Framework for ethical decision making in finance
A framework for ethical decision making in finance is based on the premise that, when firms instill ethical decision making into all employees’ decisions, a strong ethical culture will ensue, resulting in increased trust from investors, enhanced financial markets, and an overall benefit to society. The ethical decision-making framework helps the decision maker see the situation from multiple perspectives with a longer range view that is less self-centered, thereby benefiting shareholders.
On this page we discuss the four stages of an ethical decision-making framework.
Ethical decision-making framework steps
An ethical decision-making framework has four stages, which is an iterative process. The decision maker may move from one phase to another in a different order than presented.
- Identify important facts and other information that may still be needed while separating fact from opinion. Identify stakeholders and responsibility to them, along with relevant laws and regulations and any conflicts of interest
- Behavioral biases and situational influences are identified that can affect thinking and decision-making ability. In this phase, it is best to seek the advice of trusted resources, such as the compliance department, legal counsel, and advice from individuals outside the firm who are not connected to the situation to give a fresh perspective. Another technique would be to imagine how an ethical person would act in the situation.
- Make a decision and act on it.
- Assess the outcome by reflecting on whether or not it occured as anticipated and why. This is an iterative process whereby after having learned from the process it starts over again.
Applying an ethical decision-making framework can help to view a situation from multiple perspectives, thereby allowing the best decision to be made avoiding the negative consequences of making a poorly conceived decision.
We discussed the different steps of an ethical decision-making framework that is typically used by finance professionals.