"I know a bank where the wild thymes blow" --
Oberon, Shakespeare's "Midsummer Night's Dream," II,i
A few words further
(after these of November 10th and 17th), on corporate stewardship, and the
ability to assess management's commitment to long-term sustainability.
The context is the
measure of dysfunctionality in the dialog, with Lloyd Blankfein’s year-end
bonus at Goldman Sachs expected to establish a compensation benchmark for the
entire financial services sector.
Despite his
vilification for both Goldman’s off-message diversion of $500 million to the
aid of small businesses, and his own tone-deaf joke about “doing God’s work,”
there is no other banking CEO being publicly fitted for a halo. And his company’s
record is compelling, even though unless poor Blankfein suddenly develops the
political savvy to foreswear all pay for this year, he is going to catch media
hell no matter what take-home figure he tries to justify.
To take a long step
back in history, consider the vision, commitment and behavior of the great canal-building
companies of Victorian England.
These innovators
not only joined with the newly-constructed railroads in making possible the
Industrial Age, by achieving the first inland transport break-throughs in human
history – re-writing the limits of bulk and speed that had been constrained by
the capacity of an ox-cart and the pace of a horse and rider.
Knowing that the great
oaken beams and timbers in the intricate gates of their lock systems would
eventually require replacement, the canal developers had the foresight to plant
groves of oak saplings around the huts of the lock-keepers – not for the shade
and the aesthetics, but to assure a ready supply of mature trees when needed,
many decades into the future.
That their legacy
is now picturesque rather than practical owes only to the unforeseeable
over-taking of technologies based on electricity, internal combustion, silicon
and rocketry.
But sadly, it is no
less unthinkable that their modern successors – the chief executives of the
large airlines or trucking companies – or their counter-parts in banking,
industry and professional services -- should invest and manage for their future
based on such long-range planning.
Instead, there is a
disconnection between managements’ incentives and long-term sustainability
strategies -- as laid out by the guru of game theory, Bruce Buena de Mesquita,
in his provocative and challenging new book, “The Predictioneer’s Game.” (For
reviews, see the book's website. For the lite version, see his September 28 appearance
on John Stewart’s Daily Show.)
His chilling
example is the loss of vision of the Arthur Andersen leadership in the period
leading up to the Enron debacle:
As he puts it --
under the grim caption, “Incentivizing Ignorance” (pages 116 et seq.) -- Andersen’s senior management “helped foster their own
demise by not erecting a good monitoring system to protect their business from
the misbehavior of their audit clients,” chiefly because ”Andersen’s most
senior management genuinely did not seem to understand the risks they were
taking.”
And why? Because as
he puts it, “costly litigation … would not be settled until ten or so years
after the initial prediction of risk.” But by that time “the engagement partner
who brought in the business in his early to mid-fifties was retired and
enjoying the benefits of his pension.”
Which creates the
disconnection: by then, “the money for the defense was coming out of the
pockets of future partners,” so “the financial incentive to know was weak
indeed.”
Recent years have
shown the pervasively destructive influence of short-term incentives – from the
exploding volumes of unsustainable subprime mortgages, to the proliferation of
incomprehensibly risky financial instruments, to the current stripping of
seasoned employees for the sake of expense reductions -- putting at risk the
retention of expertise and capacity as the economic cycle turns.
It’s a sorry
statement on leadership that Lloyd Blankfein is one of the few left standing,
when so many short-visioned leaders have been shown unwilling to show the kind
of commitment to maintenance and stewardship of the 19th century canal
builders.
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