mary’s University in October. He did not say that personal ethics and corporate ethics were one and the same, but he went a long way there.
Trust has a moral and an ethical dimension to it, and it involves commitment, Bailey said. Trust requires skill and knowledge but also good intentions and honesty. This involves an expectation of good behaviour, an identification of common interest and values, and development of a reputation.
Through the senior person regime, the FCA is regulating individuals as well as firms because they look to commitment and that comes more from the person than the company.
The embodiment of ethical standards is most obviously seen in individuals, and the senior management. As such Bailey says the rules do represent some rebalancing from corporate institutional to individual responsibility. But the real point is that critically and primarily they have to be internalised by firms and their staff.
But at what point and how much should staff, the board or shareholders worry about personal ethics? The FRC has long been silent on the issue and only in its recent iteration has it made even a nod to it. Head hunters and nomination committees of boards seem to pay no attention to it either.And yet the leader’s character and personal ethos are perhaps the two factors which are crucial to setting the firm’s culture.