Posts

A Better New Year’s Resolution

/1 Comment/in /by

I wrote a good blog post at this time two years ago, and haven’t improved on it yet. Here it is again.

Happy New Year.
——————————————-
My unscientific sampling says many people make New Years resolutions, but few follow through. Net result—unhappiness.
 
It doesn’t have to be that way.
 
You could, of course, just try harder, stiffen your resolve, etc. But you’ve been there, tried that.
 
You could also ditch the whole idea and just stop making resolutions. Avoid goal-failure by eliminating goal-setting. Effective, but at the cost of giving up on aspirations.
 
I heard another idea: replace the New Year’s Resolution List with a New Year’s Gratitude List. Here’s why it makes sense.
 
First, most resolutions are about self-improvement—this year I resolve to: quit smoking, lose weight, cut the gossip, drink less, exercise more, and so on.
All those resolutions are rooted in a dissatisfaction with the current state of affairs—or with oneself.
 
In other words: resolutions often have a component of dissatisfaction with self. For many, it isn’t just dissatisfaction—it’s self-hatred. And the stronger the loathing of self, the stronger the resolutions—and the more they hurt when they go unfulfilled. It can be a very vicious circle.
 
Second, happy people do better. This has some verification in science, and it’s a common point of view in religion and psychology—and in common sense.
eople who are slightly optimistic do better in life. People who are happy are more attractive to other people. In a very real sense, you empower what you fear—and attract what you put out.
 
Ergo, replace resolutions with gratitude. The best way to improve oneself is paradoxical—start by begin grateful for what you already have. That turns your aspirations from negative (fixing a bad situation) to positive (making a fine situation even better).
 
Gratitude forces our attention outwards, to others—a common recommendation of almost all spiritual programs.
 
Finally, gratitude calms us. We worry less. We don’t obsess. We attract others by our calm, which makes our lives connected and meaningful. And before long, we tend to smoke less, drink less, exercise more, gossip less, and so on. Which of course is what we thought we wanted in the first place.
 
But the real truth is—it wasn’t the resolutions we wanted in the first place. It was the peace that comes with gratitude. We mistook cause for effect.
 
Go for an attitude of gratitude. The rest are positive side-effects.

Smoking Guns in the Rear View Mirror: Madoff and the SEC

/2 Comments/in /by

Experienced bloggers tell me to lead with the headline, as in newspaper stories.

So here it is: read this link. It’s the document sent to the SEC in 2005 accusing Bernie Madoff of running a gigantic Ponzi scheme.

More specifically, it’s the Wall Street Journal’s copy of the letter, separately identified as coming from Harry Markopolos, the Deep Throat of the Madoff scandal. But that’s not the point.

The point is this: take 2 minutes to click on the link and give it a quick look.

Come on, you can afford 2 minutes, this is history we’re talking about. It’s only a 17-page .pdf file, and you don’t have to read all of it.

There, that wasn’t so bad, was it?

Now—what did you think? OK, let me help you out.

It wasn’t all that hard to read, was it? Some jargon, but largely around technical terms whose connotation was clear in context. Markopolos outlined it pretty well, right? You got the sense that something was most definitely fishy, and that this guy sounded like he pretty much knew what he was talking about—right? When he says "Madoff Securities is the world’s largest Ponzi scheme," did you get the sense he was telling the SEC that Madoff was running a Ponzi scheme? Yeah, me too.

Now—if you were a staff member at the SEC and received this letter—what would you do?

My own gut-level instinct—based on nothing more than having worked 6 months for the feds 30 years ago, knowing a whole 2 SEC employees, and having lived on this planet for a few years—is that at least a couple hundred human beings at the SEC are more than capable of of understanding it at least as well as you or I. And I’m sure several got the chance.

Which begs the obvious question: why, oh why, did nothing happen?

There are several really obvious answers, which I won’t belabor. Just now. (Though venality and incompetence generally head the list of usual suspects).

Now, at the risk of losing the bloggers, let’s get past the headline. When something in retrospect is shockingly obvious, it should at least raise the possibility that it might not have been so obvious looking forward. Consider the law of gravity, for example. Or Obama’s election. Not to mention this smoking gun of a document.

What kinds of things get in the way of clear forward perception? High on the list, I think, are beliefs. Not the opacity of data; not a lack of IQ; not a conspiracy of coincidence. Beliefs.

Beliefs: preconceptions, ideologies, inclinations, habits, norms, assumptions, conjectures, presumptions, presuppositions, expectations. A word for "stuff" in the mind that the neurobiologists haven’t yet "explained," but which laymen nonetheless manage to understand quite well.

Business doesn’t believe in beliefs these days. It believes in behavior, results, measurement—these it considers incontrovertible proof.

I have two suggestions. First, go see the movie “Doubt.” It raises questions about the effects of moral certitude.

Second, go back and read that Markopolos’ document again. It does exactly the same thing.

Why did the SEC look so pole-axed? Place your bets. Venality? Incompetence? Or blindness due to moral certitude? What’s your bet?

And by the way, who owns the movie rights?

Is it Personal? Or Is it Business?

/1 Comment/in /by

In The Godfather, Michael Corleone famously says to Sonny, “It’s not personal, it’s strictly business.”

What about trust? Is it possible to separate them? Can you be trustworthy in your personal life, but not in business? Does one imply the other? And what do we think of someone we trust personally who is turns out to be untrustworthy in business?

Cue Bernie Madoff again. (No, we’re not done with him yet; Madoff is a rich vein of material).

Eric Wiener in the LA Times:

the reason so many Wall Street players couldn’t believe their ears was they couldn’t accept that Bernie Madoff, of all people, would have pulled something like this. "Not Bernie!" was a typical refrain.

And, from the New York Times:

Indeed, in the world of Jewish New York, where Mr. Madoff, 70, was raised and found success, he is largely still considered as a macher: a big-hearted big shot for whom philanthropy and family always intertwined with — and were equally as important as — finance.

It seems increasingly clear that Madoff was greatly aided in this by dozens of willing accomplices—aka banks, funds of funds, hedge funds, “feeder” funds. People who took their own percentage for assuring “due diligence” so that the fraud that took place could never take place. People who claim to be anguished "customers," but who willingly sold the snake oil downstream.

And always, they too are characterized by those who knew them as people of integrity, people you could trust. And, I suspect, they believe it of themselves.

Now, there is a code by which you lie to one group and are trusted by another. It is the code you can hear recited in Huckleberry Finn by the Shepherdsons and the Grangerfords. The Hatfields and McCoys. The Montagues and the Jets, the Capulets and the Sharks. Or as it’s taught in competitive strategy and too many sales programs: the Sellers and the Customers.

I continue to be astonished that the largest Madoff “victim,” Fairfield Greenwich Group, who made hundreds of millions from Madoff, is considering suing PricewaterhouseCoopers—its own auditor. Reportedly because, channeling Willie Sutton, that’s where the money is.

How does Fairfield’s Walter Noel explain that to the partner at PwC’s Stamford office in charge of Fairfield’s audit?

Hint, Mr. Noel: you can buy The Godfather here and start rehearsing the line. "It’s not personal, it’s business. It’s not personal, it’s business." Click your heels three times while you say it. And tell him ‘trust me.’ That way it’ll sound personal, even when of course it’s not.

 

Anatomy of a Con Artist: How Madoff Played the Trust Equation

/22 Comments/in /by

The Trust Equation  describes the components of trustworthiness.  The equation is:

T = (Credibility + Reliability + Intimacy) / Self-orientation

Of course, any such recipe worth its salt will also serve as a template for reverse engineering—a “how-to” manual for a con man.  Measuring Bernie Madoff by the trust equation shows just what an effective job he did at mimicking genuine trust. 

So let’s do the numbers:

Credibility: Chairman of the Board of Nasdaq, for starters.  Not to mention a Who’s Who client roster.  But an especially nice touch: not just any old lamb could buy in—you had to be approved by the wolf.  Exclusivity adds cache and credibility. 9 out of 10.  Better than Alan Greenspan (hey, he used to be hot).

Reliability: Arguably Madoff’s greatest contribution to the con: don’t go for the jackpot, the Big Win.  Become known for steadily hitting .335 in a league of .285 hitters.  Always just over the average means always just under the radar.  Another 9 out of 10.

Intimacy: courtesy of spoonfeedin, he was described as a gentleman, gregarious, generous, personable, charming, and so forth.  Like a mass murderer, he appears to have been ‘the last person’ one would have suspected.  Give him an 8 out of 10.

Self-orientation: who would suspect the motives of a philanthropist, a giver to religious causes, a man generous with his own (we thought) money?  Not me, not you, that’s who.  An apparent low score (low self-orientation is good, you see); maybe a 2. 

That’s a Trust Quotient score of (9+9+8)/2, or a spectacular 13 out of a possible 15.  (If you don’t think that’s spectacular, try it yourself: take your own Trust Quotient.

There is no such thing as trust without risk; Madoff was an awfully talented con man.

But he couldn’t have done it without his pigeons. 

–A great many people may have suspected him, but felt glad to be in on the “fix.”  No sympathy for them. 

–I am astonished to hear that Fairfield Partners may sue PricewaterhouseCoopers—not Madoff’s accounting firm, but their own accountancy.  Zero sympathy for that Madoffian level of chutzpah. 

–Then there’s all the relatively innocent folks out there who thought they’d found something almost too good to be true.  They learned the distance between “almost” and “definitely” is dangerously thin.
 

Where Caveat Emptor Still Stalks the Land

/4 Comments/in /by

I am not generally the dullest knife in the drawer, but when it comes to the subprime, I-mean-credit, I-mean-whatever financial crisis, I often feel like one. I know a few facts, but can’t put them together in a satisfactory way.

Fortunately, for my ego, I’m not alone. Few people seem to understand it all.

One that comes closest is the recent article The End of Wall Street’s Boom by Michael Lewis, author of, among other books, 1990’s Liar’s Poker. I heartily recommend this for anyone wanting to better understand what went on at the heart of the storm.

If you believe there is something hopelessly twisted at the heart of the financial sector of the global economy, you’ll find some support here. The most telling story Lewis relates, I think, is that of a dinner that Steve Eisman had with a fund manager:

His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.’s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, “the equivalent of three levels of dog shit lower than the original bonds.”

[Eisman] had spent a lot of time digging around in the dog shit and knew that the default rates were already sufficient to wipe out this guy’s entire portfolio. “God, you must be having a hard time,” Eisman told his dinner companion.

“No,” the guy said, “I’ve sold everything out.”

In other words—‘no problem, I’ve unloaded the toxic waste onto my customers. I’m doing fine, thanks for asking.’

Let’s be clear. If your grocer sold you toxic milk for your child, would they say ‘no problem, I unloaded it onto my customer?’ How about your local pharmacist? Your auto dealer? Heck, if your local drug dealer sold you bad weed, wouldn’t he at least be embarrassed?

Those other industries at least have the good taste to be ashamed. In this sector–well, not so much.

There is a belief afoot in Finance Land, put well in the Financial Times by George Soros last January in Worst Financial Crisis in 60 Years Marks End of an Era :

Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest.

As Soros points out, it’s simply not true. The current crisis was caused by markets, and (sort of, so far) mitigated by governments. I learned in business school the notion that competition leads to equilibrium is a bad economist’s dream: the real point of competition is to bash the other guy’s head in. Du-uh. The only reason it doesn’t reach end game more often is regulation—agencies, anti-trust laws, etc. which say “tilt” and “restart.”

I’ve met all too many people educated in our “best” schools who have come to believe that selling toxic waste to customers is a legitimate part of a noble, even moral, endeavor called ‘capitalism,’ founded by Adam Smith, tweaked by Ayn Rand, and quasi-guaranteed in the Constitution. The customers? Caveat emptor. It’s good for them. Culls the weak from the herd.

No, it’s not. It is simply selling toxic waste to customers, and it is despicable under any code of behavior within 10 miles of the word “ethical.” It is not even good capitalism.  Poisoning a customer is like selling your mother to pay the rent, or stealing the life preservers from your children on a sinking boat.

Congratulating yourself for doing it is simply beyond the pale.

How many banks and hedge funds who sold Bernie Madoff’s funds to their clients will offer to make good? To simply refund the commissions? Or—a novel thought—just apologize? There’s your caveat emptor at work, still stalking the land.

 

Selling Problem Solving by Solving Problems

/2 Comments/in /by

One thing about accountants I really like. They learn awfully fast.

I had breakfast the other day with an old friend, a forensic accountant—call him Joe the Accountant. He’s a bit of a loner, motivated by achieving results, and impatient with what he sees as bureaucratic and procedural focus. And he is very sharp.

He’s a bit like a bloodhound; don’t point him toward the scent and expect him to back off. Perhaps that’s why he tends to rotate employers every 6 – 8 years.

“Maybe I should just do free-lance work,” he mused to me. “I don’t mind selling. I just don’t know how to do it well. I could get appointments with several well-positioned past clients. I could just ask them if there’s some work I could do for them, I suppose.”

“No,” I said. “Talk to them about what problems need solving.”

Joe: Of course, silly me. Then I can pitch how I might be able to solve them.

Me: Congrats, you just went from weak salesman to average salesman in ten seconds.

Joe: So–how do I get to the next step? (Joe’s pretty impatient too).

Me: Pick one problem and solve it in that meeting.

Joe: Hmmm. I like that. But will the client do anything if I just give him the advice?

Me: You just went from pretty good to almost really good. So answer your own question.

Joe: I see, he’s got to be involved in getting the right answer in order to act on it it. So—you’re saying just do the work right there in the meeting?

Me: Pretty much.

Joe: So when do you make the sale?

Me: After you solve the problem together, you say, “This is great fun. We ought to do more of this. Though after one more session, you need to pay me. I can’t just be having fun for free. So how shall we set this thing up?”

Joe: Hmmm. Yes, that works, doesn’t it? Give ‘em a taste of your wares, so to speak. Just do it–then ask for the sale. Right?

Me: That’s about it.

Joe: Great, thanks. Gotta run; this breakfast is now interfering with scheduling my first sales call.

One thing about accountants I really like. They learn awfully fast.

Madoff Madness: When Smart People do Stupid Things

/1 Comment/in /by

Bernard Madoff’s Madoff Securities lost $50 Billion in an apparent Ponzi scheme.

You can read about the details anywhere—try the Wall Street Journal, for example. But the details don’t answer one question.

How? How could some of the world’s supposedly smartest investors—hedge funds–have been hoodwinked by something that, in the rear view mirror, was a blatant scam?

The answer reveals a common myth about trust in business. The myth is that good businesspeople make rational decisions about trust.

They often don’t. And in the rush for “best practices,” many “good businesspeople” shortchange commonsense for wishful thinking.

I have written about the Trust Equation: the trustworthiness of an individual can be expressed as a function of credibility, reliability, intimacy, and other-orientation. Someone who rates highly on these dimensions, as seen by others, is trustworthy.

But a con man is as good as the gullibility of those who want to believe him. Let’s examine the trust equation point by point.

1. Credibility: the man was the former Chairman of Nasdaq, and remains on their nominating committee. He is known as a leader in the industry. And his own website says he has "a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm’s hallmark."

Never mind there were complaints to the SEC, questioning articles in Barron’s, unavailable data, and a one-man accounting firm of record. Don’t wanna go there, uh uh.

2. Reliability: the man had a multi-year track record of over-market returns. Regular. Dependable.

Never mind that he lacked the data, or explanations, to back up just why those returns were so steady.

3. Intimacy. Many people knew him personally; he was a regular at toney golf clubs in Palm Beach and Boca Raton.

In language we usually hear about mass murderers, acquaintance Jon Najarian said, “He always seemed to be a straight shooter. I was shocked by this news.”

And in classic Big Brother language, his lawyer stated—after Madoff’s apparent confession to operating a Ponzi scheme—stated “he’s a person of integrity.” And I’m the Pope.

Never mind that “intimacy” may be the easiest factor of the four in the trust equation to fake. It’s probably the favorite factor of con men.

4. Self-orientation. Clearly his customers thought he was generous, a regular attendee of the Red Cross Ball, a desirable acquaintance by virtue of his willingness to share advice.

Never mind his broker-dealer business model was under-powered to take advantage of his supposed insights, casting doubt on his motives. Conflicts of interest were present in the situation of a funds manager using a related broker-dealer.

Trust is a funny thing. Trustworthiness can be analyzed. But it often isn’t. Which means trust is as much about the one doing the trusting as the one being trusted.

In the days to come, the absence of regulatory action will be rightly noted. Where was the SEC?

But at the same time, let’s not forget the willingness of the sheep to be fleeced.

If it looks too good to be true, it is.

There’s no such thing as a free lunch.

An emperor without clothes is just a naked man.

We know that untrustworthy people are often greedy. We can protect against that to some extent.

It’s harder to legislate against greed and willful stupidity on the part of those doing the trusting.

When commonsense takes a back seat to greed, it’s a con-man’s market.

 

 

I Think Therefore I am a Consultant: Not!

/8 Comments/in /by

I worked 15 years for a strategy consultancy, then 4 years for a change management firm.  They were wildly different.  The first celebrated raw brain power.  The second focused on emotional alignment.  (This explains my schizophrenia).

I then went off on my own to do trust work.

A few years later, I collaborated with an ex-strategy colleague, an excellent consultant.  Call him Ishmael.  He was in Boston, me in New Jersey; we met in Stamford to spend the day working together.

He began, “Let’s first spend a few hours discussing what it is the client wants.”  A classic strategy question.  I settled in to the old easy chair.

Then it hit me.  “No, Ishmael,” I said, “let’s just call the client and ask them what they want.” 

Ishmael was not impressed, but that was OK.  I knew I’d just discovered something.  

David Maister  has a medical metaphor to describe professional services firms.  There are Nurses, Pharmacists, Family Doctors, and Brain Surgeons.

Many firms aspire to be Brain Surgeons.  The market says the true number is far smaller.  Brain surgeons, as Maister points out, are known for two things.  One is great technical mastery; the other is a low degree of client interaction.

There are great examples of the “brain surgeon” model. Think of the leading strategy firms, used-to-be investment banks, think tanks, many top law firms. They are high-margin businesses, pay high salaries, and cultivate a mystique of envy and status. 

And—I would argue—they are grossly under-achieving.

Why?  Because of the cult of intellect.  We revere IQ in this culture; it is more important to cite Goleman’s Emotional Intelligence  than to read it–much less practice it. 

Malcolm Gladwell punctures this cult of intellect in talking about innovation:

Ideas weren’t precious. They were everywhere, which suggested that maybe the extraordinary process that we thought was necessary for invention—genius, obsession, serendipity, epiphany—wasn’t necessary at all.

He describes Nathan Myhrvold’s first Innovation Session, bringing together a half-dozen brilliant people:

"He thought if we came up with a half-dozen good ideas it would be great, and we came up with somewhere between fifty and a hundred. I said to him, ‘But you had eight people in that room who are seasoned inventors. Weren’t you expecting a multiplier effect?’ And he said, ‘Yeah, but it was more than multiplicity.’ Not even Nathan had any idea of what it was going to be like."

The finest law firms and strategic consultancies are great in large part not because of brilliance, but because of brilliance shared.  The pity is, their very ethos denigrates the “share” part of the equation. 

As Maister says, part of the “brain surgeon” model is the image of high-on-a-mountain solo thinkers who occasionally interact—and only with each other—to create brilliance.

How much enormous value is left on the table because of the celebration of an heroic myth of solo cogitation, rather than of direct intellectual, collaborative contact with the client?  Two bright people working collaboratively can usually out-think one very bright person.  Make it four people, and there’s no contest. 

The answer is to focus not on getting better and better at solo cognitive manipulation, but also on sharing that brilliance in a way that is ego-less, collaborative, and enthusiastic.  Brilliant 1 plus brilliant 1 makes not 2, but 5.  As Myrvohld said, it’s way beyond multiplicity. 

The absent-minded professor, the eccentric genius are respected, even revered.  But this just lets them off the hook.  By idolizing such anti-social behavior, we are rewarding mediocrity relative to what they are capable of accomplishing.
 

Is Trust a Substitute for Risk Management?

/1 Comment/in /by

Some financiers say the current financial crisis is a risk management issue. Unwarranted risks were taken; better risk management tools are needed.

They misunderstand the difference between risk management and trust.

Risk management is when we contract that you’ll staff my project with the best people, you’ll use best practices, charge me a fair rate, that I can terminate with 30 days’ notice, and so forth. And if you don’t do those things, you’ll be in violation of a legally enforceable agreement.

Trust is where we look each other in the eye, shake hands, and say, “we’re going to do right by each other, including changing whatever else it takes to do so.”

Risk management is for hurricanes—things, events. Trusting the weather won’t change it one whit, and can be suicidal.

But treating people like hurricanes actually increases the risk. The more you give employees lie detector tests, the more they’ll lie—“someone must be getting away with it, why else would they keep testing us?” More fine print just leads to gaming the system.

Conversely, when you trust people, you increase their trustworthiness. A client once cut short my praise of a proposed subcontractor. “Charlie, enough–if you say he’s good, he’s good—I trust you,” the client said. I instantly felt the weight of the burden of trust.

When people are involved, risk management partially raises risk. Trust lowers it. Why do the financiers have it wrong? Because they think our crisis is about securities capable of being evaluated in absolute terms. It’s not–it’s about people relationships, capable of being evaluated only in subjective terms. It’s not a crisis of derivates valuation–it’s a crisis of trust.

Trust won’t eliminate risk. Some people steal from honor boxes, and take advantage of others. I commonly hear, “Charlie, you’re naive. You need to legally enforce legal rights to copyright, employee behavior, or pricing. There are no sanctions with trust.”

In fact, there are sanctions, both carrot and stick, and they can be more powerful than contracts.

Suppose I trust a French contractor with my intellectual property. I could get a legal contract stating sanctions. If violated, I could enforce it in France. But at what cost in euros, time spent, and time elapsed?

Here’s the trust carrot. “Pierre, think of the great business you and I can do together—new markets, products, opportunities; as long as, of course, you continue to respect my property rights, we can do this again and again. This can be the beginning of a beautiful friendship.”

And the trust stick? “In the inconceivable event that you, Pierre, were to violate this agreement—not that you ever would, of course—then I would be forced to make that fact public. In a blog. In letters, emails, articles, public websites, aimed at your other business partners and potential partners, your customers, your employees. That would be most harmful to your reputation for trustworthiness, Pierre, and we both know that, so we needn’t speak more of such terrible things, now do we? We understand each other, oui?”

The common way to manage risk is with lawyers and contracts. The better way is often to create trust–over a fine French meal and a bottle of wine.

One of those ways is cheaper, faster, stronger, more pleasant. Why would I want to use lawyers when I can use trust? Why manage “people risk” like you manage hurricanes, when you can use trust instead?

(The usual pushback is how to scale trust: more on that soon).

What’s Trust Got to Do With Respect?

/8 Comments/in /by

On the one hand, the connection between trust and respect seems clear. As Thomas Friedman put it:

I’m often asked how I, an American Jew, have been able to operate so successfully in the Arab world. My answer is simple: it is to be a good listener. It has never failed me. Listening is a sign of respect. If you truly listen to the other person, they will then listen to what you have to say.

Aretha Franklin just spelled it out.

Behaving respectfully toward others is likely to increase your trustworthiness in others’ eyes, and to make them more likely to trust you.

But should it work the other way? What if someone is disrespectful to us? Should we then behave in a less trustworthy way toward them? Should we trust them less?

There’s an equally venerable point of view that says get over it, sticks and stones may break my bones but names will never hurt me, someone can hurt you emotionally only with your permission, hear other people but do not allow your emotions to be held hostage by theirs.

Of course, sometimes name-calling is a prelude to violence; disrespect can signal untrustworthiness. Only a fool doesn’t look for a nearby exit door in such situations.

But we over-rate how often that is true.

This territory of trust, listening and respect is rife with opportunities for self-improvement. Strive to respect others—not in the ways you would be respected, but in ways the other person would consider as being respected. Which means listening, very attentively.

But when disrespected, strive to rise above it. Return respect for disrespect, by listening for motives and for understanding.

Does this mean holding ourselves to a higher standard than others? And is that disrespectful in itself?

I’d like to think not. On some absolute scale, all of us are awful at this. When you behave disrespectfully, notice it and resolve to do better in future. When someone is disrespectful towards you, notice how much like them you are, and resolve to overlook it on the spot.