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Which is a better deterrent to crime: jail sentences, or restraining orders?

We normally apply these sanctions against perpetrators of domestic violence, or robbery. But what about the scandal du jour—endemic stock option abuse?

Which is a better deterrent to stock options abusers: prison sentences, or structural reform around corporate governance?

The latest twist in options backdating? The practice has now been found among directors, not just executives. This is the lesson from a Harvard / Cornell / INSEAD report.

"In the data, we found that directors’ grants are equally susceptible to manipulation," Bebchuk said.

A “lucky” director grant was more likely at companies where executives received lucky grants, the study found. And firms with a higher incidence of lucky option grants were more likely to have governance practices considered unfriendly to shareholders, such as a minority of independent directors on the board.

The firms were also more likely to have "entrenching" bylaws, which make it difficult for shareholders to remove directors.
The study is not the first to raise questions about a possible link between options backdating practices and board governance practices. A study by the Corporate Library of 120 companies implicated in backdating found a high incidence of interlocking directors, or directors who served on more than one company that backdated.

The study suggested that backdating practices may have spread from company to company through these interlocking director relationships.

The disease metaphor is very tempting—practices that may have “spread from company to company through interlocking director relationships.” That sounds like the right answer is quarantine—Chinese walls—house arrest—restraining orders. In other words, reform.

Tempting, but extremely expensive. The US is already an overly litigious society and businesses are creaking under regulatory weight.

Using reform to solve trust issues is like using contraceptives to control the deer population—humane, but very costly, and hard to administer.

Punishment is not the preferred vehicle of reformers. But it may be just the right medicine for trust violations. Selective, highly visible, publicized, strong sanctions, particularly prison.

Many argue that prison is not a deterrent against crimes of passion, and only fosters recidivism. Precisely the opposite can be said about corporate executives and directors. Their crimes are coldly conceived, and prison to them is likely a huge dose of ice water. Jeff Skilling’s conviction and sentencing has already prevented more Jeff Skillings, I suspect.

Trust violations at the board level don’t require Chinese walls, but Chinese prisons. Sanctions are far more efficient, and probably much more effective.

One of the biggest reasons sellers and marketers don’t become trustworthy is that they chicken out.

At the last minute, they can’t give up control. They’ve got to tweak the truth just a bit; or whine just a touch to get the sale this quarter; or massage the message just a tad. And poof—self-orientation rears its ugly head, and customer trust plummets.

Enter Campbell-Ewald, ad agency for Chevy’s best-selling SUV, the Tahoe. They decided to accelerate into the fast-lane of consumer-driven, internet-age advertising. They bought an entire episode of Donald Trump’s The Apprentice and made it about how to market the Tahoe. During the episode’s ads, they invited consumers to create their own online ads at chevyapprentice.com.

Now, you may be thinking—as I was, reading about this in Wired—OK, the heartbeat of America is about to suffer cardiac arrest as every flamer, Tarantino-wannabe, and enviro-terrorist piles on to Chevy’s website, and Detroit’s beige marketers pull the plug faster than you can say Holy Heartland!

Well, so much for my stereotyped thinking. (Plus, I stopped watching The Apprentice after Season 1). The site did in fact get a large number of creative SUV-bashers. (The text-over of one went, “Global warming…Think about what we’ve destroyed…Enjoy the longer summers!…because you suffer from penis envy…the Earth is now your bitch…FUCK THE EARTH. GET YOURS.”)

But Campbell-Ewald and Chevy hung tight. They had expected it. They knew that was the price of being in a consumer-driven, open medium. Ed Dilworth, a Campbell-Ewald exec, says the era of control is over: “you can either stay in the bunker, or you can try to participate.”

The results proved them right. Participation per se is positive. The campaign had significant positive effects on sales, both during and after the program.

This tale is only nominally about the new economy, web advertising, etc. What it’s really about is basic human nature.
People want to be heard. Sellers who hear them, in the voices they choose to express themselves, are the only sellers who become trusted.

Most sellers and marketers, instead, react from fear. They see buyer expression as something to be controlled, channeled, and steered. Hence we get “closing,” objection-handling, lead screening, metrics, scripting and CRM systems.

And what they breed is mistrust.

There are a million ways to say it. “Before people care what you know, they want to know that you care.” “The best way to get what you want is to help others get what they want.” “If you listen to what people say, they will then listen to you.”

That’s how trust works. In Detroit, Mumbai, Shanghai and New York. It’s a people thing.

Fortune talks about recommender systems.

Take Amazon’s “if you liked The Da Vinci Code, you’ll love Blink.” Now move from book-to-book relationships into book-to-other relationships: “If you liked the Da Vinci Code, you’ll like a Jura Capressa espresso maker.” That’s a recommender system.

Fortune’s example is www.whattorent.com, helping slackers save time at 10PM Friday night at the local (at least, still here today) Blockbuster by predicting what movie they’ll love.

Fortune interviewed whattorent’s two founders at a coffee shop, and put them to the ultimate test: pick two strangers in this restaurant, and—just by observing them—guess their favorite movie.

They settle on a guy and a young woman. After much clever psycho-babbling, the founders guess: Starship Troopers for Joe, Roman Holiday for Renee.

And wouldn’t ya know it—they’re dead right.

You can hear Fortune cuing up the PGA graphic—“these guys are good!” And indeed that’s our reaction—wow, how could anyone pull that off?

But wait. What if we’re mixing up cause and effect? Maybe it’s not that two twenty-somethings are great predictors. What if we’ve just all gotten way more predictable?

Everyone had their favorite Beatle. If you preferred John to Paul, it said something about you—to everyone. Because everyone had a common reference point. The Fab Four were global litmus tests.

Since then, culture got way more global. Africans wear Arizona t-shirts; Valley Girls know Tibetan monk choirs. The weapons of mass dispersion are well known—iPods, MySpace, YouTube, Hollywood.

Everyone wants to be different—but we share referent points from which we diverge. Jeans, music, hair, slang… Take five variables with five values each: five to the fifth power is 3,125 combinations. Sounds like a lot, but it’s based on a small set that’s easy to reverse-engineer.

People don’t predict us: we self-identify, and the code is easy to read. Marketers love this stuff.

Ironically, it also makes it easier to trust others. When a British Stones fan meets a Jagger aficionado from Beijing—the world shrinks.

The question is: can we keep the diversity while enhancing the trust?
 

Several months after 9/11, I had dinner with friends—a couple from New York. One’s a doctor, the other runs a small business. Both are well-educated, successful people.

They told me that the press had hushed up a major disaster affecting the PATH system (stands for Port Authority Trans-Hudson Rail; they run light rail trains from New Jersey to Manhattan, including one that went to the World Trade Center).

According to them, a PATH train had been trapped by the disaster underneath the Hudson river, where victims lay, un-rescued, for a week, finally succumbing to some combination of fumes, or heat, or starvation—my friends weren’t clear on the details.

“This was such a shocking thing,” they told me, “that the federal government asked the media to keep silent about it. It would have been too horrible for the country to handle at that point. And the press agreed to it.”

“That’s completely ridiculous,” I said. “You’ve been reading too many conspiracy novels. If that had happened, the NY Times would have been all over it. They wouldn’t give in to government censorship, and they wouldn’t have self-censored it either—that would have been a huge story.”

“They do it all the time,” my friends said.

“Oh please,” I replied, "you’re contributing to an ugly urban legend."

“Oh yeah? Well, they covered up the jumpers from the World Trade Center. Didn’t talk about it, didn’t hardly write about it, didn’t publish pictures. But those pictures were all over the UK and Europe.”

I was shocked. Somehow, I had only been vaguely aware of the jumper stories. The US press in general did in fact downplay the shocking stories and pictures—in my case, very effectively. I had had the general sense that there were only a handful. (A year later, USA Today estimated that 200 people had chosen to jump.) I hadn’t at that point realized how widespread the coverage was outside the US, having not travelled in that time frame.

This didn’t alter my opinion about the PATH train story. But I realized I no longer had a basis to tell my friends they were wrong. They knew more truth than I did.

More importantly, I realized that the very source I relied on to inform me about certain events had intentionally and successfully withheld information from me about precisely those kinds of events.

Transparency plays a powerful role in trust. Powerful enough to overwhelm good motives on many occasions.

If we have good reason to believe we have the whole story, then we trust the message. If we believe we haven’t got the whole story, then we don’t trust it.

And if we thought we had the whole story—then find out we didn’t, because of the messenger of the story—trust takes a very big hit indeed.

This is partly about the psychology of the one who feels betrayed, not about the editorial policy of a messenger (the Times in this particular case). But it’s interesting to ask: other than choosing whether or not to print the pictures or write the stories, can the messenger do anything to avoid making the recipient feel betrayed?

Put this way, the answer is yes. It’s incumbent on messengers (whether public newspapers, or individuals in private conversations) to let the receiver know some sense of what the boundaries are.

There is some ambiguity required here: if the newspaper is too specific (e.g. "our policy is not to write stories about large groups of people who hurl themselves from buildings") then the list of "policies" is endless, and we are left asking every day, "did large numbers of people hurl themselves from buildings today?" This is why we give up reading the fine print on legal documents.

On the other hand, if you leave it too vague—nothing beyond "all the news that’s fit to print"—you create the demand for disclosure of more specific criteria.

We will accept being uninformed if we have a shared understanding of the general boundaries of the non-information. (Think, "too much information, please!" on a Saturday Night Live skit). Trust requires a shared understanding of context. Absent that shared understanding, we experience betrayal.

Put six toothpicks on the table in front of a friend. Lay three of them in the shape of an equilateral triangle. Ask your friend to arrange all six toothpicks so that in total, they create four equilateral triangles.

When they finally give up, reveal the secret:—create a four-sided pyramid. The “trick” is to think in three dimensions. Obvious once you see it—but when it’s presented in two dimensions, that’s how we frame the problem.

So it is with business “problems.” They present as conflicts of interest: how can I get the sale, how can we bargain for a better price, how can I get them to increase the scope, how can I get a higher salary, how can I get the staffing I want on this job?

Just as the tabletop has two dimensions, so does this view of problems. The first dimension is “fixed benefits,” the implicit belief that this is a zero sum game—my gain is the other’s loss, and vice versa.

The other dimension is “one off,” the idea that this is a unique, one-time event.

To solve the problem, you need to notice the third dimension—which for business problems is time.

Imagine the business problem happening not just once, but recurring ten times in the future. Ten negotiations over scope creep; ten salary reviews; ten buying presentations; ten terms and conditions discussions.

If you envision doing something ten times, two things become clear. First, you’d do it a lot more efficiently. Second, both parties benefit.

Instead of negotiating whether Mary or Suzie gets staffed on the job, you decide to alternate. Result: easier, faster, cheaper, less contentions decisions—plus career planning options for both Mary and Suzie.

Instead of ten price negotiations, you discuss fairness over the long run. Net benefits: the ability to vary amounts and terms across jobs, more harmony, reduced time and costs per job.

The time dimension is the difference between a transaction and a relationship. Focusing on relationships nurtures transactions; focusing on transactions starves relationships. Relationships are more profitable for both parties, due both to decreased costs and a greater range of benefits. Relationships drive both efficiencies and effectiveness, and cut elapsed time.

Most customers are amenable to this approach. A minority are not. Those who are not are the ones to let your competitors “win.”

“Relationships” and “transactions” are cumbersome concepts. They need rephrasing to work as a “tip.”

So—when you see toothpicks on the table, think “add a dimension.” When you are presented with a business problem—multiply by ten.