We live in a world in which fraud and deception are a normal part of everyday life. Examples include roofers who promise to use good materials but who substitute inferior product because few of us are able to climb three stories to check out their product, e-mails barrage us to send thousands of dollars to the sender who will then return millions of dollars to us, and websites sell counterfeit pharmaceuticals. Consequently, it is not surprising when companies go to extraordinary measures to reduce their risk of being "taken."
The unintended consequence of living in a world in which everyone is thought of as a potential cheat or liar is that measures must be taken to thwart off unknown risks. These include complicated passwords on bank and e-mail accounts and iris recognition technology. The last thing one would expect when protecting themselves would be to run into another risk. That is what is going on with some insurance companies.
Recently, I broke a tooth. In order to have my dental plan cover the incident I had to submit to a dental x-ray whose sole purpose was to "prove" to the insurance company that my dentist was not submitting a fraudulent claim. A photograph would not suffice and instead to invoke insurance coverage which I had paid for I had to allow myself to be exposed to potentially dangerous x-rays. My dentist has had a relationship with the insurance company for more than 30 years; at some point you would think they would trust him!
Insurance fraud is a big problem. The way to solve it is not by endangering or at least increasing the risk facing insurance customers. No doubt insurance companies are bilked out of millions of dollars every year. But the unintended consequence of protecting them should not be health issues afflicted on their customers.
Harlan Platt's blog harlanplatt.com discusses similar issues all related to his new book, Unintended Consequences: How to Improve our Government, our Businesses, and Our Lives.
In a front-page story in today's Wall Street Journal we learned that Mark Zuckerberg the founder and CEO of Facebook never consulted with his board of directors before negotiating a $1 billion deal to acquire Instagram. Normally a board of directors is comprised of individuals with disparate skill sets who advise and consult with the CEO on corporate issues including strategy. A visitor to my class on restructuring at Northeastern University, a former bankruptcy judge, remarked once that in his opinion most bankruptcies are caused by CEOs who ignore their board of directors. Obviously no one would suspect that Facebook is a likely bankruptcy candidate; but that does not mean that Mr. Zuckerberg was right in what he did.
I suspect that his behavior was an unintended consequence of his previous success. My friend the bankruptcy judge explained that successful CEOs had to fight naysayers on their way to success. He felt that this caused many of them to assume a me against them mentality - even when they're all on the same team such as with the Board of Directors. I don't think Mr. Zuckerberg had too long or too arduous a battle on his way to Facebook success. In fact, I suspect this unintended consequence derives from his arrogance as a result of rapid and unprecedented success.
This unintended consequence is not going to bankrupt Facebook. After the company goes public however, public shareholders may object to his handing out 1% of their company for an acquisition of a firm with no revenues and no profits. After all, Instagram was not the only photo sharing and photo manipulating app out there.
Most people remember the inconstant behavior of the pigs in George Orwell's Animal Farm. As they gain control over the farm they soon take on characteristics and behaviors of the humans whom they expelled. According to Dominic Holden in his New York Times editorial today “Smokeless in Seattle,” legal medical marijuana merchants in the State of Washington have worked to check the full marijuana legalization movement which is on the November ballot. How odd that this unintended consequence should arise between current sellers and prospective sellers of marijuana in Washington.
This unintended consequence is similar to the mutation that took place on the farm in Orwell's book. Power and profit lead to greed and suppression of opposition. Like the pigs in the book, purveyors of medical marijuana in Washington perceive full legalization as a threat to their economic well-being. To protect those profits they have worked diligently to persuade the public to vote against the full legalization proposal. Economic interests create strange bedfellows. In Washington State, they have induced medical marijuana advocates to align themselves with more reactionary interests.
Unintended consequences are a powerful force that surface everywhere affecting everyone. The most damaging unintended consequences are those involving government or legislative decisions since those affect the most people. But decisions made by people and companies also have unintended consequences. Everything you do today may lead to something that you don't expect - that would be an unintended consequence.
Our society is plagued by a variety of ills which many believe are related to our overuse of chemicals and our disregard of keeping those toxins away from children, pregnant women, and other highly at risk individuals. One would have thought that with a Democrat in the White House who has claimed to have an environmental agenda that the Environmental Protection Agency would have been cracking down on this type of abuse. Yet this week the EPA rejected a claim by the Natural Resources Defense Council that 2,4-D a highly potent herbicide was not dangerous. This startling claim took the EPA nearly 4 years to render despite the fact that numerous scientist have indicated that the compound has the potential to cause a multitude of human ills including cancer.
Every week reports surface of how the rate of certain illnesses amongst Americans are increasing at startling rates. Rates for illnesses such as certain cancers and autism, appear to be out-of-control One hypothesis is that we are poisoning ourselves with chemicals such as 2,4-D.
Why then would the EPA issue this unexpected finding? I suspect the answer is unintended consequences. With the election just seven months away and with the two prospective candidates very close in the polls, I wonder if pressures were exerted by the current administration on the EPA to make this decision. Perhaps I've just become too cynical - what are a few more illnesses compared to getting reelected. The unintended consequence of a tight presidential race may be the abandonment of simple principles of being cautious when crossing the street, when climbing the mountain, and when deciding whether a potentially dangerous chemical should be used on lawns and farms and make its way into our lives.
This week begins the first quarter release of corporate earnings. While they are anticipated to be weaker than they have been recently, US companies have weathered the storm begun in December of 2007 when the economy entered the financial crisis. Two simple explanation for this surprising strength are 1) continued investment in technology which contributes to growing productivity and 2) ongoing efforts to constrain costs by moving production towards efficiency methods and holding down purchase costs and wages. The health of companies explains, at least in part, the high stock market valuation (just 8% away from an all-time high).
The unintended consequence of the two ways this strength arises is continued weakness in the labor market, contributing to high unemployment, high long-term unemployment, and dismal increases in wage rates. That is, the glow surrounding corporations is balanced by a dimness in the labor market. No doubt the US is better off with strong companies when labor markets are weak than the alternative which would be weakness in both companies and labor. A concern is that companies will continue to move employment overseas as they have been doing in their recemt cost controlling efforts. If that happens the labor market will remain weak indefinitely. Let's hope that it doesn't.