Archive for the ‘trust’ Category

The Ashley Madison Hack: A Sleazy Attack on a Sleazy Business

Several weeks ago, hacker group The Impact Team threatened that they would release the identities and credit card numbers of clients of infidelity promoting social network Ashley Madison. This week, they made good on their threat, releasing details of a reported 36 million user accounts.

For the moment, the data is apparently out there — some news outlets clearly have access already — but it’s hard to find. But informed commentators suggest it may soon be available and searchable online.

Some will call this a victimless crime: a scuzzy company’s lying-and-cheating customers are getting exposed for what they are. But it’s worth noting that there may be some innocent victims in all this: some Ashley Madison accounts may be spoofed by people using stolen credit cards. Others accounts may belong to people who are not in fact married, but who nonetheless don’t need their online dating habits shared with the world. And even the company’s ‘core’ customers, the ones who truly are acting dishonourably, don’t necessarily deserved to be punished in vigilante style. Or perhaps more to the point, it’s not that they don’t deserve it, but rather that The Impact Team doesn’t have the right to decide.

What about Ashley Madison itself? It’s in a sleazy business to say the least. Of course, employees at Ashley Madison aren’t themselves committing adultery (well, unless they happen to be, incidentally). So some people might wonder whether the company itself is doing anything wrong in the course of business? I think pretty clearly, yes. When you actively and knowingly contribute to someone’s wrongdoing, you share the blame. And there are a range of familiar examples in which helping someone to do wrong is considered blameworthy. Think of lawyers suborning perjury. Think of business agents facilitating bribery.

Naturally, many are calling this a “wake-up call,” for web-based companies and for the corporate world more generally. Reports suggest that insiders at the company knew that privacy was a big risk, and worried about “a lack of security awareness across the organisation.” One sign of a lax attitude toward privacy: according to a report in The Guardian, while customer passwords were stored in hashed (scrambled) format, “information such as addresses, credit card details and sexual preferences is all stored in plain-text in the database.” So anyone with access to the database has access to a treasure trove of private info.

Perhaps the moral of the story is that, human nature being what it is, it’s easier to make money by pandering to people’s baser instincts, than it is to protect the private information gathered along the way.

What’s Your Duty When Your Boss is Out of Control?

What are an employee’s responsibilities when the boss is out of control — when he or she is self-destructive, doing damage to the organization, or both? It’s one of the hardest problems of workplace ethics.

A case in point is the staff at Toronto’s City Hall, who have and continue to labour under Mayor Rob Ford, a mayor whose strange and erratic behaviour must make continuing the city’s work all but impossible. And bad news continues to pile up for Ford. This past week Toronto Police revealed that they were in possession of a certain video, one that apparently shows the mayor smoking crack, a video the existence of which the mayor had previously denied. And then details surfaced regarding Ford’s behaviour on St Patrick’s day of last year, when he showed up ‘very intoxicated,’ both at City Hall and in public.

Ford has been, in effect, a train wreck. But not exactly merely a private train wreck. He’s been a train wreck in public, and at the office. This raises an interesting question for the people who have worked with him. What are your responsibilities when the boss is a mess? Should you cover up and enable? Should you confront? Should you keep your head down? Staff at City Hall may be facing a particularly public form of this question, but it’s a problem faced in many workplaces.

Junior employees typically have the most to lose, so let’s deal with them first. The first thing that needs to be said is that junior employees aren’t always obligated to speak up, especially when speaking up puts them in personal or professional peril. For all our talk about ‘speaking truth to power,’ there’s a limit to how much we can ask people to sacrifice. It can be OK to keep your head down. This is a question of ethics, but ethics isn’t about always doing the maximum; it’s about deciding the right course of action, based on a range of relevant considerations. And keeping your job is one of those.

The corollary to the permission to keep your head down, though, is an obligation to learn from the situation, to figure out how you might help to avoid such situations in the future, and to resolve never to put junior employees in such a bind when you yourself are at the top of the ladder.

Of course, if your boss’s antics are putting lives at risk, that’s an ethical consideration that should probably outweigh your own concern with staying employed. Valuing your own job above the public safety implies a level of egocentrism that is incompatible with our general social responsibilities.

But an employee’s level of responsibility for the boss varies with power and proximity. A senior advisor with a lot of influence has a responsibility to use it. When you’ve got the boss’s ear, you owe it to him or her to give good guidance, even what it’s advice he or she does not want to hear. But if the boss won’t listen, and if your position gives you the relevant authority, you should take action. Just what action to take will depend on what options are available to you, given your organization’s governance structure.

Most crucial of all is to remember that you owe your primary allegiance not to the boss, but to the organization. With very few exceptions, an employee’s duty is to the mission of the organization as a whole. In normal circumstances, it’s up to the boss to coordinate and motivate employees in pursuit of that mission. But when the boss strays far off mission, or wanders into utter ineffectualness, then there’s justification for deviating from the usual chain of command. Good leaders — ones who are aware of their own foibles and who are focused on the good of the organization — will make it clear to their employees in advance that that’s what they would want them to do, should the need ever arise.

Ethics and Online Reputation Management

In a recent interview with, I talked about the effect the internet has had on reputation management, and the connection between that and ethics.

The risk, of course, in having an ethics professor like me talk about reputation management is that it’s all too easy to give the impression that the two topics are the same. In fact, I’m pretty sure there are people out there who assume they are the same thing.

And certainly there are those in the field of ethics who contribute to that way of thinking. Sometimes that takes the form of what is often referred to as “the business” case for ethics (or for CSR or for sustainability). “The business case” takes many forms, but all of them boil down to an assertion that acting ethically (or being socially responsible or being sustainable, whatever) is good for your business. The specific mechanisms mentioned are varied. Treating your workers well improves retention. Going green reduces energy costs. And, yes, that being ethical is good for that all-important corporation reputation.

The worry is that businesses exposed to such arguments will come to think of ethics from a purely instrumental point of view: we’ll act ethically only because, and only to the extent, that it’s good for profits. Thinking of ethics that way implies an incredibly low level of commitment. You won’t always in every situation be able to draw a straight line between this bit of ethical behaviour and that bit of profitability. And so the ethics of a company under the sway of “the business case,” it seems, would be liable to have its ethical behaviour ebb and flow on a pretty regular basis.

The key, though, isn’t to avoid talking about the business case for ethics. Because it is simply true that, on the whole, acting ethically is good for business. Sure, you can make a quick buck by being a cheat. But smart managers have known forever that the route to sustainable profits lies in paying your bills on time, treating your employees well, cleaning up your own messes, and dealing honestly with your customers. Having a reputation for doing those things is truly good for business.

Clearly, having a reputation for doing those things isn’t precisely the same thing as actually doing them. In theory, it’s possible to act badly but to keep the facts quiet. Or at least, that was the case once upon a time. Then along came consumer blogs and Twitter and Facebook and Tumblr and so on; now, accusations of bad corporate behaviour has a way of getting out and spreading like wildfire. Today, certainly, it seems like the easiest way to get and keep a reputation for honesty and integrity is actually to behave with honesty and integrity. It’s always better to avoid fires than to have to put them out. That’s why the best reputation management method is to build a good reputation in the first place.

But of course, sometimes even an honest company, trying its best to treat people right, can hit a rough patch. Sometimes something goes wrong, and sometimes — in an era in which all of your customers have access to a 7 billion-person conversation called the Internet — that fact that something went wrong gets aired in a very public way. Hence the need for online reputation management, to control the damage. But even here, the key is to make your participation in those online conversations genuine, or if you prefer “authentic.” You need to be sincere about your commitment to doing the right thing, and to making things right when mistakes are made. This is the irony of the business case for ethics. The best way to reap the benefits of a reputation for being ethical is not to pay much attention to those benefits, but to focus on the importance of doing the right thing — for its own sake.

Petraeus, Moralizing, & Leadership Obligations

This past Friday, David Petraeus, a retired 4-star general in the US Army resigned from his position as Director of the Central Intelligence Agency. He resigned because evidence had surfaced that he had had an extramarital affair.

On the surface, of course, this is just another example of a powerful man succumbing, as all too many seem to do, to the all too common temptation to betray his marital commitments. And, again on the surface, it raises questions about whether private foibles are sufficient reason to think a man unfit for public office. Petraeus himself, in his letter of resignation to President Obama, said he had shown “extremely poor judgment.” The question that always arises — remember Clinton/Lewinski? — is whether poor judgment in personal matters necessarily implied poor judgment in public matters, or whether instead the scandal really just amounts to a puerile bit of titillation.

But the fact is that Petraeus is not just another man, and not even just another man in a leadership position. He was, until November 9th, Director of the CIA, the most important intelligence organization on the planet. He was, in other words, one of the world’s most desirable candidates for blackmail. And so any transgression that could serve as fodder for blackmail is immediately amplified in magnitude. Clearly, marital infidelity is pretty high on that list. Someone in a position like the one Petraeus had has to stay squeaky clean, not for moralistic reasons, but for national security reasons.

And the seedier details that have been emerging seem to bear this worry out, at least to some extent. The woman with whom Petraeus is said to have had the affair, Paula Broadwell, is now said to have sent threatening letters to another woman who she saw as a rival for the general’s affections. That’s not to say that anything like blackmail was in the offing. But it suggests that the Petraeus/Broadwell affair had dark edges to it beyond your standard tale of marital infidelity.

There will surely be, in the coming weeks and months of analysis of this matter, plenty of talk about the demands of leadership and the character and integrity it requires. But what leadership at the highest level really requires is not just character, but an acute awareness of your own weaknesses — including weaknesses you share with the rest of the human population — and the ability to foresee and forestall the risks the flow from those.

The Hidden Ethical Value of Social Networking

Like it or not, we are in the middle of a social networking revolution. And of course, that’s hardly news. Endless ink, digital and otherwise, has been spent on worrying over whether Facebook, Twitter, and their rapidly-multiplying ilk are the best or the worst thing that has ever happened to humankind.

A recent story about car-pooling apps highlights the fact modern technology, including social media, has a role to play in making markets more efficient. And since efficient markets are generally a good thing, this counts as a big checkmark in the “plus” column of our calculations concerning the net benefit of social media.

Carpooling is a great example, because the relative lack of carpooling today is a clear instance of what economists call “market failure” — a situation in which markets fail efficiently to provide a mutually-beneficial outcome. Think of it this way. There are lots of people in need of a ride. And there are lots of people with rides to offer. The problem is a lack of information (who is going my way, at what time?) and lack of trust (is that guy a potential serial killer?) Social networking promises to resolve both of those problems, first by helping people coordinate and second by using various mechanisms to make sure that everyone participating is more or less trustworthy.

With regard to car-pooling, the obvious benefits are environmental. But the positive effect here is quite general: just about any time we find a way to foster mutually-advantageous market exchanges, we’ve done something unambiguously good. This is one example of the ethical power of social media.

Another big enemy of efficient markets is monopoly power, or more generally any situation in which a buyer or seller is able to exert “market power,” essentially a situation in which some market actor enjoys a relative lack of competition and hence has the ability to throw its weight around. Social media promises improvements here, too. Sites like allow individuals to aggregate in ways that give them substantial bargaining power.

The general lesson here is that markets thrive on information. Indeed, economists’ formal models for efficient markets assume that all participants have full knowledge — that is, they assume that lack of information will never be an issue. Social networks are providing increasingly sophisticated mechanisms for aggregating, sharing, and filtering information, including important information about what consumers want, about what companies have to offer, and so on. So while a lot of attention has been paid to the sense in which social media are “bringing us together,” the real payoff may lie in the way social media render markets more efficient.

Capitalism and Bad Behaviour

Contrary to what you have heard, there is nothing immoral about capitalism.

A couple of weeks back, the New York Times published a truly scandalous opinion piece by essayist William Deresiewicz with the provocative title, Capitalists and Other Psychopaths. The views expressed in the piece are not just false, but dangerous.

The central claim of Deresiewicz’s essay is that “capitalism is predicated on bad behavior.” This claim is entirely untrue. Capitalism in no way requires bad behaviour. Indeed, to function even moderately well, capitalist markets rely on a general pattern of basic goodwill and honesty of its participants. Commerce of any kind requires trust, and trust is predicated on the expectation that the other person is going to follow some basic rules of decent behaviour. The niceties of the rules that ought to govern business are up for debate, the basic need for some sort of rules is not. Capitalism, in other words, presumes ethics.

Deresiewicz is right of course that bad behaviour does go on within capitalist systems. That’s not exactly a news flash. Nor is it unique to capitalism. There’s no evidence that either feudalism or communism magically turns humans into selfless and cooperative purveyors of peace, love and understanding.

The beauty of a free market, as Adam Smith taught us, is that it can generate benefits even even among mean-spirited. The taxi driver who took me to the airport this morning doesn’t have to like me, and he doesn’t have to be a particularly lovely human being. All that’s necessary, in order for me to get to the airport, is that he wants to make a living. But in no way does capitalism require that people be vicious or even indifferent to each other’s fates. As Nobel laureate Ronald Coase put it, “The great advantage of the market is that it is able to use the strength of self-interest to offset the weakness and partiality of benevolence.” We are limited in our sympathies for others. The good news is that, in the marketplace, our commitment to our own welfare, and the welfare of those we hold dear, inspires a great deal of creative and industrious activity that has as its very useful side-effect the provision of benefits to others.

Deresiewicz’s essay also takes a particularly gratuitous pot-shot at business school education. “I always found the notion of a business school amusing,” he writes. “What kinds of courses do they offer? Robbing Widows and Orphans? Grinding the Faces of the Poor?” This may be a joke, but it’s a baffling one. Is business management really so trivial a task that it couldn’t possibly require any advanced training? (The old-guard communists thought so, and look where it got them.) Say what you will about business schools, there’s little doubt that the better ones, at least, teach a serious and difficult curriculum. Deresiewicz’s slam here is also terribly and unnecessarily insulting to millions of business school graduates who work diligently and honestly to produce a bewildering array of goods and services. Yes yes, we all know about Ken Lay and Bernie Madoff. Those men deserve, and have already received, ample criticism. But why impugn the honesty and integrity of every single executive, mid-level manager and accountant along the way?

The key to understanding Deresiewicz’s error is to see that he thinks ethics should be exactly the same in all situations. Not just present, but the same. The virtues of the marketplace, he suggests, should be the same as those of the Christian bible. The norms we apply to commercial exchange, he suggests, should also be (or include?) those of civic life. But does anyone really believe that? If a company rips you off should you really “turn the other cheek,” in good Christian fashion? Should Apple and Dell really debate the qualities of their competing products and then have us all vote for the one winning product that we will then all buy? To expect the same behaviour in the market as in a townhall meeting makes about as much sense as to expect people to behave on a football field the same way they do in a church pew.

It goes without saying that Deresiewicz is not alone in his misunderstanding of the fundamentals of capitalism. But his misunderstanding is especially fundamental, and especially corrosive. The really troubling thing about Deresiewicz critique is that it suggests that there’s nothing about capitalism worth saving. If capitalism is intrinsically unethical — if it has the immorality baked right in — then why try to fix it? Why try to make things work better? We all might as well just settle in and enjoy our smug cynicism. Because like a lot of really trenchant critics, Deresiewicz offers us no alternative.

Financial Advice, Competency, and Consent

I blogged recently on a California case about an insurance agent who was sentenced to jail for selling an Indexed Annuity — a complex investment instrument — to an elderly woman who may have been showing signs of dementia. I argued that giving investment advice is just the sort of situation in which we should expect professionals to live up the standard of ‘fiduciary’, or trust-based duty. An investment advisor is not — cannot be — just a salesperson.

But asserting that investment advisors have fiduciary duties doesn’t settle all relevant ethical questions. It settles how strong or how extensive the advisor’s obligation is; but it doesn’t settle just how the financial advisor should go about living up to it.

The story alluded to above again serves as a good example of that complexity. How should a financial advisor, in his or her role as fiduciary, handle a situation in which the client shows signs of a lack of decision-making competency? Sure, the advisor needs to give good advice, but in the end the decision is still the client’s. How can an advisor know whether a client is competent to make such a decision?

In the field of healthcare ethics, there is an enormous literature on the question of ‘informed consent,’ including the conditions under which consent may not be fully valid, and the steps health professionals should take to safeguard the interests of patients in such cases.

The way the concept is explained in the world of healthcare ethics, informed consent has three components, namely disclosure, capacity and voluntariness. Before a health professional can treat you, he or she needs to disclose the relevant facts to you, make sure you have the mental and emotional capacity to make a decision, and then make sure your decision is voluntary and uncoerced. And the onus is on the professional to ensure that those three conditions are met. But there’s really nothing very special about healthcare in this regard. Selling someone an Indexed Annuity isn’t as invasive, perhaps, as sticking a needle in them, but it often has much more serious implications.

Of the three conditions cited above — disclosure, capacity and voluntariness — disclosure is of course the easiest for those in the investment professions to agree to. Of course you need to tell your client the risks and benefits of the product you’re suggesting to them. But of course, many financial products have an enormous range of obscure and relatively small risks — must the client be told about those, too? There’s only so much time in a day, and most clients won’t care about — or be able to evaluate — those tiny details.

Voluntariness might also be thought of as pretty straightforward. A client who shows up alone and who doesn’t seem distressed is probably acting voluntarily, and it’s unlikely that we want investment professionals poking around our personal lives to find out if there’s a greedy nephew lurking in the background and badgering Aunt Florence to invest in penny stocks.

What about capacity? That’s the tough one, the one implicated in the court decision alluded to above. Notice that in most areas of the market, no one tries to assess your capacity before selling to you. I bought a car recently, and all the salesperson cared about was a driver’s licence and my ability to pay. No one tried very hard to figure out if I was of sound mind — beyond immediate appearances — and hence able to make a rational purchase.

Investment professionals do typically recognize a duty to ensure the “suitability” of an investment, and presumably whether an investment is suitable depends on more than just the client’s financial status. It also depends in part upon whether the client is capable of understanding the relevant risks. Being a true professional and earning the social respect that goes with that designation is going to require that financial advisors of all sorts adopt a fiduciary view of their role. That means learning at least a bit about the signs of dementia and other forms of diminished capacity. It also means knowing how and when to refer a client to a relevant health professional. Finally and most crucially, it means putting the client first — solidly and entirely first — and hence being willing to forego a sale when that is clearly the right thing to do.

Investment Advice and Fiduciary Duties

Most of us rely on accredited professionals for a range of services. Doctors, lawyers, accountants and so on play a huge role in our lives, giving us advice and rendering services that we would be foolish to provide for ourselves. Some topics, in other words, are beyond the ken of even the dedicated do-it-yourselfer. Financial planning is in that category. If you plan to do anything much beyond storing your money in a mattress, you probably want help from a professional. And you hope — really, really hope — that that professional is on the ball and has your best interests at heart.

A recent story highlights some of the difficulties in this regard. The story is about an independent insurance agent facing jail time for selling a particular kind of investment — an indexed annuity — to an 83-year-old woman. The catch: prosecutors say the woman showed signs of dementia, and the implication is that the agent took advantage of the fact that the buyer may not have understood the limits and disadvantages of the investment instrument she was buying.

Even minus the question of the buyer’s competency, there are worries here. For perspective on this story, I talked to Prof. John Boatright, who literally wrote the book on ethics in finance. He pointed out to me that Equity-Indexed Annuities are so complex that they’re a dubious product quite generally. He also pointed out that such annuities are investment instruments sold by people in the insurance industry who are not truly investment specialists. Most investment instruments are regulated such that they can only be sold by investment professionals with suitable training and credentials.

But regardless of the kind of professional you go to for investment advice, the underlying ethical question is whether that professional is going to have your best interests at heart. When the thing you’re buying is too complex to understand, you have to put your trust in the seller. Such trust is best underpinned by what are called fiduciary duties. A fiduciary, roughly speaking, is someone to whom something of value is entrusted. And a professional who bears a fiduciary duty has a stronger obligation than a mere salesman. Someone out to sell you something — a car, a stereo, whatever — has a plain obligation not to deceive you, but generally isn’t obligated to make sure that the product is right for you. Whether the product is right for you is up to you to decide. But a fiduciary is held to a higher standard. As Alexei Marcoux points out, we are vulnerable in various ways to professionals of various kinds, and that vulnerability generates duties on the part of those professionals, not just to be honest to us but to put our interests first. The transaction between a professional and a client is not a regular market transaction; rather, it is (or ought to be) governed by the higher standard implied by a fiduciary relationship.

Whether financial advisors and financial planners proclaim and live up to such a high standard is another matter. It certainly seems they should. In some places, financial professionals are explicitly expected to live up to the standard applied by a fiduciary duty, and other jurisdictions are moving in that direction. If ever there were a circumstance in which we were vulnerable, a situation in which we are trusting a stranger to tell us what to do with our life’s savings seems to fit the bill.

The True Cost of Conflict of Interest

What does conflict of interest cost?

It was recently reported that certain employees of the Chicago Public Schools food services department were going to be required to undergo ethics training, after it was revealed that they had accepted improper gifts from contractors.

The worry, naturally, is that accepting gifts put those CPS employees into a conflict of interest, a situation in which they were trusted to make good decisions on behalf of CPS, but in which they had an ‘outside’ interest — in this case, gratitude to the gift-givers — that might reasonably be thought likely to warp their judgment. The behaviour here was more specifically a violation of the section of the CPS Code of Ethics that specifically forbids accepting gifts, but the moral root of the problem is conflict of interest.

Now, in addition to the trouble the employees are in, it’s been reported that Chicago Mayor Rahm Emanuel wants to go after two food services companies that had given improper gifts.

Just what have those companies done wrong? What’s wrong with putting someone else in a conflict of interest? I’ve argued before that we might think of this as analogous to suborning perjury. When you intentionally put someone else in a conflict of interest, it means that even if you’re not violating any duties yourself, you’re encouraging other people to violate their duties.

And the companies’ bad behaviour, here, is going to cost them. It may well cost them future contracts, but it may cost them (and other companies that want to compete for CPS contracts) more than that. It’s been reported that they may be required to provide ethics training for their employees, and hire an independent auditor to make sure they’re complying with CPS ethics standards. Neither of those things is likely to be cheap. In an industry with narrow profit margins, such additional costs could well mean the difference between black ink and red.

But the most important “cost” in this case is, of course, the loss of confidence in the CPS and its purchasing procedures. That is always the risk with conflict of interest, namely that when conflicts are accepted and fostered, rather avoided or remedied, they erode confidence in the judgment not just of individuals, but of entire institutions.

Greg Smith, Goldman Sachs, and Corporate Culture

By now everyone has heard that a guy named Greg Smith wrote a letter this week. Who is Greg Smith and why does anyone care? Why is Greg Smith’s letter getting attention from anyone who isn’t a Goldman Sachs employee, customer, or shareholder? Sure, he’s a mid-level executive at one of the world’s most powerful financial institutions. So he’s certainly not a nobody. And sure, Goldman, like other big financial institutions today, is seen by many as the corporate embodiment of evil, and so people are bound to be fascinated by an insider’s repudiation of the firm — especially accompanied, as it was, by a good dollop of juicy details. But there’s more to it than that, and the “more” here is instructive.

I think the key to understanding why Smith’s letter caused such an uproar is the fact that Greg Smith’s letter taps into the deep, dark fear that every consumer has, namely the fear that, somewhere out there, someone who is supposed to be looking out for us is instead trying to screw us. Smith’s letter basically said that that is exactly what is going on at Goldman, these days: the employees charged with advising clients about an array of complex financial decisions are, according to Smith, generally more focused on making money than they are on serving clients.

Now, first a couple of words about the letter. It goes without saying that we should take such a letter with a grain of salt. It’s just one man’s word, after all. Now that doesn’t make Smith’s account of the tone at Goldman implausible. He’s not the first to suggest that there’s something wonky at Goldman. It just means that we should balance his testimony against other evidence, including for example the kinds of large-scale surveys of Goldman employees that the company’s own response to Smith’s letter cites. Then again, such surveys are themselves highly imperfect devices. Either way: buyer beware.

(Note: one group that must take this stuff seriously is Goldman’s Board of Directors. A loyal employee taking a risk like Smith has is not a good sign, and his story deserves to be investigated thoroughly by the Board.)

OK, so let’s bracket the reliability of Smith’s account, and ask — if it accurately reflects the tone at Goldman — why that matters.

It matters because of this awkward fact: in many cases, in business, all that stands between you the customer and getting ripped off is that amorphous something called “corporate culture.” Most of us are susceptible to being ripped off in all kinds of ways by the businesses we interact with. That’s true whether the business in question is my local coffee shop (is that coffee really Fair Trade?) or a financial institution trying to get me to invest in some new-fangled asset-backed security. My best hope in such cases is that the business in question fosters a culture within which employees are expected to tell me the truth and help me get the products I really want.

Now culture is a notoriously hard thing to define, and harder still to manage. Culture is sometimes explained as “a shared set of practices” or “the way things are done” or “the glue that holds a company together.”

Why does culture matter? It matters because, other things being equal, the people who work for a company won’t automatically feel inspired to spend their day doing things that benefit either the company or the company’s clients. People need to be convinced to provide loyal service. In part, such loyalty can be had through a combination of rewards and penalties and surveillance. Work hard, and you’ll earn a bonus. And, Treat our customers well, or your fired. And so on.

But sticks and carrots will only get you so far. Far better if you can get employees to adopt the right behaviours voluntarily, to internalize a set of rules about loyal service and fair treatment. An employee who thinks that diligence and fair treatment just go with the turf is a lot more valuable than one who needs constantly to be cajoled. And, humans being the social animals that we are, getting employees to adopt and internalize a set of rules is a lot easier if you make it part of the ethos of a group of comrades. Once you’ve got the group ethos right, employees don’t act badly because, well, that’s just not the sort of thing we do around here! In the terminology used by economists and management theorists, culture helps solve ‘agency problems.’ Whatever it is that you want employees to be focusing their energies on, corporate culture is the key.

Of course, there’s still the problem of what exactly employees should be focusing their energies on. Should they be taking direct aim at maximizing profit? Or should they be serving customers well, on the assumption that good service will result in profits in the long run? In any reasonably sane market — one without ‘TBTF‘ financial institutions — the latter strategy would be the way to go, practically every time. And that fact is precisely what makes large-scale commerce practical. Consumers enjoy an enormous amount of protection from everyday wrongdoing due to the simple fact that most businesses promote basic honesty and decency on the part of their employees.

Unfortunately, it’s far from clear that Goldman operates in a sane market. So it is entirely plausible that the company could have allowed its corporate culture to drift away from seeing customers as partners in long-term value creation, toward seeing them as sources of short-term revenue. I don’t know whether Greg Smith’s tale is true, and representative of the culture at Goldman Sachs. But if it is, that means not just that Goldman isn’t serving its clients well. It means that Goldman embodies a set of values with the potential to undermine the market itself.


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