Situational Urgency vs. Enlightened Self Interest

February 9, 2010

I am reading a great book called Traffic: Why We Drive the Way We Do and What It Says About Us by Ken Vanderbilt that underscores the importance of enlightened self-interest.

As opposed to where I grew up in rural Virginia, in D.C. everyone believes their individual right of way is more important and urgent than everyone else’s. However, if everyone tries to get to the same place at the same time, what happens? Traffic jams. Every day, all the time. It doesn’t take long to become obsessed with traffic in this town, or to blame “Maryland drivers” for all of our problems.

What Vanderbilt explains is that by going more slowly and spacing out merging traffic, the roads can actually bear more volume and traffic can go more smoothly. It may be counter-intuitive, but going more slowly can actually allow you to get to your destination more quickly. That is, if everyone understands the same principle. Enlightened self-interest requires everyone to be slightly inefficient in order for the system as a whole to be as efficient as possible. However, if a certain number of people don’t get the joke and crowd the merge lanes, traffic reaches a tipping point where it bogs down.

This principle doesn’t just apply to traffic. Over the weekend, The New York Times published an article about how Goldman Sachs pushed AIG to the wall. As clever business people who foresaw the financial crisis, Goldman’s traders secured their risk directly with AIG and indirectly through third parties like Societe Generale, and then naturally pushed to collect when the CDO market and other mortgage-backed securities markets collapsed as they had foreseen.

Working on the part of their investors, they pushed to collect as much as possible, just as everyone else pushed to do the same. This kind of sharp deal-making by Goldman traders contributed to AIG having to turn to the federal government for upward of $180 billion in assistance, and now Goldman as a company is currently under investigation by the SEC for the role that they played in AIG’s collapse.

Could the traders have pushed a little less hard and avoided some of these negative ramifications? Was the short-term profit for the individuals good for the company if it undermined the company’s ability to pursue its business model?

Other individual traders have been able to play the market very shrewdly too. Andrew Hall, the head of the Phibro Energy Trading Unit, argued that contractually he deserved a $100 million bonus for his work in 2008. Investment bankers might argue that companies are not being responsible if they renege on their employment contracts and don’t give employees what they deserve based on the merits of their work. For every action, there is a reaction.

As individuals push for what they think is rightfully theirs, politicians look at the whole system and think it needs to be reworked. They don’t blame the people, they target the industry. President Obama is calling for a special tax on just the largest banks. Again, individual self-interest can lead to counter-productive effects on the system as a whole. In economic terms, this phenomenon is called the “tragedy of the commons” when dealing with public goods like the air or pasture lands.

As companies embrace radically individualistic business models, we might call this the “tragedy of the enterprise” or when companies disrupt an industry, the “tragedy of the industry.” Creative destruction doesn’t just extend to one company superseding another, it extends to one business model giving way to another, as individual, enterprise, industry, and social interests come into conflict with each other.

But how do you get people to show restraint when they might not be personally penalized, and in fact, might be greatly rewarded, for trying to make a killing? After the Super Bowl, CBS premiered a very interesting new show called “Under Cover Boss,” which illustrated another dimension of this paradox: how slight inefficiency can actually be more efficient or productive than when all distractions are eliminated.

In the show, Waste Management President Larry O’Donnell tried out various jobs within the company. In one instance, he was told he was “not Waste Management material” for not picking up trash fast enough by an elderly diabetic employee who had learned from years of experience. In another case, working a traffic route with a female driver, he was shocked that his push for productivity had the unintended consequence of forcing the driver to pee in a can in order to complete her rounds on time.

O’Donnell realized that he had to change the way he thought about productivity. He couldn’t penalize people into performing, he had to figure out what made them perform well and encourage those behaviors. Situational urgency in individuals leads to emergent behavior in the group as a whole that ends up hurting the long-term interests of everyone. Individual process improvements may collectively lead to systemic experiences that hurt morale and productivity.

Knowing what works and what doesn’t, and knowing when to change, as O’Donnell did, requires judgment and empathy. Companies clearly need to be more aware of how individual ethics and practices and practices by third parties can affect their long-term interests. They need to go even further and inculcate this understanding as a basic management principle. This may mean educating individuals about sacrificing some of their short-term benefits in order to reap long-term rewards. It may mean managers need to change the way they reward behavior or what behavior they reward. It may require companies and organizations not to over-reach but to focus on their core competencies. It may require companies to come up with new ways to minimize the fall-out from the practices of third parties.

Most of all, the solution to this problem requires that people expand their sense of context. When our actions are framed by this quarter or this political session or this calendar year, the urgent gets in the way of what is really important. In poker, they call this leaving a few chips on the table so the other players will want to come back and play again.

The U.S. Chamber is very sensitive to this problem, particularly in the way that it shows up in capital markets. Chamber President and CEO Tom Donohue is on the record advocating for an end to quarterly guidance for example.

CSR managers and social business leaders can do their part by promoting an awareness of ethical behaviors and practices that will allow the company and its business model to endure. This is not just enlightened self-interest, it is basic risk management.

Now, I have to hop in my car and get home as quickly as possible so I don’t get caught in the snow storm with all of those Maryland drivers.