In my experience on Wall Street, working for a series of broker-dealers, I came to learn one very basic truth about financial services – you should to set up the incentive system in such a way that employees are rewarded for being on the side of their clients, and there should never be a big, glaring conflict of interest between what’s best for the firm and what’s best for the firm’s customers.
Firms forget this from time to time (Wells Fargo) or know it but ignore it completely (variable annuity sales) because the immediate rewards for doing so are so high.
Another thing, which is kind of an ancillary point, is that all the rules and regulations and disclaimers you can pack into back of a prospectus aren’t going to matter if people are determined to seek out loopholes, push the envelope or follow the letter of the law while completely violating the spirit of it. The examples of this sort of thing are legion. And this gets to the heart of the big culture questions – what kind of people are we hiring, how are we structuring their compensation and what are we permitting them to do in the name of this year’s bonus?
Ruth Porat joined Google as CFO a few years ago, leaving behind a career in finance at Morgan Stanley. She told an audience the following:
“The financial crisis would have been different if someone had asked” whether taking on massive amounts of financial leverage was a good idea for the big banks, Porat told a luncheon gathering of the Economic Club of New York.
“Culture is more important than rules and regulations” in its contribution to the long-term success of a company, said Porat, who worked at Morgan Stanley for 28 years before joining Google in 2015.
“The most important thing is culture,” she said.
This is not to say that Google is completely angelic or that The Street is inherently evil. However, there is a marked difference in the types of people who gravitate toward one or the other. There is also a difference in the tone of management – “They’re saying this, but what they really want me to sell is that…” There is also a difference in incentives (company stock is the big payday out west versus Christmas bonus back east) and a willingness to think past the next 90 days in the Valley that would maybe be helpful if adopted in the Financial District.
And no, I’m still not calling it Alphabet.
When Google or Apple flash a consent banner, telling you about a change in terms of service, you click “agree” within less than a second, reading none of it. Similarly, investors don’t read disclaimers and disclosures, they merely sign off on them as part of an account opening process and generally just trust the salesperson because they like them. So if no one is reading anything, then culture is going to matter a great deal above and beyond the prevailing regulations in a given industry.