Does ethics training actually affect business conduct?

In “Can Ethics be Taught? Evidence from Securities Exams and Investment Adviser Misconduct,” forthcoming in the Journal of Financial Economics,  Zachary T Kowaleski of University of Notre Dame, Andrew Sutherland of the Massachusetts Institute of Technology, and Felix Vetter of the London School of Economics “study the consequences of a 2010 change in the investment adviser qualification exam that reallocated coverage from the rules and ethics section to the technical material section. Comparing advisers with the same employer in the same location and year, we find those passing the exam with more rules and ethics coverage are one-fourth less likely to commit misconduct. The exam change appears to affect advisers’ perception of acceptable conduct, and not just their awareness of specific rules or selection into the qualification. Those passing the rules and ethics-focused exam are more likely to depart employers experiencing scandals. Such departures also predict future scandals. Our paper offers the first archival evidence on how rules and ethics training affects conduct and labor market activity in the financial sector.”

This seems like a very important study and there are far too many aspects of it to provide a comprehensive summary here. But I was particularly struck by the following:

“[W]e find the misconduct differences across passers of the old and new exam persist for at least three years, which we would not expect if advisers merely memorize rules rather than draw more fundamental lessons about acceptable conduct from the ethics portion of the exam. In sum, this evidence suggests that our main results cannot be explained by compliance alone, and that the exam change altered advisers’ perceptions of acceptable conduct.”

“[T]he behavior of the least experienced advisers is most sensitive to the extent of rules and ethics testing. These results are consistent with the exam playing a ‘priming’ role, where early exposure to rules and ethics material prepares the individual to behave appropriately later.”

“[W]e find the exam’s coverage to be less pertinent to those advisers working at firms where misconduct is prevalent. Thus, the contagion of misconduct behavior appears to limit the effectiveness of training in preventing transgressions.”

“We study turnover among all Wells Fargo advisers, and find those passing the old exam are most likely to leave after the scandal broke.”

There is much more to the study than this and I encourage you to read the original.



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