Thursday, January 26, 2012

John Carney on corporate corruption

This underlines a long-running thread here at NetNet: corporate governance matters much less than basic morality. You can set up all the rules you want but if the people running the company are not of high moral character, you'll get cheating, self-dealing and dishonesty. Rules matter less than ethics.
 Read it a CNBC NetNet

Importing Corporate Corruption
by John Carney | Senior Editor


Anonymous said...

Exactly. That's why it's better to promote ethics rather than passing more and more laws and regulatory schemes. It only hurts the honest and the ethical while doing nothing to stop the criminal.

Tom Hickey said...

Needs a selection process that filters out the riff-raff instead of promoting them.

Matt Franko said...

Right, like when a certain person in a certain position says something like:

"You 'gotta dance while the music is playing..."

In a perfect world, if that is on video, that person does not pass go and goes directly to exile; no trial necessary.

Dan Kervick said...

Promoting ethics sounds great. But it is an extremely difficult thing to to. The moral foundations of a culture, the deep layers of internalized inhibitions that determine what an individual feels free to do, and what an individual will refrain from doing even without the threat of external sanctions, is the product of centuries of culture. In some cases moral inhibitions are the product of powerful religious and political movements from the past whose impact is still felt psychologically, even among individuals who do not consciously identify themselves with those movements. When the moral moorings of societies erode, it is very hard to restore them just by exhorting people to act differently. Something more like a religious revival needs to take place.

In the meantime, we need rules and more cops on the beat. Slap strict rules on the financial sector, and then assign people to stand over the shoulders with a night stick.

Tom Hickey said...

Rules and accountability are fundamental to institutions. Of course, we need adequate rules and oversight. But rules and oversight are insufficient in that there are always workarounds. The smart criminals are always one step ahead.

A fundamental problem with political, financial, and business institutional arrangements is that the process selects in too many bad apples. Those selection processes need to be changed. One way to do this is to change the incentive structure so that the bad apples self-select out. Incentivize crime and guess what, you get crime. That's what we have now.

Dave O said...

"Basic morality" is not a helpful abstraction in terms of understanding the behavior of corporate executives. This is the fundamental attribution error. The real issue is that the situation of being a corporate executive creates perverse incentives for the individual. For someone who spends an entire career in pursuit of making money, it is easy to rationalize any behavior that will increase that person's wealth, status, or position.

One way to check the behavior of these individuals might be to envision a different form of corporate bureaucracy. For instance, let every employee get to vote on executive salaries and bonuses.

But given the established hierarchal corporate structure, the only actor that can effectively regulate is the government. The problem, as Bill Black rightly points out, is that government agencies have had neither the resources nor the will to supervise and police illegal behavior.

The last thing a regulator should ever trust is the idea that people in power can be "moral" in the same way as others. Start with the assumption that they will act based on the available incentives, and then gather information/evidence that they are not abusing their positions. Easier said than done obviously, but if you have the wrong lens, you'll never get a clear picture.

Tom Hickey said...

There are cultural aspects to this also. In most cultures there are taboos and consequences for violating ranging from shame and ridicule to shunning or banishment, to punishment. Those taboos include cultural standards of virtue, ethics, and honor,

Our culture has imposes no consequences for the top tier unless the person is convicted of a crime, which is usually difficult given the nature of white collar crime of this sort. The standard response is not, "I did nothing wrong," but "I did nothing illegal." There are no consequences imposed such as shame or ridicule, and often one's peers will congratulate the person for being so "sharp."

The result is that in such a culture, criminals become the heroes. When that happens, the society is rotting at the top, and where there is rot at the top, there is disrespect for law in the middle and at the bottom. The result is increasing chaos.