Here's hope for fewer 'perp walks'

By OLIVER R. GOODENOUGH
THE PROVIDENCE JOURNAL
SOUTH ROYALTON, Vt. -- As 2006 nears its tumultuous end, it's time to ask the perennial question plaguing corporate America: What's the matter with our business leaders?
The past year has seen the retirement, resignation and prosecution of yet another gaggle of high-profile executives. A New York court ruled against the excessive pay package of Richard Grasso, the former head of the New York Stock Exchange. Jeffrey Skilling got 24 years in jail for his role in defrauding Enron investors. Perhaps most ironic of all, charges have been filed against Kevin Hunsaker, Hewlett Packard's ethics officer.
Bloomberg Television is starting to look like America's Most Wanted. What's going on here?
Some may say that news is, by nature, bad news, and a few high-profile cases do not a trend make. That might have explained it a decade ago, but the drumbeat of dishonesty says that something more systemic is at work, and systemic problems cry out for systemic solutions. Our CEOs must radically rethink what leadership means in a free-market economy. Leadership, whether in business, politics or civic life, demands more than charisma, more even than competence.
It also requires character.
But we shouldn't just blame solely the CEOs. Society as a whole has embraced a bad cartoon as the model for our economic life, holding up unleashed selfishness as the basic driver in free-market capitalism. For two generations, we as a society, as shareholders -- and with the media's complicity -- have reinforced and rewarded business leaders who are very intelligent, shrewd, charismatic -- and ruthlessly amoral. The business section of any large bookstore will illustrate this point. We have taught this distorted myth in our MBA programs, our economics departments, and even our local elementary schools.
Of course, self-interest plays a role. As Adam Smith famously put it in his 1776 book, "The Wealth of Nations": "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard for their own interest. We address ourselves, not to their humanity but their self-love, and never talk to them of our own necessities but of their advantages."
Role of character
But the same Adam Smith also wrote another book, "The Theory of Moral Sentiments," exploring the necessary role character plays in containing, shaping and directing our self-interest. It is only through putting both of these books, and both of these sets of motivations, together that we get a complete understanding of the psychology of Homo economicus.
Hardheaded economic traditionalists still dismiss ethics as some kind of Pollyannaish add-on, harking back to Milton Friedman's famous injunction that making money contains its own ethical value. What they fail to recognize is the necessary role of institutions in an economic system. Institutions are structures of reliable expectation that make deals work, opening up the gains of trade and specialization. Institutions can be externalized into laws, like contract and property, into formal markets, like the New York Stock Exchange, or into such other business as Enron and Hewlett-Packard.
Even more important, in the long run, are our inner institutions, the limits and expectations we apply to ourselves -- in short, our character. Commitments to values such as honesty, trustworthiness, and fairness are not just nice add-ons in business life. Rather, they are what permit business life to exist.
Astonishingly, these key elements went out of fashion for a while. The "self-interest is all" myth slowly eroded the values most of us learned from family, school and church. Don't lie. Be fair. Keep your promises. These need to be put back front and center in business life, not just because they are nice but because they are fundamental and necessary to the workings of a successful free-market system, particularly one that values self-policing and wants to keep government intervention to a minimum. A business culture explicitly modeled on character, in balance with selfishness, will capture more of the gains of trade and specialization that are at the heart of our prosperity. Our country will get richer, and we'll see a lot fewer CEOs making the "perp walk."
Oliver R. Goodenough is a professor of law at Vermont Law School and a research fellow at the Gruter Institute for Behavioral Research. Distributed by Scripps Howard.