Most of us like to think of ourselves as rugged individualists – people who don’t run with the herd. The reality is less romantic: As countless bubbles have shown – from Dutch tulip mania in the 17th century to inflated property prices in the past decade – the prospect of a quick buck means there’s usually no shortage of people happy to get swept along.
The financial crisis illustrated the risks of such herd behaviour. But it also cast a light on another sort of dangerous collective thinking – groupthink. Unlike herd behaviour – where people, businesses or institutions follow each other blindly – groupthink happens within institutions. In effect, because of real or imagined pressure, employees swallow their doubts and allow their thinking to fall into line with the dominant view. In recent months, several reports have exposed how groupthink allowed regulators and officials to ignore alarm bells in the run up to the crisis.
And it didn’t just happen at national level – even the IMF has admitted that its internal culture tended to silence dissent. In a commendably frank report, the IMF’s evaluation office says one reason why the organisation failed to identify the mounting risks to the global economy was “a high degree of groupthink” and “an institutional culture that discourages contrarian views”.
“The prevailing view among IMF staff – a cohesive group of macroeconomists – was that market discipline and self-regulation would be sufficient to stave off serious problems in financial institutions,” the report says. “They also believed that crises were unlikely to happen in advanced economies, where ‘sophisticated’ financial markets could thrive safely with minimal regulation of a large and growing portion of the financial system.”
Although the term itself isn’t used, groupthink also raises its head in the report from the Financial Crisis Inquiry Commission, which investigated the crisis in the United States. It says that too often, regulators “lacked the political will – in a political and ideological environment that constrained it – as well as the fortitude to critically challenge the institutions and the entire system they were entrusted to oversee.”
The report also shows how the pressure to confirm wasn’t just imagined. At the ratings agency Moody’s, company president Brian Clarkson ruled with an iron fist: “According to some former Moody’s employees, Clarkson’s management style left little room for discussion or dissent. [Gary Witt, a former Moody’s employee] referred to Clarkson as the ‘dictator’ of Moody’s and said that if he asked an employee to do something, ‘either you comply with his request or you start looking for another job.’” The report, by the way, is a terrific read.
And groupthink is one of the factors – along with herd behaviour – fingered in a report on Ireland’s crisis by the Finnish banking expert, Peter Nyberg. In banks and financial institutions, it says, “diverging views or initiatives were often not appreciated and only occasionally sanctioned.” Among the regulators, it says of the Central Bank, for example, that there “are signs that, reinforced by the relatively hierarchical structure of the [Bank], a climate of self-censorship had become prevalent”.
Of course, groupthink alone didn’t cause the crisis. Still, it would be foolish not to think about it can be addressed. The reports offer some thoughts on how that can be done: Among a series of recommendations, the IMF report says staff should be encouraged “to be more candid about the ‘known unknowns,’ to be more ready to challenge their own preconceptions” and that managers “should encourage staff to ask probing questions …”. The Nyberg report says “it must become respectable and welcome to express professionally argued contrarian views…”.
Right now, when regulators and banks are still feeling spooked in the wake of the crisis, there’s probably an appetite for contrarian views. But that may not last forever. The real test of whether dissent is really welcome will come in the next boom, or, more likely, the next bubble.
Innovation is sometimes thought of solely in terms of new inventions. But, as the OECD’s Andrew Wyckoff explains, it’s much more than that – Apple’s iPod was innovative, not because it contained much in the way of new technology but because of clever design and shrewd marketing.
That sort of innovation can drive economic growth. As the OECD’s Innovation Strategy demonstrates, there are real obstacles to overcome in many countries first.
Should we read anything into the fact that the three panelists in the session on Business ethics: Restoring trust were all women?
In the face of what discussant Roland Schatz, president of Media Tenor, called a “trust meltdown”, the panelists and other discussants insisted that restoring trust and promoting ethics in business must be a universal issue, and one that must also involve the financial industry. As Amy Domini, founder and CEO of Domini Social Investments said, “The role of finance is pivotal to the success of the planet. If finance is working against the goals of human dignity and ecological sustainability, then governments and civil society will be incapable of achieving those goals.”
Anne-Catherine Husson-Traoré, CEO of Novethic, noted that there are already reams of rules and regulations on ethical business practices, the problem is that they are often not enforced and no sanctions are applied if they’re breached. Agnes Jongerius, president of the Dutch FNV labour union agreed, but argued that new regulations were also needed: “The G20 countries are not delivering what they promised in London and in Pittsburgh,” she said. “They have a very short time to deliver new rules for the financial world, for business ethics, for real corporate social responsibility.” She urged the OECD to strengthen its guidelines on multinational enterprises. “If you have good rules but none are applied, we won’t make the progress we need to make.”
Amy Domini stressed the tactical role that shareholders can play in influencing corporate behaviour. But first they have to assume their responsibility. “Nobody owns corporate America anymore,” she said, citing the preponderance of mutual funds in the US that have no real stake in the individual companies in which they invest. She suggested that European unions, which are far stronger than those in the US, and particularly their pension funds, could drive changes corporate behaviour. “Unions need to have a more robust opinion of their own influence,” she said.
But Edward F. Greene, partner at the law firm Cleary Gottlieb Steen & Hamilton, was not convinced. For him, it was governments and international organisations that could exert the most influence. “If we are going to manage financial institutions, we’re going to have to have much more sophisticated regulators in place and a broader regulatory system to identify and control risk.”
Carla Coletti, the director of Trade, Employment and Development at the International Metwalworkers’ Federation, was passionate: “There is no more time for unilateral good will. Enough public relations; enough window dressing; enough voluntary codes. They are dangerous because they give the impression that something is being done.” She urged ministers who will be meeting at the OECD ministerial council meeting later today and tomorrow to “take bold decisions” to require businesses to accept their ethical responsibilities.
We are publishing From Crisis to Recovery, a new book from the OECD Insights series here on the blog, chapter-by-chapter. This book traces the roots and the course of the crisis, how it has affected jobs, pensions and trade, while charting the prospects for recovery.
These chapters are “works in progress” and their content will evolve. Reader comments are encouraged and will be used in shaping the book.
Is there – to misquote William Shakespeare – something rotten with the state of capitalism? In the wake of the financial crisis, many people seem to think there is. According to a poll commissioned by the BBC World Service of people in 27 countries, only around one in ten believed capitalism works well. In just two of the surveyed countries did that number rise above one in five – 25% in the United States and 21% in Pakistan.
Unhappy as people were, the poll showed little appetite for throwing out capitalism altogether – fewer than one in four supported that notion. But people do want change – reform and regulation that will check capitalism’s worst excesses.
That view is shared by many political leaders. In 2009, Germany’s Chancellor Angela Merkel and the Netherlands’ then-Prime Minister Jan Peter Balkenende argued that “it is clear that over the past few decades, as the financial system has globalised at unprecedented speed, the various systems of rules and of rules and supervision have not kept pace”. In the United States, President Barack Obama declared that “we need strong rules of the road to guard against the kind of systemic risks that we’ve seen”. In the United Kingdom, Prime Minister Gordon Brown said that “instead of a globalisation that threatens to become values-free and rules-free, we need a world of shared global rules founded on shared global values”.
But what form should those rules and values take? How can we best harness capitalism’s power to deliver innovation and satisfy our material needs while minimising its tendency to go off the rails from time to time.
This chapter looks at some of the themes that have emerged in reform and regulation since the crisis began, focusing on three main areas:
►Regulating financial markets
►Tackling tax evasion, and
►Creating a “global standard” for ethical behaviour
What – or who – caused the crisis? Slate offers not one but 15 answers to that question here. But if you’d like a more official response, you might like to keep an eye on the Financial Crisis Inquiry Commission (FCIC) in the United States, which is due to begin public hearings this week. The ten-member commission was set up by Congress with a sweeping mandate to investigate the causes of the crisis – everything from the possible role of fraud and abuse in the financial sector to the way bankers are paid.
There are precedents for this sort of probe. In the early 1930s, the U.S. Senate’s Pecora Commission investigated the causes of the Great Depression, and “unearthed a secret financial history of the 1920s, demystifying the assorted frauds, scams and abuses that culminated in the 1929 crash”, according to Ron Chernow. That investigation had a long-term impact on the U.S. financial sector, leading to the establishment of the Securities and Exchange Commission (SEC) and the separation of commercial and investigation banking.
Whether the FCIC will have the same impact remains to be seen, but its chairman, Phil Angelides, has made it clear that he wants the commission to ask – and answer – some tough questions. “You have millions of people unemployed, millions have lost their homes, and Wall Street is having a record year with record profits and record bonuses,” he told ABC News. “People want to understand why.” What questions should the commission ask? The New York Times and The Huffington Post have some suggestions.
The Commission is due to report by mid-December 2010, but members have indicated they plan to post important findings on their website (under construction) before then.