06/13/2009 05:12 am ET Updated May 25, 2011

How to Create Meaningful Ethical Reform in Business

In the wake of the financial crisis, there's been a lot of talk about ethical reform. With the disgrace of so many of the "best and the brightest," there's a lot of soul searching going on in government, industry and business schools. Most of this discussion is focused on regulation and rules -- it seeks to answer the question, "What is good behavior and how can we mandate it?"

As Arianna recently pointed out, deep regulatory reform of Wall Street is critically important. Just as our democracy is based on laws designed to mitigate the corruption that automatically accompanies power, healthy capitalism requires strong regulations in order to control Wall Street's automatic tendency towards systemic corruption.

This is not to say that capitalism is bad, or that all bankers are corrupt. It's saying that every great strength comes with an equal challenge. As we looked at in a recent post, capitalism's greatest strength and challenge is its addiction to economic expansion. This addiction can create tremendous prosperity and it automatically creates deep patterns of denial, greed and self-deception.

Revised regulation is needed to guard against these challenges. But regulation is only part of the solution. It can create grudging conformance, but by itself it can't create true cooperation, let alone authentic leadership. Which brings up a question.

Why would people freely choose to live an ethical life?

Not out of a fear of punishment. I went to traffic court last week, and I was amazed at the level of fear, guilt and anger that came up for me. Even though the judge was wise and compassionate, I felt like a five year old being shamed for my mistakes. The experience left me with some new patterns of fear, but also with a sense of rebellion.

This shows the core challenge of regulation, in that a choice made out of fear isn't a free choice. It breeds surface compliance and hidden rebellion. It creates preachers who rail against sex while having affairs. As Joan Borysenko puts it, "Punishment is an effective way to change behavior, but usually not in the desired direction." When motivation comes from a place of I should or I must, it's sourced from fear and guilt. This can keep us from doing something awful, but it can't inspire us to authentic ethics or authentic leadership, which come from a place of I choose.

Similarly, authentic ethics can't come just out of a desire for approval. Do you remember the petty cliquishness of high school? That's what happens when a group of good but insecure people seek to define their self worth according to others' opinions. A life based on approval-seeking quickly degenerates into an empty race for money and status. While our desire for approval can be a force for good -- the shaming of investment banking's excesses is creating a major drive for change -- the whims of the crowd are fickle and can reward vice just as easily as virtue.

The primary, enduring reason to freely choose an ethical life is that a meaningful life is an ethical life. People regularly ask "what is the meaning of life?" Here it is. The meaning of life comes from growth, giving and connection: three of the primary forms of mature love. Mature love is the foundation of all ethics (i.e. do unto others as you would have them do unto you) and a life lived in integrity is also a life filled with meaning.

However -- and this is key -- ethical behaviors do not necessarily create a meaningful life. Regulation by itself breeds public compliance and private rebellion. Similarly, when we do the right thing because we know we "should" and we're afraid of how bad we'll feel if we don't, we automatically feed our inner conflicts (such as between the "angel" on one shoulder and the "devil" on the other.) This is why putting yourself on a forced diet rarely works ("I have to eat less" creates automatic rebellion).

Authentic ethics requires authentic leadership. Leadership motivated not just by fear and greed, but by a desire to live a life filled with both money and meaning.

This requires cultivating not just mental intelligence, but emotional and spiritual intelligence as well. Yet our schools do almost nothing to train emotional intelligence, let alone spiritual intelligence or authentic leadership. I was recently at a party with some business school professors. I asked them what changes were going on in their industry in response to the financial crisis. "Almost nothing," they replied. Not because professors don't want to, but because less than 5% of business school faculty have ever held a leadership position in industry.

This is a problem, because there is no such thing as a theoretical class in authentic leadership. Authentic leadership isn't about theory, it's about character. It requires integrating all of who we are. It requires learning how to integrate success and fulfillment, sales and service, money and meaning. It requires learning how to embrace the conflicts and challenges inherent in capitalism, and to use these road blocks not just as things to be avoided or controlled, but as the very stepping stones out of which authentic leadership is built.

This doesn't mean that our schools need to become more religious. It means they need to become more meaningful, by teaching students the practical skills needed to live lives filled with growth, giving and connection.

Over the past decades, business schools have sought to become ever more scientific. But by increasingly basing their existence solely on the cult of reason, they've been feeding the emotional and leadership issues at the heart of this crisis, rather than healing them. This may be part of the reason why 90% of unresolved issues in businesses are emotional in nature, not just logical. As Steve Chandler says, "business is a logical process done by emotional beings."

If we wish to create meaningful ethical reform in business, it requires teaching students practical, concrete, psychological tools for how to work with their inner conflicts and emotional patterns. It requires teaching them how to embrace the challenges that automatically come up as we seek to build businesses that create both money and meaning. It requires renouncing the fundamentalist dogmas of the cult of reason and of the single bottom line. And it requires evaluating our schools not just on whether they produce smart and successful students, but also on whether they produce wise and fulfilled ones.