Skepticism about governance regimes based on corporate social responsibility, or “CSR,” apply a fortiori to the shift in attention toward “financial stability.” What is especially pernicious about the G-20 dynamic is the manner in which the free market is in effect ceding economic control over to a global assembly of twenty nation-states, several of which fail to subscribe to the notion of a free-market economy to begin with.

All of this makes about as much sense as entrusting a team of avowed atheists with designing the curriculum content for an orthodox religious academy. And yet sage representatives hailing from principalities like Argentina, Indonesia, Russia, and Turkey were impaneled to supervise Wall Street executives to ensure their remuneration stays within appropriate bounds. Consider the irony of Argentina’s Cristina Fernandez de Kirchner judging the moral propriety of reaping too much personal financial gain, in light of her ties to the infamous maletinazo (suitcase scandal) and her appropriation last year of $29 billion from private pension funds to restock municipal coffers she and her husband had used up.

Even the staunchest critics of activist-led CSR programs often find themselves concurring with not only the spirit but also the substance of their underlying proposals. Helping businesses to play their proper role in the advancement of environmental sustainability, and improvement of labor conditions and respect for human rights in the developing world are admirable goals. What is objectionable, however, is the notion that parties having no role in the creation of profit should be accorded the authority to dictate the precise contours of corporate social responsibility. Similarly, in the case of the G-20, whereas broad objectives such as reining in incentives for financial misconduct, preventing hedge fund abuses, and establishing some reasonable oversight of the “shadow banking system” are generally praiseworthy, the scurrilousness of the process and the dangerousness of the pattern being set are alarming. The U.S. GDP is equivalent to thirteen of the G-20 members put together, and the U.S. accounts for approximately twenty-four percent of the world’s economy, yet it has one-20th of a say in this forum. The market-based democracies of the world are unwittingly taking steps to establish a global economic governance regime that seriously jeopardizes individual financial freedom and imperils worldwide prospects for renewed and sustainable wealth.

Delivering a good deal of blatherskite and patching together basically vapid protocols amounts to window-dressing, undertaken by President Obama and the other leaders he invited to Pittsburg to manufacture an illusion of achievement in orchestrating a worldwide economic recovery. If only it were so simple. In fact, there are many deep-rooted differences in corporate governance systems across nations, making coordination of them unrealistic. Some of them are utterly backward. Others are autocratically controlled. Consider, for instance, that Russia was socialist up until only twenty years ago. When the Soviet Union disintegrated, managers essentially helped themselves to the spoils of formerly state-owned enterprises. In Germany, where unions sit on the board of directors, business firms are much more regulated than in the United States. Moreover, executives around the world perform very different tasks, according to the laws of the country in which they operate.

Instead of convening more of such summits, a better approach is to abandon the fantasy that governments can be relied upon to establish sustained economic growth. Instead of mounting an attack upon entrepreneurs and market-based economies, both of which have enabled tremendous levels of wealth to be created across the globe, the representatives of the G-20 ought to own up to the reality that excessive governmental intrusion into the private mortgage market via the syndicated debt of Fannie Mae and Freddie Mac was a major contributing cause to the financial crisis, and that the private sector is where we need to look for sound economic advancement.

Some of the factors that led to the economic crisis are rooted in a deep-seated set of moral-cultural malaises.  It is difficult to say what led to excessive financial innovation and complexity, executive compensation, and neglect of moral hazard, but among the causes are factors such as technocratic, dehumanized economic thinking, egoistic individualism, greed, short-termism, repudiation of objective moral values, and a highly speculative culture. These underlying moral-cultural trends cannot be resisted or reversed simply by increased law and regulation, especially not from any directives arising from the G-20 summit.

The cultural causes of the crisis must be addressed by more nuanced ethical thinking and collective activity grounded in virtue, regard for the common good, and greater attention to the cultivation of intangible capital assets such as reputational and social capital Our thinking needs to be more sensitive to the complexity of relationships between ethics and economics and attuned to the importance of trust, truth and transparency, along with the need to establish localized and “spontaneous” social structures that are better equipped to foster such elements in business conduct than stepped-up regulation could ever be expected to do.

In the Nicomachean Ethics, Aristotle explains that human happiness arises from having chosen virtuous actions. A virtuous action falls within the golden mean, which rests midway between two vices that make up the extreme endpoints of any trait of character: deficiency and excess. For example, Aristotle states that people should be generous, meaning that they should neither be too wasteful nor ungenerous. They ought to strive to be temperate. As such they will prevent having their lives dictated by irrational appetites like envy and lustfulness.

Some types of executive compensation arrangements that are now being placed in the spotlight from the financial collapse—that is to say, schemes that offer inducements to cheat, perpetrate fraud, and cook the books in an effort to fabricate levels of reported corporate performance in order to elicit exorbitant payoffs—reward businesspeople for the immoral practices they carry out. Accordingly, such executive compensation plans are squarely counter-Aristotelian and contrary to virtue ethics. Executive compensation plans that motivate managers to manipulate performance levels rather than to engage in conduct aimed at building genuine value for their firms fail to promote virtue; instead they encourage and reward vice, namely the character deficiency of “acquisitive ungenerosity,” which for Aristotle amounts to the dishonorable worship of profit.

It must be remembered that democracy, the rule of law and a free-market economy in the United States have made this country great. Attempts to respond to the financial crisis with global governance regimes like the G-20 summit will not help in mustering the enlightened leadership required to advance beyond the crisis toward a preferable situation of a sustainable free market.

Let the market remain free from meddlesome mandates handed down from finance ministers and central bank governors hailing from communist, corrupt, and despotic states and instead channel attention towards reputational accountability of individual firms for standards of sound business that have developed from the traditions of market economies operating under democracy and the rule of law. The result of this shift in emphasis will be to reward virtue and punish vice in the respective practices of business enterprises.

Where corporate misconduct takes place, let the scoundrels be “named and shamed” according to established principles of enlightened business. Such an approach is preferable to assembling a global-financial-hit-squad whose membership includes heads of states committed to ideologies contrary to the ideals of ordered liberty and the free market held by our nation’s founders. In this regard, the current economic scandal provides a special opportunity to rethink moral standards for market participants. Rather than ceding our freedom by responding with excessive regulation, we need to look to moral reform.


Kevin T. Jackson is Professor of Law and Ethics at Fordham University’s Schools of Business in New York City, and a Senior Fellow of the Witherspoon Institute. He is the author of Building Reputational Capital and sits on the Editorial Board of Public Discourse.

Copyright 2009 the Witherspoon Institute. All rights reserved.

The recent G-20 summit convened in Pittsburgh represents a dramatic new escalation in the push for global governance of corporate financial affairs. The body’s efforts to promote international economic teamwork will not only attempt to curb excesses and set executive pay in accordance with the long-term plans of a firm, but also weigh in on issues as varied as sustainability, food policy, and corporate social responsibility.

At first glance, it all sounds like a promising idea: establish an international body that can provide robust oversight and regulation to foster greater stability in the financial world. But in fact the G-20’s Financial Stability Board (FSB) is sowing seeds that pose significant dangers for world economic freedom. Of particular concern is the danger that lies in ceding pseudo-legal authority to institutions such as the FSB to establish international norms for executive compensation and other corporate governance arrangements, which forcefully intrude into the internal functions of private firms while at the same time cranking up rules covering everything from accounting to climate change.

The problem with such a move is that it represents a stark departure from the general trend in global governance constituted by the emergence of “soft law,” or civil regulations. Within the past several decades, substantial changes in global governance and business regulations have been taking place in accordance with the process of globalization. The growing corpus of transnational civil regulations utilizes private, non-state and market-based regulatory regimes to govern multinational enterprises and global supply networks. For the most part, the regulations have been influencing the manner in which global companies and markets bear on human rights practices, labor conditions, environmental sustainability, and community development, particularly in less developed countries. The mounting influence of the stakeholder view of corporate governance together with the emergence of corporate social responsibility (CSR) reveals an intensifying influence of the so-called “global public domain” in molding public policy and regulation toward business enterprises. Scholarship indicates that the regulatory power of the state is accordingly undergoing extensive decentralization. Thus, a blend of state and market, public and private, traditional and self-regulatory institutional structures characterized by alliances built among nation-states, private nongovernmental actors (activists, NGOs) and business enterprises is replacing the traditional mode of hierarchical command-and-control regulation with regard to economic actors.

However, in the eyes of some, the march toward instituting global civil regulations for international business firms has been advancing on thin ice in the sense that it is unclear just how such emergent systems of economic governance—sometimes referred to as “governance without government”—are to be reconciled with the connected ideas of democracy, the rule of law, and legal accountability.

It can be difficult to discuss or understand “democracy” in the world arena. Corporate accountability to environmental, labor, and human rights standards—and now executive pay structures as well—is strongly decentralized and diffused. Elections, sometimes called “procedural representation,” are being replaced with functional representation by technical experts, and purported moral representation is being asserted by social groups and NGOs. Such developments increase the number of political players, creating a diffraction of political legitimacy.

As for the concept of the rule of law, corporate officers, public authorities, and the heads of non-profit enterprises are all subject to legal accountability for their behavior through established transnational mechanisms of administrative and criminal law. The World Trade Organization,  the Dispute Settlement System, the Hague International Criminal Tribunal for the Former Yugoslavia, the International Criminal Tribunal for Rwanda and the International Criminal Court represent institutions set up to enforce legal accountability in the global context. Of course, an agent’s failure to conform to standards of legal accountability will typically trigger reputational sanctions as well, and maintaining a solid record of compliance with legal accountability frequently provides for its own reputational rewards.

Yet many of the emerging forms of civil regulations for transnational business enterprises frequently operate more on the grounds of persuasion than by the force of coercion that is characteristic of domestic law and the traditional concept of the rule of law that undergirds it. International standard-setting bodies like the G-20 differ from recognized international economic institutions in that the former have numerous non-legal characteristics.  Such standard-setting institutions do not enjoy a distinct legal personality established by nation-states; they lack authority to conclude treaties, and are bereft of international legal immunities. Instead, they amount to nonformal groupings composed of state representatives and technical experts convened to speak to particular problems and to address sundry matters of special concern. Although these bodies lack competence at both national and international levels as far as hard law-creation goes, nevertheless the soft law norms that they are adopting have a perceptible effect on the conduct of states and influence the public policy debates about global financial governance.

In this regard, it should be noted that although the G-20 is for the time being only equipped to deploy moral suasion against nation-states deemed noncompliant with their edicts, there has nevertheless been chatter in some circles suggesting the possibility of impending sanction authorization. Yet to the extent that organizations embarked on crafting international financial standards perpetuate a misrepresentation of the character and status of those standards as, on the one hand, either completely noncompulsory suggestions that need not be taken seriously or, on the other hand, as binding coercive norms carrying the full force and effect of law, the substance of their guidelines will harbor the potential to hamper economic progress and financial growth.

The possibility of such a negative influence can be seen in the failure of international regulatory standards issuing from the array of financial norm-setting bodies (i.e, the “Gs” ranging from the G-7 and G-10 up to the G-20) to protect adequately the global financial system from the financial crisis. It was in part the incapability of such associations to foresee the potent risks generated in the financial system during the past decade that has sparked such widespread condemnation of both the organizations and their committees (such as the G-10’s Basel Committee on Banking Supervision) for a lack of transparency and accountability in their decision-making structures, as well as for their negligent oversight of the international standard-setting methodology.

It will therefore be important going forward for global civil society to specify carefully not only the nature of the authority, but also the degree of professional competence and credibility that emerging sources of global financial soft law must carry concerning institutional structures of decision-making set up in the name of attaining financial stability and economic growth.

More often than not, the motivations for business enterprises to comply with soft law stem more from the need to protect intangible reputational assets of the firm than from the avoidance of any physical pain or loss of liberty of the sort produced by conventional legal sanctions wielded against human persons. We might term this sort of compliance dynamic the “rule of reputation.” Indeed, it is arguable that the regime of global civil regulations and their accompanying “rules of reputation” are no less significant or effective than systems of domestic or international law; such corporate governance systems are backed by the force of reputational sanctions the nature and extent of which are not always fully comprehended by legal experts and economists alike.

As we contemplate new efforts to create worldwide standards for corporate governance, the concept of reputational capital needs to be squarely incorporated into our thinking. In the interest of preserving personal freedom and economic sovereignty, the overall process should be one inspired by corporate self-regulation grounded in moral virtue, not by excessive governmental intervention of politicians and international technical experts. It goes without saying that efforts at imposing more laws and restrictions cannot possibly be effective so long as the prevailing mindset of business managers is to find loopholes for any regulations that stand in their way or prove to be unbeneficial.  By establishing more bureaucracy, barriers, and complexity in the business world it becomes more difficult for wealth-creating entrepreneurs to pave their way and pick themselves up during and after the crisis.

Failing moral standards in business and across society are a major invisible force behind the financial crisis. Moral principles should be integrated into systemic governing bodies and corporate actions to ensure the common good. Market participants must realize that they are responsible not only for their own contribution but for how their contribution impacts the entire financial system. There must be mutual respect and a spirit of pursing the overall good of the firm and the human community, not just a narrow focus on correcting details of individual performance. Yet bodies such as the G-20, populated by officials and their delegated bureaucrats, many of whom remain clueless about the specifics of how successful business firms operate in competitive environments, the way trustworthy companies are able to generate real wealth, the fine art of creating lasting jobs, benefits, salaries, and building equity in products and services that make up the value that business delivers, tend to direct their attention towards fixing technicalities and minimizing risk. In order to establish enlightened leadership for business it is more important to look at broader root causes and to propose solutions likely to foster the forthrightness in commercial activity that is required to restore the moral deportment of many well established business enterprises around the world.  Rather than staking our hopes on increased regulatory intervention, what we need to realize is the simple truth that in the world of business, both today and since antiquity, reputation rules.


Kevin T. Jackson is Professor of Law and Ethics at Fordham University’s Schools of Business in New York City, and a Senior Fellow of the Witherspoon Institute. He is the author of Building Reputational Capital and sits on the Editorial Board of Public Discourse.

Copyright 2009 the Witherspoon Institute. All rights reserved.

The doctors who seek to heal our financial markets believe that fundamental dynamics in housing and property markets lead to speculative bubbles that inevitably bring financial systems down with them (no matter what kinds of systems they are, not just those having substantial securitization and dominated by private banks) because financial systems are heavily involved in mortgage lending. But relying upon reductive scientific explanations to account for the present business fallout is as serious a delusion as the false belief that government bailouts, coupled with the geyser of regulations set to come gushing from congressional committees, can fix everything.

Professor Harold James’ “Thinking About Greed” offers a salutary reminder that beneath this all-too-real monetary crisis there is a moral malaise that calls for a sober reckoning with enlightened philosophical concepts. Our thinking must be guided with ideas like trust, honor and virtue, wrought from an ancient if somewhat neglected heritage. Yet, equally important, we need to see clearly the demands that moral wisdom anchored in the past imposes upon us today. Consider, for a moment, the fact that the subprime business scandal is intimately bound up with a host of moral malfeasances (naming but a few) such as:

- duping of homebuyers with unsuitable mortgage arrangements ( it should be pointed out that approximately 70% of homebuyers falsified the data submitted with their mortgage applications)
- creating nontransparent financial products (securitized mortgages) with risks either not disclosed or obscured in vague (at best) or utterly indecipherable (at worst) legal terminology
- biased valuations of companies’ financial posture given by rating agencies immersed in massive conflicts of interest
- intentional circulation of false information by hedge funds in order to “short” the shares of companies’ stock (”predatory short selling”)

Regulation No Substitute for Virtue

In light of the widespread malfeasance, the current economic scandal provides a special opportunity to recalibrate moral standards for market participants. However, stepping up government regulation in an attempt to enforce moral conduct in business will provide neither a satisfactory nor a lasting solution. Not only is it the case that a great deal of business activity cannot be effectively regulated (because it is normally too difficult or costly to do so and because it typically triggers elaborate loophole-hunting avoidance schemes), creating excessive laws threatens to dilute entrepreneurial initiative if not completely annihilate it.

The problem with government regulation can be understood through a musical analogy. The idea of, say, “cooking the books” in delivering a live violin performance is inconceivable. Without authentic technical and artistic mastery of the instrument, genuine musicianship is absent; no decent music gets created. Nonetheless there are not, nor could there be, government regulatory agencies charged with the mission of fostering musical artistry. Imagine the absurdity of a law specifying how to properly deliver a trill, complete with a list of penalties for violators. Music is, in its essence, a self-regulating enterprise. A technical execution of all of the notes of a piece of music – call it “minimal compliance” if you will – is understood by all reputable musicians to be merely the barest of requirements. Outstanding musicianship is all about the artistry that is added to the “minimal” accurate rendering of the notes. It is worth noting that we refer to one who has fully mastered the art of music as a “virtuoso.” All of this is to say that just as integrity in music cannot be externally imposed, neither can integrity in business be legislated. In both music and business, the exercise of virtue is fundamental, unavoidable and part of the very lifeblood of the endeavor.

No Bailout for Reputational Losses

The preservation of market efficiency requires much more than just market freedom and government regulation – it requires trust, transparency and truth. Of course, in principle governments possess the authority to enforce business agreements. Yet official efforts to provide legal insulation from all contractual breaches would be utterly futile were it not for a thick blanket woven with shared moral standards of promise-keeping and honor around which market transactions are enfolded. Moral standards are essential for facilitating efficient economic activity. In a free market, these moral standards are properly “enforced” against individuals and firms alike, not primarily or exclusively with government regulation but rather with reputational standards established by members of a free society. Recent studies show that most people believe businesses share the same moral and ethical standards as individuals. And a sizable percentage think we ought to hold companies to even more stringent standards that we hold people to, because businesses’ size, resources, knowledge, and impact greatly exceed those of individuals.

One important lesson that must be drawn from the scandal is that a deep connection exists between economic value and moral virtue. The hard physical and financial assets that market participants work so hard to establish (or shall we say create the illusion of having established) on their books are fundamentally linked to the way they deploy, or as is increasingly the case, destroy, intangible reputational assets such as credibility and transparency. Such intangible assets, which represent the most powerful force behind a firm’s long-term performance, are vanishing virtually unnoticed from our financial system.

All of the effort spent on tallying up the staggering financial losses from the collapse of Lehman et al over the past weeks has ignored a much greater and more significant loss of wealth from the raft of financial scandals: a catastrophic exodus of reputational capital, not only from financial institutions and corporate leaders but from political establishments as well, as the public begins to perceive the bailout as tainted with complicity, and conflicts of interest.

Ecology of Market Efficiency

Professor James’ suggestion of a reconsideration of Aristotelian, natural law, and enlightenment thinking about the role of ethics in business life is prescient. Yet some may wonder exactly what the conceptual link is between phronesis and synthetic collateralized debt obligations. While spelling out all the details exceeds the scope of this reflection, let me offer a glimpse as to the sort of path this promising inquiry could take us down. Since Aquinas, the natural law tradition has sought to use human reason to derive moral principles in such a way as to promote human well-being. The moral urgency engendered by the present economic crisis ought to prompt a return to reasoned moral discernment. There should be an effort to identify moral principles that impose civic obligations on market participants – all the way from corporate CEOs, CFOs, CAOs, to behind-the-scenes “gatekeepers” such as accounting and law firms. Without such principles there is the risk of systemic damage to, indeed outright subversion of, the overall market system.

Market participants share a goal of overall economic welfare as a necessary, albeit not sufficient, condition for achieving human well-being. Maintaining a market economy demands moral coordination. We might think of this as a call to arms to help sustain the “ecology” of market efficiency. The challenge of preserving the ecology of efficiency is particularly relevant to the present problem of business scandals, because it requires that market participants (among other things) not distort and withhold information that ought to be available to other market participants – that is, information upon which market efficiency itself depends.

It is reasonable to suppose that our human nature leads us to build up what Nobel Laureate Amartya Sen calls aggregative resources. Such resources are more health care, more education, more wealth, and so on. We take an increase in these things to be good even before moving on to consider how the “more” is going to be passed around to everyone in society.

All things being equal, achieving more efficiency means having greater aggregative resources. Yet because regulatory regimes are unable to legislate and enforce all of the moral conduct necessary for optimal efficiency, market participants have civic responsibilities to support cooperative business practices that enhance efficiency. What does all of this mean in the context of the current debacle? For starters, it would suggest that market participants ought to:

- promote transparency of relevant information (e.g. disclose the value of mortgage-related securities and other investment vehicles)
- refrain from promoting opprobrious business-government relationships (e.g. creating a dependency on and expectation of, government bailouts)
- honor contracts, promises and other business commitments
- eschew crony capitalism
- resist fraud
- avoid insider trading

Business leaders will find it in their long-term interest to develop virtues of cooperative action that will foster market efficiency, not burn it down. It is clear that cultivating such economic virtues penetrate way beyond the reach of regulation. Moral coordination as a response to the rash of scandals promises to circumvent the drawbacks of overt regulation, and will be a step in the direction of building trust and restoring confidence in the markets.

Kevin T. Jackson, Ph.D., J.D., is Professor of Legal and Ethical Studies at Fordham University in New York City, and a Senior Fellow of the Witherspoon Institute. Dr. Jackson has taught at Princeton University, Georgetown University and Peking University. He has published numerous journal articles as well as Building Reputational Capital, and Charting Global Responsibilities: Legal Philosophy and Human Rights. He sits on the Editorial Board of Public Discourse.

Copyright 2008 The Witherspoon Institute. All rights reserved.