A telling taboo in elite circles is the issue of corruption. At INET last year, after a panel discussion on the financial crisis, Jamie Galbraith said he was astonished that there was not a single mention of fraud. His observation was met with a resounding silence.
Similarly, I had a colleague tell me today that I shouldn’t use the “c” word, meaning corruption, since it would alienate potential allies. The logic is similar to arguments against being shrill. He claimed that even if a lot of people in positions of authority engage in corrupt looking behavior, that doesn’t mean they understand it to be corrupt, so calling the corrupt will merely get them worked up to no useful end. They could well think they are doing the right thing and just be victims of cognitive capture.
I deeply oppose this line of argument. First, it assumes that decision-makers don’t recognize when they are taking ethically problematic actions. The people I know who have yielded to institutional pressures to do the wrong thing say they knew they were doing so and found a way to rationalize it. And I suspect even sociopaths know where the lines are. They have to do a better job of covering their tracks when their conduct is dubious.
Second, it assumes that it isn’t worth taking a firm position on ethics because it will turn off powerful people who have engaged in questionable behavior. Better to be less accusatory in order to have a dialogue with them. I don’t buy that because being indulging their justifications of their conduct helps preserve a bad status quo.
One aspect of American exceptionalism is many still believe the US is cleaner and more above board than most other advanced economies. But if you go overseas, you will find that a lot of businessmen see the US as not particularly ethical. One British colleague who has worked with major US firms described the US as becoming more and more a scam-based economy (in fairness, he was really talking about the financial services industry). An American who works a great deal with foreign investors said his clients saw the US at best as on a par with other big countries, at worst, with Russia.
One of the big reasons for the erosion in US behavior is the notion that elite crimes shouldn’t be prosecuted because it would harm the system. Glenn Greenwald describes the pardon of Richard Nixon as a critical embodiment of this principle. And while people in influential positions have long been able to get away with all sorts of bad conduct, it’s one thing to have, say, speeding tickets disappear quietly (the hoi polloi are no wiser) and quite another to have a tax cheat oversee the IRS. In the old days, propriety and reputations mattered, and that served to check bad behavior.
So it is important to define norms and not shy away from words like “fraud” and “corruption” when they fit. While it would be nice if more people in power were capable of feeling guilt, shame will do. Thus naming and shaming are legitimate strategies for letting the elites know that the broader public is not fooled.
It’s also important to recognize that some people at the top of the food chain are willing to criticize bad actors. Ruane, Cunniff & Goldfarb, the well respected investment firm that among other things, manages the fund Sequoia, sent out a letter that is blistering by the reserved standards of that industry. It says that former Fannie chief Jim Johnson, who is currently on the board of Goldman and Target, is not fit to serve on any corporate board. Those of you who read the book Reckless Endangerment may recall the detailed discussion of how Johnson aggressively cultivated support in Washington and helped forge a coalition among affordable housing backers, banks, realtors, and homebuilders (I read the book as being far more anti-Jim Johnson than anti the GSEs per se).
The Sequoia letter says it will vote against Johnson continuing as a Goldman board member and urged clients to join them in opposing him. It describes how Johnson has “been at the center of several egregious corporate governance debacles,” not just at Fannie but also as a board member of United Healthcare and KB Homes. Oh, and he also got a Friend of Angelo sweetheart loan, when with his rich pay package, he was hardly in need of a break on his mortgage.
I urge you to read this short, scathing letter in full.
It’s welcome to see an investor wage a campaign against a tainted board member, particularly one seen as particularly connected and influential. Along with the investor rejection of Vikram Pandit’s pay package, this may be the beginning of a long overdue demand for greater accountability from the governing classes. And these calls are harder to ignore when they come from experts and peers.