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The End of Ethics--and a Way Back

A new book argues that a return to virtue--honesty and trust--is critically important for capital markets to fully function.

W. Scott Simon, 07/04/2013

"The End of Ethics," by authors Theodore Roosevelt Malloch and Jordan D. Mamorsky, is a very interesting book and one well worth reading. The title alone conjures up all manner of hopelessness: what, no more ethics? But that's only part of what the book is about: The authors' grim diagnosis of the sad state of ethics in business today and its toxic effect on the global financial system. However, the last one-third of the book is the prescription--a Way Back--for fixing that system.

In a nutshell, Malloch and Mamorsky assert that the Seven Deadly Sins have come to prevail in the business world (indeed, in our culture) and that a return to virtue--honesty and trust--is critically important for capital markets to fully function. Indeed, the authors advocate that the Protestant ethic--hard work, thrift, and diligence--can go a long way toward righting the ship of capitalism.

In the first two-thirds of the book, the authors sketch out the business scandals of the last decade (especially during the 2007-2009 meltdown of the global financial system) and ascribe to each a Deadly Sin. For example, they describe the wrath of Richard Fuld and others leading up to the September 2008 bankruptcy of Lehman Brothers (the fourth largest investment bank on Wall Street at the time); the pride exhibited by many at Bear Stearns right up to the firm's sale to JP Morgan (at $2 per share) in March 2008; the greed of Tyco CEO Dennis Kozlowski, who was convicted in 2005 of looting the company where he was employed for nearly all his working life (and is now doing 8 1/3 to 25 years); the lust of Bernard Madoff (who apparently had a fetish for prostitutes) in his giant, long-running Ponzi scheme that stretched back to the 1970s; and the gluttony of business executives at WorldCom. The last two Deadly Sins--envy and sloth--are mixed in among these scandals as well.

Take the gluttony of Bernie Ebbers, the CEO of WorldCom. Within 15 years of entering the telecom industry, by 1998, he was able through a series of relentless acquisitions to merge his company (and it really was "his" company despite the fact that it was publicly traded) with MCI in a $40 billion deal to create the behemoth, MCI WorldCom. The authors describe in detail how much of this was accomplished through massive accounting fraud. An aside: My first cell phone account was with MCI WorldCom. Each time I received my monthly phone bill, it was always incorrect--and never in my favor. As a result, every month I had to call them and have it adjusted accordingly--which, to my surprise, they always did willingly and promptly. After reading this book's description of the accounting fraud at MCI WorldCom, I can now see what a great business model this would be for a criminal: Overbill your customers--some of whom won't notice or squawk--to net a handsome (illegal) return.

Each of these scandals was bad enough. But what struck me when I read about them in this book--one after the other, each finely summarized--is how seemingly easy it was for a relatively small number of people to essentially hijack large public business entities for their own nefarious ends, whether they were motivated by money, power, and/or ego.

Of course, some might argue that business leaders of today are no less ethical than they were, say, in the nineteenth century, when robber barons such as John D. Rockefeller ruled the day, or even in the days of Imperial Rome when Nero was fiddling around. Others might argue that in our day it's more likely that the illicit rewards open to the ethically challenged exist in greater abundance and are available on a wider basis to more people.

On the other hand, Rockefeller, who was generally believed to be the richest person who ever lived, could have bought Bill Gates several times over on an inflation-adjusted basis. Perhaps, then, it's the case that there were just relatively few Rockefellers in the good old days, while in our day there are relatively more Bernies (Madoffs and/or Ebbers) in waiting. It's not a very comforting thought, whether provable or not.

While no one can disagree with the authors' view that a return to honesty and trust is critically necessary in business (again, in our culture as well), perhaps that notion should be buttressed by Ronald Reagan's maxim when dealing with the Soviet Union: "Trust but verify." That is, I will trust you to do the right thing, but I want to be able to independently verify that you are trustworthy enough to ensure that my trust is not misplaced. It would seem that such verification can come only from the law and governmental regulation or industry self-regulation intelligently applied. So while I will trust you, I can be sure that law and regulations will ensure your trustworthiness even in cases where you may not otherwise want to be trustworthy.

W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understandingis the definitive work on modern prudent fiduciary investing.

Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals.

For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

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