Tuesday, April 26, 2011

Mistaking Reputation For Integrity

Steven M. Davidoff, The DealBook Professor at the NY Times, decries that Wall Street firms' reputations are dying as they increase in size and sophistication.  He laments the dearth of prosecutions following the financial collapse of '08, and cites that as evidence that "People simply don't matter as much on Wall Street as they used to.  Instead size and technology carry the day." 

That's not the impression Noman gets from reading accounts of Lehman Brothers' demise, or Bear Stearns' collapse.  In those stories, Dick Fuld and Jimmy Cayne's personal foibles and prudential failures were directly responsible for their firm's downfalls.  To say that too few people have been prosecuted for the debacle, is not the same as to say that size and technology are more important than people.  Recent problems could have been averted had more Wall Street bankers (and D.C. politicians and regulators) had more character, virtues, and integrity.
All of this means that reputation is not much of a factor in corporate America.
This creates problems. In the absence of reputation, the government and regulators act as substitutes to ensure appropriate conduct. The government becomes the enforcer through civil and criminal actions for law-breaking. So what you get is more law to cover for lost reputation.
Those who criticize the Dodd-Frank Act for its 2,000-plus pages should realize that this is partly a consequence of the death of reputation on Wall Street.
There not only needs to be more law, but also a will to prosecute. As has been noted by many, financial crisis prosecutions are few.
But there may be no financial prosecutions because there is no law-breaking. It is here where reputation is still needed. Reputation is an important enforcement mechanism. Reputational sanctions ensure people act appropriately and fill the gap between poor or unethical conduct and law-breaking. It ensures that people are penalized for their mistakes and inappropriate behavior. It is the most important of oils that ensures that the capital markets work.
Law, or external control, grows as ethics, or internal control, recedes.  The former is a necessary corrective to problems that arise from the latter's absence.  Professor Davidoff has confused reputation for ethics--a frequent confusion in today's executive suites.

Which counts for more: looking good or being good?  It's an old debate that readers of Plato's Republic and Gorgias are familiar with.  Professor Davidoff has taken the worst side of it: Thrasymachus, Glaucon, Callicles and Polus's side.  Socrates won the Western mind, if not the day, by arguing that it is preferable to be good, rather than merely be thought good, and to suffer injustice rather than commit it, for the good of the soul. All things being equal, people of good soul will also be people of good reputation.  But, that is not necessarily the case.

The real problem with size (money) and technology is that reputation can be bought with a big enough budget, and sophisticated enough advertisements.  Companies, and people, can make themselves look good when they aren't.  Note that GE, a slimy chameleon of a company, is trumpeting its free-market bona fides--earned when Ronald Reagan was preaching capitalism's virtues as GE's corporate spokesman--at the same time that it's playing footsies with Mr. Obama's government.  The President himself assures us that CEO Immelt's proximity to his ear guarantees that D.C. will be market/business friendly, and not just GE friendly.  My guess is that more people will believe the advertisements and flattering media coverage than the corporatist money & power grab that GE/DC are performing before their very eyes.

Davidoff adresses a real problem: there are insufficient deterrents--mostly internal, interior to the person--to keep Wall Streeter's straight.  Unfortunately, he has misdiagnosed the cause.  What he seems to regret is the lack of stigma attached to reckless Wall Street misbehavior.  Rather than lament the decline of reputation's importance, he should denounce it's triumph over ethics: the only power capable in a free society of arresting abberant human behavior.  In other words, too many people in our image/media drenched milieu have chosen the Ring of Gyges (see the Republic, Bk 2, 2.359a–2.360d) instead of the way of self-control; Glaucon over Socrates.

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