Monday, January 31, 2011

Bankers’ bonuses: dubious use more than dubious ethics

Bankers’ bonuses continue to receive ample critique, being qualified as immoral and unethical. However, that the bonus system suffers this critique seems largely the result of awkward semantics. “Bonus” suggests a reward for good performance, which seems something at odds with banks over the past few years.

However, in reality, these bonuses do not really serve the role of rewards for good performance. Instead, they are just a form of “flexible pay”. That is, most bankers’ salary consists of a fixed and a flexible component. The flexible component decreases if their firm performs less well, which it has done for most bankers over the past few years.

If banks would just rename their “bonuses” into something like “flexible pay” that might not only be closer to the reality of things, but also shield them from much of the vigorous critique of outraged outsiders. Instead, some might even be inclined to applaud them for taking such a heavy pay cut in these meagre times. I do not see many other job categories agree to such heavy pay cuts as they went through recently; imagine proposing a 40 percent pay cut to Tube drivers or BA crews – bankers accepted it without much grumble.

However, this does not mean that the flexible pay system that banks have grown to use (i.e. their bonus system) is a smart way of rewarding people. It is not; it is outright clumsy. Flexible pay is intended to motivate people, make them emotionally tied to and proud of their firms, and prevent them from leaving. Bonuses do no such thing. People just wait for their bonus to arrive and then leave; it has no influence in terms of retention. Things get even more awkward (or perhaps ridiculous) when they introduce “guaranteed bonuses”; how on earth are they supposed to motivate anyone?

Research on employee remuneration does not look good for them either. Bonuses tend to increase wage differences between people within the same organisation and team. Yet, research by professor Matt Bloom from the University of Notre Dame showed consistent evidence that wage differences actually demotivate people, and make a team perform worse; they even demotivate the team member with the highest relative pay. In comparison, teams with much more homogeneous pay tend to perform much better. In addition, research by professor Dan Ariely from Duke University and colleagues provided evidence that individuals are also negatively affected by extremely high pay, the same people performed better when their remuneration was within more normal bounds.

Thus, rather than being immoral and unethical, the bonus system is simply rather crude and clumsy; it does not get the job done. That is not unusual for banks, which generally seem to be run by people who are excellent bankers but very poor at managing stuff. Common sense would suggest that they rethink the bonus system’s name (and change it into something like flexible pay). Scientific evidence would suggest that they rethink the set-up of the entire system altogether.

Sunday, January 30, 2011

New Community Radio Opportunities to Increase Provision of Local Services and Information

Community radio in the U.S. received a large boost in January when President Obama signed a billed that will permit establishment of an estimated 800 to 1200 new local community radio stations

About 800 of the non-commercial community stations are already operating and providing music, health, education, and local information, news, and sports. The stations are run by community organizations, churches, and other civic groups, typically staffed by volunteers, and dependent upon donations from organizations and listeners.

Community radio operations tend to provide information about community and civic organizations that are overlooked by commercial broadcasting, focus on social issues in communities, and provide services to minority, ethic and immigrant groups. Programming on community radio is distinctively different from commercial radio and tends to be more local than, and providing alternative content to, that of public radio stations.

The stations operate on low power, making them useful for servicing small towns, counties, metropolitan suburbs and neighborhoods.

The expansion of spectrum devoted to community radio had been sought for several decades and the Local Community Radio Act signed by the president directs the Federal Communications Commission to make provision for the additional services. Some disputes with commercial channels over spectrum are expected in large metropolitan areas during that process.

Saturday, January 29, 2011

Their names liveth forever more

If you visit any of the memorials to those who fell in the First World War, you'll find five simple words on most of them - "Their names liveth forever more". A tribute to those who made the ultimate sacrifice for the sake of their country.

Today is Martyr's Day in India, the day 63 years ago when Mahatma Gandhi was assassinated. Its a day when the nation is supposed to honour those who laid down their lives for it. Its by and large a forgotten date - just look at today's newspaper to see if there's any mention of it at all. Well , passage of time dims memories. After all the last real war that India fought was in 1971 - well before most readers of this blog were born.

Last year I posted this on this day. Today a few words on the greatest of the nation's martyrs - Mahatma Gandhi. Gandhi is largely a forgotten man in India today. A few platitudes and he is conveniently brushed aside as belonging to the ancient past. But we would do well to ponder on the legacy he left for all of us, if only we would, or could, grasp it.

Its not just that he led India's independence. Is not just that he waged war on the cursed caste system that inflicts Indian society. Its not just that he advocated the path of non violence. Its the primacy he placed on values in politics.

He unflailingly acted for what he believed was right. Both the means and the end had to be Right - Right with a capital R. Morals were supreme ; everything else was subordinate. If during any of his movements, there was any violence at all, he called it off. When India gained independence on the night of August 14th, he wasn't celebrating in Delhi - he was in Calcutta holding the peace between Hindus and Muslims single handedly in that city. He argued for handing over a proportion of India's wealth to Pakistan on partition - the stand that ultimately cost him his life.

Today's politics , world over, is a far cry from those of Gandhi. With the possible exception of Nelson Mandela, there isn't a single leader who comes close. Does it have to be so ??

Yes its about elections. Yes its about making money. Yes its about power. But after that what ? Most leaders crave for immortality. Their place in history. What better way to achieve that than to be of high character. Of being known to have done the right thing, no matter what. Of being truly a man of principles and values. And if you think you can't win elections that way, you are wrong. Either Gandhi or Mandela, in their days, would have won any election in any country hands down.

Back to Martyr's Day. Today is a day when we say a prayer for those who laid down their lives for the country. They are mostly forgotten, except by their loved ones. But its on their fallen shoulders that we stand today. May their names live forever more, in at least the collective conscience of the nation.

Thursday, January 27, 2011

The Chinese wear Prada

Prada, the Italian fashion group, is reportedly going to seek a listing in the Hong Kong Stock Exchange. Nothing electric about this, except that you would have thought that they would list in Milan. European fashion houses are ,well, snootishly European. So the move to list in Hong Kong does raise eyebrows.

This is the magic of China. As even a casual visitor to China knows, every brand is ruthlessly copied and pirated on a big scale. You can easily buy any fashion brand, indistinguishable from the original, perhaps even made in the same factory as the original, at one hundredth the price. Despite this, every fashion house's fortunes these days are driven by demand in Asia, chiefly from China. The nouveau riche in China like to spend. And spend on outrageously priced brands which you can then flaunt. There's a certain pleasure into walking into a room of Prada wearers and knowing that everybody elses is a fake and yours is the real thing. Flaunt your original.

But if your main driver of growth is there, does it mean you have to list there ?? You can list anywhere in the world and still attract an international investor base. These days, investors are mainly institutional investors who invest in most of the major markets in the world. Even if you list in London, you could have an investor base that's entirely non British.

There is a symbolic angle to listing in Hong Kong. You can say that it reflects the growing importance of China to the company. But that's just pure show. It doesn't matter one inch in the actual operations of the company or the performance of its stock.

The move also reflects the growing attractiveness of Hong Kong as a financial centre. It always was a major financial hub. But it was dented a bit by the fears of what China might do to it. But 13+ years into Hong Kong becoming a part of China, the world is fully convinced that China does not intend to tinker with Hong Kong's economic apparatus at all - one of the wisest moves Deng Xiaoping and the leaders that followed have made. Hong Kong's markets are free, transparent and highly liquid as say New York or London is. And its also free from the regulatory heavy handedness of a Sarbanes Oxley. And its on the doorstep of mainland China. Presto. Hong Kong is soaring and competitors like Singapore are left by the wayside.

Its still a tiny trickle - the number of western companies seeking to list anew in Hong Kong. I don't think it will turn into a flood - I still can't see the practical benefits of listing in one place over another (other than avoiding onerous stuff like Sarbanes Oxley). What is more likely to happen is more and more companies making Hong Kong or Shanghai as their Asian base, or even their global base (as HSBC has done).

Fashion industry is all about show. You want to flaunt your wares. No wonder, Prada is enamoured by the symbolism of its move. As long as the Chinese don't take violent objection to the slightest hint that its the devil who wears Prada.

Business schools suffer from a dangerous lack of evidence based teaching

There is a great divide in business schools, and one that not many outsiders are aware off. It is the divide between research and teaching. There is very little relation between them. What is being taught in management books and classrooms is usually not based on rigorous research. Vice versa, the research that gets published in the prestigious academic journals seldom finds its way into the MBA classroom.

The consequences of this divide are grave. First of all for research: because none of this research is really intended to be used in the classroom, or to be communicated to managers in some other form, it is not suited to serve that purpose. The ultimate goal is publication in a prestigious academic journal, but that does not make it useful, or even offer a guarantee that the research findings provide much insight into the workings of business reality.

It is not a new problem. In 1994, the then president of the leading association of business academics called the Academy of Management, Professor Don Hambrick, noted “We read each others’ papers in our journals and write our own papers so that we may, in turn, have an audience . . . an incestuous, closed loop”. Management research is not required to be relevant. Consequently much of it is not.

But business education clearly also suffers. What is being taught in management courses is usually not based on solid scientific evidence. Instead, it concerns the generalization of individual business cases or the lessons from popular management books. Such books often are based on the simple yet appealing formula that they look at a number of successful companies, see what they have in common, and then conclude that other companies should strive to do the same thing. However, how do you know that the advice provided is fair and reasonable, or whether it comes from tomorrow’s Enrons, Lehmans, and Worldcoms? How do you know that today’s advice and cases will not be soon heralded as the epitome of mismanagement?

How could rigorous – and relevant – management research help? Let me give an example. In the 1990s, ISO9000 (a quality management system) spread through many industries. However, academic research by Professors Mary Benner and Mike Tushman showed that its adoption could actually lead to a decrease in innovation after a few years (because ISO9000 does not allow for deviations from a set standard, which innovation requires), making the adopter worse off. This research was overlooked by practitioners, many business schools continued to applaud the benefits of ISO9000 in their courses, while firms continued – and still continue – to implement the practice, ignorant of its potential pitfalls. Yet this piece of research offers a clear example of the possible benefits of scientific research methods: rigorous research which reveals unintended consequences to expose the true nature of a business practice. However, such research with important practical implications unfortunately is the exception rather than the rule. That even relevant research is largely ignored in business education – as happened to the findings by Benner and Tushman – unfortunately is the rule, and not the exception.

Of course one should not make the mistake that business cases and business books based on personal observation and opinion are without value. They potentially offer a great source of practical experience. Similarly, it would be naïve to assume that scientific research can provide custom-made answers. Like medical research provides general insights that a skilled doctor needs to combine into a unique treatment plan for an individual patient, rigorous management research could and should provide the basis for skilled managers to make better decisions. However, they cannot do that without the in-depth knowledge of their specific organization and circumstances.

Yet, at present, business schools largely fail in providing rigorous, evidence-based teaching. Instead, the near perfect separation between research and teaching causes their courses to largely rely on dangerously simplified generalizations of popular insights, at a time that the corporate pitfalls that rocked our economies over the recent past epitomize a clear need for more sound management in favor of popular fads.

Monday, January 24, 2011

The Business, January 26th 2011: "Special Guest Spectacular" Edition

This week The Business releases regular Businessmen Alex Koll and Chris Garcia to other comedy duties, and welcomes three special comedy guests in their place: Mary Van Note, Andy Wood and Zach Coulter!

Mary Van Note is no stranger to The Business, and she should not be to you either. She has stormed the city, the nation and the internet with her charmingly awkward and sexually blunt stand-up. She has her own web-series on, and she is the owner of an impeccable sense of fashion: ...and that's just the tip of the Van Iceberg. Catch her prior to her SF Sketchfest show over the coming weekend.

Andy Wood is truly Portland's Finest. As a comedian he has performed with the best around, including at the Bumbershoot Festival in Seattle and the legendary Bentzen Ball in D.C. As a producer and founder of The Bridgetown Comedy Festival, he has brought the best around to Portland for one of the best and well stocked comedy festivals in our modern world. He also has his own Wikipedia page:

Little is known about Zach Coulter, as his Wordpress blog is set to private. But he does exist, mostly to bring the people of Minneapolis, MN (where he is visiting us from) thoughtful and challenging stand-up. When the fifth largest blizzard in Minneapolis history tore a hole in the roof of the Metrodome, it left an opening large enough for Zach's massive talent to burst through and fly all the way out to us.

As always the show is just $5 and starts at 8pm. We are no longer BYOB, but tacos and Clearly Canadian still welcome.

Check above for 2 For 1 coupons!

Saturday, January 22, 2011

HELLO, HELLO, I have landed

There are some ideal moments to observe humanity. From a sidewalk cafe in the heart of Paris on a warm summers day. From the stands at Eden Gardens, or Anfield, or Madison Square Gardens - pick your sport. Or in an Indian train. Another such classic place is when an aeroplane lands. Regular readers of this blog are aware of this blogger's fixation with air travel and this piece will come as no surprise, especially after this and this.

As soon as the wheels touch the ground, humanity inside the plane wakes up and warms up. He may have been snoring just a moment ago, but he's wide awake now and is starting to limber up. The hand goes to the pocket and out comes the mobile phone. Its discreetly switched on and is sort of kept hidden between the legs, lest the pretty stew frowns on him and tells him to switch off. However the music on start up or the various pings rather give him away - such auditory masterpieces emanating close to an unfortunate part of the anatomy is brushed aside as an occupational hazard.

It has often been said that the definition of an instant in time is the time gap between the lights turning green and the idiot behind you honking. I submit that this is an erroneous definition. The real instant in time is when the aircraft wheels come to a stop and the action starts.

The jumping jack is the first to react. Beating all world records on speed of reaction, he reaches up to open the overhead locker to retrieve his bag. Displaying rare weightlifting talent, he hefts his bag in a wild swing designed to clobber competition..

The sprinter is equally quick to react. You see, he has deposited his bag at the other end of the aircraft as he was beaten to all the space when he first boarded the plane. Determined not to be outdone again, he pushes, shoves, crunches toes, lets elbows fly to reach his desired objective. Research has indicated that there is an overwhelming gender bias in the sprinter category - the female of the species seems to be more in number in displaying this characteristic.

The yeller is next. He has switched on his mobile phone. He then yells Hello Hello in about 1200 decibels. Only to ask the party a the other end "How are you" in the same 1300 decibels. And then disclosing the absolutely vital piece of information that he has landed.

The yeller is now being rapidly replaced by the thumb twitcher. This is the lot that switches on the dreaded Blackberry and needs to reply to E Mails. Having gone cold Turkey during the 2 hour flight and not being able to read or send emails, he is in the cold sweat of the junkie who hasn't had his fix. He makes it up with furious jabs of the right thumb, thereby increasing his chances of being afflicted with the modern day affliction of arthritis of the right thumb.

You may have noticed that the yeller seems to be a species dying out. The thumb twitchers are taking over. Conservationists are encouraged to come to the defence of the former species - Medha Patkar , Arundhati Roy, et al; please note.

Most are now standing in the aisle designed only to accommodate the impossibly svelte stew ( except in Air India where the aforementioned adjective is not in the lexicon). Impossible human contortions of the human body were earlier thought to be the exclusive preserve of the peak hour Mumbai local train - we can now affirm that this is not true. For about 7 minutes the airline traveler is standing with the head at 74 deg, the torso at 14 deg, with the arms at angles not yet invented and standing on one toe.

Deplaning now starts. Travelers can begin practice the art of the rugby scrum . Our resident kiwibloke can even contribute the Haka to bring in the mood. If its a double aisle aircraft, lane switching happens furiously. Either way, the proceedings closely resemble the goings on in an Indian road. Down the steps and then into a bus.

The bus journey is equally revealing as a study of human behaviour. Our corporate hero climbs the bus and stand squarely at the entrance. Others try to practice their rugby tackling skills. The sight of a business class worthie who has been pampered by caviar and champagne and endless smiles from the svelte stew, now clinging on to dear life by the bootstraps on a jampacked airline bus is rather interesting. Especially since he is likely to be a thumb twitcher and is trying to get more of his fix at the same time.

As they all stream out of the bus and stream in to the loo, its time to reflect on the glories and wonders of man !!!

Tuesday, January 18, 2011

The Business, January 19th 2011: "Thayer Will Be Blood" Edition

Years ago, a grizzled old oilman found a baby lying abandoned in a basket. That young boy became the oilman's nominal business partner, adding a veneer of respectability to his shady operations. Later, he grew up to be rising local comedy star Chris Thayer (Funny Party, SF Sketchfest), who returns to The Business this Wednesday as part of an unstoppable oil fire of comedy.

We've still got Alex Koll, Chris Garcia, Bucky Sinister a...nd Sean Keane, who have agreed to let Mr. Thayer plunder their comedy fields for this evening. Oh, the comedy will be deafening! The jokes will beat you over the head like an old alcoholic wielding a bowling pin! Will the show be loosely based on Upton Sinclair's "Oil"? (No.)

The show starts at 8 PM. There's no BYOB, but feel free to drink a milkshake during the show. Or even the milkshake of someone sitting nearby who won't agree to let you buy out his milkshake rights.

Five-dollar admission, and don't forget your 2 for 1 Coupons.

Be there, or be a bastard from a basket.

The BP oil rig disaster – better brace yourself: there is surely more to come

Last week’s report of the Presidential Commission examining the oil rig disaster in the Macondo well in the Gulf of Mexico draws a sharp and clear conclusion about its cause and who is to blame: it is the systemic failure of management; at BP, its partners and subcontractors Transocean and Halliburton. At the end, it also places a bit of guilt on the US government, which provided inadequate regulation and resources.

The report is to be applauded for its clarity and thoroughness, and for recognising the complex and systemic nature of the cause. However, what it fails to recognise is that the structural failure of management is embedded in an even wider context, namely how in our society we run our economies and corporations. Given this wider economic context, it is inevitable that similar disasters – of similar apocalyptic proportions – will happen in the future.

Strikingly, when reading the report, the parallels between this debacle and other corporate disasters of the recent and more distant past are stunningly clear. Many of the descriptions of how the oil rig disaster unfolded, as well as the reports’ conclusions, for example, could word for word have been taken from reports on the Union Carbide gas disaster in Bhopal in 1984. Swap some names and dates and a few technicalities and the various reports’ descriptions of a lack of a top-down safety culture, design errors, break-down of communication, and the influence of cost-cutting, and so on are near identical. And that tells us something; if alone that this is unlikely to be the last disaster of its kind that we are going to witness.


In fairness, the committee has done well to resist the common temptation, when looking at things superficially, to name and blame a particular party, or even a particular person, like the Obama government clearly could not avoid the same temptation in the weeks following the disaster, explicitly and exclusively heaping blame on BP and its CEO Tony Hayward in particular. The same happened to Warren Anderson, Union Carbide’s hapless CEO in the 1980s, whose extradition for manslaughter charges is still being sought by the Indian government.

And I am sure these companies are to blame, and their CEOs do carry responsibility for the disaster, but to name and shame them as the sole cause of the misfortune seems a dangerous oversimplification.

Professors Gabriel Szulanski from INSEAD and Sid Winter from the Wharton School, who examined corporate disasters, wrote about this “When people try to explain a disaster after the fact (an accident in a nuclear plant, for example), they are typically under pressure to name a relatively simple cause so that existing policies can be revised to prevent similar events in the future”. We are eager to find a culprit, and someone to blame, and the CEO of the offending company is the most logical and easiest target for our tar and feathers.

But, as the Presidential Committee rightly concludes “the root causes are systemic”, representing an “overall failure of management”, rather than the actions of a particular individual or even a particular firm. When you analyse the lack of communication systems, safety culture, inadequate decision making processes, and so on, a disaster – somewhere at some point – seemed inevitable and the proverbial accident waiting to happen.

The anthropologists Anthony Oliver-Smith and Susanna Hoffman, who examined a variety of man-made disasters, concluded about this “a disaster becomes unavoidable in the context of a historically produced pattern of vulnerability”. And that is what we saw at BP; a pattern that produced a situation that at some point was going to go off the rails. Hence, the committee is certainly right that “the missteps were rooted in systemic failures by industry management (extending beyond BP)”.


Where the report falls short, however, probably also because it extends the scope and vision of the committee, is recognising that the way BP, Transocean and Halliburton are managed is the logical consequence of how the world of business operates and is organised in our society. The report for example concludes, with ample surprise and indignation, that safety was not the firm’s top priority. Well, of course it is not, I’d say, because in today’s society we tell our companies that their top priority is shareholder value.

Now, certainly this disaster did not do the shareholders of BP much good, but the point is that, in financial terms, there is an optimal risk-return trade-off to be made. And all BP did and has been doing is to optimise that trade-off for its shareholders – precisely as we expect them to do.

Whenever I ask a group of executives to whom the ultimate responsibility of a company is they proclaim in chorus “shareholders” – some of them even get annoyed if not angry by questioning that very assumption. Because that is what they are supposed to do: maximise the value of the corporation for its owners. And, as said, that implies making risk-return trade-offs. The tricky thing is of course that such trade-offs inevitably at some point somewhere down the line lead to something going seriously off the rails.

In fact, the way we remunerate top managers – including Tony Hayward – is largely through stock options. The only reason to so abundantly use stock options (and not, for instance, stock) is that they stimulate top managers to take more risk. And the world of business and our stock markets in specific are organised in such a way that we believe that that is what we want: top managers who take risks. We applaud them when it goes well, but we vilify them when it goes badly wrong, although that’s simply the other, inevitable side of the same risky coin.

Of course, oil disasters are the type of risk we would like them to avoid, but governance mechanisms such as stock options simply stimulate risk taking and do not discriminate between different types of risk. Research – by professors Gerry Sanders from Rice University and Don Hambrick from Penn State – confirmed that CEOs with more stock options take more risks, but they also experience bigger losses. Furthermore, research by professors Xiaomeng Zhang and colleagues from the American University of Washington showed that option-loaded CEOs are more likely to engage in earnings manipulations. Clearly these are not the risks we want CEOs to take, but they are the logical consequence of the way we remunerate them. We ask and reward them for taking risks, so they do.


‘But I did not ask them to take more risk’, you might think. But yes, you probably did. Perhaps not directly, but indirectly; very likely. Individual investors select shares with the highest return and track record, consumers select the bank with the best rates, your pension fund invests your savings in companies with the highest risk-return trade-off, and so on. By selecting the best returns, we stimulate those companies to optimise their own risk-return balance. As individuals, we just look at the financial results, and seldom query how they came about.

But at least we are in good company; following the recent banking crisis, even the Church of England was found to have invested in the same financial instruments they so heavily criticised after the collapse of the financial system. However, you just cannot have your cake and eat it too. If we design a system in which firms are expected to maximise shareholder value and CEOs are stimulated to take risks, some of the investments are going to go wrong. And both Union Carbide in Bhopal and BP in the Gulf of Mexico were clearly investments that went wrong.

So the White House committee was right; the Deep Water Horizon rig disaster was caused by a systemic failure of management, but the system surpasses that of the three companies involved. As a matter of fact, whether you analyse the cases of Enron, the old Barings Bank, Lehman or the Royal Bank of Scotland, similar conclusions would be drawn. All these firms and managers operated conditioned by the economic context in which they operated. And since the Presidential Commission is unlikely to change that very context, we will be facing more such corporate disasters of the same kind at some point in the future.

Saturday, January 15, 2011

I have the right to own a Glock semi automatic

In the aftermath of the tragedy at Tucson, Arizona, there has been a frenzy of chest beating in the United States as to whether the poisoned and inflamed political rhetoric that is now commonplace, was a contributor to the tragedy. It took The Economist to say that was the wrong question. The real issue, as The Economist argues, is the gun control laws in the US.

For those unfamiliar with the Tucson tragedy, a deranged man attempted to assassinate a Congresswoman, Gabrielle Giffords. Six people were killed, including a nine year old girl. A further thirteen were injured, including Ms Giffords, who is battling for her life in hospital.

Unfortunately, such incidents have become all too common in the United States. Even more unfortunately, many of them happen in school and university campuses. Wikipedia even has a depressing listing of such massacres here.

Guns are far too easy to get and own in the US. The right to bear arms is enshrined in the Second Amendment to the US constitution. Rights being (laudably) sacred in the US, there is a huge body of opinion, led by the National Rifle Association defending this right at all costs. In the very same town of Tucson, barely a week after the shootings, a previously scheduled gun show went on, in an appalling display of insensitivity.

But all rights are set in a context. The Second Amendment was passed when the US, was being formed - independent states were coming together to create a federal government in the late 18th century, Each of the states had a militia and were wary of creating a tyrannical federal army that might trample on them. The Second Amendement was a compromise hammered out at that time to address that concern. It reads "A well regulated militia, being necessary to the security of a free state, the right of the people to keep and bear Arms, shall not be infringed". Is this context remotely valid today ?

In this world, where a terrorist threat is just around the corner, is it becoming a safer place where everybody carries a gun ? There are as many guns as there are people in the US. The defence that the gun does not kill, the shooter does, does not hold water. Any one of the massacres would not have been so awful, but for the power of the increasingly sophisticated weaponry that is available these days. It is also true that the vast majority of gun owners in the US do not commit crimes - but it is the sheer availability that enables the minuscule minority to perpetrate such atrocities. Sensible societies trade in some degree of personal right for protecting the rest of them. The right of free speech therefore does not extend to yelling Fire Fire in a crowded theatre.

Societies that have stuck dogmatically to the wording of a law or a belief that is no longer contextually valid have only sunk into depravity. Consider the verbatim implementation of the Sharia Law, which may have been relevant at its time, but sounds positively barbaric now. Rigid belief in every word of the Bible, brings tragedy to cults like Jehovah's Witness.

The greatness of the United States is its ability to assimilate the best from every culture in the world. A country that is at the forefront of reason and progress. Such an America might like to ponder over this fact. In virtually no other country in the world would a citizen be lawfully permitted to own a Glock semi automatic, the gun that the madman used at Tucson.

Thursday, January 13, 2011

‘Stretch goals’ tend to stretch all the way into fraud

Goal setting works. Give your employees some concrete goals and they will work harder to reach them than when you just tell them “do the best you can”. There are ample studies confirming that relationship. Professors Edwin Locke and Gary Latham, from the University of Maryland and the University of Texas, even called goal-setting “the most effective managerial tool available”.

So, I am not arguing with the effectiveness of goal-setting, but I would say it should come with a health warning. And that is because it also induces some more dubious behavior.

Let me explain. “Stretch goals” is one of these terms that have persistently entered managerial vocabulaire, earning a prominent and enduring place in consultant speak. The idea is that you set your people goals that they might just reach if try really really hard – or just not. Hence, they stretch your people’s effort to the limit.

However, there is a little catch to that. We also know from research that if people almost reach this goal (but, crucially, not entirely…) they tend to make it up.

Cooking the books

Really – quite literally. If they almost reached the stretch goal but not entirely, they will be inclined to pretend they did, and cook the books. Professors Maurice Schweitzer for the University of Pennsylvania, Lisa Ordonez from the University of Arizona, and Bambi Douma from the University of Montana designed a clever experiment. They gave seven random letters to 154 participants and asked them to create as many words as they could within a minute, writing them on a workbook. If they came up with 9 words or more they would get a monetary award. And they did that 7 times. The participants had to record themselves how many words they got each round and, at the end of the experiment, hand in a notebook of their achievements and take the corresponding amount of money out of an envelope. The experiment was guaranteed to be entirely anonymous.

But, unknown to the participants, there was a trick… Although the experiment was indeed anonymous, the researchers could match the workbooks to the notebooks and envelopes with the remaining money. Thus, they could look up how many people cheated (although they were not able to identify their names). And the answer was pretty clear and precise.

Each time people got 5 or 6 words or so – pretty far off the mark of 9 – they reported it honestly and left the money in the envelope. However, things were markedly different when people had reached 8; just one word short off the mark. In that case, a significant number of people cheated: they filled out that they had come up with 9 words and took the money out of the envelope, although their workbooks clearly showed they had missed the mark by 1 word. They cooked the books and deceptively misappropriated the corresponding monetary award.

It reminded me of organizations like Enron, Ahold, or Worldcom, where management habitually set their people ambituous goals. These firms may have gone down attributing their fall to fraud, but the fraud was induced by the organizational context created, which stimulated their people to cheat. Stretch goals may stretch employees’ effort to the limits, it also stretches their sense of ethics.


Because the interesting question is also, who were they cheating? When people reached only 5 or 6 they could have just as easily cooked the books and taken the money as when they had reached 8. But they didn’t. As a matter of fact, there was no need to fraudulently fill out the notebook at all; they could just have taken the money out of the envelope and leave. But only one out of the 154 participants took more money out of the envelope than reported on the notebook (and even that could have been an honest mistake). So why did people only commit fraud when they fell just short of the goal, and not when they missed it by a mile? And why did they insist on writing the false information in the books, when they could have just taken the money and run?

It has to do with self-justification. It seems we are inclined, when we have been set a stretch goal that we just did not reach, to tell ourselves that we sort of did, and really do deserve the reward. We can’t tell that to ourselves when we are way underperforming and very far off the mark. We also can’t justify to ourselves to just grab all of the money. But when we almost reached the stretch goal (but not entirely…) we humans are perfectly able to tell ourselves a nice little story that permits us to take the loot after all. And the people at Enron, Ahold, and Worldcom were just as human as the rest of us.

Wednesday, January 12, 2011

Please Sir, I want some more

Onions in India. Cabbage & pork in South Korea. Chilli Peppers in Indonesia. Frighteningly, wheat globally. Riots have already started in Algeria , and is sure to spread. Food price inflation is hitting the world again. Millions of children will echo Oliver Twist's begging in those immortal words which are the title of this post. Are we going to see a repeat of 2008 ?

This blogger is no expert on food economics. But the issue of food prices is close to his heart and he has posted on the awfulness of food price inflation here before. All inflation is bad, but food price inflation is especially awful. For it ceases to be an economic problem of supply and demand and becomes an issue of survival for half the world's population. It sparks a humanitarian crisis. And it will inevitably lead to unrest and riots. The world cannot afford inflation in the price of food. Certainly not the high double digit inflation that it is seeing.

The issue is a complex one. World food supply and demand is in a precarious balance. In the short run, any disruptions in supply, usually due to natural calamities leads, to a massive spike in prices. This year the wheat crop has failed in Russia and Australia. But the issue of enhancing supply is a longer term one. The gains due to scientific revolutions in crop breeding, use of fertilisers, and the like has started to taper off. No new breakthrough is coming.

The use of large cultivable land to grow bio fuels, especially in the United States is another contributor to pressures in supply. Cultivable land is finite. Any use for other than food growing, will result in lower food supplies.

On the demand side, there has been an inexorable rise, which is actually a good thing. A chief cause has been the economic development of China and India. Higher levels of nutritional requirements are a happy result of economic development and has led to continuous increase in demand. The same will happen in Sub Saharan Africa.

A third cause for inflation is the price of oil. Oil prices affect not only in food transportation, but also in price of fertilisers. Oil is a key input cost in the growing of food. And we know where oil price is - last at $93 a barrel.

A fourth cause is awful government policies. Because agriculture is an emotive subject, every government under the sun has an unbelievable maze of subsidies, freebies, giveaways that completely distort the economics of food production and consumption. And the immediate reaction to even a perceived shortage is a banning of exports - Russian ban on wheat exports are a direct cause of the rise in wheat prices. India and Pakistan are playing silly games with banning onion exports.

I am afraid food prices are going to be high for the foreseeable future. This is an inevitable equilibrium point, I believe. With high prices, will hopefully come more investment, more capacity creation, technological breakthroughs, etc etc . In other products this will happen quicker. Agriculture, because it is heavily distorted by government action, will see this much much slower. But even after this, the price levels will remain higher. This has profound implications for the world's poor - even today, hunger is not because of lack of food. Its because of lack of affordability.

Like every opinionated commentator, this blogger has his points of view on what ought to be done. It is the intention that this subject will feature repeatedly over the coming weeks. Meanwhile I invite you to ponder over the problem and share your ideas. I believe this is one of the most pressing problem facing the world today.

Tuesday, January 11, 2011

2011 and Business is BOOMING!

2010 went out with a big bang for The Business, with a sold-out house and a drop in visit from our good friend Sheng Wang. The only way to follow that of course, is to do it again at the first Business of 2011, with another full house and sets from Julian Rodriguez and Ali Wong. With such a big push/kick into the new year, we can only imagine what it will bring. We have some tricks up our sleeve, so keep an ear to the internet tracks and keep coming out to the show. See you there!


The Businesmen

Saturday, January 8, 2011

The fountain of knowledge

The Ancient Library of Alexandria was one of the pinnacle achievements of human civilisation at the time of the birth of Christ. Knowledge is the cornerstone of human achievement and cataloging and storage of that knowledge is a singular feat . The library of Alexandria was, for that age and time, an unbelievable beacon of human endeavor. It is one of humankind's greatest tragedies that the library was burnt down by the Romans.

While libraries came and went since, the Encyclopedia Britannica arose as a store of much of the knowledge and wisdom that the human race accumulated. But, with the arrival of the internet, arose another phenomenon in that same illustrious league - Wikipedia.

Wikipedia is a singular human achievement, built cooperatively and freely, as a memorial to knowledge. That its free, that its ubiquitous, that it is accessible in so many languages, that it is constantly improved and bettered, is something that the wise men who built the library of Alexandria would entirely approve. I know that there are many who thumb their noses at Wikipedia. Amateurish, pop culture knowledge, full of errors, are all accusations I have heard. Sure, it isn't perfect. But as a direction to turn to for knowledge, its difficult to find anything remotely near.

Readers of this blog will know that this blogger is highly opinionated. Facebook and Twitter do not catch my fancy. But Wikipedia is a phenomenon that I humbly salute - it's one of the high points of human achievement on the internet.

A few years back, I was fortunate to be in Alexandria and to go to the modern library that has been built there in testimonial and commemoration of the great one that existed 2000 years ago. I was in awe as I entered its portals - I could almost hear the ghosts of Euclid, Archimedes, Heron, Eratosthenes, and all the other luminaries who studied in that library. Today , I am sure they would equally cheer and applaud the spirit of their successor, Wikipedia. It isn't in any place, it isn't inside any building, but in spirit, it carries on the great tradition that began all that long ago.

Happy Birthday young girl .

Wikipedia celebrates its tenth birthday this week.

Friday, January 7, 2011

The problem of having too much money

Of course, there is no such thing as too much money. One man's dream is another man's basic necessity. But then sometimes there are those who don't know what to do with their money. The damn thing is burning a hole in the pocket (or the bank account, or wherever). They've already bought into houses, gold, shares, mutual funds, whatever. Now what ?

They invent instruments like catastrophe bonds. I read about them with my jaw dropping - hadn't known that such esoteric stuff existed. Well compared to other even more esoteric species of investments, this might more resemble "plain vanilla". That only underscores my point.

Insurance companies issue these catastrophe bonds. They carry a higher rate of interest and investors invest in them. The condition is that the investor loses his investment if the catastrophe occurs. So he is essentially betting that the catastrophe does not occur. For the insurance company, this is a form of reinsurance. If the catastrophe occurs, they have to pay out to those they insured, but don't have to pay out to these bond holders. Thus they reduce their risks.

For investors , their attraction is the higher rate of interest, but more importantly diversification of their portfolio. These bonds do not move in tandem with say equity markets or housing markets. They move in tandem to catastrophic events occurring or not occurring. Looks good, but .....

Look at what the investor is betting against. That another Katrina will not hit Florida or Louisiana this year. Or that an earthquake will not happen in Sichuan. Or that there won't be a flood in Bihar. Actually, these are bad examples. The market, at least for the moment, is mostly for disasters in the US. But why on earth would you want to take risks like that ??

I have long been disturbed by the societal implications of what is happening in the financial markets. Because the possibility of riches are huge, the best brains in the world go into finance. They innovate like crazy - compared to what happens there, an Apple or Google are midgets. They take incredible risks in the pursuit of even more money. They conjure up extremely complex and fiendish instruments that very few even understand, let alone operate meaningfully.

Its says something about a society that its greatest minds and greatest achievements are in the field of high finance. I am not convinced that its the most glorious claim to fame. I, for one, will steer clear of catastrophe bonds. Of course, that's merely an academic statement - there's the small problem of not having that kind of money !!

Thursday, January 6, 2011

Rethinking employee remuneration: Or why is it difficult to find a taxi when it’s raining

How to set up a remuneration system that gets the best out of your employees continues to be a tricky – and sometimes controversial – topic. Whether it concerns labourers or top managers, it seems difficult to get it right. Individual incentives, team incentives, tying bonuses to firm-wide performance, quantitative metrics, qualitative metrics, stock or options; all of them can potentially stimulate desired performance but could also trigger all sorts of unintended and undesired behaviours.

What does not help is that management theory about remuneration seems often to be based on a set of completely erroneous assumptions about human behaviour. And a theory with the wrong foundations can hardly make helpful recommendations.

Basic assumption: they will work more if I pay them more

Consider, for example, what we call the price elasticity of wages, as defined in economics to capture the relationship between pay and employee effort. Simply put, we tend to assume it is positive: If people make a lot of dosh per hour, we expect them to want to put in more hours. If we reduce the hourly wage, they will be less inclined to want to work many hours and, instead, prefer leisure time; catching a movie, go fishing, or crash out on the sofa holding a beer.

Of course, many people in regular jobs often have to work a fixed number of contractual hours (e.g. 9 to 5), so they don’t really face this choice. Similarly, people who in their jobs are largely judged based on their output, regardless of how many hours they put in (e.g. top managers, violists, professors) don’t get paid “overtime” so they also do not face this choice. However, in some professions people do. More importantly, this assumption – of a positive elasticity between hourly wage and how many hours someone is seeking to work – is the basis of much of the theory of remuneration, and therefore also influences how 9-to-5 workers are paid, and how top managers and violists are remunerated.

The slight problem is, the assumption appears to be wrong…

It is actually quite likely that, in reality (which is hardly the same as economic theory), people’s price elasticity is negative: meaning, if they get paid a higher hourly wage, people start to work fewer hours…

No drivin’ in the rain: NYC taxi drivers

A classic study on this topic was conducted by Professor Colin Camerer and colleagues from the California Institute of Technology. They examined New York City taxi drivers – who basically have to charge a fixed price per mile driven, but can determine for themselves how many hours per day they drive their taxi – and measured the relation between how much money they were making per hour and how many hours they were inclined to work on a given day. And basically what they found was that it is harder to find a taxi when it is raining.

“Eh…?” thou might think, and probably something like “of course it is harder to find a taxi when it is raining, because then they are all occupied”. That might be partially true, and admittedly what I used to think sheltering under an umbrella on a London street corner waiting (in vain) for a free taxi, but there is more going on. And that says something about the relation between remuneration and employee effort.

When it is raining, taxi drivers make more money, at least per hour. Because so many people want a taxi when it is pouring down – likewise when there is a Tube strike or a big convention going on – cabbies make more money per hour. That is because they don’t have to wait long for a new customer or drive around empty hoping someone will flag them down; there is such an abundance of potential customers that they’re hardly ever empty. Consequently, they make substantially more per hour when it is raining than when it’s a sunny day.

Economic theory would now predict that taxi drivers make longer days when it is raining because then they make more money per hour. Vice versa, we’d expect that they go home early when it is sunny (to lie down in the park, play with their kids, or take up knitting – or whatever excites taxi drivers). That sounds quite logical, right? Right… The only problem being that Colin’s research pointed out that the exact opposite is true. When it is a sunny day, and taxi drivers are not getting much buck for their hour, they continue driving and make long days. Instead, when it is raining, and taxi drivers have a high hourly wage, they tend to call it a day early… They, en-masse, were doing the exact opposite of what economic theory would predict. And that is a bit of bummer for our whole remuneration system and theory, because apparently it is built on shaky grounds.

But why…?

The question remains, why would they do that? Colin and colleagues speculated – based on a bunch of interviews with NYC taxi drivers – that people simply apply a different rule in their professional lives. They basically tell themselves, at the beginning of the day, that they have to make a certain amount of money and are then allowed to go home. And the taxi drivers continued driving till they had reached that amount. Some days, they (told themselves they) were lucky because it started raining and they allowed themselves to go home early. Other days – bummer – the sun stayed out and they had to drive longer to reach their target for the day. The vast majority of taxi drivers they interviewed uttered this logic; only one taxi driver said “drive a lot when doing well, quite early on a bad day” (the economists’ prediction), and I guess that’s simply because you always need one exception to confirm the rule.

What does this say about human behaviour? In economic terms this behaviour (“drive till I have reached a certain amount of money”) is plain irrational. As a matter of fact, Colin and colleagues computed that by only adopting the simple alternative rule “drive a fixed number of hours every day”, taxi-drivers could already enhance their income by 50-78 percent. They could increase it with 156 percent if they would just drive more hours when it is raining and less when it is sunny (which, incidentally, would also enable them to spend their leisure time in the sun, rather than inside grumbling at the rain!). Plain irrational indeed. But, as we both know, people aren’t always rational… So perhaps it is also time to rethink how to reward them differently.

Tuesday, January 4, 2011

Dot Com Mania II

Is Facebook really worth $50 bn ?? Yes, billion that is, not million. Or are we seeing the second incarnation of the mindless hype that we saw at the dawn of the century which made the word dot com a household name ? Judge for yourself.

What happened yesterday was that Facebook raised the first tranche of $500m funding from Goldman Sachs and a Russian investor. Goldman Sachs is putting $375m of its own money . Extrapolation is always a dangerous thing, but if you take the licence of using the same valuation per share to determine the value of Facebook as a whole, it somewhere close to $50 bn. Facebook is not a listed company; so we should be careful. But still such a stratospheric valuation ??

Facebook's revenues are reputed to be some $ 2 bn. This all seems to be old style internet ads - very few media companies have succeeded in that space. Google is different - its advertising model is such that a fair proportion of the searches actually lead to a commercial transaction. Clicks through to Gils on Facebook may yield captivating information on this incomparable blogger and such attendant pleasures, but are unlikely to yield even a dime !

So why this valuation ? I suspect another avatar of the dot com mania that gripped the world in its first edition. Great businesses are built on great ideas alright. But they also need boring stuff like profit and loss statements. They need resilience (regular readers will note this flavour of the month). They need robustness. They need sustainability. Then stratospheric valuations are justified.

It would be fairly obvious by now that this blogger is not a fan of Facebook. The only reason he enters its portals is to play an occasional game of Scramble. He is completely unable to fathom the joy of posting his mugshot or boring mundane everyday activities for the world to see. Readers might deduce from this admission that he's a bit of an old foggy.

Well, he's in elite company. Warren Buffet was called an old foggy in Dot Com Mania I !

Saturday, January 1, 2011

Life Continuity Plan

Every business worth its salt touts a Business Continuity Plan; with that dreaded acronym BCP. In many companies its mostly a piece of paper; not worth what its written on. But in some companies its taken to an obsessive level - elaborate design and repeated testing. The thought leads me to muse on whether a Life Continuity Plan is worth considering for a society or even individuals. It might sound like a morbid thought, especially as the New Year cheer has still not died down, but it isn't.

Take societies. Its "life chain"has been optimised so much that there is little slack for things going wrong. One truckers strike is enough to make most goods vanish from stores - happens in India repeatedly. The power grid in most countries is bursting at its seams ; just needs one major breakdown and there will be a fair amount of chaos - remember California of a few years ago. Natural disasters, even minor ones, cause mayhem - recall the Icelandic volcano of last year. And witness the looting and crime that happens when there's even a minor break down in law and order. When petrol pumps (or gas stations) dry up, as they easily can, imagine the consequences.

Yes, life does go on, when such things happen. Does it ?? Life doesn't go on, at least in any normal fashion, for those caught in the middle of it. Anybody in Haiti would appreciate this thought.

What about us individuals ? How many of us can face a disaster, god forbid, if it were to happen to us ? Have we written a will ? Have we insured our stuff ? Do we know what we will do if we lost our job ? Of course, such things happen to others, not to us. May it never happen to us. But just in case .......

I know this not a post keeping with the mood of the new year. But then good times are always the best of times to plan for a rainy day. I believe societies and individuals, must have a "life continuity plan". One that foresees disasters and plans for coping with them. Efficiency is all fine; but a highly underrated word is resilience.

Individuals, and societies, must build resilience into their fabric. Only then can we enjoy the true fruits of efficiency.