2017 was the year ethical failure dominated news headlines – By Fundhouse
Cartoonist Zapiro described Jacob Zuma’s long-awaited exit as President of the country as the end of an error. But does this mean that in South Africa we can anticipate the dawn of an ethical era?
Time Magazines Person of the Year for 2017 was #metoo. This referred to the many women who came forward during 2017 to share their experience of sexual harassment and abuse from men in positions of power.
Donald Trump allegedly turned down the possibility of being Time Person of the Year for the second year in a row. Time magazine denies any intention to bestow this accolade on Trump. He suggested it anyway. No surprise. Fake news was a lead story in 2017. Some argue that’s how Trump got elected anyway.
Whether in the White House, Hollywood, the British Houses of Parliament or the hallowed halls of Eskom, the theme of ethical failure dominated the global news in 2017. It seemed no sector was immune to the spread of the seemingly infectious disease of ethical failure.
Steinhoff ended the year by showing how virulent the strain of the disease is. It succumbed to the symptoms of ethical failure and handed us what may become South Africa’s biggest corporate failure.
Is 2018 the year good triumphs over evil?
Which is why most South Africans celebrated Valentines Day 2018 with such vigour. Good finally triumphed over evil. Zuma finally exited, and Ramaphosa has now taken over. Currency and equity markets seem to like the good guy. I am sure as a financial planner, you are breathing a huge sigh of relief. Now you are likely to enjoy your conversations with clients about South African politics a little more than you did in 2017.
But is our politics now really immune to the disease of ethical failure? A quick glance around the world, and a dip into history at any time in any place would suggest not. Some might argue that politics is a particularly dirty game and perhaps not the best proxy for what constitutes ethical behaviour. But as the poet Alexander Pope said, to err is human. So to what extent do we err in the financial planning industry?
How widespread is ethical failure in the financial planning industry?
This was a question we explored in late 2017 when we ran the Fundhouse Ethics Survey of over 280 independent financial advisers. The survey constituted 10 questions and was completed anonymously, online or on paper. A full report of the survey will be released separately, but with the Ramaphosa inspired shift in ethical sentiment in South Africa it is worth recognizing three sobering insights that the survey provides.
Contrary to popular belief, people are not inherently ethical
First, despite much research to the contrary, most people believe that a person is either inherently ethical or not. Cyril is ethical. Jacob is not. The survey bears this out, with just over 92% of respondents agreeing with the statement you are either ethical or you are not. Only 2% of respondents disagreed with this statement with the balance unsure.
Behavioural Economist, Dan Ariely, offers profound and disturbing insights about the falsehood of this statement in his book, The Honest Truth about Dishonesty How we Lie to Everyone especially Ourselves. In the same vein, Harvard Academic, Max Bazerman suggests that we all suffer from something called Bounded Awareness, which refers to the ways in which we systematically and predictably act unethically without any intention of doing wrong. The sad truth is that Cyril has as much chance as anyone of disappointing us, despite his best intentions. His nickname Buffalo comes from his R18m bid to buy a buffalo in an auction. Despite not winning the bid, he apologized for doing it.
Unethical behaviour is pervasive in the financial planning industry
Which brings us to the second insight in from the survey, the extent to which unethical behaviour is prevalent in the financial planning industry. In order to gauge this, we asked the question: Have you ever seen any unethical acts during the course of doing business?
It is startling that over 82% of respondents say that they have seen unethical acts during the course of doing business, and with almost 6% saying maybe push the reality of this number closer to 90%. It could be argued that this response casts a huge shadow over the profession of financial planning in South Africa. It is a view expressed by insiders – those best positioned to know what is ethical or unethical in the process of giving and implementing financial advice. We all know that financial planning often gets bad press in the public eye. The insiders seem to be telling us this may be justified.
To give a sense of how startling the response to this question is, in a survey conducted by a US law firm five years after the 2008 financial crisis, a similar question was asked of 250 Wall Street insiders (not only financial planners but also investment consultants, fund managers, stockbrokers etc.) In this survey, 23% of respondents said that they have observed or have firsthand knowledge of wrongdoing in the workplace. A strikingly lower proportion than the Fundhouse survey shows.
Reporting of financial planning professionals’ wrongdoing is low
If so many South African financial planners have seen unethical behaviour, the obvious next question to ask, which we did in the survey is: Have you ever reported the wrongdoing of a fellow professional or business?
Unfortunately, the responses to this question show that despite the extraordinarily high number of people who say they have seen unethical acts by fellow professionals, only about a third (34,8%) of respondents have actually reported wrongdoing. 65,2% said that they have never reported wrongdoing.
We now have an answer to the question that often gets raised by financial planners when we run Ethics sessions with them: why don’t the authorities act more vigilantly and harshly against perpetrators of unethical acts? It would appear that the simple answer is that potentially the authorities don’t necessarily know when such acts are taking place. This makes taking action difficult.
Which brings us back to Cyril and Jacob. A key influence on Zexit was the courage of whistleblowers. They reported wrongdoing. Given that we are not inherently ethical means that the press, politicians and the public will have to be as alert in the reign of Cyril as they were under Jacob. Hopefully, there will be less to report on.
Financial planners CAN make a difference to clean up the industry
If financial planners are to play their role in the dawn of an ethical era in financial planning, there are probably at least three things to do: one, accept that we are all prone to unethical behaviour; two, don’t turn a blind eye; and three, when you see an unethical act, report it. Unfortunately easier said than done.
In the Wall Street survey, 89% of respondents indicated a willingness to report a wrongdoing. Despite a $500 million whistle-blower fund set up by the SEC as part of the Dodd-Frank financial overhaul law, very few have come whistleblowers have come forward. In the words of Jordan A. Thomas, the initiator of the Wall Street survey, we are seeing a culture of silence, there’s an unwillingness to come forward.
As Dan Ariely and Max Bazerman suggest, there is often a gap between our intentions and ultimate actions. May 2018 be a year when we all consciously try to close this gap in our own profession. What better way to celebrate the end of an error and the dawn of a new era?
Written by our research associate, Fundhouse.