Time to change reward system - TODAY commentary

Time to change reward system
Tuesday • October 7, 2008; TODAY
HO KWON PING

TEN years ago the Asian financial crisis raged like wildfire through the region. Corporates, banks, even governments — one after another collapsed due to imprudent borrowings, poor corporate governance and crony capitalism.

Today, history repeats itself, but halfway around the world. And the fiercest critics then — the Western, and particularly American, banks — are now having to eat their own words. The very institutions which, by self-righteously blocking bailouts of distressed Asian banks, in order to pick them up at fire-sale prices, are now tasting their own medicine.

As the battle between Main Street and Wall Street builds up in America and the rest of the world watches with the transfixed fascination of a deer staring into the headlights of a car about to run it down, it would perhaps be forgivable to indulge in some bitter gloating.

Unfortunately, there isn’t much to gloat about. South-east Asia may have recovered economically from its financial crisis, but it is mired in other, perhaps even more intractable, problems. This region has not only utterly failed to live up to the lofty promises and visions of its post-war leaders, but worse, its reputation for tolerance and harmony has started to unravel.

The two geographic anchors and arguably most stable societies of South-east Asia — Thailand and Malaysia — are at best receding backwards, and at worse, spiralling towards schisms which, once they tear the social fabric apart, will be hard to repair.
Thailand is not just facing the usual musical chairs of coups, counter-coups, and revolving-door governments. Thaksin’s unprecedented, Latin American style of populism opened up sharp divisions in Thai society which has unfortunately also dragged the previously apolitical monarchy into the fray, albeit still discreetly. Not since the 1970s has Thailand been so fundamentally polarised.
Polarisation is also the common theme running through Malaysian politics. The politics of multiracial accommodation, with its delicate power-sharing between the politically dominant Malays and economically dominant Chinese communities, has, despite abuses and failures, worked well for 50 years. But as with all founding parties, hubris, corruption and complacency has haunted Malaysia’s ruling party.
Like Thailand, Malaysia has not been so fundamentally divided as a society since the tumultuous 1970s. One consolation is that this time round, our financial systems remain relatively robust. But if we succeed as businessmen, it will be in spite of, not because of, the weak, self-serving and divided political leadership in our region.

WALL STREET’S PERVERSE PAY STRUCTURE

The paucity of leadership is something South-east Asia and the US share in common. But whereas both political and corporate leadership are sorely lacking in the US, in Asia there is a genuine, though realistically slim chance, for corporate leaders to show leadership in devising an alternative to the Wall Street ethos.

The globalisation of capitalism in the past half-century has resulted in two major socio-cultural variants. The dominant variant — American capitalism — was built on very high income inequality as the incentive for risk taking and wealth creation. Its flaws were, of course, recently exposed.
As one observer noted, the sub-prime crisis and its aftermath, the humiliating bailout, has done to US leadership in financial markets what Guantanamo Bay and Abu Ghraib has done to the US moral high ground in human rights.

The second variant is Euro-capitalism. The European model of capitalism, influenced by democratic socialist tendencies after World War II, ultimately produced welfare capitalism with its stifling effect on individual initiative and entrepreneurship. It has not been a particularly inspiring alternative to Wall Street as a recipe for becoming a millionaire quickly, but it has at least proven to be less socially disruptive and therefore possibly more sustainable.

But the real issue here is not the survival or even well-being of American-style capitalism. It is whether, after almost 50 years of virtually unchallenged supremacy, American capitalism should be the unquestioned model for a newly resurgent East Asia. And if not, what alternative model can East-Asian thought leaders devise, drawing upon their own history and socio-cultural heritage?

Most commentaries on the source of the current crisis dwell on regulatory failures or excessive risk-taking, but they all fail to situate the analysis within a human context — that it was people who did all these things, and that people always function within a larger socio-cultural context. And people, as any behavioural psychologist will certify, respond strongly to incentives.

Many critics have correctly focused on the perverse pay structure of Wall Street — a highly skewed risk-reward system gone awry — as the root cause of today’s problems.
Perverse and highly inequitable compensation structures are not only morally objectionable, but more importantly, they are the obvious symbols of a society’s value system. And quaint though it may sound, values do matter even in a highly sophisticated financial system.

Successive financial crises have proven one consistent point — regulation by itself cannot prevent excessive speculation or collusive behaviour. Greed fuels any speculative boom and aggravates a bust, but it can only be reined in, not by regulation alone, but by a moral framework, the value system of the entire society, within which business is practiced.

As East Asia emerges as a major economic region, it should not simply adopt the American nor European models, but create its own alternative, rooted in its own, traditional value systems.

The common, recurring socio-ethical tradition of East Asia is its communitarian, family-focused webs of mutual obligations. This communitarian characteristic of East-Asian culture can, if thoughtfully enhanced, nurtured and developed, replace the highly individualistic, Darwinian ethos of American capitalism, or the state-welfarist tendencies of Euro-capitalism.

China and Japan are the two leading examples of neo-Confucian culture. Much of the communitarian ethic of Japan, derided by macho Western critics as overly consensual and conservative, can actually be relearnt by China, which has perhaps in its headlong rush towards wealth imbibed the worst of the American ethic of individualism, and forgotten its Confucian traditions.
Of course, critics will argue that a neo-Confucian capitalism equates to crony capitalism, as the 1997 Asian financial crisis highlighted. They have a point, but the flaws of East-Asian culture do not negate the need to develop a socio-cultural alternative to the Wall Street ethos.

If each of you questioned the fundamental drivers of behaviour within your own organisation and devised a rewards system, which actively promotes communitarian values, we will be moving just that little bit towards a neo-Confucian capitalism.

Instead, it only makes more urgent, the need for East Asian thought leaders to engage in the debate as to what a neo-Confucian capitalism actually means. We need to refine and redefine, neo-Confucian values in our own corporate lives.
What other roles can the financialinvestment community play in this shift of global economic power Eastwards, to create a sustainable and perhaps more values-based form of capitalism?

OUT OF WORK, LICKING THEIR WOUNDS

To the extent that bankers have been financial intermediaries in any society, they can also be social intermediaries, helping to shape opinions and values. Just as "greed is good" was a Wall Street ethic which insidiously permeated all US consumer behaviour, perhaps our financial services practitioners here can help make "collective is cool", an alternative ethic for East Asia!
The sheer dynamism, ingenuity, and innovation which drove Wall Street can be channelled for better purposes. One columnist rejoiced that finally, bright minds can be channelled to useful things like making better mousetraps or finding cancer cures, rather than just ways to enrich themselves.
There will certainly be lots of ex-bankers around. Half of America’s 8,500 banks and one third of its 10,000 hedge funds will fold. If we assume that each of these 7,500 failed or soon-to-fail institutions will eventually result in just say 1,000 professionals out of jobs, that’s already 7.5 million people. Add in Europe and elsewhere and you get maybe ten or more million bonus-rich but out of-work bright minds, licking their wounds while rewriting their resumes.
Investment bankers have collectively, some of the highest intellects in any field of endeavour. They now need to channel that brainpower towards helping to solve other people’s real problems, rather than tend to their own wants.

Because in the good times financial services attracted the best and brightest young minds — and many of these are now burnt out and depressed, wondering quite legitimately what it was all about and was it all worth it — leaders need to create a new vision other than financial rewards, to motivate younger colleagues.

East Asia, caught in the throes of its own greedy, headlong thrust towards wealth, certainly needs an ethos constructed from its own traditional values system.

It is perhaps ironic that while America was being humiliated by its financial melt-down, China was also on front page news for the widening scandal over tainted milk. Neither society nor culture can claim the moral high ground nor monopoly on selfish behaviour and greed.

But to the extent that East Asia society is clearly more communitarian than individualistic in outlook and values, there is a chance that East-Asian capitalism can avoid some — certainly not all — of the pitfalls of American capitalism which led to the debacles today. We laugh at the many values creating mass campaigns of Singapore and China — the anti-littering campaigns, the courtesy campaigns, the endless exhortations to create communitarian values and collective good behaviour, and Western cynics deride these as social engineering.
But we ignore at our peril, the need to pro-actively create an entire values system rooted in the symbols and fables of our own cultural traditions, which can become the ethical foundation of an East-Asian, neo-Confucian capitalism.

But even if an East-Asian model of capitalism does indeed emerge, we should not think that this will prevent future bubbles and scandals. Greed and selfishness can only be mitigated by culture and values, not eradicated. But in an imperfect world a little less imperfection will go a long way.

The only long term way to achieve a sustainable balance between fear and greed — the two drivers of capitalism — is to change a society’s entire reward system, and this can only be done with the way society views itself. Barack Obama got it right when he said that the US has lost " its sense of shared prosperity". It is the shared sense of prosperity which is at the very heart of neo-Confucian capitalism, and which East Asia needs to rediscover as the root of its success and the inspiration for its future.

And for divided, disunited South-east Asia, it can perhaps find solace in the recognition that civilisations take decades, if not centuries, to rise or fall. There is still time for this region to catch up with Europe and East Asia. But there is no time to lose.


This is an edited excerpt of a speech by Mr Ho Kwon Ping at the Singapore Venture Capital Association Gala Dinner on Sept 30.
The writer is chairman of Singapore Management University, executive chairman of Banyan Tree Holdings and chairman of MediaCorp.