Crony capitalism, shame, a sense of stewardship, virtuous capitalism, the difference between being pro-market and pro-business.
We should be noodling these concepts, but instead we're wading through unproductive, highly polarized arguments about LIBOR, Dodd-Frank, Sarbanes-Oxley (happy birthday, SOX) and money-laundering.
But the latter set of rules and events are forcing us to confront the former set of concepts, which are being examined in a growing collection of soul-searching writing on how capitalism is, and should, be practiced. This rethinking has serious implications on how companies practice risk management.
In a recent Wall Street Journal column, Charles Murray says capitalism's image problem stems in large part from:
- The rise of collusive capitalism;
- The segregation of capitalism from virtue; and
- The deterioration of a sense of stewardship among business leaders.
Collusive capitalism, Murray explains, comes in two varieties: crony capitalism in which "the people on top take care of each other at shareholder expense (search on 'golden parachutes') and "collusion engendered by government." Examples of these practices include instances where a single corporation creates a competitive advantage through the cooperation of regulators or politicians (Murray points to earmarks) as well as situations in which "an industrywide potential for profit that would not exist in the absence of government subsidies or regulations" are created (he points to "ethanol used to fuel cars and low-interest mortgages for people who are unlikely to pay them back").
When Murray explains that accepting the "concept of virtue requires that you believe some ways of behaving are right and others are wrong always and everywhere," it is refreshing (at least to my ears) to hear the notion of values -- of doing what's right, of considering the impact of a decision on elements well beyond this moment and the bottom line -- in a business context. But there is a fly in the ointment: those business leaders who know the difference between right and wrong do not speak up (at least not loudly enough) when short-sighted, unethical decision-making exerts staggering costs on business and society.
"Capitalists who behave honorably and with restraint no longer have either the platform or the vocabulary to preach their own standards and to condemn capitalists who behave dishonorably and recklessly," Murray adds. "And so capitalism's reputation has fallen on hard times and the principled case for capitalism must be made anew."
I would say that the need to make the case for principled capitalism is near an all-time high.
One of the obstacles to this case being made, notes Luigi Zingales, University of Chicago Booth School of Business professor, is that business schools fall short when it comes to educating students on the link between capitalism and morality. Specifically b-school students should be taught to: a) identify when a decision helps an organization but extracts a cost to society; and b) how to respond (with something other than a shrug) if and when that occurs.
In his new book A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (Basic Books, 2012), Zingales notes that our legislators and regulators also fall short by too frequently creating laws and rules that are "pro-business" (benefitting individual companies or industries at high societal costs) rather than "pro-market" (regulation that considers societal costs and delivers broader benefits to many businesses).
Zingales' point on societal costs ties directly to risk management. Any good risk manager will tell you that effective risk management considers the upside and downside of any event or issue. The way business, including risk management, is currently being taught at many, if not most, business schools does not address a broad enough expanse of potential down side.
Similarly, many risk management capabilities within companies do not address the concept of risk holistically enough. Does your risk management capability address:
- Legal/compliant activities that damage external stakeholders?
- Virtuous behavior (a definition of what it is, practical examples of it, and how it can be instilled)?
LIBOR, money-laundering and the inevitable regulatory response to these transgressions are about risk, but they are also about something much larger than risk, as Murray concludes:
"If it is necessary to remind the middle class and working class that the rich are not their enemies, it is equally necessary to remind the most successful among us that their obligations are not to be measured in terms of their tax bills," he writes. "Their principled stewardship can nurture and restore our heritage of liberty. Their indifference to that heritage can destroy it."