High rollers with low morals

“With so many people rolling the dice in hopes of a big score, there are bound to be some winners, their rich rewards raise wealth inequality even further.”

phelpsThis conclusion by Edmund Phelps, winner of the 2006 Nobel Prize for Economics has important implications  for the ethical behaviour, or rather lack of it in so many Western organisations.[1]

Financial traders for example are classic high rollers, gamegamble1 players who make a living from what economists call arbitrage. They spend their time spotting differences between buying and selling prices of almost anything from food to gold, from interests rates to complex derivatives, to mortgages instruments.

Quite simply, these people are gamblers. As Phelps explains, they roll the dice hoping for a big hit. With bank traders for example, all the emphasis is on short-termism leading to the non-ethical behaviour now so common.

Spend most of your working life looking for a quick big win and you’re unlikely to be concerned with more fundamental issues. These might include  how your actions might affect society, whether what you’re doing to beat the odds is legal or “right”, possible long term adverse consequences for other people, or the planet, potential fines, loss of reputation or brand destruction. None of these may seem as important as the lucrative end  the gamblers have in mind.

A relentless focus on winning, or “materialism” as Phelps calls it, means corporate leaders too may be tempted to follow their more lowly traders and sanction actions which focus on ends not means.

Short termism can tempt senior leaders to artificially boost share prices, encourage demands for subordinates to hit quarterly earnings targets, or, in the recent case of the French Bank BNP Parabas,  seek profits by ignoring the spirit of the law, while seeming to stick to the formal requirements to support sanctions against certain countries.

libor-comicNot surprisingly, some anxious or ambitious managers pressed hard to perform despite low productivity or intense competition may reach for short cuts—even when these may turn out to be criminal. For example, by manipulating prices or rates of some kind.

The latest version of this happening is at  Lloyds, where some employees have been rigging rates to cut the cost of a financial crisis.  As one insider put it: “they could rig the rate so they did.” Described by the governor of the Bank of England as “highly reprehensible” this has already led to a major fine and a dent in the share price.

But whether people choose unethical means to achieve desirable ends depends heavily how the reward system is structured to promote success. A wrong emphasis can inadvertently trigger the kind of mal practices at Lloyds and other banks.

Nor is the problem confined to the financial sector. For example the Caterpillar subsidiary, Progressprogress Rail Services, is currently facing a criminal investigation over its repairs to rail rolling stock, and the charges it makes. Apparently, some workers have even resorted to smashing brake parts with hammers, gouging wheels with chisels or using chains to yank handles loose, according to current and former employees. [2]

The Caterpillar saga is eerily similar to the earlier 1990s Sears, Roebuck case scandal. There automotive mechanics were set a sales goal of $147 an hour, presumably to increase the speed of repairs. Rather than work faster, though, employees met the goal by overcharging for their services and “repairing” things that weren’t broken.

The present evidence at Caterpillar for instance, suggests company’s inspection workers as a whole faced considerable pressure to produce billable repair work. So guess what? That’s exactly what they did.

Failed remuneration systems do not happen by chance. Such is the level of competition facing many organisations, that rolling the dice type action seems the only way forward. Even lawyers are prone to suffer from this misalignment of profits and purpose.

The last couple years for example has seen a succession of judges in both the UK and the US angry judgeopenly “shocked” at the fees being demanded by the legal profession, particularly by the larger players. The fees often seem to bear little relationship to the scale or difficulty of work undertaken. This tendency is being driven by the senior law firm partners trying to maintain their billings almost regardless of the damage they are doing to their clients.

Tough new UK banking regulations now in train may start to make a difference in that particular sector. We will have to wait and see. No one though should under estimate the ingenuity of those bent on short term goals to find short cuts and “work arounds”.

Until business as a whole can re-discover its ethical roots and re-define its purpose beyond the crude hunt of for profits we will continue to see an unedifying succession of scandals. In the end it comes down to leadership.–the right kind of leadership.

[1] E.Phelps, Corporatism not capitalism is the root of inequality, FT 25th July 2014

[2] J. R. Hagerty and B. Tita, Workers at Caterpillar Say Train Repairs Were Often Bogus Wall Street Journal July 20, 2014

 

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