predicting fund manager integrity and profitability - a theoretical

Predicting Fund Manager Integrity and Profitability - A Theoretical Analysis with First Steps Towards

an Empirically based Assessment

D I S S E R T A T I O N of the University of S. Gallen

Graduate School of Business Administration, Economics, Law and Social Sciences (HSG)

to obtain the title of Doctor Oeconomiae

submitted by

Jon Michael Ebersole

from

The United States of America

Approved on the application of

Prof. Dr. Martin Hilb

and

Prof. Dr. Dres. h.c. Rolf Dubs

Dissertation no. 3720

Difo-Druck, Bamberg, Germany

Predicting Fund Manager Integrity and Profitability

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The University of St. Gallen, Graduate School of Business Administration, Economics, Law and Social Sciences (HSG) hereby consents to the printing of the present dissertation, withouthereby expressing any opinion on the views herein expressed. St. Gallen, November 23, 2009

The President: Prof. Ernst Mohr, PhD


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Copyright © Jon Ebersole 2009 All rights reserved. No part of this publication may be reproduced or transmitted in

any form or by any means without prior permission from the author.


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Abstract

The goal of this dissertation was to test whether assessment scores measuring

socio-emotional maturity and ethical judgment ability correlate with the financial

returns of fund managers. The basic research questions are:

(1) Will fund manager scores in ethical judgment, measured by the Moral

Judgment Interview (MJI) or Defining Issues Test (DIT), show a correlation

with market returns?

(2) Will fund manager scores in emotional maturity, measured in the

“Subject-Object Interview” (SOI), show a correlation with market returns?

Positive correlation would provide a measure of the link between these assessments

of mental processes and effective behavior. Further, if fund manager maturity and

ethics scores were found to correlate with profitability the finding could enable an

augmentation of existing fund manager recruitment models, influence educational

curricula in the finance sector, and raise significant issues for investors.

Thirty financial institutions were contacted with a research proposal detailing the

above, and all thirty declined to participate. Four banks were contacted with a

simplified request for single interviews of a general nature, resulting in five interviews

that were scored for their socio-emotional content.

The result of the study are: (a) the hypothesis that, given a fair market, equal

conditions and equal qualifications, fund managers with higher levels of socio-

emotional maturity and ethical judgment ability will achieve greater profitability; and

(b) a model for how this hypothesis could be scientifically tested.

November 2009 Jon Michael Ebersole


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Zusammenfassung

Ziel dieses Dissertation war herauszufinden, ob Personaleinschätzungen, welche die

sozio-emotionale Reife und ethischen Urteilsfähigkeit messen mit der finanziellen

Renditen von Fondsmanager korrelieren. Die grundlegende Forschungsfragen sind:

(1) Werden die Ergebnisse betreffend die ethische Urteilsfähigkeit von Fonds

Managern, welche durch Moral Judgment Interviews (MJI) oder Defining

Issues Tests (DIT) eruiert wird, mit deren Marktergebnissen korrelieren?

(2) Werden die Punktzahl der emotionalen Reife von Fondsmanagern, welche

mittels “Subject-Object Interviews” (SOI) gemessen wird, mit ihrer

Marktergebnissen korrelieren?

Eine positive Korrelation würde ein Mass der Verbindung zwischen diesen

Bewertungen von mentalen Prozessen und effektivem Verhalten ergeben. Wenn sich

darüber hinaus ein Zusammenhang zwischen Reife- und Ethikergebnisse von Fond

Managern und Rentabilität als eine deutliche Einfluss für Gewinn zeigen würde,

könnte das Resultat zum vermehrten Einsatz von bestehenden

Personalevaluierungsmodellen für Fund Manager führen. Dies dürfte wiederum die

Lehrpläne für die Finanzbranche beeinflussen und könnte zu einem Thema für

Investoren werden.

Dazu wurden dreissig Finanzfirmen mit dem vorliegenden Forschungsvorschlag

kontaktiert. Alle dreissig haben die Teilnahme abgewiesen. Daraufhin wurden vier

Banken mit einem vereinfachten Vorschlag für Individualinterviews allgemeiner Natur

angefragt. Das hat zu fünf Interviews geführt, welche sozial-emotional bewertet

wurden.

Die Ergebnisse der Studie sind (a) die Hypothese, dass angesichts eines fairen

Marktes, gleicher Bedingungen und gleicher Qualifikation Fondsmanager mit einem

höheren Niveau an sozio-emotionaler Reife und ethischer Urteilsfähigkeit eine

höhere Rentabilität erzielen und (b) ein Modell, wie diese Hypothese wissenschaftlich

belegt werden kann.


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This dissertation is dedicated to the least fortunate on this earth.

Acknowledgments

This dissertation was carried out in the context of a doctoral program at the

University of St. Gallen. My sincere thanks are extended to the numerous persons

who encouraged and assisted me in this endeavor. Special thanks are due to Prof.

Dr. Martin Hilb, and Prof. Dr. Dres h.c. Rolf Dubs for the support they lent to this

study.

A deep sense of gratitude is offered to my parents, Myron and Geraldine Ebersole,

without whose support this study would have never been possible, and to my

daughters Stella and Helena Ebersole, who give me hope for the future.

Appreciation is due to persons who provided intellectual inspiration and

encouragement, including Claude Baumann, Anne Colby, Eckhard Freimann, Prabhu

Guptara, Otto Laske, Prasad Oswal, Julia Indera Ramlogan, Michael Sanson,

Jeannette Schläpfer, Florian Schulz and Zoltan Zolcer. My sincere appreciation is

extended to the many persons in the finance industry who helped to arrange the

interviews that were possible, the interviewees themselves, and to those who took

the time to consider, and some to encourage, the research project in institutions who

decided not to participate. Since the research became somewhat controversial, I

have decided to keep their names confidential. Thanks are also due to the University

of St. Gallen administration as well as the library, cafeteria and household staff who

provided a friendly environment for study. Any shortcomings are, of course, my own.


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Table of Contents

Abstract 4 Acknowledgements 6 List of Figures and List of Tables 9 Abbreviations and Key Words 10 Preface 11 1 Introductory Section: 14

1.1 Problem Analysis: The Evolution of Swiss Banking 15 1.1.1 Origins of Banking 16 1.1.2 Historical Phases of Swiss Banking 18 1.1.3 The Context of Globalization 25 1.1.4 The Digitalization of Finance 28 1.1.5 The Sub-Prime Crisis: Collective Failure and System Meltdown 32 1.1.6 The Ratings Agencies 36 1.1.7 Major Fraud Cases 41 1.1.8 The Role of Regulators 45 1.1.9 Ethics as a Financial Issue 47 1.1.10 Switzerland in the Global Context 48 1.1.11 Personnel Competencies for Swiss Banking in the Global Context 49

1.2 Goals for the Study 53 1.3 Procedure 59 1.4 Definitions 60

2 General Theoretical Section: The Human Side of Banking 63

2.1 Assessing Fund Managers 63 2.2 The Role of the Fund Manager 70 2.3 The Decision Making Context 72

2.3.1 Criminogenic Environments 74 2.3.2 The Nature of Fraud in Fund Management 75 2.3.3 Fraud as Manipulation 77 2.3.4 Regulatory Mechanisms 80 2.3.5 The Search for Ethical Leadership Capability 81

2.4 Defining the Competencies of Successful Bankers and Fund Managers 82 2.4.1 Behavioral Finance 83 2.4.2 Psychoanalytic and Developmental Approaches 84 2.4.3 Defining Competencies 87

2.5 Assessments Based On Developmental Psychology 90 2.5.1 The Genesis of Developmental Psychology 90 2.5.2 Measuring Ethical Judgment 92 2.5.3 Measuring Socio-emotional Maturity 105 2.5.4 Measuring Cognitive Capability 122

2.6 Organizational Frameworks using Developmental Assessments 125


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3 Specific Empirical Section 126 3.1 Empirical Objective 126 3.2 Empirical Targeted Participants 127 3.3 Empirical Methodology 128 3.4 Limits of the Empirical Study 132 3.5 Empirical Results 135

4 Concluding Section 139

4.1 Recommendations for Further Research 140 4.2 Contributions to Theory 141 4.3 Recommendations for Practice 141

4.3.1 For Human Resources and Coaching 141 4.3.2 For the Finance Industry 142 4.3.3 For Swiss Banking 143

5 References and Appendix 146

5.1 References and Additional Resources 146 5.2 List of Interviews 163 5.3 Final Certificate from the Interdevelopmental Institute 164 5.4 Long Letter Requesting Research Cooperation 165 5.5 Short Letter Requesting Research Cooperation 172 5.6 Banks and Investment Companies Contacted 173 5.7 Curriculum Vitae of Author 175


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List of Figures

Fig. 1. Structure of the Dissertation 10

Fig. 2. House Mortgaged with a Subprime Loan 35

Fig. 3. The Decision Making Context 73

Fig. 4. A Schematic of Habermas' Speech Acts 79

Fig. 5. DeSeCo’s overarching conceptual frame of reference 89

Fig. 6. Stages of Socio-Emotional Development by Robert Kegan 107

Fig. 7. Stages of Socio-Emotional Development 109

Fig. 8. Stages of Socio-Emotional Development with Sub-Stages 114

List of Tables

Table 1: Methods of approach to change patterns in trading. 85

Table 2. Stages in the application of rules by children 94

Table 3. Four Psychological Component Determining Moral Behavior 98

Table 4. Twelve Component Model of Moral Action 98

Table 5. Different Groups on the DIT P Score 101

Table 6. The Heinz Dilemma 102

Table 7. Six Stages in the Concept of Cooperation 103

Table 8. The Frame of Reference Stratification of Bureaucracy 111

Table 9. The Distribution of Stage Attainment in Adults 113

Table 10. Prompts for the Subject-Object Interview 113

Table 11. Overview of Emotional Development Levels 2 to 5 115

Table 12. New SOI Scoring Method 117

Table 13. Categories of Cognitive Capability 122

Table 14. Opinions About Assessment Centers 124

Table 15. Conceptual Relationship of Variables 129

Table 16. Proposed Research Time Schedule 131

Table 17. Empirical Results 136


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Abbreviations

CDO Collateralized Debt Obligation

CHF Swiss Francs

CRA Credit Rating Agency

DIT Defining Issues Test

MJI Moral Judgment Interview

SEC Securities and Exchange Commission, USA

SOI Subject – Object Interview

UCITS Undertakings for Collective Investment in Transferable Securities

USD United States Dollars

Key Words

Assessment, Banking, Competencies, Developmental Assessments, Developmental

Psychology, Fund Management, Human Resources, Industrial Psychology,

Leadership, Organizational Development, Personnel Management, Personality,

Promotion, Recruitment, Selection, Switzerland.

1 Introductory Section

2 General Theoretical Section

3 Specific Empirical Section

4 Concluding Section

5 References and Appendix

Fig. 1: Structure of the Dissertation


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Preface

In the life of every dissertation, phases can be uncovered that reveal stages through

which the author has grown through engagement with the material examined. In the

case of this study, the original intention was to work through the human resources

angle to study conflict resolution in corporate governance, with theory brought from

my background in international peacebuilding. The common problem of accessing

empirical data to analyze quickly became evident. The issue of the veracity of

interviews and reported facts seemed insurmountable.

A fresh impulse came through gaining certification in assessments based on

developmental psychology. These assessments do not rely on the surface content,

but use the latter to uncover the perspective, basic internal structure or internal

stance being used by the speaker. As the perceptive nature of these tools became

more apparent through use in executive coaching practice, a new vision of their

potential for explanatory power began to emerge.

During casual reading about fund managers, the author was suddenly struck with the

notion that emotional maturity may correlate with better investment decisions

because of the higher degree of social objectivity and lessened chances of decisions

being influenced by the opinions of others.

Reading the Peter Lynch interview in Tanous (1997, quoted in §1.2 below) supported

this hunch. The legendary manager of the Magellan Fund, appears to indicate socio-

emotional maturity to a degree that allows for post-conventional thinking (stage 4 and

above) already at the beginning of his fund management career. Later, as the author

began to pursue this research, casual conversations were held with two fund

managers who had tried and failed at their first attempts to start hedge funds.

Reflecting on these conversations, it was clear that their protestations were couched

in conventional thinking (stage 3). The dissertation project was born.

This idea meets the need that many in the small and nascent developmental

coaching community feel for a more solid evidential basis showing the utility of

developmental assessments. Fund managers, with numbers depicting their


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profitability at the end of each year, seem to be an ideal choice to quantify whether,

and if so how, the underlying capability that these assessments measure effect

performance, in this case in the financial markets, with implications for human

resources in general.

Being an outsider to the finance industry presents mostly disadvantages. Resistance

from bankers lead to much questioning and soul searching. In addition to formal and

informal networking, 30 financial institutions (see Appendix 5.6) were formally

approached, considered the research proposal, and then declined to participate in

this research. Hence the shift to a hypothesis building dissertation, requiring an

increased emphasis on the problem analysis to justify why this research is a good

idea. The amount of new empirical data gathered is much smaller than originally

intended, and hence the scientific analysis of this data is inconclusive, though it

supports the original hypotheses. On the positive side, as more ’literatures’ were

explored and the problem analysis grew, the implications of the questions which can

be addressed gained in significance.

This study begins, in the first chapter, with a problem analysis through a mostly

descriptive look at the history of Swiss Banking, building in broad outlines a profile of

how the banking profession has evolved up to the present time in order to identify the

main personnel issues. This inductive process is used in order to arrive at a basic

view of

• how the banking profession has changed in recent decades;

• the pressures bankers face; and

• the capacities and capabilities required of finance professionals.

Following this problem analysis, the goals for the study are set, the procedure for the

study outlined, and definitions used in the study are explained.

In the second chapter, a general theoretical approach to studying the personnel side

of banking is examined. Competencies required for success in this industry are

identified through a deductive process, and various theoretical approaches are

compared. Developmental psychology is introduced and placed alongside other

schools of psychology to compare the type of evidence these can produce for

personnel decisions and to establish the argument for examining the potential added


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value presented by developmental psychology based assessments. Developmental

assessments of socio-emotional maturity, ethical thinking capability and cognitive

development are explored in three sections, followed by a summary of the use of

these within a larger organizational development framework.

In chapter three, the specifically empirical section, an evaluation for selecting a

specific job category within the banking profession in order to meet the objectives of

the study arrives at a focus on fund managers as a sample. The presentation of the

empirical methodology includes a description and analysis of the efforts made to gain

agreement from financial institutions to participate in the study. The limitations of the

data gathered are analyzed and the empirical results are presented and analyzed as

a hypothesis-building result.

Chapter four presents the conclusions from this study. The implications of the initial,

hypothesis-building findings are explained and options for further research are

proposed. Recommendations for practice, both for the financial services industry

and for personnel management more generally are offered.

To amass the hypothesis building arguments presented here, justifications from both

scientific and general economic and historical perspectives, the sources of

information vary widely from the scientific to journalistic and anecdotal. The intent is

to justify this research approach, which this author continues to pursue.


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From the standpoint of business history, this study brings out one main point: techniques have changed, but human problems have remained the same. How to pick out the right person and put him in the right place was as much a problem for the Medici as it is in business today.

Raymond de Roover1

1. Introductory Section

Are fraud and lying necessary to succeed in the financial services industry? Are

profit and conscience opposing elements, do they work in concert, or are they

unrelated? Is success in the financial markets the preserve of persons of dubious

character? Or are sustained profits produced more often by persons of greater

ethical and socio-emotional stature? Are the parameters of ethics and socio-

emotional maturity essential, or non-factors in the pursuit of alpha?

The current global financial crisis coupled with continued high salaries and bonuses

has lead to a lowering of social esteem for, and trust in bankers today. “Never before

has a group of persons received such a high level of compensation for such poor

performance.” (Baumann, Interview, 2008) As the massive losses of the current

global economic crisis are generally seen to have been triggered by dubious financial

practices that generated the subprime crisis, ethics is increasingly being seen as not

just a nice extra, but as a truly economic factor. (Kümin, 2009)

This study is not value neutral. The values that motivate this study are rooted in the

search for peace, prosperity and environmental sustainability. In doing so the aim is

to be scientifically rigorous. Since individuals are making decisions that cumulatively

produce corporate cultures and market trends, are there measurable factors that

indicate tendencies which positively or negatively influence individual, corporate and

market behaviors? If so, what are the consequences? And what would that say

about Switzerland, a land where the finance industry plays such a large role in

economy and international image? This study explores one method which may help

1 De Roover, Raymond (1963). The rise and decline of the Medici Bank, 1397-1494. Harvard University Press,

Cambridge, MA., p.5.


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answer these basic questions through the use of assessments based on

developmental psychology.

The purpose of this chapter is to review the development of Swiss Banking in its

broadest outlines in order to identify the main questions relevant to human resources

management for financial professionals. How has the profession changed in recent

decades? What pressures do bankers face? What capacities and capabilities are

required to enable institutions to prosper and successfully contribute toward solutions

for the unprecedented moral and ethical challenges of the 21st century?

1.1 Problem Analysis: The Evolution of Swiss Banking

Zurich’s relationship to the world is not of the spirit, but of commerce.

C.G. Jung

Switzerland did not gain its wealth by windfall, according to Lorenz Stucki (1981), but

rather by what in the US would be called “elbow grease”. The generation of capital

that enabled industrial development came through extreme frugality and dedication.

That agriculture could prosper not only in the planes but also in the mountainous

regions was due to a culture that valued hard work of high quality. With relatively

little agricultural land in relation to the population, Swiss sent their sons abroad as

mercenary soldiers for generations to send back hard-earned cash. This heritage of

trustworthy service can be seen still today in the Swiss Guard at the Vatican which

recently celebrated its 500 year anniversary, and one could also argue that the

International Committee of the Red Cross and dedicated humanitarianism is a

transformed outgrowth of this tradition.

Stucki (1981) argues, however, that the core of Swiss wealth came from economic

pioneers who were tough, hard working, creative, and took risks to build several

industries, including textiles, clocks and watches, machinery, tourism and hospitality,

chemicals and pharmaceuticals, and, famously, chocolate. The textile industry, for

example, grew in a very grass-roots fashion, with evenings and winters spent

spinning and weaving in the farm houses across the land. Being land-locked, and

burdened by inter-cantonal taxes and tariffs, Swiss turned “necessity into virtue”

(Stucki 1981) by using the international connections, developed by their soldiers, the


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geographic location and history of trade fairs, and the homegrown practice of

neutrality that was confirmed in the Peace of Westphalia at the end of the Thirty

Years’ War in 1648, to develop international export trade that continues to be a

mainstay of the Swiss economy.

Banking was no different; success was not through deceit and it was not a gift. While

the above description hardly does justice to the complexity of Swiss history, the point

is to briefly describe the context out of which banking rose into prominence in the

Swiss and indeed global economy. Swiss neutrality in the wars that ravaged Europe

meant that Swiss banks were seen as a safe haven. The trustworthiness of the

bankers, their cautious approach to investment and capital preservation, and their

personal relationships around Europe laid the foundation for the reputation of being a

safe haven for capital. Circumstances gave rise to opportunities that were seized

and intelligently developed.

The culture of Swiss Banking is currently in the middle of a period of government

bailouts and restructuring, with calls for a return to the values of an earlier era.

Valuable as tradition is, traditional practices in banking were not capable of mastering

the demands of the current era. New strategies must be found to instill the values,

qualities and character that lend strength to this important sector of the Swiss

economy and culture.

1.1.1 The Origins of Banking

[I]t was the money changers who were the true ancestors of modern banking.

(Bauer 1998, p.3)

While the origins of money and money lending stem from the misty past of at least

ancient Mesopotamia (Ferguson, 2008), various traditional cultures and Biblical

times, “[m]odern capitalism based on private ownership” according to De Roover,

“has its roots in Italy during the Middle Ages and the Renaissance.” (1963, p.1)

During this period the Italians were both the principal merchants, with a famously

wide ranging sailing fleet, and also maintained a near monopoly in the nascent

banking industry due to their abilities in business organization. Their commercial

capitalism predates the protestant reformation by several decades, an historic reality


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which contradicts the Weberian thesis which ties the birth of the capitalist spirit to the

Calvinist Reformation. (De Roover, 1963, pp. 1-8)

Gold coins were the means of exchange across medieval Europe, with the right to

mint granted by the sovereign usually to regional bishops. Money changers were

allied with mint-masters, who melted foreign coins to make local currency, to regulate

currency. To facilitate trade, and because large quantities of metal coins were simply

heavy and therefore difficult to transport, money changers wrote notes on paper

stating the amount of gold or other coins they were holding that were redeemable

upon presentation of the note. These were at time passed from person to person, so

that the person arriving with the note to cash in the note for gold coins was not the

original depositor of the coins. Hence a highly simplified picture of the origins of

paper money.

As this system developed, money changers began to issue notes, or “bank notes” for

which they did not have any gold coins in reserve as loans to merchants, in effect

creating money. As long as the notes circulating were not all turned in at the same

time, a bank remained liquid. This process was based on trust that the notes were

backed by gold. If this trust was lost, a “run on the bank” could ensue, where by all

holders of notes raced to the bank to be sure that they got their gold coins before the

supply ran out.

The capacities that the original bankers needed then were twofold. First, the

regulation of currencies to facilitate trade, and second managing the money supply in

relation to the amount of gold reserves they had in their banks. At root, we can

assert here that these capacities were based on (1) trust in the banker’s knowledge

of trade and currency regulation; (2) trust in the banker’s judgment of what people

within the local monetary system would tolerate as an acceptable level of gold

reserve in relation to the paper bank notes in circulation; and (3) trust that the banker

was being honest and not manipulative about (1) and (2).


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1.1.2 Historical Phases of Swiss Banking

[B]y turning inward toward the pursuit of neutrality and the development of their own skills and arts, the Swiss achieved a much more lasting ‘conquest’: economic growth to an extent that was the envy of all Europe.

Baur, 1998, pp.73

Geneva can be credited as the site where Swiss banking had its historical beginnings

when it was one of the main trade fair centers in medieval Europe. Its location was,

and still is an ideal meeting ground for northern and southern Europeans. As

banking in Paris declined during the early 1400s, Geneva’s prominence grew along

with the increasing trade flowing through its four trade fairs each year. As the first

and most prominent bankers, all of the Italian banks had representatives in Geneva,

and the Genevan banks would presumably have grown under their tutelage had not

“the ordinances of Louis XI”, the theocratic state under Calvin and the political and

military pressures from the Duke of Savoy and the Canton of Bern impeded this

growth. In 1463 Louis XI issued an ordinance which provided privileges to

merchants who came to the fairs in Lyon, arranged on the same dates as the fairs in

Geneva, causing the prominence of the Genevan fairs to fade. In 1465 the Medici

Bank moved its Geneva branch to Lyon and banking in Geneva entered a dormant

period. (Bauer, 1998, pp. 3-18, De Roover, 1963, pp. 1-8)

It was in Basel that Swiss banking sank its first permanent root. A mint was

operational as early as the tenth century, and the “right of coinage was bestowed by

the Emperor [of the Holy Roman Empire] on the bishop of Basle sometime during the

reign of Bishop Adelbero (999-1025). (Bauer, 1998, pp. 22) A deed from Emperor

Friedrich in 1154 stipulated that coins should be “standard in weight and purity, and

remain so forever” (Baur, 1998, pp. 23) in order to support and improve the chances

of economic growth along with spreading his portrait on the coins. (Fried, 1984, pp.

230-231)

Under the rule of Bishop Heinrich II of Thun (1216-1238) Basel grew in importance

when he built the first bridge over the Rhine, thereby facilitating transport, trade and

the spread of Basel coinage beyond its borders. He instituted a system to protect

Basel coinage from counterfeiting and debasement from variations in purity, size and


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weight through a system that placed the mint-masters under the control of the mayor,

and the money changers became office holders under the supervision of the Bishop.

Village mayors were empowered to sample output of the local mint without notice

and then to take evidence and witnesses to the Bishop for judgment. If the coinage

was off by more than four pfennig, they were declared fraudulent. Hence one of the

historical roots of the judicial prosecution of fraud. (Baur, 1998, pp.21-25)

Through this system of strict quantity and quality controls, Basel coinage gained a

reputation for their high quality, in effect their superior trustworthiness, in relation to

other currencies in the realm. Due to this reputation and attendant human

capabilities, when the right of coinage was transferred from the Bishopric to the town

of Basel in 1373, it was possible to form the Upper Rhine Coin Alliance soon

thereafter. Thought it lasted a mere decade, this was the first example of regional

monetary cooperation within the Holy Roman Empire. (Baur, 1998, pp. 25) Centuries

later, the Bank for International Settlements was created in Basel in 1930 as the

world’s first international financial organization. (Pohl, 1994) The historical precedent

seems unmistakable.

As nation-states rose around Europe the dominant economic philosophy of

mercantilism drove a zero-sum type contest between most larger economies.

Switzerland, on the other hand, found motivation in the symbiotic relationship

between its natural penchant for hard work and the blessing this received from

Calvinist and Zwinglian Protestantism. (Baur, 1963, pp. 45-50)

Swiss banking had its origin not in commercial banking and the multiplication of

money supply based, but rather formed as “an outlet for a pre-existing supply of

capital.” (Baur, 1963, pp. 60) While most of Europe was caught up in religious wars,

Switzerland was not burdened with a feudal class that would have drained its wealth

through war. Instead, through supplying mercenaries to various external patrons,

Swiss wealth increased. Since Swiss agriculture was largely on the basis of peasant

ownership, and not of a feudal nature, savings were accrued directly by each

household and the “first use of industrial credit in Switzerland was not that of

manufacturing but of agriculture” as farmers used credit to expand their land

holdings. (Bauer, 1963, pp. 67-74) Hence, banking in much of Switzerland began as


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relatively small enterprises with a naturally connected, local customer base:

mortgages for farmers.

A second stream of Swiss banking, focused on international investing, emerged

slowly onto the international banking scene. Unlike banking from other European

countries, Switzerland has always been a creditor nation. This was its stance

already for “two centuries or so preceding the industrial revolution” (Bauer, 1963, pp.

86), yet the activities tended to be operated by individuals and not conglomerated

into larger institutions. The tradition of Swiss private banking has its roots in the

centuries old practice of individuals acting as intermediaries connecting capital to

projects. Bauer (1963, pp. 85) states that there were 16 such bankers in Basle by

1840 and there were certainly others, especially in Geneva. Two of the classic works

on the history of banking from the early 19th century, by Goddard (1831) and Hildreth

(1837), do not list a single Swiss bank, thus attesting to the fact that Swiss banking

up to this time was not carried out by large visible institutions.

Polanyi (1944) points out that the “hundred years’ peace” from 1815 to 1914 which

provided a context for much progress and prosperity rested on four pillars: the

balance of power among states; the gold standard; the self-regulating market; and

the liberal state. In addition, there developed an “acute peace interest” where, in the

aftermath of the French Revolution and growing effect of the Industrial Revolution,

the interest in “peaceful business” became universal. (Polanyi, 1944, pp.3-7) In this

context, Swiss banking saw what could be called a natural growth.

Between 1834 and 1837, “bank note” issuing “credit banks” were opened in Bern,

Zurich and St. Gallen, with agricultural mortgages as a major focus. Commercial

banking on the British model first emerged in Switzerland in Basel in 1844 (Giro und

Depositenbank) and 1845 (Bank in Basle). (Bauer, 1963, pp. 76)

The new Swiss constitution in 1848 removed many cantonal barriers that had

hindered banking activities at a time when larger scale investing for infrastructure and

industrialization was needed. From that year on, there was more capital needed for

investment than was locally available. (Bauer, 1963, pp. 104)


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Two initiatives established the joint stock company form of banking in Switzerland

that had been pioneered by “Credit Mobilier” in Paris in 1852. In 1853 James Fazy

formed the Banque Generale Suisse de Credit Foncier et Mobilier in Geneva, and in

1856, at the initiative of Alfred Escher, the Swiss Credit Bank was formed in Zurich.

These marked the emergence of a new kind of banking where local savings were

invested in ventures with reach beyond the local economy. (Bauer, 1963, pp. 75-77)

In Basel, the banking community remained settled with its traditional banking forms,

but began to invest surplus capital in the US bond market where they got higher rates

of return than was possible in Switzerland, and also avoided political uncertainties in

Germany and France. (Bauer, 1963, pp. 77) Much of Swiss private banking

continues to function on this trajectory.

1861 saw a “boom” in Swiss banks, as 24 were founded in one year, adding to the

“[t]wenty to thirty banks and lending agencies, a dozen industrial companies, fire and

live insurance companies” already in existence that competed with each other on a

capital market driven by industrialization. (Bauer, 1963, pp. 78).

Financing the Swiss railroad system can be seen as “the greatest achievement of the

banks during the nineteenth century.” (Bauer, 1989, p.152) To achieve this, “railroad

banks” were formed as intermediaries between banks and the railroad companies,

and these issued shares which were highly liquid. In the 1880s and 90s the federal

government became increasingly involved in purchasing shares. In 1891 the Federal

Council announced its intention to nationalize the entire system, but was thwarted by

a referendum which turned down this initiative. Railroad stocks had risen in

anticipation of government purchase, and then collapsed after the referendum.

(Bauer, 1989, p.152-155) Concurrent with a global recession, a representative

basket of Swiss stocks lost between 25 and 48 percent of their value. (Bauer, 1989,

p.156) This also precipitated the demise of many weaker banks, and for Bauer

(1989) this marked the end of an era in Swiss banking.

Crucial to the success of that era were bank managers who “were generally

successful entrepreneurs in their own right.” (Bauer, 1989, p.157) They were

capable of prudently guiding the formation of the Swiss economy in its various

sectors and focus on long-term value creation, rather than short-term gain, and


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pioneering the transformation of “financial capital into industrial capital” in an

unprecedented manner and scale. (Bauer, 1989, p.158, 168) And this was not only

domestic, but also in its international work where Swiss banks began in this era to

move from simple lending to the establishment of industries, sometimes in

consortiums with other banks. (Bauer, 1989, p.195)

Personnel requirements for Swiss banks began to change at the turn of the century

with the internationalization of Swiss banking. While Swiss private bankers had long

been involved in foreign investments, the first London branch of a Swiss bank was

established in 1898, marking the beginnings of the presence of large Swiss banks in

the international arena. (Bauer, 1989, p.162) With branches of Swiss banks opening

in various international capitals, and increasing numbers of international depositors

and investors, language skills and knowledge of foreign cultures and economic

practices increased dramatically. (Bauer, 1989, p.162) Swiss banks developed their

own operating standards to meet this market, developing into the premier

international bankers of the day. (Bauer, 1989, p.169)

In domestic banking there was an increase in the gathering of capital through small

savings accounts in local banks, stimulated by examples from other European

countries. There was also some restructuring, with banking crises in the cantons of

Argau and Tecino, and the closing of some 25 of 331 banks between 1906 and 1913.

All in all, the Swiss banking system had grown into “one of the more mature banking

systems of the world.” (Bauer, 1989, p.176-184)

The First World War and Aftermath

Though Swiss banks lost considerable investments abroad through the war2, the

Switzerland, thanks to its neutrality, had the only monetary and banking system in

Europe that remained intact through the war. This fact, along with the “genius of the

Swiss bankers” positioned it well to survive the post-war inflation and economic

depression that followed. (Bauer, 1989, p.175, p. 217) Substantial infrastructure

work, including bringing electricity to remote areas of the Alps, combined with

substantial financial reserves, delayed and muted the effect of the depression in

Switzerland. (Berry, 2008) Only one bank collapsed completely, the Swiss 2 Bauer (1989) reports that there while no overall estimates exist, one indicator of loss is that foreign securities

held by banks declined “in value … from 8,000 million francs to 2,500 million francs.” (p.190)


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Government responding with a bailout of CHF 200 million, “an amount then

equivalent to about half of Switzerland’s annual budget.” (Berry, 2008) The full

impact of the depression was not as great in Switzerland as in the US and some

European countries, though the effects were evident in the watch making industry

and other products produced for export. (Bauer, 1998)

The Second World War

Prior to the end of the second world war, Switzerland was a “classical industrial

country” according to Baumann (2008), with the banking sector at 4 percent of GDP,

similar to other countries. He names four categories of bank that had taken form by

that time: (1) large banks, such as the Schweizerische Kreditanstalt (Swiss Credit

Institute) that financed the development of Switzerland’s infrastructure; (2) Private

Banks; (3) Cantonal Banks and Savings Banks; and (4) Raiffeisen Banks, operating

mostly in rural areas.

In the years preceding and during the second world war, several Swiss banks were

heavily engaged in Germany, and among these two prominent banks folded due

largely to losses connected with the downfall of the Nazi regime: the

Eidgenössischen (National) Bank and the Basler Handelsbank (commercial or Trade

Bank) (Bauman, 2008). Adequate treatment of the complexity of financial transfers

during the Second World War and the importance of the questions raised by

Eizenstat (2003) and others goes well beyond the scope of this study.

Post WWII

The end of the second world war found banks in Switzerland in an ideal condition to

grow and thrive. The elements of this condition included, according to Baumann

(2008, p. 25 - 41): an intact country, undestroyed by the war due to its neutrality; a

federal system with direct democracy providing political both stability and change that

avoided extremes; an economy characterized by low inflation, high savings rates

among Swiss and a stable Swiss Franc that remained exchangeable; Swiss banking

law that ensured privacy and a high reserve ratio, thereby engendering trust; and a

professional ethos of competence, industriousness and dependability among Swiss

bankers.


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External factors also played a role in the post-war growth of Swiss banking: a treaty

between the USA and Switzerland released frozen Swiss accounts; German

industriousness and monetary reform; the broad based European post-war

reconstruction effort ‘kick-started’ by the Marshall Plan, which brought “subsidies and

loans amounting to a total of about 13 billion dollars distributed between April 1948

and June 1951” (Deschamps, undated) opened opportunities for Swiss banks to

provide reconstruction related loans and attract private accounts to its “safe haven”

based on a centuries-old ethos of Swiss Banking. (Baumann, 2008)

Ritzmann (1966) reports that in 1959 Swiss banks (he examined the large banks,

cantonal banks, savings banks and local banks, but not the Raiffeisen system and

not private banks) held cash reserves amounting to 20% of their demand deposits

(pp.10), which was “5-6 times” their legally required cash levels (pp. 3). This is

evidence of a conservative approach, attractive to customers interested primarily in

safety and stability.

Perhaps this model of prudence characterizes the classical Swiss model of banking,

arising from Swiss historical experience and formed by its unique society and culture.

The period which follows, as international competition and later the “American” model

of banking reaches Switzerland (Baumann, 2008) presents a very different picture.

Examined in more detail under sections covering Globalization and Digitalization, we

introduce in closing paragraphs of this section the broad outlines of how these waves

of change affected Switzerland.

Beginning at the end of the 1980s as the cold war drew to a close, security and

stability became less important in attracting customers because other countries were

able to provide a similar banking context. (Baumann, 2008) In response, Swiss

banks moved increasingly into overseas markets where they opened branches, and

as a new breed of international financial products became increasingly available in

Switzerland, such that by 2008 only 20% of the funds that were permitted to be sold

in Switzerland were actually domiciled here. (Baumann, 2008)

By the end of 2007 (last year available from official Swiss statistics) Swiss banks

employed 108,821 persons in Switzerland and an additional 27,381 abroad.


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(Bundesamt für Statistik, 2009) In particular, the large Swiss banks, UBS and Credit

Suisse, expanded into overseas markets to the extent that they employed more

persons outside of Switzerland than in, and their banking style and offerings similarly

began to look like those of other large global banks to the point where Baumann

(2008) states that they are “no longer Swiss banks, but global financial concerns.”

(p. 191)

Yet simply recognizing that these major banks have become global does not remove

their connection to Switzerland, nor the impact their activities have on Swiss banking

as a whole. As the global competition in the banking sector increased, so have the

pressures on the Swiss banking model. Integral to the character of Swiss banking,

confidentiality of customer data, or “bank secrecy”, has come under increasing attack

to the point where UBS turned over data from some 250 accounts to US authorities

in the spring of 2009. (Logutenkova, 2009) These attacks, particularly from the US

and UK, seem hypocritical due to the existence of extensive tax haven possibilities in

both of these countries.

By the beginning of 2008, banks in Switzerland (including branches of foreign banks)

were managing customer accounts totaling some 4.7 trillion Swiss Francs, managing

some 30 percent of the globe’s private wealth. (Baumann, 2008, p. 12)

1.1.3 The Context of Globalization

“Honey,” I confided, “I think the world is flat.”

Thomas Friedman (2005)

Globalization, one can argue, has been around for a long time; perhaps since the

idea of a spherical rather than a flat earth was conceived and acted upon. (Friedman,

2005) In its current usage, however, it refers to the increasing internationalization of

the post-Cold War era, when the near-total collapse of ideological barriers opened up

possibilities for exchange on multiple levels. Stiglitz (2002) defines and describes

globalization as

the closer integration of the countries and peoples of the world which has

been brought about by the enormous reduction of costs of transportation and


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communication, and the breaking down of artificial barriers to the flows of

goods, services, capital, knowledge, and (to a lesser extent) people across

borders. Globalization has been accompanied by the creation of new

institutions that have joined with existing ones to work across borders.

(Stiglitz, 2002, pp. 9)

The consequences of globalization are as diverse as the people and peoples

affected, and the responses are just as divergent. As described by Law (2008): “ For

some, globalization promises peace and prosperity on an unprecedented scale; for

others, it portends injustice, inequality, and the demise of community and self-

government. V In short, it is a word coined to describe a future that we have created

yet cannot fully control.”

The negative aspects of globalization are voiced in popular protest, Stiglitz saying

famously that globalization has “succeeded in unifying people from around the world

– against globalization.” (Stiglitz, 2006, pp 7) He lists the central objections to how

globalization is proceeding as described in the 2004 report of the World Commission

on the Social Dimensions of Globalization (hereinafter WCSDG) as (paraphrased):

• The rules that govern globalization favor advanced industrial countries and

have a detrimental effect on some of the poorest countries;

• Globalization favors material values above other values such as the

environment;

• The way globalization has been managed has weakened sovereignty and

local decision making, thereby undermined democracy;

• There are not just winners, but also economic losers in developed and

developing countries;

• The globalized economic system is inappropriate and damaging for

developing countries, and has often created resentment through the inclusion

of an aspect of Americanization.

(Stiglitz, 2006, pp. 9)

On the positive side, what Thomas Friedman (2005) describes as a “flattening” of our

world is the reality that through the collapse or dismantling of barriers, increased

travel, internationalization of education, trade and communications technology, the


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‘playing field’ is increasingly level, allowing more and more of the world’s population

to participate in a globalized market place. In the economic sphere this means global

competition, where especially in the service sector, which includes banking, virtually

anyone can compete for market share, with geography playing an increasingly

smaller role.

Perhaps the most important aspect of Friedman’s ‘flat earth’ book is how he identifies

the implications of globalization for business strategy. He identifies a “triple

convergence” of technologies, new ways of doing business, and 3 billion newly

connected people, that has changed the face of business.

It is this triple convergence – of new players, on a new playing field,

developing new processes and habits for collaboration – that I believe is the

most important force shaping global economics and politics in the early

twenty-first century. Giving so many people access to all these tools of

collaboration, along with the ability through search engines and the web to

access billions of pages of raw information, ensures that the next generation

of innovations will come from all over Planet Flat. The scale of the global

community that is soon going to be able to participate in al sorts of discovery

and innovation is something the world has simply never seen before.

(Friedman, 2005, pp.181-182)

Companies that will succeed in this environment will follow, so Friedman, a number

of identifiable strategies that are already emergent, here paraphrased (Friedman,

2002, pp. 340-367):

1. Given the new generation of work-tools, individuals can often compete with

large companies for the provision of specific services

2. Through networking and collaboration, small companies can perform the same

functions as large companies and compete in their markets

3. Large companies can “act small” by enabling customized interfaces where

customers command the use of diverse resources

4. “The best companies are the best collaborators” because the increasing level

of complexity in value creation means that networked specialization is required


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5. Companies stay healthy by knowing and focusing on their core competencies

6. “The best companies outsource to win, not to shrink.” Outsourcing enables

economies of scale and increased access to specialists in the growth process

7. Idealists, “social entrepreneurs”, are able to create outsourced projects in

developing economies, connecting them to the global economy

Numbers two, three and four are particularly relevant to the banking industry, as we

will see below from the example of ICICI, a private bank based in India, which started

small, acted big, became big, is acting small, and collaborating internationally.

1.1.4 The Digitalization of Finance

Writing in 1985, Nadler and Miller comment on the personnel changes associated

with the introduction of computers in banking. This was the era of large mainframe

computers and the so called “mini computers” which were actually quite large by

current standards, and prior to the internet revolution and on-line banking. “The

banking industry has widely accepted the use of electronic funds transfer services”

they wrote, and commented on.

As a measure of the impact the digital revolution on banking, we turn to the example

of the ICICI Bank which became India’s largest private bank and “second largest

retail bank, from a standing start, in under ten years” (Tapscott, 2008). This was in

part possible because it developed an e-banking platform where customers do most

of the work on their own. (See: www.icicibank.com) Virtually all aspects of personal

and business banking can be performed on-line, including applying for a home loan,

trading stocks, taxes, custodial services, etc. While this may not be an unusual

concept in today’s financial market, the completeness of the on-line offering, the

speed of its transformation from “a development financial institution offering only

project finance to a diversified financial services group” (iloveindia.com, 2009) and its

rapid spread overseas to 19 countries on four continents present an aggressive

model could turn the 21st century into the “Asian Century”.

Elsewhere in Asia, we find a similarly aggressive approach to globalization in China

where “’innovation cities’ are emerging across the country, where thousands of


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intermingling companies leverage technology, low-cost structures, and physical

proximity to destroy their worldwide competition.” (Tapscott, 2008)

In facing these mounting changes, Swiss banks imported both people and practices.

The negative side of this rush to innovate lead to overstretch and eventually financial

crisis. Swiss tradition did not provide innate ability to identify and face these

problems.

Koye (2005) examines the changes caused by the shift from industrial society to the

information society, requiring an increased emphasis on network structures in Private

Banking business models. The traditional advantage of more timely and qualitatively

better information has all but disappeared. Success comes from excellent customer

management and the ability to open doors to lucrative markets. (Karsch 2005)

The perspective taken by this study is that for Swiss Banking, and especially Swiss

Private Banking to advance into the future there needs to be a conscious effort to

build on the values of classical Swiss Banking model, retain some elements of the

current business partner model, and evolve toward an as yet uncharted “wise

advisor” model that both retains the best of previous periods and adds new value to

the banking relationship.

As part of a company that supplies IT services to banking, Shojai and Feiger (2004)

argue that for Swiss banks to maintain a leadership position in private banking, they

need to make a collective decide to innovate in order to maintain their position in the

global banking market. Historically seen, Switzerland’s banking industry was

established as a safe haven for Europeans “fleeing persecution and war well before it

became a safe haven for those seeking protection from taxes.” They point to Swiss

neutrality, its “advanced political and economic stability and flexibility”, and its

“institutionalized conservatism” in investment strategy key aspects that has made the

country a safe place for banking. In addition to this cluster of attributes as a

comparative advantage, the customer base of “wealth-preservation focused

Europeans” demanded high quality services, and Swiss banks have continually

responded.


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In describing the currently emerging customer base, Shojai and Feiger (2004) see an

increasing sophistication in their understanding of financial investments, awareness

of global opportunities and willingness to embrace an increased risk exposure for at

least part of their portfolio. Increasing numbers of wealthy clients have advanced

business and economics degrees, demand more sophisticated levels of information,

and are more independent in their decision making. While Switzerland’s reputation

as the location of choice for conservative investment can be maintained, the danger

is that tradition-bound Swiss private banking could become a sort of “security deposit

box” and miss out on the smart money that seeks more aggressive investment

strategies.

Part of what is needed to remain competitive in the latter market, is a highly

interactive customer interface that will require an increased fixed infrastructure

investment to the tune of “between U.S.$60 and U.S.$100 million” per bank “on a

purely stand-alone basis.” (Shojai 2004) And there is another problem. If Swiss

private banks do not embrace innovation, they will also not attract the most highly

qualified staff. The advisors assigned to the emergent customer base must be “more

entrepreneurial” and have a more penetrating and reliable understanding of the

capital markets to an even greater depth than these clients. This implies an increase

in the human resources costs to the tune of “two to four times the cost of a traditional

Swiss private banker.” (Shojai 2004)

Since the model of banking required to maintain leadership and market share

involves increased costs in fixed infrastructure and personnel, Shojai and Feiger

pose three choices: quietly decline; merge into larger banks, or “innovate and share

infrastructure”. If not somehow shared, these infrastructure costs could become a

crippling factor for small and medium-sized private banks. Therefore Shojai and

Feiger propose a strategy of selectively sharing infrastructure or “open architecture.”

The decision to move to an open architecture will not be an easy one. Most Swiss

banks have operated with their current business models for generations and many

might choose to continue on that path. Procrastination is made easy because the

costs will not be immediately apparent.


- 31 -

Customers at Swiss banks tend to change service providers slowly, but that does not

mean they are immobile. If the customer interface does not keep pace with demands

for high quality real-time information, and response to queries and orders from highly

qualified advisors, smart money customers will migrate to where their needs are met.

The point for this study is that both the will to innovate and the ability to provide

independent opinions in a rapidly evolving financial services market require post-

conventional competence (SOI stages 4 and 5, explained below) from senior

management and client advisors.

It is clear that if Switzerland is to maintain its position in private banking, it must

continue to respond to customer demands. To meet the increasingly sophisticated

emergent customer base will require the capability to remain true to the traditional

values that built Swiss private banking, and also to embrace innovation that goes

beyond conventional thinking about banking and banking relationships to create new

models of authentic interaction and high quality service.

In addition, to the broadened and more complex opportunities that have emerged

through the digital revolution, a “down side” has become abundantly evident. Digital

complexity has contributed to the global crisis caused by a financial “bubble” and, of

course, major and minor fraud remains a factor directly relevant to personnel issues.


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1.1.5 The Subprime Crisis: Collective Failure and System Meltdown

There was a time, perhaps, when people were able to give a fully human response to any situation because they were fully absorbed in it as human beings. But as soon as there was a division of labor things changed. Beyond a certain point, the breaking up of society into people carrying out narrow and very special jobs takes away from the human quality of work and life. A person does not get to see the whole situation but only a small part of it, and is thus unable to act without some kind of overall direction. He yields to authority but in doing so is alienated from his own actions.

Stanley Milgram (1974) commenting on his experiments regarding obedience

Once upon a time, a home loan was a serious thing.

John Rubino, 2007

The real estate market in the USA became the root of the financial crisis currently

afflicting the global financial markets. Even major figures in the finance industry such

as former Chairman of the US Federal Reserve Alan Greenspan and Robert Rubin,

former Secretary of the US Treasury, “missed the warning signs of the crisis”.

(Enrich, 2009)

In 1995, then President Bill Clinton waxed eloquent about the values of home

ownership when speaking about his “National Homeownership Strategy”, launched

the previous year as a six year program. He cited the need to counteract the

disintegration of the two-parent family, his personal experience of home ownership,

and how “[t]his is about the way we live as a people and what kind of society we're

going to have”, it is about enabling moderate income families to “build their own

personal version of the American dream”. (Clinton, 1995) He spoke of hard working

families who are paying rents that would equal a mortgage payment, but are “locked

out” of a rigid system for lack of enough savings to invest in a mortgage down

payment, promising a program that “will not cost the taxpayers one extra cent”.

Homeownership benefits the family, and has a positive ripple effect on the economy

and society.

The plan itself actually called for “expanding creative financing” solutions to help

people who (1) could not afford the downpayment; or (2) the monthly payments of a


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standard mortgage. (Coy, 2009; Mason, 2008) The intent was stability, the result,

through deregulation and quantitative magic divorced from human judgment, was the

opposite. According to Mason (2008), “social policies pushed the misuse of

mortgage credit” including both lending to persons at levels beyond their means, and

also extending increased levels of “credit to prime borrowers, fueling home price

inflation.” This already speculative market was then met by yet another

development.

In the evening of Friday, December 15th, 2000, just before the holiday recess,

Senator Phil Gramm engineered the inclusion of a complex 262-page amendment

called the “Commodity Futures Modernization Act” to the 11,000 page “government

reauthorization bill” that was passed by the senate without debate and signed into

law by Bill Clinton. (Hart, 2008) This act, according to law professor Michael

Greenberger, “prevented government regulators from halting the spread of risky

financial instruments” (Hart, 2008), and enabled the creation of financial instruments

that Warren Buffett famously derided:

“When Charlie and I finish reading the long footnotes detailing the

derivatives activities of major banks, the only thing we understand is that

we don’t understand how much risk the institution is running. The

derivatives genie is now well out of the bottle, and these instruments will

almost certainly multiply in variety and number until some event makes

their toxicity clear. V In our view V derivatives are financial weapons of

mass destruction, carrying dangers that, while now latent, are potentially

lethal.” (Buffett, 2003)

In the housing market, low income individuals and families were encouraged to take

on mortgages, even though they could not realistically handle the debt. They were

not able to afford the “broad elementary financial advice” that they needed to

evaluate the opportunity. If they had, perhaps “[t]he crisis might never have

occurred.” (Shiller, 2008, p. 124 and 126)


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Corruption comes in many forms, and Rubino (2007) described several ruses

commonly used to ‘play the system’ in the US real estate market. Rubino’s

descriptions are paraphrased here:

1. Liar Loans:

A mortgage broker instructs a borrower to inflate his or her income to meet the

requirements of a loan. The mortgage underwriter “winks” at the deception,

and passes it on to a packager who also ignores the lie. The packager

creates the derivative and sells it on to pension funds in Europe or Asia.

Rubino (2007) states that one study found 60% of the loans made in this

fashion involved income exaggerated by 50% or more.

2. Inflated House Prices:

A mortgage broker and buyer agree to offer a highly inflated price for a home,

well over the market value. An appraiser is found who will play along, and

appraise the house at a higher value, [the deal is closed, presumably, at a rate

closer to actual market value] and the three parties split the difference. The

new owner defaults on payments, the bank then repossesses the house.

Market values in the neighborhood have, in the meanwhile, inflated.

3. Pressuring the appraisers:

In 2006, some 90% of appraisers claimed “they had experienced threats,

nonpayment of fees, and other forms of coercion”. (Rubino, 2007)

4. Self-Dealing:

Subprime lenders, investment bankers and stock analysts formed mutual

support circles, publicly portraying solvency and high quality to cover up poor

performance and high levels of risk.

5. Pay-option ARM (adjustable rate mortgage) accounting:

These mortgages allowed borrowers to occasionally skip monthly payments,

with the skipped amount then added to the principle of the loan, thereby

raising future monthly payment amounts. Further, the banks claimed the

addition as “negative amortization income”, adding to their assets on paper.

Mortgages were packaged into derivatives in complex packages which were divided

into very secure, secure and “sub prime” categories. The latter were then insured in

order to gain the coveted triple-A rating that gave assurances to investors and a


- 35 -

better price to sellers. Each player in the game extracted a fee, and passed

responsibility for the loan on to the next player until in the end, the unsuspecting

investor carried substantial risk hidden behind the “AAA” rating.

Fig. 2: House Mortgaged with a Subprime Loan

A microcosm of the issues in subprime ‘debacle’ can be seen in the case of an

Arizona resident we will call Ms. H. as portrayed by Phillips (2009) in the New York

Times. In the 1970s Ms. H bought a very modest (576 square foot) home (photo

above, Fig. 2.) for USD 3500. (Phillips, 2009) She earned her living from unskilled

jobs until her alcoholism made jobs impossible to hold. On the welfare roles since

about 1996, she receives about USD 3000 per month, but could not keep up with the

“long list of creditors”. In 2008 she received an adjustable rate USD 103,000

mortgage (9.25% to 15.25%) from Integrity Funding LLC, who then sold the

mortgage to Wells Fargo & Co, who in turn sold it to HSBC Holdings PLC, who

packaged it with “thousands of other risky mortgages”. “Standard & Poor’s and

Moody’s Investors Services, both SEC certified National Recognized Statistical

Rating Organizations, gave the new security their top ‘triple-A’ ratings.” The product

was sold to investors who trusted that a triple-A mortgage backed security was a

solid investment. However, Ms. H defaulted, the house went into foreclosure, was

sold for USD 18,000 and the “investors will be lucky to get USD 15,000 in return”.

(Phillips, 2009)


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One could say that this mortgage story is as far from a Swiss mortgage as a Las

Vegas craps table is from an Appenzeller farm. The chain of buyers and sellers in

this process, from the small town in Arizona to the investors who purchased this and

similar derivative products in the climate controlled offices of banks in Switzerland, all

made their profit on the product. The local “lenders” did not earn their money from

monthly collections, but from the “origination fee”. And given the long chain of

transactions among persons and institutions between the mortgage originators and

ultimate investors, the likelihood of persons being held directly to account for their

actions became equally remote.

1.1.6 The Ratings Agencies

It would be beyond the scope of this study to examine the entire chain of regulatory

mechanisms relevant to the subprime crisis and international investment. To provide

more depth to the discussion of decision making, we will take a brief look at one

relevant regulatory regime, that of the credit rating agencies (CRAs).

In the USA, the Securities and Exchange Commission (SEC) certifies agencies,

currently ten in number, as Nationally Recognized Statistical Rating Organizations

qualified to provide their “opinion” on the creditworthiness of companies and their

financial instruments. (SEC, 2008) This qualification effectively makes them part of

the formal financial system. (Economist, 2007) Yet, “on the basis of their ‘free

speech’ rights” (Economist, 2007), credit rating agencies “have been largely immune

from civil and criminal liability,” notes Partnoy (2006).

Partnoy notes further (2006) that these agencies used complex “rating

methodologies for Collateralized Debt Obligations (CDOs) have created and

sustained [a] multi-trillion dollar market”. He cites research showing that “CDO

structurers (sic) manipulate models and the underlying portfolio in order to generate

the most attractive rating profile for a CDO” and that the “asset pricing models of the

variety used by CRAs fail to explain real world data.” The ratings became even more

important for this class of “over-the-counter” or OTC derivatives, because these were

not exchange-traded, and therefore investors did not have the benefit of market

valuations. (Whalen, 2008)


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In spite of recent efforts to increase regulatory effectiveness (SEC, 2009), SEC

Chairman Schapiro has indicated that even more rule making may be necessary.

(Lynch, 2009) The credit ratings business alone is worth over USD 5 billion per year

(Lynch, 2009), and their value has “skyrocketed” in recent years, in spite of

performing as poorly as other “gatekeepers”. (Partnoy, 2006) Cinquegrana (2009)

shows that the “Big Three”, Moody’s, Standard & Poor’s and Fitch, representing 94%

of the market, had collectively growth in their annual turnover from $3228 million in

2002 to $5570 million in 2007.

In tracing the development of CRAs, particularly in the 1930s and 1970s, Portnoy

(2001) found that these agencies became more “important and profitable” not due to

the accuracy (which was actually lacking) or value of the information provided, but

simply due to the effect of the licensing itself. Ratings create “a sort of regulatory

license that allows money to flow.” (Fons, 2009) This raises the issue of whether

more rule making for oversight and CRA process could simply lead to more

bureaucratic and financial growth in the ratings industry rather than substantive

change in the financial system.

The business model itself is a problem because it is structured so that the companies

issuing securities pay these agencies for the rating service, thereby presenting a

conflict of interest since the CRAs are effectively acting as agents of the issuing

company. (Cinquegrana, 2009; Economist, 2007; Euromoney, 2009; Fons, 2009;

Lynch, 2009; Partnoy, 2006). Some commentators consider this structural issue to

be the root of the crisis itself, with currently available investor-paid model seen by

many as a preferable option. (Lynch, 2009; WSJ, 2009, April 16) An additional

aspect of this business model that exacerbates the problem of lax standards is that

the CRAs are not required to perform any due diligence on the data being provided

by the issuers. (Cinquegrana, 2009)

In a recent editorial, the Wall Street Journal (WSJ, 2009, April 16) suggests that “the

SEC and FED [should] get out of the business of dictating which firms may judge

credit risk”, and mentioned the option of licensing individuals as an alternative.

Partnoy (2006) suggests “market-based alternatives to the NRSRO regime” should


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be considered, and Euromoney (2009) calls for “a system that would align investors’

interests with those of the ratings agencies that supposedly serve them” by a

mechanism whereby investors pay for ratings, or through a establishing a rating

system run directly by the regulators. An investor-paid system was in place before

the 1970s when the shift to the “’issuer-pays’ business model” was undertaken

because the increasing complexity of the securities and therefore the rating process

required increased levels of funding. (Cinquegrana, 2009)

The complexity issue has become more difficult in recent years. Some investor-paid

ratings agencies already regard CDOs as too complex to rate, and even SEC

Chairman Mary Schapiro opened for debate the question as to whether some

collateralized debt obligations, derivatives, are too complex to be rated. (Lynch,

2009) There are some reports that the sheer complexity of many CDOs, being

“hideously complex and opaque permutations”, was used as leverage for

manipulating deals when one or more parties could not fully understand their

contents. (Whalen, 2008) Pontell (2005b) explains clearly that “much fraud remains

shielded behind complex business transactions that are designed to hide it” and that

the “volume and complexity of insider frauds” out pace the resources of public

prosecutors charged with policing the activity.

A review of the recently updated “Code of Conduct Fundamentals for Credit Rating

Agencies” (IOSCO, 2008) reveals that the issue of the structural conflict of interest of

issuers paying for their ratings, is not addressed. (Euromoney, 2009) Neither was

the issue raised in the final “Declaration” of the G-20 Summit in November, 2008

which mentions “inadequate structural reforms” as a “root cause”, but does not

address this structural issue in its “action plan”. (G-20, 2008) The only “conflict of

interest” issue addressed in these documents is that of where individuals or

companies have investments related to the financial instruments they are being

asked to rate.

As part of a series of six hearings3 on the financial crisis at the U.S. House of

Representative, a hearing on “Credit Rating Agencies and the Financial Crisis”,

3 These Congressional Hearings on the financial crisis covered (1) the bankruptcy of Lehman Brothers; AIG

(American International Group); (3) the role of credit rating agencies; (4) the role of federal regulators; (5)


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Committee Chairman Henry A. Waxman (2008a) used direct language to describe

the role that agencies played, saying “The story of the credit rating agencies is a

story of colossal failure.” and citing how these companies broke the public’s bond of

trust while federal regulators failed to fulfill their duty. Yet the proposed changes

currently under discussion are largely technical and procedural measures to

strengthen the current structures, rather than structural reform that aligns interests

with public policy goals. As described above, the current structure, where the issuer

pays the ratings agency, is a direct conflict of interest that has led to a lowering of

standards and corrupting of relationships.

Given this trend in the reform measures under discussion, where the public sector

attempts oversight of for-profit businesses whose interests are not completely aligned

with public needs, the quality of the system remains to some extent dependent on the

character of those involved and their willingness to abide by the code of conduct.

(IOSCO, 2008)

Given the structural conflict of interest that is not being addressed, and the issue of

whether the sheer complexity of some financial instruments has made them

impossible to rate, the question arises as to whether the era of quantitative

dominance in fund management has reached its natural limit. According to Fons and

Partnoy (2009) “[t]he only way out of the trap is to reduce reliance on ratings”. They

call for a return to “judgment”.

The eerie thing about the U.S. subprime mortgage implosion is its

familiarity. ‘It’s the same with junk bonds and the savings & loans,’ says

Michael Lewitt, president of hegemony Capital Management, a Florida-

based hedge fund. ‘ A financial product gets invented, the regulators don’t

do anything about it, and the banks or whoever’s selling it push it until it

breaks.” (Rubino, 2007)

Given that international finance has continually to struggle with corrupt practices,

what personal qualities, what kind of character traits are necessary to ethically

survive, avoid crashes and make an honest profit? The Swiss bankers resident in Hedge Funds and the Financial Market; and (6) The Role of Fannie Mae and Freddie Mac (Federally backed

mortgage companies). See: http://oversight.house.gov/hearings.asp


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the US, many there to gain valuable experience and augment their resumes, were

either not able to see through the ruse, which would point to a cognitive limitation, or

they saw and simply played along, which would point to a lapse of ethical judgment

and/or ethical behavior.

The system, when seen as a whole, was ethically dubious. For Althammer it is clear

that blanket statements which blame finance managers for the financial crisis is

incorrect because the system itself was at fault.4 Yet at some level the system was

created by individual and collective decisions. To what degree are individuals

responsible for participating and profiting?

The current complexity-bound lack of transparency in the finance industry may either

be by default, due to a lack of cognitive clarity, or by design, as a means of gaining

control via manipulation of numbers, or some degree of both. What is clear is that

additional regulation adds to the administrative burden of companies already

encumbered by reporting responsibilities. (Guptara, 2009) One possible solution is

the “unified financial language that merges all financial concepts in a fully consistent

and natural manner” (Brammertz, 2009) proposed by Brammertz, et.al., which

provides “the power to ask any defined financial instrument what its value or income

or anything of financial interest would be under all market conditions.” (Guptara,

2009)

Brammertz, et.al. (2009) briefly mention the historical roots of bookkeeping in

Mesopotamia and the breakthrough of double-entry bookkeeping by the Medici family

“in the 13th or 14th century in Florence” Italy. Progress in the quantitative sciences

along with the US savings and loans crisis in the 1970s brought about a change in

accounting methods which focused on valuation rather than cash and cash flow. In

addition, expected future income and valuation began to be calculated along a

distribution curves. While this approach holds great explanatory power, the choice of

how such curves are calculated are based on expectations of future events which are

by definition uncertain, and also provide latitude for less than fully ethical calculations

to hide behind mathematical complexity. What is astounding to this non-accountant

author is that “[t]he dominant approach in modern finance has been to calculate 4 Schneider, 2009, Althammer: “Sehr häufig wird die Wirtschaftskrise auf das moralische Fehlverhalten von

Managern zurückgeführt, was definitiv nicht der Fall ist. Die Krise hat systemische Ursachen.”


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expected cash flows in a risk-neutral world.” (Brammertz, et.al., 2009, emphasis

added)

By the end of the 20th century we had on the one hand financial systems –

the double-entry bookkeeping methods – with the entire institutions in mind

but with weaknesses in analysing uncertain cash flows. On the other hand,

we had methods with powerful valuation capabilities but narrowly focused

on the single financial transaction or portfolios of these, missing the total

balance and overlooking the going-concern view. (Brammertz, et.al., 2009)

The “modern finance” approach using complex valuation became dominant partly

because of its “power to explain risk”, yet this had an atomizing effect due to an

increasing focus on individual parts of an institution. (Brammertz, et.al., 2009) A

further complication leading to opacity is that as the complexity of valuation in

modern financial accounting increased and relatively simple cash accounting began

to play a lesser role, the differences in approaches to valuation exercises in various

branches of financial institutions lead to increasingly disparate methods and tools till

departments began having difficulty communicating with each other, producing a

“silo” effect and the impossibility of data integration and financial analysis at the

macro level.

The “unified financial analysis” approach advocated by Brammertz, et.al. (2009)

attempts to “incorporate the bookkeeper and the modern finance approaches” under

one system by “using a core calculation engine operating on integrated and

consistent data”. If successful in spreading a system that enables rapid generation of

reliable financial statements from micro to macro levels (Guptara, 2009), then it may

be possible through a change in accounting systems to bring light to the murky areas

where highly complex mathematics is used to conceal fraud.

1.1.7 Major Fraud Cases

In a study of bank failure during panics, Calomiris (2006) cites the U.S. Comptroller

of the Currency’s Annual Report for 1920 which states that of 116 U.S. banks that

failed between 1873 and 1907, 30 of the 101 failures attributed to asset depreciation


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also involved fraud, and “fourteen failures were attributed to solely to fraud.”

(Calomiris, 2006, p.145) Heffernan (2003, p.379) cites research published by the

Federal Reserve Bank of New York showing that “about 50 percent of bank failures

and 25 percent of thrift failures between 1980 and mid-1993 were principally due to

fraud.” While not representing the majority of cases, these significant percentages

indicate that fraud present a major challenge to financial institutions.

In spite of these figures, characterization and analysis of risk for financial institutions

typically focuses on market forces, political and environmental factors, and internal

business structures, financial flows, business model, etc., but not on fraud and

human resources issues. (Ferguson, 2008; Haight, 2007; Marthinsen, 2009; Partnoy,

2003) HR factors are simply not conceived of as being part of the risk equation.

To illustrate the inner workings of how fraud takes place, thereby identifying the

issues relevant for this study, we turn to the following two examples of fraud.

The Madoff Scandal

The financial world was shaken by the Madoff Scandal, when the story of the USD 50

billion Ponzi scheme broke into the headlines in late 2008. (Knowledge@Wharton,

2009) Over decades Bernard Madoff built a house of cards, using new investor

money to pay dividends existing investors, leaving the fund hollow.

“Catching a fraud is practically impossible,” Busson says. “There’s only so

much due diligence you can do. This was not an obscure little manager in the

boondocks. He seemed like a very experienced, knowledgeable, trustworthy

man -- like the best con artists always are.” (Baker, 2009)

This was the experience of UBP, which lost some USD 700 million in the Madoff

scandal and as a result threatened to “pull several billion dollars of investments from

large US hedge funds because they don’t use a full-time independent administrator.”

(Bryan-Low, 2009) And yet Deutsche Bank turned down “dozens” of “opportunities”

to lend money to investors who wanted to invest in funds run by Madoff because he

“did not pass the bank’s due diligence criteria.” (Simonian, et. al., 2009)


- 43 -

Other voices also raised questions in the press (e.g. Ocrant, 2001), and the now

famous Harry Markopolos went directly to the SEC with a detailed analysis in 2005,

preferring to remain anonymous for fear of retaliation. (Scannell, 2009; Anonymous,

2005) Beginning in 1992 SEC regulators investigated Madoff at least eight times

without finding sufficient actionable evidence to enable a prosecution. Perhaps the

regulators failed to listen adequately, or to pursue matters with sufficient

decisiveness based on what they learned. According to Aboulian (2009), European

regulators are likely as a result of the Madoff scandal to increase their regulatory

activity, with one of the likely results being a rise in costs born by investors.

The well connected investors, who formed what could be compared to the term “Filz”5

in Switzerland, were also fooled. According to Maurice Schweitzer

(Knowledge@Wharton, 2009) four key principles of influence were at work: (1)

scarcity, it was made to appear difficult to get access to this exclusive investment

opportunity; (2) the “air of authority” that Madoff carried due to years of involvement

in Wall Street institutions; (3) the “social proof” of other prominent and sophisticated

investors; and (4) “the liking principle”, circulating “in country clubs [and] charitable

events” was a very agreeable environment where people simply began to “like”

Madoff and the people who associated with him.

The impossibility of national borders serving as a protective barrier to fraud in the age

of globalization and the interconnectivity this implies is so easy to illustrate that it is

hardly necessary. Nevertheless, an example can be drawn from a hedge fund based

in Switzerland, Optimal Investment Services SA, belonging to Banco Santander

which maintained a “carefully crafted reputation for cautiousness” (Catan, 2009).

This fund and its managers also came under investigation by Spain’s anticorruption

prosecutor when Banco Santander became the largest looser in the Madoff scandal

USD 3.1 billion (Catan, 2009).

Chiasso in Switzerland

Switzerland’s seminal banking fraud case occurred in 1977, in Chiasso, a town on

Switzerlands southern border with Italy. In the canton of Ticino at the time, some

“254 Swiss banks or branches” (Time, 1977) were competing “flight capital” that was 5 Filz is translated as the material “felt” in English, connoting wool hair that is connected, networked and

tangled in many unexpected ways that turn it into a fabric – of society.


- 44 -

smuggled out of Italy to escape high taxes and inflation. Ernst Kuhrmeier, a senior

manager at a branch of Credit Suisse, along with several accomplices, strove to beat

the competition by creating a system that he kept secret even within his bank. He

promised higher returns and established a holding company in Lichtenstein that

invested in sometimes risky Italian businesses. (Time, 2008; Millineux, 1987) When

these began to go south, he transformed loans into equities in an attempt to hide the

losses. (Baumann, 2008, p. 78)

In the end, of the 2,2 billion Swiss francs invested, some 1,2 billion were lost. In spite

of a substantial stand-by credit from the Swiss National Bank, there was a run on the

bank, and Credit Suisse’s General Director, Heinz Wuffli, was forced to step down. A

journalist who portrayed the event as “the first banking scandal in Switzerland’s

history” was found guilty of making false claims and damaging Credit Suisse’s

reputation by Zurich’s high court. (Baumann, 2008, p. 78-79)

A further problem was that Kuhrmeier did not question the origin of the capital, and

thereby abused Swiss banking secrecy law whereby lawyers and fiduciary agents

holding responsibility for such funds are supposed to provide assurance of their

legality. As observed by Millineux (1987, p. 149) “[a] lot depends on their integrity.”

Warning signals had been ignored, a special commission was formed to investigate,

and in response to the scandal a new code of conduct6 was established by the Swiss

National Bank and the Swiss Banker’s Association. (Time, 1977) The loss of

reputation for Swiss Banking was substantial, and the event marks the transition to

the era of Americanization of Swiss Banking with the Heinz Wuffli’s replacement by

Rainer Gut, who introduced American practices, including investment banking.

(Baumann, 2008)

In concluding this section, we can say that the safeguards of (1) social networks or

“Filz”; (2) regulators; and (3) journalists and the investing public, have not proven

sufficient to spot or prevent fraud.

6 Vereinbarung über die Sorgfaltspflicht bei der Entgegennahme von Geldern und über die Handhabung des

Bankgeheimnisses (VSB) (Agreement on the duty of care for the receipt of funds and about the handling of the

banking secrecy.)


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1.1.8 The Role of Regulators

Major financial industry scandals in today’s globalized finance, has ipso facto global

implications. While there is a debate, not addressed here, as to whether a global

regulator is a good idea, the existing context of regulatory development on a regional

level in Europe is relevant to the Swiss case.

Following the recommendation of the “Final Report of the Committee of Wise Men on

the Regulation of European Securities Markets” (Lamfalussy, 2001; called the

“Lamfalussy Report”, after the committee’s chairman), the European Commission

(EC) established two committees in June 2001: the European Securities Committee

(ESC) to provide advice and draft legislation, a primarily regulatory function

(European Commission, 2001a, Article 2; Lamfalus, 2001, p. 28) ; and the

Committee of European Securities Regulators (CESR) to advice the EC on more

technical aspects, both upon request and on its own initiative. (European

Commission, 2001b, Article 2; Lamfalussy, 2001) The ESC and CESR are part of a

complex 4-level regulatory regime, (1. framework principles and consultancy

mechanisms; 2. implementation and consultancy mechanisms; 3. strengthening

cooperation; 4. enforcement) involving linkages among various European executive

and parliamentary bodies. (European Commission, 2001c; Lamfalussy, 2001).

Using the Madoff scandal as an example, it is easy to see how most major fraud in

today’s globalized finance has ipso facto global implications. Regulators in

Luxembourg are claiming that UBS, acting as the depository bank behind a

$1.4billion fund called the LuxAlpha fund, failed in its due diligence responsibilities by

giving Bernard Madoff both managerial and custodial control; Section §44.(1) of the

UCITS directive7 states clearly: “No single company shall act as both investment

company and trustee in respect of the same UCITS.” (European Communities, 2003)

UBS claims that because the fund’s marketing documentation claimed that “safe-

keeping of assets” was being delegated to a third-party, the bank can not be blamed.

(Aboulian, 2009) France claims that differing interpretations of the UCITS directive

gave rise to the scandal, and the CESR regulators are launching an investigation of

7 'Undertakings for Collective Investment in Transferable Securities'


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how each member country is enforcing the Ucits directive in their own regulation.

(Aboulian, 2009)

The scandal is likely to result in tightening the regulatory regime, increasing the ‘red

tape’ involved, and raising costs, which will be passed on to investors. (Aboulian,

2009) In short, where management was lax, regulators see the need to grow in size

and cost. Given the already extensive and continually growing regime, the question

needs to be asked whether there is a point at which this continual growth of

centralized bureaucratic oversight and the increasing burden it adds reaches a point

of diminishing returns, and when the currently taboo use of personnel assessments

on a voluntary basis by companies such as UBS to examine some relevant aspects

of character that are within reach of current social science begins to be seen as a

useful tool for mitigating such scandals at a management level, perhaps helping to

avoid catastrophic losses. Currently, the latter option is simply unexplored; as will be

shown below, so we do not know the degree to which there is a correlation between

certain personality characteristics and job related behaviors in the finance industry.

In this case with UBS, there is no prima facie evidence of fraud; from the newspaper

account the case seems more like negligence or a clear misunderstanding of the

rules, which given the fiduciary duty involved may also be construed as negligence8.

Ethical decisions remain individual decisions, however heavy the contextual influence

may be.

8 Definition of negligence: “The failure to exercise the standard of care that a reasonably prudent person would

have exercised in a similar situation; any conduct that falls below the legal standard established to protect others

against unreasonable risk of harm, except for conduct that is intentionally, wantonly, or willfuly disregardful of

others’ rights.” Garner, B. A. (Ed.-in-Chief) (2004). Blacks Law Dictionary (8th ed.). St. Paul, MN: West

Publishing Co.


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1.1.9 Ethics as a Financial Issue

JS: [I]n what world is a 35 to 1 leverage position sane?

JC: The world that made you 30% year after year after year beginning from 1999 to 2007 and it became —

JS: But isn’t that part of the problem? Selling this idea that you don’t have to do anything. Anytime you sell people the idea that sit back and you’ll get 10 to 20 percent on your money, don’t you always know that that’s going to be a lie? When are we going to realize in this country that our wealth is work. That we’re workers and by selling this idea that of “Hey man, I’ll teach you how to be rich,” how is that any different than an infomercial?9

John Stewart & Jim Cramer (2009)

In the above quote, Jon Stewart, who some view as the top comedian aligned with

the US Democratic Party, was pointing out that the ethos which produced the

subprime crisis can be typified as trying to make money without “elbow grease”. The

connotation in this quote and dramatically portrayed in the rest of the interview, which

gained a minor cult following in the US as a major statement from mainstream media

characterizing the crisis-producing fraud in the finance industry, is that the reason for

the current financial crisis is not just that the dubious subprime mortgages were

unethical, but rather the finance industry as a whole is systemically riddled with

ethical problems that have caused major financial losses effecting the whole country

and globe. In this interview, Stewart was able to show evidence that the players on

the inside of the system knew that what they were doing did not have a solid

foundation and would one day end badly. They knew that they were acting

unethically, and pursued their personal profits anyway.

Given the minor and major scandals which beset the finance industry, this study

concludes that ethics is not simply a nice extra for those of a gentler character.

Ethics is a major financial issue; it is an essential parameter of a healthy financial

system. A major scandal in Switzerland could have greater effect on this financial

center than others precisely because it is trust that is a central aspect of the Swiss

banking reputation.

9 An “infomercial” is an ‘informative commercial’, essentially a long television advertisement, typically 30

minutes in length, selling get-rich-quick schemes and other “too good to be true” products.


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1.1.10 Switzerland in the Global Context

Today, Switzerland is one of the most globalized countries, ranking among the top

five on the KOF Index of Globalization since the 1990s (KOF 2009), with its most

current ranking as fourth overall among the 158 countries indexed, first in the

rankings on the scale of “social globalization” which measures indicators of personal

contact, information flows and cultural proximity, however only 19th in “economic

globalization” as measured by balancing actual trade and investment flows against

restrictions such as taxes and tariffs. (Dreher 2006 and 2008)

As a “brand”, Switzerland is doing well. Since 1996, when Simon Anholt developed

the concept, Switzerland’s image as a country has been tracked and compared with

fifty other countries according to indices of exports, governance, culture, people,

tourism and immigration & investment (a country’s ability to attract talent and

investment). (GfK Roper, 2008) Switzerland currently ranks 8th overall among the 50

countries indexed, and first among all countries in the governance category. In

governance, “reliable” and “trustworthy” were the terms most selected to describe

Switzerland.

In the people category Switzerland came in 5th, “scoring very strongly on reputation

of producing valuable employees”, while the terms most often selected to describe

Swiss were (in order of importance): “rich”, “skilful”, “honest” and “hard working”.

(GfK Roper, 2008) Switzerland came in fourth in immigration & investment, with over

half of respondents (53%) naming banking as Switzerland’s trademark industry.

Still, the National Brand Index contains a warning: while its image is not in danger of

loosing its attractiveness, the image is in danger of loosing its relevance. (GfK Roper,

2008) While the Index points to environmentalism, technology and education as key,

this study focuses on the forces which could damage or promote its “trademark

industry”.

A slight slippage in Switzerland’s self image and position at the top of global rankings

has been experienced in recent years. First, several events dealt unexpected blows.

The demise of Swiss Air was an unexpected calamity, bringing down what was called


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by some a “flying bank.” The deep pockets of capital built over many years were

spent buying up small airlines in pursuit of a strategy aimed at building Swiss Air into

a global brand. Evaluated as reckless by some, the strategy could have worked had

it not been for the severe drop in air travel following the September 11, 2001 attack

on the World Trade Center in New York.

1.1.11 Personnel Competencies for Swiss Banking in the Global Context

The reputation of Swiss Banking for honesty and reliability has played a large role in

its success. So one could argue that a major ethical or criminal scandal could do

proportionately more damage to Swiss Banking than banking in other major financial

centers. This raises the importance of this factor in guiding the evolution of the future

of Swiss Banking in the global context.

Financial crime and unethical practices are rooted in both contextual and individual

factors. Political processes that create contexts conducive to fraud, unethical

corporate cultures and individual decision all play their role. Since law, regulatory

control and corporate culture do not necessarily provide a moral compass, individual

factors become increasingly important.

Many of the eminent figures in the “old school” of Swiss Banking, such as Dr. Hans

Vontobel, call for return to the traditional values that made Swiss Banking great.

(Gasser, et.al., 2009, Interview with author, 2008) Yet one must question whether

this possible in the context of a culture and society that is markedly different than the

one which gave rise to these values. The culture of Swiss Banking, or rather the

society of Swiss bankers which upheld the standards, is non nearly as operative as it

once was. With the high numbers of international bankers, the impact of Swiss

culture in Swiss Banking has been lessened.

According to Claude Baumann (2008) the characterization of Swiss society as „Filz“10

also meant that bankers were in a widely understood network of responsibility for

their role in society and economy. For this reason it used to be also relevant to ask

10 “Filz” is German for ‘felt’ the cloth made up of tangled wool thread, symbolizing Swiss society which is

networked and connected in many unexpected ways and unpredictable patterns.


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whether a person lived and paid taxes where s/he was employed, and what kind of

private and social life s/he led as part of the recruitment process. (pp. 212-213)

Today, many entrepreneurs and wealthy persons are reluctant to work closely with

financial institutions because the impression is that bankers are only interested in

their own profit. When the leading bankers are not able to appear believable or

trustworthy to their public, then the finance branch is in poor shape – even when

most customers are foreigners.

With its high standing globally, Switzerland’s banking sector is looked to as an

example of good practice and dependability. In an era where “private financial flows

have come to dwarf official flows” and “concerns have been raised over V the probity

of some large international investors in the light of recent corporate scandals”

(WCSDG, 2004, pp.34), Switzerland has the opportunity to provide a leading

example of best practice in relation to providing banking services to developing

countries both in terms of integrity and wise direct investment.

As an example, the success of one Swiss Private Bank stands in sharp contrast to

the general collapse and crisis. Ivan Pictet, head of Bank Pictet, was able to

announce that 2008 was the second-best year the bank had ever had in terms of

profits, in its 200 year history. (FiNews.ch, 2009) Some CHF 17 billion of new funds

were deposited with the bank, raising its total capital under management to over CHF

300 billion.

In an age where the “metallurgical content” of a derivative has become nearly

impossible to test, one may wonder whether Emperor Friedrich, were he to resurrect

today, would recommend testing the mint-makers themselves. Given the frequent

fraud cases, the exorbitant salaries, the massive bailout of financial institutions, trust

in bankers is possibly at an all-time low.

A minimally positive correlation between the SOI, DIT or MJI and financial results

could bring about the addition of developmental psychology assessments as a

generally accepted method in rating fund managers within quantitative fund

assessment models. If the results are more dramatic, with ethics and maturity shown


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to be reliable indicators of profitability in fund managers, a shift in personnel policies

and investment strategies could result. The opposite result would largely confirm

current belief and practice.

In the closing chapter of his timely book “Swiss Banking – wie weiter”, Claude

Baumann (2008) poses five theses11 that point to a way forward:

1. Strategy: Swiss banks must pursue strategies that produce more than just

short-term profit.

2. Quality: If banks neglect proven virtues such as trust, discretion and security

they will loose their claim to quality.

3. Personalities: The finance sector will regain public acceptance only if leading

bankers again become [genuine] role models.

4. Context: As a financial center, Switzerland can withstand international

competition only through continual improvement of [business] conditions.

5. Marketing: The [image of the] Swiss financial sector has been reduced to

banking secrecy because it has failed to promote its merits.

To thrive in the emerging climate of heightened technical and ethical complexity,

Swiss Banking needs to maintain, renew and strengthen traditional values by

embodying them in new forms. In the area of personnel management, this will mean

moving beyond the default position of depending on a healthy society and

educational system, to a more focused strategy. This dissertation proposes research

to test whether one particular method, assessments based on developmental

psychology, may be able to contribute to that larger task.

There was a holistic nature to the classical era of Swiss Banking, with social values

and business practice evolving out of decades of practice and growth. The effects of

the digital revolution, with the high demands for quantitative and computer skills,

brought a dramatic change in personnel practices. A shift was noticeable from the

predominance of in-house trained to university educated, and from primarily Swiss to

increasing numbers of international executives.

11 Baumann, 2008, pp. 207-218, author’s translation


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This meant that the generation of the “giants” of Swiss Banking were not able to

transfer their know-how to the new generation in the way they had received it, with

values intact, because the know-how itself had changed. As a result of this

breakdown in the generational transfer of knowledge and practice, many of the stable

values that were the hallmark of Swiss Banking were incompletely iterated into the

new reality of digital banking.

The fascination with the seemingly endless possibilities of computer-aided

quantitative banking practice led to an enthusiasm that overestimated the

completeness of this approach. The subprime crisis is evidence of this overreach of

the digital at the expense of common sense. The complexity lent a blindness that

was, for some enterprises, fatal.

The former generation presents great symbolic and actual value, yet their answers

can not be wholly ours because they were crafted to meet the challenges of their

time, and crafted out of different historic, economic and social material. New eras

always demand new answers, a new ethos of values commensurate with present

and future challenges. A world facing extraordinarily serious environmental

challenges is placing increasing demands on economic and political power structures

to create appropriate change with unprecedented speed.

All this will require personnel and leadership also in the finance sector capable of

thinking outside the “container”, and willing to make decisions and create behaviors

that do not fit with the conventional which brought us to where we are now.

This dissertation explores one avenue, developmental assessments, that may be

able to contribute to that larger effort by helping to identify moral leadership capability

that can be cultivated to produce a new era of Swiss Banking characterized by

sustainability and planetary stewardship.

In the concluding section it will be suggested that the qualities being searched for in

personnel, the principles and virtues necessary for successfully promoting Swiss

banking and characteristics existing in Swiss culture and heritage can be profitably


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aligned, and in doing so strengthen both the financial sector in Switzerland and the

services Switzerland offers in the context of globalization.

This dissertation will explore one possible building block toward a strategy, the use of

a methodology that, like the family heritage of this author, has its origins in

Switzerland, wandered out to the USA, and returned with some New World “can do”

attitude. Specifically; we will examine the developmental psychology methods

refined at the Harvard School of Education that were first created by a child

psychologist from Geneva, Jean Piaget.

1.2 Goals for the Study

Financiers must rediscover the genuinely ethical foundation of their activity, so as not to abuse the sophisticated instruments which can serve to betray the interests of savers.

Benedict XVI (2009, §65)

The immediate goal of this research is to test whether there is a correlation between

ethical judgment capacity, socio-emotional maturity and the medium- to long-term

profit produced by fund and portfolio managers. Even a small, positive correlation

could have significant implications for fund and portfolio manager training and

selection processes and the profitability of financial institutions. Further, significant

positive results could contribute altering perceptions about the characteristics of

intelligent investing. This would represent a paradigm shift in the finance industry.

(see e.g. Kuhn, 1970) To the best of this writer’s knowledge, no one has attempted

similar research.

Developmental psychology assessments are grounded in the school of thought

started by the Swiss child psychologist Jean Piaget in Geneva in the 1960s. In the

1970s and 80s, Professor Lawrence Kohlberg, Harvard University School of

Education, used Piaget’s methodology to examine the development of ethical

judgment capacity in adults. Professor Robert Kegan built on this foundation by

uncovering the stages of socio-emotional maturation throughout the lifespan. During

the doctoral program, the researcher pursued and received certification in

developmental psychology assessments from the Interdevelopmental Institute in

Boston, USA. (Appendix 5.3)


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Though decades of research exists, the use of these assessments is relatively new

to human resources management, and rigorous research on the application of these

measures to specific problems in business and industry is still in the early stages.

The basic research questions posed in this study are:

(1) Will fund manager scores in ethical judgment, as measured by the “Defining

Issues Test” (DIT) or the Moral Judgment Interview (MJI), show a correlation with

market returns?

The primary question is whether a correlation exists between the level of

development (capacity to process complexity) in ethical thinking and profitability.

This line of inquiry asks whether a well-developed capacity for ethical decision-

making is correlated with higher profitability among investment managers, and,

whether a low score correlates with unwarranted risk taking and/or unethical decision

making. These questions also touch on the issue of whether conscience and profit

are opposing forces (a common perception), or mutually supportive (hypothesis of

this study).

(2) Will fund manager scores in emotional maturity, measured in the “Subject-

Object Interview” (SOI), show a correlation with market returns?

Trading behavior by portfolio and fund managers frequently becomes fixed in

particular styles or tendencies that favor, for example, conventional wisdom among

investment professionals who adhere to a particular school of thought, or in the

individual “pet” companies, industries, commodities, or other investments of the

individual manager. They can become too personally attached to one or another

decision they have made, and not able to pull out when they should, their decision

making capacity being held hostage to their emotional structure. Further, the degree

of objectivity in their original choice of where to look for market opportunities, may be

influenced not just by their cognitive capacity, but also the degree of “objectivity” in

the socio-emotional sense.

A sample question from the DIT is attached in Annex 5.4, providing an impression of

this instrument. The essence of the SOI is more difficult to convey, though the basic


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concepts can be explained to most audiences in 20 minutes using the diagram, also

in Annex 5.4.

Capacity for Ethical Decision Making and Success in Fund Management

Several closely related questions are addressed by researching the possible

correlation between ethical perception and performance in financial markets: Is it

possible that a well-developed sense of morality and ethical behavior correlates with

higher profitability among investment managers? Is it possible that a correlation

exists between ethical and moral perception, which rests largely in cognitive ability,

and ability to assess and decide upon investment potential? Is it possible that top-

tier fund managers with a highly developed sense of ethics may, due to this ability,

be better investors because the complexity of decision-making in ethics is similar to

the thought processes necessary in financial markets; and they may be more alert to

ethical and governance factors that could represent risk of scandal and poor

performance in particular investment opportunities? Are fund managers with lower

scores more likely to engage in unethical decision making that can lead to

catastrophic loss?

The literature thus far identified that considers both ethics and finance, does so by

addressing (a) legal enforcement concerns and criminality, (b) moral education in the

professions, (c) ethical, socially responsible and sustainable investment, and (d)

broader ethical concerns of economy and society. For example (of “d”), in her essay

“Zwischen Gewissen und Gewinn” (Between Conscience and Profit), Christa

Stewens points to a central issue in discussions of economy and society, describes

challenges and provides general answers.

"Conscience and profit" are not, according to my firm conviction, unbridgeable

contrasts. "Conscientious" leadership decisions and humanity in leadership

should not be regarded as unprofitable wishful thinking, well-meaning or

unworldly utopian concepts. Rather values such as justice, personal dignity and

liberty, solidarity and readiness to assist the vulnerable, including an


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acknowledgment of readiness efforts – should also be considered as gains,

also in their economic aspects.12

One can wish that decision makers with financial weight would think in such a holistic

and value-oriented manner and work to impress the next generation of managers

with the importance of acting responsibly with the power they will soon wield. Yet it is

obvious that all too many bankers and investors are more narrowly oriented toward

profit in a purely financial sense and make their decisions based on what is most

likely to bring financial profitability, even in very short time spans. Indeed, the very

structure of financial markets supports this tendency. In posing the question of

whether conscience and profit (“Gewissen und Gewinn”) are opposing forces, the

research described here seeks to focus the question narrowly to meet the thinking of

these decision makers on their own ground.

In examining the issue of infusing ethics into business practice, Klaus Beck (2003)

identifies three approaches:

(i) to improve theory of moral education and thereby practice of moral

education, (ii) to establish more and strict regulations supplemented with

penalties and (iii) to enhance business people’s moral competence.

A fourth approach, introduced and tested by this study, is whether the evidence will

show that it may be possible: (iv) to change the market conditions by making moral

competence more attractive to employers and investors.

If the evidence shows a positive correlation between ethical judgment capacity and

profitability, this result would motivate increased attention to (iii) and perhaps,

eventually, reduce the need for regulatory expenditure in (ii). While informing and

influencing public opinion is one approach currently being used by many pressure

groups to change market conditions, involving public information, providing SRI

opportunities, boycott of goods, etc., the present study would contribute an

12 Stewens, Christa (2005). „Zwischen Gewissen und Gewinn“ oder: Sind Menschlichkeit und Wirtschaftlichkeit

unvereinbar?, in Uto Meier und Bernhard Sill (Hg.) Zwischen Gewissen und Gewinn: Wertorientierte

Personalführung und Organisationsentwicklung. Regensburg. Verlag Friedrich Pustet. Page 71. (translation

from German to English by the author)


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examination of economic results that could point to a factual condition in the

economy that would substantiate approach (iv) by taping into the logic inherent in the

profit motive.

Is it true that “honesty is the best policy” as is commonly said? Are conscience and

profit opposing forces, or mutually supportive? A more specific rendering of the

question for the present study would be to ask ‘whether a well-developed sense of

morality and ethical behavior is correlated with higher profitability among investment

managers.’

This narrower question is not meant to oppose or deflect attention from the holistic

view, nor the values that Stewens, Beck and others wish to support. Rather, in

seeking to answer a more narrowly defined question, it is hoped that the results of

this experiment will show that moral capacity is a positive influence on profitability. If

correct, persons driven by profit, even if narrowly defined, may be encouraged both

to ascribe more importance to moral and ethical capacity when making decisions

about where to invest or which fund or portfolio manager to entrust with their capital,

and also to begin viewing the broader moral landscape of business and economy.

Socio-Emotional Maturity and Fund Management

Whereas ‘behavioral finance’ studies market swings by tracing the collective attitudes

of investors, this study focuses on individual actors in these markets to see whether it

is possible to predict which fund or portfolio managers are more likely to “go with the

flow” of collective attitudes about the market, and which managers are more able to

resist the crowd and follow their own genius. In an interview some years ago,

legendary Magellan Fund manager Peter Lynch commented:

Some people say you can’t buy companies with unions, or you can’t buy

companies in dying industries A These are prejudices and biases that prevent

people from looking at a lot of different industries. I never had that. I think there

are good and bad stocks everywhere.13

13 Tanous, P.J., (1997) Investment Gurus: A Road Map to Wealth from the World’s Best Money Managers. New

York Institute of Finance, p.101.


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In this statement, Lynch portrays a level of socio-emotional maturity that allowed him

to make decisions free from social convention – including the opinions of his

investors – and kept him free from building up the prejudices and biases that would

have interfered with his rational choice.

Lawrence Kohlberg and Robert Kegan found that development of cognitive, ethical

and emotional abilities stretches out over a bell-curve in adult populations. Some of

us remain emotional teen-agers, most of us become well-adjusted adults but tied to

the conventions current in the social groups to which we belong, and a few of us

grow beyond this stage to generate the capacity for self-authoring and true

leadership. Further, socio-emotional development does not always run parallel with

cognitive or ethical judgment ability. Basically, some fund managers may be able to

construct and use highly effective quantitative programs, and yet be weak on the

other human factors necessary to produce sound investment decisions. Even for this

group, there is hope. As Robert Kegan (1994) says: “We must be clear that what we

are calling “intelligence” is a capacity that evolves, and that this evolution can be

encouraged.” There are ways to identify, educate and ‘coach’ our various kinds of

intelligence. No one needs to remain “stuck” at any developmental level.

Current quantitative methodologies used in modern portfolio management are highly

successful in preventing “human factors” from interfering with rational choice, yet one

hears a few voices commenting that at the end of this line of development, we still

need human judgment. Perhaps measuring the ability to maintain independence of

judgment could provide a solution to this dilemma. In addition, though the SOI

assessment is a qualitative process, requiring a schooled human evaluative capacity,

the assessment result is a quantitative value, that can be expressed numerically, and

can be factored into existing quantitative models as an additional refinement. If the

hypotheses prove valid, these assessments could be of interest for the investment

community more broadly in that their use could assist in identifying fund managers

with significant potential at an early stage of their career.

As a more meta-level goal, the findings of this study may also indicate that an

attitude of stewardship, implied in part by moral and emotional maturity, is more likely

to lead to medium and long-term wealth creation than the “Liar’s Poker” (Lewis,


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1989) approach embedded in popular imagination. Ethics and emotional maturity

can be seen as conservative, traditional values, yet they are also arguably the

foundation for the values that are the most progressive, creative and essential for

facing and mastering our increasingly complex global environment.

1.3 Procedure

In the research concept, described above, the assessments (SOI and MJI or DIT)

could be used in various combinations; the precise characteristics of the data set can

be adapted to suit the cooperating institution.

The size of the data sample, and concomitant level of scientific validity, depends

largely on the availability of funding and access to fund/portfolio managers of, or

connected to, the cooperating institution(s). A small sample size of perhaps 10 fund

or portfolio managers would produce a “hypothesis building” study that could be

useful in showing the utility of a larger research project. A scientifically valid study

would require a minimum sample size of 100 persons, where the entire group would

complete a DIT questionnaire and a sample of perhaps 20 of this group would then

be selected to also take the SOI.

To complete this research project in its smallest, hypothesis building iteration, the

following resources are required:

1. Two hours of time each from 10 portfolio or fund managers;

2. Financial results data (at least 5 years) for the portfolio or fund managers;

3. Financial support for direct costs (including interview transcriptions,

communications and travel) and a stipend for the researcher.

A participating institution could participate in this research in several ways:

1. Enabling interviews of fund or portfolio managers as a pilot to test the

methodology;

2. Provide advice on, and connections to, other companies that could be

interested in this study;


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3. Financial assistance, even of a token amount, would be greatly

appreciated, and would send an important signal to any further companies

considering involvement.

The participating institution(s) could benefit from this study through:

1. Immediate use (based on written agreement) of SOI, MJI and DIT results;

2. Positive correlation with fund manager performance, if found, would lead to

increased profitability;

3. Acknowledgement of support for the research in the publication of results.

1.4 Definitions

Analysis is understood as “a detailed examination of anything complex V made in

order to understand its nature or to determine its essential features.” (Webster’s,

1986, 2) Assessment is understood as “an appraisal or evaluation” (Webster’s,

1986, 3) Behavior as used herein is understood as “the manner in which a person

behaves in reacting to social stimuli V or to inner need V or to a combination

thereof.” (Webster’s, 1986, 1a)

Ego development is understood here as the healthy development of the personality.

Emotional Development and Socio-Emotional Development (ED and SED) are used

almost interchangeably. ED is the general term, and SED is used when emphasis is

placed on the effects of ED on relationships. In this paper, ED and SED are seen in

light of the developmental school of psychology as constructed by Piaget, Kohlberg,

Loevinger, Kegan, Cook-Greuter, Laske and others.

Empirical: “capable of being confirmed, verified, or disproved by observation or

experiment.” (Webster’s, 1986, 3)

“Ethical Judgment” is understood herein as the capacity to arrive at a decision in

questions involving a valuation of right and wrong. This builds on the formal

definitions of the two concepts: ethical: “of or relating to the field of ethics or morality;


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relating to or involving questions of right and wrong” (Webster’s, 1986, 1a); and

judgment: “the capacity to arrive at a decision about the value of things.” (Webster’s,

1986, 10a)

The term Fund Manager is used both in a broad sense to mean anyone who is

making decisions about financial investments, and a specific sense to mean

someone who is hired to make investment decisions about a fund of money invested

in financial instruments “in accordance with the stated goals of the fund.”14

(http://www.investorwords.com/2128/fund_manager.html)

Integrity is understood here as “an uncompromising adherence to a code of moral,

artistic, or other values; utter sincerity, honesty and candor; avoidance of deception,

expediency, artificiality, or shallowness of any kind.” (Webster’s, 1986, 1b)

There are two divergent definitions of “Moral Hazard”, both of which are relevant and

will need to be understood through the context of use. The first is taken directly from

Investopedia: “The risk that a party to a transaction has not entered into the contract

in good faith, has provided misleading information about its assets, liabilities or credit

capacity, or has an incentive to take unusual risks in a desperate attempt to earn a

profit before the contract settles.”15 The second definition refers to the fact that

behavior may change when there is protection from the effects of the action, i.e.

when risk is absent. This definition is used primarily in discussions of government

policy and with whom the particular risk under discussion should optimally lie.

(Summers, 2007; Ahrens, 2008)

Predicting is understood in the straightforward use of the term “prediction: an

inference regarding a future event based on probability theory.” (Webster’s, 1986, 3)

Profitability is understood in the specifically financial sense derived from the root

“profit: the excess of returns over expenditure in a transaction or series of

transactions.” (Webster’s, 1986, 2)

14 Retrieved from http://www.investorwords.com/2128/fund_manager.html on December 3, 2009.

15 Retrieved from http://www.investopedia.com/terms/m/moralhazard.asp on 29 June 2009


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Theoretical is derived from “theory: the coherent set of hypothetical, conceptual, and

pragmatic principles forming the general frame of reference for a field of inquiry.”

(Webster’s, 1986, 3a(2))

Theoretical Analysis, as used in the title, refers to the use of a coherent set of

intellectual tools to examine and determine the essential features of a phenomenon;

in this case, fund manager integrity and profitability.


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2. General Theoretical Section: The Human Side of Banking

The Medici certainly were not satisfied with a modest living befitting their rank of simple citizens. Their social aspirations grew with each succeeding generation. So they strove to achieve princely status, although even Lorenzo the Magnificent continued to affect republican simplicity in his dress.

Raymond de Rover16

"If you don't know jewelry, know the jeweler."

Warren E. Buffett17

2.1 Assessing Fund Managers

Quoting Charles D. Ellis, Jonathan Davis (2003) writes:

[I]nvestment management today attracts "the most gifted group of people

gathered together in any line of work anywhere in the world. V Every time

you buy and sell securities, the odds are four out of five, or 80 per cent, that

you're buying from or selling to a professional who has equal information to

what you have, equal ambition to what you have, equal talent to what you

have, equal education to what you have and equal resources to what you

have. The resources and the talents are superb but they are evenly matched."

Given this pool of talent, the search for differences among fund managers means we

are seeking perhaps a very small, incremental advantage through personality

assessments. Still, if significant performance differences are found that correlate

with developmental scores, the validity of this data would stand out all the more due

to the highly selective and highly competitive nature of this profession.

An additional limitation, especially with the small data set used here, is that the effect

of the fund manager on fund performance is not the entire picture. Klaas Baks

(2003) studied the track record of over 2000 fund managers for seven years (1992-

1999), comparing their performance also when they changed funds and managed

multiple funds, and through these occurrences was able to disaggregate

disaggregated fund performance from fund manager performance. He found that

16 De Roover (1966). The Rise and Decline of the Medici Bank 1397-1494. pp. 7.

17 Retrieved from www.berkshirehathaway.com on 15 June 2009.


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while there is “some evidence for performance persistence among managers”

regardless of the fund they are managing, “the manager’s contribution” to “abnormal

performance” is only “10 to 50 percent” of the total. The results of his study is that,

though there are exceptions (Hulbert, 2003) “the fund is more important than the

manager” when measuring performance. (Baks, 2003)

Baks’ findings present an additional reason why a small and disparate set of fund

manager assessments such as we have here can not constitute a scientific study.

Either a relatively small set with identical conditions, or a very large set of data would

be required to isolate the value of measuring developmental indicators among fund

managers. Therefore, the data set of five cases is used here simply to illustrate how

a scientifically valid study could be carried out. In no way can the data be interpreted

for definitive results.

The Baks study also points this study towards a model whereby it is important to

measure a manager’s supporting structures, such as the research department and

the operations or trade executions desks. It may be found that the whole is greater

than the sum of the parts. It is important to have a balanced view of the role the

context and actual, functional relationships have in fund manager performance, and

not be caught in a narrow vision that sees the fund manager as being responsible for

his/her own performance regardless of institutional context.

Just how far an exaggerated, singular focus on the individual can go was described

by Prof. Robert Shiller (2008a, Lecture 7) when he described research on how

companies search for charismatic CEOs, finding that companies hired and fired their

erstwhile heroes regardless of their actual performance. If the markets went down,

and the company also, the CEO was fired regardless of his or her actual

performance. René Gerard (1986) would perhaps interpret this behavior as

identifying a ritualistic scapegoat who is sacrificed to cleanse the ‘tribe’ (company) so

that it can start afresh.

Golec (1996) studied the relationship of fund manager characteristics to fund

performance and found that higher risk adjusted performance (alpha) is found with

fund managers who are younger than 46 years old and have managed the fund in


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question for at least seven years. Fund managers with MBAs outperformed those

without, but the “most significant predictor of performance is the length of time a

manager has managed his or her fund (tenure).”

Further indication that a qualitative examination of fund manager characteristics may

produce results are evidenced by the findings of Chevalier and Ellison (1999). They

examined data publicly available through Morningstar, Inc. on over 2000 fund

managers, seeking to find whether the “observable characteristics” of managers that

may indicate “ability, knowledge, or effort” result in higher fund performance. The

observable characteristics in this case included:

• Age

• The “average student SAT score” from the manager’s undergraduate

institution (not the individual score of the fund manager) as a measure of the

quality of undergraduate education

• Whether the manager had an MBA

The correlations they found were that the “relationships between education, age, and

performance are so strong as to make it seem unlikely that ‘ability’ differences could

be the whole story.” (Chevalier, 1999) Managers with MBAs outperformed those

without, due to their holding larger amounts of systematic risk. Younger managers

out performed the older managers, perhaps because the career situation of fund

managers demands higher performance earlier in their careers as they establish their

track record, and because they are more easily fired when younger.

Their most “robust” finding related to the undergraduate institution from which the

fund managers received their first university degree: “managers from undergraduate

institutions with higher average student SAT scores obtain higher returns”.

(Chevalier, 1999) Speculating as to why this should be the case, Chevalier and

Ellison list several possibilities: intelligence, higher quality education, better networks

for information (note research on this point by Kacperczyk, 2007, reviewed below),

and that they simply work for firms that provide better support services (see research

by Baks, 2003, above).


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Chevalier and Ellison (1999) conclude that it should not be surprising that some fund

managers function better than others since their task involves information processing

and variance in performance is common to all professions. The question we can

pose, resulting from the results found by Chevalier and Ellison, is whether this

characteristic could also be measured, perhaps with more accuracy, through the use

of developmental assessments. One way to begin to identify the effect of college

would be to measure a representative samples of students, at the beginning and end

of their 4 years of study, and do this in several schools for comparative purposes.

Still, the effect of the overall status of the schools, their networks and career

placement opportunities would be difficult to isolate.

Whether Swiss practice in fund manager selection rests on a foundation of practice

that is adequate to the changed environment remains an unknown. In the course of

this study the author was not able to locate any study of personnel policies for the

finance industry in Switzerland. Though not the result of a comprehensive or even

broad search, banking literature in general seems to gloss over personnel issues in a

very cursory manner. For example, in the 926 page standard work “Das

Schweizerische Bankgeschäft: Das praktische Lehrbuch und Nachschlagewerk”

(Emch, 2004), (“Swiss Banking: a Practical Textbook and Reference Work”), one

page (p. 471), or just over 0.1% is devoted to personnel qualifications for all

categories of bank personnel. While the statement made is sound and well

considered, it is so general as to provide little practical guidance in personnel

recruitment, management and promotion processes, and in no way compares to the

depth provided in other sections of their text.

In another example, the Handbook of International Banking (Mullineux and Murinde,

eds., 2003) does not list the terms “personnel” and “human resources” in the index,

though “managerial issues”, “looting” and “fraud” are indicated in several chapters as

significant problem areas and “moral hazard” is treated extensively. In their focus on

fraud and crime in banks, Norton and Walker (2000) focus on the enforcement and

regulatory side, dealing with the issue of “personnel” in one paragraph revolving

around the issue of obtaining information in the event of fraud, and no explicit

treatment of ethics.


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Emch (2004) and others cite two central changes that have increased the demands

placed on customer relationship managers, portfolio managers and analysts:18 (1)

complexity of the market, and (2) complexity of the regulatory environment. To

address this change they propose focusing on technical qualifications and continuing

education to ensure that staff must understand the financial strategies, techniques,

instruments and products that they are selling to customers. In addition to technical

knowledge, bank personnel who have direct contact with customers should possess

personal and social skills, and the ability and willingness to listen and understand

them. Personnel in these positions must be capable to provide an honest and careful

management of funds and act in the best interest of the customer as defined by law.

They emphasize this last point, warning against institutions aggressively promoting

particular products, and customer advisors pressuring sales due to their own self-

interest or out of ignorance of the product and without regard for the customer profile.

Isn’t this last point the central issue in the Sub-Prime crisis that has precipitated a

collapse of the global financial system?

The above description of personnel qualifications can be interpreted as indicating a

need for increased cognitive, socio-emotional and ethical capacity, yet no hint is

given as to what indicators should be considered during a hiring, evaluation or

promotion process to ensure that the bank is making the right personnel decision.

In assessing fund managers, funds-of-funds managers typically look at both

quantitative and qualitative factors in their due diligence process. Publicly available

company literature typically focuses almost exclusively on quantitative analysis of the

markets and investment strategy. For example, 3A SA, a company in the Syz

Banking Group, with over USD 2 billion in assets placed in 42 hedge funds,

combines established “blue chip managers” with “innovative, smaller hedge funds

operating in niche strategies.” How managers and funds that fit into the strategy are

selected, however, remains opaque: “Erfahrung und Know-how.”

18 Emch, et. al (2004), page 471. Though the summary of this text follows closely their wording in the current

and following paragraph, translated by the author, the exact quotations have been omitted.


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A quantitative model from FRS Transparenz in Hedge Funds19 assigns quantitative

measures to both quantitative and qualitative factors, including: The Firm; Track

Record, Risk Management, Portfolio Construction, Monitoring, Screening,

Transparency, Operations, and “People”. The quantitative aspect of the model

combines financial factors in a variety of patterns, with the hard data weighted

according to various emphases in strategy. The data for input is largely from

verifiable sources: from financial records, market statistics, currency fluctuations, etc.

Indicators of how “people” are assessed remains cursory, and seems to include only

very basic data such as years of industry experience, academic record and

“biography” that are weighted in an undisclosed manner.

Research on current industry practice in the “people” aspect of fund and fund

manager selection remains difficult as the process tends to be subjective, resting on

the judgement of “talent scouts” or simply included in a cursory manner during due

diligence research. Social science, it seems, is not yet fully iterated into the process

of financial investment strategies.

Arpad Busson, widely known as one of the best talent scouts in the hedge fund

industry, identifies a personal relationship and sense of trust in the “integrity of the

trust management system, trust in the investment process and trust that the manager

will do the right thing for investors” as central to his process of selecting fund

managers. (Schurr, 29/03/06, p. 8) Yet this is not all. Schurr also quotes Busson

directly in saying: “This incredible will of somebody who lives, dreams, eats these

markets on a 24-hour basis – it’s not often I see this kind of passion, but it’s

extremely exciting.” (29/03/06, p. 8)

How are fund managers characterized? In observing the “hedge fund legend” and

“born money-maker” fund manager Philippe Jabre, Financial Times correspondent

Stephen Schurr identified the essential personality traits of “the quintessential hedge

fund manager” as “an extreme degree of competitiveness, high intelligence and

innovative thinking.” (Schurr, 20/03/06) Yet on the way to his beating the benchmark

“by 18 percentage points a year on average”, Jabre also became famous for an

opportunistic trading style, taking “unnecessary risks”, and the recent fine from the

19 See www.hedge-fund-research.ch


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UK’s Financial Services Authority found that “the trader and, in turn, his firm violated

market conduct and committed market abuse.” (ibid) Current speculation is that

Jabre will enter the hedge-fund business again, and be overwhelmed by investors

eager to place money in his hands.

Having never met, let alone interviewed and assessed Mr. Jabre, it is impossible to

know much about the man behind the public image, and we should not speculate as

to what scores he would achieve on the SOI and DIT. Nonetheless, his image is

perhaps typical of how the general public views successful fund managers. And it is

this image which will be “put on trial” in this study.

Current Practice in Fund Manager Assessments

Current industry practices by funds-of-funds in selecting hedge-fund managers

combines quantitative and qualitative data. The precise formulas used in the

investment industry are a guarded secret. Standard „qualitative due diligence“

factors mentioned in the investment industry literature including the following:

Individual factors:

• Age • Education • Remuneration • Strategy • Years of experience • Additional factors

Contextual factors:

• Group, team and management approach • Investment process • Relevant company policy and philosophy • Attitudes and expectations from superiors • Pressures from managers, investors and/or shareholders • Additional factors

For this study, the above individual and contextual factors are considered intervening

variables.


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2.2 The Role of the Fund Manager

“If these managers are not focused on preservation of capital, they should not have the right to manage other people’s money.”

Arpad “Arki” Busson20

“You all knew.”

Jon Stewart (2009)

Training, Choosing and Promoting Investment Managers

Of the Swiss banks, UBS in particular speculated and sustained substantial losses in

the US market during the current crisis. The differences between the mortgage

business in Switzerland, that created part of the stable foundation of Swiss wealth in

the 19th and 20th centuries, and the hyper-mortgage business in the US housing

market can hardly be overstated. Yet Swiss bankers, and bankers from the outside

that Swiss bankers trusted enough to hire, either did not see what was happening, or

saw what was happening and played along because it was good for their own

pockets. Both cases point to a need to review how bankers are hired, not just in

Switzerland.

In the case that bankers in Switzerland did not see what was happening, perhaps it

was because they were naively taken in by the “irrational exuberance” (Shiller,

2005b); embedded in a culture that is often attractive yet suffers from severe

overstretch. Or perhaps they saw what was happening and fully participated in the

greedy spirit of gaining their personal profit while the bubble lasted. In either case,

there are obvious deficiencies in how these bankers responded to their environment.

In this post-Americanized phase, finding the right people, who embody values that

will produce a new generation of Swiss bankers equal to current challenges, and who

embody the possibility of living up to and perhaps surpassing the heritage of previous

generations will require a more intentional, rather than default, human resources

strategy.

Traditional hiring practices in Swiss banks rely on dependability of a culture that is, to

a degree passing, and in any case does not meet the challenges of a global

environment characterized by accelerating change. As Hans J. Bär, one of the

20 Baker (2009).


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“Deans” of Swiss Banking, expressed, “banking transactions are based on trust. But

today, no one is trusting any more. There are too many opaque personalities making

mischief in the industry”21.

Trust has at least two aspects that are relevant to personnel policies and recruitment

practices in banks: (a) a trustworthy character, that his honest and does not

intentionally deceive; and (b) trustworthy abilities, the capacity to do what is claimed

in the financial market place.

In the first case (a), there is a need to spot persons with a proclivity to systematically

deceive in order to achieve personal gain. In this case, some bankers in Switzerland

may have seen what was happening, but failed to stop it because it lined their

pockets in the short run. Here, we have a clear case of fallen values. How can this

be identified before these persons are placed in situations where they risk massive

amounts of other people’s money?

In the second case (b), there is a need to ensure that persons carrying significant

decision making responsibilities are capable of interpreting not only the Swiss and

European context, but also the contexts where the investments are located.

Swiss history and culture has been fertile ground for growing trustworthy bankers,

especially for the European environment. It has not produced the street smarts

necessary to see through the bubble and respond appropriately. So what are the

qualities that Swiss bankers should have in order to construct a new era of quality

banking?

We identified three problem areas: (1) being caught in complexity (Sub-Prime Crisis,

derivatives); (2) perpetrating direct fraud, and not seeing through fraud (Madoff,

Stanford, Meinl, Chiasso); and (3) inability to resist the crowd (role of followers in all

fraud cases). While there may be additional problem areas, these three cover a vast

area and provide a useful backdrop for examining the use of assessments that

measure abilities that run parallel to these problems: (1) cognitive ability; (2) ethical

problem solving ability; and (3) socio-emotional maturity.

21 Baumann, 2008, p. 13, author’s translation


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The dilemma is well stated by Jörg Althammer: “I can not make the simple employee

responsible for decisions made at the leadership level. However, everyone can bring

this question into their area of responsibility.”22 (Schneider, 2009) The begs the

question: At what point does individual responsibility begin? Especially in large

systems that are traveling down paths that appear increasingly dubious, at what point

does individual responsibility begin? Is selling a derivative that one does not

understand an ethical lapse? Is participating in fraudulent transactions decided upon

by a boss ethically wrong for an employee who needs the hard to find job to feed his

or her dependents? There are of course no easy answers.

The “Deans” of Swiss banking are right that trust must be reestablished. Swiss

banking culture, and its viability in the future depend on the values that made it great.

As described by Baumann (2008, pp. 210-211) these include trust, honesty,

discretion and security in the context of “complete package of competence,

investment success, good trade execution, fitting finance products and

comprehensive advice”23. But the way to get there can no longer be solely based on

the recruitment practices and traditions of days gone by. New times demand new

approaches that truly fit the present and emergent future.

2.3 The Decision Making Context

To illustrate the decision making context, this nexus between individual behavior in

the corporate context and surrounding environment, the following diagram is offered:

22 Schneider, 2009. Althammer: “Ich kann nicht den einfachen Mitarbeiter für etwas verantwortlich machen,

was auf der Leitungsebene entschieden wurde. Aber in seinen eigenen Verantwortungsbereich kann jeder diese

Fragen mit einfließen lassen.” 23 Baumann 2008, p. 211, translation by the author.


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The Decision Making Context

Conscience

Skills, CV,

Competencies

Corporate

Culture Capabilities

Social, Industry & Regulatory Environment

Fig. 3. The Decision Making Context

This diagram portrays three core interactions between the corporate culture inside

the company, the relevant social, industry and regulatory environment external to the

company, and the conscience of the individual decision maker. Behavior is the result

of the decisions made by the individual conscience, as s/he uses competencies

(skills, general and specialized knowledge as portrayed in the CV), through

underlying personal capabilities (maturity, thinking capacity) in relation to the two

contexts inside and outside of the company. Robertson (1996) holds that neither

person nor context is entirely determinative. Dubs (2008) is of the opinion that undue

pressure from a minority of managers and board directors of weak character can play

a key role. Still, is there a way to refine our estimate of this interaction? Two equally

qualified persons in the same environment with the same task will not necessarily

make the same decisions, so can personality factors be identified that indicate a

propensity for certain behaviors?

In addition to expectations within the workplace, labeled here as “corporate culture”,

a decision maker will also consider how others will respond in their social circle and

their industry, where reputation will make a difference in their future, and regulators

and law enforcement officials who can effect reputation as well as extract specific

sanctions.


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Below it will be shown how high levels of cognitive ability, ethical judgment capacity

and socio-emotional maturity are necessary in order to perceive the correct issues

and withstand the social pressure to conform and the temptation to use

circumstances for illicit personal gain.

2.3.1 Criminogenic Environments

In contrast Tillman (2009) points to larger political processes that cause

“criminogenic white-collar environments” and sees white-collar crime as “ultimately a

systemic problem” (emphasis in the original). While acknowledging cases of

individual criminal activity that are “routine features of modern life”, he focuses

research on instances of large scale abuse in three industries: the dot-coms, energy

trading and telecommunications. Numerous scholars point out that certain industries

that are more crime-ridden than others, leading to studies of “criminogenic markets”.

Tillman cites research describing “criminogenic regulatory structure” (Szasz, 1986)

and takes the analysis a step further in examining the political processes that lead to

“criminogenic institutional frameworks” (emphasis in original). These are products of

multiple actors motivated by a mixture of self-interest and ideology. In the example

of energy derivatives, Tillman (2009) sites the work of Wendy Gramm who as “head

of the Commodities Futures Trading Commission” “rushed a proposal, which

included the energy derivative exemption, to a vote before the commission” shortly

before leaving the Commission to join the Board of Directors of Enron for a high

salary, and her husband Senator Phil Gramm who was instrumental in the

Commodities Futures Modernization Act (mentioned in Chapter 1.1.5) and shortly

after leaving the US Senate joined UBS Warburg, which had “earlier that year V

purchased Enron’s online energy trading unit.” (Tillman, 2009)

Tillman (2009) criticizes the assessment of Partnoy (2003), who in a measured sense

justified traders who exploited the system because being “greedy” was part of

refining the market, by saying that “white-collar malefactors did not simply react to

imperfect markets, but were part of the political process that created those markets.”

Political processes give rise to the normative, or legal basis on which behavior is

measured, and provides sanctions against those who do not comply with these

norms. But if these political processes and the norms they produce are themselves


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riddled with self-interest rather than promoting the public good, the function of law

and the legislative process is debased.

These findings lead to the conclusion that the legislative process itself needs the

checks and balances provided by constitutional provisions, as well as a more

watchful “4th estate” (the press). While supporting this larger need, the focus of this

study is on the response of individuals to the temptations of these environments.

In end effect, it is still individuals making decisions that are both the problem and

solution to fraud. Sherron Watkins, for example, blew a whistle inside Enron

(Associated Press, 2006) when she could have kept silent. Though she admits to

being flawed herself, selling shares when she “knew more than the market”

(Associated Press, 2006) she nonetheless did try to influence the company in the

direction of legal compliance when the size of the accounting scandals became

impossible to ignore.

The impact of fraud, as a specific type of ethical misconduct, on the larger economic

well-being of a country seems obvious. Pirson (2007, pp. 6-9) cites “Wall Street

investment frauds” and “corporate misconduct and unethical behavior” as one of

three main factors (the others being the shift of broader social values and the inability

of the system to provide “solutions to social problems”) responsible for the decline of

trust in corporations. Shiller (2003a) sees a clear link between this decline in trust

and investment behavior.

While supporting rigorous development of regulatory regimes, our task in this study is

to pose and explore the possibility of augmenting this effort through the voluntary use

of tools available in human resources management. To this end, we need to look at

the nature of the personal process within the individual, as well as options for

detecting and addressing the propensity to illegal activity.

2.3.2 The Nature of Fraud in Fund Management

In studying five examples of fraud in hedge funds, Muhtaseb and Yang (2008) found

that standard hedge fund industry compensation structures “whereby the fund


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manager pay is based on fund performance, coupled with the right circumstances

can encourage fraud.” They cite a Capco paper (Capco, 2003) which lists four

“operational issues” that breach ethical conduct rules:

1. misrepresentation of fund investments (41 percent);

2. misappropriation of investor funds (e.g. for personal use) (30 percent);

3. unauthorized trading and style breaches (14 percent); and

4. inadequate resources for fund strategies (6 percent).

Muhtaseb and Yang (2008) further cite then-Chairman of the US Securities and

Exchange Commission (SEC) William H. Donaldson (2004) as he argued for

authority to oversee the hedge fund industry, as he described the main types of fraud

as follows:

1. gross overstatement of performance by hedge fund advisers;

2. payment of unnecessary and undisclosed commissions; and

3. misappropriation of client assets by using parallel unregistered advisory firms

and hedge funds.

Further, the study by Muhtaseb and Yang (2008) provides a useful list of

characteristics and of how fraud is generated in hedge funds; paraphrased:

1. Fund managers take advantage of people’s trust, including use of social ties

among elites;

2. Auditors were manipulated, including firms from the famous “big five” and

small firms with ownership relationship to the fund in question;

3. Both major brokerage houses on Wall Street and also small brokerages

owned by the fund manager were used;

4. High risk investing often lead to losses that were then not accurately reported;

5. Fraud often began as an attempt to hide poor performance, and then

subsequent losses escalated the problem, causing a “snowball” effect.

The remedies suggested by Muhtaseb and Yang (2008) are, however, focused only

on actions that can be taken by investors:

1. “Inspect the background of the hedge fund managers”: essentially due

diligence background checks on the fund managers, including whether there is


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a criminal record; consulting former employers and credential granting

institutions; hiring private investigators if necessary;

2. “Examine the risk of the hedge fund”: whether the actual amount of risk was

accurately portrayed in the fund’s strategy statement;

3. “Assess the financial capability of investors”: essentially, it is suggested that

the investor perform a basic self-examination as to their risk capacity.

However prudent these suggestions may be, they do not go beyond the standard

advice meted out by most investment advisors and do not address the larger malaise

they describe at a policy level. In sum, two basic issues can be discerned that are

relevant to this study:

(1) individuals are caught up in larger systems that, when seen as a whole,

are ethically dubious

(2) individuals are making individual decisions about ethical dilemmas

Ostas (2007) found “a trade-off between moral self-restraint and pecuniary self-

interest”, whereby more law breaking is to be expected as the perceived rewards rise

in value and the expectation of sanction becomes lower. He did not examine the

issue of individual variance.

2.3.3 Fraud as Manipulation

Fraud is defined as “[a]n intentional perversion of truth for the purpose of inducing

another in reliance upon it to part with some valuable thing belonging to him or to

surrender a legal right”.24 Fraud is not legally actionable until there is reliance on the

24 (H. Black, 1991) The full definition reads: “An intentional perversion of truth for the purpose of inducing

another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right. A

false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations, or by

concealment of that which should have been disclosed, which deceives and is intended to deceive another so that

he shall act upon it to his legal injury. Anything calculated to deceive, whether by a single act or combination,

or by suppression of truth, or suggestion of what is false, whether it be by direct falsehood or innuendo, by

speech or silence, word of mouth, or look or gesture. A generic term, embracing all multifarious means which

human ingenuity can devise, and which are resorted to by one individual to get advantage over another by false

suggestions or by suppression of trugh, and includes all surprise, trick, cunning, dissembling, and any unfair way

by which another is cheated. “Band faith” and “fraud” are synonymous, and also synonyms of dishonesty,

infidelity, faithlessness, perfidy, unfairness, etc.

Elements of a cause of action for “fraud” include false representation of a present or past fact made by

defendant, action in reliance thereupon by plaintiff, and damage resulting to plaintiff from such

misrepresentation.


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misrepresentation to the detriment of the aggrieved party,25 and is distinguished from

negligence in that fraud is always an intentional, positive action whereas negligence

is a failure to use reasonable care. (see: H. Black, 1991. A more detailed discussion

of this distinction is beyond the scope of this essay.)

To provide a framework for the examination of fraud we can look to the

communications theory of Jürgen Habermas (1976, 1979, 1982, and Ebersole,

1989). For Habermas, every social action, or speech act, can be categorized into

one of six outcomes. (see Figure 5)26 While this model is useful for abstract analysis,

it is not possible from an external perspective and using speech alone to be

absolutely certain whether a specific speech act, or social action, is being produced

from a truly communicative, or strategic motive. For Habermas, the person in

question can know, if he or she is honest and mentally capable of this discernment; it

is a matter of conscience. The basic question is whether the actor/speaker is trying

to create an understanding in the other person, to communicate a meaning that will

be understood, or whether the actor/speaker is trying to reach a goal through the

listener that is external to the listener. In openly strategic action (4) both parties

know that the communication is strategic, an attempt to convince. In manipulation

(5), the speaker is aware that s/he is being strategic, but the listener is not aware of

the strategic intent. This is clearly where fraud is located. In (6) Systematically

Distorted Communication, both the speaker and listener are unaware of the

manipulative intent.

As distinguished from negligence, it is always positive, intentional. It comprises all acts, omissions, and

concealments involving a breach of a legal or equitable duty and resulting in damage to another. And includes

anything calculated to deceive, whether it be a single act or combination of circumstances, whether the

suppression of truth or the suggestion of what is false, whether it be by direct falsehood or by innuendo, by

speech or by silence, by word of mouth, or by look or gesture. Fraud, as applied to contracts, is the cause of an

error bearing on a material part of the contract, created or continued by artifice, with design to obtain some

unjust advantage to the one party, or to cause an inconvenience or loss to the other.” 25 This is true for at least US law and Swiss law (see: Betrug – Art. 146, Abs. 1, StGB).

26 The six outcomes are numbered here for easy reference, but are not numbered in the original texts.


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A Schematic of Habermas' Speech Acts

Social Action

Communicative Action Strategic Action

1. Action Oriented to

Reaching an

Understanding

Consensual Action4. Openly Strategic

Action

Latently Strategic

Action

2. Action 3. Discourse 5. Manipulation

or

Conscious

Deception

6. Systematically Distorted

Communication

Or

Unconscious

Deception

Fig. 4: A Schematic of Habermas’ Speech Acts

adapted from Habermas 1976 and 1982, and from Ebersole, 1989.

On the Communicative side of the diagram, the motive is clearly to communicate

honest meaning, leaving the listener free to respond as they will. In consensual

action, the transmission of meaning is either clear (2. Action) or being cooperatively

worked on so that meaning can be clearly understood and transmitted (3. Discourse).

In perhaps the most difficult to understand category, “Action oriented to reaching an

understanding”, the motive is honest, but the ability to communicate is both disturbed

and not clearly understood. The speaker wants to communicate meaning, but is not

capable of doing so. From the analysis of the speech act alone, it may not be

possible to discern whether a particular statement or series of statements is from

category 1, 5, or 6.

As it is not possible to discern with absolute certainty whether manipulative, or

fraudulent communication is taking place, the utility of this analysis remains

conceptual, and not practical. Conceptually speaking, fraud is rooted in an attempt to

achieve an end through another person, not in concert with them. This will be

important in the context of the developmental assessments of socio-emotional

maturity and ethical judgment capacity described below.


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2.3.4 Regulatory Mechanisms

“but if the salt has lost its savorA”

Jesus, Matthew 5:13

This study intends in no way to diminish the need for law and regulation; to the

contrary. This study postulates that multiple approaches are necessary to address

the current crisis and promote evolution toward a healthy and sustainable financial

industry.

The need for a robust regulatory environment is evidenced by a study of the limits of

cooperative behavior by Fehr & Gächter (2002). Their research showed that the

threat of punishment was necessary to provide an environment in which cooperation

could flourish. More specifically, they looked at the “altruistic punishment”, where the

punisher gains no benefit in punishing a person who is not personally known to them,

but the punishment benefits the group through the increased cooperation of the

punished party in future actions. The ‘altruistic punishers’ were emotionally

motivated by a feeling of injustice due to the perception that the non-cooperators

were contributing less than their fair share, and thereby getting a “free ride” in the

group. In environments where cheating behavior was not punished, they found that

cooperative behavior declined. Though the biblical quote above is theologically out

of context, the poetic point may be correct.

There are two implications of this research for our study of banking. First, at the

institutional level, given that dominant individuals in groups will sanction those who

are not contributing to the group’s goals, it matters a lot whether the goals of a

particular institution, or corporate culture, is criminogenic or legally compliant. In a

criminogenic corporate culture one would expect to see some form of social sanction

carried out against whistle blowers or change agents bent on bringing positive

change. Similarly, in a legally compliant corporate culture or institutional environment

one would expect to see positive reinforcement of the positive culture through

“altruistic punishment” of deviants.

Second, if we look to the next level of magnitude, of financial institutions acting within

the economy as a whole, it matters a lot that there are regulators, the equivalent of


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the “altruistic punishers”, who sanction misbehavior. Again, if the system as a whole

is of a positive character, the reinforcement will encourage positive behavior. If, on

the other hand, a financial system is established where some are unfairly rewarded

for the exploitation of others, regulators who actually do their job in trying to produce

a just and equitable system who will be sanctioned by the main actors who are

‘contributing’ to and benefiting from the unjust system.

According to Brad Balter, a fund manager who had been competing in the same

market as Bernard Madoff: “’No one trusts anyone in my business anymore, and I

don’t blame them’ says Mr. Blater” (Zuckerman, 2009). When Mr. Blater explained

his status as a registered advisor with the Securities Exchange Commission to an

investor, the response was dismissive: “’So what, the SEC didn’t catch Madoff.’”

(Zuckerman, 2009) SEC Inspector General David Kotz admitted to the House

Financial Services Committee that complicity with Madoff from within the SEC was a

possibility (McEachern, 2009) and whistle blower Harry Markopolos testified before a

congressional hearing that the SEC “had not been willing or able to uncover the

fraud”. (BBC News, 2009) For Congressional Representative Ron Paul the solution

lies not in reform of the SEC, but in its dissolution, and a return to “self-reliance, self-

policing.” (Paul, 2009)

2.3.5 The Search for Ethical Leadership Capability

Given the financial costs of unethical behavior, and the necessity for both ethical

judgment capacity and the socio-emotional maturity to maintain an ethical stance in

the face of adverse social pressures, the utility of including ethics and maturity as

competencies to be identified in recruitment practices should be clear. In the next

section methods to achieve this goal are examined.


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2.4 Defining the Competencies of Successful Bankers and Fund

Managers

"Even the intelligent investor is likely to need considerable willpower to keep from following the crowd."

Benjamin Graham27

Many commentators refer to values as being important for banking in general. For

example, Pictet (2009) mentions respect, high regard, independence, competence

and integrity. Hügli (1999) lists the traditional values as “discretion, stability,

dependability, trust-building through solid moral and ethical principles, experience in

international banking and high technical competence.” (p.36)

In examining the more general picture of the private banker, Hügli (1999) describes

the shift from traditional investment advisor to the “relationship manager”, who

connects the customer with various specifically selected specialists, that has

characterized a central role in private banking during recent years. The private

banking advisor28 combines the functions of a customer advisor with social-cognitive

intelligence and investment advisor with technical competence, and is thereby “a

generalist with specialized knowledge of asset management, finance techniques,

financial planning and investment banking.”29 (Hügli, 1999, p. 29) In describing the

social-cognitive competencies, Hügli (1999, p. 34 and pp. 32-35) identifies three

categories of abilities and behaviors in a well rounded list that was produced in

cooperation with a study group at the Swiss Bankers Association (the following list is

translated and abbreviated):

1. Personality characteristics: ethics and integrity, emotional stability, openness

to change, sociability, amicability, stamina, and intelligence.

2. Social-cognitive abilities: radiating positive energy (Ausstrahlung), active

listening, inter-cultural experience, good manners, self-control, problem

analysis, well founded knowledge of analytical and problem solving methods.

3. Strategic-cultural competencies: holistic thinking, entrepreneurial thinking and

acting, carrying entrepreneurial responsibility, and customer orientation.

27 “Quote of the Day” on www.investopedia.com, 29 June 2009.

28 “Private Banking-Berater”

29 “ein Generalist mit speziellem Fachwissen in Vermögensverwaltung, Finanzmarkttechniken, Financial

Planning und Investment Banking.”


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Important for the purposes of this study are two points. First, the social-cognitive

competencies were seen in light of the need for building the customer relationship

and separated from the technical knowledge of the specialists, such as the fund

managers who produce the products to be considered by the relationship manager

and client. Second, no attempt is made in this short study to identify indicators for

measuring the named competencies. Presumably the named characteristics,

abilities and competencies would be identified and evaluated in a recruitment

process by the opinions of others (e.g. letters of recommendation and 360°

assessments), interviewing, psychological assessments and perhaps self-reporting.

Current research from PricewaterhouseCoopers (2009, see also FiNews.ch 2009d)

predicts an overall reduction in the number of relationship managers in the asset

management industry by as much as 24% globally and up to 45% in the EMEA

states (FiNews.ch 2009d), since “[t]oday’s economic crisis presents challenges for

which CRMs have neither the experience nor the training.”

(PricewaterhouseCoopers, 2009, p. 8) The pendulum is swinging back from the

generalist toward a model with more specialization: “Wealth managers can no longer

afford to be all things to all people.” (PricewaterhouseCoopers, 2009, p. 4)

What are the traits that compose the character of a successful fund manager, as

opposed to relationship managers and bankers in general?

2.4.1 Behavioral Finance

Behavioral finance can be defined broadly as “all of the other social sciences applied

to finance”. (Shiller, 2008a, Lecture 7) In spite of this broad definition, the actual

problem identification studied by behavioral finance has a fairly narrow focus. The

origins of this field of study, according to Shiller, can be traced to an article by Paul

Samuelson, in 1963 about a bet where his counterpart did not behave entirely

rationally according to mathematical theories which prefigured the development of

Prospect Theory later developed by Kahneman and Tversky. (Shiller, 2008, Lecture

7) Empirical economic observations directed the focus, producing theories such as:

1. Expected Utility Theory – standard economics


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2. Prospect Theory – from Kahneman, related to risk avoidance being greater

than profit motive

3. Regret Theory – people spend a lot of effort in avoiding regret, more than they

do in pursuit of profit

The empirical approach, combined with the relatively young science of behavioral

finance, means that the theories at this time are fragmentary in nature, explaining

certain behaviors in financial decisions, but not really integrated into a larger, holistic

view of the human being. In addition, they tend to describe behaviors that are

widespread, though not universal, and contribute more directly to economic theory.

Therefore, these theories are not of directly examined in this study.

Our concern is with the decision maker him- or herself, and learning to assess his or

her ability to produce above market returns. Why do some portfolio managers beat

the market on a consistent basis? Is it a particular strategy, such as Benjamin

Graham’s value investing as made famous by Warren Buffet, his best pupil?

Perhaps. Yet our task here is not to find the best theory or strategy, but rather to

develop a method that will aid in finding the best managers. In order to do this, we

must briefly describe the market.

In characterizing the market, “Efficient Market Theory” states that the market price of

a stock accurately reflects its worth, because all relevant information is known and

reflected in the price. Joseph Stiglitz (2001, 2008) has shown that markets always

hold information imbalances. Therefore, fund managers who (1) have better access

to information, and are (2) better able to process information, are more likely to “beat

the market”. Access to information can be evidence of a great research team

supporting the fund manager, and/or insider information which is illegal. Our concern

focuses on the second factor, the ability to process information.

2.4.2 Psychoanalytic and Developmental Approaches

The literature about how to succeed in fund management is large, with a wide range

from popular quick-selling literature to serious academic study. Techniques, such as

various iterations of portfolio diversification theory (Markowitz, 1952), are intensely


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studied. Most theories are mathematically driven studies of markets and prices, and

it is only recently that this has broadened to include social sciences, studying the

humans who make the decisions in the market in addition to the market itself.

One feature of behavioral finance useful for this study, is that researchers have

identified patterns in trading decisions based on psychological traits. Patterned

decision making and behavior has been widely seen as a problem, and this lack of

independence of thought has been addressed by several authors. Two, who are

active as writer/practitioners in the area of coaching traders, Brett Steenbarger and

Ari Kiev, recognize the problem of emotionally based patterns that lead to profit

lowering decisions. For Kiev (2005), success in life, as in trading, requires the ability

to let go of inhibitions about winning and losing. In fact, the ability to overcome

various learned inhibitions is one of the major characteristics differentiating

successful traders from mediocre ones.30

Kiev Steenbarger Developmental Model

“a variety of psychological

exercises to maintain

motivation, concentration,

endurance, and

performance under

stressful circumstances”31

1 Dampen intrusive

emotional patterns;

2 Shift out of old patterns

by making radical leaps;

3 Cultivate new behavior

patterns.32

Cultivate growth in the

underlying capability so

that capacity and then

performance can be

improved and patterns

avoided.

Table 1: Methods of approach to change patterns in trading. (by author)

Steenbarger addresses sub-optimal trading behavior through psychoanalysis

followed by behavioral methods to address change. He focuses first on finding

observable symptoms or patterns that impede optimal trading and then proceeds to

an analysis of the underlying emotional reasons that give rise to these patterns.

Change is then fostered through the use of a basic three step model (see above).

30 Kiev, Ari, (2005) p. 2.

31 Kiev, Ari, (2005) p. 2.

32 Steenbarger, Brett N. (2003) pp. 297-302.


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Developmental methods

As will be described below, the development of socio-emotional maturity brings

greater objectivity regarding the social world and also the individual’s own

personality, thereby freeing the individual to less driven and able to make more

objective decisions. Peter Lynch seems to view opportunities in a manner

unbounded by the common opinions that influence many other fund managers. As

one of the most successful fund managers of all time, Lynch headed the Magellan

Fund when the average gain per year was “close to 30%” for thirteen years. (Tanous,

1997, p. 99) Is it possible to identify promising fund managers like Lynch at the early

stages of their phenomenal success by focusing on identifying this particular

personality factor?

In an interview, Lynch claimed that his strong suit is the use of logic: “There’s no

such thing as a hereditary talent for picking stocks. What helped me the most is

logic, because it taught me to identify the inherent illogic of Wall Street.” (Lynch, in

Tanous, 1997, p. 123) And that is precisely the point. With this statement Lynch

indicates that he does not let bias and emotion get in the way of clear thinking, and

he does not allow himself to be swayed by the crowd.

The central psychological capacity for fund managers is clearly cognitive. Success in

the complex world of finance and investment requires the ability to competently

analyze large quantities of complex data. Yet to achieve good results, many fund

managers rely on increasingly sophisticated computer-based tools that measure

quantitative data and block the influence of psychologically based misjudgments. In

effect, they are using computers to make up for emotional weaknesses and thereby

improve performance. What psychological factors influence investment decisions?

1. The ability to maintain a rational approach to the analysis of risk and return.

Compared with statistical fact, fear of loss weighs more heavily in decisions than

chances of gain among most investors.33 A symmetrical risk profile, with equal

weight given to risk of loss and chance of gain, is statistically shown as leading to

more profitable portfolio management.

33 c.f. Steenbarger, 2003.


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2. The ability to identify irrational market trends (overstated optimism and pessimism)

and decide against these trends is a fundamental capacity for sound investment.

3. The ability to deliver unexpected and unwelcome news to clients and bosses, to

make and defend decisions that differ from prevailing opinion.

In the end, finding the right fund managers is a quest to identify sound human

judgment: persons who can weigh quantitative and qualitative factors and

consistently make good investment decisions.

The section below will show how developmental assessments can assist in finding

persons of sound judgment.

2.4.3 Defining Competencies

The cornerstone of personnel selection and assessment is the demonstrated existence of measurable psychological differences between people that are of importance in determining job success.

Ivan Robertson (1996)

This section presents current theories of competencies, how these arose, their use

and implications. It provides a foundation for later discussion of assessments for

these competencies, the specific competency models for fund managers, and then

arguments for the inclusion of developmental psychology based measures of socio-

emotional development and development of ethical thought capacity.

As described in Chapter 1, the unexamined recruitment methods of the past can not

work optimally because (1) the culture and society are not in place that produce the

same results as the Deans of Swiss Banking in the past; and (2) the requirements of

work in the finance sector have increased in complexity, in multiple aspects, so that

the competencies required are not the same as earlier.

In 1973, when David McClelland first proposed “competence” as a better paradigm

for the psychological testing that was then in full swing, he did so because of

widespread dissatisfaction at the way testing was at that time ‘damaging’, because it

was “falsely leading people to believe that doing well in school means that people are


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more competent and therefore more likely to do well in life because of some real

ability factor.” (McClelland 1973, p.13)

In his statement of “six principles V enumerated for the new testing movement”,

McClelland recommended that measures of “ego development” be included, because

writers such as Erikson, Loevinger, and White had pointed to “a general kind of

competence which develops with age and to a higher level in some people than in

others.” (McClelland, 1973, p. 10) He further suggests that the Educational Testing

Service, the institution in Princeton, New Jersey where he first made public mention

of these observations and which was deeply embedded in the intelligence testing of

that era, “should include measures of such general characteristics as ego

development or moral development (Kohlberg & Turiel, 1971) based on thought

samples, because these general competencies ought to be improved by higher

educational systems anyway.” (McClelland, 1973, p. 13)

Thinking about human competencies has largely been the trust of the pedagogical

sciences, academia, and departments and ministries of education. More recently,

the OECD Directorate for Education, which functions as a policy oriented think tank

for its Member States, launched an interdisciplinary study process in conjunction with

the Swiss Federal Statistical Office (SFSO) in 1997 “with the aim of providing a

sound conceptual framework to inform the identification of key competencies, to

strengthen international assessments, and to help to define overarching goals for

education systems and lifelong learning.” (www.deseco.admin.ch)

In describing competencies and their use, the DeSeCo project acknowledged that:

Defining and selecting human competencies affects both the individual – in

his or her role as worker (employer or employee), citizen, family member, and

group member – and society as a whole. It concerns issues such as the

acquisition of mental prerequisites, the use of competency with regard to the

role and position of the individual in the social hierarchy, the influence of

socio-economic and cultural factors, and the nature of power relations.

(Rychen, 2001, p.5)


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The DeSeCo approach to constructing the set of competencies was similarly broad,

drawing on “an anthropologist, an economist, an historian, a philosopher, a

psychologist, and a sociologist”. (Rychen, 2001, p.5) The results in their search for a

comprehensive model is embodied in the following diagram:

"DeSeCo's overarching conceptual frame of reference"

Interact in heterogeneous

groups

Act autonomously

Use toolsinteractively

Reflectivity

Well-functioning

society

Vision of Society

Theoretical elements ofkey competence

Demands of life

Successfullife

HUMAN RIGHTS SUSTAINATILIBYX

EQUALITYPRODUCTIVITY XX

SOCIAL COHESION

Gilomen, Heinz (2001). Concluding remarks. In Rychen & Salganik, Eds, Key Competencies. (2001)

TECHNOLOGY DIVERSITY

MOBILITYRESPONSIBILITY XX

GLOBALIZATION

Fig. 5. DeSeCo’s overarching conceptual frame of reference. Reproduced from

Gilomen, 2003, p.184

This conceptual framework focuses on a holistic vision of competence, addressing

many, perhaps most aspects of professional and even personal life. For the

purposes of this study this conceptual framework is useful since it points to a more

less technically bound understanding of competencies that supports the search for

broader character traits. We now turn to a set of assessments which can serve as

measures of indicators of this broader set of capabilities.


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2.5 Assessments Based on Developmental Psychology

The word ‘intelligent’ in our title will be used throughout the book in its common and dictionary sense as meaning ‘endowed with the capacity for knowledge and understanding.’ It will not be taken to mean ‘smart’ or ‘shrewd,’ or gifted with unusual foresight or insight. Actually the intelligence here presupposed is a trait more of the character than of the brain.

Benjamin Graham, 1949

In this section, measures based on developmental psychology of ethical judgment,

socio-emotional maturity and cognition will be examined, presenting a rounded set of

measures that may begin to address Graham’s call for a focus on character as a

whole, it being understood that character itself defies measurement.

2.5.1 The Genesis of Developmental Psychology

Developmental psychology assessments are grounded in the school of thought

started by the Swiss child psychologist Jean Piaget. Through methodical testing and

observation of children, Piaget uncovered stages of mental growth in children.

Atkinson (1983) reviews the philosophical basis of Piaget’s theories and emphasizes

his roots in the natural science methodology of biology, citing Piaget’s own view that

of his work as that of a “’genetic epistemologist’” (Atkinson, 1983). On the other

hand, “Anglo-American psychologists” regard him as an empirical psychologist

(Atkinson, 1983), since Piaget’s results are testable and reproducible. His work has

spawned a multitude of research in decades subsequent to his first publications in

the 1920s. (Atkinson, 1983) Though some of Piaget’s findings have been proven

inaccurate or incomplete, his influence remains strong in the pedagogical sciences

and “his framework is remarkably consistent with recent directions and findings in

cognitive science and developmental neuroscience.” (Fischer and Kaplan, 2003)

One of the important contributions of Piaget and the school of developmental

psychology he initiated, is the holistic view of the growth of human cognition and

personality. Beginning in the 1960s and 70s, Piaget’s methodology was expanded in

to examine socio-emotional, moral and cognitive maturation processes in adults by


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Lawrence Kohlberg, Robert Kegan (Professors at the Harvard University School of

Education), Jane Loevinger, and others.

The concept of “ego” is extensively discussed by Loevinger (1976), tracing the

origins back to classical Greek thought and contrasting shades of usage by various

thinkers in psychoanalysis. For Loevinger (1976) the organization of the personality

“or the synthetic function is not just another thing the ego does, it is what the ego is.”

(1976, p.5) This conception is quite distinct from the concept of egotism or

egocentrism. According to Piaget, “Egocentrism in so far as it means confusion of

the ego and the external world, and egocentrism in so far as it means lack of

cooperation, constitute one and the same phenomenon.” (1932, p. 87) For the

purposes of this study, ego development will be simply considered the healthy

development of the personality.

While for Loevinger “[t]he subject of ego development cannot be encompassed by a

formal definition” (1976, p. 54), she identifies the following four characteristics (1976,

p.11):

1. ego development occurs in stages with “fixation points” that define the adult or

child;

2. these stages should be seen as structural, containing an internal logic and

logical sequence;

3. “specific tests, experiments, or research techniques” are used to investigate

this development;

4. this concept is applicable to all ages of human life.

The most important measures available through this methodology are rigorous

assessments of cognitive, moral and socio-emotional development that measure,

generally speaking, thinking ability, ethical perception and emotional maturity.

Though grounded in over 70 years of research, the use of developmental

psychology-based assessments is relatively new to human resources management,

and rigorous research on the application of these measures to specific problems in

business and industry is still in the early stages.


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The assessments we examine here belong to the category of psychological tests

called “projective tests”, where by “a stimulus, to which subjects have to respond, [is]

so designed that it encourages subjects to project onto it their own feelings, desire

and emotions.” (Kline, 2000, p. 278) Perhaps the most familiar test in this category is

the “Rorschach” test which uses “ambiguous visual stimuli which subjects have to

describe.” (Kline, 2000, p. 278) In the case of the assessments examined here, the

stimuli are not ambiguous images, but specific verbal questions or prompts which the

test subject answers in an interview situation. In addition, a skilled interviewer will

respond with further probes to encourage the test subject to become more specific

and informative in their answer.

The interviews are then transcribed verbatim and the resulting text evaluated

qualitatively in order to identify specific statements that correlate to the stages of

personality development. The intellectual roots of this kind of qualitative textual

analysis can also be found in the general field of Discourse Analysis, which

Silverman (2001) traces back to “Oxford philosopher J.L. Austin” who introduced the

possibility of seeing words as having both descriptive or literal and active or

contextual aspects in the William James lecture series at Harvard in 1955 (Austin

1975). Similarly, Juergen Habermas (1979) describes “speech acts” as having this

dual character of meaning that is literal and contextual.

2.5.2 Measuring Ethical Judgment: Is Ethical Behavior Profitable?

From the perspective of principal-agent models, A employers may be willing to pay premiums for workers with attributes such as perseverance and honesty that reduce the need to monitor.

Levy & Murnane (2001)

[I]t does not take a genius or even a superior talent to be successful as a value analyst. What it needs is, first, reasonably good intelligence; second, sound principles of operation; third, and most important, firmness of character. But whatever path you follow as an analyst, hold on to your moral and intellectual integrity. Wall Street in the past decade fell far short of its once-praise-worthy ethical standards, to the great detriment of the public it serves and of the financial community itself. When I was elementary school in this city, more than 70 years ago, we had to write various maxims in our copy-books. The first on the list was “Honesty is the best policy.” It is still the best policyA

Benjamin Graham (1974)


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As mentioned above, this study proposes research to study whether fund manager

scores in ethical judgment, measured by the “Moral Judgment Interview” (MJI), will

show a correlation with market returns. More basically, the question is whether

conscience and profit are opposing forces or whether in ideal market conditions

these factors would correlate. Popular opinion often holds that success in fund

management is similar to success at gambling, requiring relatively risky, perhaps

immature behavior that pushes ethical limits. Yet it is conceivable that “cooperative,

ethical behavior” could pay off in the end,34 and this study proposes that this key

issue is worthy of closer examination. If proven true, then the economic self-interest

of financial institutions would become engaged to encourage an increased focus on

ethics at all levels as ethical judgment capability would be seen as aligned with the

profit interests of investors and employers alike. So the basic question proposed by

this study is: whether fund managers with higher scores in ethical judgment capacity

are more profitable.

Background

In 1981 Lawrence Kohlberg published the first of three volumes (Kohlberg, 1981,

1984, 1989) that are seminal works in the academic study of moral development.

The acclaim with which these were received and their lasting value is a crowning

achievement when seen from the vantage point of Kohlberg’s beginnings – the

climate of the 1950s when behaviorism reigned in psychology. Whereas behaviorism

held society to be the host of social norms to which the individual must adjust or be

“socialized”, Kohlberg located moral decision-making as a cognitive process in the

individual conscience, arguing that society can sometimes be in the wrong (e.g. Adolf

Eichmann’s complicity with evil in administering Nazi concentration camps). (Rest,

1994, p. 2-3)

Kohlberg’s work builds on the stage or “stair case” model originally developed by

Jean Piaget, with the stages being derived from experimental observation, with each

stage building on what was learned in the previous one. As a means to understand

moral development, Piaget (1932) methodically observed and asked questions to

children regarding their games and thereby was able to define four successive

stages of development with regard to rules in children’s games. Hereunder is 34 Schneider (2009), quoting Jörg Althammer: “Auf die lange Frist zahlt sich kooperatives ethisches Handeln

aus und ist auch wichtig für einen nachhaltigen Unternehmenserfolg.”


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paraphrased the progression of the “practice or application of rules”, which differs

somewhat from the “consciousness of rules” which Piaget describes as more

“elusive”.

Stage Description

1 Motor or Individual “[T]he child handles the marbles at the dictation of his

desires and motor habits.” This play leads to

schemas, but not collective rules because it is

individual play.

2 Egocentric At age 2 to 5, the child receives coded rules from the

outside and follows them when playing alone or with

others. The child tries to harmonize the playing, but

“winning” is not the goal.

3 Cooperation Beginning between age 7 and 8, each child tries to

win, and therefore becomes concerned “with the

question of mutual control and of unification of the

rules.”

4 Codification of Rules “[B]etween the years of 11 and 12”, children become

very exacting about the rules, and “the actual code of

rules to be observed is known to the whole society”

(such as a shool)

Table 2. Stages in the application of rules by children.35

“[I]t is from the moment that it replaces the rule of constraint that the rule of

cooperation becomes an effective moral law.” (Piaget, 1932, p. 62) This would seem

to occur between stages 2 and 3, when external rules are superceded by a process

of children unifying their received rules, thereby making them their own.

[C]ooperatoin is really a factor in the creation of personality, if by

personality we mean, not the unconscious self of childish egocentrism, nor

the anarchical self of egoism in general, but the self that takes up its stand

on the norms of reciprocity and objective discussion, and knows how to

submit to these in order to make itself respected. Personality is thus the

35 Derived from Piaget, 1932, pages 16-17.


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opposite of the ego and this explains why the mutual respect felt by two

personalities for each other is genuine respect and not to be confused with

the mutual consent of two individual ‘selves’ capable of joining forces for

evil as well as for good.” (Piaget, 1932, p. 90)

“[I]t is from the moment that it replaces the rule of constraint that the rule

of cooperation becomes an effective moral law.” (Piaget, 1932, p. 62)

This describes precisely the interface between the external regulators, both official

policing from outside a company and the “corporate culture” operative at a particular

place inside a company, and the character of the individual. (See Figure 4, The

Decision Making Context, above) This internalization also means a growth of

conscience.

“[T]here can be no doubt that cooperation and social constraint deserve to be

far more sharply contrasted than they usually are, the latter being perhaps

nothing more that the pressure of one generation upon the other, whereas the

former constitutes the deepest and most important social relation that can go

to the development of the norms of reason.” (Piaget, 1932, p. 100)

More recent publications challenge Kohlberg’s framework. In particular, numerous

papers from Prof. Klaus Beck at the University of Mainz examine various aspects of

Kohlberg’s work. In a longitudinal study of young insurance clerks, Beck (2003)

found contradictions to Kohlberg’s theory of “structured wholeness” which holds that

people base their moral thinking on the highest principle they have obtained.

Beck’s data shows that individuals respond at different levels in different situations,

and are not fixed at one level of “structured wholeness” as Kohlberg had supposed,

we do on occasion regress to lower modes of thinking, and we are not indifferent to

context. Rather, individuals will respond differently, at levels higher or lower than

their main level, indicating both regressive and progressive (growth) tendencies.


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This correlates with SOI research and practice which shows that individuals respond

within a range, usually 3 or 4 sub-stages, when describing their relationship to others,

showing both regressive and growth tendencies.

In concluding, however, Beck concurs with Kohlberg’s theory in that “its inherent

Piagetian structural-genetic idea of a hierarchical order of reflection modes can and

should be upheld as well as the idea of ‘stages.’” (Beck, 2003, p. 23) To

accommodate the moral differentiation in the data, however, Beck concurs with other

authors that progress in moral development should be conceived of as the

“acquisition of a new structure of moral reflection under retention of the ‘old’

structure(s).”

Measuring Moral Reasoning Ability

The Ethics Project (undated) at the University of Leeds has identified twelve separate

assessments available for measuring moral reasoning ability. Of these, two stand

out as most suitable for research such as is proposed here: the Moral Judgment

Interview and the Defining Issues Test.

The Moral Judgment Interview (MJI) is the original method developed by Anne Colby,

Lawrence Kohlberg and a total of fourteen others collaborating in the two volumes of

“The Measurement of Moral Judgment”. (Colby, 1987) In the interviews, subjects are

asked to respond to a series of moral dilemmas such as the Heins Dilemma (below).

The responses are recorded, transcribed and evaluated according to the 900+ page

“Scoring Manual” (Colby, 1987, vol. II) in a manner similar to that used by Kegan for

socio-emotional, or “ego” development. (see §2.5.3 below) The advantage of the MJI

is the depth and quality of information that can be gathered through a direct interview

process as a projective test. It is conceivable to use the MJI in a relatively informal

setting, and the data gathered would be well suited to support coaching interventions.

A major drawback is the time consuming nature of interview, transcription and

evaluation. Using the MJI to measure a scientifically valid data set of 100 or more

would be a substantial undertaking. Since the MJI is little used, it would be

necessary to find or more likely train collaborators who could validate scores.


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In addition, in correspondence with the author, Anne Colby confirmed that to her

knowledge there are currently no programs in existence that provide training and/or

certification in the MJI method. She suggested that it would be possible, thought

time intensive, given the background and relevant training of this author, to create a

scientifically valid interview method tailored to the task of assessing fund managers.

While the issue of gaining sufficient temporal and financial resources to develop this

method would present a challenge to this author, the greater challenge, described

below, is gaining access to and cooperation of fund managers necessary to carry out

this research.

The Defining Issues Test (DIT), also based on the work of Lawrence Kohlberg, was

developed by James Rest at the University of Minnesota. (Rest and Narváez, 1994)

The DIT is a paper-based questionnaire takes approximately 45 minutes to answer

and is available in two versions: DIT-1 and DIT-2. Both tests require subjects to

respond to a series of moral dilemmas such as the Heins Dilemma (below), though

the DIT-2 uses a modified evaluation that takes into account advances in

understanding of how moral decisions are actually made. A disadvantage of the DIT

is that the end score provides little of substance that can be used to inform the

respondent of how they are function, which would be necessary for coaching

processes. The advantages of the DIT are that it is relatively easy to administer the

questionnaire and the scoring is provided by the University of Minnesota, making

scientific studies with large data sets more reasonably possible. Another advantage

is the large amount of data already gathered using the DIT, proving its validity.

What the DIT Measures

The DIT is a cognitive measure that focuses on moral/ethical judgment, or decision-

making. As a measure of moral development, however, it must be mentioned that

the DIT by itself is incomplete: “A moral judgment score does not contain information

about moral sensitivity, moral motivation, or moral character.” (Rest and Narváez,

1994, p.9) In examining the universe of moral development that determines

behavior, Rest developed a “four component model” (see table below) and

acknowledges that there may even be more.


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Four Psychological Components Determining Moral Behavior

1 Moral

sensitivity

Interpreting the situation

2 Moral

judgment

Judging which action is morally right / wrong

3 Moral

motivation

Prioritizing moral values relative to other values

4 Moral

character

Having courage, persisting, overcoming distractions,

implementing skills

Table 3. Four Psychological Component Determining Moral Behavior36

Carrying this analysis of factors influencing behvior even further, Bredemeir and

Shields (1994) begin with the four processes from Rest and add a cross section of

three sources of influence: the nature of the context, competencies held by the

individual in question, and personal characteristics or “ego processing” that is

“situationally evoked.” (sic.) This results in the 12 component model below:

Twelve Component Model of Moral Action

Influences Processes

Interpretation Judgment Choice Implementation

A. Contextual Goal structure,

situational

ambiguity

Moral

atmosphere

Domain cues Power

structure

B. Personal

Competencies

Role-taking,

perspective-

taking

Moral

reasoning

Self-structure Autonomy &

social problem-

solving skills

C. Ego

processing

Intraceptive

processes

Cognitive ego

processes

Affective

impulse

regulating

processes

Attention-

focusing

processes

Table 4. Twelve Component Model of Moral Action37

36 Rest and Narváez (1994), p. 23.

37 Bredemeier and Shields (1994), p. 178.


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While this model comes closer to accounting for the multitude of factors that

influence an ethical decision, its level of complexity is more appropriate for a case

study than for a comparative study such as what is proposed here.

Moral Reasoning Ability and the Will to Moral Action

Relevant to this study is whether there is a link between the ethical and moral

perception, resting in cognitive ability, and behavior. The relevance lies in the

possible connection between ethical issues as potential risk factors when fund

managers assess and decide on investment opportunities.

In his much-cited review of the relationship between moral reasoning and action,

Blasi (1980) demonstrated a positive correlation between level of moral reasoning

and ethical behavior. Arnold (1989) and Buchanan (1992) both confirmed this

correlation, thereby disproving the hypothesis that moral thinking is unrelated to

action. Further, Rest reviewed “several hundred studies” that address the question

of whether moral judgment predicts actual behavior and concludes that “moral

judgment is statistically linked with hundreds of measures of behavior; however, the

linkage is not strong (typical are correlations of 0.3 – 0-4).” (Rest & Narváez, 1994, p.

21)

However, Blasi (1998) showed that cognition is only one factor in explaining moral

action and that a more holistic framework is necessary. In this later article (1998), it

is self-identity that Blasi uses to as an explanatory framework. In the “self model,”

three aspects of personality predominate:

1. Moral identity, or the moral self – the degree to which morality plays a central

role in one’s identity and daily living. Are moral goals an integral part of one’s

personal goals? Do moral concerns form part of one’s identity? ;

2. Responsibility for moral action – the degree of moral engagement. A sense

of responsibility links moral reasoning ability to an understanding that one is

obligated to act in a specific manner. The source of this linkage, not yet fully

researched, may be in affective linkages to others that give rise to a “felt sense

of personal responsibility” (Walker 2004);


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3. Self-consistency or integrity – only congruence between judgment and action

can satisfy the self’s need for integrity.

Regarding integrity, processes of selective perception of one’s own moral behavior,

or moral self-deception, were identified by Bandura (1999 and 2002), including:

cognitive reconstruction of immoral acts; minimization of personal causality (blaming

circumstances and others); discounting harmful consequences; and blaming the

victims. Blasi (1995) reasoned that more mature levels of moral development should

result in lowered propensity for self-deception, though research has yet to probe this

link (Walker 2004).

Cognitive influences in moral functioning, according to Blasi (1980), are twofold: “the

creation of meaning and the determination of truth” (Walker 2004). The self-model

posits that moral knowledge carries a certain force toward moral action. The

alternative would be to see motivation as only arising from emotive, irrational,

egoistic and social grounds.

Applied Research using the DIT

Relevant to the discussion of the connection between moral reasoning ability and

moral action is the following table by Rest and Narváez (1994, p. 14) that charts a

review of research using the DIT. Of note is the score by prison inmates, being the

lowest score among adults, and lower than that of senior high school students.


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Different Groups on the DIT P Score

P – Score Group

65.2 59.8 52.2 50.2 49.2 47.6 46.3 42.8 42.3 41.6 40.0 31.8 23.5 21.9 18.9

Moral philosophy and political science graduate students Liberal protestant seminarians Law students Medical students Practicing physicians Dental students Staff nurses Graduate students in business College students in general Navy enlisted men Adults in general Senior high school students Prison inmates Junior high school students Institutionalized delinquents

Table 5. Different Groups on the DIT P Score38

Methodology

The original version of the Defining Issues Test (DIT-1), developed in the 1970s, has

been used in “hundreds of studies on over 1/2 million subjects”.39 A new version, the

DIT-2, was developed in the 1990s, which is slightly shorter (five problems instead of

six) and has cleared up minor problems present in the DIT-1. The following “Heinz

Dilemma” is an example of the kind of problem posed by the DIT (Rest & Narváez,

1994, p. 13).

38 Rest and Narváez, 1994, p. 14

39 www.centerforthestudyofethicaldevelopment.net


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“The Heinz Dilemma”

Heinz’s wife is dying of cancer and needs a drug that an enterprising druggist has invented. The druggist demands such a high price that Heinz cannot raise the money. Should Heinz steal the drug to save his dying wife?

In deciding how Heinz should respond, evaluate which of the items below raise the most important considerations, and then order them from 1 to 12, with 1 being the most important.

b Whether a community’s laws are going to be upheld.

b Isn’t it only natural for a loving husband to care so much for his wife that he’d steal?

b Is Heinz willing to risk getting shot as a burglar or going to jail for the chance that stealing the drug might help?

b Whether Heinz is a professional wrestler, or has considerable influence with professional wrestlers.

b Whether Heinz is stealing for himself or doing this solely to help someone else.

b Whether the druggist’s rights to his invention have to be respected.

b Whether the essence of living is more encompassing than the termination of dying, socially and individually.

b What values are going to be allowed to hide behind a worthless law that only protects the rich anyhow.

b Whether the druggist is going to be allowed to hide behind a worthless law that only protects the rich anyhow.

b Whether the law in this case is getting in the way of the most basic claim of any member of society.

b Whether the druggist deserves to be robbed for being so greedy and cruel.

b Would stealing in such a case bring about more total good for the whole society or not?

Table 6. The Heinz Dilemma40

In an actual DIT-2 assessment, five such problems are posed, requiring

approximately 45 minutes to complete in total:

1. A father contemplates stealing food for his starving family from the warehouse of a rich man hoarding food;

2. A newspaper reporter must decide whether to report a damaging story about a political candidate;

3. A school board chair must decide whether to hold a contentious and dangerous open meeting;

40 Derived from Rest and Narváez, 1994.


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4. A doctor must decide whether to give an overdose of a pain-killer to a suffering but frail patient;

5. College students demonstrate against U.S. foreign policy.

Scoring process

The scoring of this assessment leads to a ranking on the six-level scale below,

though Stages 5 and 6 are conflated “into a principled score” or “P-score” (Rest

1994, p. 7) as they are difficult to distinguish even at a conceptual level.

Six Stages in the Concept of Cooperation From Lawrence Kohlberg’s theory of moral development.

(Table based on Kohlberg (1981) and Rest & Narvaez (1994))

Stage 6 The morality of non-arbitrary social cooperation: Morality is defined by how rational and impartial people would ideally organize cooperation.

Stage 5 The morality of consensus-building procedures: You are obliged by the arrangements that are agreed to by due process procedures.

Stage 4 The morality of law and duty to the social order: Everyone in society is obliged to obey, and is protected by, the law.

Stage 3 The morality of interpersonal concordance: Be considerate, nice, and kind: you’ll make friends.

Stage 2 The morality of instrumental egoism and simple exchange: Let’s make a deal.

Stage 1 The morality of obedience: Do what you’re told.

Table 7. Six Stages in the Concept of Cooperation41

Research Questions

A fundamental supposition of this research is that the level of ethical judgment

capability will influence behavior, and therefore financial results, of fund managers.

From the above description of the DIT it is easy to see that higher levels of ethical

thinking and decision-making requires a commensurately higher cognitive ability.

This may run parallel with the thinking ability required to choose and thinking about

“defining issues” in investment possibilities, thereby making decisions that result in

higher levels of profitability. Further, research available shows that lower levels of

ethical thinking ability are associated with criminality. It would follow that a fund

manager with a low DIT or MJI score would present a greater risk for insider trading

and potentially catastrophic loss through high risk criminal behavior.

41 Derived from Kohlberg, 1981, and Rest & Narvaez,1994


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The DIT score may be evidence of (a) greater ability to assess the risk and return

potential of investment opportunities; (b) lower risk of illegal activity; and (c) higher

level of cognitive ability relevant to complex decision-making, independent of

moral/ethical content. In the latter case, further research would be required to

segment the cognitive ability per se from the moral/ethical content. This would

require the use of the DIT along with another cognitive measure in order to find

information as to the relative importance of cognitive ability and moral/ethical

capacity in the achievement of profitability.

Given the characteristics of the various levels mentioned above, and in considering

the task profile of fund managers, the following predictions are posited:

Prediction (1): Higher scores in ethical judgment capacity, measured in the Defining Issues Test (DIT) and the Moral Judgment Interview (MJI), will show a positive correlation with medium-term (5 to 10 year) market returns.

Prediction (2): Fund managers at L-2 (DIT/MJI level 2) will be more likely to engage in insider trading and similar criminal activity.

Prediction (3): Fund managers at L-3 will be more likely to comply with behavior patterns existent in their immediate corporate culture surrounding.

Prediction (4): Fund managers at L-4 and higher will be more likely to adhere to the legal and regulatory requirements of their position.

Question (1a): Do higher scores in ethical judgment, measured by the “Defining Issues Test” (DIT) or “Moral Judgment Interview” (MJI), show a positive correlation with market returns?

Question (1b): Do lower scores in ethical judgment measured by the “Defining Issues Test” (DIT) or “Moral Judgment Interview” (MJI), show a correlation with a propensity for unethical behavior?

Whereas research for Question (1a) can be carried out with currently active fund

managers, Question (1b) would require either a longitudinal study or data gathering

from former fund managers who have been convicted of financial crime.


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2.5.3 Measuring Socio-emotional Maturity: Does Emotional Maturity Level

Influence the Profitability of Finance Managers?

Not being in a financial center means that it is easy to avoid the deadly emotions of greed and fear. After all, the world’s most successful investor Warren Buffett is based in Omaha and not New York.

Magne Orgland42

In the above quote, Orgland points to the importance of emotion in financial decision

making, and also observes that external factors play a role in this regard. Our task in

this study, however, is to look at the internal factors, the personality traits of the fund

manager, to see whether factors can be isolated which can be used as predictive

indicators. In addition, the measure of socio-emotional maturity is one in which at the

higher levels adults gain an increasingly objective perspective over their own

emotions and the external influences on them, and in this way a greater ability to

control their behaviors.

In the past two decades, no other industry sector has seen more profit quickly made

and lost than hedge-fund management. As the amount of funds under management

in hedge funds has risen, the profit margins have narrowed. As margins narrow

faster than investor expectations, managers are under increasing pressure to

perform. Performance pressure has led to dramatic cases of deception and loss.

“I do not dismiss the behavioral aspects that Joe [Lakonishok http://www.cba.uiuc.edu/system/faculty/profiles/lakonish.html] and others have argued which is to say that there are all kinds of reasons from cognitive psychology that suggest that a real dog is likely to get underpriced, and maybe people know it's underpriced and they still don't want to hold it. It’s hard socially. You think about going to your clients and saying I want you to buy this fund which holds the worst stocks in the world. We all like to hold stocks of great companies, what some people call admired stocks of admired companies. It’s a cognitive error that people make over and over again in experiments. They identify something – it’s called a representation error – and there are various experimental settings for this, but it basically says “great company, great stock.” And if you think about that, and survey investment people, CFOs and CEOs, they make that assumption: it’s a great company; it’s a great stock. That’s the growth stock story.”

William F. Sharpe in “Investment Gurus” by Peter J. Tanous 1997 (emphasis added)

42 Head of Asset Management Research & Portfolio Management at Wegelin & Co., quoted in Bain (2008)


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The “representation error” that Sharpe describes (“It is hard socially.”) is actually not

cognitive, but rooted in the social-emotional meaning-making system of the portfolio

manager; i.e., what will it mean to give an unwanted or potentially discordant piece of

information to the client. Further, what originates as one kind of error, a socio-

emotional difficulty in bringing straight information to a client, turns into a false piece

of cognitive information (“great stock”). This second error, which Sharpe correctly

identifies as cognitive, is one that others must see through and correct.

From the above it appears that many fund managers make two errors that are

fundamentally psychological: (1) emotional limitations on rationality, thereby

restricting the ability to freely choose best investments, an internal limitation due to

feeling tied to past decisions and favored projects (hence the increasing use of

quantitative models to block this error; and (2) emotional limits on providing

information and decision-making due to allowing influence from the perceived or

anticipated opinions of others.

Developmental psychology presents a framework for understanding this

phenomenon by showing: (a) how these two errors are rooted in fund manager

developmental levels; (b) how this tendency can be identified in fund managers; and

(c) how this weakness can be addressed institutionally through improved recruitment

methods and individually through developmental coaching.

A General Introduction to Stages of Socio-Emotional Maturity 43

When still in the womb, the baby has sensations, but is not aware of being separate

from the universe as a whole. At birth, infants emerge from the womb, where their

consciousness could be described as a general and undifferentiated state of

awareness. The awakening of the child to the reality that it is not alone begins to

emerge at the point where some need, for warmth or nourishment for example, is not

met. The gentle first cry of a newborn and the response that satisfies the need

signals the first, minimal awareness that s/he is not alone.

43 This section draws freely on the work of Robert Kegan as originator of the subject – object stages, as well as

from the writing and teaching of Otto Laske, and experience in administering the assessment with coaching

clients.


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As the mother responds, warmth, nourishment and comfort arrive. This first crisis

and its resolution initiates a process of growing awareness that the primary caregiver,

usually the mother, is external and cannot be completely controlled by the infant. In

fact, realizing how much resource and control the mother has, the infant begins to

lose all of its innate sense of self. By about age two healthy children go through a

“clingy” phase where the mother is, in fact, everything to the child. (Kegan’s Stage 1)

Left alone, the child has an existential fear that it cannot describe; the center of

existence is absent!

Of course, the child does not disappear when the mother leaves the room. It

gradually realizes that it continues to exist and can play with toys and with other

children when the mother is absent. Slowly, as the child makes decisions and uses

its own will to fill its needs, a sense of self and individuality begins to emerge in the

healthy child. Over the years, a child’s sense of dependency lessens and

independence grows till eventually one becomes that awkward being called the

“teenager.” This self-absorbed being tends to be very aware of urges, desires and

wishes, and not particularly concerned about accommodating their behavior to the

wishes and desires of anyone else. (Kegan’s Stage 2) There is still time left to play

in the kingdom of fun. Until, of course, it cannot get what it wants without doing what

the holder of resources demands.

Fig. 6.

Stages of Socio-Emotional Development

by Robert Kegan44

44 Illustration adapted from training materials at the Interdevelopmental Institute (www.interdevelopmentals.org)


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Yes, s/he has to: go to school to avoid punishment; clean her room or her parents will

get upset; be home by 10pm or face the wrath of Darthvaeter; etc., etc.. But it is not

all negative. By growing his/her hair, or cutting and coloring it a certain way, and

wearing clothes that give the right look, they can be accepted as one of the cool kids.

By studying and getting good grades, significant adults, not just the parents, will

compliment and give approving looks which can even increase with cutting the hair

and good grooming. And by working, you can get money to buy cool things. Society

in general makes it clear what one has to do in order to reap the rewards it can give

in a bewildering variety of ways. As the young person begins to understand and

internalize the expectations of the set of others they choose to be influenced by, they

eventually become “socialized”, with their individual needs and wishes taking a back

seat to their dominant desire – to “fit in” to a group and be part of adult society. And

90% of us manage to “arrive” at this stage of the journey. (Kegan’s Stage 3)

Maturing into a socialized adult is a process of taking the needs and expectations of

others seriously enough to let others affect our thinking and decision-making. In this

process, we “internalize” these expectations in gestalt form – we hold images of

individuals and groups within us and hold internal dialogues to arrive at decisions that

will hold these “internalized others” in harmony. As a socialized adult, one’s

emotional well-being is dependent on achieving a balance among these internalized

forces that represent real and idealized others. In short, where individuals at Stage 2

are “self-centered”, adults at Stage 3 can be called “other centered”. A fully

developed Stage 3 person defines him/herself in terms of group membership and

identification with others.

During the growth process, the influences of self and other are ever-present. For

example, influences of Stage 2 self-interest and the Stage 3 expectations of others

commingle, with self-interest gradually diminishing in strength during the maturation

process. Indeed, these influences of Self and Other never entirely disappear. Near

the tipping point, where the balance begins to change from one Stage to the next, a

“developmental conflict” takes place where a person feels the power of each side,

and is not fully committed to either. Approaching and passing each “Rubicon,” or

midpoint between stages, involves internal turmoil as the center of gravity shifts.


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Fig. 7.

Stages of Socio-Emotional Development

by Robert Kegan showing midpoint

between main stages45

Society pushes and pulls us from the outside toward Stage 3, and the majority of

adults remain in this socio-emotional balance as “socialized adults” for the remainder

of their lives. Approximately one-third of adults become somewhat dissatisfied with

their lives being focused on meeting the expectations of others and generate an

internal drive to move beyond this state and toward Stage 4, termed self-

actualization, self-authoring or individuation. The experience is one of feeling conflict

of interest between being “in community” and being “yourself.” Moving beyond

community can be resisted out of guilt, not wanting to offend the (internalized)

“community”, nor to become “disloyal”. However, moving toward self-authoring is

also experienced as a recovery of the self at a higher, more self-aware and principled

level than the teen-age self. One is becoming more honest and authentic. This drive

toward authenticity results in perspective taking on the general expectations of

society that one internalized in order to reach Stage 3. In moving from Stage 3 to

Stage 4 one lets go of the internalized voices of others. These recede into the

background, becoming less important. There is at first an increase and then a

lessening of the internal dialogue with the “internalized others” as the central

‘Rubicon’ is reached and then crossed.

45 Illustration by author


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Stage 4 individuals make better managers because they are able to carry out both

popular and unpopular decisions without upsetting their internal balance. The

internalized voices of others are no longer there, or do not have the strength to

disturb their internal balance. Where a Stage 3 manager is likely to worry about

keeping everyone “on board” and reaching a consensus decision in which everyone

can participate due to their own internal need to be liked and accepted, a Stage 4

manager has more focus on the quality of the decision first, and then try to bring

people into line with the new reality for the good of the organization as a whole.

Stage 4 decision-makers can be idiosyncratic, shaped by a particular way of thinking,

predisposed by their individual history, knowledge and biases.

As a person begins to move toward Stage 5, the voices of others are experienced in

a true sense of dialogue that seeks to find universal principles. Where the voices of

“others” are experienced as informing and teaching between Stage 2 and 3, and as

burdensome expectation between Stages 3 and 4, the person who has a solid

grounding in Stage 4, where they have built their own identity and have little or no

residual sense of Stage 3, experiences others in a manner which aids in their growth

beyond the narrow confines of the self which they constructed. In moving toward

Stage 5, others are experienced as helpful in one’s mental and emotional growth,

helpful in the quest to reach beyond one’s own limitations. The safe space one had

developed at Stage 4, where one could perfectly control access to the self, gives way

to risk taking with selected others for the sake of personal growth and more

meaningful impact on the social environment.

Persons who are predominantly in Stage 5 are more capable of leading others than

those at earlier stages because they have an easier time stepping past their own

shadow, and because they understand the behavioral patters of those at the earlier

stages. Being past their own need to create and fill-out their identity, their focus is

less on their individual story than on making a contribution to humanity in general.

They are in a position to truly lead others because they are less adamant about the

correctness of their own ideas, tend to reach for universal principles, are less

influenced by personality politics, and are able to cooperate with others who are

significantly different from themselves.


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Table 8 provides an overview of some main characteristics of persons at various

stages on the path of socio-emotional maturation, with particular emphasis on how

persons at these stages are present in organizations.

Management Orientation

S- 2 Proto-Bureaucratic

S-3 Pre-Bureaucratic

S-4 Bureaucratic

S-5 Post-Bureaucratic

View of Others Instruments of own need gratification

Needed to contribute to own self image

Collaborator, delegate, peer

Contributors to own integrity and balance

Level of Self Insight

Low Moderate High Very High

Values Law of Jungle Community Self-determined

Humanity

Needs Overriding all others’ needs

Subordinate to community, work group

Flowing from striving for integrity

Viewed in connection with own obligations and limitations

Need to Control Very High Moderate Low Very low Communication Unilateral Exchange 1:1 Dialogue True

Communication Organizational Orientation

Careerist Good Citizen Manager System Leader

Table 8. The Frame of Reference Stratification of Bureaucracy46

In writing about competencies in the DeSeCo project, Kegan (2001) summarizes

stages 3, 4 and 5 as follows:

The third order, the socialized mind, is an adequate order of complexity to meet the demands of a traditionalist world, in which a fairly homogenous set of definitions of how one should live is consistently promulgated by the cohesive arrangements, models, and external regulations of the community or tribe. Modern society is characterized by ever-expanding pluralism, multiplicity, and competition for loyalty to a given way of living. It requires the development of an internal authority which can “write upon” existing social and psychological productions rather than be “written by” them. Postmodern society, which would require the fifth order of consciousness, asks us to gain distance not only from the socializing press, but from our own internal authorities, our favored ideologies, or ruling theories. Postmodernism asks us to deconstruct the primacy of existing social and psychological identities in favor of loyalty to the transformative process V”

What makes this progression interesting for the examination of fund managers is the

requirement of their job responsibilities in the financial market. A Stage 3 fund

manager would be most likely to run with convention, and be part of the maddening

46 Laske, 2005.


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crowd that moves markets according to the emotional trends that are the subject of

study for behavioral economists. At stage 4, the modernist position, fund managers

could be expected to use Contrarian theories according to their own best insights.

Yet attachment to these insights and attendant theories is also a limitation that adds

a color filter to the glasses used to view markets.

It is in the fifth order of consciousness that persons become capable of objectively

viewing both social norms and thier own internal prejudices. For fund managers, this

would enable objectively viewing and continually taking a fresh, unbiased look at

market data. Perhaps one could call this arriving at “mindfulness” or a “Zen Mind,

Beginner’s Mind” (Shunryu Suzuki-roshi, 1970) for fund managers facing the financial

markets.

Emergence is the concept that best describes the feeling of synthesis which marks

the closing phase of a dialectic. (Crambray, 2006) When opposing ideas or

philosophies, or a plethora of these has run their course and no longer seem to

match or explain experience, then a new overarching explanation or framework

begins to “emerge” in consciousness, holding greater explanatory power, firing ideas

and bringing order to the thoughts.

This sense of new clarity occurs as one grows from a conflicted position spanning

two main stages, toward a stabilizing in the next higher stage. Typically, a person

whose emotional structure is spread from 3/4 to 4/3 and 4(3) will feel a growing

sense of clarity as they achieve moments where their emotional center is clearly a full

stage 4 and as they experience certainty about resolving their conflicted internal

feelings between stage 3 and stage 4 and their loyalty becomes clearly and more

unambiguously stage 4, self-authored.

Applied Research using the SOI

Much of the existing management-related SOI research focuses on leadership and

people management issues. One of the most sobering sets of results, from Susan

Cook-Greuter (1999, p. 35), shows just how few of us ever become truly self-aware

and capable of authentic leadership:


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Organizational Perspective

% of Developmental Attainment

Short Characterization

S-2: Individualist 10 Instrumental

S-3: Group contributor 55 Other-dependent

S-4: Manager 25 Self-authoring

S-5 Leader <10 Self-aware

Table 9. The Distribution of Stage Attainment in Adults (Cook-Greuter, 1999)

Methodology

The Intent of the “Subject–Object Interview”, or “SOI”, is to bring forth statements

from the interviewee that expose the underlying structure of their relationship

between self and other along the stages described above, and are detailed in the

sub-stages described below. The interviewer asks the interviewee to select and

respond to one question at a time, covering perhaps two to four or five of these

questions in the course of a one-hour interview.

Success: can you think of a time in your recent work where you felt somewhat jubilant, feeling you had achieved something that was difficult for you, or that you had overcome something?

Changed: if you think of how you have changed over the last year or two, or even months, regarding how you conduct your life, what comes to mind?

Control: can you think of a moment where you became highly aware that you were losing control, or felt the opportunity of seizing control, what occurs to you?

Limits: if you think of where you are aware of limits, either in your life and/or work, something you wish you could do but feel excluded from, what comes up for you?

Outside of: as you look around in the workplace or the family, where do you see yourself as not fitting in, being an outsider, and how does that make you feel?

Frustration: if you think of a time where you were in a situation not of your choosing, where you felt totally frustrated, but unable to do something about it, what emerges?

Important to me: if I were to ask you ‘what do you care about most deeply,’ ‘what matters most,’ are there one or two things that come to mind?

Sharing: if you think about your need of sharing your thoughts and feelings with others, either at work or at home, how, would you say, that plays out?

Strong stand/conviction: if you were to think of times where you had to take a stand, and be true to your convictions, what comes to mind?

Taking risks: when thinking of recent situations where you felt you were taking, or had to take, risks, either to accomplish or fend off something, what comes to mind?

Table 10. Prompts for the Subject-Object Interview 47

47 Lahey et al., (1988) Guide to the Subject-Object Interview


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The internal “stance” or “center of gravity” in the self – other dyad is arrived at by

identifying specific statements, usually from 10 to 25 in a one-hour interview

transcript, that clearly indicate the internal stance of the speaker as belonging to one

of the main stages or any of the sub-stages between the main stages, 16 Stages in

all from Stage 2 through Stage 5. (See: Lahey et al., 1988, Laske, 2006)

Fig. 8.

Kegan’s Stages of Socio-Emotional

Development with Sub-Stages48

Discerning whether a statement fits within the boundaries of one sub-stage or

another requires careful practice and the use of technical guides (See: Lahey et al.,

Guide to S-O Interviewing; and Laske, Hidden Dimensions, 2006.) The chart below

provides brief definitions of the sub-stages that are described and delineated in

hundreds of pages in the technical guides.

48 scoring method from Lahey et. al., Illustration by Jon Ebersole


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Level Characteristic

2 Ruled by needs, desires, wishes; ‘two world hypothesis’ (me and everyone else)

2(3) Beginning to be influenced by physical and imagined others

2/3 Conflicted over risking exposure to others’ feelings and thoughts; resolution to level 2

3/2 Conflicted, but with more detachment from own needs and desires, resolution to level 3

3(2) Able to be influenced by imagined others and their expectations

3 Made up of others’ expectations; ‘our world’ hypothesis

3(4) In need of ‘handholding’ by physical other to act on own behalf

3/4 Conflicted over, and unsure about own values, direction, worth, capability

4/3 Conflicted, but with more detachment from internalized viewpoints, resolving to level 4

4(3) Nearing self-authoring, but remaining at risk for regression to others’ expectations

4 Fully self-authoring decision maker respecting others; ‘my world’ hypothesis

4(5) Begins to question scope and infallibility of own value system; aware of own history

4/5 Conflicted over relinquishing control and taking risk of critical exposure of own view

5/4 Conflicted, but increasingly succeeding in ‘deconstructing’ self; committed to flow

5(4) Fully committed to deconstructing own values, benefiting from divergent others

5 No longer attached to any particular aspect of the self, focused on unceasing flow

Table 11. Overview of Emotional Development Levels 2 to 549

For example, a person we will call “Nelson” received a socio-emotional development

(or SOI) score of S-4 (7 8 8). This indicates: 7 statements at level 4 (3); 8 statements

at level 4; and 8 statements at level 4(5). Being centered on level 4, with almost

perfectly balanced scores on either side, “Nelson” is clearly in the self-authoring

phase. Such a balance could indicate that he is developmentally “stuck” or on an 49 Otto Laske, from training materials at the Interdevelopmental Institute, www.interdevelopmentals.org


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interal “plateau” in this stage. A coaching agenda for “Nelson” would include helping

him to let go of the residual feelings of obligation to the expectations of others, and

encouraging him to engage more fully with others who are capable of challenging his

opinions and beliefs in a principled dialogue.

To arrive at a single number from the set of scores over levels, the number for each

main level can be considered as a whole number, with each subsequent sub-stage

adding 0.2 to the score. For example, S-4 = 4.0, S-4(5) = 4.2, S-4/5 = 4.4, etc.

Taking the scores mentioned in the example above, S-4 (7 8 8), we would arrive at

the following formula:

4(3) or 3.8 X 7 = 26.6

4 or 4.0 X 8 = 32

4(5) or 4.2 X 8 = 33.6

Totals: 23 92.2

92.2 / 23 = 4.03

Nelson’s final score, S-4.03, shows his center of gravity to be just slightly above level

4. A score this balanced and centered on a main stage could indicate self-

satisfaction and reluctance to grow further. More data would be needed in order to

know what the score represents for the personality being assessed.

As a second example, a person with an SOI score of: S-3/4 (6 7 4) (where 6 = 3(4); 7

= 3/4; 4 = 4/3) is considered to be in the S-3 category because their tendency is to

revert to the normative expectations of their internalized group expectations. This

person is in a “developmental conflict” in that they are straddling the divide between

levels 3 and 4, feeling the pull of self-authoring, but only occasionally follow their own

voice rather than the perceived expectations of others. Using the above formula, the

person with this score would have a center of gravity of S-3.38. In general, the closer

the score is to the halfway point, in this case 3.5, the more palpable the tension of

transition will be.


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SOI Scoring

SOI scores indicate the number of “bits” or statements that can be identified as being

rooted in various sub-stages. For example, an interviewee, whom we shall call

"Nelson", received the following SOI score: S-4 (7 8 8), indicating: 7 statements at

level 4(3); 8 statements at level 4; and 8 statements at level 4(5). This kind of

scoring provides useful detail for both the assessed person and his or her coach,

because one can identify the lagging and leading sentiments, as well as the relative

strength of the center of gravity in meaning making. The lower scores often arise in

discussion of personal and family matters, and higher scores during discussions of

work environments. Regardless of the particular constellation, identifying the pattern

enables the formulation of a more precise coaching strategy.

For the purposes of research, however, a single number to represent an SOI score

would allow more useful aggregation of findings, especially with larger data sets. A

single number score would also be useful in the process of team composition for

Requisite Organization projects. A single number is also additional information for

end-users, enabling a better understanding of the current formula that enumerates

the sub-stages. Since a single number representation could not be found in existing

literature, a formula is created here.

To arrive at a single number from the set of scores over levels, or stages and sub-

stages, the number for each main stage can be considered as a whole number, with

each subsequent sub-stage adding 0.2 to the score. The pattern would be as

follows:

S-2 = 2.0

2(3) = 2.2

2/3 = 2.4

3/2 = 2.6

3(2) = 2.8

S-3 = 3.0

3(4) = 3.2

3/4 = 3.4

4/3 = 3.6

4(3) = 3.8

S-4 = 4.0

4(5) = 4.2

4/5 = 4.4

5/4 = 4.6

5(4) = 4.8

S-5 = 5.0

Table 12. New SOI Scoring Method50

50 by author


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Taking Nelson’s score of S-4 (7 8 8), we would arrive at the following formula:

4(3) or 3.8 X 7 = 26.6

4 or 4.0 X 8 = 32

4(5) or 4.2 X 8 = 33.6

Total of 23 scores adding up to 92.2

92.2 / 23 = 4.009

There is a problem with this math, however, since each score count for one point of

division, yet a 4.2 adds more to the sub-total than a 3.8. But they are both equal

distance from 4.0, and should therefore ‘pull’ the score in an equivalent manner.

Following the above formula would skew the result slightly downward in every case.

So a slightly more complex formula is required whereby we add and subtract 0.2. for

each bit scored above and below the main score. Thus, S-4 (7 8 8):

S-4 represented as 4.0 x 8 = 32

32 – (7 x 0.2) + (8 x 0.2) = 32.2

32.2 -/- 8 = 4.025

Nelson's final score, S-4.025, shows his center of gravity to be just slightly above

level 4. A score this balanced and centered on a main stage indicates stability of

perspective, but could indicate self-satisfaction and reluctance to grow further. To

arrive at that conclusion would require more detailed information, and in any case it is

a coaching question, not relevant to this discussion.

As a second example, “Nancy” had an SOI score of: S-3/4 (6 7 4) (where 6 = 3(4); 7

= 3/4; 4 = 4/3).

Her S-3/4 score represented as 3.4 x 7 = 23.8

23.8 – (6 x 0.2) + (4 x 0.2) = 23.4

23.4 -/- 7 = 3.343

This person would be considered to be in a "developmental conflict", and could be in

a growth phase, because her score is close to the midway point of 3.5, with actual bit

scores both above and below the divide between levels 3 and 4. A person with this


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score would have the tendency to revert, more often than not, to the normative

expectations of their internalized group expectations.

We may want to consider that the accuracy of the mathematics may exceed the

reliability of the interview and its scoring. It is therefore recommended to use only

one decimal point to represent the score, thus 4.0 for Nelson, and 3.3 for Nancy.

Research Questions

As in §2.5.2 above, a fundamental supposition of this research is that socio-

emotional maturity level will influence the behavior, and therefore financial results, of

fund managers. This is supported by the following factors:

S-2 Fund managers are likely to be individualistic, very driven to succeed, and willing

to take risks regardless of what others think or how they are effected.

S-3 Fund managers, being “other dependent” and community oriented, will tend to go

with the crowd they identify with, whether that may be the general majority of opinion,

or a particular set of analysts, or the need to meet the expectations of their boss or

major client. They will have more difficulty delivering opinions outside of the

expected, and will be more likely to tell a client (investor) what the fund manager

thinks the client wants to hear.

S-4 Fund managers will be cognizant of the opinions of others (felt as expectation to

their S-3 tendencies, and as challenging ideas to their S-5 tendencies), and may use

this knowledge as part of their individual decision-making process. A “self-authoring”

fund manager will have an easier time delivering opinions and recommendations that

do not fit with a client’s preferences and prejudices. They will be more willing to

follow their best lights in responding to market conditions and opportunities.

S-5 Fund managers will be more fully cognizant of market forces and be the least

likely to let their own favorite ideas influence what they learn from others and from

market data. They will be best equipped to operate at a purely strategic level.


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Given the characteristics of the various levels mentioned above, and in considering

the task profile of fund managers, the following predictions are posed:

Prediction (5): Higher scores in emotional maturity, measured in the Subject-Object

Interview (SOI), will show a positive correlation with medium-term (5 to 10 year)

market returns.

Prediction (6): Fund managers at S-2, S-4 and S-5 levels will be more profitable than

S-3 fund managers. They will have less difficulty in distinguishing the market from

what others expect them to adhere to, and what they communicate to others, but for

different reasons. Fund managers at S-3 (other dependent) will be more tied to the

image they are trying to project to others and what they think their bosses and clients

expect and will accept.

Prediction (7): S-2 Fund Managers will be less cognizant of risk factors, and therefore

will have a more unstable, and therefore ultimately lower record of financial returns.

They will loose their ability if they mature toward and enter S-3, and this may be

experienced as a loss of courage.

Prediction (8): S-5 Fund Managers will have the highest returns since their

personality structure leaves them fully free to process information without

interference from the expectations of others (S-3) or their own belief structure (S-4).

(Note: The term “belief structures” here indicates inflexible and individualistic thought

patterns, not ethics, metaphysics or values.)

From the above we arrive at the following basic research question:

Question (2a): Will fund manager scores in emotional maturity, measured in the

“Subject-Object Interview” (SOI), show a correlation with market returns? Question

(2b): Will lower scores in emotional maturity, measured in the “Subject-Object

Interview” (SOI), show a correlation with high risk investment strategies or even

illegal behavior.


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The use of two developmental psychology-based measures, the Subject-Object

Interview (SOI) and Defining Issues Test (DIT) as independent variables, mitigated

by an evaluation of personal (age, industry experience, training, etc.) and contextual

factors (manager pressure, company strategy and regulations) as intervening

variables, will lead to a correlation with financial results as measured in average

annual returns of managed funds, as the dependent variable. This experiment

should yield new information on the relationship between SOI and DIT measures as

well as data on how these measures relate to behavioral results, in this case, in the

finance industry.


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2.5.4 Measuring Cognitive Capability

Jaques’ Requisite Organization and the Complexity of Banking

In the same general category of developmental assessments, mention should be

made of the body of work developed by Elliott Jaques, the Canadian thinker and

consultant who is sometimes referred to as the “elephant in the parlor”51 (that no one

speaks about) in mainstream management circles.

His starting point was in the discovery of natural stratification patterns in

organizational hierarchies aligned with “perceived fair rate of pay”, which is linked to

the time span of projects carried by persons in various levels of responsibility. This

led to research on questions regarding what competencies are held by persons who

gravitate to these levels and the uncovering of logical thinking levels capable of

processing increasing amounts of complexity. The table below lists these categories

in brief, with B-1 being the simplest form of adult logic.

C-4 Parallel Processing Two or more conceptual arguments pursued

simultaneously

C-3 Serial Processing Conceptual arguments organized in alternative

sequences that lead to alternative strategies

C-2 Accumulated Conceptual

Information

Arguments using concepts related to each other

C-1 Conceptually Formulated

Assertions

Principles-focused rather than concrete facts

B-4 Parallel Processing Two or more lines of argument pursued

simultaneously

B-3 Serial Processing: Arguments organized as a logical series of

events

B-2 Cumulative Processing Arguments supported by accumulated data

B-1 Assertive Processing Unsupported verbal assertions

Table 13. Categories of Cognitive Capability52

51 Harvey, 1992

52 Jaques and Clement (1994) pages 51-65.


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While the use of Jaques’ methodology may also be useful, incorporation of this

methodology would require not only additional time and expense in gaining

certification in this methodology, but would also require an additional one-hour

interview of fund managers. This would raise the required time for each test subject

from two hours (one for the Subject-Object Interview and one for the Defining Issues

Test) to three hours. This additional hour could push the data gathering possibilities

beyond the limit of acceptability for fund managers who will already feel

overextended to contribute two hours of their valuable time. For the purposes of this

study, we will limit the data to the SOI and DIT.

The Use of Assessments in Banking

Would it make sense to use developmental assessments in the banking industry?

Quantitative models, so detailed and complex that they were beyond the

comprehension of all but a small number persons in the value chain, have been

implemented with the intent to remove the problematic “human element”. Yet these

quantitative models became a problem in and of themselves. So how do we bring

the human element back into the equation in an appropriate manner?

In a recent on-line poll by wiwo.de (‘Das Portal der WirtschaftsWoche,’ a prominent

German financial news website), well over half of respondents considered

assessment centers were “only for show offs” and less than five percent consider

assessment center tests to be useful. The sample was self selected visitors to the

web site, and therefore not necessarily representative. Still, from the poll one can

make the general conclusion that assessments in general are not popular and not

trusted. Though half of companies use assessments, in the face of this kind of

opposition making the argument for yet another assessment seems like a Sisyphean

task. So what would justify including further assessments in the standard HR

regime? In a word: effectiveness. Can it be proven that developmental assessments

provide useful measures that add value to personnel decisions.


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Jedes zweite Unternehmen nutzt Assessment Center.

Wie sinnvoll finden Sie diese Tests?

4,30% Sehr gut, um sich ein Bild über die Kandidaten zu machen.

18,13% Eigentlich gut, aber oft zu realitätsfremd umgesetzt.

64,49% Nur etwas für Selbstdarsteller, Bewerber ohne Schauspieltalent sind chancenlos.

13,08% Kann ich nicht beurteilen - ich habe noch keines erlebt.

Abgegebene Stimmen: 535

(Author’s Translation) Every second company uses Assessment Centers. Do you think these tests are sensible?

4,30% A very good way to develop a picture of candidates.

18,13% Actually good, but often unrealistically used.

64,49% Only for the show-offs, candidates without acting talent have no chance.

13,08% I can not judge – I have no relevant experience.

N = 535

Table 14. Opinions About Assessment Centers53

It is clear that the poor reputation enjoyed by assessments currently means that any

argument for expanding their use faces significant hurdles. As one means to create

a more positive context for considering the utility of developmental assessments, the

following section examines the use of organizational frameworks that give a greater

context and meaning to assessments as useful measures for organizational

development.

53 Source: http://www.wiwo.de/karriere/sinnvoller-kandidatenfilter-oder-stunde-der-selbstdarsteller-384599/ on

27 January 2009.


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2.6 Organizational Frameworks using Developmental Assessments

As noted by Baks (2003), fund manager performance is difficult to separate out from

the role of the fund company itself. His extensively researched estimate is that the

fund company itself carries from 50 to 90 percent of the responsibility for fund

performance through the quality of the infrastructure available to the fund manager,

especially including the research department and trading desks, some of which are

more cost-effective than others. (Hulbert, 2003) This finding in itself would support

the suggestion that assessing not only the fund manager him or herself, but the

entire team should be considered.

Though substantially different than the central thrust of this study, it is worth brief

examination of how an investment team could be evaluated using developmental

assessments. Jaques’ approach, mentioned above, focuses on role responsibilities

within organizations and whether the complexity of these roles is met by the cognitive

capability of the persons filling them. Another framework, proposed by Laske (2008)

uses both emotional development and cognitive development measures to

behavioral outcomes. Though not yet empirically validated, the framework is

theoretically coherent.

To measure fund management performance on a team basis, a case study approach

could be constructed whereby the fund manager and his or her team of researchers

and trade execution specialists would be measured using Jaques’ requisite

organization approach for assessing complexity of roles and cognitive development

measure, combining this with the SOI and DIT as described in this study for an

expanded version of a requisite organization study. These measures would then be

compared with financial results as a means to test the validity of both the framework

and rates of correlation among the individual developmental indicators of cognitive

development, socio-emotional maturity and ethical judgment capability.


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3 Specific Empirical Section

Fieldwork is permeated with the conflict between what is theoretically desirable on the one hand and what is practically possible on the other. It is desirable to ensure representativeness in the sample, uniformity of interview procedures, adequate data collection across the range of topics to be explored, and so on. But the members of organizations block access to information, constrain the time allowed for interviews, lose your questionnaires, go on holiday, and join other organizations in the middle of your unfinished study. In the conflict between the desirable and the possible, the possible always wins.

Buchanan, 1988, p.53-54

The only good method in the study of moral facts is surely to observe as closely as possible the greatest possible number of individuals.

Jean Piaget, 1932, p.107

3.1 Empirical Objective

The object of this dissertation is to test whether certain personnel assessments

based on developmental psychology can be used as predictors of fund manager

profitability. As the data sample is relatively small, the goal of this exercise is to build

hypotheses that could be tested more fully if the necessary funding and access are

made available. The two research questions addressed here are:

(1) Will fund manager scores in ethical judgment, measured by the “Defining Issues

Test” (DIT), show a correlation with market returns?

This line of inquiry asks whether a well-developed sense of morality and ethical

decision-making, a cognitive measure, is correlated with higher profitability among

investment managers. Essentially, this is the question of whether conscience and

profit are opposing forces or mutually supportive. The primary question is (a)

whether a correlation exists between the level of development in ethical thinking and

profitability. Is a lower score in ethical judgment indicative of a capacity for ringing in

higher profits in the financial markets? Or is there no reliable relation between the

DIT score and profitability. The secondary question is (b) whether an identifiable


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correlation exists between a low DIT score and a propensity for high risk investment

strategies or even illegal behavior.

(2) Will fund manager scores in emotional maturity, measured in the “Subject-Object

Interview” (SOI), show a correlation with market returns?

Traders and fund managers frequently face problems due to a tendency to favor

certain industries, companies, commodities, or other investments. They can become

too personally attached (projecting subjective perceptions onto external reality) to

one or another decision they have made and not able to pull out when they should,

their decision-making capacity being held hostage to their emotional structure.

Further, the degree of objectivity in their original choice of where to look for market

opportunities may be influenced not just by their cognitive capacity, but also by the

degree of “objectivity” in the socio-emotional sense. Persons with higher SOI scores

show a lower propensity for projection-influenced perceptions and decisions and

therefore have the capacity to be more objective in their decisions. The primary

question is (a) whether a correlation exists between the level of socio-emotional

development and profitability. The secondary question is (b) whether an identifiable

correlation exists between a low SOI score and a propensity for high risk investment

strategies or even illegal behavior. It is quite possible that these factors are not

related, that this character trait operates independently of level of socio-emotional

maturity.

3.2 Empirical Targeted Participants

Fund managers were chosen as subjects for this research because of the key role

they play in the finance industry, a very visible cutting edge of profitability or lack

there of, and because their results can be objectively quantified at the end of the year

due to the performance of the funds they manage. This number at the end of the

year, and at the end of multiple years, allows a more objective basis for comparison

and therefore an evaluation of the efficacy of the developmental assessments used.

Fund managers are leaders in that their function is the cutting edge of profitability in

the finance industry, and also because their work is designed increasingly as a team


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function. As such, leadership research is also relevant to this study. Kaiser, et. al,

(2008) encourage “a greater emphasis on results to enhance the real-world

relevance of leadership research.” For this reason, using the actual profitability of

fund managers as a measure of their ability has relevance to this research.

Using the above basis for industry practice, the results of the SOI and DIT

assessments would be brought into relation with this third set of data and the

interrelationships of data will be described. For example, age is a factor relevant to

socio-emotional development. How does this factor relate to returns, and to SOI and

DIT scores? The results of systematic comparison would enable an analysis of

whether developmental assessments could be usefully added to current quantitative

models, and if so, how to weight developmental scores in relation to other factors.

3.3 Empirical Methodology

To become qualified to carry out developmental assessments, the author enrolled in

successive distance learning programs offered by the Interdevelopmental Institute

(IDM) in Boston, USA54. Qualifying for the certificates55 involved 65 hours of “in-

class” time (conference calls), background reading for preparation, four complete

psychological profiles of coaching clients and a defense of these.

The mechanics of performing the assessments: DIT (questionnaire) and the SOI

(interview process) are as follows:

The Defining Issues Test is a written questionnaire that takes on average 45 to 50

minutes to complete. The test is issued to the researcher by the Center for the Study

of Ethical Development at the University of Minnesota.56 The task required of the

researcher is to send the questionnaire to the test subjects with a brief introduction,

collect the completed questionnaires and send them as a complete set back to the

Center for the Study of Ethical Development, where they are scored. The results are

sent back to the researcher.

54 IDM is under the direction of Dr. Otto Laske, Psy.D., Ph.D.. Further information can be found at

http://www.interdevelopmentals.org. 55 Certificate of Developmental Coaching, Certificate of Developmental Assessment, and Certificate of Master

Certified Developmental Coach and Consultant. See Appendix 5.3. 56 See: www.centerforthestudyofethicaldevelopment.net


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The Subject-Object Interview is one hour in length and is tape-recorded with the

interviewees written permission. The tape is then transcribed verbatim with the

person and place names changed to maintain confidentiality. The scoring process

entails focused attention and qualitative judgment that one researcher called “the

hardest thing I ever do.”57 More than a mechanical or intellectual task, scoring the

interviews requires one to climb briefly inside the psyche of the interviewee to

understand the internal stance they were taking when making the selected statement

vis-à-vis the self-other dyad. The average amount of time required to score a one-

hour transcript is 7 to 10 working hours.

Data Gathering

Two options for data were pursued in the first instance.

Option 1: A group of 10 to 15 fund managers with close to identical conditions, ideally

within a single bank or investment, house would receive the DIT and SOI. As this

number is small, the research project would lead to a hypothesis-building result.

Further research with larger numbers of test subjects would be required to achieve

definitive results.

Option 2: The DIT would be sent to 200 fund managers. Subsequently, ten

managers in each of the top and lowest scoring groups on the DIT would be given

the SOI on a double-blind basis. This could lead to more definitive and academically

relevant results.

For a full empirical study, the methodology would include the following measures:

Dependent Variable Intervening Variables Independent Variables

Profitability measured through the Sharp Ratio or Information Ratio

Individual variance in age, education, etc.; and Contextual variance in working conditions, general corporate expectations and pressure from specific managers

• SOI score

• DIT or MJI score

Table 15. Conceptual Relationship of Variables58

57 Prof. Jenifer Garvey-Burger, George Mason University, telephone conversation on December 10, 2005.

58 By the author.


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Persons selected to participate in research of this kind are assigned a fictitious name

in order to protect their identity in any subsequent publication, and to mitigate bias in

the research and interpretation of results.

Sequence of Research

In the case of Option 1, a group of 10 to 15 fund managers with close to identical

conditions, ideally a single department within a bank or investment house, were

sought as a test case. While this admittedly small number would not yield sufficient

data to achieve scientific certainty, the number is sufficient as a hypothesis building

study to evaluate the viability of a larger study could yield significant results. The

research would begin with the DIT, since this requires the test subject to simply fill

out and return a questionnaire. Response on the DIT is a good indication of actual

willingness to participate in the research. Secondly, the SOI would then be

scheduled on an individual basis and carried out in person or via telephone. To

prevent bias, the researcher would not be aware of the financial data, nor the DIT

score until after scoring of the SOI.

Finally, the profitability measures would be requested from the participating

institution(s). SOI and DIT results would be compared to quantitative external

performance data from fund managers in the financial services industry to test the

reliability of these assessments as measures of executive effectiveness. Given the

large sums involved in fund management, even a small, positive correlation between

developmental levels and financial profitability could have significant implications.

Time Requirements

The time requirements below are indicative for Option 1, a study involving 15

participants. The time estimate is for the number of working days, the overall

calendar being dependent on the funding available for carrying out the tasks.


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Steps Estimated Number of Working Days

Tasks

1. Agreement with cooperating institution

Undetermined Written Correspondence Presentation of Research Strategy and Requirements Incorporation of suggestions by cooperating institution Written agreement on conditions for research

2. Selection of Participants

3 Days (for researcher, less for manager(s))

Discussions with manager(s) assigned to support the research regarding tasks and procedures Development of Questionnaire for the “individual factors” of participating fund managers (age, education, etc., see Chapter 9.1 below). Receipt and review of participant profiles Assignment of number and fictitious name

3. Data Gathering: DIT

3 Days Distribution of DIT Questionnaire with letter introducing the research Receipt of completed questionnaire Submission of DIT to the Univ. of Minn. for scoring

4. Data Gathering: SOI

25 Days Scheduling of interviews Interview via telephone with tape recording Organization of verbatim transcription service Scoring of SOI transcripts (1 day each)

5. Data Gathering on intervening variables

15 Days Interviews with the managers of the participating institution with HR, direct management, policy and strategic responsibilities relevant to the participating fund managers (“contextual factors” as described in Chapter 9.1 below). Review and analysis of contextual/environmental data. Receipt of Questionnaire on “individual factors” from the participating institution.

6. Analysis and Interpretation of Data

40 Days59 Assembling of data for individual participants and analysis of individual data from the DIT, SOI and individual factors. Receipt of Profitability Data from participating institution and assembling of complete individual profiles. Analysis of overall data results, accounting for all variables.

7. Writing of results

30 Days Drafting initial report for review by participating institution and academic supervisors. Revisions. Submission of final report and dissertation.

Total 116 Days Approximately 12 months of work at 50% of working days available.

Table 16. Proposed Research Time Schedule60

59 Steps 6 and 7 are of considerable length in part due to an anticipated need for additional research and

comparison of results with other relevant studies. 60 By author.


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3.4 Limits of the Empirical Study

The companies approached were of two kinds: (1) banks large enough to maintain

large numbers of fund managers(Option 1); and (2) fund-of-hedge-funds companies

who primarily focused on tracking investment companies that hired managers

(Option 2).

Banks and funds of a sufficient size to maintain their own roster of at least ten fund

managers, and also several and fund-of-funds, 30 in total, were approached61 with an

explicit letter detailing the prospective study. (Annex 5.4) By interviewing subjects all

within one institution, the interviewees would have a nearly identical work conditions

and policies. This would have improved the data validity by reducing the number of

variables that could affect fund manager performance in the markets. The request

was for two hours of time each from a minimum of 10 fund managers selected by the

participating institution: one hour for two questionnaires (the DIT and a short

demographic questionnaire), and a second hour for a telephone or in-person Subject-

Object Interview. Though not producing conclusive findings, this would have

produced a solid hypothesis-building study.

Correspondence resulted typically in curiosity, sometimes a telephone conversation

and occasionally meetings, mostly in Zurich, but also in Nyon, London and New York.

On several occasions there was visible interest and negotiation stretching out for up

to nine months in one case. In each of these cases reluctance eventually appeared

and then polite negative replies. The usual explanation was opaque, saying that the

approach seemed interesting but the internal financial or staff availability constraints

would not permit participation at that time.

In the case of Option 2, several fund-of-funds and fund-of-hedge-funds companies

were approached that advertised in their public documents that they maintain active

data bases of hundreds or even thousands of funds and hedge funds that they track

and analyze to refine their investment strategies. In these cases, access to large

numbers of respondents would have enabled a scientifically valid sample size.

Negotiations, involving several exchanges of letters and meetings with these

61 Details transmitted via Email to Prof. Dr. Martin Hilb.


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companies, revolved around the concept of sending up to 200 DIT questionnaires to

fund managers, followed up by 20 Subject-Object Interviews (in person or by

telephone depending on budget) for the top and bottom DIT scoring respondents.

This would have enabled a measurement of correlation between the two

developmental scores and also the correlation between these scores and profitability

measures. The persons interviewed would have been in a client relationship to the

cooperating institution, and if conclusive findings were to emerge, it could have

assisted the investment decision making process. In these cases it was made clear

that this study offered a refinement of their strategy by measuring two personality

characteristics, qualitative analysis that can be expressed in a numerical quantity,

and therefore ready for inclusion in existing quantitative models. This factor in itself

was attractive, but not sufficient.

A second approach, using one page letters mentioning the measurement of

“personality characteristics” that could augment the search for “young fund managers

with high potential” were similarly unsuccessful.

Since this level of transparency was not being rewarded with access, one adviser

suggested requesting single interviews with the best fund manager in each company

and “not mentioning the words ‘psychology’, ‘ethics’ or ‘maturity’”. A simple letter

(Annex 5.5) stating “The goal is to identify certain characteristics that successful fund

managers have in common”. This worked, and five interviews were performed in four

banks during the spring and summer of 2008.

Buchanan et. al. (1988) suggest two reasons that “[r]esearch access has become

more difficult to obtain”: first, that the amount of research is increasing, and therefore

the time demands on various interesting sectors are increasing; secondly, the

economic climate has a direct bearing on managers’ decision making in that they

become more reluctant to allocate staff time to activities that do not contribute directly

to the bottom line. In the experience described above, the these reasons could have

some explanatory value, especially in relation to requests for 20 hours of (highly

paid) staff time. Yet it seems quite telling that four out of four request letters to banks

that did not mention ‘psychology’, ‘ethics’ or ‘maturity’ resulted in interviews. This


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may be an exception to the position of Buchanan et. al. (1988) that “[n]egotiating

access to organizations for the purpose of research is a game of chance, not skill.”

Insufficient resources as an argument for denial of the request for cooperation in this

research seems incomplete, especially since the requests to some of the banks and

funds came well before the outbreak of the current crisis. Research is a standard

part of most budgets in financial institutions, and the potential for profit should have

made the very minimal requirements of this study interesting enough in itself. The

more likely explanation lies in the challenge to conventional thinking that this

research presents coupled with the sense of reputation risk, and therefore career

risk, should the fund managers in question not score well on assessments of ethical

thinking capacity and socio-emotional maturity. Further, should the findings be

positive, this could result in calls for substantive structural changes in the finance

industry, with concomitant destabilization of existing structures.

Beyond the insufficient resources or interest in the approach, and beyond the

possible apprehensions about possible repercussions from the study, a third factor

may have had determining impact. This researcher has no background in finance,

and this lack of experience in the sector may have been more evident than was

considered during the research phase of this study.


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3.5 Empirical Results

It was evident in the SOI interviews that there were several effects to a “blind”

interview, where the interviewee knew only that a researcher was there to discuss his

approach to fund management. Their instinct was to focus more on the technical

side of their work, and not the social. In fact most were surprised at the direction of

the questions, since they were being interviewed as successful fund managers and

they spoke to how they became successful. In short, in spite of assurances of

anonymity and confidentiality, for these fund managers the encounter with this

researcher may have been perceived as closer to a marketing or sales meeting

where they were interested in making a good impression, than a therapist’s couch

where they felt comfortable revealing their thoughts. There was some bravado and

grandstanding, and less relaxed self-revealing explanation. Unlike persons

interviewed previously by this researcher, in a coaching and/or assessment context,

these interviewees were not a priori interested in exploring their interpersonal

relationships in the course of the interview. This lead most to focus on the “it” of their

work and not the relationships, making these interviews more difficult to score.

In interviewing fund managers, their work context and the caution of their answers

stands out clearly. We know from Habermas (1976, 1979, 1982) that power distorts

communication, and in this case the power was simply that of the pen. Even though

these are largely an unknown quantity, the potential exposure of developmental

assessment results being on a vertical and not a value neutral horizontal scale

available through Jungian psychology based assessments such as the MBTI,

provided a sense of power differential in this ‘micro-climate’ of the interview.


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Individual Institution SOI Scores Fund Results

Andreas A bank 4 (0-12-3) = 4.04 Sharp Ratio: 0.04

Information Ratio: 0.86

Alpha p.a.: +5.9%

(December 2001 – June 2009)

Beat A bank 4 (4-4-1) = 3.93 Supportive of Andreas, who made the final decisions.

Charles B bank 4 (1-6-0) = 3.97 Oversight of several funds

David C bank 4 (0-5-0) = 4.00 Sharp Ratio: 0.2

Jensen's Alpha (3y) 0.8%

(an indicative fund)

Oversight of several funds

Edward D bank 4 (1-3-2-2) = 4.13 Oversight of several funds

Table 17. Empirical Results62

The Fund Results column is provided here simply for illustration, since the data are

not comparable. This diversity in the kind of funds managed or groups of funds

overseen would not have been overcome by further interviews using the approach

that gained access, as described above. Charles, David and Edward oversaw more

than one fund, and were not sole decision makers in these funds, having more

supervisory functions. Thus, result for Andreas is the only direct fund manager score

of the kind sought by this study, with Beat serving as part of his research staff. It is

possible to say that all four banks are well respected small- and mid-sized banks in

Switzerland, and all five persons interviewed were selected as top fund managers in

these banks. As such, this sample is not representative of large Swiss banks, nor of

the global finance industry.

What clearly stands out in these results is that all scores are very close to or even

directly on 4.0. It should be said that all five interviews and subsequent transcript

analysis were more difficult to conduct and score than SOIs performed by this author

in other settings. The fund management context and fund manager role mitigated

62 By author.


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against frank and open revealing of personal attitudes, fostering rather a sense of

performance and even a sales approach of the interviewee toward the interviewer. In

interpreting these interviews then, several possibilities must be considered.

First, the profile of stage 4 is that of a person who is highly certain of their expert

knowledge and completely independent in their decision making from an emotive

point of view. They are neither tied to conventional thinking nor do they spend too

much time reflecting on the possible fallibility of their own character. This would

leave them free to analyze and execute trades according to their own best lights, and

this is the message which came through in the interviews.

A second possible interpretation, not to the exclusion of the first, is that the

profession itself breed this kind of attitude. The function of economic and financial

analysis, and trade decision and execution, foster this mental approach.

Related to this would be a third possible explanation, a tendency to portray this kind

of perspective in the interview situation. Regardless of the explanations and

assurances of this researcher that the interviews would be kept anonymous, the

amounts of money and the employment positions at stake leave little room for

relaxed exchange. All five interviews had a tension and mental structure that have

not been met by this author in carrying out Subject-Object Interviews with coaching

clients in settings where these factors were not present. A more open context may

have revealed very different scores for these interviewees, both up and down the

scale.

This is particularly evident in the case of Edward (see Appendix 5.10) where the

conversation continued on an informal basis after the formal interview ended.

Edward’s responses were clearly of a higher sub-stage when the formal interview

was over and the topic changed. This could be indication of both the first two factors

mentioned, that of professional caution and the substantive-logical drive of the

analysis involved in the profession itself.

As anecdotal evidence in addition to these five interviews, informal conversations

were held with two finance professionals who failed in their attempts to establish


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hedge funds, and these two persons were clearly at SOI level 3. Though too sketchy

to draw any conclusions, this experience does indicate a possible direction for

research in pursuit of the current hypotheses: formal developmental assessments

interviews of fund managers who had poor financial results may provide useful data.


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4 Concluding Section

First they ignore you, then they ridicule you, then they fight you, then you win.

Mahatma Gandhi (1869 - 1948)

This research has certainly been ignored. Whether subsequent stages of Gandhi’s

concept emerge remains to be seen. The validity of developmental assessments are

not in question per se, rather their potential use in the finance industry seems to

make some persons nervous.

The lack of positive response from the finance institutions contacted thus far has left

this researcher, very uncomfortably, appearing to be in the position of one of the

“coloured birds” – a person with a grandiose vision but without practical application,

rather than the desired position of an industrious “Human Glocalpreneur”. (Hilb,

2009, p.10) But perhaps a breakthrough for developmental assessments is not

beyond reach. It is worth noting the example of Stephen Covey’s internationally

successful book and management training series on successful habits. (Covey,

1994) The central theme of Covey’s approach is that managers should learn through

the practice of seven key habits to move from an internal stance of dependence to

independence and finally interdependence. This is precisely the emotional

development growth described by Kegan (1982, 1994) in the movement from stages

3 to 4 and then 5, as described above. As the validity of this concept and line of

development is well accepted as valid in Covey’s work, it should be a short step for

decision makers to make the connection with actual assessments of this aspect of

management and leadership capability.

This study describes the use of developmental assessments as one instrument

among others (see: Hilb, 2009, p.201) for helping to identify individuals with

exceptional potential in fund management. While this is perhaps the most important

aspect of the study, the broader perspective should not be lost: assessments of any

kind provide insight into one parameter of the human personality, which is infinitely

complex. Individual assessments and sets of assessments should be considered as

aids to decision making in personnel matters, never as a substitute for healthy

human judgment.


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4.1 Recommendations for Further Research

The proposed task of testing whether a correlation exists between developmental

assessments and fund manager profitability remains untried. To carry out this task, a

partner institution, or institutions, would be required to enable access to fund

managers and secure their cooperation.

First, the research project originally proposed as a hypothesis building study (Option

1) remains a valid project. To recap briefly, this study foresees developmental

assessments of socio-emotional maturity (using the SOI) and ethical thinking

capability (using the DIT or MJI) for ten to fifteen fund managers. The outcome

would either confirm the hypothesis, establish grounds for an alternative hypothesis,

or find no correlation worth pursuing with further research.

Second, the expanded research project (Option 2) also remains a valid project. In

this study, a DIT questionnaire would be sent to 100, 200 or more fund managers

through the auspices of a fund-of-funds company which maintains a database of

funds and invests in some of these, thereby providing an incentive for fund managers

to cooperate in the study. The top and bottom ten (total of twenty) scorers on the DIT

would be approached for the second step, an SOI, to seek correlations.

Third, whole fund management teams could be assessed in a case study method,

using the requisite organization framework. (see: Jaques and Cason, 1994; Jaques

and Clement, 1994) Assessments, in addition to the SOI and DIT or MJI could

include measures of cognitive development.

Fourth, to test specifically for the correlation of developmental assessments and

propensity for criminal behavior, persons convicted of financial crimes could be

approached with a request to participate in a study. Further iterations of these

research approaches are of course possible.


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4.2 Contributions to Theory

As a hypothesis building thesis, with a data set too small for definitive scientific

results, the contributions of this study to theory are few. One possible exception

would be the observations made regarding the professional context for SOI

interviewing of fund managers being a dominating factor that influences, perhaps

significantly, the outcomes. This would need to be addressed were further research

undertaken along the lines indicated in this study.

4.3 Recommendations for Practice

4.3.1 For Human Resources and Coaching

We must be clear that what we are calling “intelligence” is a capacity that evolves and that this evolution can be encouraged.

Robert Kegan, (1994, p. 185)

As indicated by the quote from Robert Kegan, above, developmental growth in the

human personality can be intentionally fostered. There are many arenas of life

where the development of “intelligence” can be promoted. The influence of

developmental psychology to date has primarily been in the home, in child rearing

practices, and in schools, where curricula and teaching methodologies have

benefited from the theoretical and practical insights gained through research and

practice.

In adult development, it is primarily in the workplace where opportunities can be

found to use the leverage these assessments provide to initiate processes that help

improve individual and organizational performance. For human resources

management themes such as leadership recruitment, promotion and succession

planning, it is well known that the person “best placed” and with the most appropriate

experience for a particular position is not always the person with the highest capacity

for transformational leadership. Developmental assessments should be for use as

part of a human resources management regime focused on sustainable change and

improvement. This must, of course, be voluntary, and based on self interest, and

should not be considered as capable of contributing to a regulatory mechanism.


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For individuals in the finance industry, fund managers and other professionals who

aspire to leadership positions, the early identification of strengths and weaknesses in

developmental parameters would enable more focused attention toward developing

career and personality growth strategies. Executive coaching is one mechanism

through which direct application of these findings could be useful in promoting growth

for individuals.

For investors there may eventually be a question of whether they can gain access to

the developmental scores of the fund managers with whom they consider investing.

Similarly, if the hypotheses of this study are ever proven, investors may take closer

looks at personnel strategies in banks and investment companies as part of their

investment decision making process.

4.3.2 For the Finance Industry

Finance, therefore – through the renewed structures and operating methods that have to be designed after its misuse, which wreaked such havoc on the real economy – now needs to go back to being an instrument directed towards improved wealth creation and development.

Benedict XVI (2009, §65)

Already in 1985 the future Pope, then Cardinal Ratzinger, voiced his opinion that “the

decline of ethics ‘can actually cause the laws of the market to collapse.’” (Komisar,

2008) In an official investigation into excessive bonuses paid by banks during the

current financial crisis, New York Attorney General Andrew Cuomo discovered that

some of the banks that received significant bailout funding from the U.S. government

paid out million dollar bonuses to “hundreds of employees”, sometimes totaling more

than their profits and therefore showing a direct use of U.S. taxpayer money to pay

bonuses. (Cuomo, 2009; Benn & Papini, 2009) This would seem to indicate, as a

working hypothesis, that the largest banks remain captive of persons who are

primarily focused in Kohlberg’s levels 2 and 3, and Kegan’s stage 2. Perhaps this

would be worth serious examination. Perhaps voices that suggest the worst of the

global financial crisis is over are speaking too soon.

As pointed out by de Roover (1963) in the quote used to commence this study,

techniques of banking have changed since the flourishing of the Medici Bank in the


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middle ages, and we can say the techniques of today’s banking world are light-years

distant from those of the 1960s when de Roover wrote his book. Yet the personnel

practices have hardly evolved to the same extent, and remain arguably the central

weak point in the international financial system. This study offers one line of thinking,

one avenue toward addressing this weakness. It is to be hoped that the serious

study of this and also other approaches to strengthening personnel and leadership

selection practices will flourish in years to come.

Global challenges require innovative thinking and leadership which can only come

from persons who are not trapped in conventional thinking. As the globalized world

becomes increasingly interdependent, it should be clear that a central focus for

human resources management should be found in the identification of talent that is

capable of holistic wealth creation, and not focused on simply amassing more

money.

4.3.3 For Swiss Banking

As you have done unto the least of theseA

Jesus, Matthew 25:40

The American theologian Walter Wink (1986) notes that the above mentioned biblical

passage is not just directed at individuals, but also has a distinctly corporate aspect.

We are gathered in national groups, and held to account as individuals.

As progenitor and central carrier of the red cross system, as preeminent

representative of diplomatic neutrality, and as manager of perhaps one third of the

world’s finances, Switzerland carries enormous global responsibility. As the most

prominent sector in the Swiss economy, representing approximately 12% of the

gross national product, managing some 30% of private banking assets worldwide

(Baumann, 2008) and occupying even more space in the international imagination,

the health of Swiss banking has obvious importance for the national and global

economy. Yet there is another reason for supporting the health and ethical

development of Swiss banking, and that lies in the interdependence of Swiss banking

with Swiss neutrality and the Swiss humanitarian tradition.


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In a recent marketing research survey of 112 top Swiss firms by GfK63, the large

Swiss banks were listed at the bottom of the reputation table, with UBS ranking last

in both 2008 and 2009. (SDA, 2009) This should send a very strong signal regarding

the ability of these banks to compete not just in Switzerland, but also internationally,

in light of the need for a “broad span of trust” (Hilb, 2009, p.390) in transnational

organizations.

Just as in earlier eras, Swiss neutrality and the reliability and confidentiality of its

banking system are factors that will draw international customers. Given the crisis of

confidence produced by the current crisis, honesty and trustworthiness are likely to

become higher priorities for clients. In addition, given the rapid decline of the global

environment, investment practices that support sustainability are likely to become

more important for increasing numbers of clients and potential clients.

If neutrality and banking confidentiality are seen and held onto as Swiss privileges,

this is likely to give rise to increasing resentment and attack from the global

community. If, on the other hand, the principles of neutrality and banking

confidentiality are maintained as a service to the globe, they will be understood

differently and not as quickly attacked. Visible commitment to ethics and

sustainability, leading to an ethos of global stewardship, is within the reach of Swiss

Banking. If Swiss “Filz” in the finance industry is to be upgraded for the 21st century,

then it must be on the basis of mature ethical competence. The notion that peer

pressure can be used to improve the quality and membership of a social set without

such consideration opens the way for a retreat from meritocracy into old-style elitism.

Having worked in relief, development and peacemaking positions for church related

non-governmental organizations, the United Nations and OECD, this author is ever

mindful of the needs of the weak, vulnerable and impoverished in war zones, the

least fortunate on this earth. In war zones, combatants will use every resource within

reach in order to achieve military objectives, including the blood and treasure of

civilians. This strategy reaches its absurd extreme in situations like the My Lai

Massacre which took place during the US war in Viet Nam, where American military

commanders decided to “to destroy villages in order to ‘save’ them.” (Beidler, 2003)

63 See: www.gfk.ch


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Civilian foreign eye witnesses in combat zones – usually aid workers and journalists

– provide one of the few barriers to barbaric behavior, because their reports to the

outside could hurt the political support on which military operations, in part, depend.

These unarmed civilian witnesses create protection through what is often seen as a

small sphere of neutrality wherever they appear, and by far the most significant and

professional organization, that enables the activity of many other similar

organizations is the International Committee of the Red Cross. The ICRC is based

on the Geneva Conventions, International Humanitarian Law, and these in turn rest

on the foundation of Swiss neutrality. It is a direct link, and for this author not any

sort of stretched imagination, that connects the protection afforded to the weakest

and most vulnerable persons to the financial and character strength of the Swiss

nation.

What is required for the demands of our times is nothing short of a change of

consciousness from greed to stewardship, from narrow understanding of the profit

motive focused on amassing financial resources, to a universal consciousness

mindful of the responsibilities to create universal prosperity, which each one of us

holds for the whole. To grasp the significance for our planet of each action we take is

truly a task required of our generation to enable life for generations to come. In the

concept of global stewardship, Switzerland has the opportunity to offer global

leadership, and to preserve, renew and strengthen its unique character.


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5 References and Appendix 5.1 References and Additional Readings

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Tillman, R. (2009). Making the rules and breaking the rules: the political origins of corporate corruption in the new economy. Crime, Law and Social Change, 51(1), 73-86. Retrieved January 19, 2009, from ABI/INFORM Global database. (Document ID: 1613588031).

Time Magazine (18 July 1977). Less Go-Go in Switzerland, Time Magazine. Retrieved April 3, 2009, from http://www.time.com/time/magazine/article/0,9171,915141-1,00.html.

Tourish, D. (2006). The appraisal interview reappraised. In O. Hargie (Ed.) The handbook of communication skills. 3rd ed. London: Routledge. pp. 505-530. Retrieved October 12, 2008, from http://hdl.handle.net/10059/197.

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5.2 List of Informational Interviews Claude Baumann, journalist, editor of www.FiNews.ch, author of “Swiss Banking – wie weiter” and numerous other publications. Interview on April 1, 2009. Dr. Hans Vontobel, Honorary President, Bank Vontobel, Zurich. Interview on December 8, 2008.


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5.3 Final Certificate from the Interdevelopmental Institute


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5.4 Long Letter Requesting Research Cooperation

name address Bank / Fund Fax: Email:

Date

Ethics and Maturity Lead to Profitability

Dear _______________ I think research will show that there is a correlation between ethical judgment capacity, socio-emotional maturity and the medium- to long-term profit produced by fund and portfolio managers. Even a small, positive correlation could have significant implications for fund and portfolio manager selection processes and the profitability of financial institutions. Further, significant positive results could contribute altering public perceptions about the characteristics of intelligent investing. This letter describes doctoral dissertation research under Professor Dr. Martin Hilb and Professor Dr. Dres h.c. Rolf Dubs at the Institute for Leadership and Human Resource Management, University of St. Gallen, Switzerland (www.unisg.ch). To the best of my knowledge, no one has attempted similar research. Your assistance in finding a cooperating finance institution (such as a bank, mutual fund or hedge fund) would be greatly appreciated. Background and Research Questions Developmental psychology assessments are grounded in the school of thought started by the Swiss child psychologist Jean Piaget in Geneva in the 1960s. In the 1970s and 80s, Professor Lawrence Kohlberg, Harvard University School of Education, used Piaget’s methodology to examine the development of ethical judgment capacity in children and adults. Professor Robert Kegan built on this foundation by uncovering the stages of socio-emotional maturation throughout the lifespan. I received certification in these developmental psychology assessments from the Interdevelopmental Institute in Boston, MA under the direction of Otto Laske, D.Phil. and Psy.D. (www.interdevelopmentals.org). Though over 40 years of research exists, the use of these assessments is relatively new to human resources management, and rigorous research on the application of these measures to specific problems in business and industry is still in the early stages. The basic research questions posed in this study are: (1) Will fund manager scores in ethical judgment, as measured by the “Defining Issues Test” (DIT), show a correlation with market returns?

This line of inquiry asks whether a well-developed capacity for ethical decision-making is correlated with higher profitability among investment managers. The primary question is whether a correlation exists between the level of development (capacity to process complexity) in ethical thinking and profitability. This question also touches on the issue of whether conscience and profit are opposing forces (a common perception), or mutually supportive (hypothesis of this study).

(2) Will fund manager scores in emotional maturity, measured in the “Subject-Object Interview” (SOI), show a correlation with market returns?

Trading behavior by portfolio and fund managers frequently becomes fixed in particular styles or tendencies that favor, for example, their own “pet” companies, industries, commodities, or other


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investments. They can become too personally attached (projecting subjective perceptions onto external reality) to one or another decision they have made, and not able to pull out when they should, their decision making capacity being held hostage to their emotional structure. Further, the degree of objectivity in their original choice of where to look for market opportunities, may be influenced not just by their cognitive capacity, but also the degree of “objectivity” in the socio-emotional sense.

A sample question from the DIT is attached below to provide an impression of this instrument. The essence of the SOI is more difficult to convey, though I can explain the basic concepts to most audiences in 20 minutes using the attached diagram. Capacity for Ethical Decision Making and Success in Fund Management Several closely related questions are addressed by researching the possible correlation between ethical perception and performance in financial markets: Is it possible that a well-developed sense of morality and ethical behavior correlates with higher profitability among investment managers? Is it possible that a correlation exists between ethical and moral perception, which rests in cognitive ability, and ability to assess and decide upon investment potential? Is it possible that top-tier fund managers with a highly developed sense of ethics may, due to this ability, be better investors because the complexity of decision-making in ethics is similar to the thought processes necessary in financial markets; and they may be more alert to ethical and governance factors that could represent risk of scandal and poor performance in particular investment opportunities? The literature that considers both ethics and finance thus far identified, does so by addressing (a) legal enforcement concerns and criminality, (b) moral education in the professions, (c) ethical, socially responsible and sustainable investment, and (d) broader ethical concerns of economy and society. For example (of “d”), in her essay “Zwischen Gewissen und Gewinn” (Between Conscience and Profit), Christa Stewens points to a central issue in discussions of economy and society, describes challenges and provides general answers.

"Conscience and profit" are not, according to my firm conviction, unbridgeable contrasts. "Conscientious" leadership decisions and humanity in leadership should not be regarded as unprofitable wishful thinking, well-meaning or unworldly utopian concepts. Rather values such as justice, personal dignity and liberty, solidarity and readiness to assist the vulnerable, including an acknowledgment of readiness efforts – should also be considered as gains, also in their economic aspects.64

One can wish that decision makers with financial weight would think in such a holistic and value-oriented manner and work to impress the next generation of managers with the importance of acting responsibly with the power they will soon wield. Yet it is obvious that all too many bankers and investors are more narrowly oriented toward profit in a purely financial sense and make their decisions based on what is most likely to bring financial profitability, even in very short time spans. Indeed, the very structure of financial markets supports this tendency. In posing the question of whether conscience and profit (“Gewissen und Gewinn”) are opposing forces, the research described here seeks to focus the question narrowly to meet the thinking of these decision makers on their own ground. In examining the issue of infusing ethics into business practice, Klaus Beck identifies three approaches:

(i) to improve theory of moral education and thereby practice of moral education, (ii) to establish more and strict regulations supplemented with penalties and (iii) to enhance business people’s moral competence.65

64 Stewens, Christa (2005). „Zwischen Gewissen und Gewinn“ oder: Sind Menschlichkeit und Wirtschaftlichkeit

unvereinbar?, in Uto Meier und Bernhard Sill (Hg.) Zwischen Gewissen und Gewinn: Wertorientierte

Personalführung und Organisationsentwicklung. Regensburg. Verlag Friedrich Pustet. Page 71. (translation

from German to English by the author) 65 Beck, K. (2003). Morals for Merchants - Desirable, Reasonable, Feasible?, Arbeitspapiere

Wirtschaftspädagogik, 48.


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A fourth approach, introduced and tested by this study, is whether the evidence will show that it may be possible: (iv) to change the market conditions by making moral competence more attractive to employers and investors. If the evidence shows a positive correlation between ethical judgment capacity and profitability, this result would motivate increased attention to (iii) and perhaps, eventually, reduce the need for regulatory expenditure in (ii). While informing and influencing public opinion is one approach currently being used by many pressure groups to change market conditions, involving public information, providing SRI opportunities, boycott of goods, etc., the present study would contribute an examination of economic results that could point to a factual condition in the economy that would substantiate approach (iv) by taping into the logic inherent in the profit motive. Is it true that “honesty is the best policy” as is commonly said? Are conscience and profit opposing forces, or mutually supportive? A more specific rendering of the question for the present study would be to ask ‘whether a well-developed sense of morality and ethical behavior is correlated with higher profitability among investment managers.’ This narrower question is not meant to oppose or deflect attention from the holistic view, nor the values that Stewens, Beck and others wish to support. Rather, in seeking to answer a more narrowly defined question, it is hoped that the results of this experiment will show that moral capacity is a positive influence on profitability. If correct, persons driven by profit, even if narrowly defined, may be encouraged both to ascribe more importance to moral and ethical capacity when making decisions about where to invest or which fund or portfolio manager to entrust with their capital, and also to begin viewing the broader moral landscape of business and economy. Socio-Emotional Maturity and Fund Management Where behavioral finance studies market swings by tracing the collective attitudes of investors, this study focuses on individual actors in these markets to see whether it is possible to predict which fund or portfolio managers are more likely to “go with the flow” of collective attitudes about the market, and which managers are more able to resist the crowd and follow their own genius. In an interview some years ago, legendary Magellan Fund manager Peter Lynch commented:

Some people say you can’t buy companies with unions, or you can’t buy companies in dying industries … These are prejudices and biases that prevent people from looking at a lot of different industries. I never had that. I think there are good and bad stocks everywhere.66

In this statement, Lynch portrays a level of socio-emotional maturity that allowed him to make decisions free from social convention – including the opinions of his investors – and kept him free from building up the prejudices and biases that would have interfered with his rational choice. Lawrence Kohlberg and Robert Kegan found that development of cognitive, ethical and emotional abilities stretches out over a bell-curve in adult populations. Some of us remain emotional teen-agers, most of us become well-adjusted adults but tied to the conventions current in the social groups to which we belong, and a few of us grow beyond this stage to generate the capacity for self-authoring and true leadership. Further, socio-emotional development does not always run parallel with cognitive ability or ethical judgment. Basically, some fund managers may be able to construct and use highly effective quantitative programs, and yet be weak on the other human factors necessary to produce sound investment decisions. Even for this group, there is hope. As Robert Kegan says: “We must be clear that what we are calling “intelligence” is a capacity that evolves, and that this evolution can be encouraged.”67 There are ways to identify, address and ‘coach’ our various kinds of intelligence. No one needs to remain “stuck” at any developmental level.

66 Tanous, P.J., (1997) Investment Gurus: A Road Map to Wealth from the World’s Best Money Managers. New

York Institute of Finance. 67 Kegan, R. (1994). In Over Our Heads. Cambridge MA: Harvard University Press


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Current quantitative methodologies used in modern portfolio management are highly successful in preventing “human factors” from interfering with rational choice, yet one hears a few voices commenting that at the end of this line of development, we still need human judgment. Perhaps measuring the ability to maintain independence of judgment could provide a solution to this dilemma. In addition, though the SOI assessment is a qualitative process, requiring a schooled human evaluative capacity, the assessment result is a quantitative value, that can be expressed numerically, and can be factored into existing quantitative models as an additional refinement. Also of interest for the investment community more broadly is whether these assessments could help us identify the next Peter Lynch at an early stage. Practical Considerations & Possible Areas of Cooperation The research concept, described above, has been approved at the University of St. Gallen, and I am currently looking for an institution or institutions willing to support the data gathering and analysis stage of this project. Either or both of the assessments described (SOI and DIT) could be used, and the precise characteristics of the data set can be adapted to suit the cooperating institution. The size of the data sample, and concomitant scientific validity of the research, depends largely on the availability of funding and access to fund/portfolio managers of, or connected to, the cooperating institution(s). A small sample size of perhaps 10 fund or portfolio managers would produce a “hypothesis building” study that could be useful in showing the utility of a larger research project. A scientifically valid study would require a minimum sample size of 100 persons, where the entire group would complete the DIT and a sample of perhaps 30 of this group would then be selected to also take the SOI. To complete this research project in its smallest, hypothesis building iteration, the following resources are required:

1. Two hours of time each from 10 portfolio or fund managers (one hour to complete two questionnaires, and one hour for an in-person or telephone interview);

2. Financial results data (at least 5 years, Sharp or Sortino Ratio) for the portfolio or fund managers;

3. Interviews of 30 minutes each with persons who provide strategic direction (senior management) and management services (HR) to these fund managers;

4. Financial support for direct costs (including interview transcriptions, communications and possible travel) and stipend for the researcher.

A participating institution could participate in this research in several ways:

1. Enabling interviews of fund or portfolio managers as a pilot to test the methodology;

2. Provide advice on, and connections to, other companies that could be interested in this study;

3. Financial assistance, even of a token amount, would be greatly appreciated, and would send an important signal to any further companies considering involvement.

It is possible that developmental assessments will, in the future, be recognized as having significance for the financial services industry. I am looking for an institution willing to invest in this possibility. The participating institution(s) could benefit from this study through:

1. Immediate use (based on written agreement) of DIT and SOI;

2. Positive correlation with fund manager performance, if found, would lead to increased profitability;

3. Acknowledgement of support for the research in the publication of results. The implications of this study include whether an attitude of stewardship, implied in part by moral and emotional maturity, is more likely to lead to medium and long-term wealth creation than an the “Liar’s Poker” approach embedded in popular imagination. Moral and emotional maturity are traditional values,


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and also arguably the most essential for facing and mastering the increasingly complex global environment. I welcome any suggestions you may have that could improve this study, and to any form of cooperation you may suggest. Please feel free to contact me for any further information or clarifications. I look forward to your response. With best regards, I am Sincerely yours,

Jon M. Ebersole Attachments:

• A Sample from the Defining Issues Test (DIT)

• Stages of Socio-Emotional Development in Adults


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A Sample from the Defining Issues Test (DIT)

The following is an example of the kind of problem posed by the DIT. Eight such problems are posed in an actual DIT assessment. The scoring of this assessment leads to a ranking on the six-level scale below.

“The Heinz Dilemma”: Heinz’s wife is dying of cancer and needs a drug that an enterprising druggist has invented. The druggist demands such a high price that Heinz cannot raise the money. Should Heinz steal the drug to save his dying wife?

In deciding how Heinz should respond, evaluate (scoring from 1 to 5, with 5 as most important) which of the items below raise the most important considerations, and then order them from 1 to 12, with 1 being the most important.

Score 1-5

Rank 1 to 12

The “Defining Issues”

Whether a community’s laws are going to be upheld.

Isn’t it only natural for a loving husband to care so much for his wife that he’d steal?

Is Heinz willing to risk getting shot as a burglar or going to jail for the chance that stealing the drug might help?

Whether Heinz is a professional wrestler, or has considerable influence with professional wrestlers.

Whether Heinz is stealing for himself or doing this solely to help someone else.

Whether the druggist’s rights to his invention have to be respected.

Whether the essence of living is more encompassing than the termination of dying, socially and individually.

What values are going to be allowed to hide behind a worthless law that only protects the rich anyhow.

Whether the druggist is going to be allowed to hide behind a worthless law that only protects the rich anyhow.

Whether the law in this case is getting in the way of the most basic claim of any member of society.

Whether the druggist deserves to be robbed for being so greedy and cruel.

Would stealing in such a case bring about more total good for the whole society or not?

Six Stages in the Concept of Cooperation

Stage 6 The morality of non-arbitrary social cooperation: Morality is defined by how rational and impartial people would ideally organize cooperation.

Stage 5 The morality of consensus-building procedures: You are obliged by the arrangements that are agreed to by due process procedures.

Stage 4 The morality of law and duty to the social order: Everyone in society is obliged to obey, and is protected by, the law.

Stage 3 The morality of interpersonal concordance: Be considerate, nice, and kind: you’ll make friends.

Stage 2 The morality of instrumental egoism and simple exchange: Let’s make a deal.

Stage 1 The morality of obedience: Do what you’re told.

From Lawrence Kohlberg’s theory of moral development. (Table based on Kohlberg, 1981 and Rest & Narvaez, 1994)


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Stages of Socio-Emotional Development in Adults

Developmental Level

S-2 Instrumental

S-3 Other Dependent

S-4 Self-Authoring

S-5 Self-Aware

Organizational Perspective

Individualist Group Contributor

Manager Leader

Management Orientation

Proto-Bureaucratic

Pre-Bureaucratic Bureaucratic Post-Bureaucratic

View of Others Instruments of own need gratification

Needed to contribute to own self image

Collaborator, delegate, peer

Contributors to own integrity and balance

Level of Self Insight

Low Moderate High Very High

Values Law of the Jungle Community Self-determined Humanity Needs Overriding all

others’ needs Subordinate to community, work group

Flowing from striving for integrity

Viewed in connection with own obligations and limitations

Need to Control Very High Moderate Low Very low Communication Unilateral Exchange 1:1 Dialogue True

Communication Organizational Orientation

Careerist Good Citizen Manager System Leader

Frame of Reference Stratification from Susan Cook-Greuter (1999) & Otto Laske (2005)

Robert Kegan’s stages of Socio-Emotional Development, as illustrated by Jon Ebersole


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5.5 Short Letter Requesting Research Cooperation

name address Bank / Fund Fax: Email:

Date

Interview Request Dear __________ At the suggestion of my doctoral supervisor, Prof. Dr. Martin Hilb, I take the liberty of writing to you regarding research I am undertaking at the Institute for Leadership and Human Resource Management at the University of St. Gallen. I am developing a simple instrument to identify fund managers with potential for exceptional performance at the earliest stages of their careers. To verify this instrument, I am interviewing top fund managers in Swiss banks with proven records of exceptional performance. The goal is to identify certain characteristics that successful fund managers have in common. Your assistance would be greatly appreciated in securing the agreement of one or more top fund managers at RBS Coutts to make 45 minutes available for a recorded interview. Confidentiality and anonymity are guaranteed. Participating institutions will be the first to receive the results of this study, and provided with the instrument (excluding any necessary training) at no cost. At your request I would be happy to meet with you to explain this research in more detail. In the coming days I will contact your office to secure your response. Please feel free also to contact me directly at any time. Thank you for taking the time to consider this request. With best regards, I am Yours sincerely,

Jon Ebersole


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5.6 Banks and Investment Companies Contacted

Banks and Investment Companies Contacted by Jon Ebersole in pursuit of an agreement to host dissertation research

Bank/Fund Action Taken*

1 AIG emails, letter 2 ALTIN.ch conversation at presentation, emails,

phone calls 3 Alternative Bank ABS letters, phone calls 4 AXA Investment Managers letter, meeting, emails 5 Bank Vontobel AG letters, phone calls, meetings 6 Banque Sarasin & Cie SA letters, phone calls 7 Care Group AG letters, emails, phone calls, meetings 8 Citibank phone calls, meeting (in Dobbs Ferry,

NY, USA), letter 9 Clariden Leu AG letter, phone call

10 Credit Suisse, Private Banking emails, letter 11 Deutsche Asset Management,

Frankfurt email exchange

12 Deutsche Bank Research letter, phone call 13 EIM SA (Fund of Hedge Funds) multiple letters, emails, proposal, two

meetings in London and one in Nyon 14 Ethos Foundation emails, phone calls 15 Goldman Sachs & Co. email, phone call, letter 16 HSBC

HSBC Private Bank HSBC Republic Investments Limited

emails, meeting email, letters, phone calls letter, phone calls

17 ING Private Banking email exchange 18 La Roche & Co. Banquiers letter 19 The LGT Group letter, phone call 20 Merlin Global Enterprise AG email, letter, phone call 21 Norddeutsche Landesbank phone calls, letters, meeting (New

York) 22 Partners Group letter, phone call 23 Pax World Management Corp.

Pax World Management Corp. and Pax World Funds

letters, phone calls

24 Pioneer Investments letter, emails 25 Raiffeisen Schweiz letters, phone calls 26 RBS Coutts Bank Ltd. letter, phone call 27 Skandifinanz AG letter, phone call, meeting 28 Thomas Lloyd Group plc letter, emails 29 UBS phone calls, letters, emails, meetings 30 Zürcher Kantonalbank letter, phone call

*Unless otherwise noted, meetings took place in the Zurich area


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These tables are provided without names. The same table with names listed has been sent as a confidential document to Prof. Dr. Martin Hilb. Four banks agreed to single interviews with fund managers, one of these provided two interviews, resulting in the five interviews that were scored, as described in section 3, the “Specific Empirical Section.” Two of the four banks are among those listed in the table above, since they turned down the full research project. In both of these cases, the persons who facilitated and agreed to the single interviews were different from the persons who had previously declied the larger research project and were not aware of the earlier interaction. It would be impossible to reconstruct all the networking that took place to find the contacts listed in the table above. Prof. Dr. Martin Hilb and Dr. Julia Indera Ramlogan were kind enough to provide some of these names. Others came from friends, acquaintances, participating in seminars and presentations, and through internet contacts. The table below is indicative but not complete. Affiliation/Role Action Taken* 3-A SA, Fund Analyst letters, meetings Academic email exchange Christian Science Monitor email, offered article Citywire.co.uk emails, phone calls, possible article or

conference presentation Edhec-Risk Advisory email exchange FiNews.ch, Journalist emails, meetings Forma Futura Invest AG letter, phone calls Fund Analyst, Independent emails, meetings Harcourt Investment Consulting AG attended 6 quarterly “Harcourt Hedge

Fund Seminar” breakfasts Hedgeweek.com, Hedgemedia Ltd., letters, offered article Hedgeworld.com email, phone call Index Day seminar attended half-day event in Zurich Investor emails, meeting Investor emails Investor emails, meeting Newsweek, and Slate.com Business

Columnist email, offered article

Ökumenisches Institut Luzern presentation made at “Forum Ökumene 2009”

Opalesque Ltd., www.opalesque.com offered article, they posted research proposal on their web site

Peritus Investment Consultancy letters, meeting UBS – Wolfsberg letters, emails, meeting, made

presentation at conference Xing.com (an on-line network) Emails, meetings

*Unless otherwise noted, meetings took place in the Zurich area


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5.7 Curriculum Vitae of Author

Jon M. Ebersole, MA, MS

Postfach 204, CH-8910 Affoltern am Albis, Switzerland [email protected]

SUMMARY

• Founder and Managing Director, Dialogue Services GmbH

• Mediator certified by the Swiss Chamber of Commercial Mediation

• Master Certified Developmental Coach, Interdevelopmental Institute, Boston

Professional Experience Dialogue Services GmbH October, 2000 – Present Self employed as coach, mediator, trainer, meeting facilitator, and policy consultant.

Organization for Economic Co-operation and Development 99-00 Coordinator and Special Advisor, Development Assistance Committee (DAC), Task Force on Conflict, Peace and Development Co-operation, Paris, France

United Nations 94-98 Humanitarian Affairs Officer, OCHA, Geneva, Switzerland Human Rights Officer, UNAVEM III, Luanda, Angola Training Officer and Political Affairs Officer, UN Secretariat, New York, USA

World Conference on Religion and Peace 92-94 Director, Program on Humanitarian Assistance, New York, NY, USA

Employed in Non-Governmental Organizations 78-92 in New York, Beirut and Jerusalem.

Education & Awards

Doctoral Candidate, Univ. of St. Gallen, Institute for Leadership and Personnel Management 03- M.S. in Public Administration, New York Univ., New York, USA 92 Adjunct Fellow, Center for International Studies, NYU School of Law 91-92 M.A. in Cultural Anthropology, State Univ. of New York at Binghamton, USA 90 T. J. Watson Foundation Fellowship for the study of sectarian and international conflict 83-84 B.A. in Peace and Conflict Studies, Earlham College, Richmond, IN, USA 81

Other Activities

Member, Swiss Chamber of Commercial Mediation 03 – Present Member, InterDevelopMental Associates (a network of consultants) 07 – Present President, Board of Directors, Willowtown Apartments, Inc., NYC housing cooperative 93-95 Member and Corporate Secretary, Board of Directors, Global Information Network, Inc. 92-96 (U.S. affiliate of the InterPress Service, a nonprofit news wire service based in Rome) Advisory group memberships and consultancies in human rights and humanitarian affairs

Languages

English (native speaker), German (fluent working language), French and Spanish (basic).