Why Values Trump Rules and Regulation

Regulation is situation-specific, while values guide people and businesses about what do do in any situation

By Dov Seidman

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.

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