Are You A Moral Hazard? (inspired from Wall Street: Money Never Sleeps)

If you watched Wall Street: Money Never Sleeps, you will not miss these words: moral hazard. Well, I actually thought "moral hazard" made a more appropriate title than money never sleeps. What is moral hazard? “It means they can steal your money and no one is responsible.” Well, that's in accordance to Gordon Gekko.

So, we have a new buzz word in town! Ok, probably it's just me.

Anyway, I decided to read up more about it.

Interestingly, “moral hazard” originally comes from the insurance industry. It arises because a party does not take full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions. This leads to personal acts that by definition are moral hazards. For example, if you buy fire insurance for your house, you may not care less about smoking in bed as you know the insurance company will pay for the repair of the damages.

Guess what? Moral hazards occurred in employment context too especially in regards to relationships between the business owners and their management staff. As working relationships at that level are largely based on trust, business owners may not be able to observe and scrutinize every action and decision-making of their managers. Moral hazard can happen when the managers are protected from the consequences of poor decision making. Bear in mind, the managers are essentially not dealing with their own personal money and therefore likely to be less vigilant or worse still, completely with a full conscious mind, squander away company’s money for self-interest. Sounds familiar?

Wikipedia explore it further by quoting some examples of such situations:

• When a manager has a secure position from which he or she cannot be readily removed.

• When a manager is protected by someone higher in the corporate structure, such as in cases of nepotism or pet projects.

• When funding and/or managerial status for a project is independent of the project's success.

• When the failure of the project is of minimal overall consequence to the firm, regardless of the local impact on the managed division.

• When a manager may readily lay blame on an innocent subordinate.

• When there is no clear means of determining who is accountable for a given project.

So, are you a moral hazard in your company? ....:D