I didn’t really realize it, but I’ve wanted to write on this topic for a long time.
I think “business integrity,” or rather the lack of it, has a great deal of conceptual overlap with public corruption. At least there are similar ways to parse the topic. Transparency International publishes a study on levels of public corruption globally, using various indices. It’s interesting reading, not least because the position of the United States lies well down the list of countries with the lowest levels of corruption. Darker red countries in the graphic below are “highly corrupt” while those in yellow are seen as “very clean.” The U.S., somewhat surprisingly, is not at all among the cleanest.
Similarly, from industry to industry, there is tremendous dispersion in the degree of esteem in which each is held by the public. Gallup surveys Americans continually on the topic, asking them to state whether they view a given sector positively, somewhat positively, neutrally, somewhat negatively, or negatively. It’s interesting to see how quickly industries can fall from favor. Those with the greatest increase in positive perception are shown at the top of the image below.
And then there are those sectors, below, whose esteem is taking a hit. Among them, real estate, which lost four percentage points in the most recent polling. Only 30% of respondents, as of September 13, 2023, viewed real estate favorably.
Most of this decline, I imagine, resulted from the publicity surrounding the recent lawsuits against the National Association of Realtors and certain real estate brokerage firms, about which I will write later. Nevertheless, no one in this industry would be pleased with the perceptions the ranking reveals.
But the ranking isn’t my point.
History and Regulatory Structures Drive Perceptions of Integrity
Many of you know I worked in the investment management industry for quite a long time, for more than 25 years, beginning in 1994.
Thanks to the catastrophic market crash of 1929, which sent the nation spiraling into an economic depression from which it didn’t fully recover until 1942, the federal government began to intervene in securities markets, beginning with the establishment of the Securities Exchange Commission in 1934 and culminating (the initial round of regulation, at least) with the Investment Advisors Act of 1940.
If you’ve worked in the field, you know the extent to which the SEC and FINRA (the Financial Industry Regulatory Authority) scrutinize every person and every tiny event that takes place, down to the manner in which things are phrased in correspondence. As a onetime writer for such investment managers, I was all too familiar with the danger of crafting language that might be construed as promissory (“We believe this investment strategy will yield attractive results over the next five years”) versus sterile and neutral language (“We believe this strategy may hold promise of attractive returns, though of course, no approach is guaranteed.”)
Tight, Effective Federal Regulation Yields Results
The result?
Extremely high levels of regulation at the federal level have paid dividends in stabilizing the industry and bolstering the esteem in which it is held. In my entire career in securities trading, sales, and investment management (going back to 1994) not once did I observe a person behaving unethically in a capacity pertaining to the business itself.
Not one time. Over 25+ years.
In fact, the most egregious thing I remember is an instance during the time I was a broker trainee in 1995 in Houston, and one of my fellow trainees cold-called potential customers and in a rather affected manner, pretending that he knew them. Of course, it was sleazy. We ruthlessly mocked him for it. If you’re still around and reading this, Tom, so sorry!
In my work at American General in Houston (a trading position), at AIM Management in Houston (an institutional marketing role), at Thornburg Investment Management in Santa Fe (a marketing role), at USAA in San Antonio (a product management role), not one time did I observe anyone behave unethically in the slightest way regarding their fiduciary obligation to the public or to other institutions. Not one time.
Who knows? Maybe I was in the wrong meetings!
Real Estate’s State-Level Regulation is Inherently Looser
Since the turn of the (nineteenth) century, there has been no similar national-level scandal or economic calamity which had real estate as its cause and genesis. The federal government has therefore been content to allow the regulation of the real estate industry to remain in the purview of the states. It is, in my view, somewhat under-regulated, while the investment management business is arguably over-regulated, but that, again, is not the point.
Because state regulatory frameworks are most often looser in their effect, it is incumbent upon the individual to effectively reconnoiter situations with sparse regulatory guidance.
Recommendation: Walker’s Enhanced Three-Strikes Rule
One must be attentive to what I call, rather tongue in cheek, “offers of information.”
One might witness a person behave in a way that isn’t nice or kind. File it away. One might witness something similar in a different situation, and it becomes a second data point. And then perhaps a few weeks later a third instance emerges. At that point, in my view, one has enough data to form an impression and to draw a conclusion. In highly regulated fields, this perception often doesn’t matter in the least, because one knows with absolute certainty that that person is going to abide by the rules because if he doesn’t, he’ll lose his job, face penalties, or much worse. But in an environment primarily regulated at the state and not at the federal level, participants can’t always rely on explicit and detailed regulatory frameworks to assure the ethical behavior of a counterparty or an agent in a transaction.
And where there is more opportunity for a broader variety of behavior, a broader variety of behavior will occur.
I recently had had the displeasure of observing a few instances of behavior during a transaction, which were most certainly what I’d scale as unethical — but only for subjective, human reasons. No state regulation was breached, no guideline encroached upon. Indeed the nearest regulation lies approximately 602 miles away from the topic then at hand. But it was fundamentally dishonest behavior and was sufficient to flip the “avoid” sign into the up position.
Be Attentive to Patterns and Intent
It’s one thing to be extremely annoying (as I am 100% of the time) to office staff; it is another thing entirely to give someone the opportunity to say to a peer, “Wow that was not cool” and worse, to have that judgment seconded by someone else who has dealt with the same person. The enhanced three-strikes rule gives you enough latitude to allow an initial perception to be confirmed, and then reconfirmed. And once one reaches a conclusion, the action chosen is yours. Using the rule gives you a reliable framework within which to feel your way through situations that may be uncomfortable a bit too fluid.
It is therefore important to be hyper-attuned to the signals you receive, whether it’s a person being rude to another in a conversation, a remark that raises an eyebrow, or something that’s demonstrably unethical. Without a federal regulatory authority policing everyone and every minute action, it’s wise to enter into a potential transaction with the proper navigational gear.
[Editor’s note: As a reader observes in the comments, brand reputation and integrity play a role in self-governance, and the currency of Sotheby’s carries an obligation to maintain that extremely high level of brand integrity, so this is a factor too.]
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