A Hippocratic Oath for Business Executives?

Over the last year, the credit crisis has erased trillions of dollars in investor wealth here in the United States. The bad-credit contagion has spread to most of the world’s major banks.

Retirement savings have been wiped out, recession-related violence is rising, and at least one formerly financially stable country — Iceland — has teetered on the brink of bankruptcy.

Since this recession will have grave effects on so many lives, is it fair to say that the business executives that got us into this mess are guilty of financial malpractice?

That’s the idea of a new article in the Harvard Business Review, which recommends that business managers, like doctors and lawyers, should be formally licensed, and should take an oath to protect the long-term interests of their businesses and shareholders.

Requiring that aspiring executives obtain a license might lead to more sober risk management. But, on balance, would that benefit the economy or harm it?


(Dr. Katz takes an oaf.)


I'd be really curious to see what sort of training and testing would be required in order to obtain a "business executive" license.

When I was working as an engineer (an unlicensed profession), it was my employer who was responsible for any mistake that I made. Now as a Realtor (with a license) I'm personally on the hook for my actions. As an engineer, I had the ability to create far more havoc with a mistake than a realtor can.

Rather than demanding that business executives get a license, we should make everyone - licensed or not be personally responsible for whatever they do on the job. From now on, you no longer get to sue corporations. You have to sue that individual employee who harmed you in the course of his job.

I know it's not realistic but just imagine for a moment how things would change if that reform were ever implemented.


As long as a short-term bet can produce enough in compensation and bonuses to last a CEO and his family the rest of their lives, there is absolutely no incentive to do anything other than that.

The best way to ensure that a CEO has long-term interests at heart is to defer compensation to the long-term as well. If your multi-million-dollar bonus is only available when the company is doing as well after ten years as ten months, you have a much greater incentive to manage long-term risk.

The current system of incentives for decision-makers is so far off track it's laughable.


I miss Dr. Katz.


Charles commment was painfully ironic


The vast majority of shareholders are day traders and other short term investors who care only about making a quick exit. So in a way, lacking the slightest bit of foresight *is* in the interest of most of the shareholders.

If an enforceable oath could be required of shareholders (which somehow forced them to think like owners of a business, which they are), then they would demand responsible management.


I am surprised that such a serious bunch of folks would propose such an absurd idea. As far as I can tell, the only legitimate justification for the requirement official licensing is to protect consumers from problems of asymmetric information. People reasonably want to be certain that their doctors and lawyers are actually experts that can do their jobs. To my knowledge, no company has ever claimed a need for such protections in its search for executives, and if somebody was hired after misrepresenting their achievements, they would likely be guilty of fraud.

Everybody likes to complain that CEO's make too much money, but the fact is that those who complain aren't those who write the check. Stockholders pay executives and have a pretty strong incentive to hire good ones. If they want to give somebody a big bonus for doing a lousy job, then they literally pay the price. It is true that there are spillover effects when companies are wrecked by scrupulous executives, but is this not the case in every employer-employee relationship? Think of the vendors at baseball parks and waiters at surrounding bars and restaurants who loose money if their team doesn't make the playoffs. Should we force players to take an oath to play their best? Should managers of baseball teams be forced to take licensing examinations in order to prove that they know enough to not overpay players who are past their primes?



The oath has had a dismal effect on doctors. How many of them are purely driven by profit? Look at the state of the American medical system. You REALLY want our business corporations to be like that? It's bad enough as it is, don't need a false oath to make it worse by putting up a fascade.



Good idea in theory, but unfortunately, I don't think that oaths mean anything anymore

Joe Smith

Given that lots of senior executives have MBAs from leading universities and can get input from cadres of highly educated staff and professional advisors it is difficult to see how licensing and an oath will improve anything.

France has a professional management class and we all know how well their economy is doing.


We all know that lawyers and doctors don't do any damage.


An oath will not work as long as the money talks. There is a very simple solution: tie the results with the compensation of the CEOs and other leaders.

Right now a CEO will take his/her golden shower regardless whether they doubled the revenue of the shareholders or destroyed the business completely. Let there be a clause in the CEOs' contacts that says: if you do what you promise, here is your XXX million bonus. But if you screw up, here is what you owe us: a penalty of YYY million.

This second part is entirely missing from the current picture. CEOs do whatever they like to ensure some short-term success and have absolutely no incentive to act responsibly.


MBA programs already generally include an ethics course. Licensing requirements for securities, etc. include ethics questions and there should be an ethics oath as part of the license.

BUT, any institution which manages other peoples' money has fiduciary obligations at law. While the securities industry has its arbitration clauses that limit account holder rights, the companies are still subject to fiduciary rules which require prudence. I'm surprised a zillion suits haven't been filed against these institutions because it's pretty darn clear they went gambling with their investors' money.


With luck, Warren Buffet will find space in his next letter to shareholders to laugh this idea off the planet.

Anyway, businessmen more like lawyers? Attorneys have a better collective reputation than businessmen?

Headless Horseman

@#8 by way of #3...I too would be interested in hearing any proposed downside to such a graduated capital gains tax scheme in which the graduations were determined by the duration the investment is held. Certainly seems as though it would also have the effect of reducing price volatility (widely held to be a component of risk). It would also reduce asset churn which has increased to record levels as a result of system generated trades.

Only downside I could see would be reduced liquidity resulting from fewer trades in a given issue. For thinly-traded issues this could result in sizeable bid ask spreads further reducing the profitability of activities such as day trading which would, in turn, further reduce liquidity. A beneficial but unintended consequence of which might be fewer "Invest Tools" infomercials, fewer tragically misguided shows like "Fast Money" on CNBC, and fewer E*trades, and TD Ameritrades attempting to make a business model on transaction costs.

Another possibility is that the government makes more money taxing many frequent transactions at existing rates than they would tax fewer less frequent transactions at lower rates? For the government to maintain the current levels of income from capital gains it would have to increase the levels tax rate on the shorter term gains to a level that would be politically unpalatable (and since the higher they raise those short-term tax rates, the longer investors would be willing to hold positions to avoid them it becomes counterproductive to continually raise the short-term rates to make up for the decreased base).

Get down,




What ever happened to a common sense, personal responsibility and decent morals to begin with?

Imad Qureshi

It would lead to better risk management but would also slow down the growth of the economy. In some cases it would stop criminals like Jefferey Skilling but overall we'll our Economy grow at a slower pace.


#6 fiduciary duties

actually, no they don't. at least under most states' corporate statutes (almost entirely modeled on Delaware's books). they have very limited versions of the traditional "fiduciary duties" one usually associates with a trustee or (gasp!) attorneys.

what it boils down to is that unless you can prove willful misconduct or negligence rising nearly to the point of reckless stupidity - officers and directors cannot be held personally responsible for their actions with shareholders' money.

corporations are creatures of law - specifically state statutes. unless and until *all* states require meaningful personal liability of officers and directors of corporations we can look forward to this type of abuse fairly constantly. the theory is a "race to the bottom," where lax standards by one state (I'm looking at you Delaware) force all other states to adopt similar laxity or else lose corporate fees and taxes to the looser states.



At what point in their careers would a business manager like Bill Gates or Steve Jobs or .. .(insert any of all those others who started small companies and saw them grow to a large size) would have been required to go and get a license?


Another relevant, good Dr. Katz reference is also applicable to today's economy. In one episode, Dr. Katz's son has borrowed the car and calls his father to tell him that there's a problem. (The son is incredibly neurotic and moderately agoraphobic.) The son is driving in traffic and reports that the car is shaking, he can smell burning rubber, and he can see smoke coming from the wheels.

Dr. Katz asks, "Did you release the emergency brake?"

The son replies that he left it on because "some people define emergency differently."


One problem with something like a Bar for executives is that so many of them, upon exit, exit with wealth that far exceeds their worth.

While Doctors and Lawyers make a lot of money compared to average service people, they don't generally have an entire future secured with their income and or investments.

As long as CEO's can exit a job after sinking or partially sinking a company without enough assets to live reasonably for the rest of ones life (hundreds of millions of dollars seems to satisfy that) there will be a skewing of the incentives.

People respond to incentives and if there is more incentive for them to take needless short term risks because those are best for the CEO personally, that will continue to happen. No amount of licensing will end that.