Regulating corporate psychopaths

Corporate psychopaths are still occupying positions of power, says Brian Basham. Not only that, but at least one investment bank was actively recruiting them, he claims.

Should we be surprised? Not really. After all, as Joel Bakan said, if corporations really were people, they would be regarded as psychopaths. The legal duties on directors to pursue profit and shareholder value mean that corporations often behave in a way that is so selfish it would be regarded as pathological in a real person.

In some situations, the attributes of psychopaths can be quite useful. If I were involved in a turf war with a neighbouring clan, fighting my way through Normandy in 1944 or even needing to sack a lot of people quickly with a minimum of fuss, having someone on my team whose heart-rate and sweat level barely changed when faced with terrifying threats would be a distinct advantage. Psychopaths walk towards the sort of situations which have most of us running in the opposite direction.

So, when there are millions to be made and lost with the click of a mouse, who better to employ than someone with ice-cold calm and very little empathy. If your strategy is to make as much money as you can in as short a time, you need people who will push mortgages at customers who can’t afford them, buy up and asset-strip companies, package up high-risk debt with triple-A assets and sell it on or pile into asset bubbles and make a killing. It makes sense to recruit people with nerves of steel and no remorse, then reward them to do more of what comes naturally to them anyway.

This may not have been a good strategy for the long-term future of the banks or for the wider economy but no-one was thinking too much about that in the mid 2000s. Given the business strategies at the time, the recruitment and reward strategies which fell out of them did exactly what they were supposed to do.

What should we do about psychopaths running banks and other corporations? Same as we do for psychopaths in any other context. Contain them and limit the damage they can do.

Banks (and others) hell-bent on making huge amounts of money in as short a time as possible will inevitably employ people who, even if they are not clinically diagnosed as psychopaths, share some of the same characteristics. Just as we have laws and law enforcers to protect us from psychopathic gangsters, so we must have laws to protect us from the worst excesses of the corporate world. And institutions with the power and political backing to enforce those laws. That’s what we have regulation for. The mistake was assuming that these hugely powerful organisations could be left to police themselves.

As Mr Basham concludes:

In attempting to understand the complexities of what went wrong in the years leading to 2008, I’ve developed a rule: “In an unregulated world, the least-principled people rise to the top.” And there are none who are less principled than corporate psychopaths.

All the more reason, then, not to have an unregulated world.

Update: More on this theme: William D. Cohan’s Bloomberg piece, “Did Psychopaths Take Over Wall Street Asylum?” and Clive Boddy’s article in the Journal of Business Ethics,
“The Corporate Psychopaths Theory of the Global Financial Crisis.”

About these ads
This entry was posted in Uncategorized. Bookmark the permalink.

24 Responses to Regulating corporate psychopaths

  1. Pingback: Regulating corporate psychopaths - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. needs2cash says:

    The 2006 Companies Act requires more of company directors to promote the success of their company beyond what is stated in this post. Directors must also consider the long-term consequences of decisions, including:
    - the interests of employees
    - the need to foster the company’s business relationships with suppliers, customers and others
    - the impact on the community and the environment
    - the desire to maintain a reputation for high standards of business conduct

    I suggest that knowing this should prompt two questions:
    1. Have we seen any regulations to enforce this Act?
    2. Have we seen any evidence of enforcement of this Act?

    Perhaps this needs more work than an attention grabbing post?

  3. The directors need only consider the consequences of decisions on secondary stakeholders, eg the employees. There is nothing to say that their interests must be promoted and in any case the interests of secondary stakeholders are always subordinated to those of the shareholders. The law requires that shareholders’ interests rank first. The 2006 Act, at least in respect of directors’ duties to employees, changed nothing – this notional duty to consider employees was contained in the 1985 Companies Act.

    Psychopathy is a personality disorder where the individual is unable to feed empathy for others and has no conscience. Directors of large public companies seem to fit this description quite well. They have little compunction about making large chunks of their workforce redundant. Nor do they exhibit much conscience when they steal from the shareholders to pay themselves exorbitant sums in remuneration. We need to remember that these directors are not entrepreneurs, they are mere managers with almost absolute power over their fiefdoms.

    Personally, I think we should look towards the Rhineland model for corporate governance, sometimes known as co-determination. Employees and other stakeholders sit on the supervisory board and monitor, perhaps veto, the decisions of the executive board. The German economic miracle was built on this model.

  4. Niki says:

    Thought-provoking and well-written. Have you read ‘Snakes In Suits: When Psychopaths Go To Work’ by Paul Babiak and Robert Hare? I recommend it for further consideration on this issue.

  5. Needs2Cash says:

    Stephen,

    Let us please see the corresponding requirements you claim are in the superseded Act.

    Does anyone have the answers to my two questions?

    Caring for all shareholders while abusing customers, employees, the community and the environment is not caring fairly for all the shareholders.

    Agreed, we need to ensure the 2006 Act is enforced.

  6. @Needs2Cash

    Companies Act 1985, s 309 provides that:

    (1) The matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company’s employees in general, as well as the interests oh its members

    End of extract.

    The duty to consider the interests of employees is not owed to, and is not enforceable by, the employees themselves.

  7. Needs2Cash says:

    Yes, the employees would have to sue for compliance with the Act. This why I agree with you on the German model.

    I see no mention of customers, community or environment in the superseded Act In the absence of effective regulation these entities would also have to sue.

    But at least all four entities and the long-term shareholders can now can sue for breach of the 2006 Act.

    What is the regulator doing with this Act?

  8. @Needs2Cash

    Although CA 2006 repealed CA1985 s 309, I do not believe there is any substantive difference. To illustrate, suppose the directors wish to close down a subsidiary in the UK and to make the entire work force redundant. Clearly, this is not in the interests of the employees. Can they sue the company for breach of duty? Real world experience tells me they would lose and would be advised by counsel accordingly. The directors would argue a business case for the closure, that the closure was necessary to protect shareholder value and that the employees’ interests were considered but there was no alternative. It is a brave judge indeed who would seek to substitute their judgement about the business for the directors’. Hence no change from CA 1985 s 309.

  9. @Needs2Cash

    I never said that CA1985 said anything about other stakeholders or the environment, only that a duty to employees was owed.

  10. @NeedstoCash

    Has the relevant section of the 2006 Act commenced yet?

  11. Needs2Cash says:

    Keeping a loss-making business open helps no one. Surely the employees need their work to add value?

  12. @Needs2Cash

    It may not be loss making. It may be more profitable to relocate to a cheap labour location such as China.

    Anyway, you make my point for me. The directors must act in the interests in the shareholders first before the interests of the employees are considered. The interests of shareholders are promoted, but the interests of employees are considered or taken into account. Has always been thus.

  13. Needs2Cash says:

    Excuse me for thinking you said the 2006 Act was no better than the 1985 Act.

    I am not sure when this provision of the 2006 Act comes into force. I must say I thought it was already the law.

    Has it spawned any regulations yet?

  14. Needs2Cash says:

    My argument is much broader than employees versus long-term shareholders. For thirty years we have had the opportunity to ensure we were trained well enough for our work to add enough value to look after our families, our communities and ourselves.

    What did we do with that time?

  15. @Needs2Cash

    On first reading, as regards employees there seems to be no difference between the Acts. However, if the 2006 Act empowers employees to sue a company for breach of duty then this is a difference.

    I am not sure that the relevant section of the 2006 Act has commenced yet. It may that you are correct and when it does come into effect there will be employee sponsored litigation against companies. This will be a radical departure if it happens. The litigation will result in case law, not regulations. The case law will bind companies.

    On the other hand,the relevant section of the 2006 Act may have come into effect and that nothing has changed, at least in respect to employees.

  16. @Need2Cash

    Acts of parliament often commence in stages, section by section. So some of the 2006 Act may be in force, and some may be waiting to come into force.

  17. Needs2Cash says:

    Surely regulations should be issued between the Act and case law?

  18. Kevin Ball says:

    ‘All the more reason, then, not to have an unregulated world’.

    Hear, hear. Look at how well the Soviet regulation of the market stopped psychopathic managerial behaviour. Look at how few incidents of psychopathic managerial behaviour you can find in the NHS or other not-for-profit environments. Look at how well regulating crime through the law has stopped mafiosi. Regulation is the right answer, for sure.

    People are pigs, Rick. Regulation just makes them clever pigs. Environment and culture change is long, slow, difficult and politically unpalatable. But it is the only effective answer.

    • Rick says:

      Kevin – I don’t think anyone has ever claimed that regulation stops nasty people altogether, but it does contain them. Without regulations and the sanctions that go with them, you’d get a lot more nasty stuff going on.

      Changing environments, culture, education and persuasion are all good things but they take time. In the meantime, something else needs to be there to contain the pigs.Even if they are clever pigs, the rules will slow them down.

  19. @KevinBall

    Regulation is an effective way of curbing excesses. Most people respect the law and rules and will follow them. Those that don’t will lose their positions and be punished if they get caught.

  20. Needs2Cash says:

    Yes, sorry – I was using the American term for rule making based on Statutes or Acts of Parliament.

  21. Dipper says:

    Good post … the cult of Leadership has a lot to answer for. The examples in banks and other corporations such as Enron demonstrate that unregulated power in Chief executives often results in executives getting very rich at the expense of shareholders. We now see the same cult developing in our schools. Head Teachers are the key to great schools we are told. More power to head teachers! This must mean less powers to others of course …

    There are alternatives. More power can be vested in the non-executive arm, and we should ask where all the non-execs were in the banking crisis. And more power can be vested in the senior executives in companies.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s