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RADIO 4 CURRENT AFFAIRS ANALYIS THE UNDEADLY SIN TRANSCRIPT OF A RECORDED DOCUMENTARY Presenter: Diane Coyle Producer: Zareer Masani Editor: Nicola Meyrick BBC White City 201 Wood Lane London W12 7TS 020 8752 7279 Broadcast Date: 28.11.02 Repeat Date: 1.12.02 Tape Number: TLN247/02VT1048 Duration: Taking part in order of appearance: Lord Desai Professor at the London School of Economics Lord Griffiths Vice-Chairman, Goldman Sachs Bronwyn Curtis Head of European broadcasting, Bloomberg Bob Monks Shareholder Activist and Deputy Chairman, Hermes Investment Management Eamonn Duffy Professor of the History of Christianity and President of Magdalene College, Cambridge Martin Taylor Chairman of WH Smith John Caudwell Chairman, Caudwell Group COYLE When once-respected companies are sinking in a swamp of fraud and mismanagement, it’s hard to remember why we ever valued self-interest above public service. What could there possibly be to admire in greed? DESAI Societies based on greed are in one sense immensely liberating which societies based on virtue are not. Adam Smith was the first person to see that paradox deeply. He understood how, when people are motivated by greed, you think that they’re being selfish and isolated from everybody else but underneath our transactions there is a network which binds us together, and because we are motivated by greed we end up doing things for each other without necessarily intending to. COYLE Such enthusiasm for greed from Lord Desai, a professor at the London School of Economics, comes as a bit of a surprise from an ex-Marxist. As surprising as the contrasting view from Lord Griffiths, formerly head of Margaret Thatcher’s Policy Unit and now a Vice-Chairman of the investment bank Goldman Sachs. GRIFFITHS I think that greed is something which is very corrosive, because what greed does is to give an individual an enormous sense of independence. Somebody who is remarkably successful can easily become very arrogant and, as a result, very indifferent to society. And I think there’s something about wealth which makes people indifferent to others. COYLE So the left-wing economist finds virtue in avarice and the right-wing banker only vice. These are unexpected reactions to the dramatic developments in the world of business, from the stock market bubble to the collapse of companies like Enron. There’s no doubt that the desire to make a lot of money is one of the motors of economic growth. But if ever we truly did believe that greed is good, in that famous phrase from the last boom, have these latest scandals proved otherwise? CURTIS Nothing wrong with greed - it does motivate people. You see, you know, often big changes because people really are driven by this. COYLE Bronwyn Curtis, head of European broadcasting for Bloomberg, the giant New York based business news service. CURTIS What you don’t want is another Enron but, you know, that should never have happened in the first place if all the players had been doing their job. COYLE And you’ve been observing the reaction to the corporate scandals - do you think the pendulum is going to swing too far the other way? CURTIS I think it’s inevitable that the pendulum will swing too far the other way. There will be a mass of regulation which will come in and which will try to dampen it down so that they can’t make decisions - and I think that is a problem. I really think you have to be careful not to do that. COYLE In the wake of the run of corporate disasters there have been tough new rules and regulations on both sides of the Atlantic, spelling out how big businesses have to report their activities. But there’s now also concern that these new laws could increase bureaucracy and make companies less efficient and flexible. The climate of business values does change from time to time, usually in tune with the economic cycle. During the gilded age of the 1990s, huge private fortunes looked more acceptable than in the past. Bob Monks is a veteran American campaigner for corporate reform and now, as deputy chairman of Hermes Investment Management, turning his sights on British companies. MONKS We may well be going into another period like the 30s where, not only does the system involve a loss of a lot of money, but that the seeming leaders of the community become disgraced, because people on whose conduct people depended turn out to have feet of clay and, in many cases, to have had criminal intents. There is a kind of sort of cyclicality about this, that it would appear in America, at least, that we swing from pinnacles of private interest and greed to periods of time when we have more of a public concern and are able to act in a more collective interest. COYLE Don’t you think that if there is that sort of backlash or revulsion there’s a danger of going too far and people become rather moralistic and actually you could squeeze out some of the dynamism and energy in the system? MONKS Yes I do. We don’t really have a form of clutch to put in to regulate the way in which we swing from one thing to the other. And in the United States we’re prone to swing very far very rapidly. You’re quite right - I think there’s a very serious risk of swinging too far. COYLE He too accepts that a bit of greed is a necessary evil. But if that’s the practical reality of business, or even of human nature, does it leave any place for the moral view? It might sound like common sense to set some limits on excessive greed because a certain amount will always be with us, but can there be moderation in morality? After all, Christianity classifies greed as one of the seven deadly sins. No room for ambiguity here – or is there? DUFFY In St. Luke’s Gospel, Christ says quite straightforwardly, ‘blessed are you poor, woe to you who are rich - you have your reward now’. In St. Matthews Gospel, that has been softened rather - not ‘blessed are you poor’ but ‘blessed you who are poor in spirit’, thereby opening up a dimension of internal poverty, detachment and so on which would allow a rich person to hold on to their riches provided their motives were right. COYLE Eamonn Duffy, Professor of the History of Christianity and President of Magdalene College, Cambridge. DUFFY It’s not the material wealth that matters it’s what you do with it and it’s what your attitude to it. Medieval Christian thinking about greed and it’s opposite focused on the notion of charity. So rich people who were judged by the Church to be inevitably sinful - or they wouldn’t be rich - could offset their sin by giving back to the poor. This is something which is derived from the New Testament itself - the story of the unjust tax collector who’s enriched himself with the taxes of the poor, but he says, ‘I will give back everything I took and more’. So that idea of using your wealth, as it were, to buy back the integrity that you’d sacrificed in acquiring it runs very deep in Christian practice. One can view that cynically in terms of a price tag on salvation, or one can see that Christians are being urged in an imperfect world to try and put back what they’ve taken out. COYLE Some of today’s philanthropic billionaires like Bill Gates, George Soros and Ted Turner, do indeed acknowledge the social responsibility their wealth brings them. The thing that many of us find most distasteful about greed is its sheer selfishness. So philanthropy can perhaps bridge the gap between the moral ideal and imperfect human nature. By the time of the 18th century Enlightenment Adam Smith, the founding father of modern capitalism, was able to claim that there were not only good practical reasons but also a powerful ethical rationale for basing the economy on self-interest. Meghnad Desai takes the argument a stage further, arguing that one vice may drive out even worse ones. DESAI If I’m motivated by greed, I would not look at your colour, your gender, your race if you want to sell me something or if I want to sell you something. In old-style communities, before capitalism came around, you had to be a member of the community to be able to enjoy its privileges - and these were very small communities, narrow and narrow-minded communities. So if you’re, for example, a Jew in Europe or an untouchable in India you had problems. It’s only when you have established society on greed then greed doesn’t actually discriminate on any of those narrow grounds. You say, have you got money to buy my goods? I’ll sell it to you. Money has no colour, money has no smell, money has no caste, money has no race. COYLE So you know exactly where you stand with it. Greed can have unexpectedly virtuous results. It equalises rather than divides, thanks to its very universality. But there are limits, surely? TAYLOR Capitalism needs the rule of law. If you want to see things going really badly, you look at what happens in some emerging capitalist countries like Russia and China, where, because the law of contract or the law of property is not as well developed, you get all sorts of rogues - it really is the Wild West. COYLE One of the UK’s leading businessmen, Martin Taylor, chairman of WH Smith and formerly chief executive of Barclays Bank. TAYLOR Many of the things that went on in building the great American fortunes in the second half of the 19th Century probably wouldn’t stand the scrutiny of the moral philosopher. Take the gold rush of the 19th Century, I mean, that really waspure unadulterated greed. As a result of what happened huge amounts of country were opened up. There was considerable wealth generated. Now, you know and I know that at the gold diggings there were all sorts of appalling things going on. People were murdered, claims were stolen - that was the unacceptable side of the gold rush, and I think that in periods of extraordinarily rapid development when there are great temptations, people are going to behave more badly than they would otherwise. COYLE Rapacious episodes like these make it plain that unbridled greed needs restraints. TAYLOR Capitalism relies on greed because people’s desire to self-enrichment leads them to do things which are valuable to the economy. Now, the good thing about that is that greed is very reliable - people in general are greedy - just as you rely on lust for the production of children, but we have laws against rape and harassment. Equally, we have laws against taking greed too far, and these laws have been broken recently. COYLE But do you think people have got greedier even within the bounds of the law? TAYLOR Peoples’ desire for riches among those who feel it have two parts of them - the absolute part and the relative part. The absolute part is have I got as much money as I need? Can I look after my family? Call that greed if you like - it’s very natural human instinct. The other is the desire to be better off than other people and when you have an extraordinary burst of apparent wealth creation as we had in the last few years of the last century, people start wanting money because it boosts their ego and they want to have as much money, more money than anybody else. Why are otherwise do billionaires keep trying to become multi-billionaires? I mean, there’s nothing rational in it – it’s some strange psychological flaw - there’s a lot of that going on. COYLE If the desire to make a profit is healthy and most of us will benefit, should we bother to draw a line between what’s reasonable and what’s psychologically obsessive? Bronwyn Curtis thinks that allowing driven people to make a lot of money is simply fundamental to the economy. CURTIS Fear and greed are the two things that drive people, corporations, in financial markets. You know that you are paid by the profits you make. You also know that you will probably lose your job if you don’t make money in a year. And, you could almost describe each year as a nine month contract with your employer - so that if you haven’t made money in the first nine months then your chances of having a job are probably very slim, you know, after the year is over. So, people are frightened not to make money, and I think that when you look at lots of rogue traders, usually it doesn’t start that they’re trying to make a lot of personal money - usually they’ve lost money and they try and cover it up and try and make it up. COYLE But that basic incentive to make money for your employer does seem to get translated into a desire for personal gain? CURTIS Yes, I think that’s true. Often the people who are attracted to the financial business will be those that really do want to make a lot of money. But you have to have people like that - you’re handling huge amounts of money, you can’t be frightened to make decisions - you have to be a risk taker to work in that sort of environment. And usually people who are risk takers, they’re the same people who go and, you know, bet on the horses. The biggest spread-betters in terms of, you know, whether it’s on football, whether it’s on the FTSE are the people who work in the financial markets themselves. COYLE A kind of Russian roulette based on fear and greed hardly seems the most sensible business model, let alone a way of life. Yet the chance of hitting the jackpot makes the risks acceptable. That, at any rate, was the essence of the aggressive yuppie spirit that characterized the deregulated markets of the 1980s under Margaret Thatcher and Ronald Reagan. Brian Griffiths, who was closely involved in Mrs Thatcher’s reforms, now sounds far from enthusiastic about executive greed. GRIFFITHS To simply say that the driving force of capitalism is greed, I think, is a terrible over-simplification. There’s a great difference between self-interest and greed. Greed, avarice, is something really which, you know, I find I recoil from. But there are very good reasons why people may be self- interested in terms of, first of all, looking after themselves and their families and their wider responsibilities - I don’t think that’s the same as greed. COYLE But where, in practice, would you draw that dividing line? GRIFFITHS I think in a way, I mean, it becomes very personal, and I think that that choice is a choice every individual has to make as to why they work, what they do with what they get and so on. Clearly in my judgement there are some cases of executive compensation, which I have to say, I would define as greed. On the other hand, if you asked me where exactly is the dividing line, I find it very hard to say where exactly it is. COYLE The dividing line is all the harder to pinpoint because it has obviously changed over the years. Big corporations in the 1950s and 60s, offering secure pensions and other benefits to a large, stable workforce, were far more egalitarian than they’ve become in recent times. Top executives might earn 20 or 40 times as much as their lowest-paid employees, but that gap has now exploded to more like 400 times the lowest pay. Many successful companies believe it’s essential to pay their high-flyers sums that to most of us seem grotesque, because it’s the pay that ensures their success. One of these is the Caudwell Group,which includes the high street retailer Phones4U. It offers young graduates starting salaries of £60,000; its managing directors can earn half a million pounds. The pay is central to its recruitment pitch. John Caudwell is the company chairman. CAUDWELL What the package ensures is that you get a pool of some of the best people to then choose from, because the people that we require to run these businesses are incredibly commercially astute and need to have all the attributes to go with that and it’s very very difficult to find them. COYLE Do you think that money alone is enough to find them and motivate them or do you think other motivations are important as well? CAUDWELL Well let’s be clear what we’re talking about now. We’re talking about managing directors and group managing directors who’re already at the very, very top of their career, and, yes, it is very, very largely about money. COYLE Top pay hasn’t only soared, it’s changed in its structure as well. A corporate manager of the 1960s was often little more than a bureaucrat, with a steady job and steady salary. Now he’s expected to be an entrepreneur, and more of his much larger pay packet will be linked to equity, or in other words to the company’s stock market value. If he creates the money in the first place, he can keep a lot of it. Brian Griffiths, working for Mrs. Thatcher, helped to bring about this change in philosophy. GRIFFITHS Instead of having the kind of large multi-nationals that you had in the 50s and 60s, which were really mini welfare states, we’ve really had a lot more private equity put into these situations, where it’s been said to people: “we will pay you a certain basic amount, then we’ll pay you a cash bonus, but in addition to that we will pay you some equity-related benefit. If the shareholders gain, you will gain as well.” If you go back to the 50s and 60s, the head of something like Shell or BP or ICI never received executive compensation like that, and that’s been a movement which happened because capitalism was in danger of becoming ossified. COYLE It’s at least ironic isn’t it that the kind of increase in flexibility you talked about in the equity culture did generate behavior that one can characterize as excessive or greedy? GRIFFITHS Well I think that you couldn’t have the sort of pay scales that you typically had in large corporations in the past and have the degree of enterprise that you were seeking. It was inevitable from that that you would have some people who really were compensated to a much greater extent than in the past, but remember that the major element of compensation was still equity ownership, and what we find in this recession is that equity ownership is very risky. And it can go up, it went up remarkably in the 90s. But in the last two or three years a lot of people who are in that position have also found that their compensation’s come down remarkably. And, in the City of London, for example, you’ve had this enormous number of layoffs. COYLE Very few of those being laid off enjoy the lavish pay-offs that failed chief executives or City fat cats walk away with. Still, by linking spectacular pay to spectacular performance, the theory is that system should be self-correcting. Economist Meghnad Desai of the LSE shares this belief that in the end there’s no excess without success. DESAI When the stock market collapses, greed has it’s own internal limits and market limits on greed because share holders are going to say, “look we can’t afford this kind of executive salaries because these executives are taking money away from us.” Greed is good only as long as it creates profits and productivity in a capital society. If you’re greedy and if you’re not creating value, eventually it is not going to pay you. Capital is a harsher master than earlier masters because in earlier societies you could be greedy as long as you were protected as an elite. COYLE But doesn’t this rosy vision of corporate democracy place too much faith in the abstract power of markets? Investors are growing more willing to criticize multi-million pound pay deals – to take one example, they’ve just succeeded in freezing a claim by GlaxoSmithKline’s chief executive officer, or CEO, for much more than his current £7m pay package. Most of the time, though, shareholders don’t have any impact on the executives until things have started to go badly and visibly wrong. This is where campaigner Bob Monks would like to see reforms, to beef up the self-regulating market forces. MONKS I would like to see the governance system in corporations sufficiently well developed, so that when chief executives were paid, they were paid by people who had power to negotiate with them, knowledge to negotiate with them, and they were therefore able to arrive at a free market evaluation of what the person’s worth. Unfortunately, the present situation is one in which we’ve been dealing with a rigged market. All of the compensation consultants, owe their living to CEOs . All boards of directors are picked or, at least, approved by CEOs. So, you had no counter-force capable of negotiation. So, when CEOs talk of their pay as being ‘well, I’m just getting paid what everybody else running a company my size gets paid’, they really do know that that is not an honorable way of presenting the situation. In fact, it is a contrived situation and the contrivance has gotten to the point of absurdity. COYLE Do you have any problem with people who are genuinely entrepreneurs who’ve created their own businesses accumulating billions of dollars? MONKS You mean, do I mind Bill Gates? I want to keep the world safe for Bill Gates. And there are some CEOs who are the functional equivalent of Bill Gates, and they deserve to paid that way. I really don’t mind people being very, very, very rich. I don’t like them paying themselves and that’s what they’ve been doing. COYLE Whether you love or hate Microsoft, Bill Gates did create something of real value to millions of customers. The question is how to prevent all the managers who don’t innovate from rewarding each other too handsomely, just because they all play golf together and sit cosily on each other’s boards. In theory, the answer lies with the non-executive directors, outsiders brought inside the company to safeguard the long-term interests of shareholders. The UK has a tougher system in this respect than many other countries, including the United States. But, according to Martin Taylor, a CEO turned non-executive chairman himself, it isn’t at all straightforward to combine the essential safeguards with the buccaneering spirit that makes companies thrive. TAYLOR It’s very difficult to play both these roles simultaneously. I think there’s been a tendency for the policeman side to win out a bit. And I think what’s really happening in Britain is that we’re moving towards almost a two-tier board structure, where the main board, which includes the non-executives and the chairman, is spending more of its time on corporate governance issues, and the day to day running of the company is usually done by an executive committee which is doing many of the jobs which the board used to do. COYLE So, in effect, you have, in one company, both the pirates and the policeman? TAYLOR Yes, you need them both, you do - you need them both. COYLE Successful entrepreneur John Caudwell claims he has both in his company. The policing’s done by making sure everybody knows exactly how well – or badly - each executive is doing. CAUDWELL We hold a quarterly management meeting where we present the performance of the group, and it’s very, very clear for people to see the businesses that are performing well and the businesses that are performing badly. And if a business is performing badly, that managing director will be removed from the business within a space of a few months. Everybody knows the winning MDs in this business, everybody knows the losing MDs. We’ll give the losing MDs a reasonable chance to put things right and try and get them back on path, but if they’re not back on path within a reasonable period of time, then they’ll go. I believe that people should be rewarded on merit and I don’t believe people should sit on big fat salaries and do a poor job. COYLE Greed works here because it walks hand in hand with honesty, kept to the straight and narrow by a companion virtue. But they’re not natural bedfellows. Some companies may need to have the virtue forced upon them. CAUDWELL Corporate governance is extremely weak. The corporate governance allows balance sheets and accountancy reporting techniques to be almost like a Picasso painting. A creative chief executive and a creative financial director can make something that is so different from reality and I think is an absolute, utter disgrace. I’m absolutely wholly in favour of tightening wherever possible to eliminate this creativity. COYLE So even a big fan of high pay thinks we need much tougher rules for corporate behavior. The company accounts are the last place you want to see any creativity. But surely the issue isn’t just the nuts and bolts of better management? Suppose greed is economically efficient, and suppose we could police it better than we do - could the moral cost still outweigh the economic benefits? Cambridge historian Eamonn Duffy reminds us that the benefits of avarice can come at the expense of other values. DUFFY The seven deadly sins are characterized by all being directed against other people. The fundamental thing about greed or its parallel vices like envy, is that it seals up the heart against you neighbour. In Dante’s Purgatorio the envious, the grasping are the colour of stone - they’ve been petrified by their sin and Dante pictures them with their eyes stitched up with wire like hawks that have got to be tamed; so the human spirit, instead of soaring up to the empirium, is earth-bound by greed. Greed is something that closes you in on yourself. It focuses you down on mine against ours. It’s the accumulation of more than you need that has always disturbed Christians. It’s embedded in the New Testament text - the rich man who fills his barns and says now I’m secure and God says, “thou fool, this night you must give an account of yourself, so death strikes and what use is your money to you then - naked I came from my mother’s womb, naked I must return.” COYLE The heirs to the Enlightenment tradition give short shrift, though, to such concerns. On the contrary, grasping capitalism holds the key to both efficiency and virtue, according to Meghnad Desai. DESAI People today think as if religions are the basis of tolerance, religions are the basis of values, but before capitalism came along, religions were horrible things which went around killing people. It’s only the growth of what I might call secular materialism that has made us tolerant. COYLE You’re painting greed as a positive virtue but aren’t all the alternative models to capitalism based on a sense that it’s immoral. DESAI Capitalism is neither moral or immoral - it is amoral. Capitalism is consistent with all cultures because, in a sense, it doesn’t make demands upon your morality, it doesn’t make demands on your value-system. It says whatever your value-systems, they are consistent with pursuit of self interest. Very often when people say, “our model is not based on greed, it’s based on values”, examine very carefully whether this a way that the elite grabs more for itself and leaves the poor behind. The thing about the greed process is it really allows mobility. And the paradox of capitalism is that for the last 200 years people have been saying ”capitalism generates poverty and inequality and all that, but more people have been brought out of poverty in the last 2 centuries than was thought possible in any previous age - that has not happened because of benevolence - it’s happened through a process based on self-interest. TAYLOR We’re back to Adam Smith’s famous remark about the baker. We don’t rely on the baker being benevolent to give us bread, we rely on the baker’s self interest. And the wonderful thing about self-interest is that you can rely on it. If I had to chose between the system that relied on people’s self interest and peoples saintliness, I’d rely on their self-interest every time. COYLE For both Martin Taylor and Meghnad Desai, greed is a more powerful and predictable force in human nature than altruism. It can also be unexpectedly virtuous, because we’re all equal in the eyes of the greedy profit-seeker. But the vice of greed clearly has to be balanced by the virtues of generosity and honesty and that’s not incompatible with enlightened self-interest. Many leading businesses of today have concluded that their long-term interests require them to be well governed, highly ethical and philanthropic. Morality can be profitable too.