Perverse incentives strike again.

Cross-posted at my main blog here.

Thoughts on The Secret Sauce of Corporate Leadership in The Wall Street Journal

Yesterday, I read this great piece by Lawrence Cunningham about the need for a "skeptical #2" in the C-suite.  He's absolutely right, of course:  the best leaders of anything* (big businesses, small businesses, higher education, primary and secondary education, government, teams of people, etc.) recognize that they need people who can force them to think things through.  The "skeptical #2" is the opposite of the "yes man."  He or she is the person who says, "yes, but."

Here's my favorite part of the piece:

Many legendary CEOs were the more visible halves of hidden duos: Mike Eisner with Frank Wells at Disney ; Roberto Goizueta with Don Keough at Coca-Cola ; and Tom Murphy with Dan Burke at Capital Cities/ABC. Though the arrangements varied among personalities and settings, there are common threads. A prominent leader drew enormous value from a second in command who quietly contributed complementary talents, provided a sounding board—and exercised veto power. Results went far beyond good governance and performance to extraordinary achievement.

It's that "complementary talents" point that we should take away from this piece, if we remember just one thing about it.  No one's good at everything, and the value of an honest, direct second-in-command is that that person can bolster those skills that aren't as strong in the leader.  Great second-in-commands are hard to find, because they have to have enough ego to be able to speak frankly to the leader and yet be willing to let the leader take the spotlight.  And they have to have enough clout with the leader to be taken seriously.

What if there's no good second-in-command?  A Chief Legal Officer (if there is one, and if the structure allows the CLO to interact with the CEO directly) might be able to help.  If the CEO is smart enough and secure enough in his or her talents, some other direct way of giving the CEO advice might help, but the point is to be able to reach the CEO before a big decision is made, not afterwards.  The most important thing that a leader must know is that very smart people can make some very dumb decisions (for my incessant squawking about this, see, e.g., here, here, here, here, here, and here), and that even the most talented of people needs a trusted ally to help provide the necessary checks and balances.
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* Anything that involves more than one person.  If you're "leading" just yourself, you're either a bit unstable or really, really self-actualized.

We're not very good at learning from our mistakes, are we?

My husband, my friend Bala, and I have edited two books on Enron.  We edited the first one as a way of figuring out what had happened at Enron so that people could avoid making those mistakes again.  We did the second book after realizing that no one seemed to have learned from Enron, and we wanted to figure out why smart people don't learn from their mistakes.  (I'm talking with the publisher soon about a third edition, meant for both law schools and business schools.)

Two different articles this week made me realize that the willingness to learn from mistakes is a rare quality.  The first one, in the Wall Street Journal, involved a CEO who allegedly wanted his subordinates to lie about the company's financials (shades of, among other things, WorldCom).  The second one (here) has to do with Fannie and Freddie being willing to finance mortgages that have very low downpayments.  A three percent downpayment leaves the buyer with very little skin in the game.

So why don't we learn from others' experiences?  There's a whole slew of possible explanations, but the one that appeals most to me is the idea that humans will find a number of ways to fool themselves--maybe not consciously, but subconsciously.  After all, "we're" not manipulating financials; we're "adjusting" them to comport with the predictions that "must" be correct.  "We're" not encouraging people to lower their emotional and financial connections to their homes; we're "enabling people who wouldn't otherwise be able to afford a home to get one."  It's a frustrating business, this refusal to extrapolate from past financial disasters.  But it's a stubborn problem.

Two reasons to watch the Dewey & LeBoeuf indictments.

Here's one.  The other one is the use of RICO to include lawyers in conspiracies (here).  It will be interesting to see if the two intersect.

Let's assume, for the sake of argument, that the allegations about B of A are true.

Here's a story about the allegations.  If those allegations are true, and I have no idea if they are, then what we have here is a classic case of creating incentives that trigger exactly the behavior that the bank got from its employees.  An example from the news story:

“We were regularly drilled that it was our job to maximize fees for the bank by fostering and extending delay of the HAMP modification process by any means we could,” Gordon said. Managers instructed staff to “delay modifications by telling homeowners who called in that their documents were ‘under review,’ when in fact, there had been no review,” she said. 

Any employee is likely to work to do more of what the employer rewards and less of what the employer ignores or punishes.  Want your employees to serve customers better?  Then the incentives can't include "how many customers can you serve in an hour?," or you'll get cursory responses to tens of customers an hour.  Want your employees to process documents quickly?  Make sure that "accurately" is also in the incentive equation.

Everyone responds to incentives.  Companies need to pay attention to what their incentives really ask their employees to do.

Dear nominating committees of public boards (those who want some expertise in decisionmaking):

Pick me.

Insanity is doing the same thing over and over again and expecting different results.

If some traditional directors aren't doing their jobs (see today's NYT column by Gretchen Morgenson, here), then why is it that people who are likely to do a better job don't get chosen as directors of public companies?  It can't be that potentially good directors are that hard to find.  We aren't.  It must be that boards are afraid to try something new, even when the "old" doesn't work well for them. 

I'm looking for a board that is willing to take a chance on some new blood.  Takers?

Dear H-P Board: seriously, you need to add someone like me.

When I was reading today's Wall Street Journal story about the problems with H-P's acquisition of Autonomy Corp. (here), I couldn't help thinking that the problem with many public boards is that they have too many people who have run large companies and not enough people who study human behavior. 

Boards absolutely need people who "get" their business model and understand how to create the type of environment that will help a business thrive.  But they absolutely also need people who can watch the board's decision-making and call "shenanigans" on decisions that are being made for the wrong reasons and with the wrong dynamics.

Of course, I'm saying this in part because I think that I would add value to a public company's board.  I'm also saying it, though, because I can think of many people besides me who could do the same.

Boards:  next time you need to fill a seat, try hard not to fill it with someone whose background is just like everyone else's.  Insanity, after all, is doing the same thing each time and expecting different results.

My value as a director of a public board.

Recently, I was asked by a wonderful executive search firm to consider, well, being considered for a director position on a corporate board.  Those positions are hard to come by for folks like me, who serve on several non-profit boards but haven't broken into the ranks of public boards. 

So why my hesitancy?  The company was looking to diversity (no problem there),* but it wanted someone who could serve on the audit committee.  That's not in my wheelhouse, as they say.  Clint Eastwood said it best:  Man's got to know his limitations.

I'm smart.  But I don't have the background or education to do justice to an audit committee's work.  I know my limitations.

What would I be good at doing?  Risk management?  Check.  Board dynamics?  Check.  Compensation?  Check, check, check.

So I'm waiting, and with a lot of luck and some great friends, maybe another public board will consider me for things for which I actually can add value.

* Re diversity:  That's a tricky issue for me.  I know that some of my experiences as a woman are different from those of my male colleagues.  But many (most?) of them aren't.  Being a woman, by itself, doesn't automatically add the type of diversity that boards need.  (The fact, though, that precious few boards have any women or minorities on them is a problem.  When everyone on a board has the same background, then there's no one there to look at things from a different perspective.)  My diversity may come in part from being a woman (and that's likely the diversity factor that put me under consideration in the first place), but it's also from being an academic who studies governance and the mistakes that smart people often make.  It comes from my having had to lead some businesses in the past (two law schools before, and one now as an interim dean).  I know what paying attention to budgets means, and I know how important it is to have a strong team and talented colleagues.  I know I can add value, but only to a company that understands what I bring to the table.

Why I should be on a public board that could use my expertise, part n.

See Luke Johnson's opinion piece in the Financial Times (here).  How difficult is it to fix boards that have become hotbeds of infighting?

Really, really difficult. 

It's that old lightbulb joke:

How many psychiatrists does it take to change a lightbulb?  One, but the bulb really has to want to change.

It's easy to get too cozy to clients.

See Floyd Norris's report in today's New York Times (here).  Seems as though some Deloitte folks were taking the word of the execs of the companies they were auditing, rather than doing some digging on their own.  So much for learning from Enron (see yesterday's Wall Street Journal report on Enron 10 years later, here).

Why don't we learn from our mistakes? Well, I have some theories.  I think that we combine a failure to pay attention to history with some common cognitive mistakes that even the smartest among us make, and we get the same-old, same-old.

Stop me if you've heard these phrases:

"I know these guys.  They wouldn't lie."

"If there were really a problem, someone would have told us by now."
"I am not getting too close to my clients."
"Everybody does it."

So I'm not particularly surprised by this Deloitte issue, or by Andrew Ross Sorkin's report on what may be massive overvaluing of Groupon by Goldman Sachs.

It's enough to make one an avowed pessimist.