Investor relations (IR) is rife with potential ethical issues. But how often do IR professionals find themselves in an ethical dilemma? On the surface, the answer may be dependent on the industry and the business, whether it’s a public or a private firm, and the size of the company, to name a few. However, a more accurate answer should be based on two levels: (i) personal level: the IR professional’s own conscience; and (ii) corporate level: how the firm embraces its core values and ethics, as Neill and Barnes (2018) pointed out in their book titled Public Relations Ethics: Senior PR Pros Tell Us How to Speak Up and Keep Your Job.
The more profitable the business, the greater the conflict IR professionals may face. Real estate investments usually involve a great deal of capital, therefore making it vital that IR professionals are aware of potential ethical issues. Subsequent to the Townsend and Woodbridge cases, we realize that determining if IR professionals are aware of and can help avoid those ethical issues is extremely important to the IR profession.
The Chartered Financial Analyst (CFA) Institute, the world’s most reputable association for investment management professionals, requires its members to abide by the Code of Ethics and Standards of Professional Conduct. Specifically, the code of ethics include integrity, competence, diligence, respect, investors’ interests over personal/the firm’s profit, reasonable care and independent professional judgement, and continuing professional development. In addition, CFA Institute emphasizes the standards of professional conduct, namely:
Professionalism (Knowledge of the Law; Independence and Objectivity; Misrepresentation; Misconduct)
Integrity of Capital Markets (Material Nonpublic Information; Market Manipulation)
Duties to Clients (Loyalty, Prudence, and Care; Fair Dealing; Suitability; Performance Presentation; Preservation of Confidentiality)
Duties to Employers (Loyalty; Additional Compensation Arrangements; Responsibilities of Supervisors)
Investment Analysis, Recommendations, and Actions (Diligence and Reasonable Basis; Communication with Clients and Prospective Clients; Record Retention)
Conflicts of Interest (Disclosure of Conflicts; Priority of Transactions; Referral Fees)
Responsibilities as a CFA Institute Member or CFA Candidate (Conduct as Participants in CFA Institute Programs; Reference to CFA Institute, the CFA Designation and the CFA Program)
Consistently, the Public Relations Society of America (PRSA), the largest association representing global public relations (PR) practitioners, requires its members to comply with the six codes of ethics, notably: advocacy, honesty, expertise, independence, loyalty and fairness. Additionally, there are guidelines on PRSA Code Provisions of Conduct, specifically on free flow of information, competition, disclosure of information, safeguarding confidence, conflicts of interest and enhancing the profession.
Significantly, the National Investor Relations Institute (NIRI), the world’s largest professional investor relations organization, provides guidelines on Regular Member Code of Ethics and Associate Member Code of Ethics, to which its members pledge their adherence. NIRI’s Code of Ethics underlines integrity, credibility, fair disclosure, laws and regulations awareness, confidentiality, fair dealing, independent judgment, conflicts of interest, maintenance of highest ethical standards, unethical conduct reports, dignified manner, prioritization of shareholders’ and other stakeholders’ interests, transparency, and avoidance of potential ethical issues. Particularly, NIRI’s independent Ethics Council offers advice and counsel to its members and the NIRI Board.
In the Townsend case, there were seven pages in Exhibit B of the Dallas Police and Fire Pension System Investment Consultant Agreement (pp. 65-71) signed by Townsend dated Oct 1, 2004. Townsend cited the CFA Institute’s (formerly named the Association for Investment Management and Research) Code of Ethics and Standards of Professional Conduct. Nevertheless, according to DPFP’s lawsuit, Townsend failed to comply. Let’s have a look at Townsend’s website. There is no description of core values or ethics under any form, which leads one to deduce Townsend may not hold core values and ethics as important.
In their article titled Moral Person and Moral Manager: How Executives Develop a Reputation for Ethical Leadership, Trevino, Hartman and Brown (2000) pointed out that it’s crucial for employers to communicate their core values because “if people do not hear about ethics and values from the top, it is not clear to employees that ethics and values are important.” This has become a trend as companies and organizations promote their core values on their website. This is also considered a means of company branding, as many scholars indicated.
CBRE Global Investors (CBRE), one of the world’s leaders in real estate services, sets an example in this regard. Private Equity Real Estate (PERE), the world’s leading publication for private real estate markets, ranked CBRE number 9 among the world’s top 50 private real estate firms in 2017. CBRE has a dedicated site for Ethics and Compliance, particularly providing a 24/7 Ethics Helpline with an independent company, EthicsPoint, to handle ethical reports. The real estate firm states that, “CBRE has a no tolerance policy for retaliation for raising a concern under the Standards of Business Conduct or for reporting misconduct.”
In his business ethics journal titled Corporate Ethical Codes: Effective Instruments for Influencing Behavior, Stevens (2008) pointed out that merely stating core values and ethics on a company’s website doesn’t prevent unethical conduct. Rather, it’s critical that the company instill those values and ethics in its culture. In illustration, Townsend wrote the code of ethics and executed the contract, nonetheless the firm didn’t practice it, according to DPFP’s lawsuit.
In their article titled Ethical Leadership: A Social Learning Perspective for Construct Development and Testing, Brown, Trevino and Harrison (2005) defined ethical leadership as “the demonstration of normatively appropriate conduct through personal actions and interpersonal relations, and the promotion of such conduct to followers through two-way communication, reinforcement and decision-making.” Because of the absence of ethical communication on Townsend’s website and the absence of two-way communication in Townsend’s practice, it’s challenging to identify ethical leadership at Townsend.
Essentially, Neill and Barnes (2018) highlight that “Leadership also involves listening to the concerns of various stakeholders.” IR professionals are not only the firm’s assets, but they also serve as “the eyes and ears” of investors and the financial community. Hence, ethical leadership will help the IR professional achieve mutually beneficial relationships between the firm and investors.
On the personal level, as Neill and Barnes (2018) pointed out in their book, if an IR professional fails to recognize it’s an ethical issue, moral behavior may not prevail. Thus, it’s paramount that students and entry-level IR professionals learn about the code of ethics as much as they learn about the business, the financial background and the real estate industry. As a result, they will acquire ethical sensitivity.
Furthermore, it will be beneficial not only to the company but also to the community when the employer lives its culture every day and fully engages its employees in ethical practice even from the recruitment phase. This explains why in addition to the investment team, IR professionals should integrate with other departments such as marketing, public relations, legal, and human resources to make sure newly recruited employees will become part of the firm’s culture. Successful efforts of this integration will also help reinforce the firm’s core values and ethics, and prevent potential crises.
Finally, Neill and Barnes (2018) offered IR professionals helpful tips to “walk the talk” in this regard, including: frequently review your company or industry code of ethics, gather case studies from various sources, check updates on related websites, be ethically sensitive, attend training on ethics (i.e. Ethisphere, webinars, meetings and so on), read blogs, talk to mentors or senior trusted colleagues, observe and learn from others’ successes and mistakes, network, and seek opportunities to reinforce company’s core values.
Questions for discussion:
What are the challenges for IR professionals to recognize a potential ethical dilemma? What should be done to overcome these challenges?
What are some good ways for a firm to promote and reinforce its core values and ethics?
What should IR professionals avoid when it comes to ethics?
How do IR professionals integrate with other departments on ethics?