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Why Values Trump Rules and Regulation

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Everywhere I travel, I hear the same refrains: "We need more regulation," or on the flip side, "If we hadn't deregulated, we wouldn't be in this financial mess."

It looks like the White House is of this mind-set. Citing Wall Street for helping to create a "culture of irresponsibility," President Obama wants to impose more rules on the financial industry by, among other things, creating a Consumer Financial Protection Agency.

More regulation, and in particular a Consumer Financial Protection Agency, could be a very good thing, but I would suggest we don't rush to regulation without careful consideration of two key questions:

  • What is the source of the regulation? Is regulation being imposed on people from the outside or is it coming from within?
  • Is the mechanism another list of "dos and don'ts" or is it something deeper, something that inspires consistent and right behavior?

We all know that Thomas Jefferson once said, "That government is best which governs the least," and this quote is often used to support the argument for less regulation. But what many don't know is that Jefferson went on to say: "... because its people discipline themselves."

In this way, Jefferson isn't making an argument against regulation but rather putting forth an argument for the most effective source of regulation: self-regulation.

Theodore Roosevelt echoed Jefferson's sentiments when he said: "Men can't escape from being governed. They either must govern themselves or they must submit to being governed by others. If from lawlessness or fickleness, from folly or self-indulgence, they refuse to govern themselves, then most assuredly in the end they will have to be governed by the outside."

So as we, in 2009, work to overcome our "culture of irresponsibility," we need to embrace self-regulation and discipline and understand and embrace the most effective mechanism for it, which is values.

Don't get me wrong; I'm all for regulation. People need limits and boundaries. Thoughtful regulation can make financial transactions more transparent so consumers better understand the risks they're taking. But the more important questions we need to ask are:

  • Will regulation fix our culture of irresponsibility?
  • Can external rules prevent another financial Katrina?
  • Or does the culture itself — how we behave — need to change?

I would argue that our culture needs to change. And it can change only if it is driven by something more compelling than rules.

While I understand why we need rules, I also know that we need to understand what rules can do and what they can't. For example, I live in Los Angeles, and I am grateful that rules, based on solid science, have been implemented to govern the construction of buildings to make them earthquake-resistant. We need rules that prohibit sales of new drugs before they are approved by the U.S. Food & Drug Administration. Regulations can also promote transparency, as do laws that require publicly held companies to disclose their earnings, governance structure and executive pay.

But rules are less successful when they seek to govern human conduct and behavior. Rules ultimately fail because you cannot write a rule to control every possible behavior or cover every possible circumstance. It is very difficult to regulate deception, for instance. A rules-based law will do little to deter someone who wishes to be deceptive in their mortgage application. By setting floors for behavior, rules unintentionally also set ceilings.

This is a problem inside business as well as government. Let's agree that companies want to do the right thing. But they need and want to do more. They want to engage their people. They want to innovate. They want to encourage creativity and prudent risk-taking. To accomplish those goals, employees must be inspired. Rules and regulations do not inspire. To the contrary, too many rules and regulations limit behavior. They diminish autonomy and risk-taking. They suggest that people can't be trusted. Rules can be dangerous because they dictate what you can and cannot do and not what you should or should not do.

Rules are fundamentally coercive. If you misbehave, you'll be in trouble. Traditionally, business leaders have used a mix of motivation and coercion — carrots and sticks, if you will — to induce people to perform and to get them to abide by rules. Today, we are discovering the limits of carrots and sticks. We're learning that we can't write enough rules to get the behaviors we want. Nor can we deliver enough motivation.

All Rules Have Loopholes
If my carrot is a paycheck, I will leave the company for a bigger salary. If I chose to buy from a company based on price, my loyalty ends at the bottom line. Motivation turns out to be an expensive way to compel behavior, particularly in a recession when there are fewer carrots to go around.

Let's take the example of an Alaskan postal clerk who chose to express his individuality by wearing ties to work decorated with The Three Stooges and cartoon characters. His bosses were not amused and told the clerk to follow the rules regarding permissible neckwear. Now he wears suspenders that feature the caricature Taz, the Tasmanian Devil. Is this the outcome the bosses wanted? Of course not. But in focusing on the specific language of the dress code rather than the intent behind it, management has boxed itself into a situation where it really can't complain about the postal clerk's cartoon-character suspenders. Technically, the postal clerk is following the rules.

Or how about the Wisconsin law that uses taxpayer money to support a child-care-assistance program? The program pays for in-home child care, so the parents can work. But four sisters in Racine figured out they could stay home, watch each other's kids and be paid for it. They netted over $500,000 in taxpayer funds in less than three years. Legal? Yes. What the Wisconsin lawmakers had in mind? Of course not.

Rules create loopholes — values do not. If those in leadership roles want to shape behavior, they must pay more attention to instilling values. They are the underpinning of belief, and that's what inspires people and gives them a sense of mission and purpose. Only beliefs and the values that underpin them can be shared. Values perform a kind of double duty by acting as both a source and a mechanism for regulation.

If we go bowling, we can put a guard rail on the lane so that you don't throw gutter balls. But there is no mechanism to help you bowl a strike — either in life or in business. How do you throw strikes? By inviting people to buy into shared beliefs and values so that they are inspired — not coerced or motivated — to act responsibly. That's the way to avoid engendering a culture of irresponsibility.

Regulation can only go so far. Let's not try to regulate our way out of a financial meltdown. We must find the values and behaviors that will sustain innovation and ethical action. How you do things can never be based solely on rules.

Inspiration is the most sustainable and effective method of engendering principled performance. In response to those who say values are too "soft" to be reliable sources of inspiration, we need to make them "hard" by turning values into practices and behaviors.

Let's walk away from the mind-set that dictates "too big to fail" as a reason to act. Let's find a way to demonstrate that size doesn't matter, values do. Let's create a culture of responsibility by inspiring responsible behavior.

If we don't, we may find ourselves in trouble again.

*This column appeared in, and was written for, BusinessWeek.com.