Page 434 - Ray Dalio - Principles

13.9 Have good controls so that you are not exposed to the
dishonesty of others.

Don’t assume that people are operating in your interest rather than their own. A higher percentage
of the population than you might imagine will cheat if given the opportunity. When offered the
choice of being fair with you or taking more for themselves, most people will take more for
themselves. Even a tiny amount of cheating is intolerable, so your happiness and success will
depend on your controls. I have repeatedly learned this lesson the hard way.
a. Investigate and let people know you are going to investigate. Investigate and explain to people that you are
going to investigate so there are no surprises. Security controls should not be taken personally by
the people being checked, just like a teller shouldn’t view the bank counting the money in the
drawer (rather than just accepting the teller’s count) as an indication that the bank thinks the teller
is dishonest. Explain that concept to employees so that they understand it.
But even the best controls will never be foolproof. For that reason (among many others),
trustworthiness is a quality that should be appreciated.
b. Remember that there is no sense in having laws unless you have policemen (auditors). The people doing the
auditing should report to people outside the department being audited, and auditing procedures
should not be made known to those being audited. (This is one of our few exceptions to radical
transparency.)
c. Beware of rubber-stamping. When a person’s role involves reviewing or auditing a high volume of
transactions or things that other people are doing, there’s a real risk of rubber-stamping. One
particularly risky example is expense approvals. Make sure you have ways to audit the auditors.
d. Recognize that people who make purchases on your behalf probably will not spend your money wisely. This is
because 1) it is not their money and 2) it is difficult to know what the right price should be. For
example, if somebody proposes a price of $125,000 for a consulting project, it is unpleasant,
difficult, and confusing to figure out what the market rate is and then negotiate a better price. But
the same person who’s reluctant to negotiate with the consultant will bargain furiously when he is
hiring someone to paint his own house. You need to have proper controls, or better yet, a part of
the organization that specializes in this kind of thing. There’s retail and there’s wholesale. You
want to pay wholesale whenever possible.
e. Use “public hangings” to deter bad behavior. No matter how carefully you design your controls and how
rigorously you enforce them, malicious and grossly negligent people will sometimes find a way
around them. So when you catch someone violating your rules and controls, make sure that
everybody sees the consequences.

13.10 Have the clearest possible reporting lines and
delineations of responsibilities.

This applies both within and between departments. Dual reporting causes confusion, complicates
prioritization, diminishes focus on clear goals, and muddies the lines of supervision and
accountability—especially when the supervisors are in two different departments. When
situations require dual reporting, managers need to be informed. Asking someone from another
department to do a task without consulting with his or her manager is strictly prohibited (unless
the request will take less than an hour or so). However, appointing co-heads of a department or a
sub-department can work well if the managers are in sync and combine complementary and
essential strengths; dual reporting in that case can work well if properly coordinated.
a. Assign responsibilities based on workflow design and people’s abilities, not job titles. Just because someone is
responsible for “Human Resources,” “Recruiting,” “Legal,” “Programming,” and so forth, doesn’t
necessarily mean they are the appropriate person to do everything associated with those functions.
For example, though HR people help with hiring, firing, and providing benefits, it would be a
mistake to give them the responsibility of determining who gets hired and fired and what benefits
are provided to employees.