Wolfowitz and the World Bank Play Games

Sta. Ana coordinates Action for Economic Reforms. This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, May 21, 2007  edition, page S1/4.

Mr. Paul Wolfowitz finally resigned as the World Bank president.  But he did so only after engaging the Bank in a long, nasty, and draining fight.  And even though he resigned, he was pleased with the outcome.

Let us recollect the main events and issues that led to this settlement, to the satisfaction of both Mr. Wolfowitz and the Bank’s Board of Executive Directors.

The controversy erupted upon disclosure that Mr. Wolfowitz was behind the promotion and salary increase of Ms. Shaha Al Riza, a Bank employee, who is likewise Wolfowitz’s girlfriend.

Mr. Wolfowitz apologized for what he did but at the same time he had no intention of resigning in the early stage of the game, despite the wide clamor from within the Bank itself and from all over the world for him to immediately resign.  Resignation was the most honorable option.

But the most honorable option was not the most rational response. Mr. Wolfowitz knew his game theory.  His best strategy, the optimal behavior, was to dig in and fight.

If he resigned immediately, it would have been humiliating for him, for it would have meant his acceptance of committing a serious, severe offense.  If he prolonged his fight, he figured out that he could still gain concessions and not lose face.  He correctly presumed that the Bank’s Board of Executive Directors did not want a bloody ending by firing him.  A bloodbath would cause not only a rupture within the Bank; worse, it would have exacerbated the conflict between the George W. Bush administration, a firm defender of Mr. Wolfowitz, and the rest of the world.  All parties, especially the Bank shareholders from the developed world, wanted to steer clear from this dreadful scenario.

On the part of the Board, to spare itself from firing Mr. Wolfowitz, its strategy was one that would nudge him to a position where his only move was to voluntarily resign. The Board’s challenge, its best response, was to come out with watertight arguments based on solid, irrefutable evidence, even if it meant dragging the case.

This became the task of the Ad Hoc Group, consisting of seven of the 24 members of the Board.  Its mandate was to investigate “a possible violation of Staff Rules in favor of a staff member closely associated with the President.”

The gist of the case is as follows.  Because of a conflict of interest rule prohibiting the Bank Staff, and even President, from having a supervising influence over his spouse or in this case, his partner, Mr. Wolfowitz gave Ms, Riza an external service assignment.  Remaining on the Bank’s payroll, she was reassigned to the State Department. In return, the Bank President, or Ms. Riza’s boyfriend, directed the Bank to give her an attractive package of promotion increase and future salary increases.

Upon her relocation to the State Department in 2005, her annual salary went up from about US$133,000 to US$180,000, subsequently rising to US$ 193,580 in light of yearly adjustments.

It turned out that this package of promotion and future pay increases went beyond the permissible range as stipulated by Bank Staff rules.  Moreover, the Ad Hoc Group found Mr. Wolfowitz to have violated the Bank’s governance rules and to have broken the ethical obligations in his contract.

The Ad Hoc Group’s report was damning if not scathing.  Take, for example, the following statements taken from the Second Report of the Ad Hoc Group (14 May 3007):

From paragraph 94: “The Ad Hoc Group finds that Mr. Wolfowitz did not comply with the provision in his contract that required him ‘to avoid any real conflict of interest, real or apparent’ as well as the provision in the Code of Conduct requiring that he ‘withdraw from participation in deliberations or decision-making’ when he involved himself in the specific terms of Mrs. Riza’s external assignment.”

From paragraph 97: “By resisting the Bank’s prohibition on ‘professional contact’ and arguing that recusal only from personnel matters would suffice, Mr. Wolfowitz placed himself, in a manner which he had personal interest, in opposition to the established legal framework of the institution he had been selected to head and in a conflict of interest situation even in the domain where he had proposed to recuse himself. Instead of setting the example adhering to the highest (and in this case well-established) standards, he initiated a negotiation with the institution he was to lead and then sought to dilute the standard the Bank had adopted for itself.”

From paragraph 140:  “The Ad Hoc Group concludes that in actuality, Mr. Wolfowitz from the outset cast himself in opposition to the established rules of the institution. He did not accept the Bank’s policy on conflict of interest, so he sought to negotiate for himself a resolution different from that which would have applied to the staff was he was selected to head.  He did not agree with the advice he received about the legal requirements in connection with conflict of interest, so he stopped seeking advice from the Bank’s Legal Vice Presidency and instead sought an inadequate review by external lawyers after the fact. The Ad Hoc Group sees this is as a manifestation of an attitude in which Mr. Wolfowitz saw himself as the outsider to whom the established rules and standards did not apply. It evidences questionable judgment and a preoccupation with self interest over institutional best interest.”

In its concluding remarks, the Ad Hoc Group asked the Board to decide whether Mr. Wolfowitz could still provide leadership, taking into account the following:

  • the violation of the Code of Conduct and Staff Rules,
  • the violation of provisions in Mr. Wolfowtiz’s contract that required him to adhere to the Code of Conduct for Board Officials and to avoid any conflict of interest,
  • “the damage done to the reputation of the World Bank Group and to that of the President,”
  • “the lack of confidence expressed by internal and external stakeholders in the present leadership,”
  • “the erosion of operational effectiveness caused by the current crisis,” and
  • “the important strategy and governance challenges the World Bank Group is facing.”

At this point, the game was about to end.  Mr. Wolfowitz knew it was time for him to resign. But he still got what he wanted in the end game in the same manner that the Board got its desired result.

Both parties pursued the best strategies, the most rational options, and both parties earned satisfying payoffs.

In contrast to the harsh wording of the Ad Hoc Group’s report, the Board’s statement, which accepted Mr. Wolfowitz’s resignation, was soft.

The statement read:  “Over the last three days we have considered carefully the report of the ad hoc group, the associated documents, and the submissions and presentations of Mr. Wolfowitz.  Our deliberations were greatly assisted by our discussion with Mr Wolfowitz.  He assured us that he acted ethically and in good faith in what he believed were the best interests of the institution, and we accept that.”   Was this a face-saver for Mr. Wolfowitz?

Mr. Wolfowitz’s response was:  “I am pleased that after reviewing all the evidence the Executive Directors of the World Bank Group have accepted my assurance that I acted ethically and in good faith in what I believed were the best interests of the institution, including protecting the rights of a valued staff member.”

Not all stakeholders were happy with the Board’s statement.  The reaction of the World Bank Group (WBG) Staff Association Executive Committee was: “Welcome though it is, the President’s resignation is not acceptable under the present arrangement. It completely undermines the principles of good governance and the principles that the staff fight to uphold. Staff of the WBG, Board of Governors, Executive Directors and staff cannot rebuild an institution’s reputation under such an agreement.”

One can however give a different interpretation to the statement of the Board of Directors.  It is perhaps an example of a double entendre.

Take the Board’s statement: “He [Wolfowitz] assured us that he acted ethically and in good faith in what he believed were the best interests of the institution, and we accept that.”  Said differently, the Board merely accepted or acknowledged what Mr. Wolfowitz told them. Which is to say that the Board did not really accept the validity or the correctness of Mr. Wolfowitz’s statements, decisions and actions.  It would have been downright silly to accept Mr. Wolfowitz’s resignation if he “acted ethically.”

And so, the Board was able to pull a fast one on Mr. Wolfowitz.

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