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Business leaders face a public trust deficit that rivals the federal deficit in size.
Polls of public trust in major companies and CEOs show dramatic declines (for the financial sector to a historic low).
The response of too many financial sector executives has been to blame others for the financial sector catastrophe (causing a loss of about $25 trillion in the national wealth, according to Business Week), to plead for taxpayer dollars, to minimize accountability for those dollars and to move as quickly as possible toward business as usual with respect to executive compensation that shocks the conscience of most Americans.
Executives in other sectors believe they did not cause the catastrophe but are reluctant publicly to condemn the financial sector failures.
The public trust deficit hangs over all companies and free-market capitalism, not just the financial sector, and the trust deficit is playing a major role in current debates over increased government regulation of the economy. It is a major mistake for leaders in business and the gatekeeping professions such as law not to undertake a serious self-assessment of responsibility for the current catastrophe with proposals and action to rebuild public trust.
Much is at stake. I am among those millions of Americans who, over the last 40 years, concluded that a strong presumption in favor of market solutions rather than government regulation offered the best hope for addressing many of society's challenges. Both Democratic and Republican administrations supported deregulation of banking and finance, programs to increase home ownership and an easy money policy -- so long as it did not lead to serious inflation.
We trusted in the prudential judgment of business leaders to make rational decisions that would avoid financial catastrophe. But we now are questioning whether we substantially overinvested in the ideology of free-market capitalism.
We realize that capitalism has an inherent struggle in which excessive short-term self-interest and hubris sometimes trump the "self-interest considered upon the whole" that generates long-term wealth creation.
"Self-interest considered upon the whole" is the concept that Thomas Reid, who followed Adam Smith as the chair of moral philosophy at the University of Glasgow in 1766, articulated to emphasize the ethical foundations underpinning the market that lead to trust in an enterprise and the market itself. When trust is lost, the ability of a business or a market to transact business is substantially damaged.
An overfocus on short term
We have been experiencing more-frequent failures, culminating in the financial sector's catastrophic collapse, where excessive short-term self-interest and hubris have undermined public trust in large corporations and business leaders. Think Bear Stearns, Lehman Brothers, AIG and the mortgage market.
Business leaders are in general not accepting responsibility for these failures or proposing private-sector initiatives to foster "self-interest considered upon the whole" in our business culture. The natural public response is more government regulation, even though such regulation has many unintended consequences.
Business leaders must undertake a serious self-assessment of responsibility for the current catastrophe and take the lead in rebuilding the public trust. Let me suggest that the problem of the public trust deficit is principally cultural. The central problem that infects business culture from shareholders to executive management is an excessive short-term self-interest that undermines long-term wealth creation.
Shareholders are excessively focused on quarter-to-quarter results, and excessive short-term executive self-interest and hubris have created executive compensation systems in the financial sector and elsewhere that have undermined judgment. The solution will be found more in greater self-regulation through personal conscience and cultures that enforce ethical norms than in greater bureaucracies.
Our educational institutions at all levels, but particularly MBA and legal education, should undertake a deep self-assessment of the degree to which they are educating the generations of executives into excessive short-term self-interest rather than "self-interest considered upon the whole."
In particular, we need living examples that will inspire the new generation and build the public trust.
Historically, the Minnesota business and legal communities have provided national and international leadership on the ethics and fiduciary responsibilities of business, of the gatekeeping professions, and of government -- the moral foundation of a healthy market.
There is some justification for thinking that Minnesota, given this history, is the community that can best provide leadership for the rest of the country for the private sector to address the ethical and cultural failures underlying this catastrophe.
Business leaders in Minnesota, working with our educational institutions, must foster a generational change toward "self-interest considered upon the whole": prudent regulation, and long-term wealth creation. This would create a lasting legacy, in particular for the generation of baby boomers who now hold many of the positions of power in our private-sector institutions.