The Fourteenth Banker Blog

April 30, 2010

The End of Innocence

Filed under: Running Commentary — thefourteenthbanker @ 10:45 PM

Financial reform is not free for the same reason it is necessary.  This Zero Hedge post makes it clear that Wall Street is sending warning signals.  The world did not get in its present condition by the collective responsible, conservative, ethical and wise actions of all players in government and the financial markets.  It got in its present condition by too many power brokers being just the opposite for too long.  We’ve had a huge financial market unwind and rewind.  The extent of the rewind is based on rosy assumptions that we can simply return to normal with the passage of a little time.  But I do not know that Shiva is done.  In the best possible scenario there will be shifts in global and financial power.  When you add a reform effort to the mix there will be winners and losers.  We really need the winners and losers of the last decade to change seats.  If the wealthy and the powerful would volunteer to be losers for awhile, and let citizens win, we may eventually get prosperity in this land again.

The author predicts that next week might be like the Titanic sequel, implying there is a sort of Fate to reckon with. Perhaps.  I do not agree with the argument I read elsewhere that somehow we have to prop up the big six banks in order to hold up the world.  How absurd is that?  (unless you mean the other kind of “hold up”)  The big six banks are going to change.    The question is whether they will go kicking, screaming, scratching out for themselves every last dime, or whether they will put the interests of the world and its citizens in front of their own interests?   If the big six act for themselves  only, we are in for a wild ride.  The vultures will pick at their bones.

On the other hand, if these CEOs will rise to the level of statesman, I believe they can find an orderly way to restructure which does not disrupt the entire economy.  Rather than playing the Dick Fuld, they should play Lord Mountbatten and oversee the most orderly transfer of sovereignty possible under the circumstances.    That requires a release of wealth and power and giving it over to the democratic process.   In doing so they may salvage a Commonwealth out of an Empire.

Washington’s Blog – Synchronicity

Filed under: Running Commentary — thefourteenthbanker @ 8:18 AM
Tags:

Here on Washingtons Blog is a chart showing that North Dakota, the only state with a Public Bank, is the only state with economic growth from February ’09 to February ’10.    There is a link to a previous blog post which discusses Pubic Banking in more detail.     One of our readers asked that I look into the issue and I plan to do so and offer an opinion this weekend.

But, I thought the story was very synchronous with my posted observation last night.

My inquiry will be whether credit conditions in North Dakota during this time period was a key driver of this outperformance, and if so, what does that mean in relation to our largest banks.

I have seen this synchronicity occur more than once since starting this blog.

April 29, 2010

Interesting Data Correlation

Filed under: Uncategorized — thefourteenthbanker @ 11:13 PM

I was browsing a couple things today and pulled the graph below off the pending House SAFE Banking Bill.    Then I noticed this chart the Philadelphia Fed prepares to measure current business conditions against averages.     The graph does not provide absolute levels of economic activity but indicates whether conditions are getting better or getting worse.   You can get a description of the data on their site, but please notice how the growth of the largest banks coincides with the generally poor relative performance of the economy for the last decade, not just the most recent crisis period.

Exhibit in SAFE Banking Act about to be filed in the House of Representatives

But I’m not telling you anything you don’t know.

April 28, 2010

The Ownership Conundrum II

Filed under: Uncategorized — thefourteenthbanker @ 11:32 PM

Now that we have a little pause in the circus, I want to return to an issue introduced a few days ago.  I used the events of the day to introduce the idea that the ownership of an institution is important.  If the market bids up and rewards behavior that is anti society, then it will very hard to stop that behavior, new regulations or not.  Even today Dick Bove was putting a $200 price tag on Goldman and saying to buy it.  Each of us has to decide if we are willing to overlook the behavior and make the investments in these firms in hopes of realizing profits.  It is not an easy issue.  Most of us do not have periscopes into these organizations which give us enough certainty about their ethical practices to make a decision to deliberately forgo potential profit.  While we cannot easily judge the ethics of most companies, we can have more success determining whether the organization’s values align with ours.  If their values align with ours, there is a pretty good chance we can have the return on investment we need and feel good about who we own.   Let’s turn to John Mackey of Whole Foods and look at his comments on the paradox of shareholder value.  I agree wholeheartedly with these comments and believe they represent the best of what banking was, and could be again.

… There is a fundamental paradox that I call the “paradox of shareholder value”. The best way to maximize shareholder value is to not make maximizing shareholder value the primary purpose of the business. Why not? Because it is the business that satisfies customers best that has the most customers, the highest sales, and the most profits. The best way to satisfy customers best is to organize the entire business around satisfying the customer. Every communication the business makes towards its customers, its employees, and the media should be about putting the customer first. Ultimately the best way to satisfy customers’ needs best is to actually put those needs first. If profit is the articulated primary goal of the business then it is unlikely that the employees or management of the business will dedicate themselves to customer satisfaction to the same degree they would if customer happiness was seen as more important than investor profits. In the first case customer happiness is merely a means to an end — maximizing profits. In the customer-centered business, however, customer happiness is an end in itself and because it is it will be pursued with greater interest, passion, attention and empathy than the profit centered business is capable of.

Let me give you an analogy that may make this point better: What is the key to happy marriage? Is my wife’s happiness an end in itself for me or is her happiness merely a means to a different end — my own personal happiness? It has been my experience that I am happiest in my marriage when my love for my wife causes me to place her needs and desires first — ahead of my own. When my wife is happy then I am happy. When she isn’t happy, then I’m not happy. I achieve my personal happiness in marriage best by not focusing directly on it, but by focusing on her happiness as the primary goal for me in the marriage. That is the way love works, in my opinion. The beloved’s happiness is an end in itself — not a means to some other end. Paradoxically by seeking to maximize my wife’s happiness, I also maximize my own. However, that is a secondary by-product of my desire for her personal happiness. Fortunately for me my wife shares my philosophy of marriage and reciprocates my dedication to her happiness with an equal dedication to my own happiness as well.

Similarly to a happy marriage, the most successful businesses put the customer first — ahead of the shareholders. They really have to have this dedication to the customer to maximize customer happiness. Customers aren’t stupid. They know when they are being misled or merely being used. It is also difficult to impossible to truly inspire the creators of customer happiness, the employees, with the ethic of profit maximization. Maximizing profits may excite shareholders, but I assure you most employees don’t get very excited about it even if they accept the validity of the goal. It is my business experience that employees can get very excited and inspired by a business that has an important business purpose (such as selling the highest quality natural and organic foods) and teaches them to put the needs of the customers first. People enjoy serving others and helping them to be happy — when they know this is their primary goal and are also rewarded for successfully doing so.

The customer-centered business is usually the most successful and the most profitable, while the shareholder centered business usually underperforms over the long-term. I suggest reading Jim Collins’ two books Built to Last and Good to Great for empirical evidence to this viewpoint. The ultimate test of these two business theories, however, is in the marketplace — not in theoretical arguments. My company, Whole Foods Market, is a mission-driven business that puts the customer first, the team members second, and the shareholders third. We are winning competitive battle after competitive battle in the marketplace against businesses which adhere to the philosophy of maximizing profits and shareholder value as their primary goal. Whole Foods has never had a store we open ever fail in the marketplace. We have never lost a competitive battle in 27 years of business! Why not? Because the profit-centered businesses we compete against cannot beat us in the marketplace. Our customer and team member-centered business model beats them every single time.

Do you think your TBTF bank is so customer and team member centered that it has a right to demand that the Congress protect its stature?

There are more aspects of the ownership conundrum to talk about in future posts.

By the way, while my suggestion to sell bank stocks was on principle, it is interesting that the stocks have dropped sharply.  It is certainly not because of a suggestion or a couple of you selling shares, but perhaps because the universe will “mean revert” to a system that has values.   Wouldn’t that be cool!

Good night.

14


The Fabulous Fab, a Goldmanesque Fractal

Filed under: Uncategorized — thefourteenthbanker @ 10:21 AM

The hearings today were great theater.  Several Senators referred to the fact that 4 or 5 other CEOs should have been sitting with Lloyd Blankfein.  Who are they?  Was Goldman on trial or was the system on trial?  I submit that the system was on trial, and, while I did not catch all the testimony, I’m afraid the trial was not prosecuted as well as it might have been.

I found Blankfein to be the most competent witness I heard.  He argued that investors were informed and knew the risks they were assuming.  He defended the soul-less transactional approach that pervades industry today.   He knew some things and did not know the things that he was not supposed to know.  Wasn’t his confusion regarding how to respond to the questions about the release of Tourre’s emails priceless?  I don’t think it ever occurs to Lloyd to consider what the right thing to do might be.

The unasked question is, “how does such a culture comes to exist?”  Why do employees engage in renegade actions, if they were such?   Didn’t Lloyd say how strong the ethics are at Goldman?  So the basic argument is that “ethics are strong, maybe my people didn’t do enough due diligence, and by the way, we’ll throw this kid under the bus.”

I can promise you these elements exist at Goldman:

  • You are defined by what you do
  • If you don’t produce, you are out
  • Do not question the prevailing thought process
  • You may violate certain portions of the Code of Ethics so long as your manager and team benefit and these violations are on the unspoken, unwritten “approved violation” list.    Generally these will make lots of money for the firm and yourself.
  • Do not rock the boat
  • Do not mention “that which must not be named”

Lloyd had a certain amount of congruence.  He was quite at peace with who he is.  He is very intelligent and can navigate the shoals of rationalization, compartmentalization, and objectivism to be congruent with his world view even when his words are slippery.  They are slippery in a way that makes perfect sense to him.  The problem is that within Goldman, every other employee has their antennae up.  The are listening to to the spoken word, cueing off the non verbals, seeing the consequences for others, and making the most rationale decision they can based on all that they see.  The rational decision if you are an employee of Goldman, is to cut the corners you are supposed to cut.  You will figure them out quite quickly by watching others.    If you do all they do, and a little more, maybe you can name yourself the Fabulous Fab.

Tourre is a Goldmaneque Fractal.   He and the organization have a simple and recursive definition and appear similar at all levels of magnification.

The reason the Senators said 4 or 5 other CEOs should be up there, is that they know intuitively that Goldman is a fractal of the greater financial system we have today, diagram below.

April 26, 2010

Goldman and the Decline of Integrity

Filed under: Uncategorized — thefourteenthbanker @ 6:41 AM

This short article says a lot. It explains a lot that has been commented on in this blog and it’s comments.

Harvard Will Sell Major Bank Stock

Filed under: Running Commentary — thefourteenthbanker @ 4:30 AM

Harvard will sell major bank stocks with substantial investments in South Africa.  This is the headline from 1978.    Citibank and Manufacturers Hanover Trust had lent money to the government of South Africa.  Spectacular as that headline is, the official and much more recent Report of Smith College regarding companies investing in Sudan makes better reading and provides sound rationale for public institutions using their power of investment with a moral point of view in extreme cases.

Quote: “The Trustees voiced a note of caution by acknowledging the general difficulty of applying moral criteria to investments in an imperfect world. Nonetheless, they asserted, within a general policy of avoiding perfectionist goals, “we believe it is possible to identify some corporations or industries whose actions or policies do not deserve endorsement by the intellectual community represented by Smith College. We believe that the avoidance of investment in companies in this latter category should be a specific and deliberate part of the investment policy of the College.”

Goldman anyone?

April 25, 2010

The Ownership Conundrum

Filed under: Running Commentary — thefourteenthbanker @ 11:08 PM

We have a conundrum.  Even while Goldman Sachs lurches from one obscene disclosure to another, while the Financial Crisis Inquiry Commission issues subpoenas to Moody’s for selling out their ratings, while TARP banks contract credit and increase pay, while the Eurozone fractures along economic lines with risk of contageon, while lobbyists swarm Capital Hill to keep the gravy train moving, the investing elites just keep buying banks.

Beginning in the 1960’s a movement began to change the face of Apartheid in South Africa.  It did not gain steam until the 1980’s.  When it finally did, the old power structures were forced to bow to the conscience of the world.    That time has come again.  The financial system is kicking and screaming this week, pouring money into campaign coffers, lobbying and trying to water down, build in loopholes, and otherwise disembowel the legislation before it finally passes in some form.  Enraged as the public has been, it has few tools at it’s disposal.

Disinvestment, sometimes referred to as divestment, refers to the use of a concerted economic boycott, with specific emphasis on liquidating stock, to pressure a government, industry, or company towards a change in policy, or in the case of governments, even regime change. The term was first used in the 1980s, most commonly in the United States, to refer to the use of a concerted economic boycott designed to pressure the government of South Africa into abolishing its policy of apartheid.

If you have been invested in large banks, you have done reasonably well lately.  Now sell them.  Management will not change appreciably until they know the people will speak with a loud voice and hit them in the wallet.  The same regimes run the banks in the same way.   The same axis of power runs between New York and Washington.  The revolving door turns.   Regime change is a worthy goal.

April 24, 2010

TARP Banks Cut Lending More Deeply

Filed under: Running Commentary — thefourteenthbanker @ 3:20 AM

USA Today points out that TARP Banks cut lending more dramatically than banks that did not take TARP.  For clarity, it is important that it be noted that a very large number of banks took TARP.  The nine largest banks took TARP on day one, whether they wanted to or not (potential revisionism here on the part of some).     At one point the NYT listed these banks as TARP banks.  However, the largest banks do represent the lion’s share of deposits among TARP banks.     Therefore, they cannot claim to not be the reason for this difference in lending, unless they claim they don’t make many loans at all, which I don’t think they will say.

This is consistent with my comments to the Huffington Post in which I said that while loan demand was down, lending was down disproportionately more.

It is also consistent with my call to break up the largest banks as a service to our economy.     It is really very simple.     As long as the largest banks can take deposits and allocate those to the highest profit opportunity they can find, in many cases deposits taken from one geographic or demographic community or class will fund investments elsewhere. If the opportunity does not exist to pull those deposits and invest them elsewhere, the bank will invest in primary markets to the maximum extent permitted by safety and soundness concerns.

The second major point of the story is that pay at these banks rose disproportionately.    Again, this reflects paying bankers to gather deposits instead of make loans as well as the skewing of averages by big payouts for those at the top.

Comments from other bankers?

April 23, 2010

The Promise; The Con

Filed under: Running Commentary — thefourteenthbanker @ 12:35 AM

The President seemed was playing the Statesman today in his speech.  He appeared to create space for compromise, inviting the Republicans in by not being soft on Wall Street.  He highlighted the failure as a collective failure, which it is, but that is not the point.  The crisis could have been prevented by the exercise of:

1)  Effective Regulation

2)  Restraint

3)  Morality/Ethics

The topic of the speech was Financial Regulation.  It would have been fitting to clarify exactly why the behavior of financial institutions needs to be regulated.  It was not a time for pulling punches.  More graphic description of the failures of restraint and ethics, might have made a stronger case for regulation.

So what is the title of this Post about?   There seems to be a dynamic where a “Promise” is being made.  The Promise is that the bill will do what it is reputed to do.  It will prevent systemic meltdown and/or cost to taxpayers of future bailouts.  A word of warning.  A promise is often used to get people to not focus on the current reality, to deny the truth of their actual experience and their present intuition in order to hope a promise plays out.  The President downplayed the present experience and the intuition of the American people in an effort to get legislation to pass on the basis of a promise.

The “Promise” is closely related to the “Con”.  The Confidence Game involves a “Con Man”, sometimes a “Shill”, and the “Mark”.  The “Mark” is the one who believes the Promise and gets taken.  I don’t mean to be too negative on the President.     I believe he is well intentioned.  But unknowingly, he is playing the roll of the “Shill” to Wall Street’s “Con Artist”.   You are the “Mark”

The instruction for America?  “Don’t rock the boat.  We’ve got this.”  Do you believe it?  $50 Billion in resolution authority funds is nothing if risk is not reined in.

From Wikipedia:   A confidence trick or confidence game (also known as a bunkoconflim flamgafflegrifthustlescamschemeswindle or bamboozle) is an attempt to defraud a person or group by gaining their confidence. The victim is known as the mark, the trickster is called a confidence mancon manconfidence trickster, or con artist, and any accomplices are known as shills.

April 22, 2010

Breaking Up the Banks – Economix Blog – NYTimes.com

Filed under: Running Commentary — thefourteenthbanker @ 8:53 PM

Breaking Up the Banks – Economix Blog – NYTimes.com.

Simon is on a roll.     This is not a time to feel hopeless.    There are things happening and momentum for change is building.     It may not all happen in one step.

April 20, 2010

The Fall of Lehman Hearings Today

Filed under: Running Commentary — thefourteenthbanker @ 2:48 PM

Today the House will hear witnesses on the Lehman bankruptcy including Ben Bernanke, Dick Fuld, Mary Shapiro and others. This should be good theater. Will our Congressmen go the the heart of issues facing the American public today? Or will they just cast about looking for scapegoats for this particular watershed event? The questions they ask will illumine how well they understand what we are facing as a nation. It is already a matter of record that somehow the entire broker/dealer model became precarious because of both investment decisions and mismatches regarding their funding. The salvation of some, Bear and Merrill, if you can call it salvation, came from bringing them under the umbrella of the capital and deposit funding of our largest banks. Is this a good thing? Should our bank deposits be used to fund trading houses? Should bank capital be tied up in businesses that are inherently very high risk? Or should bank capital be used to fund the businesses in this economy that produce innovation, employment, personal income, and ultimately prosperity. It is a question of resource allocation. The latest bank earnings reports indicate shrinking credit and earnings driven by trading.

So a Congressman might take the position that Lehman should have been saved. But how? Taxpayer bailout to put it under the wings of a bank, further concentrating power in financial conglomerates, with all their lack of attention to main street? Or should the collapse be considered a fair and reasonable outcome? Can you be “for” saving Lehman and “against” financial concentration? Will a brave Congressman stand up to the culture of greed and elitism that dominated that time and still dominates our system? Have any major changes for the better in Commercial Banks happened post Lehman? I don’t see any. In fact, I don’t see any serious changes at all, or even discussion of serious changes. The same people run things in the same way.

What questions would you want to ask? If you have a great question, it is possible to get it before the committee in time for the hearing.

April 18, 2010

Crafting a New Future

Filed under: Running Commentary — thefourteenthbanker @ 10:47 PM

Vijay Govindarajan, Dartmouth Professor with an international perspective, asks us to consider whether these three activities must have priority in the modern organization:

Box 1 = managing the present
Box 2 = selectively abandoning the past
Box 3 = creating the future

His premise is based on the characteristics of the three principal deities in Hinduism.

The three have the roles of Preserver or Sustainer, Destroyer, and Creator. (My most simplistic summary) Note the order. Creation comes after Destruction.

My view is that many spiritual traditions are descriptive of realities experienced by those who practice them or originally formulated the chief doctrines. While it is easy for those unaccustomed to the particular tradition to disregard the form, the underlying basis for the form is often quite profound.

This particular conception of Deities is really based on the obvious cycles seen in the earth. Life itself is sustained, destroyed or ended, and provides the seed for the next cycle of creation.

He posits that organizations that embrace such priorities are more likely to succeed.

Therefore, the preservation of the status quo is a natural tendency and those who are engaged in it are behaving instinctually and rationally from their perspective. But for those able to see, if that form of organization no longer serves the greater purpose, then its destruction brings fertile possibility of new creation.

The Congress must move to allow the creative destruction to take place. The status quo is not acceptable. Moving forward boldly is required of the times.

The Case for Being Disruptively Good – Umair Haque – Harvard Business Review

Filed under: Running Commentary — thefourteenthbanker @ 6:45 PM

The Case for Being Disruptively Good – Umair Haque – Harvard Business Review.

Another reason for optimism.

Huffington Post Article on Fourteenth Banker

Filed under: Running Commentary — thefourteenthbanker @ 3:22 AM

I realize I did not post this link from earlier this week.    Some of you came from the article others were following before.

http://www.huffingtonpost.com/2010/04/13/the-fourteen-banker-anony_n_534820.html

Comments welcome.    There are some issues here deserving of more discussion.    There were also some areas we discussed in the interview that did not make it into the article but that I will post about when I have a chance.

April 17, 2010

Goldman and Bank Reform

Filed under: Running Commentary — thefourteenthbanker @ 2:14 AM

By now you have heard that the SEC charged Goldman with defrauding investors in its conflict of interest and lack of disclosure regarding the sale of complex CDOs.        This could be a strengthen the hand of reformers on Capitol Hill and in the White House. Perhaps the days of open cheating and self dealing are drawing to a close.

Why is Goldman still a bank anyway?      Clearly they can make enormous sums and the market believes they are well capitalized. Why continue to have access to the Fed Discount Window?    Answer:   because they are Too Big to Fail.

April 16, 2010

Too Big To Fail

Filed under: Running Commentary — thefourteenthbanker @ 6:33 PM

I was flipping through Andrew Ross Sorkin’s book yesterday and saw a quote attributed to Ken Lewis that the “Broker/Dealer” model would not survive because they needed the funding base of a commercial bank.     Is that a Mea Culpa?    Is that basically saying that bank deposits would be used to fund Broker Dealer operations?     Or that Bank credit ratings might become necessary (also based to large extent on deposits and the capital base).    In either case, if capital or deposits are allocated to support the I-Bank, they are diverted from traditional banking.     (Unless someone can create them out of thin air)

April 15, 2010

Confirmation

Filed under: Running Commentary — thefourteenthbanker @ 3:46 PM

This is a comment from a reader.    It has been very slightly Xd out to protect identity, but I believe it deserves to be highlighted.

I came upon your blog yesterday thanks to the good folks at Huffington Post, and have been completely intrigued at what’s been written so far. In a former “life” (I am a stay at home dad now at age XX) I was a Vice President (for 1X years at the same Bank) in Incentive Compensation for one of the major Wall Street Banks that took TARP funds. My position involved financial modeling, creation of and maintaining an Incentive budget for the XXXXXXXXXXXX Incentive Program, and payout of the incentives. My position was downsized in 20XX after we bought another large bank (and their guys took over Retail, which spelled doom for a lot of us when they IMMEDIATELY implemented their Incentive Program). If the shareholders knew the waste I saw and the casual and flippant attitude at PAYING someone who CLEARLY didn’t deserve it (but was, because of the lawsuit threat). I tried in vain to stop this (and other) practices which I saw as not only wasteful, but immoral as well. It was practically legal theft, with SVP’s gladly participating to ensure that their people ALL get something, despite them not actually EARNING it.

Obviously, I am still under a gag order that I signed (in order to receive a most generous Severance) so I cannot go into detail here. If you ever wish to correspond by e-mail, I could let you know what went on during my time in Incentive Planning from 19XX-20XX; the last two years spent one level below SVP running the show on a day to day basis. When I just read this last post, I could swear that we probably worked for the same organization…unless these practices are incredibly widespread across various Wall St Banks.

April 14, 2010

The Employee on the Front Lines of Character and Trust

Filed under: Running Commentary — thefourteenthbanker @ 11:48 PM

This is the second in the series on Responsibilities. Several excellent comments have addressed Character and Trust among the employees. We have addressed several ways in which this is compromised. First of all, there will never be perfection in this area as there is never perfection in the human race. There will be human error in hiring and managing. There will also be changes in the life circumstances of employees that cause them to not be able to hold up their end of the bargain. Those things being a given, the question I want to address is what is particularly wrong with the management employee relationship in large banks today. I will define all individuals below a EVP/SVP/MD level as employees. Many of these are managers, but generally they are heavily under the influence of senior management and it hard for them to buck the trend when senior management is like an immovable block.

First, the management should fairly compensate the employee with a salary that is sufficient relative to their skills and experience and should make adjustments to that salary as necessary to maintain that sufficiency. Too many banks have made incentive comp such a large portion of total comp that it is absolutely essential for the employee to make sizable incentive dollars for a comfortable standard of living. Incentive dollars should be a reward for going above and beyond for the client and bank. They should not be what puts the bread on the table. Incentives can be sizable when the contribution is sizable.

Second, management should not hold to a short term ranking system that creates fear for job security based on rankings on sales production.
Thirdly, management must not equate incentive goals, reporting, ranking, recognition, etc. with overall performance or value to the firm.

Fourth, management must not align the goals of different groups in ways that cause them to support ethical compromises or “quid quo pro” arrangements. These are particularly dangerous because the support a culture of cheating that becomes the accepted norm. Once this happens, the lines of ethics are very blurry.

Most importantly, management must not combine the four errors. In some percentage of the cases, excessive incentive compensation leads to either greed or, when salaries are too low, fear. Bell curves based on sales production lead to fear for those on the bottom side. Most companies now identify a bottom 10% and use severe measures in regard to the bottom 10%. It may not matter if the employee is bottom 10% on a short term, for specific reasons, because of different opportunities to excel, because of their own development track, because of ill health, because their manager or department stinks, or for whatever other reason. The very arbitrariness of such systems magnify fear. Making data based incentive goals effectively the full basis on which performance is judged makes the incentive drivers the only measures that matter. All subjective accomplishments and characteristics are effectively made null.

When you combine fear and fear, or greed and fear, you get the same result. The mind responds in a way that triggers different judgments and decisions to be made and the employee’s interest is elevated relative to the customer, bank, or shareholder.

These also puts the collective employee interest at odds with society.

Next, management has a responsibility to have an “open” organization rather than a “closed” organization. A closed organization presents few options to the employee in terms of roles and behaviors. Actions, thinking, speaking are only acceptable in narrowly prescribed ranges in a closed organization. One of our commenters referred to “drinking the cool aid” as a term used at her former bank. If you had something to say that was not what a manager did not want to hear, you were not “drinking the cool aid” and therefore were subject to sanctions. Please know that these characteristics of a closed organization are common in disaster scenarios historically. It prevents the combined wisdom of diverse people from being brought to bear and promotes group think. Group think and a closed organizations negate the benefits of various forms of diversity.

Closed organizations create confusion and various thinking errors. A bank is the last kind of organization that should be a closed organization.

An open organization for my purposes is one that invites, welcomes, and tolerates the free sharing of ideas and information. It allows dissenting views, discusses them openly and may ultimately reach consensus or not, but at least it has respected the individual.

An open organization will also not engage in mis information or promoting confusion among any of its stakeholders including the investment community and customers. Recent accounting revelations bear on how our organizations have become too closed.

Finally, management cannot wash its hands of the acts of its employees when it creates an atmosphere in which bad actors proliferate. Management generally declares that it is open, but that is not something management can determine. It must be determined by the employees, customers, and the public at large.

This post is just in introduction and invitation for comment and discussion, in the spirit of an “open” organization.

April 13, 2010

De Tocqueville on Incentive Plans

Filed under: Running Commentary — thefourteenthbanker @ 2:40 AM

“… every man feels endlessly goaded on by his fear of sinking or by his passion to rise in (that) society. Just as money has become the principal sign of social class and the means of distinguishing men’s position…. Almost no single individual if free from the desperate and sustained effort to keep what he has got or to acquire it. The desire to grow rich at all costs, the taste for business, the passion for gain, the pursuit of comfort and material enjoyment are thus the most common preoccupations in despotisms. Those preoccupations spread with ease throughout all classes of society; they even affect those very classes which had been most free of them up to that point; shortly they would weaken and debase the entire nation, if nothing emerged to check them.”

Obviously these words were not actually written on the topic of incentive plans, but the apply in several respects. One, the element of entrapment and fear. Two, the incentive as the measure of a man or woman’s worth to the organization. Three, the becoming desperate. Four, the preoccupation. Five, the lack of real control implied in his usage of the term despotism. Six, the weakening and debasing of the entire nation.

Carrots and Sticks are not free.

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