The principles of fairness, consistency and beneficial to the proper parties, plus such things as “morality,” and other such items to consider, may be called “ethical theories” that form the basis for ethical rules. But as one would suspect, very rarely is there a clear-cut situation where such rules can be applied with no hesitation and with knowledge that the ethical solution has been reached – no ifs, ands or buts.
What if you promised your family to take them to Disney World this summer? However, just a few days before the planned trip you are informed that your daughter, who has a learning disability, must be tutored during the summer months in order for her to be admitted to the next grade with all of her friends. This presents a dilemma as the tutoring will be expensive and you are not sure that you can afford it and keep another promise to your son to buy him a new bicycle so that he can go to and from Little League practice and games in the Fall. Also, if you took a week to visit Disney World, your daughter would lose that much tutoring and the information that she did not learn could be crucial to her final grade and for her moving to the new class. This is called a “real” dilemma as more than pure reasoning is involved, obviously there are emotions involved too.
F There are those who appeal to fairness and rights over the consequences, and then there are those who appeal to consequences over fairness and rights.
No discussion of dilemmas would be complete without bringing up the decision that was made by President Truman to use atomic bombs in Japan, and by doing so, ending World War II. Those who agreed with his decision say that it was worth taking the estimated 80 or 90 thousand Japanese lives in order to bring this bloody war to an end, and otherwise, in all probability, it would have cost millions of lives if the country of Japan had been invaded. On the flip side, there are those who (still) maintain that dropping the bombs was immoral and not just because of the loss of innocent lives.
These dilemmas cry for solutions, and multitudes of such dilemmas arise every business day. Solving these dilemmas is what gives us “ethical theory” and which requires more study.
F Simply put, an ethical theory lays the foundation for a principle, which in turn constitutes the most important justification for pursuing or following a course of
action.
In determining whether an action is ethical – or not – depends upon “who is asking?” to a great extent. There are those who prescribe an action for ethical reasons as to whether it benefits more people than it harms. Those who automatically look at every situation as whether or not it is “fair” regardless of the consequences, might look at a situation differently than one who always looks at every situation in the light of what benefit it would be to him (her).
A few words in respect to each of these groups of people who usually look at the same situation differently. Those that look for the benefit to themselves find that problems arise when what is good for them can only be accomplished at the expense of another. This is the key for whether such consideration is selfish, or just self-concern. Selfishness would indicate that the extreme of ignoring how an action would affect others, is the most common example of unethical behavior. In the insurance professions the code of ethics requires one to act in a way that will best serve the public interest.
Another type of person will always determine an action in light of the consequences of the act and they will then always compute the benefits and the harm of every action. Therefore,
F An action may be justified if it brings more happiness than unhappiness for more people.
This seems rather straightforward, but the problem is determining whether an action brings out the maximum amount of good, or whether it is good to a maximum number of people. If it brings out the good to a maximum number of people, then the problem becomes as to how these “goods” are to be distributed. Next problem is: How does one decide as to what counts as “good?”
Sometime “good” is defined as to what satisfies the desires of the individual the best – actually defining “good” as pleasure and happiness. Happiness is considered by many as the ultimate “good.” This discussion can (and does) fill page after page in text books, but it is presented just as an example of how professional ethical theorists can determine whether a specific action is ethical or not.
As far as the other approach that one may take to an action in determining if it is ethical—if a person acts strictly from desire, then he is acting more like an animal inasmuch as there is no moral reason to take the course of action. The question should be not what action will fulfill the inclinations, but what fulfills the sense of duty or obligation.
There is one more class of person, or perspectives used by a person, in determining whether an action is ethical, and which has been called the ethics of virtue, or as some prefer, ethics of character. The first word that comes to mind too most is “honesty.” While the classical sense of virtue is not necessarily confined to honesty, it is most descriptive for this discussion. Accountants have the responsibility to always respond truthfully and there is little doubt that this is a virtue that is mandatory for a professional accountant.
Another virtue can be loyalty. However, is loyalty compatible with good, solid (some say “hard-nosed”) auditing(for example) practices? This points out that some “virtues” can conflict. How much loyalty to a client should an auditor have? Should an auditor warn a client of an audit problem before the audit report is filed? It is easy to see the magnitude of this problem.
While it certainly would not hurt any professional to spend the time to become better educated in philosophical studies of ethics with its many ramifications; as a practical matter, most people do not think about the principles to be used in determining whether an action is ethical. Most people simply go by their “gut-feelings,” their intuition or their own personal feelings. Some simply go completely by what their training has provided them to consider.
Since people in the same vocation or endeavor have various reasons and motives for acting as they do, there must be a published code of ethics for any profession if for no other reason than uniformity.
Once these steps have been taken, then the options available must be evaluated to determine which would be correct. To oversimplify this evaluation, there are several ways to determine the right action, but many experts break it down into only four steps:
The proper evaluation of these options is the heart-and-soul of “Ethics.”
Obviously, “Ethics” can be said to deal with right or wrong. Believe it or not,
F Nearly everyone has a(n) (ethical) set of beliefs as to what is right or wrong and these beliefs do not necessarily remain the same among all persons.
For instance, abortion, capital punishment, and adultery can be good or bad, right or wrong, or acceptable or unacceptable, to a person or a group of like-minded persons. Cheating, stealing, and not keeping promises, or abusing children, elderly persons or animals are usually considered as “wrong” or “bad.” These all constitute moral beliefs, and if one were to write down all their similar beliefs, they would, in essence, create a personal code of ethics.
The primary subject of “ethics” is human actions, referring specifically to any action that is deliberately taken. If a person thinks about a particular action and then chooses to take this action, then it is a deliberate action and if the person has any control over this (these) action(s) – then they are held responsible for their actions.
In today’s society, this “personal responsibility” is becoming an “ancient” belief that is not “relative” to today’s situations. A mother drowns her children, but it is “not really all her fault…” A sniper kills innocent people at rest stops, but it was only because of the (fill in your own reason)… A corporation goes bankrupt, leaving many vendors, employees and investors with empty pockets, because an accountant employed by the company “went along” with the desires of the company President to over-inflate the value of high-end inventory items in order to show the profit to the Board of Directors that the President had promised - but the accountant is not at fault because he was just doing what his boss wanted him to do… etc., ad infinitum.
True, the actions of individual humans are not the only subject regarding ethics that must be considered. The activities of a group of individuals can be called “social practices” if one delves deeply into the study of Ethics. A practical example would be an individual using insider information to buy certain stock or in the case of a stockbroker, to notify his clients of a probably decrease or increase in the value of their stock because of “insider information.”
Remember the earlier discussion of Equity Funding. The stock analyst who was first made aware of this situation also faced an ethical problem. The analyst had been informed of the situation over lunch with an executive of Equity Funding. The analyst did some quick checking and as a result, was convinced that the executive was telling the truth. He contacted many of his clients and recommended that they get rid of their Equity Funding holdings. As a result of this action, the New York Stock Exchange charged the analyst with violating exchange rules with information about Equity before regulatory authorities made it public.
Ethical questions arose, naturally. Insider trading is a “general practice” and his using this information was an individual action. One question that could be asked – and frequently was – is “What was the analyst to do?” When he became aware of this information he was not able to completely verify the information, but he felt that it was his duty to his clients to pass on the information that he possessed, just in case… Ethically, was it not his duty to protect his clients? If he had not notified his clients and it later was disclosed that he had known of the situation, would he not be susceptible to legal action? And another related ethical question could be “Why did the executive wait for three years before exposing this situation.” [There actually is an answer to this question—think about it and then check the last sentence in this Chapter]
The Code of Ethics for any profession will state in some fashion or other, that the member should perform with the highest sense of “integrity,” of words to that effect.
F The acknowledged definition of integrity is “firm adherence to a code of
especially moral or artistic values.”
Many “old-timers” would ask, “Is it proper?” when deciding what to do in many situations. When asked how a person could know if it was “proper,” the answer usually was, “You just know.
Suppose you were 16 with a driver’s license, and you had been looking forward for months to taking Susie (or Ralph) to the movies in the family car, all by yourself. Your father had agreed to let you use the car to take (Susie or Ralph) to the movies when you got your license. When the day came and Susie (Ralph) had agreed, you asked your father for the car keys, but he says that you cannot have the car. You are understandably upset, and you cannot understand how he can go back on his word. You father can then say that he is not obligated to give you the car, therefore his belief is not justified or he should justify it to you. Maybe he just doesn’t feel like it right now.
This justification probably wouldn’t fly to your satisfaction, because he did “promise.” And, people should always honor their promises (a basic of Ethics). This could mean that any promise is not worth much – business deals will fail, marriage will come apart, and the world will go to wherever in a handbasket.
However, what if he said that the XX@&$!)**&% thing blew the carburetor today when he was driving home and he can’t get the parts until Monday. Now, there’s a reason for not honoring the promise. In other words, there is justification. This proves that
F Moral beliefs are right or wrong, correct or incorrect, and they can be
justified if there are good reasons.
It is not coincidental that this consideration would be the first to be discussed, as that is typically the first thing that goes through the average person’s mind. This is not always true, - Mother Theresa rarely, if ever, thought of herself first. For the rest of us who are not approaching Sainthood, if you can actually perform an action that benefits yourself, can you think of a better reason for doing it?
Of course, this is applicable only if it is “meaningful” work – usually defined as work that can be beneficial to the person. Most people have a need to be productive and to work towards that end (some don’t, but they wouldn’t be professionals), so therefore, work is good for us all.
Conversely, if an action hurts oneself (not necessarily physically) then that is a great reason for not doing it. This can be overdone frequently, as some people seem to think that any actions that are beneficial to them must therefore, not be the right thing to do. Of course, this is silly, as if a person doesn’t consider or concern himself or herself with an action that benefits them, then who will? You cannot go through life without looking out for yourself.
This concept can be overdone, as evidenced by taking a walk down the mall and note how many large, overweight people are in evidence. Not in every case, of course, but generally it can be accepted that when it comes to food, some of them look out for themselves just a little too well.
A good rule to follow in determining if an action is good for you is that in most cases,
F There can be justification that an act can be good simply by showing that it is good for you.
The next step is actually to take a step back and look at the “big picture.” Is this action not only going to be good for me, but is it going to be good for everyone (society) as a whole?
One outstanding example of determining what is good for society, as often quoted in such discussions, involves Tylenol and Johnson & Johnson. When Johnson & Johnson were made aware that some of their Tylenol bottles had been tampered with and it was nearly impossible to determine just how many bottles were involved, they immediately made the judgment call to recall ALL Tylenol from the shelves of the many stores and warehouses, causing the corporation untold millions of dollars in profit. This was a decision based upon whether the action would affect society, and fortunately for Tylenol users, this was the right decision.
An interesting point is that the business press solemnly but loudly (in some instances), prophesized that Tylenol would never regain its market prominence. It did.
Remember as a child, the many times that things would happen that just weren’t “fair?” Even as an adult, a situation will arise that just does not seem “fair.” When voiced, the objection was usually overcome with the statement (in some fashion of other) that “life just isn’t fair.” While this may seem logical to an adult to some degree, for a child it still is not “fair.”
Of course, all people should be treated equally unless there is some relevant difference. This can be illustrated by the way that a large (actual) European company was managed for many years. It had only one stockholder, who was designated as CEO and Chairman. In an effort to appear “Democratic,” the CEO designated a “Manager” in charge of each major division within the international firm (this would be equivalent to a Chief Operating Officer in most corporations) as a member of the Operating Management. Great pains were taken to make sure that each Manager was equivalent. However, there always has to be a decision-maker, so all Managers were considered as equal, but they would then elect one Manager as “more equal than the others” and who would report directly to the Chairman. This system survived for many years but upon the death of the sole shareholder, his heirs transformed the operation into a more-typical company-management style.
Just like “cream always rises to the top,” there always seems to be one person who is “more-equal” than others. And that is probably a good thing.
Every American has the right to be treated “equally.” And, we all have the right to life, liberty and the pursuit of happiness, and, to be technically correct, to property. However, the government grants us certain rights and when these rights are infringed upon, then we are protected by laws and regulations. The use of coercive marketing techniques and deceptive advertising is considered as a violation of our rights to liberty. Even the laws that enforce the rights are often considered as a violation of a business entrepreneur to do business.
Certain rights have become known as “entitlements.” These entitlements include the right of a child to be educated, for instance, but the means for this education must come from others who are obligated to provide this right. Healthcare for everyone, jobs for everyone, housing for everyone, etc., are not “rights” per se, but in certain situations, these rights could be assumed. If they are so assumed, it is the right of the taxpayer to know whom, how and how much these “rights” can affect the rights of the taxpayer to keep and hold property.
More pertinent to this discussion is the right of a purchaser of stock in a corporation to be provided with accurate financial information regarding the corporation.
So, if a proposed action treats all persons involved equally and fairly and there is no violation of their rights, then this is a reason to continue with the action. Conversely, if the rights of another would be violated, even to a small degree, then this is a big reason not to take the action.
A promise is a commitment, and if one has made such a promise/commitment, then one should do all in their power to honor the promise/commitment. This is an inescapable reason to pursue the course of action contemplated.
In a discussion of ethics, however, this must be taken a step further. Is there any promise/commitment beyond those that were agreed upon by the parties involved? Implied promises are generally a distinct and very important part of most transactions. For instance, if one purchases a set of golf clubs, there is an implication that the club shaft will not break or bend if the club is used properly and for the task for which it is designed. Those who purchase insurance products do not expect that when the insurance is needed, the “small print” will void their agreement with the insurer.
F It is an inherent trait of civilization that promises between persons are kept -
and most of the promises are implied. What would happen to commerce if there were no implied agreements between an employee and an employer, that the employee would show up for work every working day?
But what if you borrow some anti-freeze for your car from your neighbor with the promise to return what is not used. He later then asks for you to return what was not used as he had discovered that a cat would readily drink anti-freeze, and that when they do, they assume room temperature. And further, the cat belonging to the person across the street has been intimidating his poodle, and he is going to solve that problem, “once and for all.” Do you break your promise in this situation, knowing what the result of keeping your promise will be that harm that will come of returning the anti-freeze would outweigh the promise? (This may be arguable with some that really, really, hates cats – but you get the point.)
Financial planning is an area of ethics that affects both insurance agents and those with securities licenses and ethics are such an important part of financial planning that it should be included in the chapter on Ethics. Common sense would dictate that the same level of ethical conduct that is so important in insurance sales and service, would also be appropriate to financial planning.
As mentioned in the story at the beginning of this text, there are those who call themselves "financial planners" even though they do not have the experience, education or training to justify that title. Unfortunately, this creates problems for those professionals who have spent countless hours in study and years of experience in order to become real, professional "financial planners." For instance, it is extremely difficult for a person that only sells and services life insurance products to actually be a financial planner.
RULE: AN INSURANCE AGENT WITH NO FINANCIAL PLANNING EDUCATION MUST NEVER, EVER, REPRESENT HIMSELF AS A FINANCIAL PLANNER.
The American College awards Chartered Life Underwriter (CLU) designations, along with Chartered Financial Consultant (ChFC). These designations are the top professional designations that includes education in other insurance fields, not only financial planning. The most recognized financial planning are those leading to the Certified Financial Planner (CFP) and the aforementioned ChFC designation.
There are two organizations in particular, that set the standards for education and ethical conduct in financial planning, the Financial Planning Association (FPA) which consists of DFPs only; and the College for Financial Planning. Each of these organizations stress the ethical need for the insurance agent to consistently identify himself as an insurance agent, to identify the company that he represents and to identify the nature of the sales call that the agent is making.
F Conflict of interest can be the most serious of ethical breaches—and is also considered by most as the most serious of legal breaches.
As an insurance agent moves from life underwriting to financial planning, or from the marketing of securities to financial planning, a broader scope of ethical responsibility must be accepted. This means, among other things, that an insurance agent that is qualified to give advice or sell securities and tax-sheltered investments as well as life insurance, must not only be aware and abide by ethical requirements for insurance marketing, but also aware of the ethical requirements and the rules and regulations for securities salespersons.
An agent who is subject to the Investment Advisors Act of 1940 who charges a fee for services rather than a commission is considered as a fiduciary of the client. This means that the insurance salesperson is required to disclose to the client all material information that pertains to the services provided—which may conflict with the agent's status as a fiduciary of the customer. The agent has the duty of loyalty and care to the client, and the same duties are owed to the insurer. Obviously, a conflict of interest hazard. This problem of conflict of interest grows if both a fee for service and a commission on the sale are charged.
Financial planners who engage in rendering investment advice as part of their services will probably fall under the SEC and Investment Advisers Act of 1940. This Act has many important features, but for the purpose of this discussion the requirements that those who are in the business of giving investment advice and who receive compensation for doing so, the important part is the requirement that those who give investment advice and receive compensation for doing so, must register as an investment adviser with the SEC and conform with certain standards of ethical conduct (as defined in the Act).
Without going into further details, the SEC's position as applied to a financial planner or insurance agent, means that if his services involve rendering advice or analysis concerning securities—he is then, unarguably, an investment adviser. Therefore, the agent is subject to the Act's registration and standards of conduct provisions. Because of the nature of the relationship between the advisor and the client, the ethical standards are quite high.
Among these standards are prohibitions against using any fraudulent, deceptive or manipulative scheme or device in dealing with prospects of client, and engaging any transaction, practice or course of business that is intended to deceive a prospect or client.
Interestingly, the provisions of the Act applies not only to registered investment advisors, but to any person who meets the description of investment advisor, regardless if the person is or is not registered with the SEC.
Even after reading the previous pages, the question remains—do we really know what ethics are, and what determines what is ethical and what isn't? If thousands were asked these questions, there would be a plethora of answers, and therein lies the dilemma. Actually, our own ethics are determined by our own set of moral standards, and there is no "engraved in stone" standard that can possibly cover all situations.
Ethics principles are nice to talk about, but actually they are not very specific and in most cases, there is no one enforcing the moral codes. Therefore,
F Ethical behavior is the result of individual choice.
John and Mary are married with 2 small children. John works and Mary is a homemaker and full-time mother. Their funds are rather limited but they feel they can afford $400 to spend on life insurance. One agent shows them a $200,000 term insurance policy, but another agent shows them a while life policy with a face value of $25,000. All things being equal otherwise, which agent is correct?
Actually, they both are probably correct, as these are two adults who can differ between permanent Whole Life which will allow them to start a savings program for their kids education and still have some cash in case of premature death of the provider.
Term insurance will provide a much larger death benefit if John dies at an early age, and with $200,000 Mary could probably stay at home until the children gets older, at which time she would be able to get a job. And there is the conversion to a permanent plan at a later date if John becomes insurable.
The choices are rather clear, so if everything is discussed correctly, the couple will make their own decision.
Now, let's say that John and Mary purchased the Whole Life policy and they had not heard about the term policy. A friend of a friend is an agent who told them about the term insurance. So they contacted their agent, told him that an immediate death benefit was more important to them than the savings feature. Now comes the dilemma. If the agent replaces the permanent policy, is he wrong?
Forty years down the road, if John and Mary are still clicking along, then they may have wished that the agent would have convinced them to purchase the Whole life policy. Is the agent's actions still moral and ethical? Who can say if one is more right or wrong. The error in this situation is that the first agent did not give them an opportunity to look at two alternative solutions and decide what helps them the most.
If an agent is selling to a young couple and he knows that if it were him, he would want term insurance, so that is what he sells to the couple. One of the justifications is that if there were a death claim, he would much rather deliver a large policy, and he might have a hard time living with himself if he had not sold a larger face amount term policy.
Then another factor arises—commission. Much less commission on a term policy, much less. How does that rationalization account for that? Can an agent honestly say that commissions have little or nothing to do with what he sells? Now we have a situation that boils down to a conflict of interest.
Now the Code of Ethics comes into play, if there is a "conflict of interest situation, the interest of the client must be paramount." End of discussion. Forget the down payment on the Porsche, buy a Mustang…
Answer to previous question in respect to an executive not reporting the situation earlier: He wanted to wait until his children got out of their expensive private school as he knew he would lose his high-paying job when the whistle was blown on the operation. Was he ethical in wanting to protect his children's education by keeping his mouth shut? (He ended up as Chief Underwriter for a small life insurance company on the East Coast who knew the story. His kids went to public schools there…)
STUDY QUESTIONS
1. Ethically, an action may be justified if it
A. brings more happiness than unhappiness for more people.
B. brings more unhappiness than happiness for more people.
C. sounds good and at last three other persons agree to it.
D. causes no tears.
2. "Firm adherence to a code of especially moral or artistic values" is the definition of
A. integrity.
B. morality.
C. legality.
D. adherence.
3. There can be justification that an act can be good
A. if the act does not do you any good.
B. by showing that it is good for you.
C. if it is inexpensive and it hurts no one.
D. if it is legal and popular.
4. It is an inherent trait of civilization that promises are kept
A. even if they are fallacious.
B. between merchant and customer.
C. and most of the promises are implied.
D. but only when so directed by a ruling power.
5. The most serious of ethical breaches and also considered as the most serious of legal
breaches, is
A. intemperance.
B. falsification of documents.
C. conflict of interest.
D. bearing false witness.
6. Ethical behavior
A. always is the result of years of discipline.
B. is the result of individual choice.
C. affects only the upper class.
D. is not necessarily mandated in insurance transactions.
7. Financial planners who engage in rendering investment advice as part of their services
A. are probably regulated by SEC Circular 1036-9 (Unethical Acts of Financial Planners).
B. need not be licensed either by the SEC or the Insurance Department.
C. will probably fall under the SEC and the Investment Advisers Act of 1940.
D. are not allowed to operate in California.
ANSWERS TO STUDY QUESTIONS
1A 2A 3B 4C 5C 6B 7C