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What Are Bankers Afraid Of?

Goldman Sachs is holding its annual meeting in Texas, though it is based in New York. Citigroup met in St. Louis. Wells Fargo, based in San Francisco, met in San Antonio. Why?

As The New York Times noted, “banks appear to some to be running away from their shareholders.” The choice of meeting sites is “meant to keep the attendance low because they often require shareholders to travel long distances to attend.” (See “Telling Off the C.E.O., Once a Year.”)

To be sure, banks have had a rough year, and irate shareholders are angry at the compensation packages for top bankers, not to mention the stiff fines for their illegal practices. Under those circumstances, shareholders often use the meeting to vent their criticisms, and give bank officers a tough time.

But is that why? Are the bankers fleeing a few harsh words? Hard to believe that aggressive, hard-nosed big Wall Street personalities could be so delicate.

Or is this a sign of our new class system? Are they so used to living in their gated communities and flying in their private jets that they actually have lost their capacity to tolerate protest. Is this a new entitlement, a sign of their new aesthetic sensibility?

And the Risk

Charlie Munger, Vice Chairman of Berkshire-Hathaway, suggests that “instead of filling your ranks with lawyers and compliance people, hire people that you actually trust and let them do their job.” A radically simple idea – and a good one.

He noted that, “By the standards of the rest of the world, we overtrust. So far it has worked very well for us. Some would see it as weakness.” But the key to understanding his point is understanding trust.

First of all it’s not simply being naïve. It’s not closing your eyes and falling backwards into the arms of a stranger. In every case it involves an informal version of what lawyers refer to a due diligence, looking into a person’s history of being reliable and responsible, examining what you already know about the person.

That doesn’t mean interviewing their associates or poring over their financial records. But it does mean making an assessment based on your experience of them and that, in turn, requires being clear-eyed as you size up the person’s capacity to be honest and truthful. The work involves not only being vigilant about the other person’s history, but, even more important, monitoring your own desire to trust the person or your inclination to give them the benefit of a doubt because they remind you of someone emotionally close to you like a parent or a brother.

What do you really know about them? What are your doubts and fears? Munger said: “We just try to operate in a seamless web of deserved trust and be careful whom we trust.” The operative word here is “deserved.”

In its story, The New York Times noted: “A widely circulated study by two professors at the University of Zurich supports Mr. Munger’s thesis: ‘Conventional wisdom suggests more monitoring and sanctioning of management. We argue that these efforts will create a governance structure for crooks,’ wrote the professors, Margit Osterloh and Bruno S. Frey. “Instead of solving the problem, they make it worse. Selfish extrinsic motivation is reinforced.”

One reason for that is that formal procedures and investigations lead you to doubt or minimize your own more subjective intuitions. But, more importantly, they act as challenges to competitive, over-achievers to find the chinks in your armor, the loopholes through which they will drive their trucks. This is, no doubt, what the Zurich professors concluded. For competitive investors it becomes a game, like the hedge managers, seeking new ways to defeat the rules designed by regulators to level the playing field.

Mr. Munger, in a previous annual meeting, contended that the best way to hold managers accountable is to make them eat their own cooking. (See, “Berkshire’s Radical Strategy: Trust.”) That’s a homely analogy, suitable to Omaha. Wall Street bankers might need a stronger punishment than indigestion.a

Warren Buffett, Berkshire-Hathaways’ CEO, has been known to be slow to change his mind, and that can be a problem. If you take the time and make the personal investment to trust the people you do business with, you get involved. It’s harder to change your mind and walk away. And it should be. An honest mistake is no reason to conclude that someone is not to be trusted.

Do We Want to Know What We Know?

Researchers know that we can be much better at detecting lies than we are – and that should not be so surprising given that polygraphs can do it. The information is stored in our bodies and brains, but the statistics that measure our conscious judgments show us to be miserable failures.

The New York Times quoted Leanne ten Brinke: “our own bodies know more than our conscious minds who is lying.” (See “The Search for Our Inner Lie Detectors.”)

So what is consciousness doing with the information to make it unavailable to us?

The answer has to be that we don’t want to know it explicitly. We don’t want the burden of making those judgments.

To be sure, our knowledge shows when we avoid looking others directly in the eye, when we shuffle our feet or change the subject. We are uneasy in the presence of lies and we sometimes act on it. But openly acknowledging them is another matter.

“Dr. ten Brinke speculated that we tell one another little lies all the time — for survival, reproductive strategy, and so on — and that part of getting along socially is being able to let those harmless lies escape notice.”

I would add that knowing someone is lying confers a burden of responsibility. What should we do with that knowledge? Whom do we tell?

So perhaps it is better not to know. Perhaps consciousness spares us choices we don’t want to make.

Myths of Competition

The Wall Street Journal presented some findings about the “executive brain,” based on neuro-imaging, a technique for observing the brain’s activity while engaged in thinking. It turns out that the executive brain is no different from any other brain. The suggestions it makes for effective performance apply to all forms of thinking.

The key conclusion is that executives should disentangle themselves from some of the myths of competition that have become established among corporate leaders, myths that actually turn out to be counter-productive.

One myth is that the pressure of deadlines concentrates the mind. It found that a deadline “more often limits our thinking and can lead to much worse decision making.”

Richard Boyatzis, a professor at Case Western Reserve University, along with colleague Anthony Jack and others, has found that a tight deadline increases people’s urgency and stress levels. These people show more activity in the brain’s “task positive” network … But it’s not the part of the brain that comes up with original ideas.”
The reason is obvious, once you think about it. If you subject people to the pressure of anxiety, the mind’s priority becomes reducing that pressure. Yes, ultimately solving the problem will reduce it, but short term solutions like distractions and denials work faster – and letting go of familiar approaches, tried and true solutions, become harder and harder to resist.

A second management myth is that effective managers are super-rational, focused on facts. But Boyatzis and his researchers found: “The best leaders seem to lean on their emotions much more than logic.”

That too is not difficult to understand. Our emotions are an important source of information, and often lead us to an understanding of problems directly and intuitively. One researcher noted “that people who are good at strategy are better at sensing or feeling their way through strategies, rather than relying only on logic and being rational.”

Another myth is that “you have to be negative and tough to get things done.” But “the data says that’s just not true at a very basic human level”.

“The best leaders,” Dr. Boyatzis says, “are good at motivating people with things like encouragement, praise and rewards—thereby creating a strong emotional bond and sense of purpose among employees.” (See, “The Inner Workings of the Executive Brain.”)

These are not such surprising conclusions, so where did the myths debunked by the research come from? And what made them seem so true?

Management used to be thought of as “command and control.” Leaders sitting at the top of hierarchies, like generals at the head of armies, decided what needed to be done and issued orders to make it happen. But we are coming to realize that intelligence is a distributed quality, and often does not reside at the top, certainly not exclusively. Moreover, people perform better if engaged in understanding the problems they work on, not just in trying to please the boss. Indeed, the intelligence of leaders is often compromised because they are under pressure to perform and that very pressure makes it harder to think creatively.

So if you realize that intelligence is distributed throughout an organization, the job of leadership becomes to motivate and mobilize intelligence where ever it is.

So organizations are less and less like armies, and more like insurgents and guerillas, seeing what needs to be done and acting on their own initiative.

The Deck is Stacked

“I could be an insider or I could be an outsider. Outsiders can say whatever they want. But people on the inside don’t listen to them.” This is the advice that Larry Summers, then Director of the National Economic Council, gave Elizabeth Warren, when she was chairman of the committee investigating TARP, the Troubled Asset Relief Program.

“Insiders, however, get lots of access and a chance to push their ideas. People — powerful people — listen to what they have to say. But insiders also understand one unbreakable rule: They don’t criticize other insiders.”

Warren was passed over as the first Director of the Consumer Protection Agency, though she had been its major architect. Perhaps that was why she chose to take an independent course and run for the Senate from Massachusetts – or was she taking Summer’s advice to heart?

As senator it will hardly be her last chance to become an insider. The revolving door between legislators and lobbyists guarantees lucrative careers.

Interviewed by Gretchen Morgenson for The New York Times, she said with some heat: “The game is rigged and the American people know that. They get it right down to their toes.” (See, “From Outside or Inside, the Deck Looks Stacked.”)

That doesn’t sound like someone who wants to be an insider.