November 2, 2017

Examining Corporations: Moody’s Breach of Fiduciary Duty


Examining Corporations: Moody’s Breach of Fiduciary Duty

I have spent countless hours pondering my fiduciary duty as a lawyer that I ultimately failed to uphold during 2007-2009, the time in which I made some bad decisions that led to serious consequences in my life. In an earlier blog this year, I discussed the five ethical standards of Fiduciary Duty and I have later discussed Diversity & Inclusion as a necessity in meeting one’s fiduciary duty. I recently was listening to an interview conducted by Tim Erblich, CEO of Ethisphere Institute and Tony West, General Counsel of PepsiCo. I also have examined the 2015 settlement between the United States Department of Justice with Moody’s Investor Service, Inc. It is clear from my research that the culture of integrity within a corporation and commitment to upholding fiduciary duty and ethics standards requires transparency and “performance with purpose” as Tony West so aptly states. See “The Culture Journey: Performance with Purpose. An exclusive interview with Tony West, General Counsel of PepsiCo.” If transparency and “performance with purpose” do not permeate throughout an organization, a breach of fiduciary duty may occur.

On Friday, January 13, 2017, the Department of Justice issued a Press Release “Justice Department and State Partners Secure Nearly $864 Million Settlement With Moody’s Arising From Conduct in the Lead up to the Financial Crisis. ” Principal Deputy Associate Attorney General Bill Baer stated “Moody’s failed to adhere to its own credit rating standards and fell short on its pledge of transparency in the run-up to the Great Recession.” The DOJ’s settlement with Moody comes two years after a similar settlement with Standard & Poor’s Investment Rating Services for essentially the same allegations. Both credit rating agencies (“CRAs”) were providing credit ratings for financial products that used more lenient standards than the corporations had published. As a woman who is not knowledgeable about investing or relying on CRA ratings, I had a difficult time initially understanding the harm caused by such actions. Essentially, entities and individuals across the world rely on CRA ratings as objective and independent thus influencing decisions made across the world. Due to the CRAs more lenient ratings, investors suffered.

Clearly, the management of Andersen and the CRAs had greed. But, an examination of behavioral ethics presents a broader understanding of what went wrong. Dan Ariely writes in The Honest Truth about Dishonesty (2012), that most people can see the impact of conflict of interest in others’ judgment, but are completely unaware of the impact that conflict of interest would in any way affect their own behavior.

A review of Moody’s published “Code of Professional Conduct that is maintained online indicates that the company was committed to promoting the “integrity, objectivity, and transparency of the credit ratings process.” There were inherent conflict of interest issues in meeting its fiduciary duty to its investors vis-à-vis the clients. The clients of CRAs were the issuers of the exact same financial instruments that the CRAs were rating for potential investment by the outside world. The conflict of interest is reminiscent of the issues that arose between Arthur Andersen and Enron. “Enron was Andersen’s largest client and Andersen was heading toward earning $100 million a year in fees from Enron.” See “Is S&P the next Enron?” Robert Prentice, Though Andersen had a fiduciary duty to police Enron and keep watch over the books, ultimately it also sold its services to its client, Enron, to act as a “partner” in meeting their business goals.

Behavioral ethics also points to self-serving bias, where the ethical issue fades away as the mind focuses on the benefits to be gained from reaching the conclusion. In my case, I was blind to the fact that my client was acting unethically because I did not ask the hard questions. I did not want to know, I just wanted to reach the conclusion and so was blind to what was really going on. Similarly, an individual’s mind can be overconfident as to her own moral character. This is exactly how I rationalized. I was so sure that I was a good moral person that I just knew that any decision I made would be ethical. These factors among others caused me to have a breach of fiduciary duty.

Andersen, Moody’s and S&P are each case studies illustrating that the management of each organization did not commit to a culture of integrity starting from the top down which then leads to ethical decision making from the bottom up. But, lets take a look at Pepsico.

In his interview with Ethisphere CEO, Tony West states that PepsiCo has a code of conduct and a culture of integrity that has four legs.

PepsiCo’s Culture of Integrity – 4 Key Components:

  1. Integrity in all actions
  2. Ethical behavior in all business dealings and in all business relationships
  3. Mutual Respect
  4. Making sure that the company is acting responsibly on behalf of its shareholders. He lists that the fiduciary duty is paramount.

But, in addition, to its culture, West describes that PepsiCo is engaged in long term sustainable business strategies, which includes consideration for what is good for the community and the society within which it operates. Pepsi’s culture of integrity through the above 4 components help ensure that Pepsi does not have a breach of fiduciary duty.

If the PepsiCo principles had been introduced at Andersen, Moody’s, or S&P, perhaps there would not have been a breach of fiduciary duty, an investigation, and penalties for harm caused in the communities. Being mindful of the consequences and collateral effects of a corporation’s actions and policies will help corporations going forward in maintaining a culture of integrity and performing with purpose.


Rashmi Airan‘s mission is to share the need for ethical vigilance and to inspire you to make good ethical choices in all areas of your life. Rashmi is an ethics speaker and consultant fighting to create a culture of conversation and bring ethical issues in business to light, to promote integrity, to enhance commitment to fiduciary duty, to build ethical leadership, and to shift the paradigm of ethics standards through ethics training.

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