King Hammurabi—of “an eye for an eye and a tooth for a tooth” fame—gets a bad rap in business schools. The management precepts he laid out over 4,000 years ago in Babylon, Mesopotamia, formulated one of history’s first codes of conduct.
The Code of Hammurabi sought to organize people’s responsibilities to each other in ways that were often harsh but in some ways remarkably modern. While Hammurabi was far more authoritarian than is generally recommended for today’s CEOs, it is also true that he was probably the first servant-leader king in history. Hammurabi was concerned with the welfare of his people and thought of himself as the “shepherd.”
The sixth king of Babylonia (in what is modern-day Iraq) compiled 282 laws that categorizes three important concepts of vital interest to CEOs today: accountability, incentives, and reciprocity. The issues that concerned Hammurabi are often the same issues that concern modern CEOs: how to maintain accountability, how to align incentives, how to manage risk, and how to communicate the standards.
Mainlining Accountability. Hammurabi recognized the value of having “skin in the game” before it was a metaphor. The skin he insisted on what literal. Hammurabi understood that a clear path to having people honor agreements is to hold the parties existentially accountable. Take the way his code treated building construction. According to law number 232, if a Babylonia builder built a house using sub-par materials and for that reason the collapsed causing the death of the owner, the builder would be put to death. Harsh consequences, yes, but presumably Babylonian structures were built with quality materials and attention to detail because builders knew the consequences of default. When the parties to an agreement have real skin in the game, they care more about fairness and outcomes.
“CEOs can learn from Hammurabi’s struggle to regulate accountability, align incentives, manage risk, and communicate standards.”
Aligning Incentives. The Code of Hammurabi was one of the first attempts in history to align incentives. It discouraged Babylonian contractors from building structures with the minimum quality of materials and standards they could get away with. Given the risks of collapse, there was simply no incentive to justify cutting corners. Rather, contractors would be incented to build in a margin of safety to make the structure sturdy against not only predictable conditions such as high winds but random events such as earthquakes. It was in the self-interest of all vendors operating under the Code of Hammurabi to anticipate and account for Black Swan Events.
Managing Risk. Hammurabi understood the risk of risk. He understood that public well-being was difficult when people were cheating each other, and structures were failing. In short, he wanted a code that produced results for the benefit of the entire society. Hammurabi’s Code encouraged vendors to build in wide margins of safety for the benefit of the parties and the community. The Code regulated the caveat emptor (“buyer beware”) nature of many asymmetric transactions. Builders know more about houses than buyers. As a result, it is tempting for builders to cut corners and pocket more money, knowing the consequences will emerge after they are long gone.
There are many reasons why today’s financial systems do not incentivize the parties to create wide margins of safety, but one reason is that incentives are often hidden. Today, fines against irresponsible institutions have replaced personal accountability. Not a single major banker was held responsible for the egregious risk-taking that caused the financial crisis of 2008. Today’s financial systems too often reward participants who bend regulations, swindle their partners, take imprudent risks, or extract unearned benefits from unwilling consumers. The Wells Fargo scandal in which employees opened millions of fake accounts to reach sales quotas would have been much less likely under the Code of Hammurabi. People’s sense of risk when it comes to their own skins is finely calibrated. It’s the risk with downsides to others that usually creates havoc.
Communicating the Standards. Perhaps the most innovative feature of the Code of Hammurabi was how easy it was to understand by everyone from priests to ordinary citizens. Hammurabi sought to avoid the legal complexities and arcane language that often made it convenient for kings to punish unruly subjects. Instead, he put the rules on clay tablets and had them distributed throughout the kingdom.
While Hammurabi’s Code featured some progressive precepts—including history’s first minimum wage laws and the first expression of the concept “innocent until proven guilty”—no one is suggesting that CEOs should emulate Hammurabi. By contemporary standards, his code is impossibly harsh. It calls for different punishments based on social class and even gender. Yet CEOs can learn from Hammurabi’s struggle to regulate accountability, align incentives, manage risk, and communicate standards.