Topic: Portfolio Management

Characters: Carol, Assistant Treasurer at a medium-sized manufacturing company; Mary Ann, Treasurer at a medium-sized manufacturing company

Carol was recently promoted to the assistant treasurer position of her medium-sized manufacturing company in Rochester, New York. One of her primary duties is to monitor the three fixed-income investment managers for her company’s pension funds. She is responsible for monitoring their investment performance, for recommending allocation of the current pension funds of approximately $2 billion (split roughly evenly among the three managers), and for new contributions added to the pension funds each month Carol reports directly to the treasurer, Mary Ann, but she will also present her analysis to the Investment Committee of the Board of Directors each quarter. Based on her analysis, she may also recommend firing a manager and selecting a new manager.

Carol was asked by one of the investment managers, SNB, to attend their annual conference for their best clients. The conference will be held during the first week of February in Vail, Colorado. The conference runs from Wednesday afternoon to late Saturday afternoon. She was told to bring her skis and her tennis racket because “there will be plenty of time for skiing and indoor tennis, since the morning sessions will end by 10:30 a.m. and the afternoon sessions will not begin until 4:30 p.m.” SNB will pick up all her costs except her airfare to Vail. She is sure that she will gather some new information and a better sense of the current investment climate at the conference. But she is troubled by the possibility of an appearance of a conflict of intent if she attends a conference sponsored by one of the investment managers that she is responsible for monitoring. She also wonders whether attending the conference will taint her objectivity. Carol knows that her boss, Mary Ann, who previously was responsible for monitoring the fixed-income manager, looked forward to SNB’s conferences each year. She wondered what Mary Ann would think if the new assistant treasurer decided not to attend the conference because of the possibility of a conflict of interest. Carol did not want unnecesssarily to make her boss look bad. The other two investment managers tended to have less elaborate working conferences in New York City.

Should Carol accept the invitation to SNB’s conference?

Author: Richard F. DeMong, Professor of Commerce, McIntire School of Commerce, University of Virginia

What Are the Relevant Facts?

1. Carol, the assistant treasurer for a medium-sized manufacturing company, is responsible for monitoring the performance of three fixed-income managers of her company’s pension plan. She also recommends how new pension monies are allocated to the three fixed-income managers.
2. Carol has been invited by SNB, one of the fixed-income managers, to attend the annual conference for their best clients.
3. SNB will pay for all of Carol’s expenses except airfare.
4. Carol’s boss, Mary Ann (the treasurer), had previously attended SNB’s conferences.
5. The conference meets each day in a resort area until 10:30 a.m. and after 4:30 p.m.
6. Carol will travel on Wednesday morning and return on Sunday.
7. The other two fixed-income managers have shorter, smaller conferences in New York City.
8. Carol expects to gain significant information that will help her to do her job more effectively.

What Are the Ethical Issues?

1. Is there an appearance of a conflict of interest?
2. Would Carol’s attendance at the SNB conference constitute a conflict of interest?
3. Would a decision by Carol not to attend the conference bring into question the propriety of her boss’s trips to previous SNB conferences?

Who Are the Primary Stakeholders?

• Carol
• Mary Ann
• Pension fund beneficiaries
• Stockholders
• other two fixed-income managers

What Are the Possible Alternatives?

1. Attend the conference.
2. Attend the conference but have her own company pay all of the expenses.
3. Discuss the conflict of interest with her boss, Mary Ann.
4. Refrain from attending the conference.

What Are the Ethics of the Alternatives?

• From a “utilitarian” perspective, what are the net costs and benefits of Carol’s attending or not attending SNB’s conference? How would you measure the potential costs and benefits? For example, how could the benefits of “new information” and a better sense of the “current investment climate” be valued? Or how could you measure the cost of a possible loss of objectivity for Carol or the cost of conflict of interest?
• Discuss from a “rights” perspective what rights each stakeholder has in this situation and the corresponding duties that those rights impose on Carol. You might want to focus the discussion on the area of conflict of interest and the duties it creates.
• Ask questions from a “justice” perspective concerning the fair distribution of benefits and burdens amount stakeholders. For example, explore the fairness of Carol’s attending or not attending SNB’s conference (when she probably does attend the meetings of the other two managers in New York).

What Are the Practical Constraints?

1. If Carol raises this decision with her boss, Mary Ann, is Carol jeopardizing her own job?

What Actions Should Be Taken?

1. Should Carol attend this conference?
2. Which ethical theories have the greatest influence on your decision?