Have shareholder interests and customer interests parted company?
It’s a story worth repeating: the one where the wise old man tells his young protégé that all humans have two wolves doing battle inside of them – one good and one evil. When asked which one will win, he replies: “The one you feed the most.”
What outcomes can we expect from our economic co-existence when our diet consists mainly of immediate self-interest and self-serving junk food? When it is based on assumptions about motives that are inherently malevolent; and when we have structured that system to appeal to the worst in us and not the best. We assume for example, that most “normal” human beings are driven by their greed and avarice or their fear and insecurity.
“Do this for me,” we say, “and I will pay your more.” And if that does not work, we flip the coin and say: “If you don’t do this for me, I will fire you or cut your bonus.” Do we honestly believe that we will get the best out of people by appealing to the worst in them? Why the indignation and outrage when they lie, cheat or deceive sometimes on a grand scale like fiddling with Libor? Then we take hypocrisy to a totally ludicrous level by condemning as criminal those who have pushed that envelope a bit too far – well perhaps far too far if one reads blogger Robert Scheer’s description of it as “the crime of the century”. Still, it is only when these acts make headlines that we parade principled pixies such as values, morals, and ethics onto a sanctimonious stage, forgetting that there is an underlying force created by our assumptions about humanity and economic drivers.
I was going to add my rather thin voice to the outcry, because few love those pirouetting pixies more than I do. But in the wake of the Barclays debacle, which saw some high-fiveing traders being accused of rigging one of the most important base rates in the world -- the London Interbank Offered rate or Libor -- the coverage was somewhat overwhelming. So I decided to see whether it would reflect a growing consensus that business simply has to encourage a return to some “old world” values of honesty and integrity.
And so it did. But as usual, the remedies were proposed within two approaches – either change the structure, or change the behaviour.
Outspoken economist Nouriel Roubini has suggested that many of the structural issues that caused the financial crisis have not yet been addressed. "The incentives of the banks are still to cheat and do things that are either illegal or immoral," he argues, suggesting a breaking up of “these financial supermarkets” which within one house contain a massive conflict of interest between commercial banking, investment banking, asset management, brokerage, insurance underwriting and derivatives.
Another structural solution came from British opposition leader Ed Miliband who suggested that the country's big five banks should be forced to sell hundreds of branches to create at least two new major competitors by 2015.
On the behaviour side, we have the Financial Times analysing the shift of Barclays from “sober” Quaker values some three hundred years ago, to a culture of aggressive trading today. Local banking expert Kokkie Kooyman attributes part of the blame to lack of oversight by the British Financial Services Authority, but more on the Barclays board for badly planned incentives and failing to “select a CEO to whom they can entrust the running of the company in the best interest of shareholders.”
And there’s the problem right there – highlighted in bold italics. Which focus is more likely to ensure appropriate behaviour –shareholder interests or customer interests? For as long as I can remember, and in everything I learned and read in economics over many years, there has been the assumption that they are synonymous. It was perhaps an academic point until about the late 1970’s when there was a pronounced shift to shareholder expectations, introducing the so-called “shareholder value era”.
The concept of expectation based share-value driven business is relatively new and coincided with the advent of a host of new trading features, conditions and mechanisms that arguably gave it great impetus to a point of frenzy. They included financial deregulation, split-second electronic trading, speculation, derivatives, and new executive incentive structures. The shareholder value postulate has undoubtedly shifted business behaviour. It may be too early to reach scientifically researched conclusions about its effects but so far these seem to be negative.
What it has done is to switch our reasoning around cause and effect. For centuries there was a simple logic that the entrepreneurial spirit, creativity, innovation, passion, and a desire to make a difference attracted investment capital. Today this has been flipped to argue that the deployment of capital creates entrepreneurial behaviour and all those other essential attributes for wealth creation and prosperity. Cold war rhetoric and its lingering ferment ensured that this view became the holiest of grails and the most sacred of cows.
An important premise of shareholder-value supremacy speaks to a very deep and fundamental assumption about humanity – that immediate material self-interest, acquisitiveness and greed are basic to being human. We’re on very dangerous ground when economists, accountants, traders and brokers make policy-affecting assumptions about psychology. We have had a psychologist win a Nobel Prize in economics. I simply cannot imagine a traditional economist winning a similar prize in psychology, unless he or she has fallen off a horse somewhere near Damascus.
To argue that greed is a basic instinct “and part of human nature” is simply wrong! The basic instinct referred to is that of survival, which evolved into gathering, storing and hoarding. Greed is a perversion, an inexcusable, abominable and contemptible excess of that instinct. To even remotely link it to being human is demeaning to our species and not unlike linking rape or paedophilia to the basic instinct of procreation. Besides, we have a countering basic instinct of care and concern for others grounded on an empathetic mirror neuron. This instinct has time and again overpowered the instinct of survival.
On top of all of that we are rational creatures that should through our leadership, social structures, parenting, and education be nurtured to a point way beyond such baseness. Because these institutions may fail us from time to time, it still does not give us an excuse for misconduct and outrageous behaviour.
We must rescue economics and our transactional lives from this demeaning and gross expression. Instead of extrapolating the basic instinct of survival to acquisitiveness and greed, we should extrapolate the instinct of care to contribution and service.
This, and not shareholder value, should drive the economic machine. This is the economic wolf that should be fed.