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Gresham’s Law and the Shaky Nature of Today’s Business Ethics

Posted on 24 July 2020

Debasing the coinage of management decisions


Sir Thomas Gresham
Rijksmuseum, Amsterdam

There seems to be no end in sight to the series of corporate write-downs, business failures, lawsuits, criminal trials and SEC fines marking Corporate America’s love affair with naked competition and profit at any price. We shouldn’t be surprised. A cursory glance at the history books shows nineteenth century and early twentieth century business tycoons were every bit as ruthless and unprincipled as today’s. The pursuit of wealth in business, like the desire for political power, always attracts as many unscrupulous adventurers as genuine entrepreneurs.

Sir Thomas Gresham in sixteenth century England knew all about sharp business practice. In those days, the value of a currency depended on the amount of gold or silver in the coins themselves. The markings on the coins, in his time the head of Queen Elizabeth I, guaranteed the content of precious metal. It didn’t take long for the Elizabethan equivalents of today’s greedy executives to see how to work that to their advantage.

Forgery and debasement of the coinage became common. After all, if you accepted a coin because it carried the Queen’s head, anyone could play on your trust by producing coins that looked right but had much less silver or gold in them. Let that happen, and in a short time, the ‘bad money’ would replace the good. That statement by Sir Thomas was later codified into Gresham’s Law.

Gresham’s Law explains why the ‘good coinage’ of ethical business is constantly under threat from sharp practice and dishonesty. We want to believe that corporations and executives are honest, just as we want to believe in the value of the currency. So long as we take both on trust, forgers and cheats will seek to exploit our gullibility.

Gresham’s Law in action today

Let’s take a company whose executives’ sole objective is making money. They need to drive the company’s stock price upwards to keep adding to their wealth in stock options; and the best way to persuade Wall Street to keep ratcheting up the price of the shares is to provide spectacular business and profit growth, quarter after quarter.

Sound familiar?

At first, let’s assume, it isn’t too hard to do this. The business has a good product and has found a market niche ripe to be exploited. Results come steadily and management attracts plenty of approval.

The trouble starts when it gets tough to keep on exceeding Wall Street estimates every quarter. Faced with slowing growth, management first jumps into constant cost-cutting. When the benefit of that runs out, it focuses even harder on what seems to matter most: ‘making the numbers’. Everything else is pushed aside. Anyone who makes the numbers is praised as a hero, no matter how it’s done. Sharp management practice is accorded exactly the same value as any other approach.

Of course, it’s typically far easier to produce the required numbers by cheating than by the ‘good coinage’ of sound, ethical management. But since the numbers are all that matter, the extra effort and time needed for doing things right doesn’t seem worth it. ‘Bad money’ — creative accounting, manipulation of figures, concealed risks and other marginal or outright dishonest practices — quickly drives out good.

The result is a host of scandals and collapses, all directly attributable to the corporate version of Gresham’s Law.

Finding a solution

Gresham’s Law holds good where bad and sound coins circulate with the same face value. If good coins are worth more than bad ones, there’s no incentive to choose the bad.

It’s the same in business. Gresham’s Law produces unethical executives and dishonest corporations just as long as making the numbers is all that counts, not how they’ve been produced. So long as investors are dazzled by profits, and don’t stop to think about how they’ve been attained, companies and their leaders have every incentive to take the easiest route — and that’s nearly always the one that’s least concerned with honesty.

We live at a time when it’s become fashionable for our leaders to parade their adherence to strong values. For some, this is the truth. But the temptation is always there for others to debase the currency of honest and ethical values and hoodwink people to their own advantage. If we’re not constantly on our guard, their bad coinage will drive out the rest.

As a society, we need to return to valuing results only when they’ve been achieved fairly and honestly. Whether it’s dishonest business practice, or the use of performance-enhancing drugs in sport, bad methods will continue to drive out the good just as long as no one inquires (or seems to care) how those outstanding results have been achieved.

Ethical approaches demand time, effort and the willingness to fail rather than produce a result by any other means. They appeal to values higher than simply delivering the goods; values like honesty, integrity, fair play and human dignity. Even in today’s environment, that still sounds like the better course.

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This post was written by:

Carmine Coyote - who has written 257 posts on Slow Leadership.

Carmine Coyote is the founder and editor of Slow Leadership, with a career that stretches from early employment as an economist, through periods in government service, academia and several multinational companies, to retiring as CEO of a US consulting company and partner in a large business services firm. Carmine now lives in Arizona, but is British for all that.

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2 Comments For This Post

  1. Kevin says:

    Today I got a letter from General Motors saying that they were no longer paying dividends on their stock.

    It makes me wonder if a different leadership style 5 years ago might have made a difference. Focusing on val;ues and not the bottom line might have made GM (and Ford for that matter) better, more profitable companies.

    My colleague wrote an essay on Ford’s 8.7 billion dollar loss in Q208.
    You can read it here:

  2. Carmine Coyote says:

    Thanks for your comment, Kevin. You may well be right. Keep reading, my friend.

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