Cross-posted from Liberal Conspiracy:
Trying to put the pieces of the economy and our financial system back together again, it is clear that one of the underlying problems has been the vulnerability of many institutions to lop-sided incentives.
We’ve seen it as its most obvious with dealers – who can run big risks, retire very rich very young – and not have to worry about the long-term consequences, because they’ve long since left the scene. Another example has been in the boardroom – huge bonuses in the good times, and if it goes wrong? A nice little pay off and pension pot.
So how do we even out the score – especially in those institutions deemed too big or too crucial to be allowed to fail, which immediately sets up all sorts of risks of one-way bets?
Part of it is about control of the bonus culture. Part of it is about better management and identification of risk. Part of it is about getting remuneration committees to get external advice – rather than relying on the cosy arrangements of internal advice, which means it’s far too easy to have a situation of “you talk up my pay, I’ll talk up yours”.
Yet there is one group who really can see at first hand the ups and the downs of risk taking – and that is the ordinary workforce. It’s these people who suffer real financial hardship when risks fail to come off – but can also see in their job security (and – though not as often as perhaps should be the case – in their own pay packets too) the benefits when things do go well.
Having a stronger voice from the workforce in the senior decision making would be a vital safeguard in helping to control the risks firms run – because some of the people who really do suffer when the risks go wrong will be making the decisions, not just those largely on a one-way bet.
As an added bonus – recruiting some directors from the workforce would also add some much needed diversity to the make-up of company boards.
Diversity is about more than just “let’s add one middle-class white woman to a board of middle-class white men”. It’s about having a diverse set of experiences and knowledge and outlooks and instincts. That brings business benefits which some of those boards that collapsed in single-minded, risk-loving groupthink could have hugely benefited from.
That’s win, win, win for everyone.