In the post-Bernie Madoff world that we now live in, business schools are being held to a higher standard in how they educate students on ethical decision-making skills. Any good business school will present multiple ethical dilemmas and situations requiring students to reason through answers that are both acceptable within the confines of the law and palatable to the individual conscience. Like many other students, I was presented with these types of situations — all in the name of “business ethics.” My ethical dilemma, however, was in the context of a real-world investing issue – and I’m thankful for the experience. Let me explain the situation.
The phrase “fiduciary duty” means very little to most 21 year olds. I really didn’t fully understand the term either until I participated in Stetson University’s Roland George Investments Program, a student managed investment portfolio approximating $3 million. Upholding a fiduciary standard means that you are now entrusted with managing someone else’s finances-and you are expected to act solely in the best interests of your client.
This term becomes real as you consider the awesome responsibility and challenges involved with managing such a fund. At this point you might ask, “What defines responsible management?” Is it simply investing wisely in stocks with the most perceived value, funds with neither too much nor too little risk, or developing and maintaining a portfolio that matches the client’s risk tolerance? Is it simply maximizing shareholder wealth? Or does the phrase run deeper; do ethics play a part … a large or small part?
Part of my “fiduciary duty” entailed recommending a stock to the class, which would then be approved or denied by a board of trustees consisting of four students and three faculty members, majority rule applying. Mine and other qualified stocks were presented and some were approved throughout the semester. One stock in particular was brought forward, which raised ethical questions. This stock was a holding company whose primary line of business was a string of nightclubs providing live adult entertainment. Technically, the stock met all criteria set forth by the class at the onset of the semester: It was small cap, growth oriented, undervalued, with increasing earnings per share – and it exceeded all these predetermined standards.
Among many other things, Stetson University actively promotes gender equality, and while some may point to gentlemen’s clubs as a lucrative job market for young women, many feel the practice and the mentality behind the practice severely demean the value of women.
Although the stock surpassed expectations at one level, the question was put to every member of the class as to whether the stock was actually a responsible investment. Did the stock represent the university’s core values or were they in large part compromised? Did the absence of language prohibiting such an investment mean the previous question was a non-issue, or must a student-managed, donor-funded portfolio answer to the university’s values? Are we as investors restrained by only what is disallowed, or are we held to higher standards as human beings? Did our “fiduciary duty” require us to value stocks solely on the basis of their returns, and would one be wrong to not approve such a stock? Whether or not the resolution was voiced, each member of the class came to a conclusion. After vigorous debate on both the technical and ethical merits of the stock, it was decided that the stock would not be purchased. This was not a unanimous decision, however.
Unfortunately, many people solely define what is ethical by what is lawful: To be ethical means to abide within stated regulations and/or pay for the damages – and many companies and organizations operate on this premise. Businesses pay fines determined by courts rather than doing the right thing at the beginning. Ethical decision-making has become susceptible to cost-benefit analysis. All other things being equal, what sets individuals apart in the workplace and in life in general is that some individuals hold themselves to higher ethical standards. Most students I’ve encountered were searching for quality positions upon graduation, and what I’m afraid some failed to recognize, is that quality businesses are looking for quality individuals. These are individuals who hold themselves to higher standards, who think and act independently with a critical and thoughtful mind, rather than let their actions be determined by society’s predetermined lowest level of responsibility.
The decision regarding the gentleman’s club stock was no different than what we all face day in and day out. It was just one decision that intensified the dilemma, questioned our understanding of responsible behavior, and made us examine our individual moral convictions.
Nathan McPhail earned a BBA in Finance in 2008 from the School of Business Administration at Stetson University in DeLand, Florida. He currently resides in DeLeon Springs, Florida. He is employed as a financial analyst by the Fastenal Corporation, one of America’s largest industrial supply firms.
Roland George Investments program at Stetson is: http://business.stetson.edu/george/