The Fourteenth Banker Blog

July 9, 2010

Adverse Selection in the Talent Review Process

Filed under: Running Commentary — thefourteenthbanker @ 12:01 PM

Every major bank does talent review and succession planning. Here is a quote from John Stumpf of Wells Fargo. It is not meant to denigrate the named individual, it is just to point out the mentality and hubris regarding how corporations select managers. I will debunk the mentality.

“We have a very robust talent review process here,” he (Stumpf) says. “Avid has a wonderful future here and so do a lot of people.”

So let’s examine this. Stumpf makes a congratulatory self declaration. What he says shows the same kind of self certainty that I’m sure he felt when making all those mortgage loans and buying Wachovia Bank over a weekend. Second, he prophesies about the future. Of course a lot of people have a wonderful future at Wells. That is just a function of the bell curve. But to predict that a specific individual has a wonderful future is another matter. That is a thinking error. There is no certainty about any one individual.

Every bank, every corporation, claims to have a robust and effective talent review process. I would argue that it is just the opposite, that their talent review processes cause adverse selection. This paper was recommended by Bill Black. In it, Gintis and Khurana argue that the business educational system detracts from corporate honesty. This should be self evident to us by now. Corporate honesty is an oxymoron. There are exceptions of course, somewhere.

They write that the B-school motivational models are based on mis-application of simplified economic theories that do not necessarily bear on human behavior. Economic theory and behavioral economics are different Arts. We actually have a lot of good information concerning behavioral economics. Unfortunately the current generation of corporate leaders by and large have already been conditioned by faulty assumptions that defy logic. For example, we know that among individuals there are many that place high value on things other than economic incentives. Nevertheless, few corporate leaders factor this into processes. To quote:

In particular, many individuals place high value on such character virtues as honesty and integrity for their own sake, and are more than willing to sacrifice material gain to maintain those values. We suggest business schools develop and teach a professional code of ethics similar to those promoted in law, education, science, and medicine, that the staffing of managerial positions be guided by considerations of moral character and ethical performance, and that a corporate culture based on character virtues, together with the stockholder-managerial relationships predicated in the part on reciprocity and mutual regard, could improve both the moral character of business and the profitability of the corporate enterprise.

Please note that the authors have previously compared the shortcomings of existing B-school ethics approaches and contrasted them with courses taught in the other listed professions.

Even if business schools change their curricula, it is  A) too late for current corporate managers and  B) new graduates will come into already corrupted cultures and are likely to lose their values before they rise to seniority.

So back to talent review processes. These are founded on alignment of individual incentives to short term shareholder value. The incentives become the proxy for value creation (book profits). There are both carrots and sticks for performance relative to these proxies. The metrics can always be manipulated in many ways including by the natural delay between bad decisions and the corrosive impact of those decisions. The most manipulative and ruthless managers generate the “best” metrics. As we have discussed before, the corporation protects the individual from consequence for such decisions and the externalities foisted on the commons.

To quote again:

…if the health system, scientific research, or higher education were run on the principle that the highest-level decision makers are motivated solely by material reward, and if the training of individuals in these fields stressed that there are no binding ethical rules, and obeying laws should be subject to cost-benefit calculation, there is little doubt but that such systems would fail miserably.

The end result is the managers most sold-out to corporate interests and least wise or humane are the ones promoted higher into management. They play the game to win, and do, and we lose.


  1. The abstract to the paper recommended by Bill Black states: “We suggest that a corporate culture based on character virtues, together with owner-manager (my italics) relationships predicated in part on reciprocity and mutual regard, could improve both the moral character of business and the profitability of corporate enterprise.”

    But the gaping hole in this equation could be the owner-manager relationship. Who exactly are the owners? They could be the owners of shares traded by fund managers. The owners could literally be abstractions, disembodied entities, whose primary human relationship to the corporation is through dividends and the movement of share prices.

    Comment by tippygolden — July 10, 2010 @ 9:20 AM | Reply

  2. Tippy, you point out the central problem. Publically held corporations simply no longer have owners in the ownership sense. Ownership shares are now highly transient vehicles of speculation. This is guaranteed by relying on increased market value arising from increased net earnings to provide the required return on investment. ACtual performance is far down the list of realities contributing to return on investment unless significant dividends from earnings are continuously paid out. Before WWII, dividends were the dominant contributor to share prices. People bought distributed yield. Consequently, with 70 % of shares being program traded there is no connect to ownerhip values. More shares are speculatively traded than required to authorize liquidation of the corporation.

    Thus, corporate managers are no different than public payroll managers. The control fraud mangerial element dominate the corporate agency. They are little different than J. Edgar Hoover having his fiefdom at the FBI for decades on end.

    Comment by Jerry J — July 10, 2010 @ 12:16 PM | Reply

  3. Tippy also introduces a pet theme of mine about the similarities of actual economic organization between the USSR and the US. What emerged in the USSR after the death of Lenin was state captalism organized along lines of the corporation. What other organization is possible that allows survival of highly complex technical activities? The founders of the Communist State as organized by Bolshevik thinking had unintended consequences way apart from their economic thinking. Marxist economic thinking was simply way too simplistic and not sufficiently willing to admit the human elements necessary to long term societal survival. They got what they had not intended. What they wound up with was the same corporate leadership element composed of technocrats that were able to co-opt their theoretical concepts to their benefit. The public corporation generated the same result.

    Both sides laid low by the same unintended results based on theory that ignores real world knowledge. First rule ignored is the concept of service to others with sacrifice being an unworkable assumption about what human’s really do in the long run. Massive complexity requires highly competent leadership that cooperates sufficiently for the society to maintain commonwealth. Personal life demands personal security at the most basic level. The family and clan. Altruism today denies both in economic organization.

    What the Control Frauder’s are doing is entirely natural given the ability of others to interdict their quest for economic riches. Managers may only be attacked in terms of relations with outsiders. Everyone must protect their economic fort or choose to not participate in leadership of economic organization. The forces of criticism now destroy , which is to be expected of a nation where you are defined , more and more, by what you are against. These people are for ” them and theirs” . If not they are wasting their efforts in the economic organization.

    What better economic thinker to read here than Robert Heilbroner?

    Comment by Jerry J — July 10, 2010 @ 3:08 PM | Reply

  4. Thought you’d find this interesting

    Comment by Lucy Honeychurch — July 11, 2010 @ 1:56 PM | Reply

  5. Just like Gordon Gecko is supposed to be a parody – a morality lesson, some one to laugh at and denigrate, and not a ROLE MODEL – Animal Farm and Lord of the Flies are both supposed to be morality lessons for school children. Why, oh, why – then – are we doomed to repeat the same lessons in each generation?!

    Perhaps our ‘no consequences for failure’ way of raising our kids – where no one is prized for being better, and everyone wins even when they fail – where no consequences are assigned as long as you can articulate a good excuse, and lying is considered ‘presenting the story from a different point of view’ contributes to this kind of circular devolvement of society. Perhaps it’s our ‘Rich makes Right’ pervasive ‘ethical’ mores, or the moral relativism that’s creeped into our lives and dictates that no kind of behavior is absolutely WRONG – since you can never stand in another man’s shoes – and where being ‘judgmental’ (ie. using your God-given ability to reason right from wrong) is considered a bad thing. Not sure, just some food for thought here.

    Or perhaps the kids are raised right, then learn the hard lessons of a sham-capitalist democracy that’s been reduced to ‘dog-eat-dog’, and become changed by the necessity of surviving in this world we’ve created for ourselves.

    Maybe it’s all the above and more.

    Whatever the cause, the best way to fix it inside a firm (or inside a political system) is to institute some real and painful penalties for the everyday moral transgressions that are rewarded as exemplary behavior in our country. And the beatings have to start at the top of the food chain, b/c most of these big fish stink from the head. If you aspire to be the Gordon Gecko paragon of greed and might-makes-right management during the boom years, you get the privilege of being first in line for flogging when your philosophy tanks the ship.

    I’m not sure how we will drill these ethical lessons back into our culture – but I suspect keeping the conversation alive and active is a good start. A close second is raising kids who know the meaning and feeling of pride, honor, and shame. It may seem ridiculous to focus on children in the context of this conversation about grown-up things, but I wish to God someone had taught a young Sandy Weil these lessons before they unleashed him into the world.

    Comment by Lucy Honeychurch — July 11, 2010 @ 6:48 PM | Reply

  6. So the ground-breaking innovation created by free-market ideology is that dishonest, unethical, self-serving misconduct (eg, lying, cheating, stealing, manipulation, self-dealing, fraud, avarice) followed by the evasion of all personal accountability is the formula for material success. Actually, I am not sure this is anything new or innovative. Dante’s Divine Comedy comes to mind. In particular, Part I the Inferno and the fourth, eighth and ninth circles of Hell.

    The eighth circle of hell in the Divine Comedyis reserved for corrupt politicians, thieves, alchemists, counterfeiters, perjurers, grafters and their minion. Read and cringe.

    Bravo !!! to Herbert Gintis and Rakesh Khurana for their essay … and to 14th and Bill Black for recommending it.

    Comment by tippygolden — July 14, 2010 @ 6:59 PM | Reply

  7. Lucy Honeychurch writes: “the best way to fix it … is to institute some real and painful penalties for the everyday moral transgressions that are rewarded as exemplary behavior in our country.”

    Dante’s Inferno>/i> would be the default option.

    Comment by tippygolden — July 14, 2010 @ 7:39 PM | Reply

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