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Thursday, October 13, 2011

On the E.U. Banking Proposal: Comparative Context

“Under proposals outlined by the European Commission president, José Manuel Barroso, banks would be required to temporarily bolster their protection against losses. . . . Extra capital for European banks should be raised first from the private sector, then from [the state] governments, according to the proposal. Only when those avenues have been exhausted should a euro zone bailout fund be tapped, it said. Banks should not be allowed to pay dividends or bonuses until they have raised the additional capital, according to the proposal” (NYT 10/13/2011).

After Lehman Brothers failed in September 2008, the U.S. took “swift action to ensure its banks had a strong cushion of capital,” according to The New York Times. The same logic is said to be in the European proposal. Perhaps in general terms this is true, but a major difference is worthy of note. Specifically, the American banks receiving TARP funds were allowed to pay dividends and bonuses. To be sure, executive compensation faced limitations, but this constraint pales in comparison to that in the E.U.’s proposal, wherein no dividends and bonuses would be permitted. Also, the U.S. Treasury allowed banks to pay back the funds earlier than perhaps advisable because the bankers wanted to be free to pay whatever bonuses they saw fit to sanction for themselves (assuming they controlled their boards, which generally holds, given the separation of ownership and control).

The difference on whether dividends and bonuses should be allowed at troubled banks reflects a rather basic cultural difference between the E.U. and U.S. concerning whether economic liberty ought to be limited even at the extreme. The difference also reflects a different historical experience (and thus value-set) with respect to comfort and convenience.

I contend that dividends and bonuses are inherently “extras.” Admittedly, the bonus system on Wall Street has made its way into calculations of standard or basic compensation. However, if a bank itself is at risk, the need to increase reserves should trump any compensation that depends on the bank’s performance. Otherwise, the implication is that large profits in the short run are to be sought even at the expense of ignoring the impact on systemic risk.

I suspect that the culture of Wall Street has come to embrace surfeit compensation as an entitlement regardless of performance. The aspect of entitlement is particularly disturbing, even if it has become akin to an ingrown toenail (i.e., difficult to eradicate once it has become ensconced—like a house-guest after a week or so). A similar mentality inheres in the dynamic wherein private companies profit while the taxpayers are presumed liable in covering any losses. An entitlement exists, in other words, to enjoy the benefits without having to face the risk of suffering a loss. As the generation that lived through the Great Depression undoubtedly knows, this sunny-side up mentality is a manifestation of being too accustomed to comfort (i.e., having it too good for too long).

The bloody twentieth century in Europe gave Europeans a more realistic perspective on the entitlement of comfort at the turn of, and even a decade into, the next century. Accordingly, European officials have an easier time saying no to dividends and bonuses as long as the banks are at risk. It is a pity that the Americans have such a hard time with this; they unwittingly fall into the hands of the vested interests on Wall Street that have had it too good for too long (especially as investment bankers are “paper entrepreneurs” or middlemen rather than producers).


Stephen Castle, “Europe Tells Its Banks to Raise New Capital,” The New York Times, October 13, 2011.

Wednesday, October 12, 2011

Slovakia Stands Up, Caves to the E.U.

On October 11, 2011, Slovakia’s Parliament failed to approve the expansion of the euro rescue fund, a development, the New York Times reports, that “brought down the government.” Although the vote makes good copy, it was not at all as dire as the headline suggests. According to the Times, the state’s “leading opposition party said after the government fell that it would be willing to discuss support for the fund, pointing to the eventual approval of the deal. European officials in Brussels were counting on a political solution, but also weighing the possibility of some kind of messy workaround if Slovakia failed to pass the measure.” In other words, the vote had to do with state politics as well as resistance to bailing out a richer state. Once the state government fell, pressure from the E.U. and the new politics in the state government quickly coalesced by the next day to produce a deal in support of expanding the bailout fund. According to the Washington Post, "opposition leader Robert Fico, head of the Smer-Social Democracy party, announced he had struck a deal with the remnants of Radicova’s coalition, promising to back the fund in exchange for early elections that analysts say Fico’s party is well positioned to win." Doubtless that pressure from the E.U. was also in the mix, as E.U. officials were already hinting that the bailout fund could be expanded over the tiny state's objection. “We call upon all parties in the Slovak parliament to rise above the positioning of short-term politics and seize the next occasion to ensure a swift adoption of the new agreement,” European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso said in a joint statement, according to the Washington Post. In other words, hey guys, get your act together over there in Slovakia or else.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Tuesday, October 11, 2011

Wall Street and the Populists: A Disconnect

In October 2011, Gerald Seib observed that political and economic pressures were “pushing business leaders into the public cross hairs.” From the corporate standpoint, the time was ripe for the field of business and society, whose topics of corporate social responsibility, corporate citizenship, and stakeholder management had emerged as means by which managers could interface with the broader society. The fundamental matter to be “managed” or assuaged could be said to be divergent norms or values, which in turn can eventuate in antithetical perspectives. Seib was essentially noting that the societal populists and corporate executives were not on the same page. In being geared to creating the impression that the values espoused in a given corporation are in line with societal norms, the field of business and society may not have been equipped to deal with divergent talking points that are grounded in antipodal social realities. Indeed, being invested in one social reality can prevent someone from even being aware of threats from another social reality. Under that scenario, the cues for value-congruence are missed by boundary-spanning managers on the corporate side, which in turn solidifies the discordance between the two social realities. In other words, the pressures mount from the outside, and the validity of the corporate social reality is itself in the cross hairs. To effectively “unwind” this dynamic, the field of business and society must deepen to include the basics of how to see things from a very different perspective without discrediting it from the outset. Value-congruence, and thus the continued legitimacy of the corporate form in modern society depend on this rather-basic yet arduous ability as a precursor.

In the context of the “Occupy Wall Street” protests spreading across the U.S. in the fall of 2011, Seib pointed to the existence of “a radical disconnect between the picture populist critics paint from the outside, and the one business leaders describe from inside.” This disconnect went back to September 2008, when bankers viewed the collapse of the CDO market as a result of over-reaching, dishonest and languid mortgage borrowers and the wider society saw greedy and fraudulent mortgage originators and investment bankers behind the liars loans. This disconnect infuriated the general public, as the business perspective meant that expected contrition would never come from the bankers. In fact, the latter would engage in mass foreclosures without a hint of guilt even as the general public was dumbstruck that people could be so clueless as to inflict injury on insult without realizing it. In short, pressure actually builds from such a disconnect.

In the populist protests, the crowd saw American companies with enough profit and cash to create jobs on-shore yet inexplicable without the will to do so. In the first decade of the new century, American corporations had cut their work forces in the U.S. by nearly 3 million, while increasing employment abroad by almost 2.5 million. In the fall of 2011, Standard & Poor predicted corporate earnings growth of 13.5% for the third quarter, which suggested “to Wall Street protesters that companies were hoarding profits without creating work.” Seib goes on to observe that business leaders saw the inverse. From the business perspective, third-quarter expectations were less than expected. The managers pointed to the benefits of an artificially weak dollar that had already strengthened at the expense of exports. More broadly, businesses were looking at weak consumer demand and increasing costs with government regulations, which make augmenting the domestic work force more costly. Seib juxtaposes this view of a hostile business environment with that of unpatriotic and greedy corporate chieftains.

Debating the respective variables misses the point (or does not go far enough). The underlying disconnect may itself be a threat to American corporations. Indeed, the perspectival disconnect could mean that corporate capitalism could itself be the target of popular angst and dissatisfaction. While the field of business and society has been geared to the corporate “unit of analysis,” it is not clear that the managerial tools used to assuage perceived differences concerning norms (and thus values) will suffice when the corporate form itself has a target painted on its ass. In other words, the bastards may not see the arrows coming until it is too late, due to the rather basic disconnect in perception. Of course, it could be argued that the mega corporations have so much potential power that even a few arrows wouldn’t do much damage that could not be repaired. In other words, corporate capitalism may be so entrenched that it could easily survive being made a target without having to change the way managers view their refined domain of excellence and the broader society of sore-losers.  Even so, it couldn’t hurt to deepen the field of business and society to address the disconnect and how to manage it. Foremost, I would advocate the development of a skill-set that is devoted to being able to see things from a very different perspective without immediately falling over in supercilious laughter that only makes matters worse.


Gerald F. Seib, “Populist Anger Over Economy Carries Risks for Big Business,” The Wall Street Journal, October 11, 2011.