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Punishing the entrepreneurial class. Why Steve Cohen is in such trouble while bank CEOs aren’t.

John Cassidy has a great discussion of this at NewYorker.com

It’s a question that’s been nagging at me for some time. Not a desire to see anyone be punished so much as a desire for the punishment of white collar crime to seem less arbitrary.

Steve Cohen, Jamie Dimon and Brian Moynihan. Only one of these guys is in deep trouble with the SEC.

Steve Cohen, Jamie Dimon and Brian Moynihan. Only one of these guys is in deep trouble with the SEC.

Compare the fates of Steve Cohen of SAC and the CEOs of JPMorgan and Bank of America. Cohen has been pursued for the better part of ten years. His outside investors have largely abandoned his funds. He has already paid $616 million in fines to the SEC to settle civil accusations of insider trading. But that wasn’t enough. His firm was indicted and now prosecutors are said to be considering going after the bulk of Cohen’s fortune, on the grounds that it may have been earned through insider trading. 

Steven Cohen is not an easy man to sympathize with. The few scraps of information which seep out of his cloistered world suggest a brooding, demanding character consumed by accumulating wealth and its trophies, notably art.  He seeks neither the limelight nor popular acclaim.

It may be that the SEC has further evidence on Mr. Cohen which would freeze the blood. But for now, his punishment seems extreme in the context of what we have seen in the financial industry these past few years. Wall Street executives guilty of what seem more epic and socially harmful misdeeds, have been allowed to write settlement checks with shareholder money and walk away untouched.

A shortlist of recent major bank settlements. Last month JPMorgan agreed with the Federal Energy and Regulatory Commission to pay $410 million to settle allegations that it manipulated energy markets in California and the Midwest. A couple of weeks earlier, Citigroup paid $968 million to settle charges that it sold faulty mortgages to Fannie Mae. Goldman Sachs paid $550 million in 2010 to settle charges that it misled investors in a subprime mortgage deal. In January, the major banks agreed a collective $20 billion settlement of charges of irregular mortgage and foreclosure practices. HSBC and Standard Chartered Bank were heavily fined for facilitating transactions with sanctions-barred countries such as Iran, Sudan and Libya. Then there were settlements for improperly increasing minimum payments for credit cardholders and overdraft fees for debit card users. @PeterEavis writes in today’s @Dealbook of the reverberative effect of $GS’s sub-prime trades among homeowners.

Yet the banks rumble on. Their executives keep getting paid and their business remain in rude health. Every time they are accused of filching from the public, they their fine and move along, protected by their size. No one, including the SEC, wants them going down, no matter the cumulative impression created by all these settlements that these are organizations either too complex to manage or ethically badly astray.

The only bankers brought to court seem to be the underlings, junior figures like Fabrice Tourre of Goldman Sachs, and now a couple of JPMorgan bankers involved in the disastrous “whale” trades.

Let’s say that the punishment already dealt Mr. Cohen and his business is justified. That he is not just an enabler of insider trading but an insider trader himself. To use the SEC’s own language, he would  be guilty of having undermined “investor confidence in the fairness and integrity of the securities markets”.

On the books, insider trading is a crime, but eminent economists debate whether it should be. Milton Friedman said it brings information more quickly to the market, so we need more of insider trading, not less. On the other hand, a healthy, liquid securities market depends on the appearance of fairness.

There is no such debate over the cases settled by the major banks. They have been repeatedly and convincingly accused of stiffing thousands of their clients, and doing plenty to undermine investor confidence in the fairness and integrity of the financial services markets.

Mr. Cohen is still $9 billion and change away from the poor house. No one will shed tears for him or any other billionaire caught in the SEC’s crosshairs. Perhaps he should have settled earlier to save his business and reputation.

But it is worth remembering that he is part of the entrepreneurial class in finance. Hedge fund founders innovate, take risks, create jobs and if successful are rewarded lavishly for their efforts. The danger is that at the first whiff of trouble, their investors skitter. The SEC knows this. They can destroy a hedge fund just by announcing an investigation.

Banks, by comparison, are the corporate class. Their executives seem to get away with doing the most appalling things. Technicalities aside, treating the two classes so differently, the SEC is sending a message about the behaviors it is willing to tolerate. Rough stuff from bank executives, but a much higher standard from hedge funds.

If I were Mr. Cohen, I’d feel quite righteously cross. And if I were a senior executive at a major bank, I’d feel grateful to be able to fire and duck behind such impregnable, corporate walls.

The 7-touch rule in Sales

l strongly recommend reading Atul Gawande’s piece in the 7/29 New Yorker on how innovations spread. He focuses on medicine – he is a surgeon after all. But his piece has wide resonance for innovators and salespeople in every field.

In explaining why some innovations spread rapidly, and others don’t, he differentiates between innovations which have immediate, positive effects and those which take a while for their benefits to be seen. The former category tends to spread faster.

In the mid-19th century, anesthesia was rapidly adopted, because it offered an immediate benefit to patients by reducing their pain, and to doctors, by making operations much less traumatic. By contrast, the use of antiseptic spray during operations was adopted far more slowly, despite its huge benefits in reducing infection in the operating room. The reason, Gawande writes, was that germs aren’t visible. Their effects take time to materialize. And doctors hated having to work in a mist of antiseptic spray.

“This has been the pattern of many important but stalled ideas. They attack problems that are big but, to most people, invisible; and making them work can be tedious, if not outright painful. The global destruction wrought by a warming climate, the health damage from our over-sugared modern diet, the economic and social disaster of our trillion dollars in unpaid student debt—these things worsen imperceptibly every day. Meanwhile, the carbolic-acid remedies to them, all requiring individual sacrifice of one kind or another, struggle to get anywhere.”

If you’re in sales, it’s worth thinking about Gawande’s distinction. Is what you’re selling of immediate, tangible benefit? Or will the benefits take time for the user to appreciate? Then adapt your sales approach accordingly, perhaps using the 7-touch approach he describes later:

“In the era of the iPhone, Facebook, and Twitter, we’ve become enamored of ideas that spread as effortlessly as ether. We want frictionless, “turnkey” solutions to the major difficulties of the world—hunger, disease, poverty. We prefer instructional videos to teachers, drones to troops, incentives to institutions. People and institutions can feel messy and anachronistic. They introduce, as the engineers put it, uncontrolled variability.

But technology and incentive programs are not enough. “Diffusion is essentially a social process through which people talking to people spread an innovation,” wrote Everett Rogers, the great scholar of how new ideas are communicated and spread. Mass media can introduce a new idea to people. But, Rogers showed, people follow the lead of other people they know and trust when they decide whether to take it up. Every change requires effort, and the decision to make that effort is a social process.

This is something that salespeople understand well. I once asked a pharmaceutical rep how he persuaded doctors—who are notoriously stubborn—to adopt a new medicine. Evidence is not remotely enough, he said, however strong a case you may have. You must also apply “the rule of seven touches.” Personally “touch” the doctors seven times, and they will come to know you; if they know you, they might trust you; and, if they trust you, they will change. That’s why he stocked doctors’ closets with free drug samples in person. Then he could poke his head around the corner and ask, “So how did your daughter Debbie’s soccer game go?” Eventually, this can become “Have you seen this study on our new drug? How about giving it a try?” As the rep had recognized, human interaction is the key force in overcoming resistance and speeding change.”

Recent journalism

I’ve been writing various reviews, columns and features over the past three months in my usual venues, the Financial Times and The Wall Street Journal  and thought it worth gathering them here. Most are behind paywalls – newspapers have to make money somehow – but some are accessible for free.

On July 30, I reviewed Daniel Isenberg’s new book Worthless, Impossible, Stupid: How Contrarian Entrepreneurs Create and Capture Extraordinary Value for the WSJ. It has some interesting and inspiring stories in it, though I felt Isenberg got rather tangled in trying to justify the financial motivations of many successful entrepreneurs. He seemed loath to admit that Gordon Gekko was right, that in a free market, greed, very often, is good. It makes the whole system work.

On May 22, I reviewed Rolf Dobelli’s The Art of Thinking Clearly, a compendium of behavioral psychology and neuroscience findings of the past two decades, and on June 24 Adam Lebor’s interesting history of the Bank of International Settlements, The Tower of Basel, both for the WSJ.

July 1, I wrote an oped in the WSJ, Big Data Hasn’t Changed Everything, in which I tried to explain the limits of big data. Yes, it has extraordinary potential in all kinds of scientific and business fields. But I fear it becoming another passing management fad. Ultimately, there’s a limit on how much data even the most sophisticated manager can absorb.

I’ve also been cranking away for the Financial Times’ peerless management pages. You can read all my FT pieces here.

August 6th 2013: The new breed of education startups.

July 29, on the leadership style of Pope Francis.

July 24th on which perks work and which don’t.

July 15th, new thinking on grabbing and wielding corporate power.

Smack down in America’s malls. High-touch vs. no-touch sales.

Derek Thompson wrote a piece in the Atlantic in May, Death of the Salesmen: Technology’s Threat to Retail Jobs. It captures well a situation evident to anyone who has visited a mall recently.

Stores are basically divided in two today. Those with next to no salespeople, who are competing entirely on price. And those who believe customers will pay for service. It’s Walmart vs. Apple. JC Penney became a battleground for between these two approaches under its former CEO Ron Johnson, who came from Apple.

The high-touch, Ron Johnson approach isn't for everyone. Image: CNN.com

The high-touch, Ron Johnson approach isn’t for everyone. Image: CNN.com

He tried to bring the high-touch approach, but JC Penney’s customers showed no interest in paying for it. The only “customer experience” they wanted was low, low prices.

Thompson sums up the situation in his final three paragraphs.

“Some stores have resisted the temptation to cut workers—and have benefited from higher sales and happier customers. Costco, Trader Joe’s, and QuikTrip not only have more (and better-paid) salespeople, but also report more sales per employee than their immediate competitors, according to research by Zeynep Ton, a professor at MIT’s Sloan School of Management. Other stores, like Uniqlo, a mid-level fashion retailer, and Wegmans, a grocery chain, have similarly demonstrated that you don’t need to embrace retail’s post-employee strategy to make a strong profit.

Increasingly, there seem to be two kinds of stores—those in a race to the price bottom, and those closely guarding the patina of a shopping experience. Perhaps that’s because, more and more, there are two distinct kinds of customers. There are the low- and middle-income families—squeezed between cheap wages and the high cost of essentials like education and health care—who hunt bargains. And then there are the urban bourgeois—those who rely on Trader Joe’s for lunches and Apple for phones—who are rich enough to value something above the very lowest price. “Walmart, focused on the bottom 50 percent with efficiency, is competing on price,” said Leonard Nakamura. “But stores like Wegmans aren’t. They’re competing on experience.”

When Ron Johnson, the architect of Apple’s lily-white showrooms, became the CEO of JCPenney in 2011, he brought with him a specific approach. “People come to the Apple store for the experience—and they’re willing to pay a premium for that,” he wrote in Harvard Business Review. A year and a half after Johnson pledged to replace coupons with culture, causing sales to plummet, he resigned. It would seem that customers besieged by stagnant wages and household debt don’t want a shopping experience, after all. They just want their coupons. Ironically, it is precisely this always-low-prices mind-set that has decimated retail as an American jobs engine. Cheap prices and cheap workers—that is our vicious cycle, and the ultimate American shopping bargain. We are getting exactly what we pay for.”

Lessons from sherry making for managers.

In the Financial Times this week, I wrote a column on the remarkable way in which the Union Square Hospitality Group provides hospitality at scale. This is a huge management challenge, one I also discussed in The Art of the Sale, using the example of Steve Wynn and his casinos. Wynn employs a system of storytelling, encouraging employees to share stories of great customer service. This way, each employee, whether being monitored or not by their manager, wants to provide a heroic example of hospitality to each customer. They become the stars of their own story. It is a way of developing the powerful internal motivation which leads to great service.

sherry

Danny Meyer’s group, which runs everything from high-end restaurants like Gramercy Tavern and The Modern in New York, to the Blue Smoke barbecue restaurants, and the Shake Shack burger joints, invests heavily in hiring and training. But it also uses what it calls the “Solera System” of management, mixing experienced managers and staff with new ones across its ventures, to achieve a consistent level of service. It comes from the way Solera sherry is produced, mixing old and new wine to produce a consistent taste every year.

Solera System - diagram from barrelsecrets.wordpress.com. Old mixes with new to produce consistent wine.

Solera System – diagram from barrelsecrets.wordpress.com. Old mixes with new to produce consistent wine.

 

...and in reality.

…and in reality.

Daniel Kahneman deserves to be a much richer man.

Prof. Daniel Kahneman deserves more royalties. Photograph by Andreas Rentz/Getty Images for Burda Media.

Prof. Daniel Kahneman deserves more royalties.
Photograph by Andreas Rentz/Getty Images for Burda Media.

 

I recently reviewed Ralf Dobelli’s The Art of Thinking Clearly for the WSJ. I think there are now (officially) way too many of these behavioral economics/psychology books, all drawing on the same over-tapped well of academic research. If Daniel Kahneman had been allowed to patent his ideas, he’d be Fifty Shades of Grey rich by now. Thankfully, Thinking Fast and Slow, his own book and by far the best on the subject, has sold very well.

How to manage like Sir Alex Ferguson. If you can handle it.

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Ferguson never feared great talent.

Sir Alex Ferguson is one of those wildly successful leaders who are impossible to imitate. He’s too forceful and volatile for anyone with a more average temperament to copy. In this respect he’s like Steve Jobs or Jamie Dimon. Yes, you can point to their willfulness and determination and focus, all of which are invaluable to leaders in any field.

But they also possess a manic intensity which you either have or you don’t. A readiness to yell at people. To curse at them. To subjugate them to your will. To propel them in pursuit of a dubious mission: to win football championships; to sell electronics; to sell bank services. And pretend that these missions are really proxies for greater, more meaningful pursuits of excellence, and meaning in life.

Ferguson is motivated by forces which no one can artificially replicate. He grew up around the tough shipyard workers of Govan, in Glasgow. When his  players complained about how hard he pushed them, he would tell them it was nothing compared to working in a shipyard with rags tied round your arms for warmth.

He has this great clarity of expression. Not beautiful, but with a sheer, unmediated force as if there is nothing between his thought and our ears, no screen of reserve or politeness. “Football. Bloody hell,” he exclaimed after United came back to win the European Champions League with two goals in 107 seconds at the end of the 1999 final. He had a near poetic reaction to first seeing Ryan Giggs: “He was 13 and he floated across the ground like a cocker spaniel chasing a piece of silver paper in the wind.” Or this, my favorite, on the tricks played by Italian teams and their managers: “When an Italian tells me it’s pasta on the plate I check under the sauce to make sure. They are the inventors of the smokescreen.”

He once told an audience of entrepreneurs in Manchester that the secret of his success came down to four factors: “high ambition, ability to take difficult decisions, instilling and maintaining team discipline and foresight”.

Barney Ronay in the Guardian tried to boil down Ferguson’s managerial genius: “Ferguson has repeatedly demonstrated his own greatest strength, the ability to continue to learn and evolve even in moments of triumph. He created a thrillingly muscular champion team, at a time when English football was still a thrillingly muscular business. He oversaw the refinement of a glorious coincidence of youthful talents. He mastered the more mannered rhythms of the Champions League… Alongside this, Ferguson has bolted on with great adaptive intelligence the full range of modern skills: control of the junior millionaire; a facility with agents, media and corporate overlords; and of course mastery of the wretched mind-games, the relentless unsettling, as required, of his opposite number…Like a kind of managerial Elvis, Ferguson was there in the front rank when the world was changing, shaping its face, defining its terms, hogging the best seat.”

Simon Kuper in the FT has suggested that Ferguson succeeded by making himself indistinguishable from Manchester United. No one symbolized the club and its values more than him. This made him un-sackable.

I’d suggest that what made him un-sackable was winning.

But Kuper also notes that Ferguson was a formidable network builder, both inside and outside his club. He talked to everyone, from the tea ladies up to his superstars, keeping his door open, and always delivering bad news himself. He would never bad-mouth one of his players in public, keeping everything behind closed doors.

He was also absolutely terrifying. Like Steve Jobs, an effective tyrant. Anyone who played for him has stories of his blazing temper. But fortunately, he didn’t dwell. If someone crossed him they were either soon forgiven or exiled from the club. Neither disputes nor victories were permitted to linger. Everything under Ferguson moved forward quickly. He made decisions and moved on. As he said: “Why should I go to my bed with a doubt?”

Among the other Ferguson traits worth noting:

  • Act before you deteriorate – he was ruthless about selling players at or just past their peak in order to reinvest in youth.
  • Never criticize performance during training – only lack of effort. Training is for positives and encouragement. Ferguson says: “Well done are the two best words ever invented in sports.”
  • Don’t just practice. Practice situations. Ferguson insisted his teams practice specific game situations. What if you’re two goals down with 10 minutes left? How do you play then?
  • Swear. A lot. It scares people.
  • Don’t just win. Win the right way. Ferguson believed that there was a way Manchester United had to win. Aggressively. With attacking style. This is why fans around the world love the club.
  • Set the example. He was always first to arrive at the training ground and the last to leave.
  • Make your players better. No matter how good a player was when he arrived at Manchester United, chances are he would get better under Ferguson. Their nature would be vigorously nurtured. “Hard work is a talent too,” Ferguson once said. “I am only interested in players who really want to play for United, and who, like me, are ‘bad losers’.”
  • Trust in youth. Trusting in young talent can be terrifying for any manager. Ferguson did it consistently, often enduring tough seasons while the talent developed before flourishing. But it worked and gave his club its long-term comparative advantage over others. Not sure Ferguson has ever bothered with Arthur Rimbaud’s poetry – unless Eric Cantona slipped him a copy – but he embodied Rimbaud’s advice: “Il faut être absolument moderne.” Even at 71, Ferguson remains absolutely modern.
  • Don’t be frightened of talent. Ferguson visibly adored great talent. Whether Cristiano Ronaldo, Eric Cantona or Ryan Giggs, he treasured what talent could do for his teams. He never worried about its destabilizing effect. How many managers fear that true talent is really the serpent in the garden of their careers?

The Art of the Sale in paperback – out today.

Out today!

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How to make better decisions

In today’s FT, I review three books on decision making. Chip and Dan Heath’s Decisive, Dennis Bakke’s The Decision Maker and Francesca Gino’s Sidetracked.

 

Why cities and entrepreneurship are inextricable

I recently reviewed Daniel Brook’s new book A History of Future Cities in the Wall Street Journal. Brook weaves together the history of four cities, St. Petersburg, Shanghai, Mumbai and Dubai, all intended by their planners to be platforms for fast economic growth and social progress. The central existential problem for each of these cities is that having been designed by autocrats, they move far and fast before their success leads to civil unrest. Smart, affluent people want to be free. So what then? Can you keep the autocratic rules in place while allowing individuals the freedom to keep innovating and progressing? This internal tussle leads to the strange new forms we see in each of the cities Brook describes; huge social inequality in Mumbai; this tension between European freedoms and civilization and Putin’s controlling new Russia in St. Petersburg; Dubai’s place as the capitalist hub of the Middle East, and yet a place where debtors are still thrown into jail; Shanghai’s fraught position as the advance post of Chinese capitalism, roaring away economically while civic tensions begin to rise.

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What’s indisputable is that studying how cities function is inextricable from the modern study of entrepreneurship. If we’re going to understand the role of entrepreneurs in a modern economy, which is what I try to do at the Kauffman Foundation, we have to understand their relationship to cities. The networks cities allow, the social freedoms, the range of economic opportunities, the possibility of scale. This is the new territory for entrepreneurial study.

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