Should everyone have seen them coming? Would you have been in favor of higher airline prices and longer airport waits if imposed before 9/11? How about a small decline in the resale value of your home prior to 2008? The truth is that people are generally unwilling to accept short-term costs and inconvenience for vague, long-term benefits. This problem plagues every business.
What made Enron and similar financial scandals so predictable in 2002 was the growing lack of auditor independence. Consulting revenues and profit margins in the major accounting firms were growing at twice the rate of those for audits. SEC Chairman Arthur Levitt proposed significant reforms long before the collapse of Enron, Global Crossings and WorldCom, but he was stonewalled by our political system.
Fast forward to 2008 and we see criticism of the “big three” credit rating agencies, Moody”™s, Standard & Poor”™s and Fitch. Historically they gave investors an unbiased assessment of investments and investors paid for reports. In the 1970s, agencies started charging the issuers fees for ratings. Legislators, supposedly “fearing a proliferation of unscrupulous ratings agencies,” designated Standard & Poor”™s, Moody”™s and Fitch as the only organizations banks and brokers could use.
Why do these painful events continue to happen? Special interest groups play a key role. The airlines opposed both the cost and inconvenience of tightening security long before 9/11 and the accounting industry lobbied SEC Chairman Levitt”™s proposed reforms before the financial meltdown of 2002. This always works because politicians yield to the money and votes in order to stay in office. This isn”™t cynicism, simply a fact.
Did it help the airline industry to oppose stronger security measures, the auditing industry to oppose the Levitt reforms or to allow the credit rating industry to give their customers a break by no longer charging them a few bucks for an unbiased report? Why didn”™t the customer demand to be the one paying for the report? Are we quick to accept a small short-term gain and trade it for the certainty of long-term pain?
Ironically, in each case, the lobbying was at the center of the many causes of what we can now see as disasters in the making. According to “Predictable Surprises” authors Max Bazerman and Michael Watkins, “The warning signs were there, as they always are for predictable surprises. But people in responsible positions ignored or glossed over the signs.”
Are you willing to trade a small amount of up-front pain for significant long-term gain? It might be the pain of going to the gym in return for a lifetime of good health or replacing a profitable product or service with something better in order to stay a leader in your industry.
As a business, it often appears to be against your perceived best interests to act. If accounting firms, the airlines, mortgage originators, real estate workers, banks and brokerage firms selling collateralized debt obligations had been proactive, they would have damaged their short-term revenue and profits in the process.
When disasters occur, hindsight is always 20/20. But only foresight will keep predictable events from turning into disasters. Prevention of unpleasant surprises in your organization demands early recognition of emerging threats, focusing on the right solutions and gaining support for preventive actions. Endure a limited amount of short-term pain and inconvenience for long-term gain and avoid future disasters.
Questions for discussion:
What are some of the pending disasters we are facing right now?
How can I persuade myself and others to incur a little short-term pain to prevent them?
Joe Murtagh, The DreamSpeaker, is an international motivational speaker, meeting facilitator and business trainer. For questions or comments: Joe@TheDreamSpeaker.com, TheDreamSpeaker.com or (800) 239-0058.
