You Can't Regulate Honor
As famed playwright George Bernard Shaw once said, "The most tragic thing in the world is a man of genius who is not a man of honor." I've been thinking about the "H" word a lot lately, especially given what seems like to be a never-ending onslaught of news items about fraud or outright bad practices. The current brouhaha in the Empire State is one example.
In "Criminal Case Ensnares Aides to Ex-New York Comptroller" (March 19, 2009), Wall Street Journal reporters Craig Karmin and Peter Lattman describe a "pay to play" scheme that has the makings of a Hollywood thriller. Attempting to outgreed Gordon Gekko, several aides to a former New York State comptroller have been charged by the U.S. Securities and Exchange Commission with over 100 counts, including money laundering and bribery. According to the regulator's website (Litigation Release No. 20963), private equity and hedge fund managers were encouraged to pay many millions of dollars "in the form of sham 'finder' or 'placement agent' fees," expecting to secure asset allocation commitments from the New York State Common Retirement Fund.
Were this an isolated event (and to be fair to the defendants, these are only allegations at this point), people may be willing to look askance. Alas, we have Madoff, Sir Stanford, AIG bonus lunacy and so much more.
Not being a psychologist, I'm unclear as to why people conduct themselves in a questionable fashion. Some say that bad players rationalize their acts as short-term (not to be repeated) or legitimate entitlements ("I'm owed'). Even if one accepts fraud or sub-par practices as okay (and hopefully few do), it is not smart business. Ultimately, people get caught, even if it means mental anguish in the form of time spent, worrying about being found out, remorse or both. How sad too that innocent spouses, family members and children get a place in the "hall of shame," next to the responsible party.
I've made no secret that I'm an advocate of free markets. In response to several colleagues who demand even more mandates, my question to them is whether they think honor can be regulated. Pour moi, I think not. Force does not equate to walking a straight line.
If there is a silver lining to financial mishaps of late, perhaps it is this. More and more individuals (business persons or otherwise) are having lively debates about ethics, best practices and fiduciary standards. It's a great start, don't you think?
One attempt at getting the message out is the recently published "Principles of Financial Regulation Reform: A Model for Change." Developed by CalPERS and other large public pension plans, the March 2009 document urges greater transparency and freedom to invest, "consistent with fiduciary responsibilities," without limitation "on the universe of available investments." Somewhat ironically, the New York State Common Retirement Fund is a signatory to this call for reform. (Could some of the newly minted principles have possibly forestalled or prevented the alleged fraud now being investigated by regulators?)
