Thursday, February 25, 2021
Corporate Compliance Insights
  • Home
  • About
    • About CCI
    • Writing for CCI
    • NEW: CCI Press – Book Publishing
    • Advertise With Us
  • Articles
    • See All Articles
    • NEW: COVID-Related
    • Compliance
    • Ethics
    • Risk
    • FCPA
    • Governance
    • Fraud
    • Internal Audit
    • HR Compliance
    • Cybersecurity
    • Data Privacy
    • Financial Services
    • Leadership and Career
  • Vendor News
  • Jobs
    • Compliance & Risk
    • Information Security
  • Events
    • Webinars & Events
    • Submit an Event
  • Downloads
    • eBooks
    • Whitepapers
  • Podcasts
  • Videos
  • Subscribe
No Result
View All Result
  • Home
  • About
    • About CCI
    • Writing for CCI
    • NEW: CCI Press – Book Publishing
    • Advertise With Us
  • Articles
    • See All Articles
    • NEW: COVID-Related
    • Compliance
    • Ethics
    • Risk
    • FCPA
    • Governance
    • Fraud
    • Internal Audit
    • HR Compliance
    • Cybersecurity
    • Data Privacy
    • Financial Services
    • Leadership and Career
  • Vendor News
  • Jobs
    • Compliance & Risk
    • Information Security
  • Events
    • Webinars & Events
    • Submit an Event
  • Downloads
    • eBooks
    • Whitepapers
  • Podcasts
  • Videos
  • Subscribe
No Result
View All Result
Corporate Compliance Insights
Home Ethics

Blackstone Group: Riddle of Ethical Dilemmas

by James Bone
October 30, 2015
in Ethics
Blackstone Group: Riddle of Ethical Dilemmas

Is it possible to manage an ethical company and be successful?  Logically, most people would agree that, yes, ethics and success are not mutually exclusive conditions of sound governance.  Yet the Securities and Exchange Commission has found that private equity firms are more likely than not to break the law or have material conflicts of interests.  Has the principle of fiduciary responsibility, the “Prudent Man” rule, been relegated to the dustbin of financial market ethos?

Recently, Blackstone Group, the world’s most profitable fund manager, was ordered to repay fund investors $28.9 million and assessed a $10 million fine by the SEC for failure to disclose the collection and handling of fees that should have been used to benefit investors.  Blackstone, to its credit, reported that its internal audit group uncovered the problem and reported its findings to investors.  However, senior executives within the firm had to conceive the idea and present the proposal to a governing board for approval.  What is the cause of a lapse in ethical judgment?

Blackstone is not alone; in the same article several incidents were cited of regulatory violations related to fee disclosure by fund managers.  Blackstone Group has $330 billion under investment and close to $3 trillion dollars under administration, so what causes successful firms to cut corners?  How does governance break down?  A spokesperson for Blackstone Group responded to the violation by explaining, “our Limited Partner Advisory Committee did not exercise its right to object.”

One of the hottest topics in financial services is a new concept called conduct risk. The term comprises a wide variety of activities and types of behavior which fall outside the other main categories of risk, such as market, credit, liquidity and operational risk. In essence, it refers to risks attached to the way in which a firm and its staff conduct themselves.  There is no clear definition for conduct risk, so it is more like pornography, right? You know it when you see it!  But that is not exactly correct.  The reason conduct risk is hard to define is because we are misled by the frequency of certain events, leading to errors in judging when bad ideas become bad behavior.  These incidents beg the question of whether the unethical behavior by private equity firms is any different from Volkswagen’s emissions scandal?

The public outrage and media attention attributed to Volkswagen pales in comparison to reports of financial services firm misbehavior.  Why is this the case?  The answer is found in the field of cognitive science.  Our views of events are shaped in large part by the frequency of news reports on a variety of risks we face.  Shark attacks are a great example of this phenomenon.  We believe that more humans are killed or maimed by sharks than cows.  We know, empirically, that humans are killed or maimed by cows more frequently because farm workers encounter more cows than beach-goers do sharks.  Local news accounts of “death-by-cow” events just don’t draw the same attention as a shark attack leading us to misdiagnose the risk.

The same can be said to explain how we view misbehavior of financial services firms.  The frequency of regulatory and financial misbehavior has become almost invisible and is often relegated to the second or third page of news.  The shock factor has worn out and we are no longer surprised to find that some fund manager has over charged or failed to follow the rules.

So how do we in risk management, audit, compliance and ethics address conduct risk?  What defense can be used when the argument is, “everyone else is doing it why can’t we?”  This is the riddle of ethical dilemmas.  There is no risk framework or internal control to deal with conduct risk.  It represents 98 percent of all operational risk failures, according to a recent study.  For the largest firms, regulatory fines are no longer a deterrent and the costs of compliance, risk and audit have already been absorbed as a cost of doing business.  The public is no longer outraged about being fleeced.  In fact, car buyers will return to Volkswagen and investors will, undoubtedly, return to Blackstone Group.  Solving the riddle of ethical dilemmas is the biggest challenge faced by risk professionals who are ill equipped to adequately mitigate this risk.

It is possible to run an ethical company and be successful. But it is also possible for unethical behavior to creep into the boardroom and C-Suite because the costs no longer exceed the benefits.


Previous Post

The Legal Pitfalls of Interviewing: Make Sure Your Company is Compliant

Next Post

Hong Kong’s Anti-Bribery Laws Under Scrutiny as Former Chief Executive is Charged

James Bone

James Bone’s career has spanned 29 years of management, financial services and regulatory compliance risk experience with Frito-Lay, Inc., Abbot Labs, Merrill Lynch, and Fidelity Investments. James founded Global Compliance Associates, LLC and TheGRCBlueBook in 2009 to consult with global professional services firms, private equity investors, and risk and compliance professionals seeking insights in governance, risk and compliance (“GRC”) leading practices and best in class vendors.
James is a frequent speaker at industry conferences and contributing writer for Compliance Week and Corporate Compliance Insights and serves as faculty presenter and independent consultant for several global consulting firms specializing in governance, risk and compliance, IT compliance and the GRC vendor market. James created TheGRCBlueBook.com to provide risk and compliance professionals with transparency into the GRC vendor marketplace by creating a forum for writing reviews on GRC products and sharing success stories on the risk practices that are most effective. James is currently attending Harvard Extension School for a Master of Arts in Management with an emphasis in accounting and finance. James received an honorary PhD in Letters from Drury University in Springfield, Missouri and is a member of the Breech Business School Hall of Fame as well as the Missouri Sports Hall of Fame. Having graduated from the Boston University Graduate School of Education, James received his M.Ed. in Management and Organizational Design in 1997 and a Bachelor of Arts in Business Administration from Drury University in 1980.  

Related Posts

gold cup award on red background with stars

Ethisphere Announces the 2021 World’s Most Ethical Companies

February 23, 2021
Trump supporters on the steps of the Capitol

Trump, the Coup, and Corporate Ethics

January 11, 2021
Book Review: Grappling With The Gray

Book Review: Grappling With The Gray

December 18, 2020
edison bulb

The 7 Principles of Ethical Leadership

December 14, 2020
Next Post
Hong Kong’s Anti-Bribery Laws Under Scrutiny as Former Chief Executive is Charged

Hong Kong's Anti-Bribery Laws Under Scrutiny as Former Chief Executive is Charged

Access realtime data
Addressing systemic racism in the workplace SAI Global
Dynamic Risk Assessments with Workiva
Top 10 Risk and Compliance Trends

Special Coverage

Special COVID page graphic

Jump to a Topic:

anti-corruption anti-money laundering/AML Artificial Intelligence/A.I. automation banks board of directors board risk oversight bribery CCPA/California Consumer Privacy Act Cloud Compliance communications management Coronavirus/COVID-19 corporate culture crisis management cyber crime cyber risk data analytics data breach data governance decision-making diversity DOJ due diligence fcpa enforcement actions financial crime GDPR GRC HIPAA information security KYC/know your customer machine learning monitoring ransomware regtech reputation risk risk assessment Sanctions SEC social media risk supply chain technology third party risk management tone at the top training whistleblowing
No Result
View All Result

Privacy Policy

Follow Us

  • Facebook
  • Twitter
  • LinkedIn
  • RSS Feed

Category

  • CCI Press
  • Compliance
  • Compliance Podcasts
  • Cybersecurity
  • Data Privacy
  • eBooks
  • Ethics
  • FCPA
  • Featured
  • Financial Services
  • Fraud
  • Governance
  • GRC Vendor News
  • HR Compliance
  • Internal Audit
  • Leadership and Career
  • Opinion
  • Resource Library
  • Risk
  • Uncategorized
  • Videos
  • Webinars
  • Whitepapers

© 2019 Corporate Compliance Insights

No Result
View All Result
  • Home
  • About
  • Articles
  • Vendor News
  • Podcasts
  • Videos
  • Whitepapers
  • eBooks
  • Events
  • Jobs
  • Subscribe

© 2019 Corporate Compliance Insights