Corporate Responsibility and Reputation: It’s Business and It’s Personal

Umair Hague recently argued that a new generation of radical corporate innovators should reinvent Wall Street from the bottom up.  Yet, such a notion presumes the innovators already are positioned to take such action; they simply need to take the bold steps he recommends.  What the recent financial crisis has revealed, though, is that businesses generally and financial institutions in particular have experienced and fostered a debilitating disconnect between their objectives and those of the broader public.  The result–constricted senses of responsibility and damaged reputations–have diminished businesses and individuals alike and have impaired their ability to contemplate, much less pursue, the innovations Mr. Hague recommends. 

Care for a more concrete example?  As noted in earlier posts, executive compensation remains a “hot button” issue for the public, financial services institutions, and policymakers.  With a few notable exceptions, many financial institutions made no substantive efforts to self-regulate and instead stonewalled.  Apparently fearing the slippery slope of how far mandatory regulations might go, these institutions rejected any attempts to cultivate that slope through principled, intermediate steps such as those enunciated last month by the Conference Board or at the G-20 Summit.   Contrast a reported federal cap of $200,000 in total compensation for top executives at the financial products unit of TARP-recipient AIG with Credit Suisse’s decision to make its own “radical” pay plan changes to grasp how significant the difference can be. 

While it may be too late in the short-term for some like AIG and six other TARP recipients, it is not too late for institutions prepared to take a longer term view of the value to be gained by reconfiguring and reconnecting responsibility and reputation.  Inaction, indecision, and inertia are sure to produce more results like those in store for AIG’s financial products unit.  Alternatively, taking a hard look in the mirror reveals our ability to move forward without waiting for the government’s regulations or the market’s “invisible hand.” In that mirror, the fuzzy excuse, “It’s not personal; it’s just business” gives way to reconfigured responsibility and reputation, both business and personal, being clearly and inextricably linked. In that mirror, we are freed to look beyond next quarter’s profits and see more places where business and people’s interests reinforce one another. 

Such reflections are not the dream-induced product of Alice’s looking glass or coded support for excessive government intervention where all solutions emanate from political capitals.  To the contrary, these reflections, combining responsibility and reputation, provide the vision and platform on which we and “they” should build the wide-ranging, integrated reforms necessary for the long-term success of our financial system and individual businesses.  They provide the vision and platform for companies to differentiate themselves in the minds of a number of stakeholders and to begin forging a competitive advantage.

Next case ripe for reflection vs. more of the same–watch developments around the proposed consumer financial protection agency in House and Senate bills concerning financial services regulatory reform.  Which institutions, private and public, will use the mirror, not for purposes of looking backwards, but to see new ways to reform not only the current regulatory scheme but also their responsibilities and reputations?  Who will be willing to leave the herd and lead?  Which organizations will be among the first to realize that no case can be made for meaningful, more strategic self-regulation unless and until affirmative steps are taken to rebuild trust?

Corporate Responsibility: Individuals Also Need to Look in the Mirror

Almost another month has passed since the one-year anniversary of the demise of Lehman Brothers.  For the most part, financial services reform legislation introduced earlier this year has languished behind health care, though recent hearings and rumblings offer some signs of life.  The bipartisan Financial Crisis Inquiry Commission charged with investigating and reporting out the causes of the financial meltdown just got started last month. 

Leave aside for a moment the disappointing fact that we, the people, and many of our public institutions like legislative bodies and the media, our vaunted fourth estate, have such difficulty grappling with more than one major issue at a time.  On the financial services front, it is no small matter that we seem to have put the cart before the horse.  Not that the Commission is the “be all to end all” in terms of providing answers, but it is unfortunate to say the least that federal solutions are being debated, crystallized, and politicized through legislation at the same time the official, public inquiry meant to identify the very problems we are trying to solve is just beginning.  But, I fear we have an even bigger problem.  

By and large, what discussion there has been about financial services reform has focused on “them.”  Be it Wall Street, Congress, fat cat CEO’s, regulators asleep at the switch, “they” have riveted our limited attention to date.  Yet, in the midst of all of the finger pointing, I have seen or heard precious little about what the millions of us who work for businesses large and small can and should be doing to further the necessary reforms in financial institutions and businesses generally. 

Before claiming that there is nothing that can be done, let’s remember that collectively we made minor deities out of CEO’s and all those who reaped hundreds of millions of dollars.  We bought into the idea that short-term profits alone could be our long-term guide.  We believed quantitative financial models unleavened by common sense and real-world experience revealed the future.  We acted and invested as if what goes up continues to go up and what goes around never comes around. Having made these mistakes, corrective action cannot be limited to public policies and prescriptions for other people’s compensation, other companies, and other-worldly financial instruments no one really understood.  

It’s time to look in the mirror and acknowledge we’re all on the hook for turning things around.  The starting and ending points for corporate reform lie within each of us, within reconfigured senses of individual responsibility and reputation.

Executive Compensation: Cultivating the “Slippery Slope”

Public and therefore political and regulatory pressures continue to build to impose restrictions on executive compensation in the financial services industry.  The subject is sure to get added attention during this week’s G20 meetings in Pittsburgh.  Some may be hoping for an escape route in the U.S. that leaves only those institutions that have accepted TARP funds poised at the edge of the slippery slope.  Not so fast, though.  Discussions of possible Federal Reserve oversight to curtail compensation structures that incent excessive risk encompass more than just TARP recipients.   Without knowing precisely how such regulations will be written, much less interpreted and enforced, I imagine the “slippery slope” arguments are flying fast and furious on Capitol Hill and in corporate headquarters. 

In yesterday’s New York Times, Paul Krugman adds to the drumbeat with a “Reform or Bust” column positioning executive compensation as a fulcrum for the Obama Administration and others to prove whether they are with the people or with the bankers.   To further influence how the scale tips between perceptions and/or accusations of populism and elitism, Professor Krugman proclaims, “The good news is that senior officials in the Obama administration and at the Federal Reserve seem to be losing patience with the industry’s selfishness.”  Though Professor Krugman may be right about executive compensation being a test case of sorts, such rhetoric understandably ramps up the fear of the slope and unfortunately reinforces some organization’s resolve to fight every reform.

On the other hand, let’s not concede Professor Krugman’s blanket characterization of what is motivating bankers.  Perhaps the limited action on executive compensation so far is less about selfishness and more about an industry’s unfortunate and colossal lack (or suppression) of imagination.  As between government and private industry, it is ironic that financial services institutions (and others) would opt for a strategy in which they offer little or no change and thereby default to government innovating new compensation systems for them.  Further undermining this strategy is the fact that any such systems would have to be more of the “one size fits all” variety, thereby tying a company’s hands in terms of differentiating itself from the competition and allocating its resources.

As an alternative to taking no action or stonewalling, what if more leaders in the financial services industry were to choose terracing the slippery slope?  What if more financial services leaders were to recognize that publicly saying no to everything is not a strategy for success?  Surely there are measures financial services institutions can take on their own, without government mandates, that better align executive compensation with shareholder and systemic (i.e., public) interests than many of the current arrangements do.  Wouldn’t it produce better business results for financial services companies to enunciate certain responsible principles (e.g., rewarding long-term results) and enact various pay packages that fit with those principles (e.g., bonuses weighted more heavily toward equity than cash, payouts over time, and clawback provisions)?  

Inertia is an unreliable bulwark.  On this issue of executive compensation, the flat, anything goes, tracts of land are quickly disappearing.  It’s time to cultivate instead of blindly fearing the slippery slope.  Corporate responsibility can supply the missing piece.

Interesting postscript after drafting the above post:

• The Conference Board Task Force on Executive Compensation Report issued yesterday answered these questions or variants of them in the affirmative for corporations generally.
  •  Declaring a “one size fits all” or “rules-based” approach unworkable, the Task Force offered the sensible advice that rules “cannot substitute for the good judgment required to make sound pay decisions.”  Report at 7.
  •  Beyond this signal to not rely solely on government rulemaking, the Task Force recognized that the potential adoption of a rule mandating advisory shareholder votes for U.S. public companies was not an occasion to stonewall.  Instead, the Task Force urged companies and their shareholders to take added steps designed to increase communication between shareholders and boards regarding executive compensation.  Report at 27.  
  • Though not denominated as responsible practices, the Task Force also recommends that companies avoid “controversial pay practices.”  In attempting to define such practices, the reference points are to take into account a broad set of stakeholders—employees, shareholders, and notably the public— company credibility, and stakeholder trust.  Report at 20.  Sure sounds like some of the touchstones of corporate responsibility.
• While it’s early yet, no bank has stepped forward to adopt the Task Force’s Guiding Principles as contained in the Report.  One has to hope, though, that adoption by the Securities Industry and Financial Markets Association indicates that such support from leading financial institutions may be forthcoming or at least that active opposition will not be.   

Corporate Responsibility: Cultivating the “Slippery Slope”

Reform tends to meet inertia on the precipice of the proverbial slippery slope.  You’re familiar with the argument’s arc:  “If we were to change that practice or take that step, we would start down a slippery slope.”   Of course, fear of the slippery slope compels us to aggressively resist taking that initial step, even if on its face, it is eminently reasonable.  The result often is a stalemate where nothing happens until the forces urging change either dissipate or become so overwhelming that we are shoved down the slope well beyond where we could have willingly stepped.

So, what does this have to do with corporate responsibility?  Indulge me for one more moment, and think about what some agrarian societies learned long ago.  Tracts of flat, fertile soil are not always available.  To make progress in some settings, we have to take advantage of slopes, even steep ones, which often can be productively cultivated through terracing.

Tenets of corporate responsibility likewise can provide principled means by which organizations can terrace the reform slope.  They provide the opportunity for the organization to be deliberate in whether and where to step up or down.  Think of these terraces, these principles of corporate responsibility, as risk management tools, not simply random or empty phrases, that mitigate the feared headlong rush to the bottom of the slippery slope where no one wants to be.

See the next post for an example in the area of financial services institutions and executive compensation.

Tales From Lehman’s Crypt – NYTimes.com

Tales From Lehman’s Crypt – NYTimes.com.

Reflections on the eve of the one-year anniversary of the demise of Lehman Brothers reveal a business that was missing pieces.