Bernasek, Anna

Bernasek_web.jpgAnna Bernasek’s writing on finance and the economy has appeared in the New York Times, the Washington Post, the International Herald Tribune, Fortune, Time, and Australia’s Sydney Morning Herald. She has been a guest commentator on economics on CNN, CNBC, public television, and National Public Radio. In The Economics of Integrity: From Dairy Farmers to Toyota, How Wealth Is Built on Trust and What That Means for Our Future she reveals the deep layers of trust involved in even the simplest of transactions, and how integrity is our most valuable economic asset. Bernasek divides her time between New York City and the east end of Long Island.

[Bio adapted from: and Photo credit: Harry DiOrio]

Economics of Integrity

Anna, I met you at the re-Set Business event in New York, and you were on stage with Seth Godin, Tom Peters, Gary Vaynerchuk, and Michael Eisner. What was that like?

AB: Beforehand I was a little worried, because those are some pretty big names, and people who have done tremendous work over the years. I'm a newcomer. This is my first book, although I've been a journalist for 20 years. Speaking to a crowd is a different set of skills than the ones you develop as a writer. I ended up having a great time. Those guys are just so bright and also so wonderful to be with. I think it went well. I think we provoked people. It was a great experience for me.

I thought it was a very good event.

AB: Yes, I think people wanted more, more time with each of these brilliant people who knows so much about business, and to get each of their perspectives of what is going on today. People really crave being able to talk about this stuff with people who have been thinking long and hard about the issues facing business. People need help navigating what looks to be a constantly shifting terrain.

And then there's the huge influence of the Internet, and the Web, and the business that's being done on the Internet now, and how that's changing things. I really think it is a big deal for people. One woman in the audience was saying, "Well, do I try market myself online? And how do I do that?" We all have to deal with those questions.

I don't know if it was at this talk or somewhere else recently, or just hanging out on Twitter, people say, "You know what, just jump in." This is something that Tom Peters has been saying forever. It goes back to his book, In Search of Excellence. One of the tenets of that book was "A Bias for Action." Just get in there and try it.

The issue is that you don't know the answers. And really ultimately I think that's the thing. There have been a number of business books recently that are all about the fundamentals, getting back to basics. Trying things. Trying and failing and learning. We all learn by making mistakes. Somewhere along the line, though, the business world decided it wouldn't tolerate failures. The business world got divorced from humanity, even though it's people who are conducting business. I saw this tweet the other day where a guy wrote, "Wow, I didn't realize I didn't have to be a businessman, I could be a person." [laughter] There was no irony there. That's the weird thing. At some point being a businessman meant getting something over on someone else. It wasn't about helping; it was about coming out better than the next guy. What drove that notion I have no idea. But I think there's been a major shift away from that kind of thinking. Perhaps influenced by the Web. But your book is about...

AB: The antithesis of that, in the sense that I think that you truly cannot create wealth in the long-term unless you are operating with integrity. But, I do agree with you, that we have been seeing a very disturbing trend in the last few decades. Since the 1980's, I just think that business has taken a much more short-term view. It's all about making as much money as you can in the short-term, regardless of how you do it.

That trend is disturbing. And we've seen that with the financial crisis where even if it's not breaking the law, but you know it's wrong, people will still do it, if they can make money for themselves.

Part of that of course is the pressure on public companies to make more profits in the next quarter than they did in the previous quarter.

AB: I think that's right. It goes back, though, to what we were talking about at the conference—compensation. Everybody is compensated in that world according to the short-term performance. It's this quarter, the next quarter, with a year being the longest period over which your performance would be judged. The truth of the matter is, if you have that kind of compensation, you have people looking to make products and do services that are going to pay off in the short-term instead of the long-term.

I do think we can change this by changing compensation, and tying it to the longer-term. That would have a tremendous impact. I'm actually surprised that the banks have not taken this on because this is the thing that lies at the heart of the financial crisis.

I wonder if there's a difference between public and private companies in this regard. Do private companies that don't have to answer to Wall Street take a longer-term view? There must be a study somewhere about this topic.

AB: I'm thinking of a company like W. L. Gore, which is a private company. They do take a long-term view, because people they employ tend to stay in the company for the long-term, develop products over the long-term, and are compensated for their long-term performance. Of course that's one company.

Well, it might be an interesting study. But then the reality is, on Wall Street, for instance, people don't stay at companies for any length of time any longer.

AB: But do you think they would if that changed? Companies themselves haven't really valued people, and their attitude has been, "Well, we've got this huge pool. If you don't like it, move on." What if the management changed, and really did want people to stay? Not necessarily the way it used to be, but take a bit of that old-fashioned notion where you can have a career here for life if you really put your mind to it.

Zappos, for instance, has a policy where they train people, and then they offer them a thousand bucks to walk away. If you want to stay there, you stay there. They have a system of weeding out short-term thinkers. There are some people who are going to say to themselves, "I can have a serious party with $1,000." As opposed to somebody else who says, "No, I want to stay here and work."

AB: And companies like Google, they really do try and take care of their people, and want them to stick around. It is a combination of the management creating an environment where people want to stay and valuing their people, and secondly, how the compensation is structured.

Now, back to your book: How do you define integrity?

AB: The dictionary says it's moral rectitude, honor, honesty. We tend to think of it as a personal value, entirely up to you as the individual. But you can also look at integrity from an economic point of view. Integrity really is about a relationship of trust. Any single transaction has to have this relationship of trust in order for it to succeed. When you go to the store and buy milk, you are trusting in the integrity of the storekeeper to stock milk that's untainted and pure and fresh. Once you have that relationship of integrity and trust, you have an asset that produces economic value.

You give this very elaborate example of milk. From the farmer taking care of the cows, and the people who bring the medicines for the cows, and the guys who supply the feed from the Agway, and then the guy who comes in the milk truck.

You detail how in every step along the way somebody has to do something to ensure the quality of that milk that finally ends up on my kitchen table. You say that there's a moment of integrity every time a person participates in this process. But I see this whole process as a system of rules and regulations and people's self-interest. People want to keep their jobs, so they're going to do everything correctly along the way. There are regulations that need to be followed.

AB: I would call that integrity in the sense that you have systems that enhance that integrity. The rules and the regulations help foster the integrity of people, right? So I don't disagree with that.

I think you need to unbundle the self-interest and the integrity. There's no conflict between self-interest and integrity. The point of the book is that it is in your self-interest to operate with integrity. Our economy rewards those who operate with integrity; that's the way you create wealth. That's what's in your self-interest.

Though there are plenty of examples where it isn't in somebody's self-interest, right, as we've seen with the financial crisis. But that's where we get back to systems that can enhance integrity.

You've got a number of great examples in the book. One of which is Toyota. You use it as an example of a company that's always had integrity and operated with its customers that way. Of course, as soon as your book was published, Toyota imploded on you. They had a problem with some of their cars, but rather than deal with it openly, it seems that went into cover-up mode. What do you see that happened?

AB: It's really still unclear what happened. I think that it was partly an inability to understand what was going on, which really was that Toyota was coming under attack. And they didn't get it at all. I think there was an impulse to batten down the hatches and not deal with it, which really cost them. I think part of it was that the problem was actually quite complex. It wasn't easy for them to figure out what was going on.

One of the issues was that when they first started to understand the complaints about unintended acceleration, their reaction was "Hmmm, we can't simulate this, it must be the customer." But they couldn't come out and blame the customer, because that wouldn't have been a smart thing to do.

Well, that would have gone against everything that you have claimed is so great about them, how they were in this very trusting relationship with their partners—their customers—over the years.

AB: If you look at the studies on unintended acceleration it tends to be customer-related over the years. It tends to be people who bought a new car, don't know how to drive it, and they press the wrong peddle or their foot slips or something like that.

It's those 83-year-olds who drive through the plate-glass window at the dry cleaners. But I was also under the impression that it wasn't entirely "operator error."

AB: Toyota didn't understand how emotionally charged it was. When the Saylor family had that terrible fatal accident that was caught on the 911 call, people heard that call and that put fear into them. I don't understand why Toyota didn't take that accident apart and really figure out what happened and have it on their website. Because that accident was not about the Toyota car; it was actually about a dealer who had put in the wrong floor mat. And that's why the pedal got stuck. But they didn't take it apart. They also got it wrong from a media and public perspective.

So I do think that there is a combination of bad judgment and naivety. And I really don't think they were trying to cover up anything. Because I don't think that's the way they have operated for decades, and the way they would continue to operate.

I think there are two things. One is that I think there's still the possibility that there's some weird computer thing some people have been talking about. I also wonder, is it a matter of Toyota just getting so big that they lost sight of their basic values? Is that an issue here with Toyota?

AB: I know they said that that was an issue. And I think the president of the company actually said that when he was testifying. I guess you'd have to take it at face value in that sense, if that's how they felt.

So how do they regain trust?

AB: I don't know. I think that they've had to deal with harder things over the years. I think becoming the biggest car company and beating the American car companies was just a tremendous feat. I think that they have the potential to come out of this stronger, and really have stronger trust with their customers because they do take a long-term perspective. They do try to solve problems. And I think that every engineer, everybody in that company, is thinking about how can they make the cars safer.

I think that they've redoubled their efforts. They'll come out with some great products, and they'll be working hard to communicate that to customers. That's my take on Toyota's situation.

I agree. I think about the Tylenol incident, when some of their products had been poisoned. They yanked all their products out of stores everywhere. They gained a lot of trust because everyone understood what a financial hit they took by doing that. Toyota has now recalled a gazillion cars. I'm sure they're going to come out of it fine too.

AB: When you were talking about Tylenol, it reminded me of Goldman Sachs. Is Goldman Sachs the next Toyota? Their problem is the same in a way. It's a tainted product. What I've seen from how Goldman Sachs has been reacting, it seems they didn't learn from Toyota. Their first statement was: "Our customers should have known what they were getting into." Well, that's akin to blaming their customers.


AB: Then they backpedaled a little bit. But they haven't taken this on in a sensible way. If they really are concerned about their integrity, which is their most valuable asset, then they need to put a context around it. How big a problem is this? Is it contained? People need know that instead of just denying that the problem exists.

Then secondly, create a solution that builds trust with your customers. That's where Goldman is, surprisingly, falling into the same problems that Toyota had.

What exacerbates the problem for them are these emails with these guys gloating about how much money they're going to make.

AB: With Toyota, there wasn't a smoking gun where somebody said, "Cover this up." That's why I doubt that it was an issue of covering anything up. But with Goldman you really do have this smoking gun that these people were saying, "Yeah, we're going to make lots of money off our customers."

Part of your book is about dealing with a problem like this. You have eBay as an example of a company where when they started out they didn't know exactly how they were going to deal with their customers. Initially they hoped that the customers would manage their own complaints and disputes. That didn't work. They realized they had to have a small role as referee in the transactions. That's a recurring motif in your examples of integrity. For instance, in your milk example, there are a certain number of rules in place that give people guidelines on how to operate. But within that structure, people have got to be moral and upright and honest. And if they are, everyone benefits.

AB: That's exactly right. And it goes to the heart of that debate that we have between free market and regulation, which really is nonsensical. Because any free market has to have certain rules. The sooner that we wake up to this issue I think the better off we're all going to be. Because we can then create a sensible system where everybody benefits. It's about setting up those rules. People don't want to hear about rules. But you know, we get in the car and we drive according to the rules. That keeps people safe, and it also is efficient. And it lets us get to where we need to go.

With that mindset, what kind of rules of the road do we want in our financial system?

But, then on the other hand I would counter with these social experiments in doing away with the rules. In the Dutch town of Drachten, they've done away with almost all of their traffic signs. It's a place where cars, pedestrians, and bikes all share the road. They leave it up to people to figure it out. And what they're discovering is that it works much better than a place that has red lights and green lights. Because once you put the rules in place, then people bend the rules. It's also a matter of people then not using their own judgment, since there's a set of rules in place to follow. Whereas if you just say, "Figure it out yourselves," people are actually quite good at that.

AB: Plus, I would argue, we could do away with rules and just have simple ones that we enforce, like the speeding rule. That drives me nuts. Nobody follows the speeding limit, so what do we even have it for? Let's have no speed limit, or let's set the speed limit higher, and make sure that everybody follows that. I think we can examine what rules have been working, which ones haven't, and make changes.

Here we've got Goldman Sachs. They're under investigation and even being subpoenaed by the commission investigating them because they're being uncooperative. Do you see anything being revealed, first of all? And then do you see that an undue amount of regulation is going to follow?

AB: No, I don't see that there is going to be an undue amount of regulation. I was optimistic, but I'm becoming a bit more pessimistic about everything.

What happened?

AB: What happened was we had this tremendous opportunity to make a financial system better, and we blew it. Number one, bankers themselves have fallen really short of the mark. To me they have not stepped up and become part of the process. They've blocked legislation, and they've spent all this money to stop what's going on. I acknowledge that the regulation is not the greatest, and doesn't make the most sense.

We really do have this opportunity to make the system better, and to get bankers involved. It's something that we can all get on board with. And yet, the conversation has been about making the system safer, putting the screws on the bankers, which to me doesn't make sense.

We had a problem. We had a serious problem. Let's make the system better. That's my argument. I feel really sick that nobody is stepping up to make the system better. What's happening is that it's about making it safer, teaching the bankers a lesson. Retribution. That doesn't help anyone.

I sit there and watch these things, and I just think, "Oh God, it's like going back to high school and the kid was bad, and then he gets grounded." As if that's supposed to solve anything. Then there's no real discussion around what the learning possibilities are. I think that's exactly what you're saying. But is the opportunity lost already? Can't we still move ahead? The bankers are just pushing back. They want to operate the way they've operated.

AB: Exactly. Because, quite frankly, it's easier for them than to try and get involved in this mess in Washington, which really is a mess, and try and make some meaningful change. I actually do think it's shortsighted from the bankers, because they can keep operating the way they are for the next couple of years, maybe even longer. But unless they address these fundamental problems of trust and integrity, I do think that Wall Street and the U.S. financial system is not going to continue to be the world leader.

It is up to the bankers to make some changes in their compensation, number one. And number two, as shown by Goldman Sachs, it's time to think about whether it really makes sense to have trading and investment banking under one roof. There are some big structural issues that they need to deal with. If they don't, I think they're going to have problems.

Well, it's interesting you say that. I recently saw an article in Fast Company about Mike Mullen, an admiral who's head of the Joint Chiefs. He's also the only military guy at that level who's ever gotten an MBA. He's very interested in economics. He went to dinner in New York with Mayor Bloomberg and a bunch of the heads of big real estate companies and banks. He maintains that our economics system is directly tied in to our national security. So when I hear you say, "Our economic system is falling, where it won't be the best in the world," it's much larger than just our economics, if this admiral is correct.

AB: I think that's absolutely right. Our economic might does play a huge role in why we're the leading nation in the world. It is all tied together. But we have to ask some questions of ourselves: Are we trying to be the richest nation in the world? Or are we trying to be the best nation in the world?

I think you raise some interesting possibilities in your book. So now you just have to go out and somehow make them happen—or not. Maybe that's not your role. You're the journalist.

AB: Can I just leave you with one thought?

Of course.

AB: When you look at Jack Bogle, you look at Warren Buffet, and I include Tom Peters in this too, these are all guys who do embody what's good about American capitalism, and what's good about American business. And they embody those values that really did create this fantastic economy. But my question is, who are the next generation of Bogles and Buffets and Peters?

That's a great question. A lot of people are asking that right now. I'm interviewing a lot of business book authors, and we end up talking about Tom Peters, of course, because this is for Tom Peters' site. But a lot of people wonder: Who are the younger business thought leaders? Who should people be following? They're looking for leadership, for someone to model the way, or at least talk about what the way is. People are looking for that. And an answer doesn't come quickly to mind.

AB: No, it doesn't for me either. These guys really do have a set of moral values that make them stand out. What I take from them is that a person can lead business, be successful, and have a strong morality. And embody what we believe is good in this country, and is worth fighting for. The thing is, I don't see this quality in the next generation.

But then sometimes it takes a while for someone to be somebody. Tom Peters wasn't always Tom Peters. Same for Buffett and Bogle. There must be people out there doing things and they just haven't busted out yet.

AB: That's true, it does take decades to really make a contribution. Sometimes I feel like I've come pretty far, that I've done a lot. Then you realize, "Oh gee, I'm just starting. I just have to keep plugging away."

Yes, you do. Thank you, Anna, for your time.

AB: Thank you.

Email: annabernasek (at) aol (dot) com