Skin In The Game
2012 has been a year of scandal and disaster in the financial services industry with the misselling of payments protection insurance, rogue trader losses, IT glitches and enormous banking write-offs.
I used to think that the root cause of these situations was down to pure human greed coupled with inadequate regulation but I now believe there is something else going on here.
Too many human beings are being rewarded without risking anything meaningful in their lives. Too many human beings face no major consequences for their actions.
To put it colloquially there are too many humans who are rewarded for their actions or insulated from the consequences without having any meaningful “skin in the game”.
Traders gamble with other people’s money. Senior executives make decisions regarding businesses as if they own the firm when this is blatantly not the case. Fund managers manage money without risking a cent of their own cash. Regulators regulate without any direct consequences for misjudgements.
It is interesting to search for bankers who have gone to jail or whose reputations are been destroyed to the point of ridicule in society. There aren’t many.
From a broader perspective, our political system which underpins the laws that govern the financial services industry also suffers from this breakdown in link between risk-taking and risk ownership. How many politicians have suffered direct damage from decisions to go to war or from decisions that have led the European economy to the edge of the abyss?
Answer – NONE.
This de-coupling of risk-taking and risk ownership has been accentuated by technology. At the press of a button we can cause un-told misery and cause chaos without actually seeing our victims eye ball to ball thanks to today’s technology. Nobody seems to have “difficult conversations” any more other than by e-mail and text message. Press send and move on!
Once again on a broader basis nations go to war with soldiers sitting in front of a terminal commanding drones.
The de-coupling of risk taking from risk ownership.
Until we re-connect these two dimensions I am afraid to say we will continue to witness this moral decline and experience more disastrous consequences.
So what am I suggesting?
Examples include:-
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Forcing all proprietary traders to risk some of their own money;
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Ensuring fund management companies invest their own resources as well as their clients in strategies they believe are worthy;
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Jailing financiers who break the law;
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Exposing flawed bankers to reputational ridicule;
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Ensuring senior management in major organisations invest some of their own money (not granted through options awarded without any prior effort).