Moral hazard

Regular readers of CorporateCoach will be aware of my interest in the Law of Unintended Consequences.

There is another concept that we have heard a lot about recently, "moral hazard". The discussion has generally been around the potential moral hazard of helping out failing banks and supporting investors who have lost money. The concept is simple. If we help people when they get into trouble as a result of taking risks, there is a danger that in the long term this will cause people to take more risky decisions.

So moral hazard can lead to unintended consequences!

In my early career as a publisher I published a book by Professor John Adams which was entitled "Risk & Freedom". The theme of this book was that the more we protected motorists by, for example, requiring them to wear seat belts – or in the case motorcyclist's safety helmets – the less they will take care of their own selves and the more there will be a risk of motor accidents in which pedestrians will get injured. As an extreme, Adams' suggestion was that all steering wheel columns should have a spike in their centre so that if the driver were involved in an accident that spike would go through his heart. His belief was that as a result drivers would take more care and that, overall, safety would improve.

I first came across the concept, though not knowing it by its name, when I was a schoolboy. A girl living opposite, also still at school, became pregnant. I was fascinated by the dilemma. At one level it was clearly desirable to give this poor girl as much support as possible. However, at the same time, the more the pregnant schoolgirl was supported the less of a deterrent there would be to other girls taking risks. Furthermore, if the girl were treated too well, then such actions would contribute to a social attitude that it was acceptable to get pregnant when you were young and without support. Certainly, at the time when this happened, society did not believe that it was acceptable for young (unmarried) girls to get pregnant.

My conclusion as a young teenager was that in practice it was better to take a macro approach than a micro-approach. In other words, even though girls such as this might suffer some social and practical discomfort, the outcome would be that society as a whole, including other girls at risk, would benefit.

Hard as it might seem, I have since concluded that this rather tough approach is desirable in many situations. And recent discussions about the problems in the banking and financial sectors suggest that this is still a hot topic.

The question, therefore, is how does moral hazard apply in your own organisation or among your clients?

Some years ago I was employed for a while to work within an international organisation with responsibility for the development of directors and senior managers. One of my first tasks was to prepare the ground for sacking a managing director. My boss, the chief executive, was concerned about the message that this would communicate throughout the organisation. The feedback that I received from my soundings was that people were aware of this person's performance and that there would be more damage from a soft or delayed approach than from a tough and early dismissal.

As we move into a difficult time for employers there will be many occasions where managers have to decide between a tough approach and what on the face of it is a more caring way of supporting staff.

It is often to the benefit of the organisation as a whole, and especially to staff who remain, if tough decisions are made quickly. Helping managers consider such dilemmas and providing outplacement services to staff who must leave are roles for professional coaches.

One business response to the difficulties in the world economy is to head east. Whether by good judgement or coincidence, I am leaving on Monday for a major tour to the Middle East, India and the Far East. I would very much like to meet any CorporateCoach readers who live in Dubai, Singapore, Kuala Lumpur, Bali or Bangalore. On my return I shall be heading for what was once known as the 'New World' as I attend the International Coach Federation conference and exhibition in Montreal. Once again, I shall be delighted to talk with any other delegates.

My itinerary can be found on the CorporateCoach blog.

Richard Winfield is founder of Brefi Group.

An international facilitator, he coaches and

facilitates directors and boards in transition:

helping them to make progress by

bringing structure and clarity

to their thinking.

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