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INTEGRITY CAPACITY AND ENHANCED PROFESSIONALISM IN FINANCIAL ANALYST PERFORMANCE

INTEGRITY CAPACITY AND ENHANCED PROFESSIONALISM IN FINANCIAL ANALYST PERFORMANCE. Joseph A. Petrick, Ph.D., SPHR Director, Institute for Business Integrity Raj Soin College of Business Wright State University. The Dayton Society of Financial Analysts Dayton, Ohio October 6, 2004.

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INTEGRITY CAPACITY AND ENHANCED PROFESSIONALISM IN FINANCIAL ANALYST PERFORMANCE

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  1. INTEGRITY CAPACITY AND ENHANCED PROFESSIONALISM IN FINANCIAL ANALYST PERFORMANCE Joseph A. Petrick, Ph.D., SPHRDirector, Institute for Business IntegrityRaj Soin College of Business Wright State University The Dayton Society of Financial Analysts Dayton, Ohio October 6, 2004

  2. A. AIMR Code and Standards & CFA Professional Challenges B. Integrity Capacity Model & CFA Professionalism 1. Process Integrity Capacity & CFA Professionalism 2. Judgment Integrity Capacity & CFA Professionalism 3. Developmental Integrity Capacity & CFA Professionalism 4. System Integrity Capacity & CFA Professionalism Agenda

  3. Agenda Continued • Microeconomic & Macroeconomic Improvements 1. Microeconomic Moral Accountability & CFA Performance 2. Macroeconomic Moral Accountability & CFA Performance • Reinforced Agenda for Responsible CFA Leadership

  4. AIMR Code of Ethics • Act with integrity, competence, dignity, and in an ethical manner when dealing with the public, clients, prospects, employers, employees, and fellow members. • Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession. • Strive to maintain and improve their competence and the competence of others in the profession. • Use reasonable care and exercise independent professional judgment.

  5. AIMR Standards of Professional Conduct • Fundamental Responsibilities • Relationships With and Responsibilities To The Profession • Relationships With and Responsibilities To The Employer • Relationships With and Responsibilities To Clients and Prospects • Relationships With and Responsibilities To The Investing Public

  6. Crisis in Professional Responsibility 1. Current Perceptions of Evasion and Avoidance of Professional Responsibility 2. Cultural Shift in Acceptance of Explanations as Excuses for Professional Irresponsibility 3. Professional Shortcuts in the Face of Moral Complexity 4. Deficiencies in Professional Ethics Standards and Training

  7. Professional Rationalization Risks Rationalization Risks 1. Denial of Responsibility (What can I do?) 2. Denial of Injury (No one was really harmed.) 3. Denial of Victim (They deserved it.) 4. Social Weighting (Others are worse.) 5. Appeal to Higher Loyalties (A higher-order value) 6. Metaphor of the Ledger (We’ve earned the right.)

  8. Professional Socialization Risks Socialization Risks 1. Co-optation (Rewards are used to induce attitude changes toward unethical behavior.) • Incrementalism (Newcomers are gradually introduced to questionable and eventually to unethical behavior.) • Social Cocooning (Compartmentalize, compromise and use euphemistic language to belong.)

  9. Integrity Capacity Model & CFA Professionalism The individual and collective business and professional capability for repeated process alignment of moral awareness, deliberation, character and conduct that demonstrates balanced judgment, enhances sustained moral development, and promotes supportive systems for moral decision making.

  10. Instrumental Value of Integrity Capacity Sustainable Competitive Advantage, Public Trust & World-Class Business Performance Business & Professional Integrity Capacity Reputational Capital

  11. Dimensions of Integrity Capacity 1. Process Integrity Capacity & CFA Professionalism 2. Judgment Integrity Capacity & CFA Professionalism 3. Developmental Integrity Capacity & CFA Professionalism 4. System Integrity Capacity & CFA Professionalism

  12. Process Integrity Capacity & CFA Professionalism The alignment of individual and/or collective professional moral awareness, deliberation, character, and conduct on a sustained basis, so that enhanced reputational capital results.

  13. Process Integrity Capacity & CFA Professionalism • MORAL AWARENESS - Perception - Sensitivity • MORAL DELIBERATION - Analysis - Resolution • MORAL CHARACTER - Cognitive Readiness to Act - Volitional Readiness to Act • MORAL CONDUCT - Responsible - Sustainable

  14. Judgment Integrity Capacity & CFA Professionalism The balanced and inclusive use of key ethics theories and their subordinated cognate theoretical resources in the analysis and resolution of individual and/or collective professional moral issues.

  15. CFA Professional Judgment Integrity Capacity and the Balanced R2C2 Approach Flexibility Build Virtuous Character Enhance Supportive Contexts Internal External Follow Right Rules Achieve Good Results Control

  16. Positive & Negative Zones of CFA Professional Moral Judgment Integrity NegativeZone Context Abdicates Authority Wastes Energy Positive Zone Character Shows Consideration EnvisionsChanges Slows Production Disrupts Continuity Acquires Resources Facilitates Interaction Negative Zone Amoral Professionalism Collects Information Initiates Action Results Neglects Possibilities Destroys Cohesion Rules Maintains Structure Provides Structure Stifles Progress Offends Individuals

  17. CFA Professional Judgment Integrityand De-humanization Risks NegativeZone Context Positive Zone Character DRIVE TO BOND DRIVE TO LEARN Negative Zone Amoral Professionalism DRIVE TO DEFEND DRIVE TO ACQUIRE Results Rules

  18. Flexibility Context (ADAPTABILITY) Character (INVOLVEMENT) Internal External Results (EFFECTIVENESS) Rules (CONTINUITY) Control

  19. Developmental Integrity Capacity & CFA Professionalism The cognitive improvement of individual and/or collective professional moral reasoning capabilities from a stage of self-interested connivance, through a stage of external conformity, and onto a stage of internalized commitment to moral principles.

  20. Professional Firm Work Culture:Moral Development Stages Principled Integrity HOUSE OF INTEGRITY (Commitment) Democratic Participation Allegiance to Authority HOUSE OF COMPLIANCE (Conformity) Popular Conformity Machiavellianism HOUSE OF MANIPULATION Social Darwinism (Connivance)

  21. System Integrity Capacity & CFA Professionalism The development and alignment of the moral infrastructure within the professional organization and the shaping of the external moral environment of the professional organization to provide a supportive context for sound moral decision making.

  22. Compliance-Based Professional Organization Internal Systems 1.Establish compliance standards and procedures 2. Assign high level individuals to oversee program 3. Exercise due care in delegating discretionary authority 4. Communicate and train

  23. Compliance-Based Professional Organization Internal Systems 5. Monitor, audit, and provide safe reporting system 6. Enforce appropriate discipline with consistency 7. Respond to offences and prevent further misconduct 8. Sarbanes-Oxley Act of 2002

  24. Integrity-Based Professional Organization Internal Systems 1. Moral Leadership at the Top • Ethics Needs Assessment & Compliance Standards in Place 3. Ethics in Strategy and Structure 4. Integrity Steering Committee 5. Statement of Values/Written Code of Conduct

  25. Integrity-Based Professional Organization Internal Systems 6. Ethics Policy and Procedure Manuals 7. Ethics in Selection, Socialization, and Performance Subsystems 8. Ethics in Appraisal, Rewards/Recognition/Incentive, and Development Subsystems • Ethics in Communication Processes and Work Attitudes • Ethics Training and Education Programs

  26. Integrity-Based Professional Organization Internal Systems 11. Ethics in Decision-Making/Meeting Processes 12. Organizational Integrity Advisor Responsibilities 13. Ethics Reporting and Conflict Resolution Processes 14. Enforcement Processes of Ethical Standards 15. Ethics Monitoring, Auditing & Improving Subsystems 16. Ethics System and Quality Work Process Control and Improvement

  27. Managing Professional OrganizationalExternal Systems (NL, LS, & MS) 1. Domestic External Environment -Corruption Elimination and/or Control -Proactive Positive Stakeholder Relations, CFA Code & Standards, Laws, & Triple Bottom Line Accountability 2. Global External Environment -Corruption Elimination and/or Control -Proactive Positive Stakeholder Relations, CFA Code & Standards, Laws, & Triple Bottom Line Accountability

  28. Microeconomic Professional Moral Accountability & CFA Performance A. Individual Accountability Improvement 1. Demonstrated Process Integrity Capacity 2. Demonstrated Judgment Integrity Capacity B. Group Accountability Improvement 1. Demonstrated Developmental Integrity Capacity 2. Demonstrated System Integrity Capacity

  29. Macroeconomic Professional Moral Accountability & CFA Performance • Professional Association/Industry Accountability Improvement 1. More rigorous quality control 2. Proactively partner with competent government regulators 3. Strengthen CFA integrity capacity education B. Political Economy Accountability Improvement 1. Challenge system pressures for earnings management 2. Economic democracy and transparency 3. Expand GIPS & international accounting harmonization

  30. Reinforced Agenda for Responsible CFA Professional Leadership • National commission with task forces on improving microeconomic levels of moral accountability for CFA performance • International commission with task forces on improving macroeconomic levels of moral accountability for CFA performance • Enhanced integrity capacity building skills in CFA ethics education

  31. Contact Us Joseph A. Petrick, Ph.D., SPHRDirector, Institute for Business IntegrityRaj Soin College of Business, 206 Rike HallWright State UniversityDayton, OH 45435-0001Phone: (937) 775-2428Fax: (937) 775-3545Email: joseph.petrick@wright.edu Website: http://www.wright.edu/business/ibi/

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