How Slippage and Gray Areas Lead Us Into Ethical Lapses

1. How Slippage and Gray Areas Lead Us Into Ethical Lapses Marianne M. Jennings Professor Emeritus W.P. Carey School of Business Arizona State University

2. The Scary Slides

3. Some Stories • “Lawyer Discipline Invoked After Self-Dealing With Mother’s Estate” (2017) • Put mother in a home • Had her sign a power of attorney and then took over all of her accounts • Mother died one week later • Lawyer was PR for Estate • Under the will, $1,000,000 estate was to go to granddaughter (lawyer’s daughter) • Lawyer remarried and had a son with his new wife • Proposed to his daughter that she share the $1,000,000 with her new half-brother and give him $100,000 • Daughter asked probate court for his removal as PR

4. More Stories • “CFP Charged with $5.2 Million Fraud of Customers and Family, Including the Purchase of a Mercedes with Client Funds.” • “Financial Adviser Overstated Commissions Earned from 50 Clients by $2.5 Million.” • “Whistleblowers Report Client Steering to SEC” • “Trustee’s Excessive Fees and Questionable Use of Funds” • Beneficiary was a 7-year-old with cerebral palsy • Mother failed background check and could not be named as trustee • $230,000 trust • Trustee charged $34,000 in fees • All but $15,000 given to mother for vacations in Hawaii, Washington, D.C. and more – “good for the child”

5. Forbes Criteria for Choosing a Financial Adviser • Credentials • Experience • Criminal Record (absence thereof) • Ethics (disciplinary actions) • Bankruptcies and unpaid liens and judgments

6. What can we learn?

7. 1. There was nothing that was a close call: Clear Ethical Lapses • Conflicts of interest • Personal profits • Lying to clients • Lying to beneficiaries • Withholding information • Misuse of funds or embezzlement • Alteration of documents • False reports and stonewalling auditors

8. 2. Those involved were aware of their ethical lapses.

9. Caterpillar and the Swiss Tax Strategy “We're going to have to create a story. Get ready to do some dancing." Response: "What the heck. We'll all be retired when this comes up on audit.” E-mail exchange between PricewaterhouseCoopers partner, Thomas E. Quinn, and PwC managing director, Steven R. Williams, on the tax strategy they had helped Caterpillar create.

10. Wells Fargo • 2000 – 63 employee reports of “gaming the system” on new accounts • 2002 – all employees in a Colorado branch issued debit cards that customers didn’t ask for • 2004 -- 680 employee reports of “gaming the system” • 2007 – 288 allegations of employee sales misconduct in second quarter • 2007 – branch manager • Teen daughter had 24 accounts • Adult daughter had 18 accounts • Husband had 21 accounts • 2008 --Customers with new accounts had e-mails of “noname@wellsfargo.com • 2013 – Employees talked a homeless woman into opening six checking and savings accounts costing $39 per month • 2013 -- 1,469 allegations of employee sales misconduct in fourth quarter • 2013 – Firing 1% of its employees annually for ethics violations related to gaming the system (CEO called it “immaterial” and cited it as good news) • 2016 – 2 million fake accounts discovered • 2017 – another 1.4 million questionable accounts found • 2016 – 2 million fake accounts discovered; By 2018 – 3.5 million • 2018 -- $1 billion fine; one-half of the board removed by the Fed

11. What Happens?Recognizing the small steps: Stopping Ourselves and Avoiding Slippage

12. 1. Watch that simple, small step. It’s a doozy.

13. Nobody wakes up one day and embezzles $100,000. • The postage, the copier, the fax, the sugar in the break room, the pens, the tablets “I use personal funds for buying office stuff, so it all balances out when I use or take office stuff.” • We slip from there. • The hard, daily exercise of ethical choices.

14. When does stealing become stealing? • The “little white lie” – Why are you not saying? • That first step is not all that obvious • "At first, even a little lie provokes a big response in brain regions associated with emotion, such as the amygdala and insula. The tenth time you lie, even if you lie the same amount, the response is not that high. So while lying goes up over time, the response in your brain goes down.” Dr. Tali Sharot, University College of London • The subsequent steps become less obvious • The mistaken use of the wrong credit card – Continuing use • Brian Ourand, financial adviser, and $1M taken from Mike Tyson

15. Said I Was Sick to Get Out of Work

16. Told Someone That They Looked Okay When They Did Not

17. The Proposed Temptations “Mrs. Jennings, the seals on your windows are broken. You have to replace the windows because of the risk of water and moisture damage. This kind of problem is not covered, unless you can talk one of your grandkids into throwing a golf ball through them and then have your insurance pay for that.”

18. The Hook of Those Small Steps • When a powerful person knows that they have you . . . • Prisoners of each other

19. The Tools for Avoiding the Hook • Advice • Risk Analysis • The Reality of Truth’s Power

20. Costs of Slippage It’s the missing hand rail in the shower that will result in the greatest number of injuries and your highest costs.

21. Truth and Its Percolating Quality The laws of probability do not apply when it comes to the surfacing of unethical or illegal conduct Three people can keep a secret if two are dead. - Hell’s Angels’ motto (courtesy B. Franklin) Lying is good. It’s the only way we ever get at the truth. - Dostoevsky Circumstances beyond your control will cause bad acts to be discovered. - Anonymous • Don’t underestimate probability of truth coming out. • Don’t overestimate your ability to manage the truth.

22. 2. Watch Pressures: Pressure Skews Judgment and Introduces Diagnosis Bias Personal, financial, physical, success pressures The New York Marathon

23. Pressure: Probability from the Financial Analysts Institute P = f(x) P = probability of an ethical outcome x = amount of money involved • “Sometimes desperate in the same thing as stupid.” • Matt Dillon, Gunsmoke • “Man gets spooked, he can’t think too good.” • Festus Hagen – counseling a young man who was running from the law, Gunsmoke

24. The Pressure Prevention Tools • The “Why” Behind Rules, Policies, and Procedures • Defining ourselves

25. The Credo vs. the Chalk Line What lines are smudging ever so gradually?

26. Don’t fall into the either/or conundrum • Clint Walker’s interview with Cecil B. DeMille • The young man’s first job as an auto salesman

27. 3. Watch out for jumbled interests: Conflicts • You are not an unethical person because you have conflicts • The unethical part results from not managing those conflicts • There are only two ways to manage a conflict of interest: • Don’t do it • Disclose it (and always disclose before the media do) • Follow up with necessary recusals, actions, withdrawals • Directing clients into certain funds/charities

28. 4. Be careful not to rationalize! “Everybody else does it.” • “I looked up the word ‘cheat’ in the dictionary and decided it didn’t apply, given that it meant ‘to gain an advantage on a rival or foe.’ I didn’t view doping that way. I viewed it as a level playing field.” • Lance Armstrong, January 2013

29. The “It’s a gray area” Rationalization • Why is it important that it be gray to you? • Is it legally gray? • Is it ethically gray? • Is it a good-faith disagreement? • What if it’s not a gray area? • Does everyone believe it’s a gray area? • Interpretation vs. loophole vs. nondisclosure of relevant information “There will always be a gray area.” M.M. Jennings

30. From Gray to Off-the-Cliff • Couples and estate plans • Estates and beneficiaries • The sign-offs on documents, training, verification • MBA programs and rankings

31. 5. Keep it simple. Think simply. Act simply. Always.

32. If you were on the other side . . .