TEDx on Financial Ethics: An Interview with John Francis Diaz

Professor John Francis Diaz recently gave a talk at TEDx on financial ethics. SPI interviewed Professor Diaz about his perspectives on this new discipline.

SPI: Can you give us a gist of what you said in your latest TEDx talk?

JFD:   My TEDx talk combined a personal story of how I realized and achieved my dream of being a professor, and how I discovered my financial ethics advocacy. I shared how I found a career that satisfied my passion in teaching and writing; how that career has lead me to an advocacy; and how that advocacy has opened me to an idealism for the financial industry. My talk encouraged listeners to not just dream for themselves, but to also have a dream, a bigger dream for our society. Sounds very idealistic, but as we grow old and mature, we tend to think of ways to give back to our immediate community and even to society as a whole.

In the talk, I shared that my idealism for the financial services industry was motivated by years of teaching Business Ethics classes, where I gave lectures on the biggest financial and accounting scandals that shook the industry. I noticed that the government’s usual responses are, of course, increasing the number of regulations and imposing tighter punishments. In fact, according to the May 2014 article from Forbes.com website, in the US alone, 3,500 new regulations are being passed every year. These regulations, particularly those targeting businesses, are costing the US economy US$2 trillion every year, greatly affecting manufacturers and small enterprises.

Ironically, our supposed solutions (i.e., regulations) are not really solving the problem, and even add to the burden by creating a restrictive business environment and by undermining fair competition. To address this problem, I suggested in the talk that lawmakers need to be more discerning in passing regulations by conducting a careful cost-benefit analysis before passing a new rule; and benefits should outweigh the cost. More effective and long-term than examining regulations is change from within organizations, where businesses ensure that they do what is right through self-regulation and self-discipline. This can be achieved through educating and producing ethical handlers of financial and accounting information through financial ethics.

SPI: Why is financial ethics important? Do you think ethics in finance as a discipline is an oxymoron?

JFD:  Financial ethics, as a relatively new academic discipline, is important because it can provide us with ethical principles to govern the financial industry. This moral compass helps us prevent fraudulent activities, and eliminate the need for excessive regulations. This in turn relieves us of economic burdens coming from fraudulent activities and compliance costs. The financial industry has the greatest need for stronger ethics and self-imposed discipline because they are managing huge sums of money. According to the February 2015 article of the MarketWatch.com website, total financial assets of the industry reached $294 trillion as per the estimates of McKinsey Global Institute, Haver Analytics, Bank of International Settlements, and Deutsche Bank. This amount, managed and controlled by the financial industry, is so staggering that even a small fraction of fraudulent activity can still have huge implications. Financial Ethics as a relatively new academic discipline can help us educate current and future business professionals in the proper handling of financial and accounting information to prevent future misdeeds.

The discipline can be a big irony indeed if we are to base our judgment from the biblical statement of 1 Timothy 6:10: “For the love of money is the root of all kinds of evil. Some people, eager for money, have wandered away from the faith and pierced themselves with many sorrows.” But, I always think of money as a double-edged sword with both advantages and disadvantages. Financial ethics can only be (partially) seen as an oxymoron if you think of all the negative ways that greed for money can do. Truly, what role can ethics play if the love of money is the root of all evil? But then again, money is just a tool that has to be controlled and managed properly; and that’s when Financial ethics as a discipline will come in, to educate and train!

SPI: How do we promote financial ethics among professionals and business students?

JFD:  For business organizations and professionals:

• include financial ethics questions in company exams and interviews during the recruitment process; and give orientations for new hires about the company’s code of conduct, social responsibility initiatives, and ethical practices;
• require regular employees, particularly those handling financial statements and related documents, to attend financial ethics seminars and trainings;
• encourage resigning employees, specifically those who worked on financial-related documents, during exit interviews to suggest ways to strengthen company ethics, and to increase transparency and accountability in the treatment of financial information; and
• establish a Corporate Social Responsibility (CSR) or Ethics center (for those corporations who can afford, the likes of Walmart’s Global Ethics Office, Starbucks’ Global Responsibility Department, and Mazda’s CSR and Environment Department,) to empower employees in creating an atmosphere of moral, transparent, and consistent ethical operations. The center can become the prime source of ethics initiatives in managing employee stakeholder engagement, corporate philanthropy, and even social entrepreneurship that can become part of the corporate culture in the long-run.

For business colleges and students:

• discuss the college’s code of conduct, ethical practices, and make them aware of courses related to ethics during freshmen orientations;
• include short cases or discussions with regard to ethics in finance and accounting courses;
• invite academic scholars and industry practitioners who specialize in business ethics to share their knowledge and experience;
• require students to take up ethics in business-related courses because it also teaches case studies related to financial ethics; and
• create, at the very least, an elective Financial Ethics course (like in our College of Business, Chung Yuan Christian University).

SPI: Financial ethics is not a core course for finance focused MBA and BBA students. Should business schools make the subject a core course?

JFD:  Yes. Financial ethics should be part of the core courses of, not only finance, but also accounting-focused business administration curricula. These students will soon become professionals managing crucial and sensitive financial resources. It is imperative that they themselves have unwavering ethics and integrity in handling these assets of the company; not forget the importance (or should I say sanctity) of financial and accounting information and resources; and not be negatively-influenced by a few interested and misaligned parties in favoring personal and short-term gains. Making financial ethics a core course can presumably ensure that finance professionals won’t be part of the 9% of individuals with the tendency to misbehave in the workplace according to the latest survey of the National Business Ethics Survey in 2013. Knowledge and preparation of students as future finance practitioners are keys to having stronger and sustainable ethical practices in the financial industry.

SPI: What do you think are some of the most important principles we can teach in financial ethics?

JFD:  Balancing what’s legal, ethical, and profitable

It has always been the case that businesses should be profitable in order to survive, compete, expand and extend efforts to being ethical and socially responsible. However, going above what is legal and becoming ethical often sacrifices a certain degree of profitability, thus, negatively affecting shareholders’ wealth. One very good example is the issue of minimum wage. In the province of West Java, Indonesia, the recently approved (effective January 2015) legally allowed minimum wage per month is approximately $80 (or $960 a year). It is legal for companies like Nike, which sub-contracts manufacturing plants in the area, to just follow what the provincial legislation states. Knowing that the salary is just enough to support daily subsistence of only one individual worker, and not even a family, Nike can choose to be ethical by paying more than the minimum wage and/or giving more benefits to its factory workers. But, this is not happening. What’s worse is that Nike pays its celebrity endorsers millions of dollars to promote the brand. For example, basketball superstar Lebron James receives approximately $1.25 million a month (or $15 million a year) to market the brand. This is a good example of pursuing business profitability without a conscience. Companies like Nike can choose to be competitive and profitable while still being ethical. I always remind my students that even if maximizing shareholders’ wealth through increasing profits is the main objective of every business organization, it should be pursued at the very least in a legal way, and if it can, should strive to increase wealth in an ethical manner.

Dealing with conflict of interest and moral hazard

Conflict of interest, in most cases, is a strong manifestation of moral hazard (taking more risks because others will take the burden); and are best demonstrated in the financial services industry particularly in stock brokerage firms and investment houses. I tell my students that in the future, they will be facing a situation wherein multiple interests are at stake – their professional duties, company earnings, client satisfaction, government regulations and other related interests, even including supplier benefits. Through my case study and lecture discussions, I teach my students how to balance these competing interests by employing these techniques:

• upholding professionalism by following their job descriptions to save them from legal repercussions in the future; this also includes ensuring clients that they are qualified to do the job by showing professional competence and integrity;
• maintaining proper disclosure and open communication with superiors, clients and related parties if there are perceived deviations from their job descriptions or contracts signed; this also involves maintaining confidentiality as a way to prove one’s trustworthiness to clients;
• foregoing an opportunity is sometimes best if it presents high conflicts of interest, and if it means taking risks to the detriment of the client.

One perfect example that violated these principles is the so-called “pump and dump” scheme of stockbrokers, which is common in the financial industry. This is closely related to the now infamous Enron scandal of 2001. The scheme exposed stockbrokers and analysts from Merrill Lynch, JP Morgan Chase and Citigroup helping Enron inflate the stock price by giving the company a high investment grade based on its inflated profits and concealed debt. The increase in Enron’s stock price enticed more investors to buy into the hype, while stockbrokers and analysts from the investment firms sold their shares and stopped rating Enron favorably after benefitting from the stock price increase. Twenty-nine Enron executives also colluded with the stockbrokers and analysts, participated in the elaborate “pump and dump” scheme, and sold more than a billion dollars’ worth of overvalued stock to the detriment of investors. The conflict of interest was highlighted when it was found that Enron was a big client of these giant investment firms, and at some point were also holding stocks of Enron. Moral hazard also came into the picture when stockbrokers and analysts took the risk of concealing and manipulating information to mislead investors and earn from the transactions in both commissions and capital gains.

SPI:  Can you give us a feel for the culture of business education in Taiwan?

JFD:  From a broader perspective, business education in Taiwan for the past decade has been geared towards internationalization and stronger linkages with Mainland China universities. These were consistent with the mandate of the Ministry of Education (MOE), and the solution to the declining number of local enrollees due to decreasing birth rates. Much of the internationalization efforts in Business colleges focus on:

1. a) providing scholarships and academic exchanges; and
2. b) strengthening globalized curriculum by seeking international accreditation from renowned accreditation bodies like the Association to Advance Collegiate Schools of Business (AACSB) and European Quality Improvement System (EQUIS).

Based on the recent MOE report for academic year 2014-2015, the number of degree-seeking international students grew from 44,527 in 2012 to 49,033 in 2013; while the number of Mainland China students jumped from 1,864 in 2012 to 3,554 in 2013. As of September 2015, there are 12 AACSB-accredited and 1 EQUIS-accredited institution out of the 133 public and private colleges and universities in Taiwan.

From a narrower, college-level perspective, our business education has taken initiatives to be more holistic in approach by:

1. lessening required major-specific courses and offering more electives from other departments and colleges that suit the interest of the students; and
2. providing more multi-disciplinary courses by bringing in information technology to some courses.

As a specific example, our college added Information Management-related courses as additional electives in the Master program and one of the major tracks in the Doctoral program. Business colleges are also strengthening their ethics in business curriculum. A considerable number of colleges, including our own, offer Business Ethics as a required course for both undergraduate and graduate programs. Our Department of Finance has also recently launched a Financial Ethics elective in the undergraduate program, and around three universities in Taiwan are offering ethics courses in finance related degree programs.

SPI:  Thank you, Professor Diaz

John Francis Diaz, PhD is a professor of finance, accounting and business ethics at Chung Yuan Christian University. His research covers the areas of finance and investments, international trade and economics, and business ethics. He specializes in international finance and investments, and in the relatively new academic field of Financial Ethics. Dr. Diaz also maintains his own blog site called Ethical Practices in the Financial Industry (EPFI), which features his essays, journal publications and videos regarding ethics in finance. He advocates more transparency and stronger ethical foundation in the financial services industry.