Monthly Archives: March 2016

Good ethics are good business

Deng Xiaopeng had a saying > It doesn’t matter whether a cat is white or black, as long as it catches mice < generally taken to be an allusion to the fact that creating national wealth is a outcome which can be achieved by many means. For companies we might consider at times that something similar is the touchstone.

Shareholder value theory suggests that the key, indeed only thing, a company should focus on is maximisation of the value of the company.

This shouldnt mean a relentless focus on shortterm profits, but instead if thought through should give the company management a mandate for steady, slow accumulation of value over time.  But the issue remains open as to how. A part of how companies act is their ethical behavior. Does it matter if a company displays poor ethics or not? And given that a company, while posessed of legal personality, is not a sentient being, how do the morals of the management align and influence the morals of the company.

There is a growing body of evidence that corporate managers characteristics do markedly affect the management styles and thus the corporate outcomes.Firms led by CEO’s who hold pilot licenses tend to be more innovative, without increasing risk. This, it is hypothesised is down to a sensation seeking intrinsic motivation rather than an external pecuniary motivation. US researchers firms managed by executives who grew up during the great depression were found to be much less reliant on debt than those managed by others. Firms managed by those with military experience are seen to pursue more aggressive mergers and investment policies. Companies where CEO or CFOs have previously been employed in companies that have exhibited cashflow difficulties tend to have a more conservative financial structure  – there is a once bitten twice shy effect in action.  Examining an unnamed (but easily guessed) irish banking CEO, Niamh Brennan of UCD uses psychological mapping and demonstrated the growing hubris of the manager as expressed in shareholder correspondence and mapped this to the bank experience. A recent study on hubris provides a strong link between same in managers and the likelihood of firms to engage in earnings management and downright manipulation. There is a lot of work on gender in corporate board settings, with strong evidence that female directors are positives for companies. Firms with younger and male CEO’s tend to be more overconfident and take risks. While this is good for their remuneration the jury remains out on its effect on firms wealth.

A part of the problem with this research is that it is generally not easy to ascertain the personal ethics and morals of managers. Inference rules. Thus a paper on religiosity, widely cited and reported as suggesting that religiosity leads to greater ethical behavior, doesnt examine religious attributes of corporate managers per se but looks at the religiosity of the lowest available area around the HQ and infers from same. Much examination of corporate characteristics remains mired in economic modelling amenable to mathematical and statistical modelling without fully focusing on the personal characteristics.   A couple of recent papers havwe however managed to get inside the managerial black box.

Using data from the Ashley Madison hack the researchers were able to make a clear link. Usage of the site was strongly linked to corporate misbehavior. Weak personal ethics on the part of CEO and CFO level executives– verifiable use of a site designed to facilitate extramarital affairs – were linked to weak corporate ethics. In fact, companies run by Ashley Madison users were more than twice as likely as others to be involved in class action lawsuits or engage in financial statement restatement.

More generally , looking at the number of corporate email addresses used to register on the Ashley Madison site researchers found that companies with higher relative registration were also those that were rated lower by external ethical rating agencies and were more likely to have been the subject of regulatory enforcement.They were also perhaps more innovative, it must be noted.

There is a growing body of research on behavioral ethics as they apply to corporates. Some findings make uncomfortable thinking – ethical failures are not uncommon, ethical failures cascade large failures require the active or tacit compliance of large numbers of actors, we generally think of ourselves as being more ethical than we are, and it is hard to change cultures. Nonetheless, the findings, that personal ethics are linkable to corporate ethics, and that the linkage is clear, should provide a warning to companies. Ethics must begin at the top and the boards and leaders must push through an ethical approach in all things. Doing so is not just good moral behavior but is also good business.

Time to Fire up the Money Helicopter?

helicoptermoneyInsanity, we are told, is doing the same thing time and again and expecting a different solution. By that definition, and no surprise to anyone who has watched the slow motion train wreck that is the Eurozone, the ECB is insane. But, as I have written in 2014, there is a cure.

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Ireland : A picture of health

Health appeared as a big issue in the election. A common tendency is to say “sure we cant keep throwing money at it!”

This presumes, of course, that we have been. And we are “we”. Some we’s are spending more. Theres a creeping privatisation at work from the OECD data.

 

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Irish Health Expenditure vs the OECD 2013 -We’re in Red

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Cognitive biases and Election 2016

news-voter-issuesThe electoral dust has finally settled, and from the wreckage of the coalition we can expect no further survivors. It was a case study in how to lose an election, a mixture of arrogance and tin-eared disconnect combined with a lurking bruised populace (or “whingers” as the Taoiseach would have us known) unwilling to believe that the recovery existed, never mind be kept going.

Behavioural economics has a fair degree of traction now as the driving paradigm of how we shoud interrogate the economy. It has perhaps not yet reached the point where it is the mainstream but it nonetheless has some very useful findings which shed light on the results. A year ago I wrote on the warnings from behavioral economics for the coalition. These warnings have come to pass. 

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