When to trust, when to regulate

Dear Bob …

“Also as with business deregulation, once a good thing starts to be too much of a good thing, it can become a bad thing. Balance matters,” – Bob Lewis (“KJR themes in the news,” Keep the Joint Running, 4/7/2008)

Malice matters, too. So do chiselers, sneaks, grifters, grafters, free-riders, shysters, gonifs, thieves, embezzlers…

Consider the category of people who will put their own good above the good of “the public”, “the commons”, or “others”. Some folks might do so only once in a lifetime. Others will do so habitually, passing up even honest ways to get ahead, always looking for an angle, a way to screw somebody or game the system. In a given workplace or organization, you might not run into such a person for years, or even decades. Or, you might be incessantly plagued with them.

I happen to know the treasurer of a school. The school is effective and well-run, and serves some 900 students. It’s also honest, and no one diverts money into their own pockets. Money taken in is correctly accounted for, the spending and accounting are transparent, the money is spent in ways of which “the reasonable person” would approve.

The school also operates with a fairly large degree of trust. Quite a few families pay in cash, and this treasurer I know routinely (twice a

year) literally sits before a large pile of cash, being sole possessor of it before depositing it in the bank.

I don’t have the mentality to figure angles, other than the obvious one that the treasurer could simply run off with the cash one day. But I am certain that a person with the right skills and mindset could come up with a way to jiggle the books and siphon off money. Neither do I have the mentality to devise financial controls, “double-approval” systems, and other ways to make stealing from the school so difficult that thieves would move on to easier targets. But I am sure that someone could.

I recall a food co-op I was involved in, also successful, that also handled a lot of money. A retired executive from SCORE (Service Corps Of Retired Executives) came in an analyzed the operation, and made several suggestions for improving the cash-handling operation, with an eye to preventing theft. We took his suggestions, but before his visit, we had never had a problem. Well after his visit, we heard about another co-op that did (a head cashier simply rang up certain sales normally, then hit the “no sale” key instead of completing the transaction).

Regulation could be unnecessary in a situation where no one is trying to chisel or steal. The maximal flexibility, convenience, and enablement that universal deregulation might provide could work well in certain circumstances. In fact, very loose regulation does actually work quite well in quite a few instances, judging by my own experiences including the two I cite above.

But it all changes as soon as an actor willing to victimize (or disregard the welfare of) others, enters the picture.

What do you think?

– Deregulator

Dear Dereg …

Here’s the challenge: Capitalism doesn’t assume everyone acts for the public good. It assumes each individual works to maximize his or her own “utility” (financial advantage is the usual economic proxy measure). There is no hard line that separates doing this in an appropriate way and doing it in a way that harms others, since many economic transactions constitute a zero-sum game.

For example: Every time you buy stock or sell it, you’re making a bet on which way the market will go. If you buy and it goes up, you win and the seller loses. If you bought and the seller sold because you’d done better and more effective research, it’s considered a fair transaction. If you bought and the seller sold because you had access to “insider information” it’s now illegal and considered unethical besides. That wasn’t always the case.

And I’m quite sure there is no hard line that clearly separates insider information from the other kind. There’s always a gray area.

Here’s a second challenge: The Constitution’s framers were very clear about the importance of distrusting individual motivation. The entire structure is designed to create controls that prevent malfeasance — the usual term is “checks and balances.”

The third challenge is one you allude to: The act of creating controls can damage the relationships that can make them unnecessary. I could imagine your school treasurer becoming out of sorts if you conducted an audit and the auditor added steps designed to keep him from embezzling.

The solution: Ask him, while he’s in place and not going anywhere, to design a system of controls that would be effective should he (1) go on vacation and someone else had to fill in; and (2) decide to retire or move on, because there’s no guarantee his successor will be as trustworthy.

Another alternative is to redesign systems to close the easy holes. For example, you could configure any good cash register system so it only prints receipts on confirmed sales. Hit the No Sale button and the transaction is cleared; the customer doesn’t receive a receipt. Cashiers won’t consider that a lack of trust — they won’t even notice, unless they’re looking for ways to steal.

It isn’t that I disagree with your thought process. In fact, I agree completely — trust is the foundation on which efficient and effective organizations rely. Without it, everything slows to a crawl, if there’s any way to even define progress at all. Smart executives focus on the leadership techniques that foster it, do their best to encourage it among the teams they lead; and eliminate team members who prove to be untrustworthy.

Because people can sometimes fool you, and because things happen that cause people to change, they don’t rely on trust entirely.

Once again, balance is the key.

– Bob