“Extraordinary evil,” were the words used by the judge to describe the actions of 71-year-old investor Bernard Madoff as he was sentenced to 150 years in prison in the summer of 2009.1 Madoff’s conviction for fraud and money laundering marked the climax in the largest and most elaborate “Ponzi scheme” in American history.2 He had shattered the life savings and portfolios of many individuals and charitable groups alike. The scheme that resulted in the loss of billions of dollars quickly became the most egregious example of reckless greed in the history of Wall Street and shook people’s confidence in an already faltering financial sector.
The Madoff scandal unraveled before an American public already shell-shocked from an economic upheaval that began in the sub-prime housing market and spread to every sector of the economy. Most—including policymakers, pundits, regulators, executives and investors—had failed to anticipate the fatal flaws in the housing market and now seemed unable to rescue the system. In just one year, between the end of 2007 and the end of 2008, an estimated $6 trillion in wealth was lost.3
What happened? Sure, Madoff broke the law, and billions disappeared and a substantial number (more than 40 percent of Americans and American executives) think that crimes like Madoff’s are a widespread practice.
But something else occurred under the legal radar. The financial crisis depleted trillions, yet in most cases, those responsible for the unprecedented losses broke no laws and did no jail time—even though the consequences for Americans, who lost vast amounts of their retirements, pensions and savings, were all too real, and the global repercussions of the housing market debacle made the scope of Madoff’s crimes pale in comparison.
While many blamed insufficiencies in the laws, regulations and political oversight of Wall Street, others began asking what had happened to right and wrong. How was it that so many people had made so many decisions that left so many destitute—and all within the confines of the law? Was the fault simply one of inappropriate regulation, or was something more fundamental at work: moral bankruptcy on the part of financial managers, institutions and investors?
The crash heightened a crisis of confidence in political and economic institutions that persists to this day.4 While some—like Madoff—had flouted the law and morality, many more had kept within the law but lost their moral center, and Americans began to wonder whether the country itself had lost its moral bearings.
Moral bearings, of course, could be lost in many ways. Interestingly, in a 2008–2009 poll, Frank Luntz asked Americans, in terms of the traditional “seven deadly sins,” which were the worst vices affecting the nation. Looking at our culture, Americans could have argued for any of them. But interestingly, none came close to the first choice—greed. Luntz found that nearly two-thirds of Americans think greed (at 64 percent) is the worst vice affecting Americans as a whole. The other six “deadly sins” polled in the single digits.5 In other words, not only did greed influence the economy and contribute to the collapse, but most Americans see greed as the preeminent vice in our culture.
And when we asked people specifically about the economic downturn, it was nearly unanimous: Americans, more than 92 percent, believe greed was a major factor in causing the economic crisis. Almost three quarters (71 percent) take the strongest position possible, saying greed had “a great deal” to do with causing the crisis.6
The greed was widespread. From banks that aggressively promoted sub-prime mortgages, to real estate speculators, to Wall Street with its appetite for highly structured and speculative transactions—everyone was tempted in the quest for a quick dollar. But the plan was utopian at best, making sense only as long as real estate prices kept increasing and interest rates did not.
With the demise of banks and investment firms went the untold stories of those most hurt by such events. The savings of everyday people were wiped out as greed turned to panic and the market plummeted. The modest homeowner was evicted because of a loan he never could have afforded. Indeed, Gordon Gekko, the fictional character in the film Wall Street, who symbolized the Wall Street culture of the 1980s with his proclamation that “greed, for lack of a better word, is good,”7 found himself without many allies. His mantra was now understood to be as bankrupt as his morals had always been.
Greed found itself opposed by almost everyone: candidates Barack Obama8 and John McCain,9 the Acton Institute10 and Center for American Progress.11 Whatever their solutions and disagreements, regardless of what they thought was the source of the greed, they all agreed that greed was part of the problem.
Some proposed that greed was a problem that went beyond a legal fix. Yet on both sides of the political aisle, regulation and legislation—not morality—were the primary topics of discussion in terms of finding a solution. For the most part, the only disagreement was over what kind of, and how much, regulation was needed.
“All of us want to deliver a reform that will tighten the screws on Wall Street, but we’re not going to be rushed on another massive bill,” said Senate Minority Leader Mitch McConnell in April.12
Majority leader Harry Reid said of the regulations: “Wall Street reform is preventive care.”13
What was often missing from public debate in the United States was something that most Americans understood at their moral core: The crisis could not be fixed simply through more legislation or less regulation. Americans sensed that there was an even bigger issue at work that went beyond a legal fix—a forsaking of ethics and moral values, and specifically, a dismissive attitude toward the destructive effects of greed. Certainly laws may be made better, but without an understanding of the crisis as a moral one, without a call for each of us to respond to the “better angels” of our nature, a solution is elusive. The crisis, in essence, was caused by human beings making choices at odds with concern for their neighbor.
A purely legal solution to a moral problem may make good politics or good television, but it does not make good people—on Wall Street or anywhere else. The greedy can always find another loophole, making legal fixes seem like a constant, reactive game of catch-up. After the Enron and WorldCom scandals a decade ago, the Sarbanes-Oxley Act provided a regulatory “fix” to the crisis at hand, but it didn’t prevent the meltdown of 2008.
But there were few public calls for a return to a moral sense. So as Congress debated its various regulatory solutions to the economic crisis, we asked Americans what they thought government should do.
Despite Washington’s best intentions, people seem skeptical of a legislative fix to the current crisis. We found that a solid majority (55 percent) believe more government regulation “will hurt business and the economy.”14
Additionally, when it came to cultivating ethics in business, personal responsibility outpolled government responsibility. Fewer than half think the government should play “a major role … in making sure Corporate America upholds high ethical standards.” By contrast, 79 percent say top executives should play a major role, 69 percent say a company’s employees should and 63 percent see a major role for “shareholders and individual investors.”15
Table 1: Responsible for Corporate America’s Ethical Standards
Should each of the following have a major role, a minor role or no role at all in making sure Corporate America upholds high ethical standards?
The Knights of Columbus/Marist Poll July 2010 Survey
At the same time, 70 percent of Americans have little confidence in the government’s ability to deal with the financial crisis, according to our poll from July 2010 (47 percent are less confident than a year ago, while 23 percent “remain not confident”).16
Interestingly, compared to our polling six months earlier, the proportion of Americans who have grown more confident decreased by almost half, from 20 percent in January to 12 percent in July. The total of those showing any confidence at all decreased by 11 percentage points, from 41 percent in January to 30 percent in July.17
Perhaps it shouldn’t be surprising that Americans don’t expect lawmakers to be able to handle the crisis. After all, although our polling shows that exactly half of Americans see the “overall ethical conduct” of corporate executives as poor, politicians are viewed negatively by even more. (More than six in 10 Americans rate their ethical conduct as poor while only eight percent say excellent or good).18
In other words, Americans have even less faith in Washington’s moral compass than in Wall Street’s, which may explain why they’re doubtful a regulatory fix can fully repair what has been left shattered in the aftermath of the economic crisis.
There is a real disconnect. In July 2010, Politico found that more than 60 percent of the general population thinks the country is headed in the wrong direction. Tellingly, less than half of Washington insiders share this view; likewise, by a more than three to one ratio, they also admitted that the economic crisis had affected them less than most Americans.19
Figure 2: Confidence in Government’s Ability to Deal with Economic Crisis
Thinking about the past 12 months, are you more confident or less confident in government’s ability to deal with the economic crisis than you were a year ago?
The Knights of Columbus/Marist Poll January and July 2010 Surveys
Table 2: Ethical Conduct of Professions
Would you rate the overall level of honesty and ethical conduct of each of the following professions as excellent, good, fair or poor?
The Knights of Columbus/Marist Poll July 2010 Survey
How Washington reacted to warnings years ago about the impending crisis is also a penetrating glimpse into a culture at times either broken or overly political. Take the Security and Exchange Commission’s turning a deaf ear to Harry Markopolos, who for years tried to alert them to Bernie Madoff’s scheme.20 The system that should have worked didn’t.
Then there is Armando Falcon, the former head of the Office of Federal Housing Enterprise Oversight. Years before the economic crisis, he warned of problems with the use of derivatives at Fannie Mae and Freddie Mac. In the April 2010 hearing of the FCIC (Financial Crisis Inquiry Commission) regarding Fannie Mae and Freddie Mac, he described a failure of leadership that was “deeply rooted in a culture of arrogance and greed”—a systemic breakdown that made the companies “not unwitting victims of an economic down cycle or flawed products and services of theirs.”
In 2004, though, he found his concerns viewed through partisan lenses at a hearing by the Committee on Financial Services. Symptomatic of what the American people think is wrong with Washington, they simply wrote him off as “politically motivated” and dismissed his warnings. Members of both parties came together to urge his ouster in a spending bill in late 2004.21 The belief that political motivations were behind his report seemed altogether more important than the report itself.22
Just before Christmas, 2004, he described Congressional reaction in an interview with The New York Times:
Unfortunately, this all got caught up in a political tug of war going on at Capitol Hill. […] It became, ‘Are you prohousing or antihousing?’ when what we were trying to do was just address safety and soundness.23
Viewed through an overly political lens, the gravity of his report was distorted. Politics trumped facts and common sense.
In July 2010, Reuters reported that Fannie Mae and Freddie Mac had received from the U.S. Treasury a total of $145 billion in taxpayer funds, “a figure that is expected to continue to mount.”24
Americans have every right to look back on such episodes with frustration—but the bigger issue is how we move on from here. It’s worth asking: Is greed avoidable? Many of the most respected voices of the last century have assumed that it is not.
In 1979, Phil Donahue asked Milton Friedman about the benefits of “greed” and self-interest. “But it seems to reward not virtue as much as ability to manipulate the system,” Donahue said. Friedman replied:
And what does reward virtue? You think the communist commissary rewards virtue? You think a Hitler rewards virtue? You think (excuse me, if you’ll pardon me) American Presidents reward virtue? Do they choose their appointees on the basis of the virtue of the people appointed or on the basis of their political clout? Is it really true that political self interest is nobler somehow than economic self interest?25
Friedman, a Nobel laureate in economics, spent a lifetime defending the value of the freedom of our economic system compared to the straightjacket of communism. History has certainly proved which system was better. But better isn’t perfect, and Americans today want to hear a call for morality more than a defense of self-interest even if they agree that politics is no more virtuous than business. In fact, they want to hear the call to morality for both business leaders and politicians.
In an op-ed on the “greed” associated with the rising price of gasoline in 2006, Prof. Gary Galles of Pepperdine University quoted Friedman as saying: “What kind of society isn’t structured on greed? The problem of social organization is how to set up an arrangement under which greed will do the least harm.” Friedman didn’t think greed was good; he wanted to channel it and minimize its destructive potential. If he made a mistake, it is that Friedman may well have agreed with Galles’ conclusion that “we cannot change the extent of people’s greed.”26
The power of greed needs no explanation. Any mother who has tried to get her 4-year-old to share a toy with another child knows just how powerful a force it can be. Economists who don’t believe “greed is good” do at least often believe that “greed is inevitable.”
When I was at the World Economic Forum in Davos, Switzerland, in January 2010, I had the opportunity to listen to Muhammad Yunus, another Nobel laureate, speak on a panel about ethical decision making. Yunus noted that since people can also be altruistic, we should present them with a choice: to be greedy or to be altruistic, becoming social entrepreneurs or having not-for-profit businesses and associations that set as their aim the common good.27
Yunus’ testimony proved rather provocative—made stronger by his personal experience in bringing a social conscience to the business world through his micro-credit program in Bangledesh—gaining many supporters including Jim Wallis.
Yunus and others have done much good in challenging others to behave altruistically. But perhaps we needn’t concede quite so much. Human nature is capable of both greed and altruism. But we need not acquiesce to the inevitability of greed. The fundamental challenge for those in business today is not to set up parallel business worlds, for those motivated by greed and those motivated by a social conscience. In fact, the fundamental challenge is much older than this crisis or any other. The real challenge comes from the question in the first chapters of Genesis: “Am I my brother’s keeper?”28
How we answer that is telling. Answering, “Yes, I am my brother’s keeper” implies two things: First, you claim another person as your brother, and second, you have a responsibility toward him. This responsibility extends beyond family. Corporate America and all of us have responsibilities toward those we interact with—our customers, those we do business with, our shareholders and our employees.
This sort of thinking changes everything—in government, in business, in our social responsibility to others. It means we must consider the broader consequences of our actions.
In Genesis, Cain in effect answers “no” to the question, “Am I my brother’s keeper?” after killing his brother out of greed and envy.
That’s not to say that greedy people are murderers. But when their greed makes money disappear and a pension plan go belly up—when a widow’s life-savings vanish or a family’s college tuition nest egg gets scrambled—it’s not murder, but it certainly ruins lives.
We are a society in which two-thirds of us think that concern for the less fortunate “is not valued enough,” and more than two-thirds say they have donated time and money in the past year.29 We have a good starting point for “our brother’s keeper” thinking. There is almost no support for the sort of personal greed that can leave our brothers and sisters stranded and in need.
Such an alternative economic theory was presented in the 1980s. Like Friedman’s, it had no use for the command-and-control communist system. It saw the “determinate” nature of communism—an imposed system of collective will for individual will that renders individual morality irrelevant—as both dangerous and unsustainable. But it warned that some capitalists were making the same mistake if they saw market forces as making morality irrelevant. It had a warning for capitalism: Moral bankruptcy could cause “the laws of the market to collapse.”
The man who proposed this wasn’t an economist, but a theologian named Joseph Ratzinger—better known to us now as Pope Benedict XVI—writing in a 1985 paper titled “Market, Economy and Ethics.”30
As we look to repair our economy, we would do well to heed his observation: Capitalism misleads itself when it assumes only self-interest—and not attention to the common good—can successfully guide the market.
It is important to remember that there was a time when “virtue ethics” informed the way business was done. Some have even argued that Adam Smith, whose book Theory of Moral Sentiments deals with the subject of virtue at some length, has been inappropriately labeled as an advocate for purely self-interested action.31 Smith did point out that virtue is not only good but also good for business.
These words from Smith’s Theory of Moral Sentiments still ring true today:
By the wise contrivance of the Author of nature, virtue is upon all ordinary occasions, even with regard to this life, real wisdom, and the surest and readiest means of obtaining both safety and advantage.
Smith went on to explain that having a virtuous reputation is a great advantage in business, adding:
Since the practice of virtue, therefore, is in general so advantageous, and that of vice so contrary to our interest, the consideration of those opposite tendencies undoubtedly stamps an additional beauty and propriety upon the one and a new deformity and impropriety upon the other.32
No one wants a sleight of hand on Wall Street or a heavy hand from Washington. Americans want “virtue” and a system that allows for sustainable economic development, a system where profit doesn’t come at the expense of the common good. In short, they want capitalism with a conscience.
By overwhelming majorities, Americans believe business decisions should be guided by moral choices. We found that three-quarters of Americans believe business leaders should apply the same ethical standards at work as they do in their personal lives, though 81 percent don’t believe that usually happens.33 Nearly two-thirds of Americans (65 percent) think religious values have a place in influencing the ethical decisions of executives;34 an even greater number of executives, 70 percent, agree.35 Finally, neither the general population nor executives believe such ethical standards will hurt business: Nearly eight in 10 Americans (79 percent) believe a business can be ethical and successful,36 and nearly all business executives, 94 percent, agree.37 In short: Americans rightly understand that ethics don’t have to come at the expense of profitability. The failures are clear. So are the solutions. What is needed now is action.
The choice needn’t be either capitalism or altruism. One can have a successful market economy with an ethical foundation. Applied to business, the question “am I my brother’s keeper?” offers the possibility of success infused with a spirit of responsibility, of service, and of dedication to the common good. It challenges us to be creative and committed to pursuing excellence in business by holding as our guide our high ethical standards.
Such standards can be good for everyone and good for business. The Knights of Columbus is an example of this, not only evidenced in our charitable giving, but also in our success in running a business enterprise based on Catholic social teaching.
We consciously strive to treat both customers and employees fairly, and our investment criteria include a moral component that steers us away from investing in companies whose business operations are at odds with Catholic teaching. These criteria have not reduced our profitability; in fact, over the past decade, our investment returns have been comparable to those of major indices and have remained competitive even in the face of market declines.
In the current economic crisis, the position of the Knights of Columbus has actually improved relative to the rest of the insurance industry. As a result, we’ve received the highest ratings from A.M. Best and Standard & Poor’s, as well as ethical certification from the Insurance Marketplace Standards Association. The Knights of Columbus is one of only two insurance companies in the United States that can lay claim to all three high marks—and the only one in Canada.
In short, we believe that where we invest our money and what companies we choose to partner with are ways we can help influence the moral compass of various businesses for the better. This isn’t just something for “another company” to do. Recently, the Associated Press reported on the sustained growth of mutual funds for socially responsible investors (SRI).38 Such funds’ investments often avoid the alcohol, tobacco and weapons industry; other criteria could include a company’s environmental practices, its record on community relations, or its outspokenness on human rights. The AP reported that since the 1990s, the number of SRI funds has doubled to around 200. Even when nearly $96 billion disappeared from stock mutual funds during the 2008 crash, SRI funds beat the trend, pulling in $700 million. In terms of performance, the article continued, an index of companies that screen for environmental and social issues showed returns comparable to the S&P 500 at the three- and five-year marks.
In his books on corporate longevity and business success, Built to Last and Good to Great, author Jim Collins points out that the most successful businesses are those that place “core values” above the exclusive search for monetary profit.39
Comparing “visionary” companies to “comparison” companies—similar in many ways, but not in vision—Collins makes a compelling case for the importance of placing values over profit.
Collins uses Ford as one of several examples. He quotes former Ford CEO Don Peterson as saying, “Putting profits after people and products was magical at Ford.” Peterson wasn’t the first to think that way. As Collins points out, Henry Ford reduced prices in the face of increased demand, paid nearly twice the typical daily wage to his workers, and for his work elicited the following reaction, as Robert Lacy’s description—quoted by Collins—makes clear:
The Wall Street Journal accused Henry Ford of “economic blunders if not crimes” which would soon “return to plague him and the industry he represents as well as organized society.” In a naïve wish for social improvement, declared the newspaper, Ford had injected “spiritual principles into a field where they do not belong”—a heinous crime—and captains of industry lined up to condemn “the most foolish thing ever attempted in the industrial world.”40
Following the crash of 2008, as The New York Times noted, “A slimmed-down General Motors emerged from bankruptcy as a shadow of the manufacturing titan it had been,” the bulk of its assets now government-owned. As for Chrysler, it was “forced into the arms of Fiat.” But Ford’s story was different:
Ford never asked for cash assistance from the government. Before the recession began, it had set aside $25 billion for a turnaround fund, even borrowing against the company’s iconic blue nameplate. That money helped it weather the plunge in sales that affected all car companies when the economy went into sharp decline in the fall of 2008. It did lobby for assistance to its competitors, arguing that a collapse of either GM or Chrysler could put its suppliers out of business and create a domino effect. It was the first of the three to bounce back; the third quarter of 2009 was its first profitable one for its North American operations since 2006.41
Figure 3: Factors in Making Business Decisions*
When making business decisions, do you think corporate executives take each of the following factors into account: a great deal, a good amount, not very much or not at all?
The Knights of Columbus/Marist Poll July 2010 Survey
Despite stories such as Ford’s, and the overwhelming sense among Americans—and executives—that a business can be ethical and successful, Americans don’t think such action is the norm. In a super-consensus, at least 90 percent believe executives’ business decisions are based on “advancing their own careers,” “gaining advantage over competitors,” “increasing profits” or “personal financial gain.” Less than a third think executives’ decisions take into account “their employees,” and less than one-quarter (22 percent) believe “the public good” is a motivating factor.42
In a similar survey, more than 90 percent of executives agreed that career, profit, competitive advantage and financial gain top the decision-making matrix. Fewer than a third say “the public good,” and just over half say “their employees” are important factors in their decision making.43
This “me first” attitude wasn’t just the hallmark of those who followed Gordon Gekko’s philosophy on Wall Street. At an FCIC inquiry, Armando Falcon described the “profit at all costs” mentality that drove the business dealings even at institutions like Fannie Mae and Freddie Mac. He stated:
In my opinion, the goals were not the cause of the enterprises’ demise. The firms would not engage in any activity, goal fulfilling or otherwise, unless there was a profit to be made. Fannie and Freddie invested in subprime and Alt A mortgages in order to increase profits and regain market share. Any impact on meeting affordable housing goals was a byproduct of the activity.44
It’s a far cry from Collins’s “core values.”
Shortly after the fall of European communism two decades ago, then-Czech President Vaclav Havel addressed his nation on the importance of individual responsibility within an economic system. Speaking of the failure of communism, he said:
We live in a morally contaminated environment. We fell morally ill because we became used to saying something different from what we thought. We learned not to believe in anything, to ignore each other, to care only about ourselves. […] We have to understand this legacy as a sin we committed against ourselves. […] If we realize this, hope will return to our hearts.45
When he spoke in 1990, the world had just watched transfixed as the Iron Curtain collapsed in Europe. Indeed, one of the two financial and political systems that had defined most of the 20th century almost instantaneously disappeared from the European continent. The idea of atheistic communism as a viable economic force had been debunked, leading at least one commentator to proclaim that “the end of history” was at hand.46
But triumphalism can be dangerous, and today with the world economy in the midst of a deep recession, we would do well to keep Havel’s words of individual moral responsibility in mind as a necessary part of any real solution.
Most Americans, looking back at the crisis as one of greed and immoral action, can probably agree with Havel—along with many in business—that leaders “learned not to believe in anything, to ignore each other, to care only about [them]selves.” Communism failed because it took individual morality out of the equation. We all need to make sure we don’t make that same mistake in our market-based system.
The trouble on Wall Street didn’t happen in a vacuum. It happened in a country where our institutions became divorced from our values, despite the fact that the data indicate that both executives and the American people know such behavior isn’t necessary for success. What remains to be seen is whether America’s repudiation of greed and the desire for a return to virtue in the marketplace is genuinely embraced.
Americans have examined their consciences. They know what their values are. Ninety-six percent say if they saw a coworker doing something unethical they would take action—44 percent would report it, and 52 percent would talk to the person directly about his or her ethical lapse.47
Americans care about the public good, but Americans and business executives alike agree that all too often business decisions aren’t made that way. There is an enormous disconnect between Americans’ values and the wavering standards of ethics they see in their business leaders, and Americans expect better. We no longer want to hear that this set of ethics went to market, and that set of ethics stayed home.
We want one set of ethics—not a split-conscience of “business ethics” and “personal ethics.” Just ethics will do. Beyond self-interest and partisan ideology, it’s time to focus on how to build on Americans’ ethical consensus, for the sake of restoring and rescuing our business, political and economic systems—and thus our international standing, our capacity for charity, our parents’ retirement and our children’s future.
It’s time for all of us to listen—to the consensus, to our customers, to our constituents, to the better angels of our nature. This is what the American people are calling for, and it’s also the only sustainable way out of the current crisis, and the only way to avoid another one.