Moral hazard: What's the big idea?

Risk and trust are Siamese twins in business. And with it comes moral hazards.

by Nigel Nicholson
Last Updated: 09 Oct 2013

The naughty child overtones are deafening, which seems right today, as we hear the phrase ringing out from eurozone capitals. The kids (Greece, Cyprus, the banks - make your own list) are free to misbehave while someone else, the responsible adults (Germany, Netherlands, taxpayers etc) have to bear the hazard - the cost of mopping up all that carefree spending and all those madcap schemes.

Yet, strip away the pejorative voice and you can see that firms could not drive the road to success without a tankful of moral hazard - without it every agent would have to be a principal, creating a new set of hazards around self-interest.

The joint stock company was created partly to circumvent the arbitrary wrongheadedness of owner-managers. We have to believe that people who look after our money and interests are bound by contracts, statutes and upstanding principles.

The last of these is what economists are apt to undervalue - word as bond, handshake as deal, value as intangible.

Risk and trust are Siamese twins in business, and the solution to crisis is not to regulate every hazard out of existence but to create contexts - communities of shared responsibility - where risky innovation can flourish and people can create value through purpose, opportunity and imagination.

Nigel Nicholson is the author of The 'I' of Leadership: Strategies for seeing, being and doing (Jossey-Bass, £18.99).

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Ban football chat at work? There are other ways of being inclusive

Conversations can exclude people, but they're also what make the workplace human.

Ranked: The UK's best marketing departments

Exclusive research from Britain's Most Admired Companies shows which firms are most respected by their...

Has the cult of workplace wellbeing run its course?

Forget mindfulness apps and fresh fruit Fridays. If we really care about employee wellbeing, we...

Cybercriminals: A case study for decentralised organisations?

A study shows that stereotypes of organised criminals are wide of the mark.

Why your turnaround is failing

Be careful where you look for advice.

Crash course: How to find hidden talent

The best person for the role might be closer than you think.