Tag Archives: book review

CEO compensation – a symptom of institutional decay

So reading Emergence sprouted another thought regarding the increasingly bankrupt (literally and figuratively) model of the classic bureaucratic organizations. Again I point to Umair Haque’s post on the recent financial crisis:

The first step in building next-generation businesses is to recognize the real problem boardrooms face – that we’ve moved beyond strategy decay. Building next-gen businesses depends on recognizing that they are not about new business models or even new strategies.

The stunningly total meltdown we just witnessed in the investment banking sector – the end of Wall St as we know it – was something far darker and more remarkable. It wasn’t simple business model obsolescence – an old business model being superseded by a more efficient or productive one. The problem the investment banks had wasn’t at the level of business models – it had little to do with revenue streams, customer segmentation, or value propositions.

And neither was it what Gary Hamel has termed “strategy decay” – imitation and commoditization eroding the returns to a once-defensible strategic position, scarce resource, or painstakingly built core competence.

It was something bigger and more vital: institutional decay. Investment banks failed not just as businesses, but as financial institutions that were supposedly built to last. It was ultimately how they were organized and managed as economic institutions – poor incentives, near-total opacity, zero responsibility, absolute myopia – that was the problem. The rot was in their DNA, in their institutional makeup, not in their strategies or business models.

I think Umair is on to something and that CEO salaries may make for a great case in point.

For many years the left has decried growing CEO salaries as a sign of the market’s excesses – or worse, of a broader culture of greed. But excessive senior management salaries are, from an investors perspective, are a symptom of a staggeringly flawed institutional model. If your business depends that much on the one person at the top – if the current and future value of the entire organization rests in the hands of one person… then yikes! Shareholders beware.

The idea that a CEO is worth 1000, or even 100 times more than the “average” workers in an organization isn’t just a problem from a morale or ethical perspective (it may or may not be). If your average worker isn’t contributing that much value in relation to their ultimate superior than you have a massively top heavy – and hierarchical – organization. One where, I suspect, Umair would find there are poor incentives, near-total opacity, zero responsibility, absolute myopia. To be sure, ideas are probably not being floated about, and they are almost certainly not successfully emerging from the bottom up.

In short, it isn’t a happy place to be. And it turns out the markets may not think it is so good either.

Comfort with ambiguity

Finally polished off “Emergence” by Stephen Johnson (another post on it here) – the last 30 pages have been lingering for about 2 weeks.

Johnson’s ideas continue to touch on themes I’ve been explaining to others for two years now. More recently, on why boomers continue to misunderstand their Gen Y cousins. Take for example, Johnson’s conclusions about what video games are doing to all of us (but Yers in particular):

The conventional wisdom about these kids (gen Yers) is that they’re more nimble at puzzle solving and more manually dexterous than the TV generation, and while there’s certainly some truth to that, I think we lose something important in stressing how talented this generation is with their joysticks. I think they have developed another skill, one that almost looks like patience: they are more tolerant of being out of control, more tolerant of that exploratory phase where rules don’t all make sense, and where few goals have been clearly defined. In other words, they are uniquely equipped the more oblique control system of emergence software (and, I might add, emergent systems more generally).

While the boomer vs. gen Y comparison is generally apt, l think even more than being generational this is class based. Emerging creative classers are not only comfortable with this exploratory phase, they actively need it. This is why the large bureaucracies (but not necessarily large organizations) struggle to attract and retain both the demographic and the class. They often force upon their workers too much structure, to much rigidity on the front end, evaporating the creative opportunities where we might imagine something better, bigger or more effective.

A note of caution too for those who think the financial collapse augers a new era of safety in large bureaucracies. Don’t fool yourself. It was the large bureaucracies of the banks and government regulators, working in tandem, that got us into this mess. While some creative classers may attempt to retreat to the safety of a large government or private sector institutions I suspect that many will do just the opposite. As bureaucracies become still more risk averse and controling their capacity to foster to new ideas and approaches will be that much more constrained. The “outside thinkers” will be in still greater demand.

The Great Crash vs. Emergence (re-mixed)

So it is with impeccable timing that about 3 weeks ago I started listening to John Kenneth Galbraith’s “The Great Crash: 1929.” (Indeed, I wish I had similar impeccable timing when planning my RRSP, 401k and stock purchases). Obviously the events of the last week, and more precisely the events of yesterday make this essential reading for everyone.

By quirk of luck (due to a recommendation by Mark Surman) I have also been reading Emergence: The Connected Lives of Ants, Brains, Cities, and Software by Steven Johnson. Emergence is about “the way complex systems and patterns arise out of a multiplicity of relatively simple interactions.” Possibly the most easily understood exmaple of emergence is seeing how ants or termites can create complex societies based on a few simple rules.

Interestingly, although Galbraith and Johnson almost certainly never met, and their books were written over 50 years apart, they are fundamentally writing about the same thing.

John Kenneth Galbraith’s The Great Crash is about an emergent system – the speculatory stock market bubble that lead to the 1929 crash. Indeed what makes reading these books simultaneously so interesting is observing how Galbraith describe an emergent system without the language and frameworks available to Johnson 50 years later. Consequently, Galbraith’s book is hints at a larger system even as he struggles to describe how the decisions of hundreds of thousands of individuals could be simultaniously coorindated but not directed. He intuits a distributed system, but simple can’t describe it as accurately as Johnson.

A great example of this struggle is visible when Galbraith’s describes his frustration with others efforts to pin the 1929 crash on a given, or set of, individuals. I’m willing to bet that, sadly, we are about to embark on a similar misadventure: I wager the next congress is going to launch a series of hearings to determine “who” caused our current financial crises. This, as Galbraith pointed out about “The Great Crash”, will be nothing short than a colossal waste of time and energy, one that will distract us from the real challenge. This is not to say illegal activities did not occurr somewhere on wallstreet (or K street) both in recent years and in the years leading up to 1929. I’m certain they did. Nor should they go unpunsished. They should. It is just that then, as well as today, they almost certainly did not cause this crisis. As Galbraith puts it:

“This notion that great misadventures are the work of great and devious adventurers, and that the latter can and must be found if we are to be safe, is a popular one of our time. Since the search for the architect of the Wall Street debacle, we have had a hue and cry for the man who let the Russians into Western Europe, the man who lost China, and the man who thwarted MacArthur in Korea. While this may be a harmless avocation, it does not suggest an especially good view of historical processes. No one was reponsible for the great Wall Street crash. No one engineered the speculation that preceded it. Both were the product of the free choice and decisions of thousands of individuals. The latter were not lead to the slaughter. There were impelled to it by the seminal lunacy which has always seized people who are seized in turn with the notion that they can become very rich. There were many Wall Streeters who helped foster this insanity, and some of them will appear among the heroes of these pages. There was none who caused it.”

There was no one who caused it. Remember that. Galbraith wants to pin it on something large and decentralized but can’t put his finger on what it is. Consider this line “No one engineered the speculation that preceded it. Both were the product of the free choice and decisions of thousands of individuals. The latter were not lead to the slaughter. There were impelled to it by the seminal lunacy which has always seized people who are seized in turn with the notion that they can become very rich.” Throughout his book Galbraith keeps talking about a “collective lunacy” but cannot account for it. As he concedes, the desire to become rich is ever present, something in 1929 triggered a larger hysteria. Some emergent property made it vogue.

This is what we need to understand. In 1929 – as well as today – a group of people lived and worked in a system that had powerful incentives that encouraged them to engage in risky practices (in 1929 it was investing in stock on margin, today it was lending people money who simply could not afford it). Finding the people will achieve little compared to understanding the basic set of rules that created these incentives – removing the people will do little. Managing the incentives will do everything. A big part of this may involve new regulations, but probably more importantly it requires recognizing that whole new business models are required as these shape incentives far more than regulations. No business wants to go through this type of crises again. A business model that insulates them against it will be the one to copy. This is why Umair Haque’s post is so important.

Encouragingly and contrary to popular beleif, Galbraith doesn’t believe that the crash of 1929 caused the Great Depression. Depressingly he sites other problems that lead to the larger crisis – problems some of us might see as familiar:

  • A dramatic and uneven distribution of income (we got that)
  • Poor corporate structures (we got that one too)
  • Poor banking structure (check)
  • A uneven state of the foreign balance (check again, although in reverse)
  • Opaque economic intelligence (not so sure about this one).

Yikes, so we are batting 3, maybe 4 out of 5.

My biggest fear and suspicion is that this bailout, if it occurs. Will probaby not “rescue” the system. It will simply give us breathing room to adapt the system. Certainly that would have been the case in 1929, and history very much looks like an emergent system, beyond the control of a top down state, has once again taken over.

Wikipedia: Community Management as its core competency

Last week Paul Biondich lent me The Starfish and the Spider and I just finished reading it (I know, I didn’t put it in the sidebar). Indeed, a number of people I respect have had great things to say about it – John Lily suggested the book ages ago and I remember reading his review and wanting to pick a copy up.

Tons of exciting ideas in the book. One that excited me most related to an idea (articulated by many people) that I’ve been trying to advance – namely that Community Management is core to open source. Specifically there was this exciting piece on how Jimmy Wales, the “catalyst” behind Wikipedia, spends his time:

Jimmy focuses a great deal of attention on maintaining the health of the Wikipedia community. “I go to speaking engagements all over the world at conferences, and everywhere I go I meet Wikipedia volunteers,” he told us. “Usually we go off to dinner and talk shop about Wikipedia. The Wikipedia gossip is the same all over the world-just the characters are different. The problems that affect community are always the same problems.” When he doesn’t meet the members in person, Jimmy spends “a ton of time writing e-mails internally, to the community, touching base with people, discussing issues that come up on the mailing list.” But “as far as working with Wikipedia, I don’t write articles. Very, very little do I ever edit. But I do engage with people on policy matters and try to settle disputes. (page 112 – paperback edition)

It could be that in starfish organizations the role of managers and leaders isn’t to tell people what to do, but help settle disputes, grease the wheels and make sure that groups are working well. Is this to say other expertise are not needed? Not at all. But it is great to see another take on how soft skills such as dispute management, facilitation, negotiation and mediation may be essential for sustainable success of starfish organization (like open source communities).

The challenge of Wal-Mart – the challenge of America

Just finished reading The Wal-Mart Effect by Charles Fishman and thoroughly enjoyed it. So much to discuss and share, which I intend to, in a future post. Right now, I’ve just landed in Chicago about 4 1/2 hours later than planned and it’s late so I’m going to head to bed.

The one thought I wanted to throw out there was that this book – which beautifully dissects the strengths and weaknesses of Wal-Mart (hint, they are one and the same) is a fantastic microcosm of the two critical challenge facing America at the start of the 21st century.

The first, centres around if and how America will renew its social contract in the face of globalization and the existence of companies like Wal-Mart that are simply so much larger in scale than anything it has previously experienced. This challenge is made all the more complex by the fact that despite being a retailer, Wal-Mart is, at its core, an information company. The story of Wal-Mart is the story of America’s transition from the industrial to the post-industrial era (I think this is fascinating because of course no one sees Wal-Mart as an information age company but it is a much more accurate reflection of what this change looks like than say, the story of MicroSoft).

The second has to do with how isolated Wal-Mart is from American mainstream culture (and by extension the world’s) and America’s isolation from the world’s culture. Check out these lines from the last few paragraphs of the book:

“No one likes to hear or read an accounting of his or her faults. Most of us would wave off such blunt recital, or avert our eyes. But Wal-Mart needs to continue to try to listen to what Americans are saying about it, and we have a responsibility to continue to insist on accountability.

What Wal-Mart is trying to do, really, is engage the world, understand the world, meet its customers and suppliers in a different setting than shelf price. To do that, Wal-Marters need to travel, to routinely get out and hear what people say about them-in city council meetings, in industry conferences, at public forums. The transformation of Wal-Mart itself must come from the buildings in Bentonville [it’s HQ], yes: but the motivation for change can’t be found in the supplier meeting rooms or the streams of sales data, no matter how cleverly analyzed. The motivation for change will be found in the passion of customers and vendors-the ones who like Wal-Mart, the ones who don’t like Wal-Mart but can’t resist, the ones who define themselves by their refusal to deal with Wal-Mart, the ones who fear Wal-Mart.

For Wal-Mart to really change, it needs to be able to see itself as we see it, it needs to see the world clearly, it needs to look out.”

Substitute Wal-Mart for America and think about this as not the marketplace, but the global stage and you pretty much sum up the challenge of America. The country no longer can see itself the way the rest of the world does – and it needs to, if it is going to play the role we need it to play. America, like Wal-Mart, is neither inherently good or evil, it is simply an increadibly powerful force that needs to figure out how it is going to choose to make its actions felt. And we all have a responsiblity in shaping those choices. Americans’ or not.

The Public Service as a Gift Economy

In his description of why Open Source works Eric Raymond notes that open source communities don’t operate as command hierarchies or even as exchange economies. Instead they often operate as gift economies:

Gift cultures are adaptations not to scarcity but to abundance. They arise in populations that do not have significant material-scarcity problems with survival goods… Abundance makes command relationships difficult to sustain and exchange relationships an almost pointless game. In gift cultures, social status is determined not by what you control but by what you give away.

What is interesting about the public service is that it, in theory, could operate like an open source gift economy. Indeed, there are no survival necessities for those who work in the public service – their salaries are generally acceptable and their jobs secure.

This isn’t to say scarcity doesn’t exist within the public service. But it is driven by two variables – neither of which is intrinsically scarce – but have been made so by the public service’s cultural history and industrial structure.

giftThe first is resources, which are siloed into various functions and cannot allocate themselves to problems without the consent of a centralized administrator.

The second is information, which for primarily historical corporate cultural reasons is rarely shared, and is hoarded in order to maintain control over resources or agendas.

Neither of this are necessary for the public service to function. Indeed, it would function a whole lot more efficiently and effectively if such a scarcity model were abandoned. This is why I’ve been such an advocate for a social networking system within the public service – it would serve as a clearing house to allow information and resources (people) to move around the system more freely and allocate itself more efficiently.

Such a clearing house would reduce the benefits of hoarding information, as it would be increasingly difficult to leverage information into control over an agenda or resource. Instead the opposite incentive system would take over. Sharing information or your labour (as a gift) within the public service would increase your usefulness to, and reputation among, others within the system. Nor would this mean political actors at the centre of this system would have to abandon agenda control – a central authority can still have enourmous influence ascribing value to what should be worked on. It would simply no longer have absolute authority over that agenda (It is worth noting that under the current model this absolute agenda power is merely theoretical anyway – public servants have an amazing ability of doing whatever the hell they want regardless who which party is setting the agenda).

Indeed, the above contrast also explains, in part, the challenge around recuiting. As gift styled economies become more prevalent, the command hierarchy model of the public service is becoming an increasingly undesirable system within which to reside.

Update: Think a gift economy built around reputation and recognition still doesnt make sense? The Ottawa Citizen’s Katheryn May recently noted that “The “churn” of the public service, characterized by the rapid and high turnover of people in jobs, has been identified as a big problem. The APEX survey showed 64 per cent of executives think of leaving their organization at least every month. More than half want to leave because of lack of recognition. (H/T to CPRenewal)”

Why does Kinsella support Obama?

So I’ve just finished Kinsella’s new book – The War Room – which I thoroughly enjoyed, but not for the reasons I thought I would (more on that in another post).

I find it interesting that Kinsella is an Obama fan, and that he’s been one since early on (e.g. long before Hillary went off the deep end and her campaign started imploding). After finishing his book I was even more surprised. Here’s why:

First – Kinsella’s fighter:

Kinsella is the ultimate Canadian political fighter (second to Chretien, I’m sure he’d add). As his book testifies, he’s unafraid to pull out the brass knuckles and pummel his opponent. But which Presidential aspirant does that sounds like? Who talks about beating up Republicans, of the dangers of ones political opponents? No one is more partisan, nor more of a scrapper, than Hillary. She’s practically remolded her campaign around the notion that she is a “fighter.”

It doesn’t stop there though. Not only is Kinsella a fighter, he’s also not a believer in any type of “new politics” – such as that advocated by Obama. In his book’s intro he states (page 27):

“So they [politicians] will make soothing noises about the need to “do politics differently” and to avoid “the old politics” (or what has been called “the politics of personal destruction”). They make these disclaimers because they know it is what the voting public wants to hear (even if it isn’t what the voting public necessairly believes, but more on that later). Watching them, you would think such politicos would seldom utter a discouraging word about anyone.
But that is a pile of crap.”

Given that Obama talks regularly of how people are tired of the politics of division, does Kinsella think this is all a clever ruse?  Either way, I’d have put him squarely in the Hillary camp (on a philosophical level at least).

Second – her war room runs like his war room:

To my (untrained and unsophisticated) eye, Obama campaign conducts itself in manner counter to the approaches Kinsella argues for in his book. This is in contrast to the Clinton war room, which hits back hard and fast at any opportunity.

(I’d love to hear Kinsella’s take on the Obama war room – I’m pretty sure my blog will never get on his radar but with luck he’ll blog about the democrates respective war rooms). For example on page 90 Kinsella shares the rule “Leave No Charge Unanswered:”

Any critical statement offered up by a reporter or the other side, no matter how imbecilic or nonsensical it may seem at first blush, must be taken seriously, and pronto. If the charge appears to be getting ready to blast off into the political stratosphere, fight back.

Again, unlike the Clinton campaign, the Obama campaign appears to ignore this rule on some occasions. On numerous points through out this campaign the Hillary camp has claimed to have won the popular vote, the states that count, and criticaldemographics. Often, the Obama camp does not seem to hit back, or at least hit back hard. (This strategy frustrated me enormously a few months ago) Indeed, on occasion they’ve been near silent – especially on the charge that Hillary has won the popular vote. There is rarely a counter-quote from the Obama campaign team in articles about Hillary making this claim (especially on CNN).

Finally – Legitimate Policy differences:

While there are few legitimate policy differences between Hillary and Obama, one area where people are concerned there might be differences is over Israel and Middle East policies. In his book Kinsella self-identifies himself as a ZIonist… and if any candidate can be defined as pro-Israel it is Hillary Clinton. Indeed, this one part of the Democratic Party that Obama has been working hard to assuage.

That, and the fact the (like me) Kinsella is a huge fan of Carville and Bill Clinton (and unlike me, Begala) I would have landed Kinsella squarely in the Hillary camp.

In sum:

Obviously, these are only 3 of thousands of reasons why anyone might choose to support one of the nominees. As an Obama supporter I’m pretty pleased that Kinsella is a fan as well. It’s just that his book has left me more puzzled, not less, about why he’s a supporter. I’d be interested to know what Kinsella thinks the Obama campaign has done effectively, and what it has done poorly, and if he thinks Obama is going to redefine politics, or if he’s a just a brilliant new spin on an old theme.