THE 'PERSONALITY' OF THE FINANCIAL MARKETS
Joel Bakan, in his book 'The Corporation', characterises large companies as individuals without a moral guidance system. He claims that the behaviour of corporate 'individuals' is driven by a single-minded pursuit of profit. Any outward manifestations of corporate social responsibility, claims Bakan, are the result of the conviction that a perception of the corporation as a responsible citizen will enhance opportunities to maximise profits. When it comes to a real crunch, and a direct conflict arises between profit and a significant restraint of profit for the public good, profit wins every time.
It occurred to the author that the most important driver of corporate behaviour was maximising 'shareholder' (investors') returns - and that behind nearly every large corporation lay a force much more powerful than corporate leaders - the investment markets. It is perfectly clear that investment institutions in London dominate the industrial agenda and exercise enormous influence over management. This thought coincided with a chance meeting with a business psychologist from a clinical background who had worked for a large investment bank, first on the trading floor and then as an investment banker on corporate deals. In the end our friend moved back to their first love, business psychology.
In discussion, it became clear that our friend had a fascinating story to tell, made more powerful because of the insights generated from the world of psychology.
This is their story......
"The following essay represents a link between my own observations, experiences and many rich memories from investment banking and a more recent interest - that of financial scandal, fraud and white collar psychopathy - and the cultures that perpetuate those behaviours. I continue to work in the capacity of a business psychologist with financial institutions, psychology being my first love.
Psycho-pathology in Organisations
What is a psychopathic organisation? There is a range of general pathological symptoms that we may observe in humans. I have taken these symptoms and propose here how they may manifest themselves in an organisational context. Then through a discussion of my own experiences and some of the recent scandals it will, I hope, become clearer what we are cultivating in today's financial markets by rewarding amoral behaviours, turning blind eyes and condoning short-termism.
Psychopathic Symptoms Commonly Manifested in the Financial Markets.
|Grandiose seld-centeredness||Lack of interest in a wider environment, variability in success - great success with huge dips. Internally referenced belief in own importance and rights to high rewards. 'Inappropriate' expenses.|
|Lack of moral sense, irresponsible, asocial tendencies and behaviour. Emotional immaturity, lack of empathy.||Profit justifies risk, legality pushed to the boundaries. No sense of wider impact. Views and welfare of a wider community ('Society') are peripheral and unimportant.|
|Difficulty in forming meaningful relationships, relating to others superficially.||Short-termist, transactional approach. Kow-towing to the most immediately powerful influences and stimuli rather than taking a balanced view of the long term future of employees, community and general stakeholders.|
|Inability to control impulses, manipulative.||Culture of disregarding policy and procedure as and when it suits. Policy viewed as unwanted restraint rather than empowering in other regards e.g. supporting development.|
|Unable/unwilling to accept responsibility for consequences of own actions, lack of learning from experience.||Lack of public apology. Blaming individuals rather than tackling the culture/system for misdemeanours.|
|Accept and impose social pressures to conform, punish those who step out of line.||Herd behaviour, unreasoning belief in the latest 'craze', unwillingness to learn from outside immediate environment, aggressive behaviour towards 'recidivists'. Lack of challenge to generally accepted ideology.|
|Inability to feel remorse, little change in behaviour after punishment.||Serial repeats of scandals, fraud and legal problems.|
Psychopathology and Investment Banking - How we are Bred
Many people ask me how a psychologist came to be working on a trading floor and then in corporate finance. There are three reasons. First, the herd instinct of the markets and the sociable nature of the work seemed to make it a natural choice for a somewhat mercenary, fun-loving psychology graduate who had been told to get industry experience by business psychologists and wanted to pay off a bit of student debt. Second, British degrees have never been that vocational.
Finally I showed some flair about my skiing style in an interview.
I survived and even enjoyed the trading floor. It all struck me as a little reactive and short-termist. Lots of banter, high energy and high stress. An event occurs, predictable mass reaction occurs, companies or even countries broken or propelled into favour on the back of reactionary sentiment. Clients rude to us, us rude to clients: kiss and make up. Tempers flaring, errors outed in public. Our sole goal - do the deals that give us the greatest profit margin working within certain given client boundaries (it's a pension fund - can't be too risky). Investors didn't want to know the story behind a company or country - they relied on credit rating agency judgement or broad analysts' sentiment. This simplified my job but made it a little dull.
Six months in to the job the first round of bonuses were announced. In my performance appraisal I had rated myself with Bs and Cs. My manager told me to re-rate higher as everyone else would give themselves A's regardless. A paltry £500 was given to most first year grads in other occupations, which in most circumstances would have made me quite happy. Already highly paid for a graduate, but essentially still learning and riding on the back of a Tier One bank's reputation and money, I soon felt as hard done by as everyone else. I was reassured by more senior colleagues that I deserved a token £10-15 k at the very least. Our graduate programme had all been about technical skill and becoming big swinging dicks, nothing much about deeper purpose, meaning or values. So we whined and we bitched. We talked about moving to the bigger payers. I'm not sure it once occurred to us that the world and the bank didn't owe us a favour, or that most other friends were surviving on a third of the amount. Of my intake about 70% had left within two years to go to other banks or get out.
Around that time a German paper got a chimp from the Berlin Zoo to pick a stock portfolio. It outperformed the market. Fourteen year old Jonathan Lebed burst on to the scene in the U.S. He pumped and dumped penny shares, making $800k. Prosecuted by the SEC he paid back $300,000 of the money he had made, but kept half a million dollars. In his defence, he successfully claimed he was only doing what the professionals do every day. Financial publication Barron's seemed to believe that Lebed "adapted standard brokerage house procedure and put out wildly bullish buy recommendations larded with fancy...what little Jon seemingly wasn't aware of was that only chartered financial analysts are legally entitled to engage in the practice."
Research seems to support this dim view of the funds and brokers who play in and move these markets. A study by the Cass Business School examining the performance of over 1500 UK funds between 1975 and 2002 concluded that only 16 of these performed well because of skill rather than luck. They also demonstrated that the converse is not true - badly performing funds generally exhibited poor skill, rather than suffering bad luck.
After a year or so I was becoming bored. My naturally precocious, assertive style was flourishing and encouraged. I was a gremlin - quick, defensive, reactive, all mouth. No different from many colleagues. I decided to try something else in the bank so made the move to Corporate Finance. At first I found it all a little too pedestrian, lacking in the immediate dramas of the trading floor. Where were the screens?
But in its own way it was a little more interesting. I actually considered marginally more information beyond that day's share price and what the Federal Reserve was doing with interest rates. But we certainly were not encouraged to have any deeper sense of values around the client - we just had to know more history.
However, all non-financial/economic elements were still ignored. It's no small wonder a huge percentage of mergers and acquisitions fail. Hopefully someone else was employed to do check the other bits ( what the now departed Carly Fiorina of Hewlett Packard called the 'squishy bits'), though much to my chagrin I know many such transactions continue with little or no money put aside for managing change until the change is upon a company. Even then lip service is paid to it. When will senior executives realise that the difficult part is not making an acquisition, but all the 'soft' stuff that follows?
When once involved in a significant return of capital to shareholders, on the back of the breaking news we proceeded to hawk the idea to practically every corporate client with spare cash on their books. One retail client was prepared to take the idea further if it could be factored into a greedy group of directors' bonus plans. Never mind the fact this was a company desperate for some inward investment. All we cared about was making money.
Progress stalled later on in negotiations when it became obvious an employee and shareholder mutiny would be the most likely outcome of this wildly unacceptable cash-draining plan.
From a personal motivation perspective I knew my days were numbered in banking when I worked on the merger of two engineering companies in the late 1990's. Charged with finalising the financial transaction modelling I became much more interested in how a new outspoken, autocratic American CEO was actually going to be able to work effectively and productively with the newly acquired executive team, who were clearly hostile and 'anti' his proposals. The deal looked good from a 'numbers' perspective - primarily advisors' fees and CEO's bonuses - though controversy abounded in the press. The merger proceeded. Two years later the CEO 'retired' with a significant cash sum - with shares at a nine - year low.
A comment on fees
The Monopolies and Mergers Commission has investigated price fixing between investment banks but it is difficult to prove. It seems ridiculous and counter-intuitive for bankers' fees to be a flat 2-5% of the value of a deal, regardless of the value created or the volume of work performed. Most other industries charge for work done, maybe even payment for 'success' - which really ought to be the value generated by deals.
It is a fact that corporations in the U.K are bound under stock exchange regulations to use a corporate banker to liaise between the stock exchange, investors and the company. The same fee is charged even where the work is limited to a few meetings and daily market reports (which I used to knock up in a few minutes). How I used to feel pity for the corporate lawyers I knew were being paid a third of my salary! At the end of a meeting I went home and they returned to their bunkers and marked up documents for the printers to turn round overnight ready for us to go through again the next day.
Ultimately the banks are shooting themselves in the foot. They have a sizeable population of investment bankers who think it is they and not the system that is the star. In the absence of loyalty and emotional attachment, longevity is determined solely by satisfaction with bonus and perks. Many individuals genuinely believe that because they do billion dollar deals, even if the deals destroy companies and value, they should nevertheless get a percentage of the billion, never mind that they are only playing with someone else's money and take no personal risk. Evidence abounds that people celebrated for their 'innate talent' in a narrow world that lacks balanced perspective become unable to see their faults and develop fantasies about their abilities and true merit. In banking they breed that mentality into employees early on.
Joel Bakan is kind enough in 'The Corporation' to infer that many corporate managers are different people in their private lives. I'm not at all sure that this is true of many people in the financial markets. Many of the individuals I know talk about being 'long a girlfriend' or 'short of action', depending on their hours. Trader friends are impatient and unforgiving of anyone else's carelessness or perceived stupidity. Humans are commodities, described in financial terms. There is a general disdain and contempt expressed for anyone who has not had the nous to make it to senior/board levels in non-finance industries - in my mind illustrating a total lack of understanding of the long term journey leadership can represent in other industries. Intellectual puzzle-solving is valued over more reflective intellectual and human qualities.
I see it in my work as a business psychologist - incontrovertible evidence when you stack up results of psychological assessments from financial clients against other industries that often financiers are all short term focus with little interest in developing organisations or leading people unless it impacts immediately on their P&L. No sense of investment there. Sadly the individuals I deal with from trading functions are often markedly less creative and satisfied in their roles than many others I meet. Less so from a financial perspective, though they all seem to think they're underpaid, but more from lacking a sense of purpose, value and depth to what they do.
If you have ever wondered how investment bankers earned so much in the late 1990s, US congressional investigators offered a satisfyingly simple answer: Wall Street and the City are a scam. Wall Street under fire: daily, complaints grow of unfair treatment and unethical deals.
Financial Times. (London) October 4, 2002
What a business, fees for putting Humpty on the wall, fees for pushing him off, fees for putting him back together again.
John Plender, Financial Times.
In recent years Elliot Spitzer fined 10 banks $1.4bn following a U.S investigation into conflicts of interest between research and investment banking departments. Various individuals have been outed, for example Henry Blodget of Merrils, who was singled out for his coverage of certain stocks. Blodget's private emails were leaked, showing he put 'buy' recommendations on stocks which he privately thought to be 'crap'. He was fined $4m and banned from practising in the industry. The industry has been dogged by harassment cases, more often than not settled out of court.
One of the central questions of Bakan's book, 'The Corporation', is that in view of recent fines, which surely hurt these companies with their overt profit motives, perhaps things will have changed? Are the banks learning from their mistakes? Are they forming meaningful relationships with the wider world? Has their behaviour changed? I fear not. There are still frauds being investigated that are more recent in nature than those that resulted in the SEC fines and sharp practice continues unabated.
There is something rotten to the core about what has been going on in investment banking. Yet as I have already mentioned, many of the activities are technically legal yet from a client or market perspective are nefarious and damaging - fees that sap value, mergers that advance on the base of rigorous financial due diligence but with minimal consideration of the harder to handle but equally important factors (people, products, market etc). Narrow legality becomes the measure of acceptable or even desirable conduct.
The markets are obsessed with narrow technical and financial concerns -constant fiddling with balance sheets, debt equity ratios, capital raising, returns of capital rather than a broader more balanced understanding of companies and markets - as if spreadsheets were the panacea to answer all questions and cure all ills. At what point are stakeholders in companies (and I say stakeholders NOT shareholders on purpose) going to stand up and actually ask ... all this and to what end? What difference is it making to our end product, our efficiency, our culture, our customer service, our employees, our community? Ultimately you can put lipstick on a pig but it's still a pig. Investment bankers are the most highly paid beauticians with an audience of ready and willing pigs - the CEOs and CFOs anxious to do deals that make a mark on careers defined by ever decreasing tenure".