The new generation of business leaders who entered the workforce over the past 10 years and are more oriented toward working in groups. They are not likely to let extreme individualistic behavior push entire markets into taking ever bigger risks just because their competitors are doing so. This mind-set to changes in the educational system initiated at the request of business, which needed more people who were able to attack complex problems in a team structure.
It’s not so weird now to talk about a team-based, effort-and-reward system in which a group takes responsibility rather than just an individual. Regulatory efforts in the United Kingdom are now focusing on industry-wide cooperation that may prevent a rogue individual or company from doing something that could be ruinous for competitive markets, such as mortgage securitization.
The UK has a track record of having key people in industries create blueprints for themselves and then let the government participate. In the U.S., we have more of a tendency to want the government off our back and to resist any reform. The head of British Petroleum took the unprecedented step of joining with other leaders in the oil and gas industry to encourage government to take uniform steps to reduce climate change. It keeps the playing field even so you don’t have the virtuous paying more.
Following the demise of Enron and other scandals, the accounting industry began to take some initiative at reining in ethical problems. Many firms created an anonymous hotline for employees to report such matters. However, the problems that really trip up companies are so obvious they don’t lend themselves to a tip line. For example, the entire accounting industry was at one time participating in ways to shelter income from taxes that either broke the law, or came close to it until regulators finally cracked down. These are the kinds of things that people sitting around at a top management meeting have a queasy feeling in their stomach about, yet don’t really want to talk about it. Usually a lot of money is being made.
An expert has helped companies develop a system in which a trusted senior executive is designated as a sounding board for employees who don’t want to put their careers at risk with a public campaign, but are concerned about broad based unethical behavior. Many firms have ombudsmen, but they are usually lower down in the corporate hierarchy. Companies should designate a senior manager to be open to these types of conversations in order to assess and protect against potentially damaging reputation risk.
US businesses need to be aware of what a tribe in New Guinea called “mokita,” or the truth that everybody knows but agrees not to speak about.
A Wharton professor of legal studies and business ethics, worries about the so called “moral hazard” created when financial services companies get a government bailout to stave off widespread economic disaster. Such rescues may contribute to weak leadership, because “markets for efficient organizations work only when they are allowed to correct and punish mistakes and mismanagement. Some of the current examples of very large government bailouts are setting bad precedents for the future. Some bailouts may be necessary to prevent a broad collapse of the financial system, but the need to take such extreme measures is a clear indication that a regulatory overhaul is necessary to reduce the long term economic risk to tax payers.
Better regulation is only one solution. Unfortunately, regulation typically lags behind awareness in an industry. The unregulated hedge fund industry may pose the next big challenge to the economic system. There may be one or two big hedge fund failures away from Congress stepping in with regulations.