Dangerously narrow views of public – and self – interest

Last week the Financial Reporting Council (FRC), the  body that regulates the accounting  profession in the UK, fined Deloitte L.L.P.  £14 million pounds – a record setting penalty for that body – and issued the firm a severe reprimand, as well as fining  a former director of the firm £250,000 and banning him from  accounting work for three years.  As described in the NY Times,  the case arose from the firm’s work for MG Rover, a  failed automaker, and for the “’Phoenix Four,’ four businessmen who took over the automaker in 2000 and ran it into the ground, taking out millions of pounds for themselves in highly dubious transactions before the company failed.” Although Deloitte had been the company’s auditor it was not the audits that were faulted but the corporate finance work run by the former director – particularly its “very prominent role” in some of the questionable transactions.

In the UK, “ethics rules require accountants to consider the ‘public interest’, but Deloitte argued that this duty was inapplicable to corporate finance work.”  The FRC rejected this argument, noting that, among other things, the applicable rules make no such distinction.   The FRC’s decision on this issue seems correct to me, as one can readily imagine the difficulty clients and others would have in trying to discern whether an employee of an accounting firm was in any given instance being guided by a very high standard of ethicality (as a public interest test entails) or something less.  Indeed, the notion of an ethical carve out would tend to diminish the overall trust the public has in accountants, and that would be bad not only for the profession but – given the key role they play in various aspects of business life – the economy generally.

But is it possible to have an overly narrow view of self interest? Eddie Lampert of Sears may have had just that,  as described by Jonathan Haidt and David Sloan Wilson in their new column  for Forbes –  “Darwin at Work.”   The article is based in part on a recent profile of Lampert by Mina Kimes in  Bloomberg BusinessWeek,  which had noted: “’Lampert runs Sears like a hedge fund portfolio, with dozens of autonomous businesses competing for his attention and money. An outspoken advocate of free-market economics and fan of the novelist Ayn Rand, he created the model because he expected the invisible hand of the market to drive better results. If the company’s leaders were told to act selfishly, he argued, they would run their divisions in a rational manner, boosting overall performance.”

Haidt and Wilson write: “The results have been disastrous, in part because Lampert was ideologically committed to the metaphor of the invisible hand and the associated idea that people are purely selfish. Ideology is a lens – it makes some things more visible, others less so. Lampert’s ideology prevented him from seeing that he was destroying the invisible band – the bond that forms around groups that can trust each other and work together toward shared goals.  Evolution is a different lens – one that we believe brings unparalleled focus and resolution when examining complex human systems. A brief look through the evolutionary lens would have made it obvious how dysfunctional Lampert’s reorganization was likely to be.”

They further note: “Evolution is all about competition, and the dramatic effects that competition has on the structure and behavior of organisms over time. But here’s the key idea: competition occurs at multiple levels simultaneously, and the winner at any one level generally succeeds by suppressing destructive forms of competition at the level below.”  Finally, they suggest that “the next time someone suggests changing the organizational chart, incentives, or culture of your company to ‘align incentives’ or appeal to selfish interests, ask them if they have thought about the full range of motives evolution has bequeathed to our complex species.”

In effect, what Haight and Wilson are doing is identifying a different type of conflict of interest – where an interest – or at least one’s perception of such – conflicts with human nature itself. It is an important area to pursue, and I certainly look forward to reading more of Darwin at Work.

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