Corporate America has received a lot of bad press over the years (not as bad as Congress, but what mere mortals could be expected to match its low public approval marks?). When recently confronted with this sorry record, one frustrated Silicon Valley executive was moved to offer a defense: “Wait a minute! American doesn’t have a business problem, it has a finance problem.”
He told me that most recent news related to poor corporate governance, regulatory violations, balance sheet misrepresentation, ethical malfeasance, and plain vanilla greed originated on Wall Street (and within the broader financial industry). He contrasted this with the record of large corporations in the manufacturing, technology, and retail sectors, whose executives have been on their best behavior since the scandals at Enron, WorldCom, and Tyco undermined public trust in big business in the early 2000s.
I’m inclined to believe the executive is on to something. I’d venture to say three-quarters of the negative examples commonly cited as evidence of bad business behavior come from the finance sector (with most of the rest related to financial practices of corporations in other industries).
According to a recent piece in the Economist, Goldman Sachs executives have identified the source of their industry’s chronically bad PR: money. (Thank you Willie Sutton for pointing out the obvious!) The auto industry needs capital to manufacture cars, and retailers need capital to build outlets and purchase inventory. But when the goal of an enterprise is not to make a better product or provide a better service in order to create a customer (as Peter Drucker famously said it should be), then the sole metric of its success is how much money it makes. That’s why the big rewards in financial institutions go to those who make the most.
Ergo, as Goldman Sachs has concluded, Wall Street behavior is best understood in terms of performance incentives. If organizations get the behavior they reward, then it is clear why financial sorts can be counted on to devise new means and methods to bring in more cash (and cut regulatory and ethical corners to do so, if necessary). That’s why the invention of concepts like derivatives is inevitable (even if such ingenious instruments amount, in sum, to high-stakes gambling). Don’t get me wrong: Manufacturers, retailers, and high-tech nerds want to get rich, too. But that’s usually their second concern—and, importantly, they view the money they earn as a reward for the utility of the product or service they provide.
Plato observed that the pursuit of “more” was the root cause of non-virtuous behavior, leading his student Aristotle to draw a sharp moral distinction between economic activities involved in the making of things, and those involved in the making of money. And religions as diverse as Christianity, Islam, and Buddhism have looked askance at making money from money (for example, prohibiting usury). Like many people today, I find such judgments unrealistic and impractical. Modern economies need healthy, efficient financial sectors in order to grow and prosper. Moreover, large and small companies depend on the countless, virtuous bankers who provide them not only with operating capital but often with advice and support in good times and bad.
Yet there’s research data to support what philosophers and religious leaders (and common sense) have told us: The more you focus on money, the less likely you are to behave ethically. In a series of experiments, psychologists have documented that people who have been primed to think about money are far more likely cheat at various tasks than those primed to think about other things (such as time).
Apparently, that’s why Goldman has announced that it’s changing the way it does performance evaluations from using the single metric of how much money an individual manger produces to using a balanced set of metrics that include teamwork, accountability, and building client relationships. Welcome, Wall Street, to a practice used in other industries for nearly a decade! No matter how tardy it may be, I congratulate Goldman on the change. Yet I fear it will be devilishly difficult to design incentives to generate virtuous behavior in their industry. After all, it’s hard to domesticate a tiger. The animal’s behavior is rooted in the nature of the beast.