Bottom Line Ethics

​Today I sat across the picnic table from a gorgeous, blue-eyed girl who had fixed me a fancy sandwich and snicker doodles. She proceeded to recite the second chapter of I Peter from memory, pausing only for one conjunction. Impressive. All that, and good-looking, too.

​She memorized that because it is important to her, the way she knows the birthday of every living human being who has come into contact with us in the last 33 years. She knows what gift she gave you, and she rightly expects that I ought to remember what gifts others gave me.

​I, on the other hand, remember Jim Gentile’s important batting statistics from 1961. No one else remembers Jim Gentile. I remember where I was sitting, and who I was sitting with, and how cold I was at the 1974 A&M-Texas game. I remember K.C. and the Sunshine Band. But I also remember the anniversary of my first date with the World’s Most Beautiful Woman. And I remember being 22 and staring through the glass at the most glorious sight I had ever seen, my baby girl, as I left the hospital at 2 a.m. with my last two dollars in my pocket.

​My office is gradually transitioning from a place of pictures and gifts from my children into a shrine to grandkids. But there are still important memories in this place. Behind my desk is a small plaque from one of my first students that says, “A Loving Teacher Makes Learning a Joy.” There is a picture taken by a photographer of me on another campus walking across the street with my two youngest children when they were small. I have an aquarium hanging up made out of two paper plates, and a picture of all five kids in the backyard in Michigan. The class of 1998 at Hillsdale College, one of whom just made partner at a major accounting firm, is on my file cabinet. I even have the radio I listened to in high school.

​There is a significant need within each of us to remember the things that matter. It seems that this longing only grows as our capacity for it diminishes. I find that my wife is generally a superior judge of what ought to be remembered, because she has a better sense of what are truly the permanent things. But we both have to work harder than we used to at remembering.

​I have also found that it is very important to people to be remembered. I think I underestimated early in my career how important it was to my students that I know who they were. When you teach 250-300 students a year, and when those students love to come back to campus to remember, and to recruit people to their firms, it is a challenge to always have names on the tip of your tongue. But it would be naïve of me to think that it doesn’t matter whether or not I try.

​The traditions at Texas A&M are centered around remembering. We remember E. King Gill as the 12th Man stands ready to take the field, if necessary, on fall Saturdays. Every month we remember the current students we have lost at Silver Taps. Elephant Walk, Final Review, and, in former days, Bonfire, have evoked emotions in Aggies as accumulated history washes over each person’s personal experience with this place. And its graduates wear a ring like no other, proudly earned and warmly extended to others, as the ultimate sign of a common bond of memories.

​I say all this because tonight I will attend what is perhaps the finest of Aggie traditions, Muster. It seems ironic that it falls on Holy Thursday: “Do this in remembrance of me.” I will go to remember, and to celebrate the lives of those who have gone on before us. I may not feel the need to call out “Here!” as I have in another year. But I will be there. And I will remember.

With the jury deliberating in the Barry Bonds trial, one of my students asked me to blog about steroids. My student’s basic view is that people have the right to take whatever they want to enhance their performance, as long as they are willing to live with the personal consequences. This is a viewpoint commonly applied to drinking, smoking, and other personal choices. And it is probably more appealing when it comes to performance enhancing drugs, because smoking and drinking have more easily recognized externalities, or consequences to others, such as second-hand smoke and a variety of alcohol-induced behaviors.

I am in favor of steroids. My son is able to see clearly because of steroids that have been planted in his eyes as “seeds” that leech out a little bit at a time over multiple years. I am also against steroids. I have seen how oral steroids affected his body when he had to take them over a modest period as a young boy. I am very thankful for the more targeted steroids that help his vision.

So I am in favor of steroids. I am just not in favor of steroids used to enhance performance in sports.

Sports generally evolve in one of three ways: changes in equipment, changes in rules, or changes in people. There is almost always disagreement about whether these changes are good or bad. But let me provide an example of each.

Today’s Wall Street Journal has an article about bats that have been banned from Little League this year because of dangers to players. These titanium composite bats apparently get springier with use, launching balls at speeds not experienced by past Little Leaguers. I admit to being jealous of today’s bats, because I was a lousy hitter with the old wooden bats growing up. But the fact that you can hit the ball farther and harder is not necessarily a good thing, particularly when you are hitting it at people who are just learning to use a glove.

Of course, many changes in equipment are designed to provide additional protection, such as better designed football helmets. The unintended consequence of equipment that makes players feel safer can be an unlimited amount of spearing with the helmet, leading to serious injuries for the tackler and the ball carrier.

Swimming changed equipment by allowing buoyant, full body suits. But as record after record disappeared, it quickly became evident that the swimmers were not any better. The records were being set by the equipment. And the swimming establishment pulled back, banning the suits. Golf has not pulled back as quickly from advances in clubs and golf ball materials. You can always make fairways narrower and rough deeper, greens more challenging. But at some point, when people are driving par 5’s, the nature of the game will change in a way where it becomes unrecognizable.

The second way that sports evolve is through changes in rules, often to generate more offense. Baseball added the designated hitter, for example. Purists hate it, fans love it. As with most changes, the market decides whether it stays. In 1968, when pitching was dominant, major league baseball lowered the pitching mound and hitting proliferated. Three-pointers are here to stay in basketball. If soccer changed the offside rule, the game would change dramatically.

The final way sports change is through changing people, the athletes themselves. This has happened through nutrition, particularly in the last generation. Many baseball fans my age can remember Charlie Hough of the Texas Rangers smoking between innings in the runway between the dugout and the clubhouse. Now, you need a personal trainer by the time you are fifteen if you hope to compete at a high level. Most would say better nutrition is a good thing.

Pressures change people, too. My buddies in my Little League played in the Little League World Series Championship game on ABC Wide World of Sports. None of them played on travel teams, or had personal trainers. None of my friends went to a baseball camp. We played hotbox, and whiffle ball, and backyard baseball. And then we played every other sport in its season. Now you have to specialize.

And steroids in sport are largely a result of the competitive setting that arises from specialization. Specialization and excellence allow people to get rich, and steroids provide an advantage. Like better nutrition, they change people physically, and there is evidence that they change them emotionally as well. The question is whether they change them for the better.

I have seen steroids provide healing. But even in settings with carefully controlled doses, I have also seen them cause damage. And steroids in sports are not carefully controlled. If they were, human nature says athletes would push past those limits and game the system to gain an advantage (think Tour de France). The drugs are new enough, and they change often enough, that it is difficult to estimate long-term effects. But, as with most things that provide short-term benefit, the tendency is to underestimate long-term harm if you are making the decision.

What seems certain is that, over time, steroids will exclude the non-steroid user from the game. There are a fixed number of slots available on pro teams, and college teams, and high school teams. Today’s good high school teams are like the last generation’s small college teams. It will become evident that you do not play if you do not take steroids. And, as with personal trainers and travel teams, steroids will be taken at younger and younger ages.

As the Little League article in the Wall Street Journal indicates, we pull back from other types of changes in sports because we see the potential for people to be harmed at significant levels. I could use dramatic examples of what steroids have done to people like former NFL stars Lyle Alzado and Mike Webster. But suffice it to say that steroids have the potential to do untold damage when compared to differences in equipment, especially when they are taken for advantage, and not simply for healing.

I cannot safely predict what a generation of athletes who were virtually all on steroids would be like in their 30’s, 40’s, and 50’s. But if it happens, the effects of their choices will not just be limited to what happens to their bodies. I can make serious justice arguments against allowing steroids in sports. But even if they are refuted, those unintended consequences that arise from changing people, not just equipment or rules, weigh heavy on my mind. It takes a lot for me to support restricting people’s freedom. But steroids should be banned from sports.

It is impossible to read the business press in recent weeks without being impressed by the extent to which insider trading dominates the headlines. Last week Berkshire Hathaway executive David Sokol resigned after revealing that he had taken a large stake in Lubrizol prior to pushing for Berkshire Hathaway to acquire the company, a transaction that increased the value of his stake by $3 million. He invested only after Citigroup had identified them as a good acquisition target for Berkshire Hathaway.

The Wall Street Journal’s Holman Jenkins opined that “…Berkshire’s shareholders aren’t out a dime unless Mr. Sokol has somehow put out word that Lubrizol was in play, thus driving up the price—which he didn’t.” Even if you believe that a previously uninterested party taking a $10 million stake in a company sends no signal and has no effect on the price of the stock, you would also have to assume that Mr. Sokol had no influence on the price offered for Lubrizol, which may be true. To be fair, even Mr. Jenkins saw a whiff of insider trading, a conflict “[t]o the normal business eye.” And this is a lot for Mr. Jenkins, who rarely objects to any behavior that makes the market more efficient. He largely assumes away any mixed motives in Mr. Sokol, and the editorial’s title clearly states his opinion that it did not bother Berkshire Hathaway CEO Warren Buffett: “St. Warren Casts Not the First Stone.”

But it bothers a lot of other people. It is true that insider trading increases the efficiency of the market by speeding up the incorporation of information into the share price. But what drives insider trading laws, and what bothers most people about it, is the issue of fairness. Trading on insider information is not a victimless crime. There is another party on the other side of that transaction, since the number of shares in the market is fixed. What are that person’s (or investment fund’s) rights?

My guess is that Sokol’s situation is not something that will result in any kind of criminal charge, though it may result in SEC sanctions. Raj Rajaratnam, on the other hand, is fighting for his future in a courtroom. If courtroom testimony and the confessions of others who have pled guilty are to be believed, Mr. Rajaratnam never hesitated to mine information for his Galleon Group by whatever means possible. The vortex surrounding his trades has sucked in people within his firm, traders with other firms, an IBM executive, even his own brother. As detailed in a recent Fortune article, the story is a real page turner.

The FDA is holding its collective breath after charges were filed last week against an employee accused of making millions trading on information to which he was privy. He allegedly used seven accounts in other people’s names. He had access to the system that tracks the approval process for drugs, trading against denials and buying shares ahead of approvals. Not that long ago, it was inside information about an FDA action that led Martha Stewart to dump ImClone shares to avoid a loss, and the subsequent investigation led to charges of lying to investigators, and a federal prison sentence.

Once Mr. Rajaratnam’s trial is over, we are likely to see one or more high profile trials aimed at ferreting out networks of “experts” that may be enabling insider trading on a massive scale. Firms hire “experts” as consultants who are then interviewed by hedge funds and other traders. These experts are often insiders at public companies. If they do not reveal private information, but just opine on industry conditions, this is generally not a problem. But there appears to be significant evidence that a number of these experts have stepped over the line.

So what is fair? If there is bad news, shareholders will be impacted eventually when it is revealed. This is just accelerated by the insider trade. However, the insider trader avoids the loss by trading out of it. It reminds people of what happened at Enron when management changed pension plan providers, preventing employees from selling their Enron stock while management was dumping its stock in large quantities. It helped adjust the stock price rapidly and efficiently. But was it fair?

When an insider buys shares on inside information, the insider is taking those shares from someone at a discounted price from their true value, which is unknown to the seller. I am guessing that David Sokol will hear from one or two of those folks who traded out of Lubrizol when he was buying in.

I am a believer in market efficiency, both as a description of what is generally true and something that is largely good, and to be preferred. But that does not make it the ultimate value that ought to control markets.

There is a moral problem in insider trading that is rooted in fairness. Immature markets are dominated by insider trading. But in mature markets, as long as there are people who care about fairness, you can expect to see insider trading prohibitions enforced.