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Thursday, August 8, 2013

Corporate Social Responsibility and Reputational Capital: JPMorgan Facing Criminal Investigation

After years of claiming that no criminality had been involved in the securitization and sales of subprime-mortgage-based bonds, the U.S. Department of Justice began to change its tune by mid-2013. The Justice Department was investigating the $2.6 trillion-in-assets JPMorgan Chase bank over its sale of mortgage securities from 2005 to 2007. The government was investigating other large financial institutions too, but the damage to JPMorgan’s reputation could easily dwarf such impacts on the other big banks. For this reason, JPMorgan’s executives, rather than having no comment as the bank released the news in quarterly filings, should have “taken the bull by the horns” by acting proactively in terms of corporate social responsibility.

"Ok, I lied to clients about the bonds, but we had a deal: No Jail Time!"  Image Source: serenity-international.com

The full essay is at "JPMorgan: An Unethical Monstrosity?"

Wednesday, August 7, 2013

Beyond the Banks’ Price-Fixing and Racketeering

A lawsuit filed in a district court in Florida alleges that JPMorgan, Goldman Sachs, and the London Metal Exchange (LME) artificially inflated aluminum prices.  The plaintiffs accuse the companies of anti-trust practices and racketeering, including the “manipulation of the aluminum market through supply price fixing.”[1] This sounds like what led to the forced break-up of Rockefeller’s Standard Oil Company, though in that case the restraint of trade had to do with the company’s main line of business: oil. In the case of the banks, owning commodity assets such as storage facilities and trading in raw materials do not constitute banking per se. Lest the bankers breathe a sigh of relief, the point triggers a larger question involving the repeal of Glass-Steagall.

      Should we allow banks to expand even beyond these functions to owning commodities and related real-estate? What does this do to the banks' systemic risk?    Image Source: salisburyareafoundation.org
Under Glass-Steagall, commercial banks were not permitted to engage in investment-banking activities, such as proprietary trading and market-making. The law’s repeal in the late 1990s is ironic, for in just a decade the notion of systemic risk would flash into the public’s consciousness under the label of banks being “too big to fail.”

Rather than confront systemic risk directly, U.S. lawmakers and regulators tend to prefer focusing on incremental change in particular areas. For example, when the lawsuit was filed in Florida, regulators were “scrutinizing ownership of commodity storage facilities by major U.S. banks.”[2] Unfortunately, the scrutiny was limited to price-fixing and racketeering, and those regulators probably were not talking to regulators at the SEC who were still promulgating regulations as part of the Dodd-Frank Act of 2010, which was ostensibly geared to reducing systemic risk through providing for the “orderly liquidation” of banks and other financial institutions too big to fail.

Were the various government regulators to compare notes, they might ask each other whether branching off into trading commodities and owning storage facilities increase the banks’ systemic risk. By taking on market risk (i.e., of commodity and commercial real-estate markets) that is higher than the risks in commercial banking, the banks increase their systemic risk. Factor in the legal and reputational liabilities associated with price-fixing and racketeering and the systemic risk increases even more.

Therefore, beyond the question of collusion and restraint of trade in a side business, it can and should be asked whether banks should go into side businesses at all, given the matter of systemic risk. Focusing narrowly on whether lines formed at warehouses, and, moreover, debating secondary issues more generally, are at the very least distractions from the fundamental matter of systemic risk. To the extent that Dodd-Frank fails to curb such risk, we as a society put the economy and financial system at a higher risk of collapsing if we follow the government and the media in focusing too narrowly on just the possible wrong-doing of the bankers. Ironically, sustaining such a focus may be in the banks’ own financial interest.

[1] Melanie Burton, “Glencore, JPMorgan Sued Over Warehouse Aluminium Prices,” Reuters, August 7, 2013.

[2] Ibid.

Sunday, August 4, 2013

Non-Positional Leadership

The concept of non-positional leadership is typically associated with charismatic leadership.[1] The Hebrew prophets are a case in point, as none had any formal civic position.  To be sure, a non-positioned leader need not be charismatic; such a leader can be effective in utilizing persuasion to get his or her position (i.e., "vision") sufficiently adopted by followers to become the default.  Obviously, a positioned official, whether in the upper echelons of a large corporation, government, or religious institution, need not “stoop” to persuasion; power from authority can be sufficient for an official's will to be done. However, does that evince leadership or simply raw power?

          Gandhi epitomized non-positional leadership. He never held a formal office in religion or government. Is the strength of non-positional leadership necessarily moral?  Image Source: Idleindia.com
Authorized power is typically also reckoned as leadership, especially if the official’s decision is unpopular at first, yet quickly implemented and effective in the end. In fact, merely the stature of “high” position can give a decision itself the semblance of leadership. Modern society lavishes an extraordinary amount of credence on organizational position itself, regardless of the particular occupant. Such positional power, as distinct from positional leadership, is excessive, even reckless. For example, Richard Fuld was able to inflict Lehman Brothers with an overwhelming amount of risk, and for so long, in line with a warped “vision” and without having to lead in the sense of persuading others of his vision. To assume almost blindly that CEOs are not only “natural” leaders, but also persons of high caliber in terms of skill and character, simply because of their position is foolhardy and yet this is typically done in modern society.

1. On “non-positional” leadership, see David Burkus, http://theleaderlab.org/

Toward a Theory of Ethical Leadership: Beyond the Ideologies

Constructing an accurate ethical-leadership concept that is not over-extended by one’s ideological agenda ought to begin with defining leadership itself. That is to say, more attention should be paid to thinking about what leadership is. Beyond its attributes and any contextual artifacts, leadership itself must be identified as a distinct phenomenon before we can go on to highlight the ethical dimension that completes “ethical leadership.” Then what counts as the ethical dimension of leadership can be clipped back to that which is implied in the definition of leadership, which in turn is entailed in the essence of the phenomenon.
Often overlooked, what is leadership?    Image Source: Gaebler.com

Material from this essay has been incorporated in The Essence of Leadership, which is available at Amazon in print and as an ebook.