What got me thinking about this was news that major accounting firm EY was considering splitting into consulting and auditing businesses. The first is what investors will want to own: consultants are paid handsomely to agree that an idea is good, then spend hours working to bring it to fruition.
Audit folks, on the other hand, are lower-paid duty markers, there to make sure corners haven’t been cut or liberties haven’t been taken with assumptions or revenue. . Managers resent their cost and interference; investors see them as a safety net that is only noticeable in the event of failure. No one really wants them there, but when things go wrong, everyone demands to know why they didn’t arrest him.
The same thing happens regularly in banking and investments. After Credit Suisse Group AG lost $5.5 billion, more than any other bank, in the collapse of Archegos, the massively overleveraged hedge fund-like family office, the investigation revealed how those responsible risk and credit control had lost their power to say no.
The independent report commissioned by the Swiss bank into the disaster found that its risk management team overseeing hedge fund clients had been regularly “hollowed out” and left with less experienced staff. Other banks have probably made similar mistakes, but not so spectacularly.
In 2008, when Lehman Brothers went bankrupt, former employees said there was little internal dissension: it was bad for your career. In fact, after the crisis that the company spawned, the industry recognized that many banks had disempowered their loan officers in the rush to originate and securitize as many new mortgages and other loans as possible. The bankers and their bosses just wanted to keep dancing until the music stopped, in the infamous line of Citigroup Inc. CEO Chuck Prince.
In the aftermath, British playwright David Hare dissected how greed had completely overtaken fear. His production was called “The Power of Yes”.
Investors today are petrified by a slump in high-growth tech stocks, which have been driven higher in part by the math of ultra-low interest rates, but also by the money fire that is aimed at them by investors who are clamoring to shout yes to a founder’s vision.
In their desire to accompany these new leaders, investors have sometimes voluntarily given up their power to say no. Big tech companies like Google parent Alphabet Inc. and Facebook (now Meta Inc.) have popularized the use of two-class share structures, where voting power remains in the hands of the founders and owners have little say. .
The pinnacle of this era will be remembered as the $100 billion Vision Fund attached to Softbank Group Corp. from Japan. Its exciting and impulsive leader, Masayoshi Son, has made it his mission to embrace the ideas of as many tech prophets as possible with as much money as possible. There was a culture of sycophancy towards Son and an abnormally high risk tolerance within the fund, a Bloomberg Businessweek investigation found in 2019.
The fund is now suffering billions of dollars in losses on companies like WeWork, the temporary office rental company that was less a tech company and more an ever-expanding party, or even a mass delusion: the book on its brilliance and brief flaring is called “The Cult of Us.” She had unlimited ambitions, now she is content to rent workspaces on a short-term basis.
The recent tech boom, like many fads before it, is rife with visionaries who have proven either wrong, disreputable, or incompetent. It also enabled outright deception, in which internal and external dissent was completely suppressed. Among them is Theranos Inc. founder Elizabeth Holmes, who was found guilty this year of fraud. Meanwhile, former Wirecard AG CEO Markus Braun awaits trial in Germany and EY auditors are among those charged (and prosecuted). However, the payments company was adept at squeezing EY: when Wirecard entered the DAX 30 in 2018, it was paying annual audit fees of just over $2 million – a small fraction of other German blue chips .
It’s hard to gauge how much quality or risk gatekeepers should cost: most companies aren’t looking to cheat or cheat. We could live in a world without scams, or without the risk of making bad loans or investments, but the cost of progress would be high. As economist Dan Davies writes in his study of the history of fraud, “Lying for Money”: “It is highly unlikely that the optimal level of fraud is zero.” Without the risk of theft or loss, we would never have invented international trade, the limited liability company or even paper money.
We have to say yes to go anywhere, but too many yes men are a problem everywhere. All kinds of CEOs succumb to overconfidence when surrounding themselves with pimps, according to James Westphal, professor of business administration at the University of Michigan’s Ross School of Business. A study he participated in ten years ago, and which he reproduced for a recent book, revealed an insidious effect of flattery and conformity of opinion. CEOs who were overwhelmed by it wouldn’t change strategy when their companies were underperforming.
Forget about progress: saying yes can just as easily cause stasis or decay. Harvard Business Review has tons of articles about getting rid of the wet blanket of groupthink and stupid agreement. Not doing so is how incumbents like IBM or Nokia have been confused by Dell’s PCs or Apple’s iPhone.
For political leaders, especially autocrats, not having MPs who will voice unpopular views can open terrible pitfalls. Russia’s invasion of Ukraine might never have happened if President Vladimir Putin’s deputies had given him a realistic idea of the state of his armed forces and the determination of Ukrainians to defend their homeland .
British academic Noreena Hertz, author of a book on smart decision-making called “Eyes Wide Open”, wrote that every leader needs a powerful challenger. She pointed to Eric Schmidt, who actively sought out people who disagreed with him while he was executive chairman of Google, and President Abraham Lincoln, who named rivals to his cabinet. It was to sharpen his own thinking, according to biographer Doris Kearns Goodwin.
One of the most successful hedge funds in the world, Bridgewater Associates, shows another way to cultivate the debate. But its culture of constant challenge and radical transparency for all still seems extreme: many have been unable to live with it.
So while “yes” may sound like the path to the sunny highlands, it can be disastrous if thoughtless or cowardly. The “no” has a bad reputation for being backward, even reactionary. It can even be comical, like William F. Buckley’s definition of a conservative as “a guy who stands through history shouting ‘Stop!'”
What all businesses and decisions need is a healthy, thoughtful dose of both – along with a generous helping of “why?”
More from this writer and others on Bloomberg Opinion:
• Which side of an EY breakup do you want to be on? : Chris Hughes
• SoftBank’s Son Has Survived Bigger Disasters: Gearoid Reidy
• Tiger Global and the Dangers of Crossover Hedge Funds: Shuli Ren
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
More stories like this are available at bloomberg.com/opinion