Roger Lowenstein had an interesting article in the NY Times Magazine this past Sunday, concerning the fuzzy line between legitimate information gathering and felonious “insider trading” [http://www.nytimes.com/2011/09/25/magazine/in-the-insider-trading-war-market-beaters-beware.html?_r=1&ref=magazine]. His point was that what counts as insider trading is not clear, and that this is a virtue, not a drawback, to the regulations. If regulations were clear and unambiguous, then traders would quickly find a sure path on which to avoid them.
The article brought to mind the disclosure several months ago that David L. Sokol, protégé of Warren Buffett, purchased shares in a company shortly before Buffett’s Berkshire Hathaway bought it. Buffet’s announced investment caused shares of the company—Lubrizol—to skyrocket, and Sokol stood to make millions. What made this case so striking was Buffett’s pristine repution.
Was Sokol’s purchase of Lubrizol an instance of insider trading? And was Buffett complicit in that Sokol had informed him of the position in Lubrizol while the purchase was being contemplated. Both men assured us that Sokol did nothing illegal. U.S. securities laws require disclosure of “material information,” which has in turn been defined by the Supreme Court as information where there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as
having significantly altered the ‘total mix’ of information made available.” This definition, as Lowenstein points out, leaves plenty of room for interpretation. Moreover, the fact that Sokol did not have final decision authority in making the deal almost certainly mitigates against a ruling of materiality. So we were willing to bet that Sokol did nothing “illegal.”
But is what he did unethical? Here, too, the situation was far from straightforward. He might have advised Buffett to do the deal for the same reason he bought the stock—because he thought that Lubrizol was a good and undervalued company. Buffett has made his billions precisely by seeking and then buying good, but undervalued companies. I doubt that if you put a bunch of business ethics professors together in a room they would emerge with a consensus about whether Sokol and Buffett did anything unethical. Admittedly it seems odd that a man like Buffett, who apparently values his reputation for honesty and integrity more than all his billions, would do anything that had even the appearance of impropriety. But the issues are complicated, and reasonable people can disagree, so perhaps we should the “Wizard of Omaha” deserves the benefit of the doubt.
What this episode reveals, beyond its particulars, is how difficult ethical judgments can be in the complex world of finance. Sure, we can make a bunch of “bright-line rules,” but as long as the world the rules apply to is fuzzy, there will always be room for interpretation and disagreement.
So, to cut through this complexity, I want to propose a single, simple ethical rule of thumb—one question people should ask themselves before embarking on a course of action. If people asked themselves this question, and took the answer to heart, we wouldn’t need ethics courses, ethics texts, and ethics panels. The question is this: “Would you tell your children?” If the answer to that question is yes, then go ahead and do it. If not, back away.
Other quick and dirty rules of thumb have been proposed over the years, but this one has the others beat. “Does it pass the smell test?” is one, but we invented perfume so that almost anything can pass the smell test. “Will you be able to look at yourself in the mirror?” is another, but for forty years psychologists have documented the ways in which people can deceive themselves when they look in the ethical mirror. “Would you tell your spouse?” That’s better, but also flawed. Our spouses have already learned about our various moral imperfections. They’ve gotten used to us. And they’ve learned from experience how ethically ambiguous life can be. We’re afraid that our spouses are too likely to give us a pass, or at least, the benefit of the doubt. But our kids? To kids, the world is a place of moral clarity and moral perfection, and their parents are moral heroes. There is no money in the world that can make up for the look of disappointment in a child’s eyes. If people just got in the habit of asking themselves this one question, many of the ethical problems we encounter on a daily basis would vanish.
Would a doctor order a procedure she thought unnecessary to earn a fee because she knew it would do no harm? Not if she asked herself this question first.
Would a banker offer a no-doc, unaffordable loan to eager home buyers, even if the post-teaser rates were fully disclosed and the clients insisted they knew what they were getting into? Not if he asked this question first.
Would a teacher deliberately teach students items that would be on the standardized test, even when he thought it was bad pedagogy? Not if he asked this question first.
And would Sokol and Buffett have done the deal? We don’t know the answer to this one, but my guess is that at the very least, they would have thought longer and harder about it before going forward. It’s amazing how ethically complex issues get simplified when we imagine having to explain ourselves to our kids.
We know that not everyone has kids, that some people’s kids are too young, and other people’s kids are too old—already jaded by corrosive experience in the actual world. But it shouldn’t be hard to adapt this question to your individual circumstances. “Would I tell my sister’s kids?” “Will I tell my kids when they get a little older?” “Would I have told my kids when they were in sixth grade?” I’m convinced that if we adopted this family of questions as our ethical touchstone, we could throw most of the ethics texts, casebooks, and guidelines away. We would do the right thing more often, and with less effort.