Management author Tom Peters wrote a column in May 1987 criticizing what was then an emerging employment policy: workplace drug testing. It ran under the headline, “Drug testing of employees will damage their trust – and their commitment.”
At the time, Peters was at the top of his game. His eagerly awaited words were accepted as revealed truth in boardrooms and classrooms across America.
But with all of his credibility and all of his popularity, employers paid him no mind on this issue. Drug testing of job candidates and workers expanded quickly, and for an ever-larger number of Americans it is considered a necessary part of the employment process.
The reason that employers ignored Peters’ advice on this issue was simple: litigation.
The growing number of work-related lawsuits put employers in the uncomfortable and costly position of being responsible for their workers’ actions as well as their health. At a time in our history when personal responsibility was in decline, employers’ responsibilities were being expanded by lawsuits.
Drug testing seemed like an effective way to screen out the workers and job candidates who represented potential liabilities.
The effects of the screening are felt far beyond those who find themselves battling in court. If one business is successfully sued others will take steps to protect themselves. Sometimes this boils down to companies taking evasive action.
That seems to have been the case with the firms that make up the U.S. financial markets centered in New York City.
Despite the record bonuses handed out at the end of last year, Wall Street isn’t as healthy as we might hope. Concerned about employment and growth in that key sector, the city commissioned McKinsey Global to conduct an analysis of the situation. The results aren’t pretty.
If Wall Street were a company, its stockholders reading this report would be concerned at this point; not shaken, perhaps, but certainly stirred. One dashboard warning light for any organization is market share – and ours is flashing that we are losing it.
The U.S. now controls about 16 percent of the large (over $1 billion) initial public offering market. In 2001 we controlled 57 percent. Something has clearly changed, and you don’t have to be an alarmist to be concerned about it.
Hedge funds have been the major attraction for institutional and individual investors, and for many years New York City was their home field. There were a few in nearby Greenwich, Conn., including two spectacular failures. But hedge funds generally did not want to get too far from Wall Street.
The big hedge funds, though, have been voting with their feet and seeing Manhattan in their rearview mirror. In 2002, New York City was home to 28 of the 50 largest hedge funds. Now there are just 18.
The hedge fund migration is not the kind of cost-reducing flight to the suburbs that every big city, including New York, has to contend with at various times. Instead, the prime destination for the big hedge funds has been London, where real estate, taxes and other costs are even higher than in New York.
Something other than routine operating costs is clearly behind the skedaddle factor and New York’s reigning politicians believe they know what it is: litigation. No country on Earth, certainly no major financial center, has to put up with the amount of lawsuits that torment U.S. companies.
From the investor-litigator standpoint, all investments must be essentially risk-free. In today’s financial markets, however, measurement and disclosure of risk presents some major dimensional issues. Even ordinary corporations can have quite complex financial structures and their risk exposures can be difficult to explain let alone disclose.
The situation is even worse in hedge funds, which often deal in self-created layers of financial derivatives. Calculating exposure and risk for these funds requires zeal and patience, along with, of course, math skills not found in ordinary mortals.
It is not surprising, then, that hedge funds are taking evasive action and leading the migration to lands where lawsuits are rarely encountered. At the same time, firms seeking financing are finding the punitive aspects of the Sarbanes-Oxley regulations make private equity more attractive than publicly traded stock as a source of capital.
Our financial markets are paying the price for this, and eventually our economy will, too. It isn’t just a question of New York City getting its groove back. The problem affects all of us. It is not an easy one to solve, but it is encouraging that the politicians have at last realized that something is wrong. That’s always a good first step.
James McCusker is a Bothell economist, educator and consultant. He also writes “Business 101” monthly for the Snohomish County Business Journal.
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