On Business Ethics, the Market Meltdown, and Bernie

Back in business school, we had a mandatory ethics course. We read case studies and discussed ethical business dilemmas. Personally I found it interesting, but in retrospect I question the practical application. Those of us who choose to act ethically do so out of principal or at least a healthy fear of punishment, not because we do not have the common sense to understand an ethical dilemma. Those among us who behave without an ethical compass cannot be taught ethics in a classroom.

Plenty of finger pointing is going on now about who and what got us into this economic mess and whether a lack of business ethics is to blame. Of course, the answer is more complex than a discussion of ethics. Most of us contributed to the bubble in some way, and many of us profited from it. The blame game must be very broad in scope. Nevertheless, more finger pointing should be focused at the Federal Reserve, Congress, and the White House for building a perverse framework of rules and incentives for business (mostly under the moniker of “deregulation”), instead of the businesses and individuals simply operating within these rules for financial gain. Criminal characters like Bernie Madoff are just a red herring for government and the press. The market meltdown exposed his unbelievable Ponzi scheme, but he is not to blame for the market meltdown. Yet maybe there is something to learn from the mess we are in by understanding what makes Bernie tick.

If we are to consider changing the rules to encourage more ethical behavior in business (or at least discourage the opposite), we need to consider why an ethical compass is lacking in some business people. Some people think that “business ethics” is an oxymoron; however, I am not one of them. Despite sensational examples of ethical failures from Enron to Madoff Securities and Worldcom to AIG, the majority of businesses and business people try to operate within some framework of social values and ethical conduct.

Many have suggested that Bernie is a psychopath, and the evidence to support this diagnosis is compelling. Psychopathology involves a confluence of interpersonal deficits, such as lack of guilt and empathy, impulsive behaviors, arrogance, and deceitfulness. Successful psychopaths like Bernie also have high intellect, excellent powers of observation, and endless charm. His behavior makes a lot more sense if we understand that he is not concerned with ethics, feels no remorse, and enjoys using manipulation to get what he wants.

Ready for the truly scary part? Estimates are 2% of the general population might be labeled as psychopaths. We tend to focus on a few charismatic murderers, like Ted Bundy or Christian Bale’s character in American Psycho; however, the diagnosis of psychopathology does not require any ghoulish behavior. The prison population is estimated at about 20% psychopaths. Obviously, these are mostly the unsuccessful variety, but very few are bloodthirsty murderers.

This leads me to wonder about career self-selection for the high-functioning psychopath. Do you suppose that the successful psychopaths would become Peace Corp volunteers, preschool teachers, or nurses? Very unlikely. Instead, you may be wondering about politicians, investment bankers, sales professionals, Fortune 1000 CEOs, private fund managers, lawyers, and even entrepreneurs. How frequently might we find successful psychopathic minds in these vocations?

If we assume that more than the average percentage of bad apples can be found in some of these fields, then it is reasonable to ask whether business schools and law schools should teach something about ethics. The problem is there is very little evidence that education or even psychotherapy can remediate the psychopathic mind. Whatever we teach and whatever laws we make, these individuals will naturally desire to game the system without remorse. And the historical record supports this conclusion. Every form of human society breaks down eventually. From communism to capitalism and from democracy to dictatorship, all could result in utopian societies… in theory. In practice, a handful of psychopaths at the top and the bottom of these societies seem to wreak havoc every time.

We should consider the psychopaths when arguing for deregulation of industries and self-policing of business practices. I am a big fan of the core values of capitalism and free markets, but when taken to extremes, their advocates seem very ignorant to the human condition. I wonder if the same people, who promote minimal regulation and self-policing, also lock their doors at night, pick to live in communities with excellent police and fire rescue response times, and believe in a strong military. They see clearly that thieves, arsonists, murderers, and terrorists exist; however, apparently they do not see the need to contain bad actors in the business world. The logically inconsistency would be almost comical, if it was not so pervasive.

Unfortunately debates over business regulation usually have more to do with the political game of improving the position of one interest group over another, and both political parties are guilty. These are not disagreements over genuine principles, although the language is always framed in such terms. Even now, when so many are disillusioned with the efficacy of regulations and enforcement, we are naturally more concerned with what can be done in the short term to repair our stock portfolios and keep our homes from foreclosure. We want medicine now to cope with our symptoms; we cannot collectively focus on how to prevent the disease in the future.

So what can the rest of us do, if no institution is really going to protect us from the psychopaths in the business world? First, educate yourself about the characteristics of psychopaths, and when you think you have spotted one, avoid them like they have the Swine Flu! They can only do you harm both professionally and personally. Second, if you suspect that someone who works for you or with whom you have partnered or invested money is a psychopath, dig deeper. If he or she truly is a psychopath, eventually you will regret your association. Third, if your boss is a psychopath, you may want to find another job. Charismatic bosses with no ethics have dragged too many ethical people into corrupt business practices and government activities. Do not be fooled into thinking you will know when your boss has stepped over the line or manipulated you to do it for him. Fourth, if you take a closer look at your friends, you can identify at least a few potential suspects. If you associate with a lot of successful professionals in business and government, you may be able to identify more than your fair share. You will likely experience a high level of cognitive dissonance between the thoughts “I really like this person” and “this person might be a psychopath.” Try not to let this anxiety lead to rationalization. If you are like me, you will want to prove them innocent. Who wants to accept that long-term friendships held dear might be entirely one-sided? Psychopaths also tend to get worse over time, which can explain why childhood friends of Bernie cannot understand what he has become.

I am not advocating paranoia in your professional or personal relationships. Most interpersonal skills and behaviors that define a psychopath are commonly displayed by all of us in certain circumstances and are often considered valuable when used appropriately. In particular, when you meet someone for the first time in an adversarial context (e.g., a negotiation or competition), this is a lousy time to pass judgment. The charismatic co-worker, business partner, or boss that you already trust is more of a concern, but you should believe that the evidence is overwhelming before passing judgment.

These people must steal, manipulate and enjoin others to prove their own sense of superiority; however, the successful ones, like Bernie, tend to create an attractive veil to hide the truth. They operate in a game with zero-sum rules where they must take from others, but they succeed by building a group of loyal followers. I do not think business schools or government regulations are equipped to identify or contain the bad apples (although they must endeavor to do better). Each of us must take responsibility for our professional and personally associations and try to protect ourselves, because these people cannot succeed at their games without our help.