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Ethics in a Time of Crisis

Oct 6th, 2008 • Posted in: Commentary

by Rushworth M. Kidder

Crisis invites introspection. As the markets tumble, credit freezes, and pundits mutter about the end of free-market economics, individuals and nations are revisiting their principles. What they’re finding is an age-old truth: At times of momentous challenge, there’s a tremendous yearning for straight-up integrity and sound ethical analysis.

That’s different from political or economic analysis. The former helps explain last week’s hesitation waltz, as members of Congress weighed the electoral costs of voting for the financial rescue plan. The latter helps us understand the symbiosis between Wall Street and Main Street, and why only demagogues think we can cut the former adrift without sinking the latter. These two kinds of analysis provide the default languages of journalism — the way reporters typically write about the world. These days, however, neither language brings us to the crux of the matter, which is essentially ethical. We’ve finally got to confront the question of whether the way we run the world is not simply politically astute or economically feasible, but whether it’s right.

Fortunately, we have a clearer understanding of “right” than we had two decades ago, when the seeds of today’s problems were sown. In 1987 it still was fashionable to assert that ethics was relative, situational, negotiable, and wholly subjective. That year, too, the movie Wall Street gave us Gordon Gekko, the Ivan Boesky-inspired character with the signature line, “Greed is good.” In the years since, there’s been a curious divergence of paths. On one hand, philosophy and public thought — and parts of the corporate world — increasingly have rejected moral relativism, recognizing instead that humanity shares a core of ethical values centered on honesty and responsibility. On the other hand, the financial community — or at least some parts of it — have drifted along on Gekko’s surf, clinging to a moral relativism that dismisses ethics as the “soft stuff” that impedes serious progress.

The question is, Which parts of that community? Before we can cleanse the current mess, we need to distinguish innocent human error from gross moral turpitude. Did this crisis arise because well-meaning people — CEOs, regulators, congressional committee members, traders, investors — simply took their eyes off the ball as the system grew more complex? Or was the crisis caused by fraud, deceit, and corruption — by mortgage lenders coaxing unwary buyers into unconscionable debt, banks fudging their figures, and lobbyists growing rich by misrepresenting Fannie Mae and Freddie Mac? If it was the latter, individuals need to be convicted and reparations paid. If it was the former, the system needs to be restructured and new regulations designed.

I suspect history will show us that it was some of both. For starters, then, there are two obvious courses of action:

Build better regulations. If greed is the demon, we need up-to-date, applicable restraints. It’s been said that some of the new financial instruments are so mathematically complex that only a handful of people in the world actually understand them. Regulation always has sought to prevent the marketing of the inexplicable to the unwary. Perhaps it now should require financial institutions to demonstrate an elegant and ethical simplicity in their product lines.

Create better enforcement. Under the market deregulation of recent years, the hope was that self-regulation — always the best form of enforcement — would work. Predictably, however, a financial community still mired in ethical relativism was never really going to embrace self-enforcement. Hence the need for new structures of punishment — and a diligent, well-paid, mature cadre of enforcers who can demand tough penalties that won’t be shrugged off as simply a cost of doing business.

But none of this will matter unless the regulations also require that, within our financial organizations, we take vigorous steps to create genuine cultures of integrity. Unless we can build into the corporate DNA a commitment to honesty, responsibility, respect, fairness, and compassion — in other words, to doing what’s right — all the regulation and enforcement in the world will create only more high-stakes efforts to game the system. Creating such cultures of integrity won’t be easy: The Ethics Resource Center found in 2007 that only 9 percent of U.S. companies had strong ethical cultures. But the need increasingly is recognized: The Revised Federal Sentencing Guidelines provide favorable treatment for companies that “promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.”

If there’s a silver lining to the current crisis, it’s that public demand seems to be building for a culture-of-integrity movement. If this crisis grew out of greed and corruption, such a movement is obviously the right response. But it’s also the right response if the crisis arose from well-meaning leaders who weren’t paying attention. Sadly, we now have evidence — from a text-messaging commuter-train engineer in Los Angles who accidentally killed 25 people last month — that well-meaning inattention isn’t good enough. In financial markets, too, we can define such a thing as culpable indifference — and trust even that failure to be remedied under a strong culture of responsibility.

Bottom line? We’ll emerge from this crisis with a stronger commitment to integrity, a chastened revulsion against ethical relativism, and a firmer grasp on right. We didn’t need a crisis to get us there, but now that it’s here, there’s a growing clarity that the way out lies along the road to ethics.