Deus Ex Macchiato

Rhymes With Cars & Girls suggests

the biggest free-lunch to be had in corporate America is to shutter all the “HR” departments and meanwhile cancel the contracts for the stupid keyword-matching resume-parsing software. Just let team leaders call up & hire directly all their friends and people they like – which is what ends up happening anyway. the biggest free-lunch to be had in corporate America is to shutter all the “HR” departments and meanwhile cancel the contracts for the stupid keyword-matching resume-parsing software. Just let team leaders call up & hire directly all their friends and people they like – which is what ends up happening anyway.

In my view this is to misunderstand the true role of HR in most businesses. It seems to me that HR exists firstly to provide useful cover when a ‘manager’ hires friends and people they like, and secondly to create a smokescreen of performance appraisal so that ‘managers’ can pay their staff what you want to and claim to have some kind of justification other than pure prejudice for it. Or perhaps I just an old cynic…

Posted in: Compensation, Organisational Culture by David /
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Last week, I mused a little on the cultural theory of risk and its consequences for financial risk management. Today I want to say something about risk reporting in that context. Specifically, I would suggest that one wants risk reporting that meets the needs and attitudes of all four cultural groups. That means

1. Individualists want ‘ordinary conditions’ risk reporting; things like 95% 1 day VAR. They will also focus much more on the P/L than on risk measures.

2. Egalitarians want to see different risks treated fairly, so they are a valuable resource in ensuring that the risk framework doesn’t give unfair advantages to some businesses. They will want to see a range of stress/scenario tests reflecting their belief in the fragility of ‘ordinary’ conditions.

3. Authoritarians want a strongly-policed and comprehensive limit framework, capital plans, and so on. For them it is all about risk-process-as-constraint. Focus your authoritarians on enforcement not design.

4. Fatalists are hard to please because they think (probably rightly) that no risk framework can avert disaster all of the time. However, giving them notional measures (if everything goes completely wrong we can still only lose x) and highly pessimistic stress tests helps. Their skepticism is a very valuable tool, and you want at least one prominent fatalist in any high level risk committee.

Construed this way, risk reporting can be a cross cultural communications tool. It needs to cater to all four attitudes if it is to be effective in that role. The key is to ensure that as one or other attitude becomes culturally dominant, the risk framework does not become too distorted.

Posted in: Organisational Culture, Risk Management by David /
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Yesterday, we outlined four attitudes which the Cultural Theory of Risk advances as a fundamental classification. Today, I want to look at what that classification suggests organizationally.

David Ingram suggests (1) that you find

Individualists in Sales/Underwriting/Trading. They tend to be paid with a high proportion of incentives or bonuses. They prefer to get paid for what value that they bring to the firm. They will frequently argue with the nit pickers and bean counters about how good the deals that they do will be for the company.

Fatalists in Operations and IT. Their priorities are frequently changed without their knowledge. Many firms tend to value the flexibility of Fatalists who do not expect things to stay steady and predictable anyway. Fatalists in a firm are quite happy with a job where they do not know in advance what they will be doing from day to day. You probably want a Fatalist on your help desk.

Egalitarians in Compliance, Internal Audit, ALM and some CFO and Legal functions.
Egalitarians will tend to keep to themselves within the firm and have few connections with the other areas. They tend to think that the company is going into decline, but that their department is run well and things would be much better if people just listened to their group more.

Authoritarians populate the risk management area and are commonly CFOs. When there is an Authoritarian CEO or powerful authoritarian senior administrative officer, the firm will usually have a very organized planning process with regular update to short and long-term plans. The emphasis of Authoritarians in management will be to set goals and measure progress against those goals.

Now, if we read this as a broad tendency rather than a prescription, I think he has a point. Certainly the CFOs I have known tend to be authoritarian (sometimes sufficiently so as to be to the detriment of their firms), and you certainly want someone who believes in fairness and the rule of law in compliance. Where I think Ingram goes wrong, though, is in a statement that he gives emphatically

Enterprise Risk Management is clearly an Authoritarian risk perception

It can be, but it does not need to be. Risk managment infrastructure should be a decision making aid, no more. At its best, it provides good information – quantitative and judgemental – which allows management to decide on which risks to take and which to hedge.

If objective risk measures are used in a purely authoritarian way, two things happen. First, the firm will miss out on opportunities that don’t look good according to the particularly risk framework. Individualists will see this, and some will leave in frustration. Second, other sneakier individualists will try to game the system. Sometimes they will succeed, and that can lead to disaster.

Firms with better risk management implicitly understand this. Their risk philosophy is a blend of egalitarian (let’s create a fair risk framework, including human decision judgement) and fatalist (how are those bastards trying to screw with me today?). Yes, sometimes you need an authoritarian to say ‘no, you can’t go over your risk limit’. But if that is all you have, you are in trouble; although perhaps slightly less trouble than if risk management is run by a bunch of fatalists (2). Risk management, as with so many other things, is better with if it has more cultural diversity.

(1) His discussion is based on insurers; I have adapated it slightly to be more bank-relevant.

(2) There is a school of thought that risk managers are simply short out of the money puts on the P/L, and that their aim in life is to be employed long enough to collect sufficient premium. This is an essentially fatalist view of the role (which is not entirely without basis).

Posted in: Organisational Culture, Risk Management by David /
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A friend of mine has just pointed out that for a social worker to renew their license in the US, they have to have had at least 4 hours of ethics training in the past two years. Perhaps given recent Abacus/Libor/muni swaps/corporate swaps/… it should be a criteria for renewing your series 7 or FSA registration too. Luigi Zingales argues on Bloomberg that we need to improve the ethics training in business schools, and I agree, but ethics is not a learn once and forget thing; constant reinforcement is needed, especially if you are dealing with a group that may well include psychopaths.

Posted in: Legal Risk and Trade Documentation, Organisational Culture by David /
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Aditya Chakrabortty tells a lovely story about how Antanas Mockus solved Bogota’s traffic problems:

Put yourself in the position of one of Colombia’s would-be tough guys. Dawdling obediently at a red signal is hardly going to enhance your credibility, while traffic policemen are figures of authority whom it is your right, nay, duty to menace.

What to do about the ensuing rush-hour chaos? Soon after taking office, Mockus decided to hire 420 mime artists, to stand at key junctions across the city centre. Now jay-walkers found themselves followed by clowns, imitating their movements. Similar mockery was dished out to reckless drivers.

This was ingenious: any Colombian machito trying to clock a face-painted mime artist would look ridiculous. So what happened? Within months, the proportion of pedestrians obeying traffic signals leapt from 26% to 75%.

As Chakrabortty says, Mockus spotted that the problem he was up against was cultural, and hence it required a cultural solution. This is a nice example of re-engineering behaviours.

Posted in: Organisational Culture by David /
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Oliver Burkeman in the Guardian quotes Alasdair MacIntyre:

One key reason why the presidents of large corporations do not control the United States is that they do not control their own corporations… When implied organisational skill and power are deployed and the desired effect follows, all that we have witnessed is the same kind of sequence as when a clergyman is fortunate enough to pray for rain just before the unpredicted end of a drought.

Broadly, I think that that is right. Even worse, when it isn’t right, the corporation is often a considerable risk because the CEO has the power to change the firm for the worse. Consider the two Greenbergs, Ace at Bear Stearns and Hank at AIG for example. They were both strong leaders, much more in control of their companies than is typical. And they were both in the hot seat when the seeds of disaster were sown. You only want a strong leader if you are really, really sure that that leader is never going to do anything silly. Typically a leader is only good for a while, and then does something damaging. At least if they are weak, that damage is likely to be easier to repair.

Posted in: Organisational Culture by David /
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As a palate cleanser between stodgy doses of regulation and financial disaster tourism, I’d like to reference an interesting criticism I read recently of the advertiser led business model — Google’s business model.

The article is EMC vs. Google: There Should be No Competition by Rob Enderle on IT business edge. For me the key point is this one:

It isn’t really clear who Google’s customer actually is. Advertisers pay the bills …, but most of the products are focused on providing services to others… Harry Potter doesn’t fly in and create an enterprise offering. Someone is paying the bill to create it and that someone is going to want value. When you decouple revenue from the product, it becomes very difficult, and you can see this with Google, to stay focused on quality and customer satisfaction.

In one sense Google is a hugely successful company. It makes adverising-led free (or cheap) products work. But this is at a significant cost for the user in privacy and security. You get what you pay for. In the retail space, Google’s focus on selling advertising and providing an insecure but free service might make sense for some. But in the enterprise space, the argument is much less clear. Corporate IT might be moving to the cloud, but I doubt the Google model will have that much success there. At the end of the day, companies understand that if you are not the customer, the product is not designed for you, and it probably won’t meet your needs.

Posted in: Organisational Culture, Software and Virtual Worlds by David /
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Chris Atherton has an interesting explanation for Why experts are morons (which I have edited mildly to suit my purposes):

Below is a recipe for modest success … and for becoming a legitimate ‘expert’. (Quantities and ingredients may vary according to your needs and experience.)

• You need to be bright-ish. Not supernova bright, just bright enough. (If you’re too bright in school, you’ll get bored; see next point.)
• You need to be well-behaved. (If you don’t behave, you’ll be labelled disruptive and that will do exactly what you think it will to your chances of academic success. Yes, even if you are bored because lessons are too easy.)
• It helps to crave everyone’s approval. (If you don’t care what your teachers or parents think, why would you try hard on subjects that don’t really interest you?)
• Questioning authority probably isn’t in your nature. (Or if it is, it’s a very specific kind of critical thinking, like “hey, maybe nukes aren’t that great an idea, mmkay?”)
• You are comfortable letting other people set goals for you (“You think I should go to university? Great!”)
• You acquire a certain nerd-like pleasure (flow, if you like) from gnawing on very specific questions.
• Your school years have conditioned you to understand that most people are mean, and best avoided.
• Metaphorically or actually, you have let a thousand cups of tea go cold while you geek out on your chosen subject.

… okay, that much will get you through university and into a postgraduate programme. At this point, it will be particular helpful if you can screen out information about the world around you, because this will just distract and confuse you about the relevance of what you are doing. (Having a crisis of meaning is one of the fundamental stages of doing a Ph.D.)

Much the same argument applies to the associate stage at an investment bank, too, only the hours are worse.

So, where do we get to given that this treadmill is operating?

Chris says that the

side-effect of being an ‘expert’ is that if you’re not naturally inclined to cause trouble, question the system, or think critically about more than subject-matter problems then sometimes you end up saying really dumb stuff

This is essentially because you have rather less connection with `real life’ than most people, and share rather little context with them. Looking at the testimony of the bank chiefs to the Financial Crisis Commission Testimony, their actions on pay, the bonus tax, and so on, one is struck by how out of touch they are. But perhaps most experts, be they bankers or academics, are similarly disconnected. It’s a scary thought.

Update. The Epicurean Dealmaker has (what I hope he will not object to me characterising as) a similar if more eloquent take on the unusual nature of the men who run investment banks here.

Posted in: Organisational Culture by David /
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In typically breathless style, Zero Hedge picks up a recent survey by reported Finextra.com of quantitative analysts:

A staggering two thirds of quantitative analysts think their supervisors do not understand the work they do

Now these numbers are likely to be distorted, firstly because the survey was done by a training provider, and secondly because there is a natural tendency for people to think that their boss knows nothing. Nevertheless, the fundamental proposition that the people who manage investment banks do not understand the details of quant trading is likely to be mostly true. It can hardly be a surprise that people who have been away from mathematics for thirty years, and trading desks for ten, are not in touch with the state of the art. What is more impressive is when the managers admit this. I once spoke to a very senior investment banker at a leading bank with regulators present: he frankly admitted that he had no idea how it all worked, but that he had people who worked for him did. He then explained the controls around the business: they were comprehensive and effective. Sometimes honesty and fear of the unknown produce a positive effect.

Posted in: Organisational Culture, Risk Management by David /
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One good way of telling the truth obliquely is to pretend that it is fiction. This was an established technique for ex-spys to spill the beans; and it works for bankers too. Humour is good here – it makes it clear that the author has enhanced the story for comic effect. Except that often they haven’t. The Epicurean Dealmaker is a master at this style: often he sounds as if he’s relaying a shaggy dog story over a martini in the Library Bar at the Laneborough, when he’s actually just giving you the inside track. This passage, though, is uncharacteristically straight. He’s talking about the perceived (and actual) success of Goldie:

360-Degree review systems, 24-hour response voice mail, and rotation of bankers through different departments only work when senior managers refuse to make exceptions to the rules. There are a nauseating number of investment banks which profess an undying commitment to teamwork and a dedicated focus on cultivating client relationships rather than chasing transactions. But these banks fall short time and time again because they do not enforce these principles. If Mr. Big Swinging Dick Managing Director who brings in a billion dollar IPO or a ten billion dollar merger throws a hissy fit and threatens to stomp out the door if he has to share credit, or a successful M&A banker refuses to manage a group in Capital Markets, or a Group Head inflates the review scores of all his subordinates to boost their pay and his power, senior management can either hold firm and preserve the culture, or they can cave. If they hold firm, everyone else at the bank hears about it, and they learn that the rules and the culture will be enforced. If they cave, everyone knows that too, and it’s off to the bad old races of “what’s in it for me.” Sadly, most investment bank executive teams cave.

Michael Lewis would have illustrated this story with a mildly amusing tale of bankerly bad behaviour. Other journalists would perhaps have tried to garner outrage before they had even finished making the point. But, being an insider, ED is smart enough to know that the sex, drugs and science fiction work best as garnishes for the real erudition.

Posted in: Organisational Culture by David /
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I’m still digesting the proposed changes to IAS 39 and to Basel 2 (you wait two years for major accounting and regulatory change then two of them come along at one), so for now I’ll just quote a delightful Luke Johnson column in the FT. I read it on a plane, and I agree with this wholeheartedly: BA has become an institution run not for the benefit of its customers – who provide its revenue – but for its staff and pensioners. Its shareholders, meanwhile, have long been forgotten. If a firm like BA isn’t a conviction short, I don’t know what is.

Posted in: Markets, Organisational Culture by David /
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I will ignore for a moment the fact that Epicurian Dealmaker does not make very accurate use of the term `psychogeography’ (see Mind Invaders for a reasonable if amusingly partial introduction), and answer his question. First he quotes Tolstoy, the important part being

A Russian is self-assured just because he knows nothing and does not want to know anything, since he does not believe that anything can be known.

The question is then

Naturally, I exclude the Russians from my analysis, because I am completely unaware of anyone currently operating in the financial sector who will admit to knowing nothing, much less take pride in it.

Your thoughts?

My thoughts are that many of the MDs I have ever met in M&A fit Tolstoy’s description admirably.

Posted in: Organisational Culture by David /
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Jacqui Smith, possibly the least competent Home Secretary since Henry Brooke (although there in Blunkett to consider for that title too, and that is pretty tough competition), has already announced that she will not be going ahead with a massive snoop project (although she wants the same functionality provided privately). The cancellation of the id card project is apparently being actively considered, and anyway the Tories have said that they will cancel them. And the Trident replacement may be on the block, along with a number of other large defense projects. This is all good.

It’s just a shame we are still stuck with this:

Yes, the grandiose, ultimately useless (or at least currently without a use) and hideously expensive Olympic building projects sail on regardless. Our shameless pandering to the IOC continues. As Simon Jenkins says, while the ­citizens starve, the precious ones are fed. Still, at least some of these cuts are better than none.

Posted in: Organisational Culture, Politics by David /
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From Bloomberg:

Dresdner Bank AG, the unprofitable lender acquired by Commerzbank AG, was sued by the former head of capital markets at its investment banking unit over his severance pay… Dresdner in-house lawyer Matthias Woldter told the Labor Court that Neumann can’t seek the severance payment because his unit contributed 5.7 billion euros to the investment bank’s record 6.3-billion-euro loss last year.

“The losses were incurred especially at the unit Mr. Neumann headed,” Woldter said. “His duty was to care for its short-, medium- and long-term profitability. He significantly failed in bringing that about.”

Tanja Karhausen, Neumann’s lawyer, said that the payments were due independently of the 2008 results.

Bankers wonder why they are so widely disrespected. Law suits like this are part of the reason. Individually it may make sense for this guy to sue. But collectively he is just helping to put another nail in the coffin of the reputation of banking.

Posted in: Organisational Culture by David /
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From an interview with Philip Tetlock on CNN money about prediction:

The better forecasters were … self-critical, eclectic thinkers who were willing to update their beliefs when faced with contrary evidence, were doubtful of grand schemes and were rather modest about their predictive ability. The less successful forecasters were like hedgehogs: They tended to have one big, beautiful idea that they loved to stretch, sometimes to the breaking point. They tended to be articulate and very persuasive as to why their idea explained everything. The media often love hedgehogs.

One might add that hedgehogs who are successful in the short term tend to get promoted fast too, as are forceful as well as (accidentally) right. Eventually these people will fail, but by then they may be in a position of considerable power.

See here for a further discussion from the Big Picture.

Posted in: Markets, Organisational Culture by David /
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There is a story, probably just a rumour, that there used to be a man at the Bank of England who had a “not read” stamp. He would use it to stamp documents he wanted to be able to claim he had not seen before returning them to the sender.

The fact that this story is vaguely plausible is a big part of the problem with regulation. Epicurean Dealmaker suggests:

Staff the SEC, or whatever “Super Regulator” the government decides to deputize to oversee this mess, with a bunch of highly-paid, tough-as-nails, sonofabitch investment bankers. You will have to pay them millions, just like regular bankers. (You can tie their incentive pay to improvements in the value of securities held under TARP and TALF, if you like.) Pay them well, and investment bankers won’t be able to treat them like second-class citizens at the negotiating table. Pay them like bankers, and your regulators won’t hesitate to read Jamie Dimon or Lloyd Blankfein the riot act, because they won’t give a shit about getting a job from them later.

Trust me, these are the kind of people you will need on your team: highly educated, financially sophisticated, psychotically hard-working, experienced professionals who know or can figure out CDOs, SIVs, balance sheet leverage, and credit default derivatives just as easily as the idiots who created and trade this shit. Leading your enforcement and supervision teams you need a bunch of smooth, smart, plausible, grandiosely self-confident senior bankers who will not hesitate to tell Vikram Pandit to go fuck himself, his mother, and the cow she rode in on if he ever tries to fuck with the United States government, the US taxpayer, or the pizza delivery boy again. You know: psychopaths.

Of course he is right in that such people, properly empowered and paid, would indeed regulate quite well. They would get it in a way that most public servants don’t. The same argument applies to the tax authorities: if you staffed them with ex tax lawyers and investment bankers who got to keep 10% of everything they saved the taxpayer, you would collect an awful lot more tax and there would be many fewer tax avoidance schemes.

So it would work. But no government would ever have the courage to try it. You would have to fire a lot of the current senior regulators or tax collectors, and completely re-engineer the culture. Mr. “Not Read” wouldn’t last ten minutes in a psychopath-enabled regulator. Which is both the reason it should be done and the reason it won’t be.

Posted in: Organisational Culture, Regulation, Taxation by David /
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Diversity is important, not just on grounds of fairness, but also because dissent is valuable. You want different views in an organisation, different perspectives. And you certainly don’t want the same culture informing all your decision makers.

In this context it is interesting to see two different storms blowing up. One against the Goldman Sachs -isation of the US Treasury. But the one I’m really interesting is the observation by Nick Cohen (here) amongst others that not only have governments of the left as well as the right been obescient to business, they have not even tolerated any non financiers in positions of power of the City. Think of people like Lady Vadera (why does the architect of PFI have _any_ place in a Labour government?), Mandelson (does judgement no long matter at all in a politician?) or Paul Myners. Is Vince Cable the only person in parliament who knows something about finance and isn’t in the pocket of the banks? Even bankers know that hedging can sometimes be a good idea – and a good hedge against coming up with bad policies is having a few people around with different points of view.

Posted in: Organisational Culture by David /
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What do you call a Frenchman in sandals? Phillipe Phillop.

With that out of the way, we can get to the point. Long or Short Capital, a good financial satire site, has an occasional series of Quotes Entirely Relevant to Investing. Well here’s one, an entirely serious one, from an excellent article by Julian Baggini:

The trouble with most people is not that they lack the courage to stick to their guns, but they don’t have the greater bravery to change course. Consistency is a good thing, but not when it is understood as simply refusing to change your mind…To worry more about whether you’ve stuck with your views than about how they stack up now is to value loyalty to ideas more than fidelity to the truth.

Great traders have great ideas. But more than that, when they have an idea that does not work out, they take the trade off. They don’t invest too much in any particular idea — because they know that if it doesn’t work out, they need to be able to recognise that, learn the lesson and move on.

Posted in: Markets, Organisational Culture by David /
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The columns of the FT have been reverberating with comments on banker’s pay recently (see here, here, here and here) with a predictably strident reaction from the blogosphere (see, if you must, here, here and here). One issue here that hasn’t received attention, though, is the wonderful effect of diversification for managers.

Suppose you are a junior trader with a budget of $5M and you get paid 10% of your excess P/L over $3M. Your bonus is therefore 10% x max(0, P/L – $3M). Suppose the average trader makes budget, just, and the SD of returns is $2M. Then while the average trader makes $200K, a bad or unlucky guy 2 SD from the mean makes 10% x max(0, 5M – 2 x 2M – 3M) = 0. Fair enough.

Note though that the trader owns a call, and you maximise the value of the call by increasing volatility. So the trader is incentivised to make their P/L volatility as large as possible.

Now consider the desk heads. Suppose each employs ten traders, so their budget is $50M. They too get paid on the same basis, so their bonus is 10% x max(0, P/L – $30M). The mean is $50M but the SD goes as the square root of the number of traders employed, so it is root ten times $2M or about $6M assuming zero correlation. Therefore while the average desk head takes home $2M every Christmas, a bad one 2 SD from the mean has a bonus of 10% x max(0, 50M – 2 x 6M – 30M) = $800K. So even a pretty bad (or unlucky) desk head makes money. Of course the zero correlation assumption is a stretch but note that the desk head owns a call on a basket, so they should maximise both volatility of the basket components and their correlation.

Finally consider the head of the business employing a thousand traders. By the same logic, their budget is $500M, and they get paid 10% x max(0, P/L – $300M). Their volatility though is only root thousand times $2M or $20M. So a really terrible manager four SDs from the mean still earns 10% x max(0, 500 – 4 x 20 – 300) = $12M. Very nice. Diversification works beautifully in executive pay, at least if you are one of the executives. Shareholders may have a different perspective.

Posted in: Organisational Culture, Organisational Structure, Rules by David /
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A river of money that is. Writing in the FT, Raghuram Rajan comments on recent bonus decisions:

Banks have recently been acknowledging enormous losses, yet those losses are barely reflected in employee compensation. For example, Morgan Stanley announced a $9.4bn charge-off in the fourth quarter and at the same time increased its bonus pool by 18 per cent. The justification was that many employees had a banner year and their compensation should not be held hostage to mistakes that were made in the subprime market.

[...]

Even so, most readers would suspect something is not right here.

FT alphaville provides further background:

Banks structured bonuses to include a greater proportion of restricted stock, which is released over several years. And they set explicit targets for compensation costs as a proportion of revenues, typically around 50 per cent.

The pitch to investors was simple: we may give our staff half of everything they bring in, but this will rise and fall in line with the state of the business.

This formula worked well in boom years, but is beginning to creak. Of the Wall Street banks that have released fourth-quarter earnings so far, the two most affected by the subprime meltdown reported sharp increases in their compensation ratios. In 2007, Morgan Stanley’s wage and bonuses bill rose 18 per cent, to $16.6bn.

This in a year when the bank’s revenues fell 6 per cent, it wrote off $9.4bn in subprime losses, and was forced to raise $5bn from China Investment Corporation. At Bear Stearns, the bonus pot shrank by a fifth, but revenues fell more than a third.

[...]

There is a certain logic to this largesse. The subprime losses are generally the work of a small number of people working in the fixed income division. Meanwhile, other parts of the business have enjoyed record years. It may be in the bank’s interests to pay to keep its best people, even if there’s not much left for shareholders.

This argument fails to acknowledge the fact that all employees benefited when the fixed income operations were raking in the profits during the credit boom, and should probably share in the losses. It also highlights a fundamental flaw in the bonus culture: that costs and benefits associated with risk-taking are not equally shared.

Here’s the problem. Suppose after costs you split the pile 50/50 between shareholders and staff. Staff expect 50% of what they make. But there is no such thing as a negative bonus, and all attempts at delaying compensation or holding money back for later have proved profoundly demotivating and ineffective. So while most people are making money, paying 50% of the upside to staff is fine. But if one group loses, oh say $10B and everyone else makes money, you have a real problem, and one that slashing bonuses for the head of the business does not solve. In reality there is no collective responsibility in most investment banks and little sense of working for shareholders. Bankers are more like piece workers than traditional employees – but your average piece worker can’t endanger his employer’s capital base. The only solution to this issue will be if shareholders demand it and if the industry collectively changes: if anyone breaks ranks to gain competitive advantage, reform will fail. And we know how good investment banks are at cooperation…

Posted in: Organisational Culture, Organisational Structure, Rules by David /
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An article in the New York Times raises one of those issues that is unmentionable in most company – do companies discriminate against the childless? A moment’s thought indicates that most of them do: think of maternity and paternity leave or staff leaving early or arriving late because their child is ill or for a parent’s evening/school play/whatever. These excuses for, well, not working, seem to be treated as if they were morally better than ‘I was hungover’, ‘I wanted to visit a gallery’ or ‘my friend was ill’. The answer is to offer the same benefits regardless of the reason: some firms for instance permit their staff to take 4 half days a year in addition to their vacation for whatever reason and on short notice. This covers everything from doctor’s appointments to interviewing a new dog walker and goes a long way to tackling the inevitable resentment the childless will feel if work/life balance is only seen to apply to those with children.

In this context then, the recent news that Gordon Brown wants to give flexible working rights to 4.5M extra parents is particularly annoying. Why just parents? Don’t the rest of us deserve a work-life balance too?

Posted in: Organisational Culture, Politics by David /
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There’s a provocative post on Econlog which raises an interesting question. Suppose someone has a good academic idea. How long does it take to be become part of the canon of accepted wisdom?

Clearly some ideas hit quickly: many of these are simple technical improvements which are obviously correct. Some never hit because, although correct, they are too boring and marginal to make a difference. Indeed some ideas enter the canon then leave it again as subject areas die: a great example here are many of the techniques used to speed tedious calculations from the days before digital computers.

As Kuhn pointed out, however, some ideas are so radical that they cannot be incorporated into the mainstream without effecting it: the paradigm must change. These ideas tend to take longer to be accepted.

I’m interested in mid-sized ideas: theories which are somewhat disruptive, but which are not big enough to qualify as paradigm changes. My suspicion is that these are slow to be accepted too, perhaps even slower than paradigm changing ideas because there is less payoff from including them, yet they still challenge the current academic hegemony. I’d love to see a careful sociological study on this. Could it be that the average time to acceptance of a such an idea is a significant fraction of a career?

Posted in: Authority and Leadership, Organisational Culture by David /
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I wasn’t feeling well over the weekend, and spent a lot of time in front of the TV, trying to stave off a cold. Two programmes caught my attention for the same reason: their depiction of the workplace.

NCIS is an american show about a Naval Criminal Intelligence unit solving crimes involving sailors. It isn’t very good. What is interesting about it, though, is the way the leader of the team, Gibbs, bullies and intimidates his staff. The writers probably think they are showing him as a strong leader, but to me he comes over as rude, aggressive and hectoring. He clips his staff behind the ear. He tells them he will fire them for the most minor infractions. He never gives them a break. In short, he’s the kind of arsehole you would never want to work for. And the worst thing about this program is that it encourages people who behave that way at work to think that it’s OK. And I bet it is net negative for Navy recruitment.

24 in contrast, although it is deeply unrealistic in many ways, shows workplace conflicts with some measure of realism. It portrays much more nuanced inter-personal relations. The office is political, and people bear grudges and have their own agendas, but somehow they manage to work together, more or less. In 24′s CTU people with different points of view cooperate, imperfectly but adequately: this is how real organisations work. Command and control is dead: long live the adaptive organisation.

Posted in: Organisational Culture by David /
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Suppose you’re playing poker. You look at the cards on the table, and those in your hand. You can’t be beaten. So you raise.

Corporate strategy discussions use lots of analogies like that, and they can be helpful. But what they hide is the fact that in the real world, we very rarely have complete information. We don’t know what our competitors are doing; we don’t know what factors in the world might change. So even if we could come up with an optimal strategy based on what we know, it might be invalidated by facts unknown to us.

The risk mitigant to uncertainty is often diversification. We don’t know which stock will go up, so we buy them all, or a lot of them. But in strategic discussions, how often do companies consider having two strategies or three or a dozen?

Clearly it is not efficient to try to do three things when you could do one. But it is not efficient to buy the top three performing stocks: you could have put all your cash in the best one if you knew which one that was going to be.

There is a lovely piece of research about how this relates to executive behaviour. Suppose I give a hundred pounds to ten people to enter a large poker tournament, with a prize for the one who wins the most. It is likely that the winner will be the person who made the biggest bets and was lucky, not the prudent gambler. So if we reward executives solely by the size of their financial successes, we discourage diversification, so when they do get it wrong, they get it very wrong. There have been so many examples of this recently it would be jejune (as well as potentially actionable) to name names.

So by all means have a strategy. But part of that strategy should be what you do when the strategy goes wrong and how you spot that that has happened early enough. One solution might be to put, say, 50% of your resources on your best guess as to the right thing to do next, 30% on another likely possibility and 20% on a rank outsider. At least you’ll have the other projects to fall back on it you turn out to be wrong about the best strategy. Think of it as an ecological approach to corporate strategy.

Finally, Maynard Keynes is important here:

When somebody persuades me I am wrong, I change my mind. What do you do?

Strategies have to be monitored regularly and resources reassigned in the light of new evidence. Keeping an open mind about what might work in changing conditions is vital.

Posted in: Organisational Culture, Rules by David /
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Firstly an apology for the dreadful pun.

This blog is going to be about systems thinking and games in the large: rule-based systems and their behaviour. Part of the motivation for the name came from thinking about one of my favourite cafés, Dal Professore in Naples (try the Nocciolato, it’s great). In most large Italian cities, coffee houses of this quality are routine and the coffee is cheap: perhaps one euro for an espresso. Yet outside Italy, ‘coffee houses’ which are both much more expensive and serve considerably worse coffee dominate. Why? The outcome in Italy seems, to me, better than the outcome elsewhere, and it is certainly different. What is it about conditions there that has allowed places like Dal Professore and thousands of others to thrive?

The answer is clearly complex: the Italian habit of taking a quick coffee standing up obviously allows for faster throughput; a focus on the flavour of the coffee (rather than the size of the cups or the number of different varieties of muffin); a culture that encourages opinions about taste; an economy that supports small businesses versus large chains; and so on. I’m interested in how the rules determine the behaviour. Usually, I think there is no deus ex machina dictating the outcome, no system to be praised or condemned. There are just complicated interacting constraints, contexts and capabilities which determine what happens. Hopefully this will be
a space to discuss this kind of systems thinking in a number of domains. Welcome.

Posted in: Organisational Culture, Software and Virtual Worlds by David /
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