Russ Roberts

Allison on Strategy, Profits, and Self-Interest

EconTalk Episode with John Allison
Hosted by Russ Roberts
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John Allison, CEO of BB&T Bank, lays out his business philosophy arguing for the virtues of profits, self-interest and production. His definition of justice, one of the core values of his firm, is that those who produce more, get more. He argues that Bill Gates would do more for the world improving Microsoft than running his foundation and giving away money. Allison praises Atlas Shrugged and refuses to let his bank make loans to companies that use eminent domain to acquire property. Is this any way to run a company? Does Allison really run his company this way? How does he deal with the gap between his philosophy and our popular culture's view of business and profits? Listen as Allison and host Russ Roberts discuss BB&T's unusual business strategy.

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Readings and Links related to this podcast

Podcast Readings
HIDE READINGS
  • John Allison's Home page
  • "Our Philosophy". BB&T Bank's philosophy, by John Allison.
  • On eminent domain:
  • On Ayn Rand:
  • Highlights

    Time
    Podcast Highlights
    HIDE HIGHLIGHTS
    0:37Intro. BB&T started in 1872 as a farm bank in North Carolina. Allison joined in 1971. Bank has since grown to a multi-state financial services holding company operating as 33 community banks with decentralized decision-making. Sixth largest insurance broker in the U.S. Internal strategic culture emphasizes rational self-interest. Sense of purpose, reason, and self-esteem; rational thinking. Doing your work well increases your personal self-esteem and is also in accord with the values of the company. Success in financial sense, taking advantage of other people, self-sacrifice, altruism. Monks took self-sacrifice and altruism seriously. "Proper alternative is to be a trader, to create value for value." By having the value of acting in our rational, long-term self-interest at heart, both the employee and the company get better together. Win-win relationships.
    9:53Charity. United Way. Psychological effect: give more if you give out of rational self-interest than out of sacrifice. Isn't the narrow self-interest is to let others create the good community, doing the work for you? How do you dissuade free-riders? Handicapped workshop example. By focusing on what life is about you can get meaningful rewards from other things than just making money. Shirking is socially shunned, which does help prevent it, but society has to work to create those feelings in individuals. Bill Gates, Microsoft. Gates does more for society by working on what he does best--Microsoft--than by giving charity. What did we lose by Gates's working on charity, which was not his comparative advantage? Charity is secondary, peripheral even for the non-Gates of the world.
    17:08Mission Statements are always full of platitudes. Motto of Ritz-Carlton is "Ladies and gentlemen serving ladies and gentlemen" and is somewhat accurate, but most mission statements are less so. How do you pass down your mission statement to your employees, and is there any evidence that it has an impact? Businesses' value statements often rely on altruism, and employees figure that out and look instead for the hidden reward system of the company. BB&T has tried to state its philosophy clearly, pamphlet, yearly talk, and to integrate it in its value system. Performance appraisal system includes attention to and feedback about how employee is doing in relation to the core values. "We live our values because they work." Justice: "Those that produce the most should receive the most." Not the usual definition of justice. The ten BB&T values: Reality--start with the facts. Reason--capacity to think logically, active mind, refuse to evade, education, focus. Independent thinking--thinking for oneself, being responsible for oneself, creativity is only possible to an independent thinker, entrepreneurs. Productivity--profit in a free market is a good thing, gut-level commitment to get the job done, performers vs. non-performers. Honesty--doesn't require you are always right, but you have to say what you mean and know what you mean, avoid white lies or exaggerate your knowledge, keep agreements. Integrity--acting consistent with one's beliefs, requires not sacrifice but a long-term perspective. Justice--those who contribute the most ought to receive the most, hard to measure but try to carry it out. Pride--Aristotle, reminder to do go coupled with reward for having done good, live values consistently. Self-esteem, self-motivation--work is more than work, sense of purpose that goes beyond work feeds back. Teamwork--work toward common goals within the context of the rules: do your own work well, root for teammates to get better, undermining psychological effect of envy, think how your work affects the rest of the team.
    31:09How do you actually get employees to really think about these things? How can you implement it? How do you convince people that saying things like "profits are good" is in their own self-interest when society often argues the opposite? What kind of process do you use to hire employees who might find all those values good ones? We make it work because we live it. Employees see it around them. If you do something unethical, we will fire you--e.g., dishonesty, measurably undermining fellow employees, manipulating the system, bending the rules for a short-term result. Selection: focus on management level, test for values, explicit in the interview process about expectations of value system. Imperfect but good filter. Justice and profit: focus on long term perspective, don't want to take advantage of our clients. We expect to make a profit, and we expect to earn it. We want to be more reliable, more responsive, more empathetic, value-based service. "The conflict around profit is: 'Hey, I'm making it by taking advantage of other people.' That's not how we want to get there." We pass on short-term profitable things. Example: did not get into the negative amortization mortgage business.
    38:49Milton Friedman, social responsibility of business is to make money. But our social culture doesn't teach this--it rather teaches the opposite. "We want to be your friend" on a bank's billboard is not what one usually wants a bank to do. We look elsewhere for friends, and expect expert financial services from a bank. But when you say this explicitly it is jarring. Some people have not formed final opinions on the matter, so are open to the idea. Atlas Shrugged, defense of capitalism. Management level people do read it. Selfishness in the book: a common misperception is that Rand is all about selfishness; but that is not what the book is about and is often confused.
    44:45How is Allison's own compensation set? Based on performance of bank. At risk, bonus if we outperform those goals. Stock ownership. Does luck matter? Yes, but over the long term it's only a minor factor. Tends to work out. Does Allison see himself as an educator? Yes, a coach, an evaluator of philosophy. Invest more in employee education than competitors, and less on advertising, relying more on word-of-mouth. Eminent domain: Supreme Court's Kelo decision "potentially threatened property rights and property rights are the foundation for economic well-being." U.S. is first country to be founded on a set of principles, including individual rights, including property though it is not explicitly listed by Jefferson: life, liberty, pursuit of happiness. Hard to pursue happiness without property. Why is eminent domain used for private projects, if government subsidies are necessary for the project to succeed? BB&T bank decided to not finance projects that involved taking property from one individual and giving it to another through eminent domain. Sacrifice of short-term gain. Reaction was overwhelming---thousands of people moved their checking accounts to BB&T. Poignant email: private farm taken to build a municipal golf course. Underpayments: judges often are elected lawyers and hence are politicians, and were working to bring down the prices paid during eminent domain takeovers. Clint Bolick podcast. U. of North Carolina vs. Duke.

    COMMENTS (11 to date)
    Nathan writes:

    I'd really love to hear you interview Steven Pinker to discuss how the instincts evolution has hardwired into us affects our behavior as modern economic entities.

    cljo writes:

    A great podcast. Its nice to hear about libertarian ideas being implemented in the real world.

    Torsten writes:

    I had a look at their web site. I think the proper word for values the way they use it, would rather be virtues...
    From the site: "...The great Greek philosophers saw values as guides to excellence in thinking and action. In this context, values are standards which we strive to achieve. Values are practical habits that enable us as individuals to live, be successful and achieve happiness..."

    Values are abstract, while virtues are properties of the agents.

    Anyway, it is important for an organisation to have shared values, have a common understanding of them and to put them into practice to form good habits...

    Yahonza writes:

    Good interview. But I wonder what his take would be on some issue you did not discuss.

    Ayn Rand was an avowed atheist. Does religion play any role, directly or indirectly, in the management or operations of BB&T?

    Does BB&T have a diversity program? If so, how does that square with BB&T's values? If not, is the bank under pressure from its customers, the government, or other outside forces to adopt one?

    What does he think of Taleb's Black Swan theory?

    Finally, how does he feel about running a business in an industry that is so highly regulated?

    Luke writes:

    I only recently discovered your show through a link from Nassim Taleb's page. Just wanted to say I really enjoyed both the Taleb show as well as today's show.

    Atlas Shrugged is also one of my favorite books, and like Allison I use the philosophy of Ayn Rand in my everyday life. Keep up the good work.

    muirgeo writes:

    Indeed I like the format. As a liberal minded person I was prepared to dislike Mr. Allison but I found him charming and uplifting. Indeed if every man were so the form or need for government would be questionable. But I guess I've seen the current system produce one to many Ken Lay types. I'd like to believe a true free market would indeed allow excellent people like Mr. Allison to rise to the top but I'm still very skeptical. In the mean time I am hooked on your podcast. I came to this site via The Skeptical Optimist site.

    Thanks and I'll keep an open mind on the Libertarian view point.

    nathan writes:

    I didn't like this interview. I think it is going to be very hard to get insightful, honest commentary from a current business leader. Or politician, for that matter.

    While the average person would benefit from Mr. Allison's libertarian-ish views on profits, etc ... this stuff is taken for granted by those who regularly listen to Econtalk.

    My favorite episodes have been the two with Bruce Bueno de Mesquita. His incentive-based analysis of foreign policy and politics is very cutting edge ... he really helps make sense of these topics that have always been difficult for me to grasp.

    rob writes:

    This one seemed a little bit fluffier. Did he ever give a solid example of any of his ideas in action. Except of course the no loans for eminent domain projects. I listen to econtalk to hear hard probing on economic topics. Like when you challenged the ideas of soft paternalism.
    Rob
    PS I too thought Allison's definition of justice was a fascinating surprise.

    Conrad writes:

    Dear Russ Roberts,

    This is the only of your interviews that I have heard and I enjoyed it. You allowed your guest to present himself in full. I think this is good because that has allowed me to understand where he was "coming from." If you have him back to discuss an issue I will know what he means. Many shows today interrupt their guest before they are done speaking, this makes it impossible to understand fully what was meant and to get anywhere on an issue; resulting in an incomplete picture; a meaningless, forgettable interview.

    To the other posters:

    I'm not sure that John Allison is a Libertarian, or that his philosophy reflects that of Libertarians. Judging by this interview and an article on wikipedia, he sounds to most closely align himself with Ayn Rand's philosophy of Objectivism; which rejects Libertarianism.

    Quote:
    Q: Why don’t you approve of the Libertarians, thousands of whom are loyal readers of your works? [FHF: “The Age of Mediocrity,” 1981]

    AR: Because Libertarians are a monstrous, disgusting bunch of people: they plagiarize my ideas when that fits their purpose, and they denounce me in a more vicious manner than any communist publication, when that fits their purpose. They are lower than any pragmatists, and what they hold against Objectivism is morality. They’d like to have an amoral political program.

    More can be found here:
    http://www.aynrand.org/site/PageServer?pagename=education_campus_libertarians

    Matt C. writes:

    I found this podcast fascinating. It's fine and dandy to talk about how economics works in the "theoretical" (for lack of a better term) world, but to see a company actually implement the ideas of the free market is an interesting case study.

    The criticism of Allison not answer concrete answers regarding the reaction of the employees on the Justice principle would be difficult to give concrete examples. The CEO isn't going to be can't or shouldn't concerned about a high turn-over position like that of a teller. He does have control over his upper management which then pushes those ideas onto their reporting management.

    If you could get Charles Koch to do an interview I think that it would enhance this format.

    Please don't get me wrong, I enjoy the other interview format that you have done just as much.

    In regards to Yahonza's question on Atheism in BB&T's culture, I very much doubt it holds any significance in the culture or that Mr. Allison promotes it. I've heard John Allison speak at a few Objectivist venues [lectures and such] and from what I've heard he understands the philosophy and lives it excellently. And in the context of Objectivism, Atheism is a footnote in a larger system of belief. Atheism just says you're against a particular belief without saying why or what you're for. _In general_ [bearing in mind that I'm by no means a representative of the phlosophy], Objectivists prefer to discuss and implement Objectivism, and not the minor issue of Atheism.

    For example in his lecture/essay "Religion vs. America" Leonard Peikoff, Rand's intellectual heir, states, "'Atheism' is a negative; it means not believing in God--which leaves wide open what you do believe in. It is futile to crusade for a negative; the Communists, too, call themselves atheists". [Google: peikoff religion america]

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