Tuesday, March 17, 2009

Freek Vermeulen's analysis of the causes of the crisis

Comparing the current banking crisis with the Enron debacle, with Ahold’s demise or even with the Union Carbide disaster in Bhopal in 1984, London Business School's Freek Vermeulen suggests, in the latest issue of the School's e-newsletter, "London Views", that the common basic causes of these debacles include: over-specialisation, the "myopia of success", social pressure to continue doing what is wrong simply because it is profitable, and what I have called "institutionalised greed" but which Vermeulen explains clearly and at greater length.

He concludes that "More rules and regulations and more quantitative and financial controls are unlikely to solve the problem or prevent similar things from happening in the future. All organizations and people involved in these cases, ranging from top managers to traders and customers, were governed and incentivized by means of quantitative and financial controls. However, today's businesses are too complex to be controlled by rules and financial systems alone".

So what will solve the problem? In his view, "organizations will need to tap into the fundamental human inclination to belong to a community (such as an organization) and the desire to do things for the benefit of that community rather than focus on one's individual, narrow interests. These are alien concepts in the City today, where incentives are geared towards optimizing individual short-term performance. At the same time, company loyalty and a sense of community are all but destroyed by those financial incentives and culture. Yet, when such human desires to contribute to a community are artificially suppressed through narrow financial incentive schemes, weird things can happen".

It is interesting that Vermeulen considers the desire to belong to a community "fundamental". It seems to me that he does not realise the extent to which human motivations in this area have been adapted over the centuries. He regards as "weird" what seem to me to be the natural results of the "narrow financial incentive schemes" as well as what he earlier calls "the structure of the whole corporate system". And he does not ask WHAT has caused the change, whether in "fundamental" motivation or in corporate structures over the last few decades. These are matters which I have addressed elsewhere, in my remarks on the moral makeup of the last three to seven decades, and the reasons for that.

The point to note is that Vermeulen's analysis clearly concurs that such debacles are moral before they are structural, and that such debacles are structural before they are financial. Sphere: Related Content

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