Ethics and Incentives

An interesting article in the New York Times examines recent thinking on why the financial services industry continues to struggle with compliance and risk-taking. The concerns raised may also be applicable to companies that work with information and suggest that a privacy code of ethics may be helpful.

The article notes Citi developed sophisticated controls to prevent the shenanigans that contributed to the financial crisis. Citi continues to find itself in trouble with regulators for similar reasons. A 2006 study concluded that financial incentives need to be tied to doing the right thing and that financial penalties to individuals who failed to adhere to policies and procedures. This assumes an effective enforcement mechanism.

In a related blog post, Justice Posner writes that in a system where employees and capital can jump ship quickly, firms are under pressure to deliver results in the short-term or they risk losing to less scrupulous firms. This attracts persons who highly value money and have a high tolerance for risk. The complexity of financial products easily allows for people to be taken advantage of.

These concerns can apply equally as easy to companies that work with information. In the world of information use and management, data is capital. Its possession and use can be a significant differentiator. Some might argue that recent examples of social media companies and dating sites running “experiments” on their customers, arguably without consent, have some similarities to financial institutions failure to disclose the risks related to their complex products (and perhaps purposefully made complex to facilitate a lack of understanding). Despite numerous security breaches and enforcement actions for Section 5 violations, companies continue to engage in poor privacy practices. Startups are driven by the goal to push out a Minimally Viable Product (MVP). Compliance is a secondary consideration and some would argue a disregard for their customers’ information welfare.

Are technology/data companies adopting the ethics of the financial services industry?

In the current MIT Technology Review (Vol. 117, No. 4, July/August) Vivek Wadhwa (a fellow at Stanford University working on corporate governance), writes:

Laws forbid lenders from discriminating on the basis of race, gender, and sexuality. Yet lenders can refuse to give a loan to people if their Facebook friends have bad payment histories, if their work histories on LinkedIn don’t match their bios on Facebook, of if a computer algorithm judges them to be socially undesirable.

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As a society, we need to be mindful that powerful innovation now occurs too quickly for existing ethical frameworks and laws. This means questioning, rethinking, and reframing those values, as a culture, at an accelerated speed.

Financial services is one of the most heavily regulated industries on the planet. If information is the new currency, then the tech industry needs to be careful it doesn’t end up being similarly regulated. Regulation usually results when citizens are harmed, e.g., Glass Steagall, Dodd-Frank.


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