Friday, July 27, 2012

Economic Inequality and Management Scholars: The Challenge Awaits


By Dr. Suhaib Riaz (for BEIF).

An interesting sub-theme on “Institutional Work and the Institutionalization of Inequality” was held at this year’s EGOS (European Group for Organizational Studies) conference in Helsinki. The conveners, Tom Lawrence, John Amis and Kamal Munir, brought together scholars interested in various types of inequalities, with a focus on how these inequalities become institutionalized.

Aalto University, Helsinki.
Venue of EGOS conference
The excellent initiative served to highlight the challenges in the field. At the outset, inequality often remains an add-on issue for management scholars, rather than the core of the investigation, per se. Further, while several types of inequalities are looked at, such as social class, emotional capital, and environmental issues, the burning issue of today, economic inequality in society, receives less attention from management scholars. These observations reflect the wider pattern in the literature.

Within current socio-economic systems, given the primacy of economic resources in providing access to most other resources, such as education, status, environmental resources, etc., it is perhaps no surprise that public attention is focused on where the money is.

Economists and philosophers, in contrast to management scholars, have given more thought to the topic. From John Rawl’s focus on primary goods (sometimes including ‘money’), Amartaya Sen’s highlighting of people’s capabilities, Richard Arneson’s push for opportunities, the field has much debate on what should be equalized, within the broad issue of economic inequality.

This challenge for management scholars is also an opportunity.

The aspects of economic inequalities studied by economists have moved more into the social realm that involves deeper understanding of people, their interactions, and society, as opposed to the earlier focus on more objective commodities. Further, the business organization angle, which is perhaps the most important part of this public issue today, is expectedly missing from the debates. Management scholars are already engaged with social and organizational issues, and are thus in a unique position to bridge the gap.

The conversation and the challenge await.

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This blog post is cross-posted with the Business and Economic Inequality Forum blog

Wednesday, July 18, 2012

Banking as Theatrical Comedy?

In the wake of one crisis after another, the banking and finance industry has entered the realm of popular culture in various interesting ways. A poster in London for the BBC-origin theatrical comedy, Yes Prime Minister, comments on the fall of Bob Diamond, Barclay's CEO, as part of the ongoing LIBOR scandal. Perhaps there is enough material in there for a full-fledged theatrical comedy on Banking...?

On a more serious note, such representations in popular culture also highlight the desperate need for the banking and finance industry to come up with a "society" strategy...a major re-imagining of their role in society along with related cultural changes...




[Photo/Comment: Suhaib Riaz]
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Update: Looks like the comedy idea is already being cashed in on, with Patrick Combs' "Man 1, Bank 0" show: www.man1bank0.com !

Tuesday, July 3, 2012

Numbers Versus Context: How to change the finance industry beyond LIBOR scandal



One of the most relied-upon numbers for the entire financial industry, that impacts loans worth several times the world’s GDP, has been found to be unreliable. Touted as an objective measure of interbank lending rates, LIBOR, is now under investigation for the numerous ways in which it was manipulated for various types of illegal gains. On one hand, bank traders made profits by asking bank submitters to manipulate rates to their advantage; on the other hand, fake lower rates were submitted during crisis times to fool others about the bank’s health.

This is not an isolated incident, and reveals fundamental cultural and ethical problems with the industry as a whole, that my colleagues and I have pointed out earlier. The Financial Times reports that investigations now involve about 20 banks across three continents, and that similar other numbers, such as Tibor (Toyko-based), were targets of attempted manipulation by Citigroup and UBS.

What is the deeper issue here? I would argue this story again raises the issue of what numbers really mean, devoid of proper, detailed context. This problem is specially endemic in the finance industry where numbers are often used to hide, not reveal, the real meaning and context.

The rare media commentator such as Gillian Tett of the Financial Times, does touch upon such issues at times, helped no doubt by her anthropology background:

“Ever since the computing revolution took hold on Wall Street and the City of London in the 1970s, finance has been treated not as an art but a science – and banks have operated as if computer models could not just explain the past but predict the future, too.

Now those “quants” and rocket scientists find themselves at sea. Computer models alone can no longer calculate meaningful probabilities about what will happen next in the eurozone. Instead, what really matters now in places ranging from Finland to Greece are non-quantitative issues…”

The problem is not confined to industry, but also plagues Strategy, and more broadly, Management scholarship. In a field where context should be king, arms length statistical analyses, without due attention to deep context, reign in academic journals.  

Boston College- Venue of Fields Conference
Proper qualitative analysis of the context behind numbers is challenging and time consuming. Fly-by-night management book writers abound, who proclaim the next fad based on some sketchy qualitative data using interviews and conversations. Yet, small islands of rigorous qualitative research do exist. A few weeks ago, at the annual Boston Community Fields Research Conference at Boston College, it was pleasing to see the devotion to deep context research. What still surprises me though, is the limited research of this nature on the finance industry.

Perhaps the most needed scholarship of our times is to take a deep qualitative look at the most important financial industry numbers- to question and understand what they really represent and mean, be it numbers related to complex derivatives, inter-bank loan rates, credit ratings, etc. I would even argue that the industry itself should be part of such transparency efforts, which would be a critical part of fundamentally changing its strained relationship with society. Any takers? 

Saturday, June 23, 2012

The Dual Failure Puzzle

By Dr. Suhaib Riaz.
 MIT Stata Center

A scintillating session at MIT on “social innovation in the public sector” a few days ago made me reflect on what I call the “The dual failure puzzle” - what do you do when societal needs are unmet as there is both market failure and government failure? 

The session was hosted by TiE (The Indus Entrepreneurs) Social Entrepreneurs group and brought together an interesting panel engaged with the practical issues in this field.

The entire discussion highlighted how much excitement there is in the area of building social enterprises. And there seems to be no dearth of problems for which such initiatives could be created; given the large spaces that business or government cannot serve, or can only underserve, e.g. health, utilities, crime, education, etc. in various parts of the world.

An interesting argument was that social entrepreneurship is not something that should be ‘done’ to people; but rather, a shift in mindset is needed that would enable, say an informal advisor in a low income migrant neighborhood, see herself as a social entrepreneur. Perhaps the word ‘entrepreneur’ itself has connotations that are scary for some people and prevents their systematic engagement with such efforts.

The biggest challenge that came up is that of scale. While social entrepreneurs might have the know-how for fixing intractable social problems, how do they scale activities to the level of governments or large corporations? Should they look to innovative funding models involving financial markets? Partnerships with governments seemed to be an option. I was also reminded of Mohammad Yunus’s Social Business ideas for dealing with the challenge of scale.

I would say this attention to social enterprise (also including hybrid and newly legally recognized ‘benefit’ corporations), is a reflection of much more fundamental problems in existing economies. It should not be seen just as a patchwork, but as a questioning of the philosophy underlying current institutional structures in the economy.

For a long time, the focus has been on for-profits because the often unstated but underlying assumption has been that firms competing with each other to make more profits will, in the ultimate impact, benefit society. On the other hand, in countries where such competition was largely stifled, we have seen some pretty negative societal consequences as well.

Personally, for those with government failure experiences in places like India, it is challenging to reconcile with increased roles for government there. And yet, one has also seen a whole different type of problem with the business and finance organizations recently in many parts of the world.

Given these scenarios, I wonder if it is possible that much criticism of government or business is at some level quite superficial. Whatever are the characteristics of disliked governments are the same as those of disliked businesses: Inefficiencies, corruption, abuse of power over those they are meant to serve (customers, stakeholders - taxpayers and society). It seems these can exist anywhere in any form of organization. More importantly, wouldn’t these problems manifest again in some partnerships between governments and business, if the basic models of each remain the same?

Can there be management models that root out these problems per se, instead of simply pointing blame on government or business? What kind of imaginative solutions are needed to overcome these challenges and solve the dual failure puzzle? Could some social enterprises be on the verge of discovering such models?

Academically, the field is burgeoning with new research, as I’m learning by working with colleagues in the area. There are now research programs devoted to the theme; my own institution is launching a PhD program in Organizations and Social Change. This is certainly an area to watch for its intellectual and practical challenges. On another note, I wonder how many such initiatives currently address the problem of economic inequality that my colleagues and I are working on...but more on that another time. 

Sunday, May 6, 2012

Political Turmoil in Europe: Time to Re-evaluate Business Strategies?



Surprising political outcomes from elections around the world, particularly in Europe, are in the news. In France, Francois Hollande’s victory brings a socialist government to power for the first time since 1988. But just as interesting is that right-wing Marine Le Pen scored 17.9 of the votes in the first round.

Is this really surprising, as many mainstream media commentators are noting?

Perhaps not really. Certainly, a crisis can polarize opinion and make extreme solutions more palatable to the general public. I believe election results will continue to show more gains for non-moderate parties on both the left and the right. Predictive candor is rare amongst academics; and yet I was compelled to make this ominous argument early on during the global financial crisis, (.pdf: Academy of International Business Insights, 2009):

“The range of voices on the pros and cons of various institutional arrangements is likely to widen on both sides of the existing neoliberal welfare-capitalism models, with Austrian economics and its arguments on minimal government roles gaining attention on one hand, and more socialist-leaning arguments on increased roles for government attracting new followers on the other.”

What do these upheavals in the political environment mean for business? While the electoral results are showing outcomes along the lines I argued, it seems business thought leaders and academics haven’t really taken on the challenge I tried to pose: 

“These increasing philosophical differences are likely to underpin debates in management on issues such as shareholder versus stakeholder management, corporate governance structures, the role of non-market strategies, business ethics, sustainability, responsible leadership, and so on.”

Where more extreme parties come into power, business will face a direct change in the political climate. However, even if extreme voices simply get more recognition, without actually coming to power (as is likely in the United States), business will have to face a more complex political environment than they have known for decades before the financial crisis.

Even as I write, Greece is next, where the mainstream political parties have thrown up inconclusive results, and gains by left-wing Syriza are an indicator of the public anger on issues such as the bailouts. Golden Dawn, a far-right party, is poised to make its first ever entrance into Parliament. The issue is not somewhere far-off in the future anymore. Election results are bringing it to the present.

One approach is to figure out how to function on a day to day basis in a reactive manner; another approach, is to proactively assess these forthcoming changes, re-evaluate the relationship between business and society, and play a role in building a more sustainable future. It remains to be seen which approach most businesses will choose. I would argue it is time to fundamentally re-evaluate business strategies for a more complex and changed political environment. 

Thursday, April 26, 2012

Rising revolts on executive compensation: What’s Strategy got to do with it?


There’s hope for Strategy. In the matter of a few days, there comes news of a pattern of revolts against executive compensation at places like Citigroup, Barclays, Deutsche Bank, and yes, even GE. Why should this be so interesting to strategists?

Because there’s more to this revolt against egregious executive compensation than meets the eye.

Executive compensation questions are at the heart of strategy issues raised during the global financial crisis. The disconnect between compensation and long-term firm performance has become almost routine at large banks and companies. Most troubling is the lack of strategic thinking in deciding such compensation, which, even when linked to some notion of performance typically focuses only on short-term blips.

And Citigroup investors have raised an important point, as far as the underlying strategic aspect is concerned. An argument touched upon by them, but one that should receive even wider attention is about the time horizon that Vikram Pandit and his top folks had in mind when planning to reward themselves. While investors continue to suffer declines when seen in terms of longer time-horizons, executives are busy rewarding themselves by setting low targets for the next year.

But is any of this surprising? Perhaps not. As research by my colleagues and me suggests, there is little recognition amongst those entrenched at the top of existing systems that a substantial cultural-cognitive change is needed. They are simply creeping back towards established practices.

Strategic thinking on these issues shouldn’t just remain limited to a re-evaluation of specific business practices such as compensation, but should go deeper and discuss the overall relationship between business and society in the aftermath of the global financial crisis.

And in that vein, the surprise in terms of shareholder reactions should not be that this is happening, but the fact that it took so long.

Shareholder activism on this aspect is good to see, but let’s not forget that there are other stakeholders in the picture. What about the negative externalities caused by banking and other business practices in the wider society. As just one example, how do these compensation practices lead to increasing economic inequality in the wider society, which ultimately has other negative repercussions (www.beif.net)?

While shareholders are demanding their right to debate existing business practices, shouldn’t wider society debate these issues as well? Perhaps colleges and universities should be good places to start, as I've tried to argue here: "Does occupy offer teachable moments?" (.pdf). 

Saturday, December 3, 2011

Where’s the Public Uproar? Why Banks Can’t Pay Back the Secret Bailouts

By Dr. Suhaib Riaz

Recent revelations on the secret loans by the US Federal Reserve to banks should cause massive public uproar, if reflected upon. That a lawsuit was needed to show the scale and no-strings attached nature of these bailouts, suggests the explosive potential of this information.

On one side these secret loans were saving the banks, on the other side bankers were assuring the world of their health – as detailed in an earlier study of bankers’ rhetoric during the crisis, co-authored by a team that I was part of (presented this year 
at the Academy of Management in San Antonio).

The key question these revelations should re-invigorate is this: How do you “pay back” a secret bailout that saved you – in human equivalent terms, saved your life?

Well, you could return the dollar amounts, once your health has been restored. Which is what the banks keep harping about – we’ve paid it all back, just leave us alone now – no need for any fundamental changes. Many are so confident about this “paid back” argument, that they believe anyone who protests on this count doesn’t understand Business 101. Such comments were common on a recent piece I co-authored (with Hari Bapuji) in the HBR blog network, suggesting the need to at least listen to arguments by protestors, including some by “Occupy Wall Street” protestors, who smell something rotten in today's business environment.

Agreed, the dollars might have been “paid back” in a narrow sense. But let’s look beyond that for a moment.

First, what price were these dollars, coming as they did at a time of severe crisis, when all other sources of loans, and that too on such a massive scale, were non-existent. Shouldn’t the “market” price be way higher than regular price at such a time? It turns out, of course, that these secret loans were below the market price.

Second, what’s the value of keeping the loans secret? How do you repay that – given that keeping loans secret certainly helped banks present themselves in better health, which has all sorts of additional symbolic and substantive benefits. Amongst these are the ability to be back in business faster - raise more loans – as well as resist tighter regulation that might have resulted from public uproar earlier. And one doesn’t have to connect too many dots to see how this secrecy and consequent impression of good health would help continue the outrageous executive compensations at banks that were in reality utter failures.

Third, what’s the value of the scope of these loans – not just the scale, but the fact that these were distributed across so many banks at the same time, effectively helping save them all: in a tide, all boats rise. Saving the system was what saved the individual banks. How can you pay back the value of the “tide”?

Fourth, what’s the value of the “future guarantee” offered by these loans – once the Fed has demonstrated the scale and scope of actions it is willing to take to save banks, this in itself endows banks with a legitimacy and “failure-proof” guarantee for the future. This perception (related to the idea of ‘moral hazard’) works in the background, and is not much talked about – but it certainly helps banks conduct their business. How do you pay that back?

Overall, these arguments call for a broader shift in the way banks look at their own roles in society. Banks do not exist in isolation, but are part of a complex socio-economic system that includes, amongst others, taxpayers and the general public. A complex systems perspective is essential to have any hope of seeing this bigger picture, which seems to be consistently eluding bankers. It was heartening to see much ongoing work on complexity at the annual MIT Systems Thinking conference a few weeks ago – yet much more is needed specifically on the financial system as part of society. 



Perhaps such a broader perspective will help banks understand why you can’t “pay back” someone who has just (secretly!) saved your life.