Though not one of the five principles of finance, ethics and trust are essential elements of the business world. In fact, without ethics and trust, nothing works. This statement could be applied to almost everything in life. Virtually everything we do involves some dependence on others.

Although businesses frequently try to describe the rights and obligations of their dealings with others using contracts, it is impossible to write a perfect contract. Consequently, business dealings between people and firms ultimately depend on the willingness of the parties to trust one another.

Ethics or, rather, a lack of ethics in finance is a recurring theme in the news. Financial scandals at Enron, WorldCom, Arthur Andersen, and Bernard L. Madoff Investment Securities demonstrate that ethical lapses are not forgiven in the business world. Not only is acting in an ethical manner morally correct, it is a necessary ingredient to long-term business and personal success.

In 2017, Equifax found itself hacked and the social security numbers, birth dates, addresses, and other information of 145 million people stolen in one of the largest data breaches of all times. Equifax discovered the breach in July, but did not disclose it until September, in spite of the fact that U.S. companies are required by law to quickly report any new information that could materially affect its financial outlook. What happened to Equifax? Its market value dropped by over 20 percent—that’s a bit over $4 billion. How this will all play out for Equifax may take years to determine, but clearly, no one wants to do business with someone they don’t trust. More recently, in 2018, Steve Wynn, the CEO of Wynn Resorts, was accused of a pattern of sexual misconduct which he denied.

Still, Wynn Resorts almost immediately lost $3.5 billion. Just a week later, shares of the apparel company Guess Inc. fell 18 percent after model and actress Kate Upton accused the company’s co-founder of using his power in the industry to harass women. Why might this have happened? If consumers don’t feel good about a company, they are less likely to spend money on its products, and that impacts stock prices.

Concept Check 

1. According to Principle 3, how do investors decide where to invest their money?
2. What is an efficient market?
3. What is the agency problem, and why does it occur?
4. Why are ethics and trust important in business?