You Push the First valve Down

Wriston, Walter B.


Sometimes in the press of getting our daily work done, we don't take the time to step back and think about how today's events will impact our business tomorrow. This tends to be particularly true of events that are perceived as not directly related to one's business. The corporate graveyards of the world are full of defunct companies whose management failed to understand what was happening to the world around them and to their markets. Quite often the forces operating on our affairs come from the least expected direction.

Today we have some tides running in our society that may seem like annoyances, but may grow into something more deadly. One of the functions of the academic community is to look with fresh eyes at old events and discern new patterns of social behavior. Business, like all society, moves in cycles, and often becomes fascinated with new fads.

In man's constant struggle to predict tomorrow we have moved from inspecting the entrails of a goat to desk-top computers. The future direction of the stock market is supposedly revealed by observing the length of women's skirts, the joy or sadness of popular music, or the won-lost record of the Mets. All of this is good clean fun and the law of averages will validate one theory or another at one time or another. But while we are playing those games, other more fundamental things are going on in the society that should have our attention.

In our country, we decided early on that our experiences with the capriciousness of sovereigns dictated that we find a more stable and predictable base on which to plan our future. The system we chose was based on a well-documented fear of the concentration of power as being destructive to human liberty. Our Constitution then provided for the separation of powers between the Executive, the Legislative and the Judiciary. While all of this is known, or at least used to be known, to every schoolchild, from time to time the system gets out of balance. The founding fathers could not foresee what kinds of new tyrants would come forth in the future, but they could and did provide a mechanism to make the system more or less self-correcting if good men and women did not turn away from hard problems.

Today, I would suggest that the great engine of economic expansion that drives our country is in some danger of being destroyed by an imbalance in the very social structure that makes it possible for it to function. We are observing once again that everything carried to the extremes is destructive. The poet was right, "Surfeit cloys the sweetest taste." Today the surfeit is the surfeit of law, both judge-made and that passed by the legislators. It is a fact of modern life in America that problems of every shape, size and description, both real and imaginary, are brought before the courts at great expense and often with horrendous unintended results. A friend of mine, a judge of a Federal Circuit Court, told me the other day that the economic illiteracy among the judges on that circuit is appalling. This ignorance of other disciplines is neither unusual or surprising. C. P. Snow many years ago wrote about the lack of understanding and communication between scientists and literary people. Today the world is even more complex and it is impossible for anyone to acquire real knowledge in all intellectual disciplines. Today we even have a judge, undoubtedly well-intentioned, designing a new telephone system from the breakup of what used to be the finest communication system in the world. All the problems, real or perceived, from star wars to toxic dumps are endlessly and expensively litigated. Many years ago Spinoza put it succinctly: "He who tries to fix and determine everything by law will inflame rather than correct the vices of the world."

In our American system of checks and balances, if all the emphasis is placed on the check and not enough on balance, we risk destroying the dynamics in our system. Here in New York City we have recently seen how a handful of people can thwart a decision arrived at through the democratic process. Whether you think building Westway was a good idea or not, the facts are that the Congress of the United States voted for it, two governors of the state and three mayors endorsed it, but a tiny unelected minority killed it. While the law must always protect against tyranny, this is a system used for a purpose not intended. How did we arrive at this state of affairs? Clearly, there were and are very real wrongs to be righted. There was, and doubtless is, malfeasance. Citizens must have recourse to a system to adjudicate complaints. That system which furnished this protection has now been corrupted.

Innovative lawyers working for large contingency fees developed discovery procedures that are out of control; they have ascribed to health care procedures long term effects that were totally unknown at the time of treatment, and have attempted to embed in the law the concept that risk should be removed from life. As the system was distorted by pressure from the plaintiff's bar the judicial equilibrium was disturbed. As usual, economics played a part.

Today there is no economic penalty for bringing any law suit, so the rent-a-client syndrome abounds. There is about a 12-hour delay between the story in the newspaper reporting just about any government or corporate event and the filing of a class action suit. Newspaper ads beg for clients, who up till then did not know they were wronged, to step forward. The last time I got served with papers alleging several hundred million dollars of damages due to my failure to perform adequately, the person operating the word processor in the law firm grinding out the complaint forgot to change the name of the company being sued, so I was served for the alleged sins of a company with which I had no connection. The lawyers don't care, because to file a suit against someone for billions, costs only 50 or 60 dollars and there is no down-side risk at all. The so-called client, who is often solicited by an advertising campaign, won't see much money even if the case is won. The money will go to the lawyers. While many believed that the attorneys would take the lion's share based on anecdotal evidence, we now have hard data proving that this is true. The Rand Institute of Civil Justice has published a study showing that in the thousands of asbestos claims that were tried or settled on the courthouse steps, the injured party wound up with about 30 cents of every dollar paid by the defendants, and the lawyers took home close to 70 cents.

Clearly such a result demonstrates that the system is out of balance. The total cost to society is enormous and largely uncounted, since discovery proceedings can go on for years, cause the production of millions of documents, and divert the attention of management from productive tasks. The alleged injured party gets no money for all the period these maneuvers take, which may be measured in years.

Studies of the Rand Institute also show that a plaintiff suing on what is known in the trade as a "slip and fall" case can count on the operation of the deep-pockets theory from our justice system. The Rand data for Cook County show that a person so injured can expect, if the suit is successful, to be awarded just over $10,000 from an individual defendant, about $14,000 from a government over $80,000 from a corporation. In other words, the same injury will produce eight times as much money from corporation as from your neighbor. All of this excess of a litigious society is driving the insurance business out of business. It is not that underwriters have lost their skill, but rather that the legal system in our country is out of balance. A. M. Best & Co., which tracks the insurance industry, has produced statistics for 1984 on the financial results of the 134 reinsurance companies they follow. The numbers show that these companies paid out $1.33 in claims and expenses for every $1 they received from premiums. All told, they showed a collective underwriting loss of $2.4 billion. Putting aside what you may think about the accuracy of insurance accounting or the effectiveness of insurance company management, the fact remains that our legal system has run so far out of control that the availability of insurance to business is endangered. Lloyds of London, which for decades has insured everything from dancers' feet to jet aircraft, is making public noises about leaving the American market because of the inability to function in this legal maze.

The healthcare industry, which now exceeds 10% of our G.N.P., is also at risk. Doctors are hanging up their stethoscopes and heading for retirement homes because of the high cost or total nonavailability of malpractice insurance. Dr. Frank Edwards, writing in Newsweek recently recounted a story of a drunk who wandered into his office during a busy period. Nevertheless the doctor took time to arrange for the person to be admitted to a good inpatient clinic. While waiting for transportation, the man wandered away and in crossing a highway was struck and killed by a truck. The doctor is getting sued for not staying with him until he could be transferred. Even though alcohol and drug abuse are self-inflicted diseases, the attorneys look to put the blame on others. It is not surprising that more and more doctors will no longer accept patients. The effect on the business community is not dissimilar. If directors of public companies cannot get Directors' and Officers' Insurance, which many can't, companies will have to go back to interior boards of directors, and this, in turn, will mean delisting from the Big Board which requires outside directors on audit committees. When the directors of the Bank of America got notice in the mail that their insurance was canceled, none can doubt we face a serious problem in the business community. It can be argued that this emerging crisis has been caused not so much by business mismanagement -- although there is some of that -- or economic conditions, but rather by a plaintiff's bar run wild. It is a worthy and essential part of our society that a citizen can find redress for injury through our justice system. This remedy must be preserved as it is one of the rocks upon which our freedom rests. No one would suggest or wish that corporations or their boards, or physicians and surgeons not be responsible and accountable, but the situation now is out of balance. Our British cousins don't have this problem for a variety of reasons, one being that if you sue someone and lose in the United Kingdom, you must pay the other party's legal expenses. As we all know, economic rewards and penalties always work in the marketplace. It is time our society on this side of the Atlantic addresses the problem.

What I would suggest to you is that it is not just a business problem, although it is one of the most serious problems faced by business; it is not just a legal problem, although it is one of the most serious faced by the bar; it is a question of balance in a society and, therefore, it is a problem for us all.

In the big band era of the '30s and '40s, one of the songs that made it to the top of the Hit Parade was "The Music Goes 'Round and Around." Countless vocalists sang "You push the first valve down, and the music goes 'round and around, and it comes out here." While the song writer may not have been trying to be profound, nevertheless, it is a description of what happens in our society. When the legal system becomes unbalanced and runs out of control, it affects the ability of the insurance business to underwrite risks. When insurance dries up, this causes directors or companies to behave in different ways. If outside directors refuse to serve public companies because the risk is too great, then this causes the progress achieved in corporate governance to be put in jeopardy. All of these interactions cause management and labor and governments to alter their behavior. This lack of balance in the system affects not only manufacturing and service, but the huge health care industry and that means your personal physician and the care you receive. The latest sector of society to be impacted are cities and towns whose insurance has been canceled or the premiums have shot up so high as to suggest a tax increase to pay them. Our society has always been saved by our system of checks and balances. It seems to me that checks now exceed the balance -- a system with so many veto points by small unelected groups can slow down or even stop the risk taking that produces the innovation and spirit of entrepreneurship on which our economy and our very national security depend. We look to the thinkers, to the academics in the business schools to focus on the problems we have described even though at first glance they do not appear to be essentially business problems. I would suggest these things I have talked about briefly today deeply affect the future of our society. Bringing balance back into the system is worth our best efforts if we want the American economy to continue to supply the jobs, and the goods and services which drive our great economic engine.

  • The document was created from the speech, "You Push the First valve Down," written by Walter B. Wriston for the Fellows of the Academy of International Business on 18 October 1985. The original speech is located in MS134.001.007.00001.
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