This note was prepared by Professors Kenneth A. Merchant (University of Southern California) and Wim A. Van der Stede (London
School of Econom-ics) for the sole purpose of aiding classroom instructors in the use of the Philip Anderson case. It provides
analysis and questions that are intended to present alternative approaches to deepening students comprehension of business issues
and energizing classroom discussion.
Marshall School of Business
University of Southern California
Philip Anderson
Teaching Note
Purpose of Case
This case illustrates a common control system dysfunctional side-effectincentives-caused
conflicts of interest faced by brokers in the retail brokerage industry. Sometimes brokers are
torn between serving their clients and their firms best interests. This case can be taught from
the perspective of Philip Anderson, the branch manager, which makes it an ethics case. Does
Philip have an ethical obligation to serve his clients interests to the best of his ability, even at
Suggested Assignment Questions
To make the conflict of interest more tangible, it is probably best to give the students a specific
scenario to discuss. The case can then serve as a backdrop to this discussion. Here is such a
scenario:
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Table A
Three Investment Alternatives
Alternative A Alternative B Alternative C
Investment Growth fund from a large
investment company
Growth fund from
Stuart & Co.
Exchange-traded
fund
Load or commission None 5% front-end 3% to purchase;
3% to sell
Questions:
1. Which investment alternative:
a. Provides the highest returns to the client?
b. Provides the highest profits to Stuart & Co.?
Case Analysis
The conflict in this case is obvious to most students. Philip, the branch manager of the Phoenix
branch of Stuart & Co., a retail brokerage, is rewarded for meeting a set of goals that
presumably serve his firms interests. The measures taken into consideration at the branch level
include the following:
Branch profits
Branch revenues
New clients
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The case is not specific as to how these various factors are weighted in performance evaluations,
but it does indicate that Philip has been given specific performance targets. If he fails to achieve
these targets regularly, Philip will face some repercussions, such as lower salary increases,
lower promotion prospects, and even loss of job.
The Ethics Issue
The ethics of this situation can be analyzed using the multistep method described in the chapter.
(Some of the steps have been combined in this teaching note.)
Determine the facts:
Among the facts that should be brought out are the following:
Alternative A is probably the best investment choice for the client. C might be superior if
the client holds onto the asset for many years because its return has, historically, been
B provides the highest short- and long-term profits to Stuart & Co. The 5% commission is
earned immediately, and the management fees provide an annuity that is earned over time.
The broker and firm earn nothing from directing the client to A. This choice does allow
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Philip is merely an advisor. The client will make the final investment decision. But Philip
Define the ethical issues:
Stakeholders: Philip
The client
Stuart & Co. and its stockholders
Stakeholders for the other investment company and the exchange-traded fund.
Major ethical principles:
2. Fairness
Ethical issues:
Here, clearly the clients financial well-being is at risk. The primary competing interests in this
situation are the clients right to good professional advice vs. the rights of Philip and Stuart &
Co. to earn profits. Does Philip have an ethical obligation to do what is best for the client, even
if that alternative provides little, or even no, profits to the firm? Or does Philip serve a role more
like a salesman who has the right, or even the obligation, to push his own firms products in
pursuit of his own self-interest and that of his firm?
Utilitarianism does not help to address this issue. This is a zero-sum situation. If the client
makes an inferior investment decision, the client suffers, and a number of people, including
www.stockbrokers.org.au
Such codes specifically mention virtues such as honesty, integrity, and fairness. They mention
the ideals of avoiding conflicts of interest and placing clients interests above their own. But
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There is even some question as to whether stock brokers are professionals. Consider this quote:
The financial services industry spends huge sums each yearmore than $700 million [in
the U.S. alone] on magazine advertising aloneto persuade investors that they provide
professional advice. The reality is that Wall Street is not in the business of providing
Decision alternatives and their probable consequences:
The extremes of the decision alternatives are as follows:
1. Philip does his best to identify the best investment alternative(s) for the client and to inform
the client about those alternatives.
Choose the best alternative:
Students should evaluate the alternatives and their consequences and select the alternative that
best fits their primary principles or values. Take a vote. It is not necessary for all students to
agree. Examine the rationales for the students different positions.
The Control System Issue
If this case is used to focus on the companys control system, the first part of the discussion
should focus on causes of the conflicts of interest that people like Philip face. The basic cause is
the companys incentive systems. Not surprisingly, they pressure company personnel to
generate revenues and profits.
Once managers understand how they want the branch managers and brokers to behave, then
they can decide how to design a control system to ensure the proper behaviors. The controls that
need to be tailored to the situation include the following:
Incentive system design. Should brokers be evaluated in terms of client satisfaction? Or, to
protect against the possibility that clients do not know what is best for them, should an
independent expert review board evaluate the advice given in a sample of situations for each
broker?
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Codes of conduct
Hiring policies
Pedagogy
The case discussion can be done with the entire class or with small groups. This teaching note
lays out a reasonable strategy for discussing the case with a large group.