Is the real crisis one of morality?

Is the world indeed experiencing a financial crisis, or are the troubling times in which financial markets continually have found themselves since 2008 a mere symptom of the real crisis – a moral crisis? A recent article asserted that “the American business world that has emerged from the financial crisis is rife with unapologetic amorality”. And in South Africa, the fired chief executive officer of a government-owned utility company - who in that position earned an annual salary twice that of the president of the country - claims "the benefits due to him in terms of (his)… contract" are worth a massive R85 million.

The article by Drake Bennet for www.boston.com illustrates the amorality of the American business scene with the fact that “mortgage banks encouraged people to take out loans they couldn’t afford; distinguished investment houses peddled deals to their clients they themselves wouldn’t consider investing in; and officers at those same institutions continued to pay themselves millions of dollars even as they were bailed out by the federal government, all while insisting – even in front of Congress – that this is simply how the game is played.”

Speaking at the occasion two weeks ago of an honorary doctorate being bestowed on him by the University of Cape Town, academic, former trade unionist and head of the Competition Tribunal David Lewis said, “The current economic crisis is not viewed predominantly as a crisis of markets or market failure of regulatory failure.  … overwhelmingly, it is being viewed as a moral crisis, a crisis of values caused by unalloyed greed and unrestrained power”.

Harvard Business School professors Rakesh Khurana and Nitin Nohria, who are widely credited for starting a global drive to establish an MBA oath aimed at putting business management on a professional and ethical footing similar to medicine (with its Hippocratic Oath) and law, in an article published last week, argue that in order to put business on a path toward sustainable economic growth, appropriate regulations alone will not be sufficient.

“This cannot be achieved through financial engineering or a continual transfer of public resources to the financial sector. Instead, it will require a significant departure from the managerial paradigm of shareholder maximisation paradigm that has guided corporate boards and executives and also been the staple of business education over the past three decades.”

While the output of business schools’ MBA graduates has become the main supply line of corporate managers over the last century to attempt to professionalise such management, it seems to have become one of the main causes of the present crisis.

Khurana and Nohria write that the “vision (of business schools) was the large corporation would be run in the interest of society by turning the occupation of management into a bonafide profession, like medicine and law, with the educational underpinning, certifications, and code of conduct that go along with it.”

But as the demand for managers exploded after World War 2, not only were more schools with more programmes established, but courses in business ethics and the relationship between business and society were quietly abandoned while the emphasis shifted from professionalism and education to “vocationalism” and the training of skills.

In the late 1950s, another shift took place with management being afforded the status of an “applied social science”. This “applied science” became superimposed on other vocations such as engineering, accounting, marketing - and even in some cases professions such as medicine - to cater for the management needs of corporate players in those sectors.

Further, it almost universally entrenched the economic theories that came to dominate the global village.

The two Harvard professors describe these circumstances as a perfect storm: “For just around the time concepts such as agency theory and efficient-market theory found their way into the classroom in the 1980s, the system of manager-dominated capitalism was collapsing. Thus, at the very moment that increasingly aggressive investors were taking advantage of the growing market for corporate control to extract greater value, MBA students were being taught that they were merely agents, bound by arm-length, contractual relationships to clients and shareholders.

"Long before the accounting scandals of 2001, let alone the crisis that is unfolding today, management had ceased to be guided by the ideals of professionalism.”

From early in this century, the adoption of an oath by particularly graduating future “business leaders” was pursued by environmental lobbyist and pressure groups as an instrument to come to grips with what was/is perceived to be man-made global warming.

The debate came to a crescendo during early 2008 when a posting on a website, referring to the efforts of the two Harvard professors, stated: “Widespread recognition of climate change and other major environmental problems has made it clear that the next generation of corporate leaders will be forced to grapple with a set of enormously complex and important issues. Given how business activities affect the environment, should new managers be asked to take an oath similar to the ones that doctors recite – requiring business leaders to first do no harm, including harm to the environment?”

While the original article was less than 600 words, the heated debate it triggered in the comments column stretched to more than 12 000 words.

Then came the financial crisis and the worst recession since the 1930s. As so clearly formulated in the boston.com article, it became clear that global warming is far from being the only problem, and the real crisis is one of “unapologetic amorality” in most of the business world.

Even the strongest proponents of an oath by business leaders acknowledge that on its own, it will not be enough to turn around this crisis. Some critics even warn that it would do more harm than good as a mere knee-jerk reaction by business apologists to the current financial crisis.

There further seems to be fairly wide consensus that legislative regulation on its own will not do the trick either. It is clear to most that a much broader  turnaround strategy is called for.

We will dissect this issue further in the weeks to come.