Final answer:
Performance-based compensation for money managers can lead to ethical dilemmas, where managers might take undue risks or misrepresent performance to achieve targets. As outlined by Milton Friedman, the business goal of profit maximization can conflict with ethical practices, even though access to public information may temper reliance on personal assurances from managers.
Step-by-step explanation:
The discussion of compensation linked to the performance of portfolios managed by money managers can lead to potential ethical dilemmas. This incentive structure could pressure managers to take excessive risks to boost performance or to engage in the misrepresentation of results to meet targets and receive bonuses. The mini-case study provided describes a situation where the project manager sought to alter an evaluation report to enhance the appearance of positive outcomes, which presents a scenario where managerial actions could misalign with ethical practices, leading to conflicts between personal gain and fiduciary duty.
Milton Friedman's essay underscores the belief that businesses, and by extension their agents including money managers, should prioritize profit maximization. However, this goal can conflict with providing accurate and honest information to investors. As firms grow and information becomes publicly available, the intimate knowledge of individual managers may become less critical to investors, but the ethical expectations on those managers to act responsibly with the provided capital remain a cornerstone of their professional conduct.