Not rocket science, Toshiba.

My go-to joke about rocket science is that my husband's best friend is, in fact, a rocket scientist at NASA--so every time I need to know if something's rocket science, I can just ask Randy.  ("No, that's not rocket science, Nancy.")

It's not rocket science to figure out that alleged pressure from Toshiba's top brass may have led to serious accounting problems (see here and here).  The formula is [top brass has particular incentives to get big rewards] + [incentives are linked to the company's financial performance] + [the better the performance, the bigger the incentives] = [increased tendency to lean on lower-level managers to fudge results].

Do the lower-level managers have options?  Sure, but none of those options will end with happy results.  Balk at upper-level pressure?  Get fired.  Yield to upper-level pressure?  Run the risk of being part of a conspiracy.  Blow the whistle (I have no idea what the whistleblower laws are in Japan)?  Maybe come out unscathed (technically) but run the risk of becoming a pariah.  Cynthia Cooper's autobiography is still my favorite book about whistleblowing.

So what's the solution?  Boards need to think hard--and strategically--about what incentives they're giving to their C-level officers.  Bad incentives = bad consequences, every single time.

Lucy Kellaway is right (as usual)--this time about the selection and interview process for corporate boards.

See here.

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

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

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.
____________________
* 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. 

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 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.

It's the incentives.

In today's special Dealbook section on BigLaw, there's a great article about the culture of firms like Cravath (here).  What I found especially interesting was the notion that taking out the eat-what-you-kill types of incentives, as well as the "if we don't pay them a lot of money, they'll leave" instincts, leads to a firm where people aren't necessarily cutthroat and still get to do very interesting work.

Not a big surprise.  After all, people work to fulfill the incentives given to them.  The people who focus on salary (see "anchoring effect"), at least after they reach the "comfortable living" threshold, seem to me to be among the most unhappy people.  I've had colleagues at every place I work whose mission in life seems to be to ferret out everyone else's salary and then sulk if they're not at the tippy-top of the list.  (They also tend to taunt the higher-paid among their colleagues.)

So when folks are paid in lockstep, they have to find their self-worth in other areas, such as the quality of the work they're getting, or the opportunities to do new and interesting work. 

Folks who head up organizations should take note.  It cannot be true that people need to be at the top of the pay scale to be happy.  And, because we don't live in Lake Wobegone, not everyone can be at the top of the pay scale.  Giving people opportunities and--when the money is there--raises is important.  Placing people into ordinal rank by salaries alone isn't.

A very smart op-ed about executive pay.

By Gretchen Morgenson, whose columns I always like.  Here.

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.

A perfect combo: Jen Lancaster and a discussion of optics of public companies.

Enjoy.

A great idea: tying risk to responsibility.

See Joe Nocera's New York Times column today (here).

Quite sensible suggestions, really.

And quite likely, they'll be impossible to implement, unfortunately (here), thanks to the bureaucracy.