Professors Steven Kaplan, Luigi Zingales, and Tobias Moskowitz Tackle Ethics

Published on January 11, 2010

Among three pieces of “common sense advice” MBAs can use in making ethical decisions on the job is to not do anything they would not want to see on the front page or the homepage of the Wall Street Journal, said Steven Kaplan, Neubauer Family Professor of Entrepreneurship and Finance. “I think of this as an argument for greater transparency,” Kaplan said during a Myron Scholes Global Market Forum, sponsored by the Initiative on Global Markets, at Ida Noyes Hall on January 11.

The other two tips Kaplan offered were to focus on “fundamentals and substance” and to avoid doing anything illegal. “The latter is obvious, but clearly, people violate it,” he said. “In the case of fundamentals and substance, that means stressing cash flow and cash. Don’t take actions that are purely cosmetic and look good, but have no substance and do not generate cash or value. If you follow that advice, you will more often than not end up in the right place.”

Most difficult decisions, ethical or otherwise, involve tradeoffs, Kaplan said. “In those cases, there may be no one right answer for everyone,” he said. “In making a decision, you want to make the decision that makes you better off. Act in your self-interest. But you really have to think very broadly about what your self-interest is. For example, it’s wrong to think that taking an unethical or illegal action is in your self-interest. That may lead to short-term gain, but it almost certainly leads to long-term negative consequences.”

Educators should emphasize the essential role reputation plays in making ethical decisions, but it does not solve all ethical dilemmas, said Luigi Zingales, Robert C. McCormack Professor of Entrepreneurship and Finance and David G. Booth Faculty Fellow. “Sometimes reputation is actually the wrong incentive,” Zingales said. “If I am an assessor for real estate transactions, my incentive is not to create trouble. If I want to be referred to other real estate agents, I do not want to create problems that prevent the transaction from being completed.”

Tradeoffs are invaluable in ethical decisions, but sometimes they involve guile and trickery, he said. “In the case of a company outsourcing work to eliminate the jobs of employees with high health care costs, you are bypassing the law because technically you cannot fire somebody over health insurance,” Zingales said. “You can claim you are restructuring, but your real purpose is to get rid of those people.”

MBAs must think “very, very deeply” about the tradeoffs involved in ethical decisions, said Tobias Moskowitz, Fama Family Professor of Finance. “You have to consider short term versus long term and gains versus losses, and not just your reputation among your peers, but your reputation in broader society,” Moskowitz said. “Once you do that, even if you come to the same decision, the point is that you’ve gone through that thought process of thinking very carefully about all the ramifications of your decisions. You can come to a better decision and, more importantly, defend that decision.”

Ethics did not necessarily cause the recent financial crisis, but definitely contributed to it, he said. Many investors did not fully appreciate the long-term consequences of some decisions, at least partly because of the incentives created on Wall Street, Moskowitz said. Standing up against the crowd of investors who are making such decisions is difficult and could put an investor out of business, he said.

However, the ethics must be questioned of not just Wall Street traders, but all participants in the investments leading to this crisis, Moskowitz said. “The incentive to sell off all these mortgages was created by the government in its own self-interest,” he said. “Politicians wanted to gain votes with a certain segment of the population. The other people partly to blame are the ‘poor, unsophisticated borrowers.’ Let’s face it. People were running through the door to borrow money to buy homes they couldn’t afford, because it was a really good deal. They, too, were acting in their self-interest.”

Phil Rockrohr