Tag Archives: Ethics

2015-10-16 by: James Bone Categories: Risk Management Blackstone Group: Riddle of Ethical Dilemmas

free_136985 business manIs it possible to manage an ethical company and be successful? Logically, most people would agree that, yes, ethics and success are not mutually exclusive conditions of sound governance. Yet, the Securities and Exchange Commission has found that private equity firms are more likely than not to break the law or have material conflicts of interests. Has the principle of fiduciary responsibility, the “Prudent Man” rule, been relegated to the dustbin of financial market ethos?

Recently, Blackstone Group, the world’s most profitable fund manager, was ordered to repay fund investors $28.9 million and assessed a $10 million fine by the SEC for failure to disclose the collection and handling of fees that should have been used to benefit investors. Blackstone, to its credit, reported that its internal audit group uncovered the problem and reported its findings to investors. However, senior executives within the firm had to conceive the idea and present the proposal to a governing board for approval. What is the cause of a lapse in ethical judgment?

Blackstone is not alone, in the same article several incidents of regulatory violations related to fee disclosure by fund managers were cited. Blackstone Group has $330 billion under investment and close to $3 trillion dollars under administration so what causes successful firms to cut corners? How does governance break down? A spokesperson for Blackstone Group responded to the violation by explaining, “our Limited Partner Advisory Committee did not exercise its right to object.”

One of the hottest topics in financial services is a new concept called Conduct Risk. The phrase “conduct risk” comprises a wide variety of activities and types of behavior which fall outside the other main categories of risk, such as market, credit, liquidity and operational risk. In essence it refers to risks attached to the way in which a firm, and its staff, conduct themselves. There is no clear definition for Conduct Risk so it is more like pornography right? You know it when you see it! But, that is not exactly correct. The reason conduct risk is hard to define is because we are misled by the frequency of certain events leading to errors in judging when bad ideas become bad behavior. These incidents beg the question of whether the unethical behavior by private equity firms is any different from Volkswagen’s emissions scandal?

The public outrage and media attention attributed to Volkswagen pales in comparison to reports of financial services firm misbehavior. Why is this the case? The answer is found in the field of cognitive science. Our views of events are shaped in large part by the frequency of news reports on a variety of risks we face. Shark attacks are a great example of this phenomenon. We believe that more humans are killed or maimed by sharks than cows. We know, empirically, that humans are killed or maimed by cows more frequently because farmworkers encounter more cows than beachgoers do sharks. Local news accounts of “death-by-cow” events just don’t draw the same attention as a shark attack leading us to misdiagnose the risk.

The same can be said to explain how we view misbehavior of financial services firms. The frequency of regulatory and financial misbehavior has become almost invisible and is often relegated to the second or third page of news. The shock factor has worn out and we are no longer surprised to find that some fund manager has over charged or failed to follow the rules.

So how does risk management, audit, compliance and ethics officers address conduct risk? What defense can be used when the argument is, “everyone else is doing it why can’t we?” This is the riddle of ethical dilemmas. There is no risk framework or internal control to deal with conduct risk. It represents 98% of all operational risk failures according to a recent study. For the largest firms, regulatory fines are no longer a deterrent and the costs of compliance, risk and audit has already been absorbed as a cost of doing business. The public is no longer outraged about being fleeced, and in fact, car buyers will return to Volkswagen and investors will, undoubtedly, return to Blackstone Group. Solving the riddle of ethical dilemmas is the biggest challenge faced by risk professionals who are ill equipped to adequately mitigate this risk.

It is possible to run an ethical company and be successful. But it is also possible for unethical behavior to creep into the boardroom and C-Suite because the costs no longer exceed the benefits.

2013-03-21 by: James Bone Categories: Risk Practices Avoiding Integrity Land Mines by Ben W. Heineman, Jr.

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As the chief legal officer at GE for nearly 20 years, I was part of the senior management group that sought to fuse high performance with high integrity. No one was more demanding about hitting financial targets than Jack Welch or his successor, Jeff Immelt. But both knew that employees up and down the ranks face the temptation to make the numbers by fudging the accounts, cutting corners, or worse. Unconstrained, these internal pressures—made more intense by corruption in emerging markets, demanding customers, and unscrupulous competitors—can lead to corrupt capitalism.

The changes in laws, regulations, stakeholder expectations, and media scrutiny that have taken place over the past decade can now make a major lapse in integrity catastrophic. Fines, penalties, and settlements are counted in the hundreds of millions (or billions) of dollars, not the millions or tens of millions of a decade ago. And worse, in some cases (as Enron and Arthur Andersen demonstrated)—a company can actually implode.

 

2013-03-16 by: James Bone Categories: GRC Articles OCEG Red Book

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BlueBookimage

OCEG, the Open Compliance & Ethics Group has developed standards for the structure of GRC (Governance, Risk & Compliance).  Although initially focused on GRC as a risk practice OCEG has shifted focus to a new concept called Principled Performance.  OCEG has modified Enterprise Risk into a Principled Performance model that is inclusive of the COSO Enterprise Risk framework.  This shift in focus appears to imply that risk management is responsible for firm performance.

2013-01-22 by: James Bone Categories: Risk Practices Engineering Ethics Case Study: The Challenger Disaster by Mark Rossow, PhD retired

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crew of space shuttle challenger5

On January 28, 1986, the Space Shuttle Challenger burst into flame shortly after liftoff. All passengers aboard the vehicle were killed. A presidential commission was formed to investigate the cause of the accident and found that the O-ring seals had failed, and, furthermore, that the seals had been recognized as a potential hazard for several years prior to the disaster. The commission’s report, Report to the President by the Presidential Commission on the Space Shuttle Challenger Accident, stated that because managers and engineers had known in advance of the O-ring danger, the accident was principally caused by a lack of communication between engineers and management and by poor management practices. This became the standard interpretation of the cause of the Challenger disaster and routinely appears in popular articles and books about engineering, management, and ethical issues.

2013-01-15 by: James Bone Categories: Risk Management Building a Culture of Inclusion at the US Air Force Academy by Adis M. Villa

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Adis M Villa Building a Culture of Inclusion at the US Air Force Academy