Evil CEOs vs Bad Incentive Systems

A lot of people seem to think that most CEOs are actively evil and that this explanation can be used to explain many of the problems in our economy.  A recent example of this fallacy comes from a ritholtz.com post looking into the way appraisers that didn't inflate the value of houses were seemingly systematically blacklisted. 

"The appraisers’ petition was done over the course of seven years.  Even if we assumed, contrary to fact, that the CEO did not originate the plan to inflate the appraisals the CEOs knew that they were making enormous numbers of fraudulent “liar’s” loans with fraudulent appraisals.  It is easy for a CEO to stop pervasive fraudulent lending and appraisals.  Where appraisal fraud was common it was done with the CEO’s support."
I've met a few CEOs, and while they may care much more about the bottom line than the average person they aren't looking to break the law in order to gain a small advantage. The risk usually isn't worth the reward.

In most of these cases there is a much simpler explanation: The CEOs presided over an incentive system that rewarded misbehavior on a small scale without doing anything to directly endorse the behavior.  In the case mentioned above, those who originate the most loans will be bringing in the most revenue. There will be no comeuppance to catch the overconfident employees who bend the rules because an overly optimistic appraisal will be justified by rising prices a year from now. The more cautious employees will stagnate compared with those who are willing to bend the rules.   And so the people who get promoted during a boom will be the revenue generators (the rule benders) and the practice will become more widespread as time goes on.

All that this requires is that the CEOs set up a system to encourage and promote the people who are generating business. They don't have to have anything untoward on their mind. 

Grand conspiracies are fun to talk about. It would be nice to have a few specific people to blame for the problems in our world because that implies we can solve those problems by targeting the people at fault. But the truth of the matter is that the incentive system set up by the people running the show is at least as important as the moral character of the people in charge and probably more important.