When a series of corporate scandals erupted soon after the collapse
of the 1990s bull market in equities, policy makers and reformers
chiefly responded by augmenting and refining the checks and balances
around publicly traded corporations. Through measures such as the
Sarbanes-Oxley Act of 2002, securities regulations were intensified
and corporate governance was tightened. In essence, reformers followed
the tradition of modern political philosophy, with its insistence
that pro-social conduct is best produced through institutional mechanisms
that harness self-interest.
The empirical evidence, however, suggests there is little promise
that the modern approach of institutional reform will work to prevent
future ethical breakdowns. Consequently, we look to another stream
of political philosophy, the ancient tradition comprising Plato and
Aristotle, which argues that social groupings, such as corporations,
work best when led by individuals of good character. Applying the
ancient view to modern commercial realities, Benjamin Franklin connects
the development of virtuous character with self-interest, thus offering
a compelling ethic for corporate leaders.
The recent conflagration of corporate scandals enveloping the
likes of Enron, WorldCom, HealthSouth, Tyco, and Parmalat -- painted
the picture of a corporate executive class running amok, flouting
their legal and ethical obligations while systematically looting ordinary
investors. Confronted with this pervasive pattern of unjust conduct,
policy makers and corporate reformers could have responded to improve
ethical standards in one of two ways.
One of these would have been to proceed from the assumption that the
problem rested with peoples characters. On this view, the scandals
occurred because individuals holding leadership roles in the corporate
arena lacked an inner moral core to influence their choices, and instead
let opportunism and self-interest, expressed in the love of money,
entirely dictate their conduct. The lesson of the corporate scandals
would then be the need to reform businesspersons souls, to make
them internalize the idea that money is not the end all and be all
of life, but that that there are moral principles to which the pursuit
of wealth must sometimes be sacrificed. The other alternative would
be to change the institutions in which individuals operate, making
little attempt to reform peoples psyches. Rather, individuals
are accepted for what they are which is to say, mostly selfish
and the emphasis is on changing the rules of the game to ensure
that peoples interests are properly aligned to produce the outcomes
that justice and morality requires.
The first approach emphasizing the character of leaders reflects the
views of the ancient philosophers, of great thinkers like Plato and
Aristotle. The second approach focusing on institutional structure
is more in line with the modern philosophic tradition as typified
in the Anglo-Scottish Enlightenment by Thomas Hobbes, John Locke,
Bernard Mandeville, Adam Smith, Baron de Montesquieu, Immanuel Kant,
James Madison, and Alexander Hamilton. Today, no discipline more fully
embraces this conception of the appropriate way to design social systems
Partly because economists dominate the scholarly analysis of corporate
activity, partly too because politicians find it easier to change
laws rather than souls, the primary response to the corporate scandals
tended to follow the principles of the moderns over those of the ancients.
It is true that immediately after the scandals erupted observers pressed
the need for corporations to adopt rigorous codes of business ethics.
Figuring, however, that moral suasion would not adequately secure
better behavior on the part of corporate elites, the loudest voices
ended up being those calling for more regulation of corporations.
Leading this charge was the corporate governance movement, a loose
coalition of pension funds, labor unions, portfolio managers, and
academics seeking to reorganize the distribution of power within corporations.
Long before the scandals broke out, the corporate governance movement
had been arguing that the structure of corporations was stacked against
the interests of workers and ordinary investors. In a victory for
this movement, the U.S. government in 2002 reacted to the corporate
scandals by passing the Sarbanes-Oxley Act, the most comprehensive
reform of federal securities laws since the New Deal.
Structural reforms of the sort promoted by the corporate governance
movement will do little to prevent the recurrence of widespread wrongdoing.
The empirical evidence on added regulations is mixed at best regarding
their efficacy, if not negative. While the modern paradigm has its
merits, particularly in its reliance on market mechanisms, it needs
to integrate some of the core ethical insights of the ancients. This
means laying more emphasis on the character of business leaders, on
instilling the practice of the
virtues in their managerial activities, as opposed to just steering
them by a mixture of laws, regulations, checks, and balances. As any
application of the ancient teaching must suit modern commercial realities,
we will propose that business leaders be actuated by a set of bourgeois
virtues, as articulated in the writings of Benjamin Franklin.
This paper will be structured as follows: section 2 will summarize
the key points of contention between the moderns and the ancients
regarding the promotion of moral conduct in societies; section 3 will
demonstrate the modern views shortcomings by referring to empirical
studies challenging the efficacy of popular corporate governance and
regulatory measures as means to improve managerial behavior; section
4 will lay out Franklins efforts to promote the ancient ideal
of character formation within the context of modern capitalism; section