1. Ethics

• Participants

• Four facets of purpose + links to value creation

• Legal duty to act in clients’ best interests —> not own

• Requires loyalty, care, impartiality and diversification

• Avoid conflicts of interest

• 4 Are of obligations

• 4 Challenges

• Five values

• Five areas of value creation

• Virtuous cycle

• Acting ethically even when difficult

• May involve personal or professional risk

• Component of Principle 1

• Required for client relationships to generate value

• Comprises FITL

• Fiduciary Duty

• Interest conflicts

• Trust

• License to operate

• Asset Owners / Allocators

• Agents

• Stakeholder

• Asset Owner = principal (ultimate owner)

• Allocator = Agent acting in a fiduciary capacity for asset owners

• Examples:

  • Pension funds

  • Endowments

  • Insurance companies

• Provide services to asset owners to enhance value

• Examples:

  • Asset managers

  • Investment banks

  • Consultants

• Parties directly or indirectly affected by the industry

• Examples:

  • Governments and regulators

  • Investee firms

  • Co-investors

• Fundamental Purpose

• Intrinsic Purpose

• Core Purpose

• Collateral Purpose

• Investment industry helps society:

  • moving money where needed

  • growing wisely

  • creating jobs

• Social License

• Increase societal wealth and well-being

• Foundation

• Matching those with excess capital with those having capital needs

• Skill + Expertise

• Increasing wealth and managing risk

• Asset to Economy

• Provide employment & growth opportunities

• Decline in number of listed companies

• Increased share buybacks

—> intrinsic motivation of allocating capital unlikely to generate value as capital is not given to new…

• Wealth and Risk Management (Core Purpose)

• Stewardship (Fundamental Purpose)

• Taking responsible care of something that is not yours but you are entrusted with

• E.g. engagement with investment companies to promote long-term growth

  • Sustainability -> meeting asset owners needs while not harming interests of future stakeholders

  • Social license principle -> socially valued goals legitimize commercial goals

• Business = part of society (business sick = world sick)

• Society is part of environment and therefore of Value Creation

  • create future wealth, stakeholder’s subjectivity view, lon-term occuring

• Loyalty

• Prudence and care

• Diversification

• Impartiality (no bias)

• Interpretation changes

  • context

  • over time

• No consistent interpretation of obligations

• Priorization of ESG over short-term gains

• Ethical & professional behavior

• Client partnership

• Client first

• Transparency, integrity, accountability

• Public responsibility

Professional should:

• Adhere to best practice

• Learn

• Diligent and competent

• Avoid risk

• Situations where choice is not clear:

  • conflict of interest

  • Benefit/cost tradeoff

  • Limited client knowledge

    -> Decisions follow methodical & transparent process

    
    

• Set of values and beliefs within group driving behavior

• Driven by senior leadership

• Aligns behavior (trust)

• Directs focus (Prioritize)

• Effective communication (engagement)

• Behavior aligning with fiduciary duty

• Holistic approach (different goals)

• Fair rewards (manager & public)

• Portfolio Performance

• Client Benefit (Objectives)

• Asset Manager Success (Reputation)

• Organization often fall short of professionalism

• Investment industry -> prone for misaligned industry

  • high remuneration for short-term gains -> bad for society

• Weak Value Proposition (Fees)

• Misalignment manager/client values

• False communication

• Professional mindset -> professional industry

  • good for long-term industry & society

• Transition -> sacrifice short-term profits & generate long-term value

• Informal societal approval to operate

• Approval depends on benefiting society

• Sustainable practices

• Legal requirements

• Adherence not sufficient to build investor trust

• Essential for investment ecosystem

• Involves all stakeholder

• Firms must have clear purpose

• Vision guides long-term decision-making

• CVEA -> Required to build/maintain trust

  • Competence

    • Values

    • Ethics

    • Accountability

• Followed by Assurance

• Expertise: Technical knowledge

• Beliefs: Ethical values

• Doing right: acting in client/society interest

• Purpose + Professionalism + Assurance = Value

• Fiduciary duty to clients

• Interest conflict

• Trust and reputation

• License to operate

• Client experiences

• Investment outcomes

• Purpose

• Professionalism

• Socially valued actions legitimize business goals

• Willingness to act properly

• Worthiness (integrity/competence)

• Capital and domain (resources/expertise)

• Avoid conflicts

• Disclose if unavoidable

• Act fairly

• 8 Principles

  • 4 Doing the right things (Intent)

  • 4 Doing things right (Execution)

• Ethical and Professional Behavior

• Partnership

• Client-First Mindset

• High Standards of Conduct

• Transparency

• Integrity

• Accountability

• High Standards of Practice

• Professional Work

• Continued Learning

• Collaboration

Ethical and Professional Behavior

• Create culture promoting behavior

• Investment decisions consider broader impacts

• Client first while managing external impacts

• Not voicing concerns

• Manipulating market prices

• Misleading client

• Bribes

• Act ethically and professionally

• Concerned for well-being

• Personal responsibility

• Act / Encourage moral courage

Partnership

• Act as Peer / Partner to clients

• Use expertise to client success -> not exploit it

• Based on trust, empathy, and open communication

• Know your client

• Communicate clearly and on time

• Align personal interest / values with clients

• Missing Due Diligence on client

• Misaligned fees

Client-First Mindset

• Put client’s interests first

• Act with loyalty / purpose -> builds trust

• Support strong governance / ethical culture

• Avoid / disclose conflicts

• Acting in personal interest

• Weak / no oversight

• Bribes

High Standards of Conduct

• Act to highest standards

• Transparent, accurate and authentic communication

• Set / communicate goals / expectations

• Disclose errors/costs

• Take accountability -> integrity culture

• Not disclosing fees / exposures

High Standards of Practice

• Rigorous, evidence-based, ethical practices

• Align with industry best practices -> regular review

• Define ethical standards & competencies

• Professional accreditation

• Evolving ethical framework with fair rewards

• Lack of ethics policy

• Bribery / unethical incentives

Professional Work

• High-quality research and DD

• Holistic thinking & risk understanding

• Client interaction

• Comply with laws

• Transparent, documented work -> appropriate assumptions

• Ethical judgement -> professional in stress

• Embezzlement

• No risk management

• No DD

Continued Learning

• Ongoing personal and professional development

• Adapt to new information and conditions

• Be curious and open to learning -> seek education

• Understand technology impact

• Inform about broader changes (AI, Climate)

Collaboration

• Improves insight & decision quality

• Critical thinking & diverse perspectives

• Strenghten client communication

• Value diversity & teamwork

• Embed collaboration in organization

• Support professional community / regulators

• Ethics guided by principles -> rules complement

• Focus on intent and ethical judgment

• Flexible across situations

• Adapts to changing environment

• Encourages professional judgment & critical thinking

• Rules support principles

• Rules alone lack nuance and flexibility

• MF Global

• Archegos

• Bear Stearns

• NYSCRT

• CalPERS

• Commodity brokerage executing client derivatives & trading

• Suffered $1bn loss in 2011 from highly leveraged EU sov. debt bets

• Use client funds to meet company margin calls

• Poor governance, excessive leverage & no transparency

• Bankruptcy & $1.6bn loss in client funds

• Principle 1 -> employees did not speak up

• Principle 3 -> no governance & misuse of funds

• Principle 4 -> losses not disclosed

• Principle 6 -> breach of asset segregation

• FO of hedge fund manager Bill Hwang

• Highly leveraged derivatives on U.S. equities

• Concealed total exposure to counterparties

• Borrowed heavily to make large bets -> hid big loans to other counterparties; invested heavily which temporarily increased stock price

• Losses in 2021 caused $10bn in counterparty losses

• Principle 1 -> market manipulation

• Principle 4 -> counterparty transparency

• Principle 5 -> no ethic framework

• Principle 6 -> false risk management

• 2 credit hegde funds collapsed on 2007

• Client losses $2bn

• Managers downplayed problems

• Claimed to add personal assets while redeeming funds

• Principle 1 -> Misleading clients about fund health

• Principle 3 -> Withdrew personal assets ahead of clients

• Principle 4 -> Failed to disclose risks and losses

• NY comptroller made investment decisions

• Accepted gifts and donations from allocated firms (2001-2006)

• Conflict of interest not disclosed

• Personal benefits prioritized over pension beneficiaries

• Principle 1 -> Lack of integrity & disregard for beneficiaries

• Principle 3 -> Personal interests ahead of client

• Principle 6 -> Poor and conflicted investment decisions

• CEO accepted bribes from adviser (2002-2008)

• Bribes for allocating to adviser-linked managers

• CEO falsified investment approval decisions

• Severe conflict of interest & governance failures

• Principle 1 -> accepting bribes

• Principle 3 -> no client interests

• Principle 5 -> unethical reward system

• Financial oversight officer

• Supervising and controlling public funds

• Principal

• Agent

• Stakeholder

• Fundamental -> social license / increase societal well-being

• Intrinsic -> capital allocation: match excess with needed capital

• Core -> wealth & risk management

• Collateral -> asset to economy; create jobs & growth opportunities

• Investment industry -> prone for misaligned industry (part. good for industry / bad for society)

• Industry has to adapt for trust & value for society

• Otherwise alternative systems will come with technology (DeFi)

• Chain of intermediaries creating value for clients / system

• Participants

• Technology

• Markets

• Purpose (FICC)

• Professionalism (CVE)

• Assurance (FITL)

  = Value (Outcome & Experience)

• Meet today’s need without compromising future needs -> inv. outcome & impact

• Capital Allocation has primary driver of value creation

• Move excess capital where needed

• Followed by stewardship

• Public Markets

  • Liquidity, Price Discovery, Risk Transfer, Stewardship

• Private Markets

  • Capital Allocation, Active Ownership, Time Horizon, Impact

• Active Responsibility to create long-term growth & manage risk

• Treat stewardship target as own

• Ensure invested capital is managed responsibly

• Shareholder (Economic)

• Shared (Environmental)

• System (Social)

• Corporations should focus on

  • economic

  • environmental

  • social value

• Legal duty to act in clients best interest

• LPDI

  • loyalty

  • prudence & care

  • diversification

  • impartiality

• Ethical & Professional Behavior (ALDA)

• Client-First

• Partnership

• Transparency

• Public responsibility

• ALigns Behavior

• Directs Focus

• Effective communication

• Interpretation may change over context / time

• No universal interpretation

• Priorization of short-term gains vs. ESG

• Social contract thinking

• Society toelrates economic goals as long as society benefits / no harm done

• Trust Model

  • Worthiness of trust (Agent)

  • Willingness to trust (Principal)

  • Trust = capital & domain

• Prone for misaligned industry due to

  • Short-term gains

  • Profit maximization

  • Conflicts of Interest

  • Misaligned Fee/Value

• Follow methodical & transparent process

• Rely on Fiduciary Duty and Professional Behavior

• Behavior aligning with Fiduciary Duty

• Holistic approach

• Fair rewards

• Portfolio Performance

• Client Benefit

• Asset Manager Success

• Good for industry & society

• Bad for industry

• Partially good for society

• Bad for industry & society

• Trust Willingness

• Trust Worthiness

• Trust Capital -> Expectations

• Trust Domain -> Scope of Trust

• Ethics -> set of moral principles guiding behavior

• Values -> individual beliefs that motivate acting

• Purpose & Value

• Professionalism

• Strategy

• Outcome to Organization / Client

• Professionalism -> CVEA -> Assurance (FITL)

• Guided by Purpose & Vision

• Create strategy for successful outcome

• Essential Standards A Professional Must Exhibit For Client Trust

• Acting in Beneficiaries Interests and Avoid Conflicts of Interests

• Investing Prudently

• Judgement with Care

• No Bias

• Avoid Favoring Interests of Particular Beneficiaries Over Other

• Arises When Other Interests Conflict Client Interest & Personal Rationale

• Honesty

• Strong Moral Principles (Loyal, Fair, Care)

• Quality / State of being answerable for actions / results

• Create Behavior Promoting Culture

• Investment Decisions Consider impact

• Client-First

• Act Ethical & Professional

• Consider Societal Well-Being

• Personal Responsibility

• Act & Encourage Moral Courage

• Act as Peer / Partner

• Use Expertise to Client Sucess

• TEO (Trust, Empathy, Open Communication)

• KYC

• Communicate Clearly & Timely

• Align Personal Values & Interests With Client

• Put Client Interest First

• Act in Client Interest -> Demonstrate Loyalty & Trust

• Client-First

• Strong Governance

• Avoid / Disclose Conflicts

• Act to Highest Standards

• Transparent Communication

• Transparency

• Set Goals / Expectations

• Disclose Errors / Costs

• Integrity & Accountability

• Comply / Review Investment Skills & Practice

• Rigorous, Evidence-Based Thinking

• Define Practice & Competencies

• Seek Accreditation

• Ethical Framework & Reward System -> that adapts

• High Quality DD & Reseach

• Holistic Thinking & Risk Understanding

• Client Interaction

• Comply With Law

• Appropriate Assumptions & Models -> Document Work

• Ethical Judgment -> Professional in Stress

• Adapt to New Content & Conditions

• Ongoing Personal & Professional Development

• Curiosity & Seek Education

• Growth Mindset

• Understand Technology & Broader Changes

• Peer Review

• Knowledge Diversity

• Critical Thinking

• Different Perspectives

• Peer Review

• Value Diversity & Teamwork

• Support Ecosystem —> Investment Firms & Regulators