“I Can’t Trust Nobody…(in business)”

If there are any lessons from 2008, it’s about trust – or who not to trust. It’s a bit of an issue really, because trust is a pretty important part of doing business. In fact its the foundation of an efficient economy. If your a business, you need to trust your staff and your suppliers, your banker (dare I say it) and your insurer. If your a consumer, you need to trust the producer and the product description.

The sub-prime events have revealed a lot about trust – or at least what happens if its misplaced.  If you trust people who don’t deserve to be trusted then the whole system of business can break down.  We trusted financiers we thought were smarter  and they weren’t.  We trusted mortgage salesman who sold unnafordable loans , we trusted banks offering credit that couldn’t be repayed and on so on.

The world is too big and complex not to trust others – we need too believe that they know what they are doing and will give us good guidance and advice.  Without trust it all breaks down – and it did.

Many countries in the world who had prior experience of misplaced trust and have the benefit of regulations to underpin financial integrity are responding better to the sub prime mess.    But unless we want an army of regulatory bureacrats overseeing all our decisions, we must all start taking reesponsibility – learning more about what we can afford, learning to ask the hard questions of those in positions of responsibility.

To trust others we need to be confident in their ability to understand and act for the benefit of everyone.  Those who are take a role which effects the lives of others need to ask themsleves ‘do I have the capacity and knowledge to do this job competently and with integrity?’.  Those that allow them to take the job need to ask them the same question and piss them off quickly if they can’t.

The fact that so many in positions of responsibility performed so poorly gives no excuse to place any individual on a pedestal beyond accountability.  No manager, CEO or Executive is that much of a superstar that they shouldn’t be made to stand and account for their actions.  There are no Gods of business – just ordinary men and women. When they perform well we must rteward them and when they stuff up, we’d better find them before they bring us down.

Corporate Fraud – Overconfidence or Incompetence?

According to a recent Viewswire article ‘Are overconfident executives more inclined to commit fraud?’ Wharton researchers, Schrand and Zechmand propose that overconfident executives may be at risk of being overly optimistic about future company performance. When events fail to live up to their expectations and the cost of their error impacts, they may resort to fraud as a means of covering up resulting business predicaments.

It’s an interesting if not common sense thesis. The idea that managers may find themselves in positions where they have badly underestimated the outcome of decisions is a natural consequence of taking action in in an unpredictable world. Overconfident managers misjudge the risk involved in a decision and may also have difficulty withdrawing from unfavorable situations. Thus they can end up in the deep end and turn to fraud.

From my reading of news reports of costly corporate fraud around the world it would seem many cases involve incompetence and recklessness. The failure of events to live up to expectations arises from flawed expectations – as I said, an inevitable consequence of taking action. But when the flawed expectations have a debilitating cost to the company, its usually a failure to assess or even understand the real risks involved in the decision. This behaviour seems to involve incompetence – that is a lack of skill or capability – as much as overconfidence.

Clearly, the incompetent person should never have been promoted to a position where they could be so unskilled. The question arises how they got there in the first place, and therefore calls into question the overall competency of the organisation. In effect, the poor decision was not the one made by the incompetent person but the person who actually placed them in the position where they could make the decision – or who failed to ensure policies and practices were in place to guide their work (if they broke these then thats a premeditated crime). How did they get there – nepotism, labor shortages, poor recruitment or promotion practices? Is their manager incompetent, or their managers manager?

The authors suggest that you are more likely to be over confident in complex industries. Sure, if your out of your skill depth then the more complex the industry the more likely you are to crash and burn. On the other hand if the industry is more complex, you need greater skill, greater care and more risk management.

One can’t help suspecting that there are a lot of companies out there face a problem of promoting overconfidence and incompetence. When credit gets tight and the bear market growls, poor risk business practices bring it to the surface. It can be a scary time for many CEO’s.