One way to get better employees? Read this New York Times interview.

Vivek Gupta's interview includes some really great ideas (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.

Hat tip to Jack Ayer for pointing out this interview about ethics and finance.

Here.  My favorite paragraph in the interview?

The ethical subversions which have cost banks and their shareholders so much, the collusion and self-dealing, were genuinely frowned on in my parts of the financial world. However, the wide gap between our practices and our clients’ true interests was so inherent in our business proposition that I can easily imagine how such behaviour seemed perfectly appropriate to practitioners elsewhere in the firms.

The answer to the question of whether we learn from our past missteps: "No."

Over at Credit Slips, there's an Adam Levitin post on the new QM/QRM mortgage rules (here).  Couldn't have said it better myself, and his post is worth reading.

Really good advice from Fay Vincent that applies to all leaders.

In the WSJ (here).

It's not what you say; it's how you say it--and to whom.

I loved James B. Stewart's story in today's New York Times (Boss's Remark, Employee's Deed and Moral Quandary).  When one is a boss, one needs to be painfully aware of how even the most tossed-aside comment will sound to an employee.  My favorite part of the story:

No one asserts that Mr. Corzine told Ms. O’Brien to take customer money. Mr. Corzine’s lawyer, Andrew J. Levander, said Mr. Corzine was told the night before that the firm had $82 million in cash and another $602 million in unencumbered securities, and “it never dawned on him” that Ms. O’Brien or anyone else might “violate the golden rule” about safeguarding customer assets.

But how would Ms. O’Brien have interpreted Mr. Corzine’s comment? When I discussed this with John Hasnas, director of the Georgetown Institute for the Study of Markets and Ethics, he drew an analogy to the murder of Thomas Becket, archbishop of Canterbury, after Henry II is said to have uttered, “Will no one rid me of this troublesome priest?”

“He didn’t actually tell anyone to murder the archbishop,” Professor Hasnas noted. “But people knew what would make him happy.” Indeed, history records that four of Henry’s courtiers promptly set off and dispatched the archbishop in the nave of Canterbury Cathedral. 

Yep.   And do I believe that Corzine's request added a silent "legally, of course" kicker?  Not for a minute. 

Skilling's sentence is reduced.

See here.  Is fourteen years enough for the havoc caused by those who led Enron (after Rich Kinder left)?  It's hard to say.  I've never been in a federal prison, even as a visitor.  I can't imagine what life "inside" is like.  I know it's not easy, even in a minimum security prison.  But I also know that there are many, many people who can't retire until they die, thanks to those who manipulated financial information at Enron, WorldCom, and the like.  The people whose pension funds were wiped out have life sentences, so to speak.

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.

Let's see if I can get this straight....

Affairs aren't good things, I know.  But let's do some calculus:

CIA Director has affair, has to resign.  I get that, although I'm saddened by that, because I had a great deal of respect for him.

Incoming Lockheed CEO has affair, gets fired--and gets $3.5MM in severance pay.  Huh?

Neil Armstrong on what constitutes a good work ethic.

Here.  And my favorite quote in this Wall Street Journal piece?

I can only attribute that to the fact that every guy in the project, every guy at the bench building something, every assembler, every inspector, every guy that's setting up the tests, cranking the torque wrench, and so on, is saying, man or woman, "If anything goes wrong here, it's not going to be my fault, because my part is going to be better than I have to make it." And when you have hundreds of thousands of people all doing their job a little better than they have to, you get an improvement in performance.

R.I.P., Neil Armstrong. 

Frank Partnoy on the lawyers involved in the Standard Chartered scandal.

Here.  He said it perfectly.  My favorite part of his Financial Times piece?

We know bankers can be ruthless when pursuing profits. But bank lawyers are not supposed to think like bankers. Decades ago, the general counsel of a bank thought more about ethics than efficiency. But today’s in-house counsel are often profit centres, fonts of wisdom on how to avoid accounting rules, cut taxes and maintain the secrecy of dubious practices. One reason for the recent wave of abuses at big banks is that their in-house lawyers have been more focused on speed and profit than on right and wrong.

And that's why it's important to focus on more than the bottom line.

What's the right balance of "talent" and "luck" that accounts for someone's accomplishments?

See Lucy Kellaway's column (here if you subscribe to the Financial Times; here if you don't) and Michael Lewis on his Princeton commencement speech (here).

Is stealing worse than lying?

The NYT's Dealb%k* feature is one of my favorite parts of the newspaper, and this morning's column (here) was no exception.  In today's column, the very smart Steven Davidoff makes an interesting argument that Jeff Skilling may have been less culpable than Bernie Madoff and should therefore have his sentence reduced.  His argument is a perfect demonstration of the principle that reasonable people can disagree.  I disagree with his rank-ordering of stealing and lying.

Here's a key paragraph from today's column:

But if Mr. Skilling did lie, as the jury found, that does not make his sentence right. It all boils down to whether there is a difference between lying — that is, telling an untruth — and stealing, or taking something that does not belong to you. Some may argue that they are equally bad, but the difference comes out in comparing Mr. Skilling with other recent financial criminals.

Professor Davidoff and I part ways when it comes to this comparison.  Had Jeff Skilling merely been negligent in his management, his negligence would have been awful, but it wouldn't have been intentional, the way that outright lying is intentional.  Even if Enron did disclose what it was doing (albeit in vague footnotes in its SEC filings), and even if all of the warning signs about Enron were out there (which they were), there's still a problem with Enron's intentional misrepresentations about the financial health of the company.  Those half-truths and sneaky partial disclosures may not have fooled sophisticated financial folks, but they fooled most normal people.  Fooling folks meant that the market had nowhere near the "perfect information"** that Enron investors wanted, and that led in part to the losses that Enron investors incurred.

Lying prevents the non-specialist from being able to make intelligent decisions.  Let's say that my car has some sort of a hiccup going on, and I take it to my mechanic.  The mechanic will see all sorts of things going on with my car that are obvious to him but not at all obvious to me.  He can make a better decision about what to do than I can, even though we have equal access to the information.  Let's say that he lies to me about the severity of a particular problem, saying that the cost to fix the problem is several times higher than it should be.***  I'm likely to follow his recommendation about what to do, even though it'll be more expensive than it should be. 

Lying makes the already opaque market worse, which in turn causes people to make worse investment decisions.  That's why lying and stealing are equally bad, in my view.

Sorry, Professor Davidoff.  But I still love your work.





*  The column's name is Deal%k, with the "%" sign in the name.  I could've written "Dealb[oo]k," but "Dealb%k" is just a much better name.

**  I've yet to see a market that has perfect information, but it'd be nice to see one with truthful information all the way down the line.

*** Note to my mechanic:  I'm talking about a hypothetical mechanic, not you.  You wouldn't lie to me.

No consequences? That's why LinkedIn was hacked.

See story (here).  Oh, part of the problem is that smart people tend to forget that bad things can happen to them.  Part of the problem is flat-out hubris.  But the biggest problem?  If there are no real consequences to bonehead mistakes, then the incentive to avoid those mistakes is very, very low. 

Will heads roll at LinkedIn?  Maybe.  But I don't know if the right heads will roll.  Unless the folks at the very top feel the consequences, then the wrong people will learn the lesson about not protecting passwords.

What do you get when conflicts are ubiquitous?

You get people who wake, as if from a dream, to realize that what they've been doing has (a la Arthur Andersen) come 180 degrees away from the firm's original culture (see Greg Smith's NYT op-ed, here) and what they've been facilitating hasn't been nearly as clean as it should have been (see Andrew Ross Sorkin's NYT Dealbook columns here and here).

Greg Smith's "Why I Leaving Goldman Sachs" includes this paragraph:

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

Mr. Smith is right about the importance of leadership in a firm's culture.  It matters that a company's officers and directors reward the right behavior and punish the wrong behavior.  But what I liked most about Mr. Smith's op-ed is that it recognizes that culture isn't up to the C-level suite and the board alone.  Senior people have to reinforce the culture all the way down the line.  They have to watch what their people do and say (and reinforce the right behavior).

As I've said before, the problem isn't that all people are evil.  It's that all people are human, and humans have an unlimited capacity to fool themselves into thinking that what they're doing is the right thing to do, even when it isn't.  When senior people rationalize their behavior, a company's decline isn't far behind.

As for the board, it can start thinking about how to turn around this very important company, or it can continue down the same path.  I'll be interested in watching what happens.

Conflicts of interest redux.

Andrew Ross Sorkin wrote a great piece in yesterday's New York Times about the "heads I win, tails you lose" approach that Goldman Sachs seems to have used in the El Paso-Kinder Morgan deal (here). 

Lots of people think that mere disclosure of conflicts will cure each and every one of them.  Sure, disclosure will cure some, especially with sophisticated clients.  But even with the most sophisticated clients, disclosure is a tough thing to get right.  Disclose too little, in consideration of each client's confidential information, and the consent to the conflict isn't very "informed."  Disclose too much, and the clients' confidential information goes out the window.

I'm going to guess that most of the time, the disclosure is too little, not too much.  And that's not just right.

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.

Best quote in an op-ed referencing Nozick.

John Kay's piece in the Financial Times (here) includes this wonderful paragraph, which applies to corporate pay and the pay of estate professionals in bankruptcy cases:

And again, problems arise when people voluntarily hand over money that is not their own. John Kenneth Galbraith once described executive pay as a warm personal gesture by the beneficiary to himself. In today’s world of remuneration committees, it is more often a warm personal gesture by friends to each other. 

Perfect.

The economic crisis in a nutshell, courtesy of Dilbert.

See here.

Character matters.

For those of us who love "the pinks" (Financial Times subscribers), this morning brought a lovely piece about how character isn't innate--it's earned.  Luke Johnson wrote A Crisis Is the Only Way to Test Your Value (here).

He's right, for several reasons.  First, it's easy to behave well when everything's going right.  That's no test of character.  Second, experience shapes character.  Character is a series of decisions over someone's lifetime, not a static quality.  And third, someone's reaction to an event will be affected both by his own experiences and the group he's in.  We're affected by social pressure more than we realize, so being alert to that social pressure matters.

Leaders need to understand that it's not "who they are" that matters as much as how they behave, especially when things aren't going well for them.