Reporting the Numbers – Why Ethics is Good for Business

In Hollywood, there is no shortage of movies about shady financial dealings, greedy financiers and associated lavish lifestyles. Characters portrayed in blockbusters such as Wall Street, The Wolf of Wall Street and The Big Short are classic archetypes of corporate mavericks ‘gone bad.’

Who can forget the classic words of Gordon Gekko in the movie Wall Street, words now part of Hollywood legend? In an odd twist of fate, his classic phrase “greed is good” served as a premonition of what was to become of the world’s financial markets.

Are Professionals in the Finance Industry More Prone to Ethics Violations?

While the majority of financial industry professionals don’t fall under the category of a Gordon Gekko or Bernie Madoff, the question still remains. Are people working in the industry more prone to ethics violations and if so, why?

The catastrophic financial crisis of 2007-2008 had many causes, one of which was the tendency of key players to push the boundaries of what was considered legal in the industry. At stake was the maintenance of efficient and competitive capital markets, a core value of the sector, yet somehow there was a widespread failure by a variety of stakeholders to manage the activities that led to the breakdown.

A Strong Sense of Ethics is Good for Business

It’s important to consider the nature of the industry itself. Money markets are essentially driven by emotion and stock markets are often influenced by speculation and mass market hysteria.

In many companies, the pressure to make more is often prevalent. Financial products are often quite complex by design, making it even more important for consumers to feel that they are being given the right information to choose a product that’s right for them.

Professionals are also exposed to potentially sensitive financial information on a daily basis. Information that, if not handled properly, could lead to charges of insider trading.

In the finance industry, a strong sense of ethics is the cornerstone to the efficient operation of capital markets. A lack of trust between peers and/or companies and their clients means the whole system is broken and the markets fail. Put simply, a strong sense of ethics and adherence to governance rules foster a culture of trust between players in the industry. This is good for business both from an internal as well as external perspective.

The Importance of Ethical Standards and Corporate Governance

While there are many examples of financial crises in the U.S., Canada is not immune to financial or ethics violations.

In 2018, the Deposit Insurance Corporation of Ontario (DICO) took control of PACE Savings and Credit Union Ltd. as it investigated governance issues. PACE was placed under “administration” as DICO moved to protect depositors.

Cannabis producer CannTrust Holdings Inc. laid off 20 per cent of its workforce in response to regulatory issues related to unlicensed growing and possible insider trading. The Ontario Securities Commission is involved as well as Health Canada who cancelled their license in September. The company estimated that inventory and assets impacted by the regulatory issues would be about $51 million.

To gain full regulatory compliance, CannTrust said it would destroy about $12 million worth of plants and about $65 million worth of inventory. In response to the announcement, the company’s U.S. listed shares rose 24 per cent.

Accountability – Encouraging Ethics and Transparency

While it’s important for individuals in the industry to maintain professional and ethical standards, it’s also up to organizations to promote and maintain industry wide codes of ethics and behaviour. Should someone be made aware of unethical activities, nobody wants to be in the position of having to be a whistleblower.

As a result of the financial crisis of 2007-2008, numerous consumer and protection acts were implemented in the United States including the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act included several components and was designed to promote financial stability and protect consumers from abusive financial services practices.

The majority of Canadian organizations hold financial professionals to a high degree of ethical standards by publishing guidelines outlining ethical standards and governance. Most governing bodies responsible for key financial designations such as CPA’s, CFA’s and CSC’s also publish detailed Codes of Ethics and Standards of Professional Conduct.

As well, governing bodies such as IIROC monitor compliance of regulated firms and their employees on issues related to business conduct, financial operations and trading practices. As of June 2019, the Financial Services Regulatory Authority of Ontario (FSRA) now assumes regulatory duties of the Financial Services Commission of Ontario (FSCO) and DICO. It regulates Ontario’s non-securities financial services including insurance, pensions, credit unions and mortgage brokers.

While not immune to cases of insider trading and shady business practices, it’s good to know that overall there is a high degree of trust in the Canadian financial system and the employees that work within it.

By encouraging and maintaining workplace safeguards designed to encourage ethical behaviour in the financial industry, organizations can continue to lead the way in ensuring fairness and transparency for all stakeholders.