International Investment Management


International Investment Management

Seven Pillars Institute is pleased to announce the publication of International Investment Management: Theory, Ethics and Practice, the newly released book from Routledge authored by Dr. Kara Tan Bhala (President of Seven Pillars Institute), Warren Yeh and Raj Bhala. 

A quick take on the book:

International Investment Management synthesizes investment principles, Asian financial practice, and ethics reflecting the realities of modern international finance. These topics are studied within the Asian context, first through the medium of case studies and then via the particular conditions common in those markets including issues of religion and philosophy.

A longer description of the book as found in the…


Synthesizing Three Extant Theories

This textbook is a first of its kind and unique in three ways.

First, unlike other textbooks on investments, this one gives as much space to other finance theories as it does to the predominant, mainstream theory known as Modern Finance Theory (MFT). The text is, of course, about finance, specifically investment management, with details, descriptions and instructions on financial markets, players, instruments, and security analysis. But the text speaks of behavioral finance and Islamic finance in addition to MFT.

As an offspring of neo-liberal economics, the latter has been useful in modelling financial markets and guiding investment decisions. MFT gives one view but not the full 360-degree perspective of markets and instruments. After five decades or so of habitual use, MFT has hardened into an orthodox ideology only lately questioned, and only by some in the higher rankings of financial academia. This book gives an objective critique of MFT and the reasons that logically follow from the critique, why students of investments should be wary and aware of the shortcomings of MFT. Fortunately, other finance paradigms are establishing themselves that counter these deficiencies.

The two other increasingly influential finance theories are behavioral finance and Islamic finance. This textbook provides the student with details of both approaches. Behavioral finance has to do with the psychology of individuals and groups and how this affects behavior in financial markets. The behavioral finance approach complements, not supplants, MFT, which completely disregards human psychology and behavior and their consequences on investment decisions. Together, behavioral finance and MFT provide a fuller perspective of financial markets, but still not the 360-degree view. For a more comprehensive view of markets, Islamic finance, the third theory we discuss in this book, is required.

Islamic law, or Shar?‘a (transliterated simply as Shari’a) is the foundation of Islamic finance. One key principle of this approach is the requirement to be ethical. MFT does not propound any deliberate purpose to finance. Through rational self-interest and profit maximization, the financial system achieves economic efficiency. In contrast, Islamic finance states unequivocally that the purpose of finance is to help people and the community to flourish. Islamic finance must contribute to the development and good of the Islamic community. Therefore, the fundamental feature of Islamic finance is socio-economic justice. Being based on Islamic law, Islamic finance contains a comprehensive system of ethics and moral values. The ethical element is missing in both MFT and behavioral finance. Synthesized, the three theories together provide the most complete insight into markets. The synthesis of theories still does not provide the full 360-degree view, because there are likely to be other finance theories waiting to be discovered. However, they do present a more extensive view than can be obtained from the aspect of a single one of the theories. We know of no other attempt to synthesize the three extant finance theories.

Incorporating Financial Ethics

Secondly, this textbook is not just about investment management, but also about ethics, specifically financial ethics. We intend for the student to understand ethical theories and apply these theories as working, viable frameworks in everyday financial practice. Too often, ethics is treated as a laundry list of dos and don’ts, a dry, unexplained catalogue for behaving in the right way. The ethics section of this book instructs the student, who will be a future or is currently, a finance professional, on the method of ‘doing’ ethics. This method requires the use of human reason, applying appropriate ethics theories, and coming to right action through internal and external discourse.

The text first presents and explains philosophical ethical theories. A chapter discussing religious based ethics follows the chapter on secular ethical theories. The former cannot be ignored. After all, the vast majority of the world receives ethical instruction based on religious upbringing. Throughout the chapters on ethics, examples are given to help the student apply each theory to a situation. Application of theory is just as important as knowledge of theory because ethics is ultimately defined by action driven by reason. Indeed, the last section of the book gives case studies with detailed explanations of why a particular act in a real financial case was unethical. Thus, the book incorporates practical ethics into investment practice.

Introducing Pertinent Legal Concepts

For non-lawyers, it is not possible to practice international investment management without knowing something of the law. For lawyers, law is their ‘bread and butter’. Investment professionals need to know at least enough about the law to stay out of trouble, and lawyers have to guide them as to how to do so efficiently and with integrity. Moreover, investment professionals need to know at least the outlines of how their discipline is regulated (or not). Again, lawyers have to provide wide counsel on this matter.

Accordingly, the third unique contribution of this textbook is its synthesis of legal concepts pertinent to the practice of international investment management with the theory and ethics of that management. The text provides a reasonably detailed overview of International Banking Law and International Securities Regulation. Those topics affect the everyday work environment, as they are the rule-oriented paradigms in which managers operate, and with which they must comply. The textbook also provides careful case studies of international sanctions. They raise ethical and practical, and detailed and policy, questions that managers confront. As many high-profile investigations and prosecutions demonstrate, failure to comply with sanctions has grave consequences.

To be sure, this textbook is not a legal treatise. Its legal coverage is suitable for use in a business class setting without supplementary legal materials, and in a law school with supplementation. We are confident the coverage of legal matters essential for investment professionals will highlight the uncomfortable reality that law and ethics do not always coincide: behaviors and transactions that are legal may not be ethical. When there is a disparity, we think it arises in part because of a long-term secular trend in law away from Natural Law (which holds law and morality are intimately related), and toward Positivism (which claims there is no necessary connection between law and morality). That very debate may be of interest to some readers. But, in any event, we hope the coverage of relevant legal matters will help improve the dialogue between investment managers and lawyers, by ‘starting early’, that is, in school.

The Journey to this Edition

We are grateful this textbook materialized despite a couple of distressing setbacks. International Investment Management was inspired by the financial ethics course, which Kara taught at a conventional US business school. It was one of a tiny handful of such courses taught in the American business academy. The course was cancelled, thanks (at least in part) to opposition to the teaching of financial ethics.

Coinciding with the abrupt withdrawal of an agreed-upon co-author, the course cancellation ostensibly was a blow to scholarship and teaching in the subject of financial ethics. The two events—which seemed, perhaps, to be somehow linked—did more than slow progress on this book. These events were an emotional blow. Authors—especially women seeking a new paradigm in a conventional, male-dominated field—must be resilient against such blows if their project ever is to see the light of day.

God does indeed work in mysterious ways. Unexpectedly, another co-author filled in with enthusiasm. And, who could have foreseen the coincidence of the (1) post-2008 global economic slump civil society outcry against Wall Street, i.e., the 1 versus 99 per cent movement, and (2) 2013 naming of Francis as the 266th Pope followed by his statements about modern financial capitalism? These events, splashed out almost daily across global media, called attention to the importance of financial ethics to a degree that no business school professor, nor any book promotion tour, ever could.

Not just happily, but vitally, financial ethics continues to grow in its reach and influence. There is a higher level of interest and a realization of its significance by regulators, senior management of financial institutions, clergy—a realization occurring to even educators, but for the most quantitatively trapped and ideologically rigid.

To that quest, namely, the flourishing of research, promotion, and education about financial ethics, Seven Pillars Institute for Global Finance and Ethics, and its many supporters around the world will remain faithful. Ultimately, possibly in the not too distant future, the teaching and practice of finance will be enhanced by ethics becoming an integral part of financial theory.