by Rabbi Pinchas Rosenstein
The Barings scandal has once again brought to our attention the thorny issue of regulation and controlling the stocks and futures markets. The fundamental question that we must ask is: How is it possible to regulate sophisticated markets that are so strongly driven by self-interest?
Judaism, which recognises that mankind exhibits two essential drives, one selfish and one selfless, argues that there is an important role for the selfish (self-interest) impulse to play. “But for the evil desire, no man would build a house, or take a wife or have children or buy and sell in business…” (Bereshit Rabbah 9:7) Without individual ambition society would be a worse place. Judaism therefore sees man’s role of moderating and controlling this selfish drive as one of his greatest moral challenges. Furthermore, Judaism does not in principle object to a free-market economy. A society may choose any system it wants to set its prices, as long as the demands of justice and mercy are met.
It does seem clear however, that a regulatory system imposed by, and policed solely by, the Markets themselves is unlikely to be based on anything except self-interest. Commercial pressures generally encourage the application of morality and ethics only to the degree that the individual or company fear discovery of wrongdoing and the consequences thereof. Such a system clearly has many inherent weakness. Morality rooted mainly in the fear that dishonesty may be discovered causes integrity to be adulterated by other considerations. Furthermore the competitive modem market environment often polices itself in a disappointing way with sophisticated deceit going undetected for a long time.
There is highlighted in the Barings case a further moral issue, beyond the responsibility of the individual trader who ‘broke the bank’, namely the irresponsible behaviour of the various management levels of the bank. The biblical prohibition on “Placing a stumbling block before the blind” has never been limited to its purely literal meaning. This concept is understood as a prohibition on placing people in contexts where they would be unable to cope with their responsibilities and temptations. This point takes on a greater relevance as it appears that adequate systems of financial control were simply non-existent in the Barings case, whereby one individual was allowed to control both the front and back offices, a situation that inevitably led to abuse.
Jewish sources have always demanded such controls and a commitment to financial transparency as prerequisites for adequate corporate governance. The Mishnah (Shekalim 3:2) related that the priests who had to enter the Temple treasury were not even allowed sleeved cloaks so as not to arouse any suspicion that they were illegally enriching themselves through stealing public funds. Similarly it has always been understood that charitable funds would require more than one person to administer them in order to ensure financial probity. Indeed, even the greatest Jewish leader of all times, Moses, was expected to provide a full set of accounts relating to the raw materials donated for the construction of the Tabernacle.
It must however be recognised that all the regulatory controls in the world cannot totally root out unethical behaviour in the market-place. Like it or not, we are dependent to a large degree on self-regulation.
Judaism therefore demands a high standard of self-regulation, but such a system can only be effective if it is coupled to a programme of moral education, for it is only through moral education that self-regulation becomes both possible and indeed effective.
Pinchas Rosenstein is the director of the Center for Business Ethics and Social Responsibility.