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Who Are the Ultimate Trusted Advisors?

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What profession do you think has the most ultimate trusted advisors per capita? Consultants? Doctors? Financial planners? I now know where my vote goes. PICU nurses.

A Child in Intensive Care

I spent the first ten days of 2011 coming from and going to the Pediatric Intensive Care Unit (PICU). Our six-year old niece “Abigail” (not her real name) was critically ill (she is better now.) It was a once-in-a-lifetime scary 10 days for our family.

During this time I observed–and experienced–the PICU nurses as they did their jobs. Obviously, education, training and technical expertise is required to work in PICU. But what blew me away was the dedication, passion, commitment and ultimate customer service that everyone showed—to a person.

Their every action was executed with love and care. Each time they touched Abigail or did anything to adjust her equipment or medications, they told her what they were doing (though she was totally sedated): “Abigail, I’m going to suction you now, honey.” They showed the utmost respect for her as a patient and as a human being. It made me re-think what it means to be of service.

I emerged from this rough week with a fresh appreciation for what it means to be dedicated to clients and love what you do. I found myself wondering whether anything I had ever done could come even remotely close to what these PICU nurses do every day. I’m not trying to compare apples to oranges (e.g. I am an organizational performance consultant, not a nurse), but I think there are some apples-to-apples lessons to be learned here.

Applying PICU Lessons to Consultants

I live in Washington, DC, a town brimming with consultants. Just one search command reveals plenty of consulting firms claiming to be trusted advisors. But if you parse them using The Trust Equation–I wonder how many would match the kind of ratings these nurses get?

PICU nurses may be the ultimate trusted advisors. They are experienced, technically skilled and have a high degree of credibility. They have to be reliable; if they don’t show up on time to replenish a medicine the patient could die. In many ways they have to subvert their egos and have a low self-orientation to be of service to the patient.

In fact, could they do their jobs if they didn’t care? I concluded maybe they could execute the task-oriented aspects of their jobs without caring. But the love and care they put into their work, which drives the intimacy component in the Trust Equation, may be a critical part of the medicine and treatment for the most ill.

The Power of Care

Some studies show that the hormone Oxytocin (dubbed the “trust or bonding hormone”) is released with human touch and stimulates feelings of serenity, happiness and love, dampening fear and stress and nurturing trust and security. While our niece lay in a medically-induced coma for days, one of the nurses on the midnight shift took the time to carefully comb through Abigail’s long, tangled hair –and then put it into two braids.

When her mother awoke in the morning she was moved to tears to see that while she slept in the room in a rather uncomfortable chair, someone had shown her daughter the love and care that often only one’s mother can offer. How might this display of intimacy have contributed to Abigail’s healing process?

Lessons for Advisors

Abigail was hooked up to advanced machines and pumped full of life-saving medicine. She received world-class health care. But she also was cared for by perhaps the ultimate trusted advisors. We’ll never know the full power of the PICU antidote that brought Abigail back to full health but we might take a few lessons from them:

  • Know what your client needs and then deliver it
  • Communicate straightforwardly (never lie or sugar coat anything)
  • If necessary, under-promise and over-deliver
  • Allow yourself to bring humanity to what you do, knowing that this may be what makes the biggest difference
  • When you say you are going to do something, deliver on your word
  • Never, ever let your ego get in the way of doing your job.

Trust & Investment Banking: Interview with The Epicurean Dealmaker

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The Epicurean Dealmaker is the nom de plume of an investment banker who has written a blog by that name since January 2007.

TED (as I’ll refer to him henceforth) recently achieved a measure of fame, or at least notoriety, by being interviewed and quoted in a New Yorker article calmly but deeply critical of the financial industry, titled What Good is Wall Street?

As he puts it:

I facilitate, justify, and advise parties to M&A transactions, when I am not advising against them. I have been doing this for almost two decades, mostly at a couple of big banks everyone has heard of and lately at an independent advisory boutique. I am one of the bad guys, if you like.

Or, as he suggests in a more recent post, referring to the changes in the investment banking business, “I am one of the good guys, if you please.”

The title of his blog refers to the apparent contradiction between the view of the philosopher Epicurus– that an imperturbable emotional calm is the highest good–and the view of his profession, which is about rather the opposite.

It’s not surprising that TED was chosen for that New Yorker interview—as his choice of name suggests, he has a talent for seeing contradictions in the world; or maybe he just likes playing at being schizophrenic. In any case, he has a unique perspective on the financial sector, and it’s a treat to interview him for Trust Quotes.

CHG: First of all, TED thanks very much for speaking with us here today. I have thoroughly enjoyed reading your blog for several years now. In addition to the rare combination of philosophy and Wall Street, I have always found your comments to be grounded in common sense.

Let’s start with some context. When you joined the field of “investment banking” 20 years ago, what did that term mean?

TED: Thanks, Charlie. I have enjoyed reading your informative and insightful blog on trust issues ever since I got involved online, too. And I promise that I will release your dog back to you unharmed as soon as I am convinced you have presented my views in the most favorable light possible.

As far as “investment banking” goes, when I started over two decades ago, the term described those individuals and firms which acted as middlemen in the global financial markets for capital and control. Our job was to bridge the gap between the providers of capital—investors, both individual and institutional—and the users of capital, which consist of for-profit businesses, state, local, and federal governments and other entities. In addition, investment bankers helped corporations buy and sell control of each other and subsidiary businesses, which is known as mergers and acquisitions, or M&A.

CHG: You and I both believe that investment banking in that sense plays some very socially useful roles. Could you elaborate?

TED: Yes. Well, for one thing, global and even domestic capital markets are huge and extremely diversified. Even in the narrowest of segments, like, for example, technology-oriented equity markets, the numbers of potential providers of capital and the potential users of capital are huge and ever changing. It is surprisingly hard for the people who need money to find the people who have money. And, once they have found each other, their interests, prejudices, and perspectives are so different that they have difficulty talking to each other.

This situation is tailor-made for a middleman, who understands the perspectives and needs of each side, to make a connection. A similar process takes place in M&A. An added wrinkle is that raising capital or doing M&A tends to be a very rare occurrence for most people who do it, so they usually need both a guide and an advocate to help them through the process. I believe this serves a useful socioeconomic function.

CHG: We’ll dig more deeply into this later, but what has the term “investment banking” come to mean these days?

TED: Well. Over the last decade or so, large, global, integrated investment banks have really turned into hedge funds in disguise. Either explicitly, in the form of acknowledged proprietary trading or in-house private equity funds, or implicitly, in the form of large security origination, warehousing, and distribution factories, large investment banks have shifted dramatically from a pure middleman or agency model to a proprietary one.

Most of the revenues and profits investment banks earned during the years leading up to the financial crisis came from trading or investing for their own accounts. This is a role and business which is in fundamental conflict with the role of middleman. For one thing, you act as a competitor to many of your usual clients. For another, it is a far riskier business model than traditional intermediary investment banking.

Part of this transformation resulted from the gradual convergence of commercial and retail banking—lending money to corporations and individuals, in its simplest form—and investment banking into what have become known as universal banks. (Universal banking is only a recent development in the United States, having been the norm almost everywhere else, notably Europe, since inception.)

The other part was the tremendous explosion in the amount and velocity (turnover) of funds available for investment around the globe, which led to increased investment and trading, which in turn offered increased opportunities for trading intermediaries like investment banks to take advantage of.

CHG: I have to ask, how was it that you, given your interests and personality, got involved in Wall Street in the first place?

TED: After graduating from college, I did a number of things completely unrelated to finance. It took me a while, but I eventually figured out that what I enjoyed most about all my different jobs was the learning curve. When a job became routine, I had to leave. Essentially, I discovered that I have the attention span of a gnat. This was quite a revelation for me. Eventually, via friends and by just soaking up the atmosphere of New York City in the 1980s, I discovered investment banking, which is never the same job twice. It’s been a marriage made in heaven ever since.

CHG: So let’s raise the big question: what has happened to Wall Street, and IB in particular, in the last two decades?

TED: Well, as I said above, the industry strayed from its historical roots in pursuit of ever-larger profits, and this led it to taking on ever-greater proprietary risks. In retrospect, it now seems my peers did not have a good handle on either 1) the risks embedded in their own institutions’ activities or 2) the risks embedded in the highly integrated global financial network in which investment banks played a pivotal role.

CHG: Jamie Dimon says the problem lies not with size—after all, Europe and Canada have higher concentration than we do–but with unregulated financial flows. Others, like Sy Sternberg, are quite clear that the problems arose from repeal of Glass-Steagall. What’s your view—what went wrong?

TED: At the end of the day, it’s pretty simple: banks just got too big. Too big to manage effectively, too big to understand the complex waterfall of risks embedded in their business activities, and too big and interconnected for governmental authorities to allow to fail when they did in fact blow up.

Look, the challenge is this: traditional investment banks, and traditional proprietary investment firms (like, e.g., hedge funds), are designed to take relatively high risks. That’s how they make money. The problem arises when their failure or potential failure propagates through the global financial system like an out-of-control virus—through interconnection, domino effects, sheer size, or whatever—and threatens catastrophic failure of the entire system.

That is what governmental authorities perceived as a serious possibility when Lehman Brothers blew up, and AIG, Merrill Lynch, and other major financial institutions were teetering on the brink of failure.

Note that the failures I am talking about were failures or potential failures of the wholesale financial system, not the retail system of deposit taking and consumer loans (although, of course, the entire mortgage industry was deeply implicated). Nevertheless, governmental officials in this country were seriously worried that cascading failures could have paralyzed the global financial system to the extent that automated teller machines would not have been able to dispense cash on Monday morning.

I have no reason to believe they were exaggerating.

CHG: Let’s start honing in on trust. The concept of a client, client relationships, client service, is hardly new to Wall Street, whether we’re talking about commercial banks, investment banks, or even traders. But has it changed? Does ‘client relationship’ mean something at McKinsey that it doesn’t mean at Goldman Sachs?

TED: Wall Street really has two different definitions of the word ‘client’. The one that operates in my business of advising on mergers and acquisitions and raising capital means someone to whom I have special obligations of care, duty, and best effort. My job is to help them accomplish something, usually a deal.

Whereas on the sales and trading side of the business, ‘client’ really means counter-party: someone to whom you have no obligation other than to satisfy the terms of a particular trade. The situation gets a little blurry, of course, because there are sales and trading counter-parties for whom investment banks act as true middlemen—known as market making—and these tend to be stable, recurring relationships which do involve trust.

But the more an investment bank acts for its own interests—like a hedge fund—the less it cares about any obligation to its counter-party other than the terms of the trade itself.

CHG: It seems to me, from afar, that major banks have become a mixture of two kinds of very different businesses, and for some reason they have become blurred in the minds of those banks. I see traditional client-centric businesses like what you signed on to do; and I see, for lack of a better term, casino-like businesses. I do not mean that term to be purely judgmental; casinos are legal, they play a social role of sorts, and we have ample examples of how they can be run fairly with solid regulation, e.g. the Nevada Gaming Commission. But they are, clearly, very different businesses.

Are they not so clearly different? Or have the bankers lost their discriminatory ability to discern the differences?

TED: No, we can tell the difference. But you must understand that the casino bosses, as you call them, have taken over Wall Street. They have been in control for many years–because they made tons more money than my colleagues and me in the advisory and underwriting departments. And the Golden Rule on Wall Street is that he who makes the gold, makes the rules.

CHG: Let’s go over full-strength to trust now. First, broadly speaking: what is the role of trust in a financial system?

TED: Well, at base it is absolutely essential. The word “credit” derives from the Latin verb credere, “to believe.” Again, to use a simple but powerful example, think of a savings account at your local bank. If you and everyone else who had savings at that bank tried to withdraw all your funds at the same time, the bank would not be able to disburse them. There simply isn’t enough money in the vault: it has been lent out many times over to businesses and individuals. And yet (normally) no one worries about this, because that is just how banks operate.

The details and relationships of savings to credit and investment in the global financial system are far more complex than your local bank’s accounts, but the idea is the same. Trust is absolutely essential to the proper functioning of any modern financial system.

CHG: Let me guess that, given how much more interdependent the world has become, there must be some areas of the financial sector where trust has actually increased. Is that true?

But I suppose the opposite is even more true, that there are many areas where trust has decreased. What areas stand out?

TED: I’m not sure trust has increased anywhere, to be honest. But then again, I’m not sure trust is actually a measure that makes sense in the financial system on a systemic basis. I am suspicious of global financial measures that cannot be quantified. How can you quantify trust?

In some sense, you could say trust is measured by credit ratings, credit spreads, and even the prices of financial assets like stocks and bonds themselves. But then again, prices are also the outcome of a balance of supply and demand. And there remains an enormous amount of money that needs to be put to work in financial assets.

I think it is safer to simply say that investors have always had to hold their noses when they invest. It’s just a matter of degree. Certainly, there is no doubt that trust of the financial system and its participants has plummeted among governments, regulators, and ordinary citizens.

CHG: What can we not trust now that we used to be able to trust? Is it particular markets? Or techniques? Or institutions? Where do you find trust is in particular short supply?

TED: Again, I’m not sure the basic challenge of trust in investment banking has changed at all. If you interact with an investment bank, your obligation as a potential customer is to understand what role the investment bank intends to play in your interaction. Is it acting as an agent, with all the attendant obligations of duty and trust, or as a principal, whose only obligations are to its own best interest?

Then, if it is the former, you must decide whether you trust the bank as agent, based upon all the criteria that you describe so eloquently in your own writing here. There is nothing particularly special or different about this kind of trust in investment banking. It is as it has always been. Perhaps only the scale has changed.

If it is the latter, then you as a customer are simply buying something from the investment bank, just like any other purchase. You want to make sure that the product is not defective, that it functions as advertised, and that it is not fraudulent in any way. These are measures of quality, or compliance, with norms and regulations, but they do not rise to the level of trust you normally speak of here, which is a deeper and more comprehensive set of criteria.

CHG: How does trust erode—what are the drivers of erosion? And what can we do to reverse the erosion? In particular, what are the proper roles of a few key institutions—regulators, legislators and educational institutions, to pick three.

TED: I will skip over this one, Charlie, if that’s okay. It doesn’t fit well with my primary conception of trust. I think of trust as a personal, one-on-one relationship, rather than a structural or institutional one. As an investment banker, I view it as my job to build trust with my clients, not anyone else’s.

CHG: Interesting. I’m very prone to that view too, that trust is primarily personal at root. But there are plenty out there who focus on ‘institutional trust,’ and will speak about audits, regulation and reliability statistics. Does that stuff leave you cold?

TED: Yes, it really does. For one thing, you can’t legislate morality. For another, the finance industry is so dynamic and volatile by its very nature that I sincerely doubt any externally imposed and monitored measures or regulation will be able to stay on top of the situation. Lastly, the proper role of regulation—which I believe in wholeheartedly, by the way—is not to impose or enforce someone’s ideas of trust or trustworthy behavior, but rather to prevent fraud, crime, and abuse. This is a much lower bar than establishing and maintaining trust.

CHG: Let’s deal with one sideways issue, the question of anonymity. Some commenters on this blog have been critical of anonymous bloggers. I think anonymity can play some interesting roles, and in some ways can be critical. You’re an anonymous blogger; your view on the subject?

TED: Anonymity can indeed foster all sorts of bad, irresponsible behavior, and I am not in favor of it in general. But blogging (or even commenting on another blog) under a pseudonym, as I do, is very different. Anonymity means no identity; pseudonymity means a false or assumed identity.

For one thing, operating under a pseudonym allows one to build up a corpus of opinion that can be judged in toto. Third parties can develop an opinion of your credibility and the value of your opinions for the very reason that you present a consistent identity, that you do in fact have a name. That this name is false, and a mask, is more a matter of convenience and perhaps professional necessity than it is of deception.

If people judge my words and opinions interesting, provocative, and worthy, it does not really matter whether they know me as TED or Joe Smith. One can always worry that a pseudonymous commenter or blogger has an ulterior agenda, but I suspect that is both hard to conceal over a long period of time (I have been blogging for over four years) and, frankly, beside the point. I challenge you to find anyone commenting in public who does not have at least one unstated agenda. And yet we should be able to judge and evaluate each other’s contributions nonetheless.

I claim to be an investment banker with over 20 years experience in the business. I claim many other things besides. Neither you nor anyone else really knows this to be true or not, and yet I hope my words and opinions themselves have earned me a measure of trust in this respect that a resume or a photograph would not add to. Perhaps I am naïve, but I believe that, given enough time, trust can be built upon words alone. My entire career testifies to that belief.

CHG: I think you’re a testament to the truth of that proposition. Thank you very much for spending time with us today!

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The Epicurean Dealmaker on Trust and Investment Banking is number 19 in the Trust Quotes: Interviews with Experts in Trust series.

Recent interviews include:

Robert Eccles on Integrated Reporting (Trust Quotes #18)

Jordan and Barbara Kimmel on Trust Across America (Trust Quotes #17)

Sy Sternberg on Trust in the Life Insurance Business (Trust Quotes #16)

Read the complete Trust Quotes series.

To Tell or Not To Tell: The Three-Question Transparency Test

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We’ve all had those moments when we realized we knew something that someone else didn’t know and it was awkward. Think of the last time you were at lunch and you noticed your tablemate’s big, toothy grin adorned by a piece of big, leafy spinach—yep, that’s the kind of awkward we’re talking about. Even though most of us probably ascribe to a principle of Transparency—being honest, open, candid except when illegal or injurious to others—we’ve all made the choice at some point to say nothing.

The question is: did we do the right thing?

Use the Three Question Transparency Test to find out.

When a Lie by Omission Seems Like a Pretty Good Option

On the surface, it’s easy to say “Honesty’s the best policy!” Dig a little deeper and it’s not so clear.

Let’s look at some client examples to make this real—cases where you know something that he or she doesn’t (or might not), and you wonder “to tell or not to tell?”

– Imagine you’ve discovered a mistake in your work. The impact is relatively minor. Does it help or hurt the customer relationship to call attention to it?

– Or…you’ve discovered a mistake in your client’s work. The impact is significant. So is the likelihood of embarrassment (or worse) for them. Are you honoring or dishonoring the relationship by saying nothing?

– What if you learn something unfavorable about a competitor—one your customer is currently engaged with. Are you the hero or the jerk if you bring it up?

– And—maybe the worst of all—what do you do when you notice your client has spinach in her teeth?

End the Debate with the Three-Question Transparency Test

The next time you’re debating “to tell or not to tell,” ask yourself three questions:

1. Is my reason for not telling actually for my benefit, rather than theirs? Let’s face it: we human beings have a natural tendency to avoid scary, uncomfortable stuff—and that includes not telling things when telling is precisely what will honor the relationship. Is it really in the other person’s best interest to say nothing or is your desire to avoid your own discomfort creating a platform for a nice, juicy rationalization?

2. If I don’t tell and he finds out later, will he feel misled? This question invites you to see the situation from the other person’s vantage point—always a good practice when it comes to relationship-building. (By the way, if you’re banking on the fact that he won’t find out later, check your probabilities…and your motives.)

3. Would I tell her if she were my friend? This is my favorite question because it really cuts to the chase and invites us to set aside the arms-length decorum (often masked as “professionalism”) that defines most business relationships.

If at any point your answer is yes, do not pass Go, do not collect $200. Say what needs to be said (with compassion and diplomacy, of course – caveats help immensely.)

An Even Simpler Test

If three questions seem like too many, here’s the ultimate litmus test. Thanks go to Chip Grizzard, CEO of Grizzard Communications Group, who recently shared these words of wisdom. Chip says, “If you’re expending any energy on the debate, then it probably means you should say something.”

It doesn’t get much simpler than that.

In Theory and In Practice

While the principle of Transparency sounds good in theory, it’s actually very hard to live by. It takes courage. It takes a willingness to get comfortable being uncomfortable. It takes a commitment to removing yourself from the equation. And it takes a certain level of discernment to figure out when it’s hurting versus helping to sidestep the truth, the whole truth, and nothing but the truth.

Use the Three-Question Transparency Test—or the simpler “Grizzard Gut Check”—the next time you wonder whether to tell or not to tell.

The Two Times You Should Refer a Customer to a Competitor

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You may be thinking, “Wait—why would I ever want to refer a customer, potential or otherwise, to a competitor?” Good—this article’s for you.

In fact, there are two such situations. One won’t surprise you. The other is even more obvious—but even easier to miss.

Why We Don’t Give Referrals to Competitors

It’s not as dumb a question as it sounds. Competitors are those we compete against; what we win, they lose, what they win, we lose.

That certainly means we don’t want to lose direct competition. But as the idea of competition has become like mother’s milk in business, we tend to take it one step further: we want to prevent competitors from winning, even if we’re not directly involved.

So: we hate to lose, and we hate to see them win. Two distinct reasons we don’t give referrals to competitors.

The Competitive Gospel Applied to Selling

The Gospel of Competition says that the whole point of business, including selling, is to win.

The business strategists tell us that key to being successful is being number one or number two in your business.

The football strategists tell us winning is not the main thing, it’s the only thing.

The military theorists tell us the enemy of my enemy is my friend.

The problem with the Gospel of Competition is that, taken to extremes, it competes with the Gospel of the Customer.

The Gospel of the Customer Applied to Selling

The Gospel of the Customer says that the whole point of business, including selling, is to help the customer. If you succeed in doing that, then most likely you will also ‘win’ in the competitive market place.

Though if those two goals come in conflict, you’ve got a serious problem. What if the right thing for the customer involves helping your competitor? That turns out to be a serious question of business identity.

Competitive Referral Number One

The most obvious referral to send to a competitor is a very difficult customer. If you worship the Gospel of Competition, you can justify this on the grounds that it gets rid of a problem for you, and causes a problem for your competitor. Machiavelli would be proud.

But there’s a better reason for doing this—if you believe in the Customer Gospel.

If you believe the Customer Gospel, then you believe in relationships and trust, and the economic benefits for all that come about through collaboration and transparency.

A difficult customer for you, then, is likely to be a customer that doesn’t believe in those things. And a competitor for you is probably a competitor who also doesn’t believe in those virtues, at least not as much.

In that scenario, you do all three parties a bit of a favor, though you perhaps the most. You align transactional sellers and buyers, while focusing on relationship customers yourself. You gain competitive advantage—but everyone’s at least a little better off. That’s good.

Competitive Referral Number Two

The more—or less—obvious situation is when your competitor actually is better suited to serve the customer than you are. Then what do you do?

In this case, not only do you lose a sale (maybe), but you lose one to your competitor. If it’s an existing customer, you risk giving your customer exposure to a competitor—risking them leaving you forever.

Why would you ever do such a thing?

Because if you would never, on principle, give a lead to a competitor—even if they are better suited than you—then you cannot be trusted; you have just said, in principle, that you would always put your own selfish interests ahead of those of your customer.

I once heard a physician make this point directly:

“In my 25 years as a doctor, I have never heard a pharmaceutical rep from any company ever recommend a drug from any other company. Consequently, I don’t trust any of them.”

What’s at stake is your trustworthiness. It depends heavily on your willingness to take the long view, and focus on your customers’ needs ahead of your own—rather than continually trying to gain competitive advantage at every transaction.

And–paradoxically—in the long run, you probably end up getting the competitive advantage as a collateral effect anyway.

The Surprising Reason You Lost That Last Sale

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How many times do we hear from someone out of the blue and wonder what it is they are after?

Recently I met a CEO from an ASX top 200 (our Aussie version of DJI or FTSE 100) company at a social event. I had gotten to know him through my work with a Big 4 firm. Our conversation turned to the Partner who had completed much work for his company.

I asked, “Have you seen X recently?” He replied in words to the effect of, “I haven’t heard from him for a couple of years. He must be too important to contact me nowadays.”

The Partner in question had since taken on very senior roles within the firm, and even though the comment was meant in jest, I think there was a tone of underlying disappointment. I’m sure they had spent many hours together, probably talking not just about work, but about personal issues as well. Intimacy would have developed over time.

Now in the rear view mirror of time, this CEO may have come to believe that the care shown at the time by the Partner was not authentic, that it was used only as self-interest to gain revenue.

This I know would not have been the case; but certainly may now have become the perception.

This reinforces to me the importance of the simple ‘checking in’ call. It reminds me of Mizner’s, “Always be nice to people on the way up; because you’ll meet the same people on the way down”

The same man said, “A good listener is not only popular everywhere, but after a while he gets to know something.”

As you may know, the power of listening is a core theme in The Trusted Advisor and Trust based Selling.

At this time of year I remember a story, which at the time surprised me, but which I now completely understand.

A number of years ago I asked a friend what criteria he had used to decide on a service provider for a facility management contract. He said it was a difficult decision; the 3 tender documents he received were similar, the people he met from each firm were all credible and seemed to be people he could work with. The clincher for him was that only one of the tenderers sent him a best wishes card for the holiday. That’s the firm he chose.

As Trust-based Selling suggests, it’s the ‘hard’ credentials that buyers consider necessary conditions and which they use to screen. But it’s the ‘soft’ credentials that are the tie-breakers, the sufficient conditions, that buyers use to make the final selection.

I also find inspiration regarding the importance of personal connection from an odd couple: an 18th century postmaster, and an early Greek philosopher:

“I love a hand that meets my own grasp that causes some sensation” (Samuel Osgood).

“A hidden connection is stronger than an obvious one” (Heraclitus of Ephesus)

Spamfitti: Mindless Following and Promiscuous Friending

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Email is being replaced by Twitter and Facebook. Or, maybe it’s not. But what do you call it when a Twitterer follows 3,000 people, has 2,800 followers—and has yet to write a single tweet? Are they ‘friends’? I suggest it has something in common with both spam and graffiti, and requires a new word–‘spamfitti.”

This is not another stupid rant about the word ‘friend.’ That ship has sailed. This rant is about the need to keep what killed email from choking social networks.

The Spam Factor of Following

Consider: email spam is so hard to eradicate because the economics of one more marginal spam address are essentially zero—so almost any non-zero response rate turns it profitable.

Twitterers and LinkedIn users (I can’t speak for Facebook) are increasingly acting like spammers. They are indiscriminately following others, since the reciprocity instinct is so high in human beings that the follow will quite often be returned.

If what you want is followers, then the human-economics of adding more followers by following are very compelling—far more even than the economics of spam. I follow you, you follow me—it no longer has anything to do with the message or the content; it is simply about the badge, the Klout, the rankings. This is the second derivative of Marshall McLuhan’s ‘the medium is the message.’

The Graffiti Factor of Following

Why do social spammers follow? To be followed. Why do they want to be followed? Perhaps for a few it’s to provide a base for future monetization. But for a vast majority, I think, it’s reflexive—the follow itself is the new currency. It needs no justification beyond its own existence.

This is graffiti. The reward of spray-painting your name (or carving it in rocks 150 years ago in Wyoming) is largely the knowledge that others will see it. Pure adolescent or childish ego, in other words. (My grandmother taught me: “Fools’ names, like fools’ faces, often appear in public places.”)

The Power of Spamfitti

Spamfitti combines the ease of graffiti (the whole idea behind social networks is that they’re public), with the economics of spam—only worse. Because the driving motivator is ego, not money—and the former trumps even the latter in terms of power. And because it relies on another human frailty—the built-in instinct to reciprocate a ‘favor.’

The Hare Krishna cult used to exploit this frailty; they’d offer you a flower with a smile, and even though you knew you were being hussled, if you took the flower, you felt like you had to give them a dollar.

Why is this a big deal? Because it drives ‘networks’ ever closer to the original non-network, email. Each of us individually maximizing our good at the margin ends up collectively ruining our good.

This is a well-known problem in human economics, called the Tragedy of the Commons. And like everything else, cyberspace just puts human issues on steroids.

The Chris Brogan Exception

I’m aware Chris liberally follows those who follow him and that gives me pause because I think Chris is a genuinely fine human being, and he’s smart to boot. So here’s my @chrisbrogan exception clause: he does it so he can liberally use search tools and HootSuite analytics on a large followership and still not have to read tweets in Mandarin or Greek.

So: unless you use HootSuite analytics (and can’t read Mandarin), this exception does not apply to you.

The Rest Of Us

How do we get out of this conundrum of human frailty?

Stop following every fool who gives you the digital equivalent of a flower and a smile. And don’t be so promiscuous with your own follows, either.

(Turns out maybe this was a bit of a rant about ‘friends’ after all).

A New Cybercrime…Spying On Your Spouse?

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In his introduction to the Trusted Advisor Mastery Program launched in November, 2010, Charlie Green talks about the skills for being a trusted advisor including “doing the right thing, in the moment, as it’s called for.”

What does this have to do with cybercrime and spouses? According to an article posted by the Detroit Free Press, and a follow up article posted a few weeks later, a husband is currently being prosecuted under a state statute designed for trade secret theft. His alleged crime? Reading his wife’s emails; he used her password and found out she was having an affair. Of course, there’s more to the story in the articles. They’re divorced now.

As a former practicing lawyer, I find the legal issues interesting – see Peter Vogel’s technology law column in the e-Commerce Times. More intriguing to me as a business development and executive coach are the boundaries of privacy in relationships and what doing “the right thing” really means. After all, not everything we do in life can, or should be, regulated by law.

In a family, talking about boundaries help clarify expectations and behaviors. Respecting boundaries can engender trust; violating boundaries destroys it. In my home, my wife expects me to open her snail mail relating to financial or family matters, even if they are addressed solely to her. However, I don’t open her personal mail. For emails, Social Media communicating (including texts and Facebook), unless they ask, I don’t look at my wife’s or kids’ computers or cell phones. When I’m in front of their computers or cell phones for a reason, I may glance at the screen, but even that feels intrusive. It’s just the wrong thing to do in my family because of how we’ve chosen to respect each other’s privacy.

So while the criminal court determines in the Detroit case whether a statute has been violated, the rest of us need to pay attention to “doing the right thing in the moment, as it’s called for.” And when that involves boundaries in relationships, as I often ask my coaching clients, “What’s the best way to find out how other people feel, believe, or think?” about these types of issues. There’s only one right answer: ask them.

Is Capitalism 2.0 a Mirage? (Part 2 of 2)

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Yesterday, in Part 1 of 2 of this blogpost, I noted that Capitalism 1.X is under attack for its very legitimacy. One approach to fixing the problem is to change the dogma and the ideology—what I called the approach of Capitalism 2.0. An approach like this is taken in two new writings by major strategic thinkers.

I quoted Umair Haque on his approach to Capitalism 2.0:

The outlines of an updated economic paradigm…include two fundamental axioms:

…first…through the act of exchange, an organization cannot, by action or inaction, allow people, communities, society, the natural world, or future generations to come to economic harm. [italics are Haque’s]

And I quoted Porter/Kramer from Shared Value:

The purpose of the corporation must be redefined as creating shared value, not just profit per se.

These are exciting, heady statements. They are directionally right, and very inspiring to most of us. I believe each work makes a very positive contribution to business thinking.

There’s only one problem. The authors are still using the language of ideology.

Beware of Closed Systems

Haque wants an axiom. Unfortunately for Haque, I don’t know of any organization for whom it is axiomatic that they cannot do any of the things he lists. Calling something “axiomatic” simply doesn’t make it so.

Porter and Kramer, in their treatment of Shared Value, use the word ‘must’ in a similar way (“The purpose of the corporation must be redefined as creating shared value, not just profit per se”). But the result is the same. Nobody ‘must’ do anything, as the human race perversely insists on proving time and again.

Karl Marx, in the Communist Manifesto, declared communism inevitable. Capitalism 1.5 had the same flavor. Haque’s ironic use of “Manifesto” and the language of ‘axioms’ suggest the same pull of logical necessity. But axioms are abstract, not empirical–they don’t drive action, unless someone chooses to act on them. And Porter’s ‘must’ has no causal force; it is exhortation dressed up in the words of logical necessity.

There is a beauty in such simple, powerful idea systems, a beauty well-loved by economists, mathematicians, physicists and strategists. The problem is–they are closed systems. That’s OK for math and physics. But for most other fields, once you get outside a closed system, things eventually degrade.

Inevitability Isn’t

Marx was wrong about communism’s inevitability. Greenspan was wrong about large companies’ inclination to self-regulate based on reputation. Friedman was wrong about the gyroscopic capabilities of the Invisible Hand.

If Porter and Haque believe that they have discovered an ideology as attractive, powerful and self-sustaining as those were, then we’re probably just looking at another shiny-object, perpetual-motion, too-good-to-be-true closed system.

In fact, it was our unquestioned belief in the closed-system aspect of Capitalism 1.X that helped cause Capitalism 1.X to fail. It all sounded so good that we wanted to believe it–until long after the writing was on the wall. Not for the first time, the charm of dogma blinded us to facts on the ground until it became not just overwhelming, but undeniable. We’re left thinking, “What were we thinking?” and the answer is, we weren’t. We were just believing.

The search for another compelling but unrealistic logic is likely to be equally misguided.

Both Porter-Kramer and Haque argue that systemic adoption of Capitalism 2.0 will lead to higher systemic profitability. This is certainly true. But the heart of the matter is not a systemic issue—it is whether individual companies will make decisions that are not profitable to themselves in the short term. And this is where ideology gets in the way:

What should, and will, a company do if an initiative is profitable in Capitalism 2.0 terms–but not profitable in Capitalism 1.X terms? Not every business problem is simply a failure of imagination, even if many–even if most–are. The problem of the commons remains unsolved.

I’m not optimistic that Porter can find a profit that is “imbued with a social purpose…that arises…out of a deeper understanding of competition and economic value creation.” I think that’s a circle that can’t be squared.

But it is also not necessary. The answer lies in sober thinking about how social change happens; not in a new Idea System.

Haque is most productive not when he’s offering ringing phrases, but when he’s offering examples of new business opportunities that are not only holistically profitable, but profitable as well in today’s simple quarterly income statement terms–examples like Threadless and Nike’s Considered Design.

Porter is today more famous for his early Five Forces model than for his value chain model, but the latter has probably had more impact. Similarly, his solid thinking today on clusters and the proper role of regulation may end up having more impact than his heroic effort to cognitively re-conceive competition.

There is richness in both works, worthy of a lot of thoughtful reading.

The Other Solution: Dial Back the Dogma

Ironically, it was Marx who said, “The point is not to understand the world, but to transform it.” Ideologues and dogmatists insist on the primacy of theory. Change agents are more pragmatic.

Parts of our society are addicted to dogma and ideology. Business, under Capitalism 1.X, is one; others are politics, academia and particularly economics. But it’s not the norm.

The legal profession isn’t dogmatic, apart from a general belief in advocacy. Education has many sub-currents but not one unifying theory. The practice of medicine, other than the Hippocratic Oath, is more practical than ideological.

If ideology is ultimately empty calories, then what is to be done? How else can we get to the alternate vision of business that both Porter and Haque so clearly, and rightly, envision?

First, we need to give up our addiction to ideology. What’s needed is not another intellectual home run, but a dogged effort to get better at getting along—on all social dimensions, not just those of business.

What can you do? Here are a few examples:

1. People with visible responsibility can start talking about civic and moral virtues, instead of the virtues of an abstract system which magically does the heavy lifting for us.

2. Porter, Kramer and Haque as writers–and all of us as readers–can use the rich and stimulating examples they have uncovered as a challenge to our imaginations, and a spur to creative thinking. The power of what they’ve written lies more in their examples and simple models than in the attempt at a Unifying Theory.

3. Measurements are powerful in business; many managers believe that management requires it. We can all support global attempts at Integrated Reporting accounting, combining traditional financial accounting with other socially-relevant measures. New vocabularies seriously drive new dialogues.

4. Trade associations can shift emphasis from narrow sectarian lobbying to offering education and perspective on increasing the long-term viability of their industries.

5. Business strategists and economists can look to outside functional arenas; negotiation and bargaining experts know how to integrate zero-sum oppositional positions with shared interests;

6. Politicians can rediscover bi-partisanship and compromise, rather than scorched-earth zero-sum competitive games; citizens can hold them accountable by re-discovering the same.

7. Elections and legislation are heavily controlled by corporate interests in the United States today. This is not long-term healthy even for business. Business organizations can collaborate with other groups to pursue campaign finance reform, thus putting stakeholder collaboration into serious practice.

8. Business education, mainly MBAs, can start emphasizing long-term sustainable collaboration, rather than Capitalism 1.X. Ethics courses are no good if they’re contradicted by 1.X courses in competitive strategy down the hall.

9. News media can try to stay sober, serious, thoughtful and responsible, not giving in to pure entertainment; business can play a role along with consumers in helping media resist the pull in that direction.

There is no unifying ideology; if Santa Claus can’t pull it off, why should we expect strategists and economists to do so?

But there are still guidelines.

  • “Be the change you want in the world.”
  • “The best way to make someone trustworthy is to trust them.”
  • “Ask not what your country can do for you, ask what you can do for your country.”
  • “Don’t argue over who gets the slice of the pie, focus on making the pie bigger.”
  • Maybe even, “Do unto others as you’d have them do unto you.”

When Gerstner took over IBM he said, “The last thing IBM needs is a vision.” The last thing capitalism needs right now is a new ideology. Business needs simply to take its seat among other social and political institutions, and to play nicely in the sandbox alongside them.

Is Capitalism 2.0 a Mirage? (Part 1 of 2)

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PART 1 of 2

When Lou Gerstner took over IBM at a time of corporate crisis, he was asked if he would chart a radically new direction for the firm. His memorable response was, “The last thing IBM needs right now is a vision.”

For the past several decades, business has had a vision; one so dogmatically defined that we might even call it an ideology—the ideology of Capitalism 1.0. Now that vision has turned toxic. Many agree with Michael Porter that business is now facing a crisis of social legitimacy.

The question is–what to do about it? Does capitalism need a fundamental reframing? Or is the issue more one of execution, about getting along in broader society?

In this two-part blogpost, I’ll examine the case for radical reframing–let’s call it the search for Capitalism 2.0. Part 1 provides background and two approaches to Capitalism 2.0. Part 2 evaluates the results.

REFRAMING CAPITALISM

One answer to the problem of business legitimacy is to re-frame Capitalism. Re-thinking capitalism is as tempting to capitalist ideologues as rethinking Marxism was to generations of socialist ideologues. ‘If “shareholder value maximization” isn’t working, then let’s come up with another encompassing business theory that is even broader than the old one, but that works. Let’s call it Capitalism 2.0.’

Two of our leading thinkers—Michael Porter, with Mark Kramer, and new kid on the block Umair Haque—are attempting an intellectual rebooting of the capitalist operating system. Porter’s concept, contained most recently in an HBR article, is Shared Value. Haque’s new book is called The Capitalist Manifesto.

Can capitalism truly be re-visioned from within? Or is it a closed system whose solutions must come from without? If anyone can square the circle, these authors can. Let’s start by understanding what they’re reacting to.

Capitalism 1.0

The full name of Harvard Business School used to be “The Harvard Graduate School of Business Administration.” In the 1950s, that name was apt. Adam Smith was rarely mentioned—Schumpeter and Hayek, even less.

It was pragmatic, non-ideological. Peter Drucker had just begun to conceive of management as distinct from administration; ‘strategy’ was an occasional term, borrowed loosely from military theorists.

In the 70s and 80s strategy went quantitative, bringing us portfolio management theory, the growth/share matrix and log-scale experience curves.

MBA consultants flooded boardrooms with models in lieu of gray hair. Consulting firms seized thought leadership from the business schools. An ideology was being born.

Capitalism 1.0, circa 1980

Around 1980, the core business ideology saw business as a corporate competitive struggle for dominance and survival. All players—producers, their customers, their suppliers, government and regulators—competed. Winning was defined financially, driven by market share, in turn driven by competitive strategy.

Economists and financial theorists joined the mix in the 1980s. One result was greater emphasis on debt, which led to junk bonds, LBOs, private equity and the S&L crisis. Another was the reign of Alan Greenspan and the Chicago School of Economics, whose contribution to dogma was the idea that markets are largely self-correcting.

As tech boomed, the public caught the bug as well. Wall Street created day trading, hedge funds and IPOs, and the public bought it.

Capitalism 1.5

By around 2006 capitalism’s dogma had become more sharply stated—something like:

Business is the value-creating engine of all society. It works best when left alone. Through creative destruction and the Darwinian efficiency of self-correcting markets, it creates value and wealth for all. All business transactions can and should be expressed in present value cash flows terms. The social purpose of a corporation is to earn a profit, and its proper goal is the maximization of shareholder value.

The dogma had held despite Michael Milken, Marc Rich, the S&L and Long-Term Capital crises, Enron and WorldCom. But then came the financial crisis of 2008.

Several items are striking. Alan Greenspan recanted his belief in Capitalism 1.X. Nearly every Chicago economist (notably excepting Eugene Fama) shifted back in the direction of Keynesian economics; Paul Samuelson says Milton Friedman himself would have done so.

The MBA Oath was created at Harvard in 2008. One of the group’s faculty advisors, Nitin Nohria, became the next Dean of HBS. He believes business needs to be more socially attuned–away from shareholder value maximization, toward broader social responsibilities.

In other words, Capitalism 1.X is under attack as a belief system. What will take its place?

The Search for Capitalism 2.0

Business strategists and economists love elegantly simple models. Many past successes have come via idea home runs—redefining paradigms, thinking outside boxes, changing game rules. Porter and Haque have made powerful attempts to do so, as follows:

Shared Value and the Capitalist Manifesto

Both approaches describe Capitalism 1.X’s failures sweepingly. They indict zero-sum thinking, short-termism run amok, and a systemic inability to link corporate benefits to social costs. If anyone needs a comprehensive statement of what’s wrong, look no further than these two works.

Each work also describes a better end-state; longer time horizons, broader collaboration, comprehensive calculations. Yet the solution, both Porter and Haque seem clearly to say, lies in ideology: in re-framing the tenets of capitalism.

Here is Haque’s version:

The industrial age’s dilemma is unsolvable if we’re still confined to thinking in yesterday’s terms…Escaping the capitalists’ dilemma requires a paradigm shift.

The outlines of an updated economic paradigm…include two fundamental axioms:

…first…through the act of exchange, an organization cannot, by action or inaction, allow people, communities, society, the natural world, or future generations to come to economic harm. [Italics are Haque’s]

Porter is equally didactic:

The purpose of the corporation must be redefined as creating shared value, not just profit per se.

The concept of shared value resets the boundaries of capitalism.

Not all profit is equal—an idea that has been lost in the narrow, short-term focus of financial markets and in much management thinking. Profits involving a social purpose represent a higher form of capitalism—one that will enable society to advance more rapidly while allowing companies to grow even more.

We need a more sophisticated form of capitalism, one imbued with a social purpose. But that purpose should arise not out of charity but out of a deeper understanding of competition and economic value creation…It is not philanthropy but self-interested behavior to create economic value by creating social value.

This all begs some pretty big questions: what exactly do we get with a new definition, a new paradigm, an axiom? Do the authors mean that the single biggest, most critical issue is to fix our thinking? Is it really necessary to have a new paradigm in order to get on with matters?

And even if it is necessary to re-think capitalism–is the re-thinking a sufficient condition for getting the job done? For that matter—can it even be done at all? Can we really stretch “capitalism” so far as to equate social good with corporate self-interest? Or is Capitalism 2.0 really a mirage, a distraction from more mundane but critical ways of changing business?

Tomorrow: Part 2 of 2: Capitalism’s Search for the Holy Grail.


Daniel Pink on Getting Employee Engagement All Wrong

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There’s a chasm the size of the Grand Canyon between what science knows – the science around human motivation – and what business does, and the result is disastrous for the economy, for businesses, and for human beings. This, according to Daniel Pink in his book Drive: The Surprising Truth About What Motivates Us.

Motivation 2.0

The author calls the old business understanding of what drives us Motivation 2.0: without extrinsic motivators of rewards and punishments, people at work will be unmotivated, aimless and unproductive. Thus, the science of management: employees and teams need to be motivated and managed externally.

And Motivation 2.1 isn’t much better, despite talk around flexibility and empowerment.

“.. .consider the very notion of ‘empowerment.’ It presumes that the organization has the power and benevolently ladles some of it into the waiting bowls of grateful employees.”

Pink argues that not only does Motivation 2.0 not work in the new economy, it does great harm. Backed by rich research from various fields the author gives examples of how the misuse of extrinsic rewards, so common in business, impedes creativity, stifles personal satisfaction and turns play into work. After basic material needs are met, the quid pro quo of if/then rewards–if you do this, I’ll give you that–saps the juice from the job.

One of the most fascinating examples of this in the book is research done by Teresa Amabile of Harvard Business School. Prof. Amabile and colleagues asked a number of artists to select twenty of their works, ten of which were non-commissioned and ten of which were commissioned. A panel of curators and art experts, knowing nothing of the nature of the research, was then asked to rate each work on creativity and technical skill. And – as you guessed – while the skill ratings were equal, the commissioned works consistently rated lower on creativity. The commission turned the artists’ play into work.

MOTIVATION 3.0

Motivation 3.0 stems from the understanding that we, as human beings, are intrinsically motivated to take on responsibility, to look for creative and intellectual challenges and to solve problems. We are self-directed and work best when we have three things:

– Autonomy: the ability to control aspects of our time, tasks, techniques, and teams

– The Opportunity for Mastery

– Purpose: a connection to something larger than ourselves

These are the factors which create real employee engagement.

Then why is it so hard for business to move to Motivation 3.0 – nourishing employees’ intrinsic motivations instead of “managing” employees through carrots and sticks? After all, the research, while growing, isn’t new. Some of these findings have been around since the 1940s.

I believe it’s a matter of trust – “managers” aren’t ready to trust their teams’ or employees’ intrinsic motivation to do good and creative work. If the motivation is extrinsic – rewards like money and promotions, or punishments like docked pay – they can control it. If the motivation is intrinsic, managers have to trust their employees. It’s that simple, if not that easy, and Drive speaks to the heart of these issues in a rich and readable way.