From this post by Leo Tilman at Harvard Business Review Blogs, I have pulled the final paragraph for discussion.
The most important battlefront, however, is around the leadership and governance of financial institutions. In dealing with market and competitive pressures, financial executives must demonstrate genuine leadership in making decisions that benefit all stakeholders, including the society at large. In addition to proper incentives and governance, this requires a moral “true north” that has been missing at many failed institutions. Equally critically, boards of directors must become more informed and proactive, embracing their fiduciary responsibilities and enacting a new kind of corporate governance — the one grounded in risk management. I’ll be talking more about this as this HBR debate unfolds.
I will be curious to see the debate unfold. Several times on this blog readers have pointed out to me that the corporation exists for the shareholder’s enrichment, that if management makes decisions that are not in the interest of the shareholder, they can and will rightfully be sued. I don’t see the issue as so simple, though in my more aggrieved states I may wish it were so. There are all sorts of reasons that considering the interests of all stakeholders would prove to be in the interest of the shareholder as well. Perhaps I am wrong, but I have not seen shareholders line up to sue management when they are too compassionate. Generally those lawsuits are based on gross mismanagement that normally include instances of graft or excessive externalizing of costs to such an extent that the backlash detracts from shareholder value. In fact, you may have heard that BP is being sued by its shareholders over losses related to negligence in the Alaska Pipeline spill of a few years ago, the Texas City blast and this latest catastrophic spill.
Defendants’ disdain for safety and environmental laws, and the resulting loss of lives and property, has plunged BP into a public relations crisis,” the lawsuit claims. This has resulted in BP being “tagged as an unsafe company and gross polluter, all of which are extremely negative developments which are hurting BP’s business.
So corporate responsibility is more likely to be in the interest of shareholders than not.
But back to the HBR quote above which addresses Financial Institutions. The professor makes a rather bold statement that all the stakeholders including society must be considered and that in addition to proper incentives and governance, there must be a moral “true north” and that it has been missing in many failed institutions. I take exception to the caveat “failed institutions”, unless meant to broadly include those institutions that failed society, employees, customers, and the legions of unemployed. For the very concept of moral “true north” is bankrupt is it only applies in hindsight to failed institutions. There must be a degree of honest self appraisal and few institutions can look in the mirror and not see a blemish.
What must the nature of this new leadership be? Its measure is not strictly in Risk Management. As we discussed a few days ago, the nature of a bank is to take managed risk.
It is time to introduce some questions for which ancient answers reappear in new science. Is the carrot and the stick an effective management practice? Already the HBR post posits that it is not, but does not indicate what “true north” might mean. We must begin to discover a “true north, at least one that can be experimented with by new managers and tested in the marketplace. I am optimistic that a progressive institution with principled management can succeed in winning over the best bankers, the best clients, and even the best shareholders.
One thing that is strikingly obvious both in the financial crisis and the oil gusher crisis is that the most brilliant and educated leaders are partially blind and inadvertently drive blindness down through the organization. Remember the comments about a fractal. The organization carries the image of its leader, and vice versa. The system holographically re-images itself. This is not a rare happenstance, it is the new normal.
Like meth addicts, New York bankers run fast and hard from one high to the next. As in meth addiction, the lows are intolerable. The system runs on emotion. The question is what emotion, how is it used, and what are the ramifications for the individual, the firm, and the society?
Plato said that a good person is happy and a happy person is good. Scary. There are not many happy bankers these days. Included in Plato’s notion of happiness is a sense of calm. Not a sense of mania with more meth under the Christmas tree. Yet that is the happiness that banks have cultivated. An addictive happiness. A controlling happiness. An imprisoning happiness. A miserable, low quality, fearful happiness that makes one insane. Small happiness. Small flourishing.
An Eastern view of constructive and destructive emotions adds nuance to our Western view. In Eastern philosophy, a destructive emotion has with in an obscuring, afflicting mental factor. It prevents the mind from ascertaining reality as it is. So to be grossly simple about it, the management systems of banks create attachment to incentives, and aversions or fears of banishment, to control behavior in a way that maximizes profit. A side effect of using these emotional manipulations is that the mind is obscured from seeing reality as it is. So there you have it. The root causes of the financial crisis, the oil gusher crisis, the leadership crisis throughout our land, is in the nature of mind.
While that is enough for today, Western neurology also supports the same findings.
So next time you hear a Financial CEO or Tony Hayword say something half baked, have compassion. Their minds are afflicted by their own conditioning.
In an upcoming post we will consider whether FinReg does anything to address these root causes.