We Get What We Reward
Outcome is just as important as income
Unfortunately, one of the most tragic aspects of human progress is that we only learn the real lessons the hard way. Or as Will Rogers famously said: “Good judgment comes from experience, and experience comes from bad judgment.”
Obviously, 2008 was a tragic year in world economic affairs. As the dust settles, we are like archeologists trying to understand what happened, primarily from studying the wreckages of once-impressive enterprises. With time, the clarity and precision of our understanding will no doubt be enhanced and, hopefully, we can at least avoid making the same mistakes in the future. Rest assured, we will make new ones. Such is life. And that’s a good thing. How boring life would be without the anxiety of the declines followed by the exhilaration of achieving new heights previously unimagined. One just wishes that the pain associated with the falls could be better prevented.
One aspect of this crisis that is particularly troubling is the asymmetric nature of the burden of pain. When looking at the past five years of Wall Street bonuses and other forms of financial rewards, it is clear that most of the financial industry executives are likely to be net positive out of this ordeal: The size of their accumulated rewards prior to the crises most likely outweighs their more-recent loss of stock options, direct compensation and short-term humility. Compare this to the many more innocent investors, homeowners and other businesses that have lost a significant part of their net worth without having had the ability to cash in as the financial agents did.
As an entrepreneur, corporate executive, board member and investor, I have during my career always been fascinated with the financial industry. Clearly, the capital markets play a central role in any modern economy. Providing access to capital is the lubricant of our global economy. Without it there will be no forward motion. But what is the price of this lubrication? I have spent most of my career in the restaurant industry, and food, it could be argued, is of similar importance to human nutrition as capital is to economic prosperity. But we don’t pay restaurant operators nearly what we pay bankers.
In the aftermath of this financial tragedy, we ought to have a constructive public discussion centered on what contributions in society should have the highest rewards. To be clear, this is a discussion — I am not advocating regulation or a committee deciding who makes what; I am not allocating blame, either. People make what they make, and the broader society tends to deserve the bankers, businesses, government and media it deserves. Yet another sobering reality of life.
There are many vectors in society that are mysteriously undervalued. Why do we pay so little for great teachers when we know that a better-educated future population would most likely make all of us much richer? Why do we only spend 3 percent of our trillions of dollars in health care investments on prevention when we know that 80 percent of our chronic diseases, which account for a significant percentage of our total health care bill, could often be naturally avoided? Why did we not invest in — particularly in the aftermath of 9/11 — energy solutions that could not only mitigate risks of global warming but also reduce our vast spending on wars fueled by oil that, to a large extent, is consumed by us? There are many more examples, of course.
One could envision many interesting voices passionately arguing for and against different aspects of this issue. The most common voice heard is that we should let the markets sort it out. But who are the markets? Aren’t we the markets?
Clearly, there is only one solution. As Jerry Garcia so wonderfully put it: “Somebody has to do something, and it is incredibly pathetic that it has to be us.” We all —everybody — have to engage and care about where we put our money, where we shop, what banks we do business with, what we ask from our financial advisors and how we value the most important parts of our lives. When you step aside, it does seem bizarre that we appear almost obsessed with shaving off a dollar or two from many items we buy weekly, when we nearly ignore all of the thousands of dollars that are flushed away by people we don’t know in banks and institutions we don’t visit. When did you last visit with the people who manage your 401(k)?
While I don’t have a solution to the problem itself other than to raise the topic and hope that a constructive dialogue ensues, I’d like to contribute two themes that I believe in, and one of them so much that I have devoted my career to it
The first is the time horizon for our financial expectations. I do believe that the longer the horizon, the fewer the problems — within reason. Sure, there are exceptions to every rule, but in general we all value people who spend a large amount of time creating something of great value. Longevity cures a lot of ills. Anything that has stood the test of time is likely to stand a bit longer, and therefore the risk of a large reward for the creators feels more deserved. I learned this from a union leader in Sweden many years ago when we discussed wealth. He told me: “I don’t have any problem with a neighbor of mine, whom I see every day working hard in his yard, having a much nicer yard than I do. I am not jealous. I am impressed. In fact, he inspires me to work harder in my own yard.” I do think it is important for society to reward people the most that we value the most. That creates less friction, less partisanship and less division.
The other theme is one of purpose — a purpose bigger than your product. As mentor, friend and author Charles Handy once said: “Where there is no vision, there you find short-termism, for then there is no reason to compromise today for an unknown tomorrow.” One possible starting point of self-reflection for members of the financial industry is to try to identify their purpose beyond annual bonuses and returns only. If they saw their industry as the true Jiffy Lube of capitalism perhaps many of the more extreme risks and behaviors that today so clearly have exacerbated our crisis could have been avoided. If mortgage industries saw their job as providing homes, not loans, then perhaps we’d have a different housing market.
There is nothing wrong with making money. But making money is always an outcome of what you do — not just an income. If we continue to reward income more than outcome I am rather certain that we won’t like the result.
Author and columnist Thomas Friedman recently said in The New York Times: “We’ve fallen into a trend of diverting and rewarding the best of our collective I.Q. to people doing financial engineering rather than real engineering. These rocket scientists and engineers were designing complex financial instruments to make money out of money – rather than designing cars, phones, computers, teaching tools, Internet programs and medical equipment that could improve the lives and productivity of millions.”
I wrote the following response to a blog posted onhttp://howblogazine.com/greenwashing-comes-out-in-the-rinse/#comments
When I read your greenwashing post (about whether implementing chief sustainability officers is a sign of a much-welcomed new approach to larger businesses), it triggered a need to write something about what I believe needs to happen. The problem is less about whether companies are taking ethics or HOWs seriously. I believe they are and I believe they always have been. Most people are honest people. They want to do the right thing. Call me naive, but that is my experience. The issue instead concerns the governance surrounding these officers and who they ultimately answer to.
Most people operate under the assumption that “what interests my boss fascinates me.” In other words they will do what is monitored, measured, and expected. There are two gravitational forces pulling against our natural tendency for doing the right thing. We need to be more aware of them both. First, there is distance in people. Second, there is distance in time.
The first distance has to do with the distance between heart and head that has been created by the many layers of professional managers existing between companies’ owners and their hired executives. The courageous and truly sustainable decisions are often being made by the owners of businesses. They have everything to lose and everything to gain. From that position there is often dilution down the chain of ownership. The further away you are the more tactical your decision-making often gets. Your name is at stake (your reputation is not as much, at least so you think) as long as your numbers are good. Of course this is not true, but it is a persistent illusion.
The other force is the the time horizon we have for our investment activities. I have long been inspired by the Egyptians who decided to build the pyramids. These were people that had a vision so grand they knew that only their grandchildren would be there to enjoy the fruits of that vision. As Charles Handy so eloquently writes: “Set your sights on immortality, or as close to it as you can get, and most of the ethical dilemmas sort themselves out. Today the skyscrapers of business tower over the old cathedrals. We must hope that those who build the enterprises within them are cathedral builders in their turn, for if they fail us then we all fail.”
How do we solve for this? Well, there are many things we can discuss. I, for one, like the separation of the Chairman and CEO. I grew up in Europe where this is more common and I believe it is a good practice. It is becoming more en vogue here too. Furthermore, I am also skeptical of the current premium we seem to place on people making money in the short term. Perhaps it is my Swedish upbringing but I tend to value and appreciate long-term shareholder creation over short-term. I know there are benefits to both worlds but if you look at where most wealth has been created in the past 5 years we seem to be overdosing on hedge funds. We must be careful what we celebrate. It sends the wrong signal to our next generation. What if they all wanted to be come hedge fund managers? I am afraid many of them do and that is not a recipe for a sustainable future.