What got me thinking about this was news that the big-four accounting firm, EY, is considering a split into consulting and audit businesses. The former is what investors will want to own: Consultants are paid handsomely to agree that an idea is good and then spend hours working how to make it happen.
The audit folk meanwhile are lower-paid markers of homework, there to make sure that corners haven’t been cut or liberties taken with assumptions or income. Executives resent their cost and interference; investors see them as a safety net that is only noticeable when it fails. Nobody really wants them there, but when things go wrong everyone demands to know why they didn’t stop it.
The same thing happens regularly in banking and investing. After Credit Suisse Group AG lost $5.5 billion, more than any other bank, on the collapse of Archegos, the massively overleveraged hedge fund-like family office, the inquest uncovered how the people in risk and credit control lost their power to say no.
The independent report commissioned by the Swiss bank into the disaster found that its risk team monitoring hedge fund clients had been steadily “hollowed out” and left with fewer, less experienced staff. Other banks probably made similar mistakes but not quite so spectacularly.
Back in 2008 when Lehman Brothers failed, ex-employees said there had been little internal dissent: It was bad for your career. In fact, after the crisis the firm spawned, the industry recognized that numerous banks had disempowered their credit officers in the rush to create and securitize as many new mortgages and other loans as possible. Bankers and their bosses just wanted to keep dancing until the music stopped, in Citigroup Inc.’s then-Chief Executive Officer Chuck Prince’s infamous line.
In the aftermath, British playwright David Hare dissected how greed had completely overtaken fear. His production was entitled “The Power of Yes.”
Today’s investors are petrified of a collapse in high-growth technology stocks, which have been driven upward partly by the mathematics of ultra-low interest rates but also by the firehose of cash aimed at them by investors clamoring to shout yes at some founder’s vision.
In their desire to go along with these new leaders, investors have sometimes willfully surrendered their power to say no. Big tech firms like Google parent Alphabet Inc. and Facebook (now Meta Inc.) popularized the use of dual-class share structures, where voting power remains in the hands of founders and owners have little say.
The pinnacle of this era will be remembered as the $100 billion Vision Fund attached to Softbank Group Corp. of Japan. Its excitable and impulsive leader, Masayoshi Son, set out with a mission to buy into the ideas of as many technology prophets as possible with as much money as they could take. There was a culture of sycophancy towards Son and abnormally high risk tolerance at the fund, a Bloomberg Businessweek investigation found in 2019.
The fund is now nursing billions of dollars in losses on ventures like WeWork, the temporary office-rental company that was less a tech firm than an ever-expanding party, or even a mass delusion: The book about its bright, brief flaring is called “The Cult of We.” It had limitless ambitions, now it just lets short-lease work spaces.
The recent tech boom, like many manias before, is full of visionaries who turned out to be either wrong, unsavory, or incompetent. It also enabled outright deception, in which internal and external dissent were thoroughly suppressed. Among them is Theranos Inc. founder Elizabeth Holmes, who was convicted this year of fraud. Meanwhile, Wirecard AG’s former CEO, Markus Braun, awaits trial in Germany and EY’s auditors are among those facing some blame (and lawsuits). However, the payments company was adept at squeezing EY: When Wirecard entered the DAX 30 in 2018, it was paying annual audit fees of barely more than $2 million — a small fraction of other German blue-chips.
It’s hard to judge how much good the guardians of quality or risk should cost: Most companies don’t set out to defraud or just screw up. We could live in a world without scams, or one without the risk of making bad loans or investments, but the cost to progress would be great. As economist Dan Davies writes in his study of the history of fraud, “Lying for Money”: “It is highly unlikely that the optimal level of fraud is zero.” Without the risk of theft or loss, we’d never have invented international trade, the limited-liability company or even paper money.
We have to say yes to get anywhere, but too many yes men are a problem everywhere. All kinds of CEOs succumb to overconfidence when they surround themselves with panderers, according to James Westphal, professor of business administration at the University of Michigan’s Ross School of Business. A study he was involved with a decade ago, and that he replicated for a recent book, found an insidious effect of flattery and opinion conformity. CEOs who were swamped in it would not change strategy when their businesses underperformed.
Forget progress: Saying yes can just as easily cause stasis or decay. Harvard Business Review has reams of articles on the need to throw off the wet blanket of groupthink and dumb agreement. Failure to do so is how incumbents like IBM or Nokia got disrupted by Dell’s PCs, or Apple’s iPhone.
For political leaders, especially autocrats, having no deputies who will voice unpopular opinions can open terrible traps. Russia’s invasion of Ukraine might never have happened had President Vladimir Putin’s deputies given him a realistic idea of both the state of his armed forces and the determination of Ukrainians to defend their homeland.
The British academic Noreena Hertz, author of a book on smart decision-making called “Eyes Wide Open,” wrote that every leader needs a powerful challenger. She pointed to Eric Schmidt, who actively sought people who disagreed with him while executive chairman at Google, and President Abraham Lincoln, who appointed rivals to his cabinet. This was to sharpen his own thinking, according to biographer Doris Kearns Goodwin.
One of the world’s most successful hedge funds, Bridgewater Associates, shows another way to cultivate debate. But its culture of constant challenge and radical transparency for everyone always sounds extreme: Many have been unable to live with it.
So while “yes” might look like the path to sunny uplands, it can be disastrous if ill-considered, or cowardly. “No” gets a bad reputation as backward, even reactionary. It can even be comic, like William F. Buckley’s definition of a conservative as “a fellow who is standing athwart history yelling ‘Stop!’”
What all companies and decisions need is a healthy and considered dose of both — accompanied by a generous helping of “why?”
More From This Writer and Others at Bloomberg Opinion:
• Which Side of an EY Breakup Do You Want to Be On?: Chris Hughes
• SoftBank’s Son Has Survived Bigger Disasters: Gearoid Reidy
• Tiger Global and the Perils of Crossover Hedge Funds: Shuli Ren
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
More stories like this are available on bloomberg.com/opinion