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Friday 29 June 2012

On The Corrosion of Moral Leadership

LIBOR Illegality

News that Barclays Bank has been fined for LIBOR manipulation in both the UK and in the US, and that there are likely to be many more similar cases from other banks to come, just adds to the increasing evidence of a lack of moral leadership in our primary institutions.  It’s not just that illegality occurs, but that it appears to occur in a moral vacuum where the participants are happily and openly engaged in behavior which is corrosive to good society.

This isn’t just a problem in the financial industry, we’ve seen plenty of examples in other areas – in the media, in our legislators – where rank and file staffers mindlessly operate in a morally ambivalent bubble, without even attempting to hide their actions.  This doesn’t happen by accident, it comes from the top, and the buck needs to stop with those who permit these festering cultures to survive. 

The Eyes Have It

There’s a famous experiment with an honesty box that demonstrates the importance of moral oversight to us.  Conducted by Melissa Bateson, Daniel Nettle and Gilbert Roberts, in Cues of Being Watched Enhance Cooperation in a Real-World Setting:
“We examined the effect of an image of a pair of eyes on contributions to an honesty box used to collect money for drinks in a university coffee room. People paid nearly three times as much for their drinks when eyes were displayed rather than a control image.”
In fact, as Dan Airely has shown, we’re nowhere near as honest as we’d like to think we are.  In the research we looked at in Gaming the System, he showed that people will systematically cheat if we think we can get away with it. 

Moreover, more powerful people are less honest than others, because they seem to think the rules don’t apply to them (see: Game On: Basel III).  Similar effects seem to apply to wealthier people (see: Born Rich, Born Greedy).  Of course, it’s not pleasant, and we engage in all sorts of convoluted reasoning to justify our immorality, but the facts are the facts: we lie and we cheat when we think we think we can get away with it.

Honest Immorality

The immediate issue for Barclays, and all of the other banks under investigation in both the US and the UK, is that LIBOR is used to set other rates – so artificially manipulating it is tantamount to defrauding customers.  One senses a very nasty class action case on the horizon.  However, perhaps the more worrying aspect of this is that the deliberate practice of reporting less borrowing at lower rates masks signals to the market about levels of bank stress.  Back in 2007 and 2008 Barclays senior executives were adamant that the bank was financially sound: had the true extent of its borrowing strains been known that might not have been true, such was the fever of the time.

What’s truly extraordinary about these revelations is that the people involved in this gross and illegal manipulation were completely open about it.  There was no attempt to hide what was going on, which implies that the culture of the organisations involved had lost sight of the difference between right and wrong in the quest to maximize shareholder value (see: Greed’s Not Good For Shareholders). No doubt incentivisation-led bias was implicated, but such problems only become endemic when the culture permits it; otherwise it's just one-off fraud.

Poisonous Cultures

This isn’t the first time we’ve seen this type of problem.  In the US legislators apparently couldn’t see anything wrong in trading on inside information about the rules they were intending to set.  Hedge fund managers couldn’t see what was wrong in making a quick billion bucks or so on insider dealing, done in the most blatant way. 

In the UK we’ve had two further, extraordinary, examples of how corporate cultures can poison morality.  Firstly we had the remarkable revelations that the UK’s legislators were routinely fabricating expenses claims – an action that had seen people in other walks of life regularly sent to prison.  The initial reaction of many parliamentarians to be held to the standards of the laws that they had themselves set was outrage.  Even now there’s simmering resentment at the treatment they received.  Some went to prison, others had their careers terminated, others were held up to ridicule – yet many of them couldn’t see that they were doing anything wrong.


Then there’s the phone hacking scandal, in which UK journalists regularly hacked into the voice mail accounts of various celebrities, despite this being a clear breach of the UK’s privacy laws.  This went on for years, with only a few token prosecutions until the news broke that the phone of a young girl who’d been abducted and murdered had also been hacked by journalists working for Rupert Murdoch’s News International.

The resultant fallout has seen Murdoch hauled in front of parliament, his bid for control of the UK’s satellite broadcaster blocked, his son resign his UK directorships and the closure of the salacious News of the World newspaper responsible for the hack.  The police investigation is ongoing, with the list of people allegedly involved in either hacking or covering up the hacking growing by the day.  There’s now even an investigation into the original police investigation which appears to have been conducted along the lines of someone asking News International if they’d done anything wrong, and News International saying they hadn't.  Another triumph of investigative policing.

Moral Disengagement

In all of these cases we have clear examples of illegal behavior being conducted openly by people who clearly didn’t feel they were doing anything wrong.  This process is part of what Albert Bandura calls moral disengagement, where people manage to distance themselves morally from their own actions.  This behavior is morally corrosive but can only occur on a wide scale if organizational leadership closes its eyes to it (see: Euphemisms for Morally Disengaged Managers).  The morality of organizations is set from the top so the evidence we’ve seen that powerful, rich and socially privileged people tend to be more morally ambivalent isn’t a good starting point.  

In recent times we’ve seen a variety of problems with our banks with what appear to be one-off failures of risk control.  These aren't an issue of morality, but the outcome of a series of mistakes of judgement: such mistakes if admitted and fixed should yield a better and safer corporation.  We tend to fire people who admit mistakes but we shouldn’t, we should put them on probation to make sure they don’t repeat them.

On the other hand, events like LIBOR fixing appear to have been culturally accepted and mediated.  It doesn’t matter that there won’t be a smoking gun showing that senior executives approved these practices, that’s not the point.  The point is that the ethics of corporate cultures are set from the top and that’s where the buck stops. 

End the La-La-La Defence

You cannot legislate for moral behavior, but you can make sure that everyone knows what’s right, and what’s not, and set an example.  If, as a leader, instead of posting a pair of open eyes above every employee’s station you ensure that you avert your gaze, stick your fingers in your ears and sing “la, la, la” very loudly you shouldn’t be able to escape your responsibility.

Moral leadership should be a fundamental requirement of our leaders, whether they be politicans or businessmen.  The alternative is corrosive of trust, and when trust fails so does the basis of capitalist society.  Leaders who fail this test should resign or be forced from office.  They have forfeited their right to lead.

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  1. I doubt the "quest for shareholder value" is at all relevant to this. It would be quite altruistic of an investment banker to care about some societal abstraction ("shareholders") rather than their own individual value which is only tangentially if at all related to shareholder value -- even if part of their "compensation" is paid in shares or derivatives, maximising that is not as such particularly aligned with broad shareholder interests, because they just need to manage their own entry/exit price.

    "Shareholder value" is like the "customer is king" thing, a marketing ritual. Very few people who articulate it actually care or believe in it, other than instrumentally when they think it helps reach other aims (and perhaps rightly so, on its own it's a rather pointless endeavour).

    As for capitalism being built on trust, that's debatable: intrinsic societal trust may have survived despite an economic system whose natural forces tend to erode it. It could be that ultimately you can have a trust-based society, or a capitalist economy, but not both at the same time.

  2. Great Article guys, have thoroughly enjoyed the behavioural analysis of world events - a good read.

    I had a look at the LIBOR scandal from the behavioural point of view

    I believe that the theory of deindividuation plays a role here as when everyone you know is doing the same thing and especially for such a long period of time (10+ years!) it is easy to legitimize your action as legal