The February 19, 2014, Lab seminar was led by Edmond J. Safra Lab Fellow, Gregg Fields, and Senior Faculty Associate and Harvard Business School Professor Emeritus of Business Administration, Malcolm Salter. Titled, "Breaking the Curse: What to do about Institutional Corruption in the Private Sector," the presentation probed underlying causes of institutional corruption in the private sector, and offered potential remedies to mitigate its occurrence. In the first part of the two-part presentation, Salter spoke of the rise of a new transactional and speculative financial culture dominated by short-termism which he argued invites institutional corruption. In the second part of the presentation, Fields discussed the lengthy implementation of the Volcker Rule, and how complexity in regulation works to the industry's advantage and encourages the gaming of financial regulations.
Salter began his portion of the presentation by discussing how U.S. capitalism has been compromised by an increasingly unequal distribution of income, continuing shortage of attractive personal incomes, stagnation in upward mobility, and declining public trust in the country's leading financial institutions. Describing what he called an "economy of incentives," Salter explained that the increased trend of equity-based pay, particularly in the form of performance-based stock options for executives, has given rise to a new financial culture ruled by short-termism. And it is this short-termism, he explained, which increases the likelihood of institutional corruption. For the shorter the period for measuring organizational and employee performance—and the larger the rewards and penalties tied to such measures—the greater the incentives for executives to pursue personal gain at the expense of their companies' reputation, espoused values, and business strategy. Consequently, Salter suggested that the four most common forms of institutional corruption occurring in business today manifest in the gaming of financial regulations, the toleration of conflicts of interest, the persistent violation of norms of fairness, and cronyism. Given the pervasiveness of these problems, how might firms realign incentives to curb short-termism? Salter proposed several corporate governance measures for curbing short-termism, including expanding Directors' oversight capabilities, de-emphasizing short-term capital productivity measures, and lengthening the duration of performance metrics.
Continuing with the Lab seminar, Gregg Fields headed an in-depth discussion centered on the implementation of the Volcker Rule, section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Volcker Rule, which is set to go into effect on April 1, 2014 (although conformance is delayed until July 21, 2014), prohibits banks from engaging in proprietary trading; that is, trading with the firm's own money to purchase financial instruments such as commodities and derivatives. Citing the 18,000 comment letters received during the public comment period for the Volcker Rule, and the five agencies that are to be tasked with implementing it, Fields surmised that the overall complexity of the law would only allow for legal and lobbying strategies to develop and game the regulation. At this point in the seminar, one participant of the Lab commented that corporations frequently lobby laws to subvert the intent of the regulation. Fields and Salter agreed and pointed to JP Morgan's aggressive lobbying of the Volcker Rule, specifically to support language to allow portfolio hedging. A robust conversation ensued where Lab participants discussed differences between rule making and rule following games.
To summarize, the presentation focused on identifying the root causes of institutional corruption in the private sector, with Salter advancing the idea that short-termism is largely to blame. Further, the presenters also conceptualized institutional corruption in the private sector as institutionally supported behavior, while not necessarily unlawful, that weakens public trust of a specific company by undermining its integrity and delegitimizing its otherwise legitimate processes, which in turn inhibits its ability to achieve espoused business goals.
-Summary composed by Joseph Hollow