THE PSYCHOLOGY OF CORPORATE IMMORALITY
Big Business has lost its moral compass. Why?
The collapse of the banking system was caused by lax regulation, consumerism, rampant greed and the deterioration of moral values in the face of a Tsunami of money. Many big non-financial corporations stand accused of ripping off customers, seeking to bribe politicians, forming cartels and environmental destruction. In the face of all this malpractice, most of the theories behind free markets have been conclusively shown to be fatally flawed.
This global financial disaster was the culmination of a period when many governments retreated before the pressures of free-marketers dedicated to the proposition that unfettered competition in unregulated markets would be good for all in society. The results have been terrible for all but a tiny minority of the super-rich.
Here are a few examples of the results of letting the market dictate corporate behaviour.
Let's start with the finance sector:
The behaviour of the banking and financial services industries over 20 years or so, has been a procession of fraud, rip-offs and wild speculation driven by an obsession with making as much money in the shortest possible time, without any consideration for the wider economic and social consequences
Surely large corporations with millions of customers and subject to investment market scrutiny provide better examples of "good" behaviour?
It would take too much space to chronicle the history of "bad" behaviour by non-financial corporations, but here are a few pertinent examples:
- Safety and environmental destruction.
- Cartels, misinformation, swindling customers whilst simulating consumer “choice” and value
- Gross pay differentials, underpaying and exploiting staff
- Threatening public health - Foods, drinks, tobacco and big pharmaceuticals. All have been found out suppressing vital health information, behind the scenes lobbying and misinformation of the public
- Tax avoidance, using many devices to evade tax
- Mediocre performance; grossly unjustified and unfair rewards and (in the case of top UK companies), underinvestment in longer term projects leading to a lack of competitiveness.
Of course, not all corporations behave like this. The exceptions tend to be enterprises where staff have a partnership stake, some co-operatives and many family companies.
Why is all this happening?
There are several related reasons for the growing malaise of gross incompetence and corporate immorality:
- The wealth and thus the power of huge corporations in the finance and industrial worlds has increased vastly over 50 years. Accompanying this increase in size and power has come a huge increase in the wealth of top executives and other top managers. In the US and UK, top executives' pay has increased from small multiples of the average in their enterprises often to hundreds.
- This has happened as the power of the financial markets over companies has exploded. It is now the case that a CEO who is not supported by the investment markets will have a very short tenure indeed. This has caused top managers to look outwards towards the financial markets, and much less to their employees and customers. These have in the main become cannon fodder to feed the voracious demands of investors. And so the proportion of corporate earnings going to the capital markets and their agents, top managers, has grown explosively, to the point that average real earnings in the US and now Britain have stopped growing in line with GDP growth. In the USA this phenomenon has been the case since the late 1970's.
- Thus top executives have been psychologically detached from the companies they are supposed to lead and drawn inexorably towards the financial markets. The skill sets of many top managers have narrowed. Financial skill and a deep knowledge of “The Numbers” has edged out the broader and more human skills needed for effective leadership.
- Financial markets across the globe form part of a massive and powerful industry with a dominant and pervasive culture. Such is the nature of global banking that it could be described as a separate planet, cut off from the worlds around it. Its relationship with customers and the community has become predatory.
- Big business and big finance seek to influence the surrounding environment by seducing customers with massive advertising and politicians by lobbying and patronage that amounts to rampant corruption. Much of the lobbying is carried out in the shadows away from the gaze of voters. Such is the scale of corporate “support” for politicians in the US it is undermining the democratic process. The UK is not far behind.
Today, top corporate executives and bankers live in a world that is separated from the lives of most of their customers and staff. The psychological effects of this separation and the creation of closed networks of people with similar interests are dramatic. To illustrate the point, here is a letter written by a subordinate to the CEO of a large international corporation - just at the point that the subordinate was retiring!!
The CEO as Sun King
Letter to a “Superstar CEO”
"The trouble with being treated like old fashioned royalty and cut off from the world inside your company is that you are developing a strong sense of entitlement and with it a false impression of your own importance. The really difficult thing is that your points of reference are now others like you and a media circus that behaves as though you actually are the company. This sense of self-importance can only be exacerbated by the trappings of power and position - chauffeured cars, corporate jets, an office suite guarded by many assistants, publicity advisers and bag-carriers - and a lifestyle that cuts you off from the worlds of the average mortals that make up your fellow employees and customers. Talk about 'l'etat, c'est moi'!
"Of course the reality is that you are very powerful, because you can cause great damage in conjunction with compliant external directors, a few corporate staff, and external advisers. You, without any reference to the many thousands of people who do the real business of this firm, can buy and sell assets and people and cut huge deals that will more likely than not damage the real company and with it many peoples' lives. You can also issue edicts and initiate programmes from your office that may change the lives of thousands of people without actually meeting any of them.
"But that is where your uniqueness stops. If you were minded to nurture the company and grow its business steadily and sustainably, then you would have to lead and rely upon many others - and in doing so, would have to mix with them and develop a wide range of internal networks and relationships. Then you would come to realise that you are a member of a community, perhaps not even the most important member, except maybe in times of crisis or great opportunity.
Alas, you are unlikely to realise any of these things. Perforce, you have joined another universe, the centre of which lies outside the company in the world of your peers and competitors, the media and the financial markets. Of this trinity, the investors are the most powerful, because they can destroy you - and it is not in their interests that you should value the company, its customers and its people more than them.
This is the nub of the matter - although you may not even realise it, you are trapped in a sort of limbo - a space that is in between the company you are supposed to lead and the investors that you have to satisfy or perish. In reality you cannot be wholeheartedly a part of either. If you manage the balancing act, for a time you will be richly rewarded with both wealth and acclaim - get too close to either and you will most likely be judged to have failed the one or betrayed the other. Like policemen, your range of friends and contacts is very limited.
Some people might envy or even hate you, but I feel rather sorry, because deep down you know that you cannot commit yourself to the people you lead and you are rather frightened of the markets and the media - and of the gnawing worry that it could all end in failure. Personally, I wouldn't want your life for all the tea in China. It is actually quite rational to want as much as you can get out of it, quickly, because it may all come to an end soon. A corrosive combination of great power, great insecurity and great pressure is working its insidious influence on you and we are all the worse for it".
What matters to CEOs?
Here is an interview with a CEO of a top company high up in the UK top 100, in which he discusses with unusual candour the pressures on him.
"I believe that performance can be looked at in several dimensions:
- Firstly, there is the perception of performance through the eyes of others. "Others" includes staff, executive director colleagues, customers and the like - but the crucial audiences are the financial markets (The City), the media, the chairman and non-executive directors. If the City and media turn against you, it is time to take up gardening, because it is highly unlikely that the board can support you in the longer run. I'll talk some more about perceptions, because managing how people perceive you and your performance is crucial. But let me move on to a second dimension, which is reality.
- Reality is not as simple as it might seem - and I apologise if this is becoming a bit convoluted. Reality for the board and the City, press etc is mainly concerned with the Numbers, but other facets might also come into play - for example, if there is an evident public falling out between a CEO and his colleague directors. Now, the thing about reality is that it can be subject to a degree of manipulation or I would prefer to call it "management". For example, it is quite possible to put a degree of spin on the way numbers are presented, although given the great improvements in the work of Audit Committees, I wouldn't over-emphasise this. However, given a little time, it is much easier to manage reality or (I apologise if this sounds a little cynical) the perception of reality. Let me explain, as this is quite important. You see, another dimension is Time. The longer the timescales, the more possible it is to manage reality by doing something about it - reduce cost, dispose of problems, grow by making acquisitions etc. But also, longer timescales mean that there is also a greater possibility of managing perceptions; it is more possible to shape how information is projected to the outside world, to manage expectations and to develop credible stories about the future. So, it is absolutely crucial to avoid getting between a rock and a hard place with little time to manage your way out - and this means carefully managing both reality and perception - being in control of both is the real skill. If matters get out of control and your share price begins to slip, then it can be very difficult to get back on top of events in the short run.
So, the bottom line about performance as a CEO of a quoted company is to remain on top, be in control of events rather than a victim of them and to be very careful to manage the perceptions of those who matter.
Now, if all of this sounds like a big game, of course it is. This is not to say that the business is unimportant, that the thousands of people who work for it don't matter or that relationships with fellow directors, especially non-executives and the chairman are totally false. But, I and my chairman knew what the game was really all about, and no matter how good a relationship we had, in the last resort he was there to judge me on behalf of others and if the 'others' (the City) were serious about having my head on a plate, there wasn't much either of us could do about it.
So, let me give you a list of things to manage:
- Obviously information about performance, especially numbers. These can be managed to a degree - for example, I have known numbers to be depressed a bit one year to provide a bit of comfort in the future.
- Secondly, how you come across to important audiences. It is crucial that senior investors and analysts see you as confident, on top of the numbers, keen to serve their needs, fit and well-presented. Even haircut and clothes can be important - if you look shaggy and unkempt, they will wonder if you might be losing it.
- The same applies to the chairman and non-executives. They will become concerned if you look knackered and untidy, unable to manage your diary efficiently or subject to stress. And of course, it is absolutely crucial that the CEO and fellow executive directors sing from the same hymn sheet - I can't emphasise that enough.
- 'Events' and the future. It is very important to look ahead and see elephant traps coming - not to be caught by surprise by unexpected events, to have a Plan B and not get yourself into a crisis situation in perception or reality.
Some people wonder if all of this is worth the candle, and I must say that I enjoyed most of it. It's a fascinating game and very satisfying if you get things right, with good colleagues, the business moving in the right direction, a supportive board and good external vibes. But in the end, you have to remember that things can turn sour quite quickly and staying ahead of the game takes a lot of skill and some low cunning. Unfortunately, events (some of them not of my own making) turned against me. I greatly regret this, but have found other roles that I have greatly enjoyed - and would you believe it, many have forgotten the past, so I'm in demand as a director again. CEO? Not any more!
The Psychology of living in “Bubbles”
It is not difficult to understand how individuals who live in a bubble can develop habits and values which are referenced to the narrow world in which they live.
Most CEOs only meet and know a relatively narrow circle of people inside the company. A few corporate colleagues, often in the corporate office, and personal assistants make up the majority of their contacts. Meetings with other employees are often choreographed through presentations and corporate videos.
This means that there is little or no challenge to their views, which will be mainly influenced by external advisers, such as investment bankers and Public Relations consultants. Investors and the financial media will also have a considerable influence.
Many CEOs are interested in the lives of others like them, and scan the financial press for news. In some cases, senior executive search consultants will also be influential, because they service the closed community of top executives and non-executive directors. The truth of this can be seen from the relatively small number of people who circlulate around top corporate roles. There are societies, associations and meetings which enable top people to meet others of their kind away from the rude gaze of the mass.
Private clubs, industry associations, exclusive gatherings like that at Davos, as well as the parties and private gatherings organised by those wishing to sell services (for example executive search consultants) all contribute to the sense of enclosure caused by only meeting people with similar roles and views.
Groupthink, a term coined by social psychologist Irving Janis (1972), occurs when a group makes faulty decisions because group pressures lead to a deterioration of “mental efficiency, reality testing, and moral judgment”. Groups affected by groupthink ignore alternatives and tend to take irrational actions. A group is especially vulnerable to groupthink when its members are similar in background, when the group is insulated from outside opinions, and when there are no clear rules for decision making.
Janis has documented eight symptoms of groupthink:
- Illusion of invulnerability - Creates excessive optimism that encourages taking extreme risks.
- Collective rationalization - Members discount warnings and do not reconsider their assumptions.
- Members believe in the rightness of their cause and therefore ignore the ethical or moral consequences of their decisions.
- Stereotyped views of out-groups - Negative views of “The Others”, or regarding outsiders as weak and exploitable
- Direct pressure on dissenters - Members are under pressure not to express arguments against any of the group's views.
- Self-censorship - Doubts and deviations from the perceived group consensus are not expressed.
- Illusion of unanimity - The majority view and judgments are assumed to be unanimous.
- Self-appointed 'mindguards' - Members protect the group and the leader from information that is problematic or contradictory to the group's cohesiveness, view, and/or decisions.
When the above symptoms exist in a group that is trying to make a decision, there is a reasonable chance that groupthink will happen, although it is not necessarily so. Groupthink occurs when groups are highly cohesive and when they are under considerable pressure to make a rapid decision. When pressures for unanimity seem overwhelming, members are less motivated to realistically appraise the alternative courses of action available to them. These group pressures lead to oversimplification, carelessness and irrational thinking since groups experiencing groupthink fail to consider all alternatives and seek to maintain unanimity. Decisions shaped by groupthink have low probability of achieving successful outcomes.
Pressures to be (and appear to be), quick and decisive
Top executives are expected by investors and the media to be decisive and to make decisions quickly and efficiently. Uncertainty and extended reflection are thought to be weaknesses.
Nobel Prize winning psychologist Daniel Kahneman threw a powerful light on the problem by his research into how people think. He identified two modes of thought:
- The first is the way in which we habitually make decisions, which is based on experience and habituation to the community in which we live. He called this “Thinking Fast”. This mode enables us to make quick decisions, which are often the correct ones. We draw on known information and do not question our basic assumptions. Kahneman describes this as “What You Know Is All There Is”.
When this is applied to behaviour inside finance and business, the effects can be marked:
- Little review of alternatives
- Ignoring of dissonant information that is outside the narrow perceptions of players
- Impetuosity, making quick decisions, changing them quickly when things go wrong, causing whole cycles of sudden jerky change that confuses others.
- The second mode of thought is much more reflective - and slower. New information is sought, the wider situation is taken into account, alternatives are considered, the views of others are taken into account.
Kahneman described this as “Thinking Slowly”.
Thinking Slowly requires seeking new information, weighing and reviewing often complex and conflicting information in order to override habituation and existing convictions. This mode is essential if decisions require complex thought.
The absolutely crucial point of these two modes is that making moral and ethical judgments requires Thinking Slowly. That is probably why ethics are left out in many corporate decisions and actions
Inside the corporate pressure cooker the prevalent mode of decision-making is based on fast thought which may be appropriate most of the time. But when deeper consideration is needed the effects can be quite disastrous. Corporations whose top managers are cut off from external opinion and believe that they knew it all have led their companies to disaster. Industries that have very strong cultures are very susceptible to “What You Know Is All There Is”.
The best example is Global banking, which is infused with a dominant culture that reinforces compliant behaviour, punishes deviance and regards outsiders as either victims or the enemy. And.... We know to our cost the effects of this culture on decision making.
Two features of investment banking make the industry particularly susceptible to amoral behaviour:
- Much of the industry is simply about manipulating money to make money. An insider described a large part of investment banking as “Lacking in social purpose”. This environment encourages a single-minded focus on making money and getting rich.
- Working in much of investment banking and trading requires micro-second decisions, a classical example of Kahneman's “Thinking Fast”. This completely bypasses any consideration of morality or ethics.
Deception: The appearance of Ethical behaviour
A common habit amongst big corporations is cultivating appearances. The intent is to project to the outside world an impression of an enterprise that cares about people, environment, customers and Society without having to fundamentally modify actual practices.
Realising that the public may judge them on their behaviour, they delegate social responsibility to the corporate Public Affairs or PR departments, which will prepare speeches for the CEO and bombard the media with statements of good intent. BP is an excellent example; promoting its “Beyond Petroleum” message whilst neglecting safety. The consequences were eventually disastrous.
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 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 she moved back to her first love, business psychology.
In discussion, it became clear that she had a fascinating story to tell, made more powerful because of the insights generated from the world of psychology.
This is her 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 self-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.
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.
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 long departed CEO 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?
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 on 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".
The whole environment surrounding banking and large corporations is not conducive to easy reform. Many politicians have been “bought” by banks and large corporations. The average customer stands no chance of influencing the system. Corporations and industry lobbyists will fiercely resist change. This has bred a kind of hopeless cynicism and general mistrust in the general public.
There are three kinds of remedy, none of them easy to bring about in countries where the political process is dominated by big finance and big business - but all possible given sufficient political will.
- Encourage the formation of different forms of financial institution. Regional and local banks are more likely to be responsive to customer needs and closer to the issues facing the region. The German example of regional banks is a very good one to follow. Credit Unions that support local savers and borrowers generally have a good record and are trusted as a way of avoiding the clutches of rapacious lenders.
Achieving critical mass of regional, industrial and local financial institutions will need a long term strategy supported by national and regional governments.
Such institutions will need to be favoured by tax treatment and some government funding. The overall strategy should not be to found a new generation of mega banks. As has been demonstrated by social enterprise, the best form of growth is “viral”, learning by example and spreading good examples through observation and learning. The key is to preserve the local and regional roots.
- Separate personal and small corporate lending from investment banking. Surround “Casino” activities with stringent requirements about risk ns institute strong sanctions for malpractice and illegal behaviour. It has been demonstrated that fines do not deter. It is crucial that individuals and institutions which behave outside the bounds of morality as well as the law should suffer effective retribution. The answer probably lies in licencing institutions and individuals to practice, as happens in medicine. It must be possible to debar individuals from leading or working in institutions where deliberately unethical behaviour occurs. Corporate fraud law needs to be strengthened so that individuals can be suitably punished. The whole process of law needs to be speeded up and individuals debarred from practicing until proven guilty.
- Take a strong line against corporate malpractice. Unfortunately, it is probably beyond the power of any one national government to take on rampant corporate power, so action by international institutions like the European Union is the only way round the violent opposition from corporate interests backed by lackey politicians.
- Stimulate the foundation and growth of Social Purpose Enterprises. It is becoming clear that enterprises which escape the clutches of the financial markets are able to reinvest profits more easily and take a long term view of their business. In Britain the fastest growing segment of the economy is social enterprise. Social enterprise formation and durability is far superior to their equivalent small and medium tern enterprises.