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And: First, Do No Business. The MBA Oath

Just walk ‘round like you own the place. Always works for me.
- Dr. Who, “The Shakespeare Code”

First, do no harm. Then, when they’re not looking – f*** ‘em where they breathe!
This was the text first considered for the new Code of Ethics for new MBA graduates. After due consideration, it was shelved in favor of a somewhat more flowery text that includes such notions as protecting the interests of shareholders, managing one’s enterprise in good faith, and taking responsibility for one’s own actions. We especially like the undertaking to “understand and
uphold, both in letter an in spirit, the laws and contracts governing my own conduct and that of my enterprise.” Considering how many folks get to squirm out of a tight spot by pointing to inconsistencies in the black letters of law or contract, it would be a welcome breath of fresh air to have managers one could actually rely on to interpret such documents for the benefit of the enterprise.

Now (WSJ, 2 July, “Adviser Adopts Cuomo’s ‘Code Of Conduct’”) Pacific Corporate Group Holdings LLC has voluntarily signed on to NY Attorney General Cuomo’s new document, the Code of Conduct. In so doing, PCG “also will return $2 million in fees it received from the New York State Common Retirement Fund.” As has been earlier reported, both the Carlyle Group and Riverstone Holdings have signed this documents and made payments to the State of New York.

The Code of Ethics is now a requirement for investment advisory firms, and brokers and hedge funds have long wrestled with the compliance manual, endlessly supplemented by memoranda and addenda. This cumbersome document is almost never read by any person to whom it pertains, but read in meticulous detail by examiners who pick apart every sentence and now actually quiz
employees on its content, and on how the prescribed procedures are implemented.

The Code of Ethics is a sort of pre-consent decree. Regulators often have a hard time proving a case, but at a certain point it becomes compelling for both sides to seek a settlement. So the firm, or individual, pays a fine and enters into an agreement “without confirming or denying” the charges. They then promise that, even though they do not admit that they violated a rule or broke a law, they will not violate that rule or break that law in the future.

This has now led to the Code of Ethics, where firms and employees sign a document in advance of engaging in any business, affirming that they will not break the law.

This process of regulatory creep goes on constantly. In an ideal world, it would be a positive. Regulators who were well versed in the industry would fine tune their approach as the industry evolved. Over time, regulators in the field would report a consensus that the industry had changed, and the commissioners and senior staff would review rules and procedures accordingly. From this process would evolve Best Practices. New rules would be drafted, and old ones scrapped or modified to keep pace with reality. This would keep the rule books lean, and the rules and
practices current. It would achieve buy-in and self policing from the industry and would benefit all.

Until the SEC and FINRA drop the pretense of knowing what they are doing and actually hire large numbers of people with real industry experience, regulatory creep will ensure that old rules stay in place – and stay old – while new rules will continue to display a tin ear with respect to the marketplace. In the current political environment, the regulators are too busy appeasing special interests. Ditto the White House and Capital Hill.

Check out this howler from the Wall Street Journal (2 July, “SEC Plan Aims To Better Foretell Risks”) in a description of new rules proposed to regulate executive pay. “The proposed compensation rules would require public companies to disclose information about how compensation policies can lead to increased risk-taking and explain how those risks are managed. Companies would only need to provide this information, however, if the risks could have a material effect on the business.”

When is disclosure not disclosure? When it’s not material. Who gets to decide when an item is material? Well, since the company itself will not have to make a disclosure unless it is material, logic dictates that the company itself makes the determination as to materiality. After all, no one but the company itself will ever have
access to this information. Why did we just bother using taxpayer resources to discuss and propose a rule designed to enshrine in statute a company’s prerogative to scam its shareholders?

MBA students are lining up to swear an oath of morality, integrity, and good business practices. Why aren’t their professors telling them that it puts them at an immediate disadvantage in the careers they are preparing for?