subject: Honesty In Business [print this page] By Leslie Pratch By Leslie Pratch
December, 2009
In the past few years, I have taken to telling clients that honesty is essential for business success and effectiveness. No doubt the moral philosophers would criticize me for not appreciating it for what it is. But the fact that companies can do well by doing good may just be another plus for the human potential.
The market runs on trust. It is the trust we put in one another that allows the wheels of commerce turn smoothly. On the other hand, it is the same general trust that creates the opportunity for individuals to profit by the abuse of that trust. The former CEO of an investment bank with a brokerage operation who wanted to remain anonymous once told me about a small institutional account that traded with his firm.
"Everything settled on time. Then the account made a large purchase in the aftermarket of a hot IPO, only to see the price collapse shortly thereafter. The account claimed that he had put in a sell order, not a buy order, and refused to pay. I knew he was lying, but it was his word against our trader's word and we wound up taking the loss on the position instead of him. Obviously, that was the last trade we did with him."
Any company with liars and cheaters in its midst runs great risk and if it does not get rid of them the whole business could be brought down. There does seem to be a general exception when very large companies do very bad things. Sometimes they put themselves out of business but more often they survive malfeasance: The legal system does not want to put them out of business because of the loss of jobs and impact on competition.
Arthur Andersen was put out of business by the Justice Department. Many believe it was a mistake because it eliminated a viable competitor in an existing oligopoly and put many innocent individuals out of work. Its brand was severely damaged by the Enron and WorldCom scandals. It certainly would have paid handsomely in settlements and fines. But I believe it could have survived had it not been for the indictment.
I suppose if honesty issues lead to economic loss on the part of the perpetrator, a certain degree of justice has been rendered and life can go on. It would be interesting if an economist could make the case that there is a large cost to corruption.
