Gongol.com Archives: April 2022

Brian Gongol

April 13, 2022

Business and Finance On your most professional behavior

A very good question -- "How do we identify and create professional business executives?" -- recurs chronically because we abuse the word "professional". ■ A "professional", correctly stated, is a person who obtains legal coverage to keep other people out of their trade. In exchange, they promise to conduct themselves according to binding professional standards. ■ An essential part of the "professional" trade-off is that the professional surrenders the right to extract maximum profits from their clients. It's an acknowledgment of an insurmountable knowledge problem on the part of the client. ■ A "professional" doctor, for instance, surrenders the right to upcharge a patient for tests or treatments they don't need. In exchange, the patient (through the government) protects the doctor from competition. With a profession comes not just the assurance of good (though not extravagant) compensation, but also social esteem. ■ The meaning of "professional" starts to break down by little erosions -- celebrity doctors profiting off weight-loss fads, dentists hocking snake-oil tooth whiteners, and accountants pivoting to more-lucrative business consultancy. ■ Any old set of dopes sharing a common craft or trade can form a guild to keep others out, and they can peddle their influence to protect themselves from competition. (This, of course, is the source of the gag behind Gob Bluth being purged from his own "Alliance of Magicians" in "Arrested Development".) Without binding standards that serve to protect unwitting customers from being manipulated, what we call "professions" are often just guilds dressed up in fancier titles. ■ The more we chip away at the fundamental meaning of the word "professional", the more we lose touch with an important distinction. After all, does a "professional" athlete swear to uphold a self-sacrificial code of conduct like the Hippocratic Oath? Hardly. Sports leagues often enforce tougher codes of conduct for fans than for owners and players (see, for instance, how Atlanta's baseball team continues to profit from the indefensible Tomahawk Chop). ■ All of this is a shame, because America (and the world) really could use higher standards for "professional" business conduct. But that would require the managerial professionals to sacrifice some material self-interest in exchange for professional status. ■ As a symptom of the principal/agent problem, the absence of any widely-used codes for business conduct is a problem. This problem is on display tenfold when you look at how some agents abuse the trust of their clients. ■ The absence of binding professional codes in business is why Warren Buffett's words to the staff of Salomon Brothers stood out: "Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless." ■ Jack Bogle also sounded like a moralist in contrast with the vacuum of professional business standards when he wrote, "I am arguing that our business principles have been diluted [...] There are some things that one just doesn't do". Bogle willingly gave up what could have been enormous riches because he thought bringing thrifty, low-cost index funds to the public was a matter of doing the right thing. He voluntarily held himself to an extremely high professional standard because he believed that was the right thing for a capitalist to do. ■ Perhaps we would be better off if business owners (particularly the shareholders in publicly-traded firms) insisted that corporate suites were full of people sworn to uphold a professional code that would put owners' interests ahead of maximizing personal gain. ■ But given the routine use of lavish compensation models to keep board members fat, happy, and complacent with the will of the CEO, it seems unlikely we'll see the advent of a truly "professional" business class anytime soon without the ignition supplied by other reforms. Poodles in the boardroom are no substitute for sheepdogs. ■ That's a shame, because even Adam Smith saw that there was a moral dimension to well-functioning markets. Not everything that is legal is right, and not always is the right course (by ethical standards) the best way to make a buck. Correcting for those shortcomings would be good for capitalism.