Should Ethics be Taught in Business and Finance?

I was watching a televised interview of Warren Buffet and Bill Gates at Columbia University recently and saw Warren Buffet field a question about “whether ethics can be taught [in a business school curriculum].” I frequently talk to college students about the CFA program and its role in a financial career, and get similar questions about the ethics segment of CFA studies. I agreed with Warren Buffet when he said that “ethics should really be taught in the home,” but I was sad that he dodged the question about the role of ethics in business school preparation and accreditations.

In short, I think, “YES,” ethics studies are valuable and can make a difference for business students and the businesses that they run.

It is common to laugh a bit and complain about the ethical situations that are tested on things like the CFA examinations, and it is true that some of the questions asked are maddeningly subjective and difficult to figure out. In defense of the CFA examiners, however, they do not fail candidates if they get some of these questions wrong, and it is theoretically possible to pass the exam without giving a single correct response to any ethics question. I do think it is reasonable to ask potential charterholders to be able to answer most ethics questions correctly, particularly if they are going to receive a charter that - should the holder be found in violation of ethical and professional standards - can be suspended or even revoked.

The more common objection, however, is that passing an ethics course or examination is not going to turn an unethical person into an ethical one. There is indeed comic irony in the image of a bright, confident, attractive student who receives an “A” in business ethics by copying homework in some clever way and cheating on the exams. On this point, I agree: having passed an ethics course, perhaps even with strong marks, is no guarantee that the person passing it is therefore ethical. A true, forward-looking, evaluation of a person’s ethical character must consider many more indicators of behavior than simply whether they passed an examination or took a particular course.

But the rationale for ethics courses in business schools and on credentialing examinations is not really about the transformation of unethical people into ethical ones - though one can hope this might happen in a few cases. Rather, it is about building awareness of the ethical landscape surrounding business issues, understanding how ethical dilemmas arise, and how to deal with them at different stages of their development. The hope is to be able to identify, manage, and perhaps avoid ethical difficulties at early stages, when they are easier to handle, rather than discover them late, panic, and search for the most expedient solution, which may itself be ethically problematic.

There is a big difference between someone who is unethical - willing to break moral and ethical norms for personal gain - and someone who is simply unaware of the ethical dimensions of the decisions they make. The former is unlikely to be reformed by an ethics curriculum, but the latter is likely to gain something from it, and the business community in general will profit by the improvement in the quality of its membership. I have no hard evidence for this, and it may reflect my conservatively optimistic view of human nature, but I would guess that - particularly at early stages in a career - there are many more ethically unaware or neutral students than truly unethical ones, and the ethically unaware do benefit from ethics training.

The ethically unaware and untrained may still engage in unethical behavior, but in these cases, it is often because they have unwittingly stumbled into situations of conflict of interest, of competing pressures from more senior staff, or simple ignorance of the expectations and needs of their supervisors and clients. In these cases, education which focuses on how the conflict evolved, what ethical standards are at stake, what plausible actions can be taken to resolve the situation and avoid it in the future are genuine contributions to the education of new entrants to the professional community.

Even ethically committed may benefit from ethics training just as much as the ethically unaware. Candidates who have, as Warren Buffet said, “learned ethics in the home” can still benefit by learning alternative methods of handling the types conflicts that may not have been apparent before, simply because the context of a business situation may not have been considered much in one’s “home training.” These professionals can also benefit from ethics training because some business profits that might otherwise have been forgone due to an ethical concern may now be realized because of ethical alternatives that have been learned to obtain them. Even those who take their ethics and living an ethical life very seriously are not born knowing how to navigate the complex situations that life and business situations throw at all of us. Ethics training can help to identify these alternatives and create both business and social value in the process.

Although this point can fill several blog posts or even several books, a more ethical business is in fact a less risky business. To the extent that “ethics risk” is an unnecessary risk (i.e. to the extent that there are ethical alternatives to unethical business practices), ethical behavior creates economic, business, and shareholder value. I do not necessarily believe that all unethical business practices have ethical alternatives, but I do think that there is much value to be extracted by substituting ethical for the unethical in many cases. The challenge is that most “ethics risk” is “tail risk,” and so a long period of outperformance by less ethically constrained companies can sometimes make it seem as though ethical constraints are a business liability, particularly in contexts where there is a strong first-mover advantage and/or information is scarce. It is likely that ethical companies perform adequately or even better than unethical on a risk-adjusted basis, but this is a topic for a separate posting.

Ethics courses and ethics requirements will not rid the business community of the truly unethical, but it can turn the ethically unaware into ethically responsible members of society and reduce the number of unintentional ethical breaches that destroy trust, raise the cost of capital (through increased risk premia), and make society less productive. This is the true goal of ethics education in business and credentialing: to create more “virtuous” business participants and a more efficiently functioning economy, and I support it heartily.