Lecture #11 Flashcards
Who was Adam Smith? what was the bottom of his message
Adam Smith, was a key member of the Scottish Enlightenment. A believer in a free market economy, he is known as the father of modern capitalism¹, also was the first moral philospher
Bottom Line:
Moral principles and ethical/virtuous behaviour form key underpinnings of capitalistic system.
What is capitalism’s social license to operate?
Capitalism exists because it creates value for society and individuals, but its survival depends on:
- Good behavior by industry participants
- Proven value creation for society
- Safeguards for all participants
Maintaining public trust is essential—it’s a social contract that allows capitalism to function long-term.
Define Neoclassical economics and what are flaws?
Neoclassical economics: says people act rationally, aiming to maximize utility or profit, and markets work best when free from interference
But there are flaws:
* Hidden Costs: Some costs (like pollution or long-term harm) aren’t obvious or included in the price of goods.
* Externalities: Not all impacts (e.g., environmental damage) are fully corrected by taxes or fines.
* Unequal Resources: Some resources (like clean water or rare minerals) are limited and not easily replaced.
* Short-Term vs. Long-Term: Market decisions often favor short-term profits, not long-term sustainability.
* Inefficiency: Markets can misallocate capital—bad decisions (e.g., Enron) show they’re not always efficient.
* Tragedy of Horizon: There’s a conflict between current profit goals and the needs of future generations.
what is the bottom line of the neoclassical econonic theory
Bottom line: While free markets aim for efficiency, they can overlook long-term impacts and social responsibility, which can lead to economic, environmental, and ethical problems.
What is the TIIP? WHat does it stand for?
Also, what is the Butterfly Effect? Universal Owners?
The Investment Integration Project (TIIP) challenges traditional investing models like Modern Portfolio Theory (MPT) by emphasizing that the world is a closed, interconnected system.
- Universal owners (large investors holding broad market stakes) are especially exposed—if one company behaves poorly, it can harm the entire portfolio.
- The Butterfly Effect shows how small actions can cause major, unpredictable consequences.
- System-level risks like climate change, financial crises, or social unrest can derail even well-planned investments.
Key Point: Long-term investors must consider broader systemic risks, not just individual company performance.
Capitalism requires proper oversight by regulators and “” by market “”.
maintenance, participants
What are the key things to Maintaining the Integrity of Capital Markets?
- Integrity of individual actors and market participants is key to preserving social licence to operate of the investment profession
- Preserving trust and confidence of the public, especially those who do not work in financial services
- Cultivating long-term thinking
- Understanding butterfly-effects / knock-on effects of personal actions
- Real direct costs: reputation, fines, jail-time, other costs (OBSI)
- CFA Code of Ethics & Standards of Professional Conduct = Good roadmap
When hiring people to build a team, what are things you look for?
- Start with a strong foundation: hire for attitude, curiosity, and integrity, not just intelligence
- Don’t rush hiring—each person impacts team culture
- Look for “diamonds in the rough”: people who’ve overcome challenges and learned from failure
- Value diversity of experience when evaluating candidates
How is culture shaped within an organization?
- Through leadership and behavior modeling—employees watch leaders for cues on what’s acceptable
- “Tone from the top” sets the standard and trickles down through the organization
”” and “” are the building blocks of a great culture and the bedrock of sustainable value creation
Trust and integrity
Why is integrity aWhy is integrity and ethics vital to organizational culture?nd ethics vital to organizational culture?
- Creates long-term performance gains and competitive advantage
- Enhances and protects brand value, especially important in the age of social media
- Prevents ethical drift—small lapses can lead to bigger issues if ignored
- Ethics must be deep-rooted and continuously maintained—they’re part of the organization every day, all the time
Ethics and integrity does not go home at night, go on break, or take a day off.
What does this mean ““The Fish Rots From the Head””?
- “The Fish Rots From the Head” - The idea that all organizational problems can be traced back to its leadership
If corporate leaders do not place importance on integrity and ethics – what can we expect from the rank & file?
List the 3:
In fundamental analysis we look for 1 important attribute;
1 Characteristic of high-quality management teams
1 Governance: Hard & Soft (non-rule based governance)
- In fundamental analysis we look for 1 important attributes:
○ High quality management teams - Characteristics of high-quality management teams:
○ Keepers of the culture; strong governance and aligned with shareholders - Governance: Hard & Soft (non-rule based governance)
- Soft governance and board culture are built with ethics and integrity
Indicators—or clues—that investors and analysts can use to evaluate the quality of a company’s management and culture.
CEO Letter to Shareholders
Gives insight into the CEO’s vision, tone, transparency, and how they address challenges—helps assess leadership integrity and long-term thinking.
Glassdoor Rankings
Reflect how current and former employees view the company—strong rankings often indicate positive culture and internal trust.
CEO Appointed From Within
Shows the company values internal development and likely has a strong talent pipeline and consistent culture.
% of Independent Directors
A higher percentage of independent board members suggests stronger governance and better oversight of management.
All Board Committees Independent
Ensures that key committees (e.g., audit, compensation) are not influenced by insiders, promoting objectivity and fairness in decision-making.
Employee Engagement Scores
Measure how committed and motivated employees are—high scores often lead to better performance and lower turnover.
Net Promoter Scores (NPS)
Shows how likely employees or customers are to recommend the company—a strong indicator of loyalty, satisfaction, and reputation.
- Ethics and integrity are not just about rules and compliance. They are drivers of
“” “” “” creation for individuals and companies.
long -term value
