Anytime money is involved, it’s natural to have questions and concerns about ethics. And that definitely holds true in the investment industry.
Regardless of your role within the industry - from an investor to an advisor - it’s important to have a sound understanding of ethics, as this ensures that you always know right from wrong (while also protecting yourself).
What is Ethics?
Before we discuss ethics as it relates to the investment industry, let’s review the definition as shared by Encyclopedia Britannica:
Ethics, also called moral philosophy, is the discipline concerned with what is morally good and bad and morally right and wrong. The term is also applied to any system or theory of moral values or principles.
With that definition in mind, it’s easy to see how ethics would apply to all facets of the investment industry.
Ethical Issues at the Forefront of Investing
Although no two people have the exact same definition of ethics, it’s important to gain a clear understanding of the impact this has on the investment industry.
Some of the many details examined by investors include:
1. You Win (or Lose), Someone Else Loses (or Wins)
Are you in it for yourself, or do you also care about the impact of your decisions on others?
For example, a financial advisor may suggest that you make an investment that actually benefits them, not you. They don’t care about whether or not you make money, as long as it benefits their financial position.
Before you make any investing decision, consider the players involved and the potential impact across the board. If you find that someone is acting in an unethical manner, they may be doing so for personal gain.
2. Leadership Ethics
Take for example an individual investor considering a variety of options for investing their money. If gains are the only thing on your mind, there’s nothing else that’ll sway their decision.
However, leadership ethics has the potential to come into play. The management team of a company sets the table for all its employees. If they’re ethical, play by the rules, and want to do what’s best for everyone, it’ll put your mind at ease.
However, if you have reason to believe they’re unethical, such as the result of recent news stories or criminal charges, you may think twice before investing - even if it means missing out on potential gains.
Running a business in an ethical manner is easier said than done. And while it may work against a company in regards to short-term gains, an ethical approach always pays off in the long run
3. Employee Ethics
It’s often difficult to know what’s happening at the top, but as you move down the chain of command you may gain a better understanding of how a company is doing business.
When management leads a company in an unethical manner, employees are likely to feel entitled to do the same. It may benefit them in the short-term, but over time it begins to drag down the company as a whole.
If you find that employees are acting in an unethical manner, it’s likely that company leadership is going down the same path.
4. Industry Ethics
When investing in any company, you must consider the industry they’re part of.
For example, energy companies like Exxon are constantly scrutinized in regards to environmental impact. Conversely, when you look at tech companies like Google and Facebook, this is very rarely the case.
Now, let’s move to the other side of things. Well-known tech companies have constant concerns about customer privacy and security. But when you look at energy companies, this isn’t nearly as common.
Answer these two questions:
- How are companies in a particular industry judged in regard to ethics?
- What’s most important to you?
Remember, just because a tech company isn’t being judged based on its environmental record doesn’t make it right to act in an unethical manner.
Benefits of Ethical Business for Organizations
Let’s move on from individual investors for the time being and focus more on the benefits of ethical business practices for organizations, such as investment firms and corporations.
- Employee loyalty: When employees know they’re working for an ethical company, they’re more likely to do the right thing at all times. Not to mention the fact that it helps build loyalty, which results in retaining top talent.
- Reputation: The last thing a company wants is a bad reputation, as it can result in high employee turnover, lower sales, and a bad outward appearance to the public.
- Social responsibility is the name of the game: This may not have held true in the past, but it’s definitely the case in 2020 and beyond. Employees want to work for companies that are socially responsible. Investors want to invest money in companies that are both socially responsible and ethical. Any gray area here has the potential to do irreparable harm.
What About Asset Managers?
This is where the lines of ethics often get crossed up. Individual investors are looking to find an asset manager to assist them. The problem with this is that not all asset managers have the best interest of their clients in mind.
Ethical asset managers share the following responsibilities to their clients:
- To act in an ethical manner at all times
- To act in a way that benefits the client, not them
- To act with objectivity
- To communicate accurately and without delay
- To follow all rules, laws, and regulations
Final Thoughts on Ethics and Investing
It doesn’t matter what the word ethics means to you, it’s a big part of the investment industry. If you’re investing, providing advice, or building a company, it’s a must to act in an ethical manner at all times.
As you become more familiar with investing, your approach, and where you fit in, you’ll find it easier to pinpoint who’s acting in an ethical manner and who’s missing the mark. And that alone will go a long way in helping you build toward a better future.