Move over Mr. Burns: how the institutional imperative explains state and corporate corruption

Most of us are governed by institutions, and when they go bad we suffer serious consequences from entrusting them with our welfare.

I came across a term recently that set off a whole series of lightbulbs in my head. The institutional imperative. It is a term that is neither poetic nor elegant, but I think it is useful, especially in today’s dualistic political climate. This term, and what it describes, has helped me to arrive at a deeper understanding of how institutions, both state-run and private, can become corrupted without the need to invoke authoritarian governments or shadowy cabals. This process is liberating my thinking with regard to the ethical integrity of institutional power structures from the extremes of both paranoia and naivete that limit our ability to reason with clarity.

The term ‘institutional imperative’ was coined by economist Warren Buffet who first used it in a 1989 Berkshire Hathaway shareholders letter, where he defined it as: “the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so.”

The institutional imperative then involves not so much a shared ‘herd’ instinct as an ‘alpha’ instinct where the leaders copy one another’s ideas and behaviors often just so not to be left behind, even when doing so is clearly creating to a bad result. Bad ideas enthusiastically adopted and incorporated into the practices of institutional governance do not remain simply bad ideas. They lead to systemic corruption over the course of time. The actions of Wall Street bankers that led to the 2008 financial crisis is one of the most startling examples of the potentially devastating effect of the institutional imperative, which is perhaps why Mr. Buffet expressed regret at not learning about it in business school.

Andy Lin offers one sobering example: ‘Citigroup CEO, Chuck Prince, at the height of the mortgage and leverage tsunami of the mid-2000s famously said, “As long as the music is playing, you got to get up and dance.” Prince was transfixed by the lure of conventional wisdom, but the institutional imperative, and he and his shareholders would soon dance off the cliff as the company’s stock plunged from a 2007 high of 40 dollars to less than 3 in early 2009. During a period of horrendous market and industry performance, Prince managed to underperform both the S&P and his peers.’

Scale and time also influence the reach of the institutional imperative. Smaller organizations can tackle the infiltration of bad ideas much more easily than large ones. Corruption is not only more easily identified but can be rooted out without taking the entire organization down with it. Large legacy institutions develop nested bureaucratic structures operating at every level, that process even the smallest of decisions. Creativity expressed in new ideas are automatically filtered out by the bureaucracy. Once these structures become habituated to preference certain incentives, it becomes almost impossible to effect even a small change within the institution since every decision is channeled through the same system that remains invested in keeping everything exactly the same. Thus when strains of corruption begin to emerge, they never do so in isolation but always as part of the greater whole, which is why, especially when the whole is a huge lumbering entity, there is enormous pressure not to address it.

The institutional imperative explains why fraud cases are never uncovered voluntarily within the institution, but always require either an internal whistleblower or an ex-employee. Companies and institutions cannot tolerate criticism and will respond with threats to dismiss (or worse) those who dare contradict their internal narrative, and tie employees to legal contracts that prevent them from speaking out even when they are no longer in the organization’s employ. The institutional imperative gets passed on through all the levels and structures so that eventually everyone becomes tainted by the poor choices being made at the top. In a sense, everyone is to blame and no one is to blame. A finger pointed somewhere, ends up pointing everywhere, and so is rarely raised.

All authoritarian governments corrupt the institutions that serve them, but institutions do not require overtly authoritarian states or dictators to become corrupt. The institutional imperative is all that is required. This does not mean that there are never bad actors pathologically oriented towards their own personal concerns at the expense of others. In all likelihood, there are. The apex of power structures whether political or commercial tend to attract personality types that lean towards narcissism and sociopathy. But it does mean that a lot that goes on within institutions that looks as though it must have been motivated and planned by conspiring malevolent forces, might well be less conscious than we suppose.

This actually can make the situation harder, not easier, to address. Bad actors can, in theory, be identified and expelled, even if the process to do so is convoluted. But if the entire system is running on interdependently mirrored damaging themes set on autopilot, then changing a few people at the top of the pyramid will have little effect on the rest of it. Both horizontally (in terms of the leadership of peer institutions and their institutional bed fellows) and vertically (in terms of the structures of the individual institution itself) everyone else is still playing the game. The game is now in charge. This is something that Buffet observed: that simply changing the management of a poorly performing company did not bring about the positive changes expected. “I’ve said many times that when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

Perhaps if the institutional imperative remained only peer to peer, while it would still inform catastrophic decision-making, it wouldn’t necessarily capture the entire downstream culture. But whether we are talking about a university, a corporation, a government agency, or even a field of study, institutional imperatives are passed down through the chain of command to become an unspoken but nonetheless vital ingredient in the choices and decisions being made on a daily basis by every single participant. Buffet explains how the institutional imperative drives the leadership to embrace policies that support their resistance to change (despite evidence to the contrary) and how subordinates clamor to carry out executive orders regardless of how dumb they are. Eventually, like with a highly transmissible virus, everyone becomes infected.

Someone with a high level of institutional trust will contest that our institutions run on certain foundational principles: good governance, the rule of law, democracy, human rights, etc. and it is these principles that rule the day. Such people argue that the good guys are ultimately running the show, those with our best interests at heart. Of course, there are a few bad apples here and there, their argument goes, but the system – being ultimately good – filters them out in the end. The institutional imperative puts paid to such fancies.

It is just as naïve to believe that institutions cannot become corrupt as it is paranoid to believe that all of them are necessarily corrupt. What the institutional imperative teaches us is that there is another way to look at institutional corruption that doesn’t require us to engage in willful blindness nor to become, as Carl Sagan so perfectly put it, ‘so open-minded that our brains fall out’. Beyond the paranoia that sees corruption under every suit and the naivete that sees decency where it is unmerited, lies a cooler more discerning gaze that understands how even our most nobly conceived institutions can lose their way.

With an understanding of the institutional imperative, we can step out of the naivete that blinds us to more difficult truths without becoming a raging conspiracy theorist, simply by embracing a more realistic, a more human, and yes I am sorry to say, a more prosaic, story. Again, this is not to suggest that evildoers cannot and do not exist [see my blog post See no Evil, Farewell to the Good] simply that it is not necessary to evoke them in order to understand how institutions can go truly and horribly wrong.

The institutional imperative is closely connected to incentives. Pharmaceutical companies, for example, are incentivized to create reasonably effective products, but the biggest of them are so wealthy that they can absorb the lawsuits from faulty ones. Their own legal teams calculate losses from lawsuits from medical side effects into their marketing strategies. This is how they are able to pay such massive fines such as Pfizer’s 2009 2.3 billion dollar settlement for misrepresenting their products and paying kickbacks to doctors. Eventually, companies like Pfizer become a law unto themselves, setting their own rules for who can litigate against them and who cannot, and are powerful enough to pressure governments into contracts that remove all company liability.

Pharmaceutical companies are ultimately more incentivized to create profit for their shareholders than to create beneficial products. It should come as no surprise then that this incentivizes grossly unethical behavior such as the mass manufacturing and marketing of a product so addictive that in the words of US Department of Justice’s Deputy Attorney, General Jeffrey A. Rosen, it caused ‘a national tragedy of addition and death’ citing a civil settlement of 8 billion dollars against the opioid producer, Purdue Pharma. Were the actions of Purdue Pharma evil? Perhaps they were close enough that the difference is irrelevant. Was everyone involved in these actions evil, every single employee from top management down, or just those at the decision-making level? This is a different and far more difficult question. An individual might be unaware of their role in a crime through ignorance. But is ignorance of the connection between one’s involvement and a harmful outcome sufficient to be considered innocent? Perhaps this is why the institutional imperative is so prevalent, because it cushions the individual conscience against uncomfortable revelations of personal responsibility.

When an entire institution is corrupt then blame is parsed out. Everyone is implicated but it is hard to find anyone responsible. People will say, “I was only following regulations” or orders or protocol or whichever word they prefer. Blame is even further dispersed when institutional imperatives get transferred out from the boundaries of the institution itself to the general public who may continue to enact the institutional imperative out of a certain ideological loyalty, or through habit or fear or a lack of any alternative.

Government institutions are supposed to serve and benefit the people, not corporations. When corporate interests and state interests become indistinguishable from one another, this is the power structure of fascism. What happens, for example, when one institutional body whose job it is to regulate another institutional body is incentivized to appease that body instead? Fortunately, we have a perfect example of this in the relationship between Big Pharma and the American governmental regulatory body, the Food & Drug Administration (FDA). The FDA gets 75% of its funding for drug research from the pharmaceutical industry – an industry which the FDA was set up to regulate. It doesn’t take much imagination to consider the corruption that might ooze from such an arrangement.

This is how institutions can, sometimes so gradually that it is difficult to notice, become captured by motives and behaviors that increasingly direct its energies towards shallow internal interests as opposed to the common good. Whether these interests are to benefit the shareholder or the funding partner (as in the case of the FDA and Big Pharma), the result is the same: success becomes measured in terms of profit, while harmful outcomes are brushed under the rug.

Institutional trust types might counter, wait a second, this is all very well, but someone in the chain of command will surely put up their hand to say, “No. This just isn’t right and I won’t be party to it.” But that’s not what tends to happen. At a certain point, everyone signs off on the bad the ideas circulating within the institution simply by complying with them. And anyone who doesn’t is ejected. The pressure to comply comes from all sides and attempts to complain or even actively disagree are met with a metaphorical brick wall. We all like to imagine ourselves as Oscar Schindler, but at the end of the day, most people ‘go along to get along’. Everyone has to eat, after all.

Further downstream from the toxic brew of the institutional imperative is the unsuspecting citizen/consumer depending on whether we are talking about a governmental body or a corporation. In the case of the Covid pandemic, it was both, since we the public were called upon to consume a product (in this case a vaccine) created by corporations and which was touted by a governmental institution (the FDA) which those same corporations significantly fund. Most of us find this problematic. Others might consider it a perfectly convenient arrangement.

It is still somewhat baffling to me why some remain reluctant to seriously entertain the possibility that shocking levels of corruption could be happening now, right under our nose, within the institutions that have been set up to protect us. It is as if such people can only imagine such corruption as the stuff of history books or dystopian fiction. Even after witnessing one of the biggest public frauds of all time, which bankrupted and robbed the savings of millions of ordinary people, and then watching as our leaders bailed out the criminals. Even after that. Baffling.

Perhaps one of the reasons that we struggle to except the reality of institutional corruption, even when it stares us in the face, is that our own lives and values have become entwined with the very institutional imperative that caused the corruption. To free ourselves from its toxic influence, we have to accept the unpleasant fact that we have been fooled, cheated and lied to. And in the words of Mark Twain,’ it’s easier to fool people than to convince them that they have been fooled.’

Much as it makes for a better story to believe that our institutions are run by cackling Mr. Burns-like specters or else by noble knights in shining armor, the reality is, generally, far duller. The institutional imperative is running them; a kind of lemming-like mass-hypnosis. When more of us turn and take a firm stand against these self-destructive impulses, the more chance all of us have to steer things back in the right direction. The only other choice is to follow the rest of the doomed sorrow throng – over the edge of the cliff.

About subincontinentia

writer and eternal optimist
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