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Does Closing Kill Sales?

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Jill Konrath has a great little podcast titled Closing Can Kill Sales, at salesopedia.com.  

Right there, you may be tempted to say, ‘oh come on, that’s old hat.  Nobody does that anymore; it’s totally schlocky and manipulative and in (B2B, consulting, telecom—pick your choice) no one does that anymore.’

Well, just last week I came across a sophisticated B2B software/communications company, and guess what they wanted to know: how to close more sales.

They may not be thinking old-school “assumptive closes, constant closing,” or “you want more fries with that?”  But they are still focused, as a critical operational goal, on how to “close more sales.”  Plus ça change…

Jill is refreshingly direct.  Pure Midwest, corn-fed charm, you betcha; and she’s the real deal in person.  She came up the classic way, selling Xerox copiers.  She cut her teeth on the “ABC” rule—Always Be Closing.  But, like Huck Finn, she always felt badly about not being able to do it.

About closing, she is direct: “I hate it.  It always felt like a violation of the way people normally behave.  It’s about manipulative strategies to get people to say yes, and I just hated it.”

She sold a lot of copiers, though.  “One thing Xerox did teach us was to ask a lot of questions, and I was good at that.  I was really trying to find out the business case, and I didn’t know if it was there or not.  So I kept asking so I could find out, for myself.”

What does Jill say to people about closing?  “I say to them, never close; never be closing.  But always advance the sales process.  They need to know the next step, whatever it is, that’s true.  And eventually, you’ll hear a magic word—they start to say ‘we.’ Then, after a while, it’s ‘how do we buy this?”

There are others—Phil McGee is one, I hope we hear from him—who I think might say that’s exactly what ‘closing’ is supposed to mean—not manipulation, just relentlessly exploring questions. 

But Jill is no dummy either, and she’s quite insistent about ‘never close.’  Why the passion?

I think it’s because the word ‘closing’ is encrusted with nearly a century of subtext of control and manipulation.  It is too baked in for the niceties of alternate definitions to have an effect.

Take my B2B software example.  They don’t want old-school scripted trick lines; they think they’re too sophisticated for that.  But they’re kidding themselves.  Just as much as an old door-to-door vacuum cleaner salesman, they’re looking for a way to get a customer to do what they want them to do—namely buy their product.  They just want it done in a hip, 2009, Sales 2.0, CRM, modern kind of way.

Control and manipulation by any other name is still the same.

The real meaning of Jill’s dictum is deeper, I think.  It means, stop, stop stop trying to force your will on others.  Allow yourself to believe that if you really treat customers well and help them to make the best decision, you’ll get your fair share of that opportunity—and way, way more than that in the opportunities that follow.

For most of us, closing does kill sales.  Paradoxically the best way to sell is to Stop Trying to Sell, and Stop Trying to Close.  Just help your customer.     

Sacred Cows, or Goals Gone Wild

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Personally, I love seeing sacred cows sacrificed. Maybe it’s that contrarian thinking helps learning. Maybe skepticism came with studying philosophy and doing strategy consulting.

Maybe I’m just a little bent. Whatever.

Let’s take goal-setting. That’s about as big a sacred cow as you get in business. Googling “goal setting” gets you 5.6 million hits.

Jack Welch praises it. Scottie Hamilton and Michael Phelps get cited as examples of it. Martial artists swear by it. Management by objectives is built around it.

I’m not sure there’s any more common theme in self-help and business success books. It’s just so, like, obvious. Goal-setting may be the secret behind the success of Motherhood and Apple Pie. I’m pretty sure it explains the Boy Scouts.

So–what an unexpected delight to find a balloon-pricking, mellow-harshing, skeptical piece of inquiry in, of all places, Harvard Business School.  (Actually, it’s in the HBS Working Knowledge series, which does a fine job of exploring quirky ideas. They’re just not usually so big as this one).  A little bonus: the smirky title, "Goals Gone Wild: the Systematic Side Effects of Over-prescribing Goals Setting."

The paper is summarized here and co-author Max Bazerman is interviewed here:

From the executive summary:

• The harmful side effects of goal setting are far more serious and systematic than prior work has acknowledged.

• Goal setting harms organizations in systematic and predictable ways.

• The use of goal setting can degrade employee performance, shift focus away from important but non-specified goals, harm interpersonal relationships, corrode organizational culture, and motivate risky and unethical behaviors.

• In many situations, the damaging effects of goal setting outweigh its benefits.

But surely, you say, this is a case of excess, of bad apples. Goals are not the problem, people who use goals badly are the problem. (You remember–guns don’t kill people, people kill people).

No, says Bazerman. When the adoption of goals so predictably and systematically produces negative results, it is fair to say it is goals themselves that are the problem. (Are you listening, NRA?)

Well, you might say, if goal-setting is so dangerous, how’d we get to use it so much and so deeply?

Says Bazerman:

It is easy to implement. It is easy to measure. It is easy to document successes. And in laboratory experiments, it has been shown to be extremely successful at improving the measured behavior. [we] simply argue that goals have gone wild in terms of their impact on other unmeasured outcomes. When we factor in the consistent findings that stretch and specific goals both narrow focus on a limited set of behaviors while increasing risk-taking and unethical behavior, their simple implementation can become a vice.

Bazerman and his co-authors are not saying goal-setting is bad per se; they’re not raving nut-jobs. They’re just asking a question that doesn’t get asked nearly often enough.

They have taken a sober, holistic look at one of the most pervasive, unchallenged, unexamined mantras of business—and brought some welcome fresh air to the issue.

Bravo.

Groups vs. Individuals: Ruining It for the Rest of Us

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Do groups force conformity among their members?

Or do individuals pull up or drag down the groups of which they are part?

My guess is most of us would say “both.”  As to which is more powerful, my further guess is that most of us would say, “It depends.” 

But here’s an outlier study, courtesy of Will Felps,   assistant professor of management at Rotterdam School of Management (by way of U-T and U-Dub), in turn courtesy of This American Life. 

Felps devised a simple study.  He divided a bunch of college students into teams of four, gave the teams a 45-minute task, and a $100 per-person reward for the winning team.  The catch: 1 in each team was an actor, scripted to behave badly—either The Slacker, The Jerk, or The Depressive Pessimist.

OK, place your bets.  Did the teams co-opt the actors, or were the actors converted to the greater team good?

Ready?

Well, if you believe in the redemptive and influencing power of groups—pay up.  If you believe in the “one bad apple spoils the barrel” philosophy, then collect from your optimistic friends.

Groups with a bad apple performed 30-40% worse than the control groups without one.  And the bad apples didn’t just bring down the average—in at least one case, the whole group descended to the bad behavior of the actor.

Now we know the power of the serpent in the Garden of Eden. 

The interesting question—as always—is, therefore what?

Did the $100 affect things?  Did the ad hoc nature of the teams play a role?  Did the determination of the actors to hew to a consistent anti- role overcome normal tendencies to be socialized?

Or, is it as eecummings said—“sometimes a cigar is just a cigar.”

These things are usually nuanced, with many cross-ruffing factors at work, but let me say a few words in defense of the power-of-the-individual viewpoint.

The collectivist view, I think, reigns these days.  That is what Felps suggests, and it’s what I see in most business studies.  The role of incentives and behavior is stressed, and the role of things like conscience and personality is de-stressed.

That makes “these days” not unlike the 1950s, the last time we collectively believed in the collective power of the collective.  (Of course, the 50s were rapidly followed by the 60s, if memory serves.  Quite a counter-reformation).

In history, this question gets phrased as the “great man” debate, or “historically significant individuals.”  Did the Union survive because of Abraham Lincoln, or would someone have risen to fulfill Lincoln’s role had he not been there?

Such debates, for the most part, are unanswerable.  But they do get chipped away at as we learn tidbits and refine the theories and the questions more narrowly.

In the meantime, I’m all in favor of the snake theory, hippies, Abe Lincoln, eecummings, and Felps’ faux bad guys.

Why?  They’re just way more interesting.  It’s a simple as that.

Find Felps’ article in a volume of Research in Organizational Behavior,

research by Ashley L. Green

March Carnival of Trust is Up!

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The March Carnival of Trust is up. 

Hosted this month by  Beth Robinson, at her blog Inventing Elephants, Beth brings above all an eclectic perspective to the subject of trust–and it shows in her wide-ranging choice of topics and insightful commentary.

The Carnival of Trust, hosted on a rotating basis, chooses the Top Ten trust-relevant posts of the preceding month–and provides trenchant, bite-sized commentaries on the posts themselves.  The result is a limited set of highest-quality content.  High content, pre-screened and with intelligent value-adding commentary.

Click through to the Carnival and see what Beth’s eclecticism brings to the subject of trust.  There are strong blog pieces here ranging from social media, to building business trust in China, to an advocate of predictability over trust, to ROI and accountability.  All of which wonderfully demonstrate the breadth of issues touched by trust. 

If you’ve got a blog post you’d like to see in that Top Ten list, feel free to nominate it.  The carnival comes out once a month, on the first Monday of each month. The deadline for submissions (see http://blogcarnival.com/bc/submit_1693.html) is always the prior Thursday.

Thanks again to Beth for hosting; drop on by for some tasty reading. 

The Ethical and Regulatory Morass of the Stanford Scandal

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I didn’t start out looking for trouble.

But like the camera shots in a Sergio Leone western, every time the camera pulls back for perspective in the Stanford Investment Bank story, the plot changes.

But let’s begin at the beginning. You of course know Madoff–the man with the minus touch.

Now we have "Sir" Allen Stanford–let’s call him mini-Madoff. He’s head of the Stanford International Bank (SIB), now accused by the SEC of bilking about $1.8 billion through, what else, a Ponzi scheme. Based in Antigua, operated out of Mississippi and Texas, a very private management team.

SIB had an outside lawyer from the prestigious firm Proskauer, Rose. His name is Thomas Sjoblum. On February 10, in the SEC offices in Fort Worth, Texas, Mr. Sjoblum accompanied his client, SIB’s Chief Investment Officer Laura Pendergest-Holt, to a 4-hour deposition by her.

The next day, Mr. Sjoblum told the SIB folks he was resigning from the case.

Musta been one helluva testimony Ms. Pendergest-Holt gave, eh? So it would sound.

In a blackberry email to an SEC lawyer two days later, Sjoblum clarified:

"I disaffirm all prior oral and written representations made by me and my associates … to the SEC staff regarding Stanford Financial Group and its affiliates.”

For me, it all started with that funny word–“disaffirm.” In a blogpost on February 20 I said “disaffirm” was a tortured linguistic construct aimed at putting distance between telling the truth and technically not lying.

But then the real fun started. Pull the camera back a few feet.

I then separately heard from two lawyers for whom I have very high regard, suggesting I had been too hard on Sjoblom. They suggested Sjoblom was a whistle blower whose actions were principled, difficult and courageous.

They were not alone. The blog AmLaw Daily had written the day before:

…Sjoblom…sniffed out the fraud, withdrew his representation, and told federal investigators he essentially took back everything he had told to them in recent weeks…

Am Law Daily contacted a number of legal ethics experts to discuss Sjoblom’s decision to come clean about a client’s alleged frauds–especially given the possibility that in doing so, he disclosed confidential client information to the government…

Experts said Sjoblom did precisely the right thing–and, more importantly, that the federal Sarbanes-Oxley Act likely made his decision much easier than it otherwise might have been.

"He [Sjoblom] did the right thing here," says Stephen Gillers, a legal ethics expert at New York University School of Law.

I started looking for crow to eat. Until, that is, I read the Memphis Daily News account of what actually happened at that February 10 SEC deposition.

By the SEC’s own notes, Sjoblom came out swinging—asking if the SEC had yet referred the case to Justice, arguing that the SEC didn’t have geographic jurisdiction, arguing that the (allegedly) bogus CDs Stanford sold were not “securities” under the relevant legal definition.

Huh?

Suddenly the aspiring Hollywood screenwriter in my head switched stereotypes: this was not the plot for the courageous whistle blower movie. This was the script for the B "mob lawyer" movie. Could he really have had a Saul on the road to Damascus conversion in one afternoon?

So–what happened in that room? Did Ms. Pendergest-Holt really drop a bombshell that blindsided Sjoblom? Or did Sjoblom do a Claude Raines (“I am shocked, shocked! to discover my client has lied to me for years about billions of dollars!”)? Incidentally, Ms. Pendergest-Holt was arrested by the FBI a few days later.

Let’s pull the camera way back.

Attorney Sjoblom is an ex-assistant chief litigation counsel in the SEC’s Division of Enforcement. On February 10 he aggressively explores defenses for SIB just before Pendergest-Holt comes on and says things that get her arrested. The next day he resigns.

The obvious question becomes, ‘What did Sjoblom know, and when did he know it?’ Of course I don’t know, but let’s consider what Sjoblom might have known:

  1. In 2003, a whistle blower case against Stanford was brought in front of the NASD (FINRA’s predecessor).
  2. In fact, according to Henry Blodget, "at least five former Stanford employees told the SEC they thought Stanford was running a Ponzi scheme, from 2003 on."
  3. A January 2008 lawsuit was filed against Stanford alleging endemic lack of compliance.
  4. A Venezuelan analyst wrote a report called Duck Tales in January 2009 which did for Stanford what Markopolis did for Madoff–blew the conceptual lid off.
  5. But the nail in the "shocked, shocked!" coffin is in the FBI arrest claim for Stanford’s Pendergest-Holt:

..the complaint alleges there were stormy preparation sessions for Pendergest-Holt in January and February “during which the bank’s shaky asset base became apparent to a wider circle of officials and to the lawyer — ‘Attorney A’ — who later quit.”

Um, who might ‘Attorney A’ be? Whoever it was, he knew something was up back in January.

So–just when did Sjoblom "sniff out the fraud?" The day after he heard testimony in Dallas? Or way before?

If he knew anything in advance–then why the aggressive denial-of-jurisdiction rant at the outset of the hearing? How much charade does a lawyer have to go through before he can speak some truth? I know legal ethics is much concerned with maintaining client confidences. But how much pretzel-twisting is required to serve that particular god?

The legal experts said Sjoblom did “exactly the right thing.” They also say that Sarbanes-Oxley made it far easier for lawyers to reveal confidences in certain situations. Let’s assume both statements are true. How horrible it must have been pre-Sarbanes–how many would-be whistle-blowing lawyers went to the grave mute?

How much in-your-face evidence of massive fraud does it take before a lawyer can say "my client is a crook and a liar" in a legally acceptable manner?

May I suggest the right answer should be–"less than this."

If this was a praiseworthy, ethical act consistent with the highest standards of the law, then something is very wrong–either with a lawyer, with legal ethics, or with the law itself. The law owes society more than citing last-minute tortured "disaffirmations" in the face of egregious criminal wrongdoing as examples of ethical behavior.

Note: It’s possible that Professor Gillers was not aware of all this background when he called Sjoblom’s actions "exactly the right thing." For all I know, given the background, he might even agree with me. I’d welcome his perspective here, and I’d welcome any correction from anyone about matters of law or fact.

Fixing Executive Compensation: Social Engineering, or Ethics?

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A little over two years ago I wrote a post called The Next Big Trust Scandal—suggesting it would be Executive Compensation.

I may have gotten that one right. Think of the fuss lately about corporate junkets (most recently, Northern Trust) , CEOs on private jets, etc. And of course, Obama’s proposal to cap executive compensation.

Which brings us to yesterday’s Wall Street Journal Op-Ed page, where two respected academics (Judith Samuelson, Lynn Stout) write “Are Executives Paid Too Much?”

They get a few things quite right—and one big thing quite wrong.

They suggest an epidemic of short-termism is responsible not only for compensation excesses, but for value destruction in the economy as a whole. In this they are surely right—or, to be accurate, I completely agree with them.

They also offer a simple, practical and powerful suggestion:

“Top executives who receive equity-based compensation should be prohibited from using derivatives and other hedging techniques to offload the risk that goes along with equity compensation, and instead be required to continue holding a significant portion of their equity for a period beyond their tenure.”

Well done.  But now for that Other Thing. The heart of their problem statement is:

“Our economy didn’t get into this mess because executives were paid too much. Rather, they were paid too much for doing the wrong things…. The system was perfectly designed to produce the results we have now. To get different results, we need a different system.”

No. The problem extends well beyond “the system,” and it won’t get fixed at the same level it was caused.

We cannot let business off the hook by claiming the rat maze was incorrectly designed, the cheese was of the wrong variety, or was hidden in the wrong corners. The solution does not lie (solely, or even mainly) in tweaking financial incentives, even in shifting timeframes.

The solution to egregious excesses—and to a lot more—simply must include a healthy dose of personal accountability for doing the right thing. A conscience. An inkling that society has expectations, and the power to demand that they be met. For lack of a better term, ethics.

Samuelson/Stout’s three solutions—metrics, communications and compensation structures—don’t include a simple social demand to behave decently.

What has to happen, I think, is not behavioral engineering, but shock therapy.

I am not being naïve here. In fact, I think they may be. The verbs in their recommendations are “we need new ways to measure,” “must change the ways they reward,” “need to ensure.”

The academics and the exec comp consultants are not going to force change. In fact, by treating the issue as a strictly technical one, solvable by just tweaking metrics and rules, they are actively complicit in the continued non-ethical framing of the problem.

Force is what’s needed. CEOs and Boards don’t do things because an academic says they should. Radical politicians have it right when they say, “power comes only to those who take it.”

My suggestion is for a lot of people to get really ticked off. The authors may deride Obama’s solution, but a president proposing policy exerts a lot of pressure. Columnists, bloggers, authors, short-sellers, reformers—get angry. Shareholder activists, get active. Demand accountability and decency.

As Alfie Kohn says, “monetary incentives work. They incent people to get more monetary incentives.” If we believe the only reason corporate people behave the way they do is to maximize their own personal bank accounts, then we will get nothing but more rats, moving in slightly different directions, more and more firmly grounded in nothing beyond their rat-ness.

Ironically, author Lynn Stout may understand this well, having recently written a paper called Taking Conscience Seriously. It looks good. One hopes she will allow her thoughts on conscience to more deeply infect her writings on altering corporate compensation.

 

 

Sucks To Be You

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Ever feel like being sincere–but want to hedge your bets?  To sincerely empathize with another–but not lose your hipness?

Then it’s hard to beat, “It sucks to be you.”

The phrase has been around at least a decade; it was the title of a 1999 hit record by Prozzak, and a song in the play Avenue Q.

Which is more popular: self-pity, or sarcasm?  Here are googling results for:

    “Sucks to be me”    111,000
    “Sucks to be you”    215,000

Sounds like sarcasm wins.

I was reminded of this phrase a few days by a scene in the TV show Scrubs, wherein a new intern used it in lieu of a more traditional bedside manner.  (Another Scrubs moment: Turk tries it on Carla, with not so funny results).

Here are some snarky definitions from the Urban Dictionary: 

When something bad happened to another person, it sucks to be that person.  “Your daddy is in jail for getting you pregnant. Sucks to be you.”

A phrase which expresses mild sympathy for the plight of another, while implying greater relief that those circumstances have befallen someone other than the speaker.

An expression of acknowledgement of hardship. Depending on context, can be sympathetic or taunting.

“You: My car broke down, and I have to get to the other side of the state tonight!
“Me: Damn, dude. Sucks to be you.

“Her: I totally blew my interview, and now you’re going to get the job for sure.
“Him: Ha ha! Sucks to be you!

I’m fascinated by this phrase, and I’m not entirely sure why. 

•    On the purely aesthetic side, it is an artfully efficient expression of ambivalence—in only four words, it confuses the listener as to the speaker’s intentions.

•    Like much slang, it can change meaning depending on intonation alone.

•    Like doublespeak, it can hide motives, while appearing clear.

In other words, it’s the ideal phrase for those seeking to remain ambiguous.

I have no idea whether the phrase has gotten more, or less, popular in recent years, but I suspect it’s a phrase for the times–when the times are slippery, hip, frivolous, and when sincerity is slightly out of vogue.  Like, a few years ago.

If that’s true, then I suspect the phrase is in for a decline.  The times right now are darker, less celebrating of witty repartee. In such times, snarky humor just isn’t as funny.  

We are inclined to be more frustrated, seeing that our fates more are tied to those of others. If it sucks to be you, it probably sucks to be me too. It behooves us all in such times to relearn trust in each other.

 

Regulatory Policy 2.0 – The Alternative

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[Second of a two-part Blog Post]

Yesterday I suggested that our existing 3-legged approach to regulation (separation, compliance, transparency) not only failed to prevent Madoff, but positively enabled him.

Today I’ll talk about an alternative.

Until last weekend, when the world discovered Madoff hadn’t bought stocks for 13 years (TrustMatters readers heard about it 5 weeks earlier here), the consensus was Madoff was so sophisticated no one could follow him.

Turns out sophistication itself was the ultimate scam. Madoff built a Potemkin village. He knew what a trading system and a hedge fund should look like, and gave us the appearance of one.

In fact, it was just another Nigerian Ministry scam.  Give me your bank account numbers. and I’ll make you rich. Trust me.

The SEC, like all regulators, relied largly on three mechanical approaches:

• structural separations
• compliance processes
• disclosure.

All were built around the modern sophisticated financial world. What they entirely missed was the human element of any great scam. Hide stuff in the most obvious of places. Utterly believe your own lies. Get the con to focus on your spiel while you swap the pea out of the walnut.

They missed the “man” in con man.

If past is prologue, as unfortunately it usually is, there will be a firestorm of protest and we will end up, through the best efforts of Congress, Fox News and the tabloids, with More of The Same. The same trio of regulations that Madoff manipulated. And it will cost billions and billions more in regulation and in stifled economic sub-optimization.

So what’s the answer?

Human-based regulation–beyond structure, processes, disclosure. Regulation 2.0.

Human-based regulation recognizes and embraces three human traits:

1. We live up (or down) to expectations
2. People are infinitely creative–regulators must be as well
3. Selective audits plus severe consequences both inform and deter people.

Set clear expectations. We cannot allow confusion between “ethics” and “compliance.” The phrase “but it was legal” cannot be permitted to be the end of conversation. Regulators have to continue dialogue with non-lawyer citizenry, stay in touch with norms and mores. Most important—they must have a visceral sense of the “rightness” that their agencies were built on in the first place, and unflinchingly convey that sense of mission and expectations to their industries.

Harness Creativity. Regulators can find role models in the audit profession, the IRS, and the GAO. They can look farther afield at successful police departments, e.g. New York City’s counter-terrorism operation. The ultimate objective can never be to just ensure compliance—it must be to fulfill mission.

Visiting RIA offices to review papers too easily becomes a bureaucrat’s exercise. We need regulators who think like cops, who are inherently suspicious, who demand proof, who creatively out-think the Madoff du jour. (Harry Markopolis’ testimony in Congress—the second part—gives excellent examples of this, epitomized by the simple, “is something funny going on around here? Here’s my card—call me if you see anything suspicious.”)

Selectively audit, severely penalize. Auditors and the IRS have excellent track records doing selective audits. You don’t need to examine every book—just let every bookkeeper know that their books might be the ones examined next.

Combined with the public announcement of severe consequences, this approach both tells the industry what behavior is expected, and says they are accountable to the public they serve. It’s like a police perp walk—it publicly shames and humiliates.

(From this point of view, the continued absence of a perp walk for Mr. Madoff, together with the absence of any consequences thus far, sends the wrong message. It says “old” regulation still holds sway: he can stay in his comfortable digs until the legal process grinds its way to some determination of whether or not he has committed a violation of a particular law).

Madoff’s scam was old-school, Nigerian-Ministry, thuggish. That doesn’t mean the SEC employs incompetent people. It does mean, however, that they are toiling under an inadequate philosophy of regulation.

We will not regain trust in our institutions until we remember that trust is, at its heart, a human thing—and begin to act that way.

Regulation 2.0 is a good start.

Regulatory Policy 2.0 : The Real Meaning of Madoff

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[First of a two-part Blog Post]

Madoff has been a late-night TV comedy staple for some time now. While his victims surely don’t appreciate the humor, most of use have relegated him to cafeteria conversation, alongside Lindsay Lohan and the Oscars.

That would be a big mistake.

L’affaire Madoff will dramatically affect our approach to regulation. And in this case, our first instincts—can you say, ‘Sarbanes-Oxley 2.0’—would be the worst. We need Regulatory Philosophy 2.0. Here’s why, and how.

The Latest on Madoff. The headlines this past weekend screamed one thing: Madoff Bought No Stocks for 13 Years. ‘Look how brazen he was, how could the SEC miss that, no way his sons weren’t in on it all along, etc.’

It was no surprise to readers of this blog.

On January 17, I wrote, in a blogpost titled Madoff—Investment Fund or Virtual Reality Game

It’s beginning to look like Bernie Madoff’s business model had less in common with a hedge fund or investment management firm than it did with an online virtual reality game. Sort of a Sim City for investors. The money sent in was real: everything thereafter was from Oz…
…[It] was bupkus. Virtual reality money. Sim City money. Monopoly Money. In the real world, it didn’t exist except in Bernie’s bank account and a computer program.

This was not a case of sophisticated hedge fund managers in Greenwich or rogue currency traders in Hong Kong. The SEC was not out-gunned, outsmarted, or out-manned. This was not a Danny Ocean operation.

This was as simple as a Nigerian inheritance email spam scam. Gimme your bank account number and I’ll send you money. A garden variety mugging. Like a good magician, Madoff got us to look one way, while he swapped card decks.

Overnight, this recasts the regulatory task facing the SEC. We can no longer rely on traditional regulatory philosophy: we must get personal, human, and trust-based.

Regulatory Philosophy 1.0. Regulation (and not just in the financial industry) has become driven by three models—separation, compliance, and transparency. None of them stopped Madoff—in fact, they enabled him.

Separation. Think building walls—to legally and physically separate potential co-conspirators. Think traditional anti-trust laws. Think separating accountancies and consultancies. It is a heavy-handed, expensive, and sub-optimal way to regulate.

Madoff used this to his benefit—claiming his brokerage and investment management businesses were separate because, ‘after all, they had to be.’ Therefore FINRA could claim “it wasn’t my job.” Madoff knew FINRA would make that claim; in fact, he depended on it.

Compliance. This approach turns legislation into a blizzard of administrative processes, which must be complied with. Think check-boxes, filed copies, no-later-than dates, renewal requirements. All monitored and tracked in the latest systems. This approach is less heavy-handed, but equally oppressive—and mind-numbing to boot.

Madoff used this also to his benefit. You want forms? I’ve got forms. But the data was itself bogus.

Transparency. Lawyers, financiers, mortgage brokers and credit card operators love transparency-as-panacea. Coupled with a convenient belief in efficient market theory, this enables people to blame those who didn’t read the small print (Rick Santelli, are you listening?).

Madoff used this to his benefit too—blitzing investors with day-trader-like “records” of trades (bogus). We have come to measure “transparency” by the pounds of documents “disclosed,” rather than by their truth or import.

If we focus only on outrage at Madoff and at government bureaucrats, our politicians will do what they’ve always done: legislate more structural boundaries, design more and more checkbox procedures, and require publication of more minutiae. And thus we’ll enable Madoff 2.0–even faster this time.

Regulation 2.0.  There is a better way.

It is based on a simple fact–people are human. People are good and bad, trusting and non-trusting, sometimes all at the same time. Systems don’t commit fraud, people do. In this case, one Bernard Madoff.

Yet our existing regulatory processes are entirely non-human. Walls, processes and transparency are mechanical things. Devised by people, they can be broken by people. And being inhuman–we don’t trust them.

Our existing Philosophy of Regulation does not engender trust. To trust our institutions, we have to return to a simple principle: trust is inherently human. We have taken the human part of trust out of regulation, and we’re paying the price.

Tomorrow’s BlogPost: Why we need to build regulatory policy more around personal trust.

Mini-Madoff Scandal Scales New Linguistic Heights

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R. Allen Stanford, head of Stanford International Bank, has been charged with fraud by the SEC.

Another day, another Ponzi scheme. Stanford’s take: $8 Billion. Not chump change, of course, but neither does it put him in Madoff’s league (up to $40 billion).

I think I shall call him mini-Madoff.

But the Stanford scandal has set a linguistic record—a record for creative disingenuousness. According to Securities Docket:

…one of Stanford’s own lawyers has emerged as a key figure in the matter. Bloomberg reports that last week, Thomas Sjoblom, a partner at law firm Proskauer Rose doing work for Stanford’s company’s Antigua affiliate, told authorities that he “disaffirmed” everything he had told them to date. According to his bio on his law firm’s website, Sjoblom spent nearly 20 years at the SEC, and served as an Assistant Chief Litigation Counsel in the SEC’s Division of Enforcement from 1987 to 1999.

“Disaffirmed” (italics mine). Doncha love it?

I hereby nominate “disaffirmed” as the new leader in the “Mistakes Were Made” category at the forthcoming Creative Language awards ceremony.

This is no trivial honor. It outpaces such classics as “the dog ate my homework,” “I have no recollection,” and “it depends on what the meaning of the word ‘is’ is.”

In my humble opinion, the only one that comes close was “modified, limited hangout” from the Watergate days.

It is a distant descendant of the old IBM (or was it GE?) culture that used “concur” and “dis-concur” as part of its decision-making process. But that was for standard business processes; this is for excusing $8 billion of malfeasance—clearly vaulting the term into another category altogether.

Sjoblom, a 20-year SEC employee, originally affirmed certain facts to his old employer. Enquiring minds want to know–where did he learn “disaffirm?” Was it at the feet of Stanford? Did he bring it with him from the SEC?  Was he–oh, this is juicy–speaking Ponzi-talk?  Or was he talking bureaucrat-speak?

And what’s to make of the syntax? Does it truly confound logic, as in "have you stopped beating your wife?" Or is it just a fancy "I lied?"

Never mind–let’s be practical. Where else can we put this word to use? After all, if you can undo a legal affirmation by using it—why, the sky’s the limit!

  • That affair I had back when I was married? I’d like to disaffair it, please.
  • Remember when I said I’d pick up the tab? Distab that, if you don’t mind.
  • The vows we made at our marriage? Disavow them, please (oops, that one’s a real word). Yes, I know I said "I do," I’m just saying "I dis-do."

You get the idea.

Language evolves marvelously to fit the circumstances requiring description. So it is here.  Double-talk is as double-talk does.

Mini-Madoff financially, perhaps. But in a league of its own in AOL—Abuse Of Language.