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Saturday, September 14, 2013

Pruning the Debris Off Ethical Leadership

As business practitioners grapple with the intangible yet potentially valuable notion of ethical leadership, it is left to scholars to assess whether those practitioners are “coloring within the lines.” It is admittedly all too easy to draw in exogenous material that is pleasing to the eye; it is all too easy to deem such material required for ethical leadership rather than ballast weighing it down, unnecessarily. 

              As you reflect on these examples of unethical leaders in business and government, ask yourself whether you have a gut reaction that ethical content must be part of ethical leadership. 
One business practitioner characterizes ethical leadership as that which “inspires the behaviors in people necessary to create competitive advantage.” As achieving a sustainable competitive advantage is the task of strategy, inspiration alone can be extracted as that which is particular to leadership. Strategy is what is left once one has extracted inspiration from the characterization.
As though to isolate the concept of ethical leadership on a petri dish, the practitioner adds that ethical leaders “distinguish themselves by doing that which is inconvenient, unpopular, and even temporarily unprofitable in the service of long-term health and value.” These stipulations may be dogmatic in the sense of being arbitrary, however, rather than intrinsic to the concept.

To continue reading this essay, please go to: "Shaking the Ideological Debris from Ethical Leadership"

Related Essay: "Toward a Theory of Ethical Leadership Without Ideology"

Dov Seidman, “Ethical Leadership: An Operating Manual,” BloombergBusinessWeek, December 17, 2010.


Thursday, September 12, 2013

Insurance Companies Gaming the States’ (Flawed) Regulatory System

In September, 2013, New York pulled out of a framework that the States had agreed to try out. Known as “principle-based reserving,” freed insurance actuaries from having to follow statutory requirements in their calculations, allowing the actuaries “to use their own data and assumptions."[1] That compromise has resulted in such a loose framework that it had made the “gamesmanship and abuses” in the industry ever worse, according to Ben Lawsky, the financial services superintendent of New York. A sample of sixteen insurance companies were found to have increased their reserves by a combined total of only $668 million, far short of the $10 billion that would have been required had the companies had to follow the statutory formulae.
Insurance company executives had argued that the formulae are too formulaic, resulting in far higher reserves than necessary—in the (self-serving) opinions of the executives. Presuming nonetheless that they could not be wrong (and thus that the regulators could be in a better position to make the judgments), those managers approved “secretive transactions to artificially bolster their balance sheets [and presumably bonuses too!], often through shell companies in other states or states abroad.[2] According to Lawsky, the framework made the shenanigans possible.
     An insurance company manager smiling innocently for the camera on his way to cutting reserves by carving in stolen (i.e., ficticious) assets. Image Source: www.123rf.com
Five years out from the financial crisis of 2008, just the fact that state insurance regulators would feel the political need (or pressure) to compromise with their regulatees, whom would naturally (i.e., expectedly) exploit any loopholes gained by the compromise. That insurance companies have been able to “create surplus assets out of thin air” should been something more than a minor blimp on the screen.[3] With claims circulating that an even worse financial crisis could be expected next time around, compromised regulators were not exactly inspiring the public’s confidence.
Lest the problem be answered by federalizing insurance regulation, all of the fifty States were giving the framework a try, whereas Lawsky’s rigor-oriented pull-out was singular—that of New York. Rather than the problem being not enough federal consolidation, the fault-line lies at the subterranean level, where wealthy (and thus powerful) companies or entire industries being regulated “capture” their regulators. Whereas the capture theory of regulation falls well short in explanatory power by the sole argument that regulators are dependent on data from the regulated firms, the real capture is effected as government officials are “bought and paid for” through campaign contributions and other favors. The conflict of interest in turn masks the American shift from representative democracy to plutocracy (the rule by wealth over that of the public interest).  

1.  Mary Williams Walsh, “New York Regulator Sees Abuse Increasing Under New Insurance Rules,” The New York Times, September 12, 2013.
2. Ibid.
3. Ibid.