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Archive for January, 2011

HBS MBA class of ’93 avoids jail…just

A gloating friend emailed me this from The New York Daily News. Llewellyn Connolly, HBS class of 1993, pleads guilty to tax fraud. Saying he was living in London while living in New York. Pays millions of dollars in fines and has to spend 300 hours tutoring prison inmates. Gothamist notes Connolly appeared in the latest HBS Alumni magazine and includes this photo:

I fished out my December issue to find this entry for Section A, class of 1993: “For another first, we received word from Llewellyn Connolly who writes: “Not sure I have ever written in. I started a new hedge fund in March: Eumaeus Asset Mgt. (Eumaeus was the shepherd for Odysseus, the keeper of his wealth.) Most important, I have been spending a lot of time in the last few years mountaineering and snowboarding, mostly in Alaska and South America.”

I wonder if that last line was a coded message to the IRS. “Not in New York, see????”

Eumaeus was launched in March 2010 and by July had $26 million in Assets Under Management. Eumaeus was in fact Odysseus’ swineherd rather than his shepherd. He is a model of simplicity, honesty and integrity, the very opposite of Penelope’s suitors who consumed Odysseus’ wealth in the expectation he would never return from Troy.

Not Quite Adults

This is a piece I just wrote for The Daily Telegraph in the UK about Not Quite Adults by Richard Settersten and Barbara Ray. It’s well worth reading by anyone 18-34 wondering how to make choices about their future – and by their parents and employers who might feel flummoxed by what they are seeing.

 

 

Prompted by the President’s appointment of Jeff Immelt as his jobs tsar…

I rustled up some numbers based on my hunch that G.E. may be wonderful in many respects, but U.S. job creation isn’t one of them. Like any company of a certain size, its focus is on efficiency and productivity not job creation. And especially not job creation in high-cost labor markets like the United States:

  • In 1980, G.E. employed 405,000 people.
  • In 2000, it employed 340,000 people.
  • In 2005, four years into Immelt’s tenure, the number was down to 307,000.
  • Today it employees 304,000, of whom fewer than half are here in the U.S.
  • Between 2008 and 2009, the number of workers employed in the U.S. by G.E. fell from 152,000 to 134,000.
  • Below is a graph from on G.E.’s own website which shows not only the drop in employees, but also the dramatic drop in American employees over the past five years.

Is Immelt really the right man to be entrusted by the President with creating American jobs? Wouldn’t an entrepreneur, who has created thousands of American jobs, be a better choice?

You’ll never meet an ugly drug rep

Five years ago, The New York Times ran this piece on the number of cheerleaders who become drug saleswomen. It’s a great example of how even the most sophisticated businesses in the world rely on the most primal human tendencies to succeed.

For the drug companies, the calculation ran like this: each blockbuster drug now costs so much, we need to squeeze every last penny out those we have, even if it means getting doctors to prescribe them for conditions they were never intended to treat. How do you persuade the mostly male doctors? Send in gorgeous, peppy young saleswomen, preferably ex-cheerleaders to flirt them into ordering more drugs.

This was a big reason behind today’s revelation of the £2.2 billion charge taken by GlaxoSmithKline to settle product liability lawsuits and regulatory fines linked to sales practices. Last year Pfizer paid $2.3 billion to settle state and federal charges also linked to aggressive marketing. Other standard ploys used to persuade doctors to over-prescribe certain drugs included offering dinners and holidays.

There is a lot of pseudo-science out there about the sales process. But sometimes, it really does come down to bored customer + attractive salesperson = sale. Even when what’s at stake is patients’ health.

Time to Stand Up for Middle Managers

My Financial Times column 10/11/11

The death of the middle manager is one of those headlines like falling house prices or rising university tuition that seem purpose-built to wreak mental havoc on swaths of the professional middle class. What other curses do the economic gods have in mind?

These thoughts were prompted by a recent column in the Harvard Business Review titled “The End of the Middle Manager” by Lynda Gratton, a professor at London Business School. Prof Gratton argues that new technology means the end for the middle manager as we know it. There is no longer any need for the manager filling the gap between senior executives and the people who do the work or, in Prof Gratton’s definition, those with the “shallow general skills that kept things running smoothly rather than created and innovated”.

There appears to be plenty of support for Prof Gratton’s view. Middle managers have become the whipping boys of the corporate world. While senior executives have taken advantage of the rise in financial leverage to reward themselves with ever larger compensation plans, middle managers have seen their salaries stagnate.

Middle management is no longer seen as a route to the top. They can toil away for years hoping for a promotion, only to see the top jobs filled by ex-consultants or fresh-faced MBAs. There is the all-consuming work itself, worsened by the 24-hour global working day, which corrodes personal lives. And then there is Generation Y, who consider middle managers losers and have no truck with 20th-century anachronisms such as meetings and weekly reports.

Prof Gratton says technology is now the general manager. “It can monitor performance closely, provide instant feedback, even create reports and presentations,” she writes. Meanwhile, the innovators in companies no longer need managers. They can self-manage and report to the executives at the top.

At first sight, it is hard to argue with all this. But there is something obnoxious about the dehumanising idea that companies will soon be made up of self-managing creative teams and executives, with nothing in between.

Steven Spear, a senior lecturer at MIT and author of The High Velocity Edge, says the difficulty with Prof Gratton’s argument is that it is based on an outdated view of middle management. It is the view articulated by Alfred Chandler in The Visible Hand, the classic account of the growth of US corporations from the 19th to 20th centuries.

According to Chandler, the middle manager fulfilled two roles: he conveyed information back and forth between the executives and the workers on the line; and he drove functional efficiencies, in the system designed by the executives – for example, better managed sales forces, lower pricing and better channels of distribution.

Of course, Prof Spear says, all of these traditional managerial roles have been under siege for years from technology, from systems that are cheaper and more efficient than humans.

What Prof Gratton fails to acknowledge is how companies’ needs have changed. While they may no longer need middle managers who meet Chandler’s definition, they do need middle managers who can manage the complexity of modern corporations.

Prof Spear has spent a lot of time at companies such as Toyota, Alcoa and Intel, as well as studying the healthcare industry, and he has found repeatedly that middle managers are as vital as ever but in a different way. Technology is yet to give the chief executives of these companies a clear view from top to bottom of their operations. They still depend on managers to tell them what is going on. As Prof Spear describes them, these must be “agile managers capable of dynamic problem solving and solving local problems locally”.

Abundant evidence of this need was provided during the financial crisis when it became clear that many bank bosses had no idea of the risks being taken inside their own organisations.

Prof Spear offers two persuasive analogies with armies and the human body. For all the sophistication of modern warfare, armies still need non-commissioned officers and officers to provide the link between generals and privates.

The human body also has layer after layer of middle management, across cells, tissue and organs, leading up to the brain. Remove any of those layers and ask the brain to talk directly to cells and you have something quite different and less efficient.

Prof Spear’s final, resounding point is that, given how fast business changes these days, human beings remain the most adaptable management tools any executive could want. They can learn, lead, change, haggle, calculate, persuade, emote and inspire. Middle managers will survive because they give a great company its pulse.

 

 

New rules of engagement for banks and regulators

A feature I wrote for The Financial Times 01/05/11 on how banks manage their relationships with regulators.

Spare a thought for US bank regulators. On one side they have the banks, loaded with lobbyists, analysts and political contribution money fighting new regulations word by word. On the other, they have WikiLeaks, threatening to expose the private dealings of at least one leading US bank and show up the regulators’ lack of investigative muscle. Thrusting through the middle are the pitchfork-wielding voters and politicians eager to see bankers blamed and punished for the financial crisis.

Crisis always brings regulators and the companies they oversee into close contact, whether it is the US Food and Drug Administration and Merck over Vioxx in 2004, or the Securities and Exchange Commission and Goldman Sachs over the sale of mortgage-backed securities.

The financial crisis of the past two years, however, has led the banks and their regulators into new waters. The latter are trying not only to prevent another “too big to fail” scenario, but also to catch up with the warp speed and globalisation of financial innovation.

The banks, meanwhile, are trying to ensure they have a decent business once the political retribution has been wreaked. By many accounts, they have been effective in the US and established a model for other industries beset by crisis and the threat of increased government regulation.

“What’s evident from this crisis is the extent to which the banks have managed to get their way in spite of pressure from regulators,” says Rupert Younger, director of Oxford university’s Centre for Corporate Reputation. “The banks are very sophisticated and extremely well-connected. By sophisticated, I mean that they have armies of people who engage in the policy details of what regulations they’d like to see. By contrast, the regulators have only a small fraction of the manpower that the banks have, which creates a power imbalance.”

Cash and manpower, however, are not all it takes. The banks also showed an ability to separate political noise from permanent engagement with regulators.

Dealing with politicians can often descend into an ugly public spectacle. In January of last year, the heads of JPMorgan ChaseMorgan StanleyBank of America and Goldman Sachs respectively were grilled at a public inquiry into the financial crisis (pictured above). And in April, Lloyd Blankfein, chief executive of Goldman, appeared before a Senate panel investigating the bank’s role in selling toxic mortgage securities, only to be assailed by Democratic senator Carl Levin repeating expletives from Goldman’s internal e-mails.

But the effect of such theatrics seems to have been short-lived, partly because the political cycle is much shorter than the regulatory cycle. Provided companies can outlast politicians’ short attention spans, they can fight the real battles far from public view. And following November’s midterm elections, influence in Washington has tilted back towards the more banker-friendly Republicans and much of the heat seems to have gone from the attacks on banks.

“The regulators are very keen to work with the markets,” says Rob McIvor, a spokesman for AFME, the Association for Financial Markets in Europe, a trade group representing European wholesale financial markets. “There is no point in them bringing in regulations that don’t work.”

As the Basel Committee has been working on a new set of rules for Europe’s financial institutions, AFME and similar groups have put together teams of bank specialists to go over the committee’s recommendations line by line and offer suggestions. “We’ve found in general that regulators are receptive,” says Mr McIvor. He says the ideal relationship for a bank and its regulators should be “close and continuous” rather than confrontational.

Mr Younger says banks and regulators regularly second staff to each other’s institutions to understand the other’s activities better. “The banks have so much more power and artillery that it can become hard for regulators to get an unbiased and considered perspective. That’s been very evident in this last financial crash,” he says. “There have been regulation discussions since time immemorial, and there hasn’t ever been a time when financial regulation has been too tight.”

Critics argue, however, that too close a relationship can lead to a blurring of the lines between regulator and regulated. Investigations of the explosion on BP’s Deepwater Horizon rig last year, for example, found that the government agency meant to be regulating and inspecting it, the Minerals Management Service, had been lax in its work. The MMS had previously been criticised by Barack Obama, US president, for its cosy relationship with the oil companies it was supposed to regulate. The agency has since been renamed and is in the process of being overhauled.

Edward Kane, a finance professor at Boston College and keen critic of the latest wave of US bank regulation, believes that none of it addresses the government safety nets underlying the country’s financial system. He points to the Dodd-Frank act as an example of how the banks were able to influence policy away from the public stage of the Senate hearings. The banks knew they’d have another bite at the apple as the regulators came up with their rules,” he says.

Prof Kane believes that global banks regard regulation as a service that can be bargained for in multiple jurisdictions and through multiple layers of authority. If they do not like the regulation in one place, they move to another.

Also, while the biggest banks operate globally, regulators can only act locally. Mr Younger says this is part icularly frustrating for politicians in Europe. There is only so much a British policymaker can do when so much bank regulation is written at the pan-European level. “Banks are doing a terrific job managing the regulators,” says Prof Kane, especially in the US.

Jamie Dimon of JPMorgan Chase has been especially effective at managing through the crisis and arguing his bank’s position in Washington and Europe. He has made the political centres almost a second home, and become a trusted sounding board for regulators and cabinet members. He has, in short, made himself part of the solution, says Prof Kane.

Robert Merton, an economist at Harvard Business School, argues that there is a more fundamental challenge: financial regulations will al ways be outpaced by financial innovation. He compares the process to a hurricane: “Government policy can either reduce their devastation by establishing early warning systems or it can aggravate the damage by en couraging the building of housing in locations that are especially vulnerable to such storms. Government action can significantly influence the path of development of financial innovation.” But it cannot dictate the path entirely.

According to Mr Younger, the separation of politics and regulation is key. “There are two issues,” he says. “The public pressure on bankers, are they good or bad, then the much more important issue of regulatory reform. On the gritty areas of reform, such as capital adequacy, these matters are not interesting to the mass, but that’s the level of detail that regulators are interested in and which are of fundamental importance to the improvement of the financial services sector. The more populist stuff politicians tend to get focused on is very tangential to the real core issues for regulators.”

This has been apparent in the fights over bankers’ pay. Every swing by governments has been met by a feint from the banks. Cap cash bonuses in one year, and the managers bring the payments forward or delay them, or issue options instead of cash.

For the banks, separating the reputational and headline political disputes from the more humdrum but essential discussions over regulations has been essential to their success.

Two years after facing collapse, most are again thriving. In spite of their fears, the banks have managed to deal ably with the regulators. They are far from being regulated out of business. Whether this is good for the countries and economies where they operate will become clear when the next hurricane hits.

Tips for dealing with policymakers

●Maintain a close and continuous relationship.Regulation evolves constantly and should be treated as a strategic concern. It is not to be addressed only when regulators are breathing down your neck.

By maintaining continuous contact with regulators even in non-crisis situations, US banks remained in a good position to communicate in spite of the crisis.

●Separate noise from substance. After the onset of the financial crisis, public opinion turned hostile to the banks. Many politicians launched attacks on the sector. The regulatory response to the crisis, however, was planned far from public view, where the banks could make their case without their every move being scrutinised and painted in the worst possible light.

●Be the regulators’ best source of information.Companies know far more about what they do than the regulators that oversee them. By helping regulators understand your industry, you put yourself in a good position to help frame rules and legislation.

●Embrace the constraints.Regulations may impede some opportunities but open up others. Goldman Sachs might have had to cut back on proprietary trading. But its investment in Facebook reveals a fresh focus on serving investment clients and future investment banking business.

 

 

Management Gurus Up for Review

My Financial Times column 01/03/11

Whatever economic trauma besets the rest of Japan, its pop culture never ceases to throw up surprises. The latest is a novel about high school baseball shot through with lessons from Peter Drucker. Yes, that Peter Drucker, author of The Effective Executive; Management: Tasks, Responsibilities, Practices; Managing for the Future and fistfuls of other managerial rip-snorters. The book, titled What if the Female Manager of a High School Baseball Team Read Drucker’s ‘Management’, by Natsumi Iwasaki has sold 2m copies in the past year and is being turned into a manga comic and anime television series.

On my first visit to Japan a couple of years ago, I was amazed to see how Drucker’s books still dominate the business sections in Tokyo’s bookstores. In the US and Europe, one is hard-pressed to find managers under 45 who have more than a passing acquaintance with Drucker. In Japan his works are holy writ.

There are swaths of Drucker’s encyclopedic oeuvre that no longer resonate. They reek of the hair tonic and smoky rooms of 1950s manufacturing companies. But The Essential Drucker, edited and introduced by the man himself, is still remarkably fresh. The essays, a series of incontrovertible meditations on the art of management, are shot through with humanism. Drucker was never a headbanger and rarely a bore.

His enduring popularity started me thinking about the difference between those Gods of Management who endure and those who go stale. Who deserves to hold their place on Olympus alongside Machiavelli, Sun Tzu and Drucker, and whom do we throw off the mountain?

My top candidate for eviction is Jack Welch, the former chief executive of General Electric. It seems an eternity ago that Fortune magazine named him the best CEO of the 20th century. His yappy, aggressive style is woefully out of sync with contemporary business culture. And his status as the champion of shareholder value was destroyed when he made off from GE with a retirement package both outlandish and petty. Did a man worth hundred of millions of dollars really need to insist on his former company paying for the electricity at his various holiday homes? Welch once seemed a guru for the ages but is now fossilised.

No business writer has had greater influence over the past decade than Malcolm Gladwell. The ideas contained in The Tipping PointBlink and Outliers come up in conversations between businesspeople as often as the travails of Tiger Woods. Sheer Tipping Point exhaustion, and a streak of writer’s jealousy, had me pondering Gladwell’s status on the managerial Olympus, but then I felt obliged to keep him up there. As a storyteller and synthesist, he is peerless. He provokes a huge audience to think in original ways, without being bossy. My guess is that in 50 years, people will be reading The Essential Gladwell and the Japanese will have turned him into animé.

Gladwell, like Drucker, has the advantage of not being a business practitioner. He can observe impartially. Jim Collins, the author of Good to Great and most recently How the Mighty Fall, is similarly impartial, but the case studies in his books, as in many of those written by business school professors, risk ageing poorly. He would do well to follow the example of Tom Peters, who wrote In Search of Excellence in 1982 but has never stopped reinventing himself and developing new material, becoming a blogger and Tweeter at an age when many gurus would rather retire to their herbaceous borders. Peters is on Olympus. Collins has more to prove.

Gary Hamel may now be one of the world’s most sought-after strategic advisers, but his career was nearly snuffed out after he acclaimed Enron as a model of strategic innovation. Hamel, though, earns his place on the coat-tails of his frequent co-author C.K. Prahalad, who brought us both core competence and the fortune at the bottom of the pyramid.

Last year’s Rework by Jason Fried and David Heinemeier Hansson has the rare virtues in a management book of brevity and provocation. Big company managers should worry. Their entire management models are going to be kicked apart by companies following Rework’s refreshing creed, which says ignore the hyperbole and hyperactivity that consume many businesses. Fried and Heinemeier Hansson earn junior divine rank.

As does Freek Vermeulen of the London Business School for his ornery and entertaining book Business Exposed, a rigorous challenge to many business assumptions from the hollowness of strategic planning to the value of indecisiveness.

I realise I have admitted more gurus than I have expelled. Blame it on the lingering Christmas spirit. If I were Jack Welch, I’d have fired the bottom 20 per cent.

 

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