Sunday, November 23, 2008

For Lack of a Better Word

"I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentleman, that greed, for lack of a better word, is good."

-- Gordon Gecko, in the 1987 film "Wall Street."

Over the last several months, many explanations have been offered for the causes of the current economic crisis, including (but certainly not limited to):

  • Subprime mortgages that allowed people without jobs to buys homes they couldn't afford.
  • Speculation in the housing market, where a seemingly unending cycle of "buy, upgrade, and resell for more money" eventually created a market bubble that priced homes beyond the means of average citizens, even those with jobs.
  • Lax regulation that created complicated financial instruments, such credit default swaps (CDS), that were difficult, if not impossible for anyone to understand without carefully reading a 400 page prospectus.
  • The financial companies themselves using CDS's and other instruments to essentially borrow money in order to fund insurance policies on investments they didn't own. These policies were then bundled for sale to other companies, hopefully before the insurance needed to be paid.

I believe these are symptoms of a larger problem, one endemic to our current corporate culture: Greed!

Greed is not a new problem; we've seen it before and we've always chalked it up as an aberration, a blip of instability on the part of individuals, an exception to the rule.

  • The fall of Enron, for example, was blamed on the desire to manipulate the market so that the company's stock price performed better than it deserved to.
  • According to the BBC, Alan Greenspan (then Chairman of the Federal Reserve) attributed the causes of the the 1998 hedge-fund bailout to "a small number of highly sophisticated, very wealthy individuals who had tried to get high rates of return."
  • Likewise, the causes of the Savings & Loan scandal of the 1980's are almost as varied as those attributed to the current crisis and showcase fraud, market manipulation, and a desire to maximize profits beyond those appropriate to the means.

One thread common to all of these scandals is an excessive focus on what is politely called "shareholder value" or (more plainly) "profit." These folks didn't just want the profits they earned, they wanted more. In a sense, they became more interested in strip-mining the wallets of their customers and investors than they were in sustaining their businesses.

In many aspects of our society, we're becoming aware of the importance of sustainable practices. We're now replanting forests so that we'll have timber to harvest in the future. We're trying to create renewable energy sources. And so on.

What if companies began to develop sustainable business models? What if they shifted their focus from just the bottom line to a more balanced approach? What if the value proposition sought to balance shareholder return, customer value, and community (social) impact?

We don't need a financial cop to patrol financial instruments. We don't need an automotive czar to design a better carburetor. We need to develop a better economy, one that balances prices, taxes, and profits. One that recognizes that innovation in services is the appropriate response to fluctuations in the stock price, not innovation in accounting practises.

As we look forward to the new Administration, we can tell our representatives what we expect, we can hold them accountable to those responsibilities, and we can vote with our wallets by supporting companies that engage in fair practices.

Photo credit: 20th Century Fox.

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