But all it takes is a look at the Bernard Madoff scandal to know that the Dodd-Frank incentives aren't superfluous--but absolutely necessary. The wreckage that occurs when the smart people fail to say something is made vivid in the best Madoff book to date--Wizard of Lies by Diana B. Henriques.
The extraordinary reporting in her account includes the author's interviews with Madoff, family members, government regulators, whistleblowers, and other key players in the case. Henriques recounts how incredibly savvy financiers were willingly duped and refused to accept the obvious.
Even as Madoff's scheme is collapsing, Madoff scolds hedge fund managers and investors like Jeffrey Tucker and Walter Noel, who then send Bernie a fawning note even as they suspect something is going afoul. Hedge fund manager Sandra Manske poured most of her clients' funds into Madoff even while she worried that "Madoff exposure was a potential disaster." Fred Wilpon and his family--New York real estate developers and owners of The New York Mets--didn't see or say anything, expanding their investments with Madoff even as his returns outperformed the profits of fantasy.
And when smart people did see and say something, they couldn't get the most important people to take action. As has been well-reported, the Securities and Exchange Commission received formal complaints, including dozens of detailed analyses from quant analyst Harry Markopolos. Even when Barron's ran a skeptical piece about Madoff, one so pointed that Madoff himself expected it would trigger an SEC investigation, no significant authorities picked up on it, nor did prominent Madoff investors respond.
What does this say to you as a manager or entrepreneur? Many of us have an experience where we witness a practice that we believe could be wrong ethically or legally. Do we say something? Whom do we say it to? How do we do something?
Many corporate compliance and ethics processes are thinly-funded with no bite or clout. Organizational expert Michael O'Malley, author of The Wisdom of Bees (Portfolio/Viking) and CEO of Promontory Financial Human Resource Solutions, told me, "Whistleblowers emerge when there is endemic incompetence and corruption with no strong corporate oversight or internal mechanisms to air grievances. The mere existence of whistleblowers is an index of a putrid, oppressive culture."
The key to a corporate culture that addresses and solves difficult issues (whether in the financial services or other industries) is that phrase: "the internal mechanism to air grievances." If you're considering a new job or have questions about your own company, see what you can learn about the firm's grievance procedures, and how it presents the oversight role of corporate boards.
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