Who mistreats you the most?

Who do you feel most mistreated by? Your telephone company? Your bank? The airlines? Relationships between companies and their customers are inevitably fraught with conflicts of interest. Companies seek to extract from customers the most money for the longest possible time, while the latter aim to pay the least, get the best possible quality and have the widest freedom of choice. We know that. But it is easy to forget, as companies go to great lengths to bury their clashing interests with their customers under massive marketing and advertising efforts. Companies insist on persuading us that they are our friends and trusted allies — indeed, part of our family — and that their decisions on price, quality and services are guided by our interests and their ethics.

This last idea has not fared well lately. Barclays Bank, for example, paid a $452-million fine for having fiddled the interbank interest rates (known as the Libor, which some cynics are now calling the “Lie More”). “We aren’t the only ones,” explained the Barclays CEO, after offering his resignation. His colleague at JP Morgan, Jamie Dimon, insists that more stringent banking regulation is not only unnecessary but even counterproductive. Banks will do the right thing, Dimon argues, thanks to competition, self-interest, their own internal controls and their ethics. This view became harder to defend as the JPMorganChase CEO revealed that he had been taken by surprise by hidden trading losses at his bank of $2 billion. This figure was then corrected and it turned out to be $3 billion. Then it was corrected again, and the most recent estimate is that the losses may be as high as $5.8 billion. So much for the reliability of internal controls and the power of ethics. Dimon confessed that he was shocked by the dishonesty of the JP Morgan bankers responsible for the losses and their cover-up (a small detail: some of those were among his top and more trusted managers). Rajat Gupta, the former head of the prestigious consulting firm McKinsey&Co (“We are an organization guided by values”), has just been convicted in New York for leaking valuable secret information on Goldman Sachs, a company on whose board he sat.

Another bank, HSBC, is also apologizing: in 2007 and 2008 its subsidiary in Mexico accepted deposits of some $7 billion in cash, which it then sent to the US, thus helping drug traffickers launder their money.

And on the subject of Mexico, according to a study of the Organization for Economic Co-operation and Development (a club formed by the governments of the world’s richest countries), the excessive prices charged by AmericaMovil, Carlos Slim’s telephone company, cost that country’s consumers $26 billion a year. But to pay more for a phone call is not as dangerous as taking a medicine that, instead of curing, kills. The pharmaceutical firm GlaxoSmithKline (GSK) has just been fined $3 billion for promoting medicines that can harm, and even cause death. The fine is a stiff one, but then the company’s earnings in 2011 were $8.2 billion.

Has abusive business behavior increased, or are we just better informed when it happens?

What is happening here? Has abusive business behavior increased, or are we just better informed when it happens? Both. The fact is that the ancient principle of caveat emptor, a Latin warning that it is the buyer who must take precautions, as the risk is his and not the vendor’s, is more valid than ever.

The fiendishly complex modern economy is asymmetrical and skews in favor of sellers, putting the consumer at a disadvantage. Companies spend fortunes on creating tangles of incentives and obstacles that limit the consumer’s freedom to stop buying from them, or to take their business elsewhere. Changing an airline ticket or a cellphone service contract is an odyssey that few can accomplish without incurring further costs, often substantial ones. We have all been surprised, and appalled, by phone bills that were run up without our noticing, or because we failed to scrutinize the contract with a microscope. Time and again the gurus of corporate strategy explain that a successful company is one that manages to instill loyalty in its customers to the point that they behave as subscribers rather than buyers. To induce a user to enter into a permanent commercial relationship, where he regularly and automatically renews the purchase/sale relationship, is a sort of gateway to commercial nirvana. While subscriptions used to be limited to services such as cable television or products such as encyclopedias and magazines, the strategy is now also applied to cars, clothes, food, and so on.

Consumers, however, now enjoy advantages and possibilities that they didn’t have before. Hyper-competition between rival companies helps to curb the abuses that can only be sustained over time when firms coordinate prices and policies. This still occurs, of course (shall we talk about the price and duration of shaving blades?). But it is also true that in many sectors there is more competition, and the older, dominant companies are ever more threatened by new rivals. What’s more, consumers today have access to more information than ever on what they are buying, and on who is selling it to them. Barclays and GlaxoSmithKline have just found this out.

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