For more information, see this week’s Research Report.

by Rushworth M. Kidder

By all accounts, the world’s financial institutions are surging toward reregulation. But unless the new rules are set in a context of corporate integrity, they could make things worse. Here’s why.

The smartest guys in the room — the moniker for corporate hotshots like those who wrecked Enron and shattered their own careers — used to be the smartest kids on the playground. Back in third grade, ordinary kids followed the rules. These other kids found the loopholes. When the rules said, “Don’t run in the halls” and “Don’t chew gum,” these kids found ways to walk really fast and use tongues (rather than teeth) to avoid the definition of chew. Where ordinary kids saw rules as necessary annoyances, these kids took them as delicious challenges.

Back then, adults could have helped these kids understand the relationship between ethics and regulation. They could have explained ethics as “obedience to the unenforceable,” a term coined in 1924 by a British jurist, Lord Moulton, to distinguish the idea of morality from the principle of law. Adults also could have shared analogies about the usefulness of rules: As a former London banker put it to me recently, “Cars have brakes so they can go fast.” In addition, they could have developed in kids a sense of community beyond self, a moral commitment to doing right even when nobody’s looking. Finally, they could have explained that while any dolt can bend the rules, only the wise can maintain integrity and prosperity at the same time.

Would those lessons have crushed out the entrepreneurial wizardry of youth? On the contrary, it would have nested it safely within a moral conscience. In many cases, of course, adults did say these things. As a result, today’s financial community has a strong cadre of creative talent moderated by a sound moral compass.

But it also has its devil-may-care cohort. Dressed up as adults, but carting around a third-grade moral neutrality, that cohort is exceptionally bright. Their lust for challenges is almost Pavlovian: When a new rule comes along, they salivate at the idea of taking it apart, seeing what makes it tick, finding its flaws, and inventing a workaround. As in third grade, well-crafted rules serve only to inspire a more aggressive loopholism. Like computer hackers, for whom every new firewall is a chance to prove their mettle, they relish the gotcha game of one-upping the regulators. And like hackers, they find technology showering them with new products that regulation hasn’t caught up with yet.

What’s to be done? Start by recognizing that twentieth-century rule-making procedures won’t stand up to twenty-first-century pressures. As we learned from Sarbanes-Oxley, layering on rules without addressing ethics simply causes corporations to build extensive compliance operations. It does nothing to change thought. It doesn’t shift the balance away from those playing Masters of the Universe and toward those living by their values. Instead, it stimulates more rule bending.

So should we stop regulating? No. Deregulation has proved calamitous. Instead, we need to parallel every regulatory advance with concerted efforts to promote ethics in the marketplace. Research on this point, beginning with a string of surveys from the Ethics Resource Center in Washington, overwhelmingly points to the need to shift the emphasis from enforcing compliance to building cultures of integrity.

How can regulators foster such cultures? For starters, don’t make them mandatory. If Lord Moulton is right, that would reduce the unenforceable to the punishable — more rules and more loopholism. Instead, regulators should use their enormous moral suasion. From their bully pulpits, regulatory agencies can encourage financial institutions to recognize (among other things) four characteristics of such cultures. They are:

• Identifiable. They have attributes that any reasonable observer can spot. These include a commitment to the core values of honesty, responsibility, respect, fairness, and compassion, along with a decision-making methodology for applying them and the moral courage to put them into practice.
• Measurable. These attributes allow a culture to be compared to others in its field. These measures should not be imposed by external demand but arrived at through internal self-regulation.
• Replicable. These measures can be imported into other corporations and bring noticeable improvement. Business schools can play a role here in encouraging such replication as an effective management tool.
• Sustainable. Successful cultures of integrity make ethics a core part of the corporate mindset rather than a passing fancy.

What will the result be? No more Bernard Madoffs? Probably not. But Madoff and his ilk have given regulators a powerful ally: public moral outrage. If regulators work equally hard on each side of this two-pronged approach — creating rules while promoting ethics — they’ll tap into an enormous public yearning for integrity. Corporations that don’t get it will find themselves increasingly isolated, at the pointy end of piercing public opprobrium. Meanwhile, corporations who do get it will relearn an ancient truth: Rules alone won’t create an ethical culture, but an ethical culture makes it easy and natural to obey the rules.

©2009 Institute for Global Ethics

Questions or comments? Write to newsline@globalethics.org.

“I’m amazed and astonished that the Global Climate Coalition had in their possession scientific information that substantiated our cautious findings and then chose to suppress that information.”

– Dr. Benjamin Santer, a climate scientist at Lawrence Livermore National Laboratory, commenting in a piece last week from the New York Times that examines efforts by the coal, gas, and oil industries to create doubt about the science of global climate change.

Santer’s work as part of the Intergovernmental Panel on Climate Change was challenged by the industry-created Global Climate Coalition, which lobbied the government — and the public — by trying to cast doubt on scientific findings, even by their own scientists, that human energy use was a key cause of global warming.

The industries’ efforts have been likened by some to obfuscation efforts by the tobacco industry. “They didn’t have to win the argument to succeed, only to cause as much confusion as possible,” a British environmental activist and writer noted to the Times.

Industry representatives have denied trying to suppress the truth.

Source: New York Times, Apr. 23.

For more information, see: Related Newsline story, Mar. 9 — Related Newsline story, Jan. 29, 2007 — Related Newsline story, Jan. 8, 2007 — Related Newsline story, Jan. 30, 2006 — Related Newsline story, June 13, 2005.

In rebuttal, Cheney takes consequentialist view, saying Obama should release information on the success of such measures; Slate notes that such views show debate’s shift from morality to mere legality

WASHINGTON
In the latest round of debate over the ethical implications of U.S. treatment of terrorism suspects, Congressional Democrats and activist groups last week turned up the heat on the Obama administration to prosecute Bush administration officials who authorized “enhanced” interrogation techniques used on terror suspects.

President Obama said he does not support the establishment of an independent panel, such as the one that investigated the 9/11 terrorist attacks, to probe the issue, reports the Boston Globe.

But he did leave the door open to some type of probe of those who drafted memos permitting practices such as waterboarding, MSNBC reports. The president said he was turning the issue over the Attorney General Eric Holder.

Holder has said he would not criminalize policy-making, but also left the door ajar for prosecution by saying he would enforce the law if he saw evidence of wrongdoing, according to ABC News.

Continuing to weigh in on the debate was former vice president Dick Cheney, who has denied wrongdoing in his administration’s authorization of techniques that many, including the Red Cross, have deemed torture. Cheney last week called on Obama to release CIA memos that Cheney says document the success of the use of enhanced interrogations, according to CBS News.

CNN reports that Cheney claimed it was unfair for Obama to release memos detailing the tactics themselves but not those that addressed the result of the tactics.

Slate legal analyst Dahlia Lithwick noted over the weekend that arguments like Cheney’s denote a fundamental shift in how U.S. officials and the public have come to view torture five years after the overwhelming outrage at prisoner abuses by U.S. guards at Abu Ghraib.

“We have become so casual about torture that we now openly debate its efficacy — something nobody would have dared do in the first days after Abu Ghraib. The fight playing out between the left and the right now isn’t ‘Did we water-board?’ We already knew we did. It is barely even ‘Was it legal?’ Virtually nobody seriously argues that it was. The fight we are having in America now is ‘Did it work?’”

Sources: Slate, Apr. 25 — Boston Globe, Apr. 24 — CNN, Apr. 24 — ABC News, Apr. 23 — CBS News, Apr. 22 — MSNBC, Apr. 22.

For more information, see: Related Newsline story, Apr. 20 — Related Newsline story, Apr. 13 — Related Newsline story, Mar. 9 — Related Newsline story, Mar. 9 — Related Newsline story, Jan. 26.

Wrenching ethical decisions would inevitably accompany severe outbreak of new mutation of virus

VARIOUS DATELINES
World health officials are worried that recent mutations in the swine flu virus could trigger a pandemic and consequently revive a simmering ethics debate over who gets scarce vaccines and access to treatment if health facilities are overwhelmed.

The most recent strain of the virus, a unique mix of pig and flu viruses that appears to be directly communicable among humans, has spread alarm in some parts of Mexico with ripples extending through Asia, Europe, and the United States, reports the U.K. Guardian.

In Japan, the government recently released a draft on how pandemic vaccines would be prescribed, according to the Tokyo-based Daily Yomiuri. The draft classifies millions of people in 97 occupations that would get priority for vaccine access. The top-priority category includes medical professionals and police officers. Category II includes the prime minister and other government officials, while Category III lists those in the power, gas, and transportation industries.

The dilemma has been the focus also of U.S. states, some of which have convened ethics panels to plan for the wrenching decisions that would be inevitable in a severe outbreak.

A Minnesota panel, for example, in February recommended that supplies of vaccine be reserved for key workers, including medical personnel, and that ventilators be given to people most likely to survive and those most likely to need them for only a short time.

In South Carolina, an ethics task force is investigating what are expected to be unconventional approaches to medicine should a pandemic materialize.

“The medicine will change in a pandemic,” task force chairman Phil Schneider told Columbia TV station WIS. “There will not be enough resources to treat everyone that’s sick. That means you have to treat the people that have the best chance to survive, not necessarily the people who are sickest.”

Schneider told WIS that transparency and fairness are the key principles driving the task force’s plans. “We want people in the communities to understand the ethical principles which will guide these decisions,” he said.

Sources: Guardian, Apr. 25 — Daily Yomiuri, Apr. 25 — WIS, Columbia, S.C., Apr. 24 — Duluth News-Tribune, Apr. 23.

For more information, see: Related Newsline story, Feb. 9 — Related Newsline story, May 27, 2008 — Related Newsline story, Feb. 5, 2007 — Related Newsline story, Oct. 30, 2006 — Related Newsline story, Oct. 2, 2006.

Britain’s Nuffield Council on Bioethics says the tests, which are supposed to divulge risks of contracting serious diseases, often provide inconclusive results and may do more harm that good

LONDON
Ethicists in Britain are worried about the implications of tests available to the general public that can scan for DNA-related problems and other health issues.

The BBC reports that the Nuffield Council on Bioethics says such tests may cause unnecessary alarm among users, effecting more harm than good.

The Nuffield Council, which gathers leading experts to examine ethics issues, says that home tests often show conflicting results or give incomplete information about a person’s risk of developing diseases such as cancer or diabetes, the London Daily Telegraph reports.

Many of the home tests, which are very popular in Britain, require no medical supervision or follow-up genetic counseling, reports the Times of London.

According to the British Press Association, the Nuffield Council plans to seek input from the public and address the social, legal, and economic problems that are related to home testing in a report scheduled for release next year.

In addition, the Council also will examine other technology-related medical dilemmas, including the availability of prescriptions over the Internet.

Sources: Times of London, Apr. 23 — Telegraph, Apr. 21 — BBC, Apr. 20 — U.K. Press Association, Apr. 20.

For more information, see: Related Newsline story, Jan. 19 — Related Newsline story, May 19, 2008 — Related Newsline story, Sep. 24, 2007 — Related Newsline story, Sep. 17, 2007 — Related Newsline story, Jan. 22, 2007.

Chain claims rival launched “lifestyle” hotel brand with pilfered information

BEVERLY HILLS, Calif.
A corporate espionage scandal is brewing over allegations that one hotel chain stole information from another.

Hilton Hotels has been served with a subpoena concerning espionage allegations made by competitor Starwood Hotels and Resorts Worldwide, reports UPI.

Starwood claims that two former Hilton employees took trade secrets and helped Hilton develop a new line of hotels called Denizen, trendy hotels appealing to a young demographic, Bloomberg reports.

In a statement, Hilton said it was suspending development of the Denizen brand and had put the Denizen development team on paid administrative leave, according to a report from Condé Nast Portfolio.

The Financial Times reports that the suit centers on allegations that Hilton used confidential information about a comparable Starwood hotel chain called “W.” According to court papers, the information allegedly misappropriated includes strategic plans, financial reports, information about target markets and demographics, and details of negotiation strategies with brand owners.

Sources: Bloomberg, Apr. 24 — UPI, Apr. 22 — Financial Times, Apr. 22 — Condé Nast Portfolio, Apr. 21 — Wall Street Journal, Apr. 21 — USA Today, Apr. 16.

For more information, see: Related Newsline story, Nov. 24, 2008 — Related Newsline story, July 10, 2006 — Related Newsline story, July 25, 2005 — Related Newsline story, June 6, 2005 — Related Newsline story, Oct. 19, 1998.

Public interest groups claim release of information violated state ethics laws

ALBANY
New York State’s highest ethics council is reviewing a request from watchdog groups to probe allegations that the governor’s office leaked confidential information provided by Caroline Kennedy when she was seeking appointment to the U.S. Senate.

The New York Times reports that the state Commission on Public Integrity is reviewing the request but had not, as of last week, decided whether to pursue an investigation.

Various rumors about Kennedy surfaced after she withdrew from the running for the U.S. Senate seat vacated by Hillary Rodham Clinton when she became secretary of State.

The leaks included allegations that Kennedy had encountered tax problems over a domestic worker — claims that turned out to be exaggerated and of little consequence — notes the Times.

New York Gov. David Paterson was in charge of the selection.

The public interest groups filing the complaint argue that the leaks were orchestrated to discredit Kennedy after Paterson made the decision against her and to deflect blame from Paterson for his clumsy handling of the Kennedy’s Senate bid.

Anger over the purported leaks are part of the cause of Paterson’s plummeting popularity in the polls, according to an analysis from NBC New York.

A Paterson spokesman said he is confident no ethics regulations were broken, New York television station WCBS reports.

State laws prohibit the leak of confidential information, such as the answers to questionnaires completed by Kennedy when she sought the seat, according to Newsday.

Sources: Newsday, Apr. 24 — NBC New York, Apr. 24 — New York Times, Apr. 23 — WCBS-TV, Apr. 23.

For more information, see: Related Newsline story, Feb. 16 — Related Newsline story, Sep. 22, 2008 — Related Newsline story, Mar. 17, 2008.

Congress says it will keep an eye on cable companies as they roll out target ads; Web founder warns of privacy intrusion; privacy advocates question propriety of banking software

VARIOUS DATELINES
Ethics and law were attempting to keep pace with technology last week. Among the stories:

• Congress is putting cable-TV companies on notice about the privacy implications of targeted advertising. The Associated Press reports that cable operators are preparing to roll out target ads delivered to individual viewers based on data gathered by the user’s set-top cable box. Lawmakers say they’re worried about the intrusiveness related to advertising to customers based on what they are watching. Industry executives told a House panel that they will be conscious of privacy issues, notes the AP.
• The man credited with founding the World Wide Web last week warned that targeted advertising based on Web searches, a major component of the financial engine that currently propels the Web, threatens privacy and should be opposed. Tim Berners-Lee told a conference in Madrid that he wants assurances that “when I click on a link it is between me and the Web, and the Internet service provider is not going to immediately characterize me in different categories for advertising or insurance of for government use,” reports the Agence France-Presse. Berners-Lee maintained that targeted advertising should be based on cumulative browsing habits rather than the results of one search or one trip to a particular page.
• A common technology used to authenticate computers used in online banking is a threat to consumer privacy, according to a civil liberties advocate speaking at a computer-security forum, reports tech network CNET. Jennifer Granick, a lawyer at the Electronic Frontier Foundation, warns that a type of banking software — one that puts a unique identifier on the customer’s computer or monitors the individual characteristics of the device’s installed software and physical location — could be used to track consumer behavior and produces data that could be combined with other information to develop intrusive profiles. Granick says there is “very little privacy protection in the United States for this type of information.” A spokesman for one of the companies providing the software said it is very “privacy friendly” and is useful in preventing fraud, notes CNET.

Sources: AP, Apr. 24 — CNET, Apr. 24 — AFP, Apr. 24.

For more information, see: Related Newsline Commentary, Apr. 20 — Related Newsline story, Apr. 13 — Related Newsline story, Apr. 13 — Related Newsline story, Apr. 6 — Related Newsline story, Mar. 16.

In op-ed, John Bogle says unchecked market forces wiped out ethics standards

NEW YORK
Self-interest got wildly out of hand during the run-up to the economic meltdown, maintains Vanguard Group of Mutual Funds founder John Bogle.

In an opinion piece published in the Wall Street Journal, Bogle writes that self-interest “created a bottom-line society in which success is measured in monetary terms. Dollars became the coin of the new realm. Unchecked market forces overwhelmed traditional standards of professional conduct, developed over centuries.”

The result, Bogle argues, is a shift from moral absolutism to moral relativism. “We’ve moved from a society in which ‘there are some things that one simply does not do’ to one in which ‘if everyone else is doing it, I can too.’ Business ethics and professional standards were lost in the shuffle.”

Bogle is calling for the establishment of a “fiduciary society” in which professionals entrusted with managing other people’s money are legally bound to put the interests of their investors first. Money managers and agents also need to act “in a way that reflects their ethical responsibilities to society.”

Source: Wall Street Journal, Apr. 20.

For more information, see: Related Newsline story, Apr. 6 — Related Newsline story, Apr. 6 — Related Newsline story, Mar. 30 — Related Newsline story, Mar. 23 — Related Newsline story, Mar. 23.

In addition, more favor criminal probes than independent panels, Gallup poll finds

From Gallup:

“Earlier this [year], Sen. Patrick Leahy called for a special commission to investigate possible government wrongdoing by the Bush administration in its anti-terror policies, as well as possible attempts to politicize the Justice Department through the firing of U.S. attorneys who were viewed as potentially disloyal to the administration. While Americans appear to support some kind of investigation into these matters, no more than 41% favor criminal probes….

“For each of three controversial actions or policies of the Bush administration, survey respondents were asked whether there should be a criminal investigation by the Justice Department or an investigation by an independent panel that would issue a report of findings but not seek any criminal charges, or whether neither should be done.

“…[A]t least 6 in 10 say there should be either a criminal investigation or an independent probe into all three. This includes 62% who favor some type of investigation into the possible use of torture when interrogating terrorism suspects, 63% who do so with respect to the possible use of telephone wiretaps without obtaining a warrant, and 71% who support investigating possible attempts to use the Justice Department for political purposes.

“So far, President Obama has been reluctant to pursue such investigations, but Leahy and Conyers in particular are calling for an accounting of what happened on Bush’s watch.

“Perhaps not unexpectedly, a majority of Democratic identifiers favor a criminal probe into all three matters — including 54% who do so with respect to warrantless wiretaps, 51% for the possible use of torture, and 52% for the firing of U.S. attorneys.

“In contrast, Republicans are most likely to oppose any type of investigation, including a majority who say so in regard to the possible use of torture (54%) and warrantless wiretaps (56%). Republicans are more receptive to an investigation into possible efforts to politicize the Justice Department, with 24% favoring a criminal probe and 28% in favor of an independent panel report. Still, the greatest number (43%) of Republicans think there should be no investigation into the Justice Department matter.

“Independents’ views on all three matters fall in between those of Republicans and Democrats, with a majority favoring some type of investigation but (unlike Democrats) not a criminal probe….”

For more information, see: Full press release from Gallup, Feb. 12 — Related Newsline Research Report, Mar. 9.

“The secret of prolonging life consists in not shortening it.”

– Ernst Von Feuchtersleben (Austrian physician, poet, and philosopher, 1806-1849)