Ethics Newsline®

by Rushworth M. Kidder

If memory serves, my earliest acquaintance with a grandfather clock was in a bank lobby. As my mother did business with a teller behind a high marble counter, I stared around down at knee-level, listening to the stately tick-tocking of the clock’s massive pendulum. It was the sound of confidence. We’re here to safeguard your money, it said, and nothing will break our rhythm. Grave and perpetual, it bespoke the essence of financial order.

But suppose you stood that clock in the back of a pickup and drove it pell-mell down a potholed logging road. Imagine the pendulum, slamming randomly from side to side in the pitching truck. Not only would it be useless at keeping time, it would be lucky to survive without smashing through the polished cabinet. Violent and haphazard, it would be the epitome of disarray.

Watching the markets this year, there’s little doubt which pendulum symbolizes our age. As the first quarter of 2008 closes, the swings have been extreme. Writing in the New York Times last week, Floyd Norris noted that U.S. markets posted twelve sessions this quarter in which stocks either rose or fell by more than 2 percent — “something that didn’t happen even once in 2004 or 2005.” But the biggest change — a 4.2 percent rise in the Standard & Poor’s index of 500 stocks on March 18, as the Federal Reserve cut interest rates — was modest compared to volatility in France and Germany, which bounced around in ranges above 6 percent. In Hong Kong, the Hang Seng index rose 10.7 percent on one day and dropped 8.7 percent on another, with India and China showing extreme volatility as well.

Is there an ethical issue underlying these excessive swings?

I think there is, and I think it traces back to a financial short-termism that seriously imperils the free enterprise system. This trend — the quest for immediate profit at the expense of long-term financial security — is not new. In 1936, British economist John Maynard Keynes contemplated measures to “make the purchase of an investment permanent” as a way to “force the investor to direct his mind to the long-term prospects and to those only.”

Recent critiques of short-termism have erupted on all sides of the political spectrum, with observers as different as Warren Buffett and Al Gore calling for change. And several weeks ago the Economist, contemplating Wall Street’s woes, pegged short-termism as a root cause. “Spurred by pay that was geared to short-term gains,” its editors wrote in the March 19 issue, “bankers and fund managers stand accused of pocketing bonuses with no thought for the longer-term consequences of what they were doing.”

What’s wrong with short-termism? That question underlay two studies by reputable organizations in 2006, well before the current crisis. In a report titled “Breaking the Short-Term Cycle,” the CFA Institute Centre for Financial Market Integrity and the Business Roundtable Institute for Corporate Ethics called for reform of “practices involving earnings guidance, compensation, and communications to investors.” It declared that companies need to “make adjustments to their involvement in the ‘earnings guidance game’” — the practice of providing quarterly assessments of earnings prospects to Wall Street analysts, thereby encouraging investors to look only at immediate, bottom-line results rather than Keynes’s “long-term prospects.” It also called for executive compensation to be based on “long-term strategic and value-creation goals” rather than on these quarterly targets.

That same year a Conference Board report, “Revisiting Stock Market Short-Termism,” spoke presciently about today’s situation. “The pressure to meet short-term quarterly earnings numbers,” it asserted, “can cause undue market volatility.” Such whipsawing, in turn, can “cause management to lose sight of its strategic business model,” compromise global competitiveness, and fail to invest in “such critical long-term focused areas as research and development and environmental controls.”

These reports set forth the financial case against short-termism. But what about the ethical case? In themselves, neither short-term nor long-term thinking is “wrong.” In fact, situations that pit our present needs against our future obligations are so common that the phrase short-term versus long-term is used as a paradigm to describe some of humanity’s toughest right-versus-right dilemmas. And for good reason. All of us must honor the short term by spending for today’s necessities. To say, “I won’t eat today — I can do that next month,” is not an option. But neither can we say, “It’s boring to bring in the harvest — let’s just live for the moment.” There’s a moral case for both the long-term and the short-term — and frequently a need to choose between them.

But as with the other decision paradigms — individual versus community, justice versus mercy, truth versus loyalty — an excessive focus on one side over the other invites unethical behavior. In successful decision making, the two are kept roughly in balance. When one side continually drowns out the other, volatility rules and moral chaos ensues.

That’s nowhere truer than in short-term-versus-long-term dilemmas. More than the other paradigms, this one helps explain why market volatility is an ethical issue. Think of short-termism as consumption and long-term thinking as investment. Then remember that the issue driving the recent downturn — the housing market — represents something that, for most Americans, is the largest and most long-term investment they will ever make. Yet consumption — cashing in on rising markets to make immediate profits — represents one of the fastest ways to make money that most Americans have ever seen.

Does it now make sense that whatever would seek to destroy investment for the sake of consumption could be considered unethical? True, there are lots of financial causes for today’s downturn. But unless we recognize that behind them all lies the twenty-first century’s addiction to excessive short-termism, we’ll never address the ethical cause. Instead, we’ll just keep driving down that potholed road to nowhere — and wondering what all the clanging is about.

©2008 Institute for Global Ethics

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