The American Academy of Arts and Sciences has issued a very worthy report about corporate governance—an admirable effort to make sense of the excesses of the 1990s and the regulatory and market reaction to them. One suggestion that emerged from the report is that investment bankers could agree to abide by a new voluntary ethics code that, as the Wall Street Journal put it, “like the Hippocratic Oath, might be taught in schools, framed and hung on office walls and called upon when arriving at life’s ethical crossroads.”
Now that you have stopped giggling, let’s talk about this.
A new voluntary ethics code posits that investment bankers are rational moral beings who act according to a sense of what is right and just. That’s a noble thought. The problem is that investment bankers and their colleagues in money management and trading operate on principles that are more feral than moral.
Herbert Allen, president of the investment banking firm of Allen & Co. Inc., famously noted that “over a long weekend, I could teach my dog to be an investment banker.” Which got me thinking: To really control bankers’ behavior, perhaps we should think of them like dogs rather than humans.
Like a good dog, a good investment banker is a CEO’s best friend. Unerringly loyal, he can provide companionship in lonely times (on golf outings and hunting trips) and snarling protection when threatened by hostile raiders.
Like our canine friends, investment bankers respond extremely well to rewards. Have you ever seen a bunch of greyhounds booking around a race track? They furiously jockey for position in pursuit of a shiny object—an underwriting assignment? an advisory gig?—that’s held just out of reach. When they cross the finish line (the end of the year), they get patted on the head by their bosses and receive rewards (bonuses) based on how they placed. They devour the bonus quickly—summer house, Ferrari, and Vail—and get ready to start again.
Dogs and investment bankers both respond to the harsh stick rather than gentle persuasion. They will not modify their behavior through appeals to a higher moral sense, but they will respond to a rolled-up newspaper (Sarbanes-Oxley), or to a tough trainer who makes it clear precisely what they can and cannot do and who swiftly metes out punishment to those who transgress (New York Attorney General Eliot Spitzer).
With both dogs and investment bankers it is important to lay down very specific rules about what constitutes acceptable behavior, because dogs and bankers will otherwise act in ways that defy common sense and disrupt social order. When I was a child, we had a dog who routinely drank out of the toilet, jumped on the dinner table, gnawed furniture, and ran out into the street. Posting a code of good-doggie behavior and reading it aloud daily would have had no effect on him. The same holds true for investment bankers. In the 1990s, every investment banker, money manager, and trader operated under overlapping ethical codes—corporate codes of conduct, regulations promulgated by the New York Stock Exchange and National Association of Securities Dealers, Securities and Exchange Commission regulations, state and federal laws, the Bible. A lot of good they did.
Like dogs, investment bankers engage in behavior that is so self-evidently stupid and self-destructive that it beggars belief. Common sense—let alone business ethics—would dictate that you don’t tell your brokerage clients to buy stocks you know are losers because you like the underwriting business the crappy companies give you. If you’re the head of the mutual fund, you wouldn’t trade rapidly in and out of your own funds to make a few bucks and jeopardize your whole career. (Even in the new era, highly paid employees at massive investment banks are apparently incapable of reason. Citigroup’s London operation is in hot water after executing a trade it dubbed internally as “Dr. Evil.”)
Speaking of the limits of ethical codes, Felix Rohatyn, the investment banker who wrote a chapter of the report, told the Journal that, “Ultimately, it has to be instinctive.” Here is where all the codes and training in the world will fail. Perhaps investment bankers’ hearts and minds can be trained to behave properly—but only most of the time. Author Jack London believed that imposing order on dogs, even though they may have been domesticated for centuries, conflicted with the beasts’ primal nature to live as wolves. On Wall Street, money and profits are the vital life force that explains all behavior. For investment bankers, the mandate to seek profits everywhere is The Call of the Wild.