Free Markets Right and Wrong
We are in a moral tizzy over the hazards of our free market system. Our search has been, collectively speaking, less about finding true answers and more about placing blame on one set of individuals. To date, we have pilloried chief executives, board directors, Fed chairmen, and politicians, and now derivative traders are the popular whipping boys. Perhaps we will trot out Bill Gates next, for without Excel spreadsheets none of this could have happened.
Before we question our system’s foundation, let’s review the historical record.
Advocates, including our most famous living free marketeer, former Fed chairman Alan Greenspan, celebrate Adam Smith as the founder of free market economics. But there is another, lesser-known side to the great Scottish thinker, which economist Herbert Stein wrote about: “He was not pure or doctrinaire about this idea. He viewed government intervention in the market with great skepticism…yet he was prepared to accept or propose qualifications to that policy in the specific cases where he judged that their net effect would be beneficial. He did not wear the Adam Smith necktie.”
Smith’s magnum opus, The Wealth of Nations, famously illustrated that the free market is guided to produce the right amount and variety of goods by a so-called “invisible hand.” But it is in his lesser-known work, The Theory of Moral Sentiments, where Smith proposes that it is the act of observing others that makes people aware of themselves and the morality of their own behavior.
In other words, capitalism requires a moral foundation to work its true magic. If we carelessly violate this boundary, we will indeed be subject to blame.
“Do unto others,” may not be the most sophisticated chapter in the Capitalist’s manifesto, but it makes for a very good beginning.
Boardroom Dynamo
Recently, I had the pleasure of interviewing Ira Millstein, senior partner of Weil, Gotshal & Manges, on the subject of how the boardroom needs to respond to the current crisis.
Ira’s world is the boardroom. His take on the current environment signals a sea change in the way the corporation and government will work together. While the immediate declaration of cooperation is a good thing, longer term we need to adapt a new set of governing principles or we may set into motion a system of corporate welfare and obeisance to legislated behavior that could permanently damage our ability to innovate and compete. Ira’s prescription: restore trust and accountability. Where to start? Compensation. How to begin? Separate the chief from the chair.
For more from Millstein on regulatory reform and other issues, see “A New Agenda.” We would do well to listen.
One Simple Way: Prevention is Preferable to a Cure
Overheard at the KPMG International Audit Committee Issues Conference from Henry Keizer, vice chair—audit of KPMG LLP:
“There is a real opportunity from my perspective for audit committee directors to set the right tone and be constructive in dealing directly and candidly with the CEO and the C-suite, so make sure you leverage it. Seize the challenging times by being a force for clarity and diligence in the boardroom. When the C-suite has their helmets on, they are down in the trenches and the team or the individuals may not have examined the issue that may now appear as only a distraction but later turns out to be critically important. Clarity, candor, and directness are the necessary ingredients to understanding and then influencing what goes on in the boardroom. So be confident…it’s enormously powerful. It’s all right to engage, even if it results in a tough board meeting, but one that was fair and robust and that no one walked out on. To me, if there’s one simple takeaway, it’s that—engage.”