Good Governance Depends on Whom You Ask…

Want good governance?  Ask around.

“The greatest trick the devil ever pulled was to convince the world he didn’t exist.”

Roger “Verbal” Kint – The Usual Suspects

Do you sit in a position of power?  Do you, also, sit in a position of isolation?

Oddly, the two things can coalesce into one if you fail to remain vigilant.  One of the hallmarks of bad governance everywhere–from Teapot Dome to Barings Bank to Enron to, I’m sure, Volkswagen–is the existence of good people in powerful positions who have allowed themselves to become isolated from the facts on the ground.

Consider the case of Volkswagen…

VW has now lost upwards of 40% of its market capitalization since the emergence of the news that engineers and managers in the company conspired to cheat on international emissions standards in the company’s small diesel engines.  I won’t belabor the point, but I can assure you that there are powerful people in high places in the company…its board and senior management (possibly up to and including its now-resigned CEO) who would not have consented to such egregious white collar crime had they known the existence of it.

I won’t speak for all the executives or board members at VW, because I simply don’t know them; but I will speak for the consistently present minority (or even majority) in such situations who were elevated to high places and subsequently isolated from the reality of ethical and legal behavior on the ground.  They allowed themselves to be convinced that things were being done right.

But what’s the deal? 

It happens in most every situation of moral, ethical, or legal lapse within corporations: Good people at the board or senior management level–usually due to great performance of the organization they are called to lead or govern–stop asking questions.  They take the word of people whom they “have no reason not to trust.”

They, essentially, fall asleep at the switch.  And, to give some examples, the fallout looks rough.  Namely:

Unethical behavior surreptitiously drives performance (such as in the Teapot Dome bribery scandal of the early 20th century).

Low control of rogue elements destroys entire institutions (such as in the Barings Bank collapse of the 1990s).

Entire financial fictions are erected by complicit management and advisors (such as in the Enron case of the early 2000s).

And, in some cases, good companies are systematically disabled and functionally dismantled by management with incentives very different from boards and shareholders (which occurs in far too many companies worldwide).

None of the bad actors in the named scandals above gave outward reason to doubt their trustworthiness in the times leading up to the scandals; and in some cases they would have recoiled or lashed out with righteous indignation at their higher ups if they were, in fact, questioned.

That’s the refuge of ne’er do wells everywhere–righteous indignation.

Watch for it.

But what to do?

In every case, people in positions of fiduciary and ethical responsibility have the obligation to ask.  But, they have the obligation to ask those who actually can convey reality, not those who are charged with packaging reality for consumption by boards and senior management.

In his book Why Zebras Don’t Get Ulcers, Stanford University professor and author Robert Sapolsky coined a proverb that is quite powerful for people in positions of assurance everywhere… It goes like this:

“If you want to know if the elephant at the zoo has a stomachache, don’t ask the veterinarian, ask the cage cleaner.”

You get it? If you really want to know if something just isn’t right, don’t ask the so-called experts…they rarely have the task of cleaning up the mess.  Ask the people who witness and clean up messes.  Ask people lower down the ladder, whose credibility might not naturally be so high, but whose incentives might also not lead them to unnecessary spin or outright dishonesty.

In other words, ask around.  If you sit on a board or in senior management and find your interactions with rank and file people to be overly stage-managed, then ask some more.

You know why?

Because–with apologies to Verbal Kint–the greatest trick that bad actors pull is convincing the world that they aren’t bad actors.

Reality depends on whom you ask. So, ask around.

I welcome your questions and comments.

Yahoo and The Danger of Irrelevant Benchmarks

Morgan Stanley says that relative to Facebook, Yahoo is fat. Well…Relative to Usain Bolt, we are all slow.

Morgan Stanley has posted a report on Yahoo that urges Yahoo’s CEO to cut 1,400 jobs to keep earnings flat.

The driver?

Yahoo’s revenue per employee is sub-par relative to a list of other seemingly similar “names.”

Here’s a link from Business Insider that outlines the situation.

The insight

This is not a post about Yahoo, even though the pursuit of cost cutting there seems to be required, and the process seems to be misguided, I’ll leave that to another post.

This is a post about knowing your benchmarks.

Morgan Stanley produced this exhibit to show that Yahoo’s revenue per employee is out of whack.


What I see is a list of “tech” names.  That’s easy enough.

What I also see is a list of companies with vastly different business models.  Amazon is a conglomeration of retail, digital, and media.  Priceline sells travel.  PayPal is a financial services company.  I actually have no idea what AOL does these days (okay, that’s a bit tongue in cheek, but still.).

The implication…

The point is this:  If you are a shotputter, it’s irrelevant how fast you run compared to Usain Bolt.

We are all slow compared to Usain Bolt.

Morgan Stanley is committing an analytical sin here, and it’s an easy one to commit:  That of the inappropriate first order comparison.

Inappropriate first order comparisons tend to come up with executives and analysts when they are either ill-informed (actually less common) or just looking for simple (or lazy) comparisons (actually more common).

If I have a company in the tech sector, it seems simple to compare myself to another company in the tech sector; but the reality is much more complex.  Business models are highly divergent, even within the same “sector” like tech.

That’s not to say that a company shouldn’t look to others to compare its business model and think strategically about change; it is to say that simply doing mathematical benchmarks without considering business model differences is a loser’s game.  

So What? 

Morgan Stanley looks at revenue per employee and says “cut employees.” We could just write that off to the naivete of a Morgan Stanley analyst who has never run a business.


…A lot of executives manage by spreadsheet in this manner.

A better way is to do a second order scrub for business models, scrutinize the business model, then execute.

The reason is this:  Trying to take a “square peg” business and benchmark it against a bunch of “round peg” businesses can lead to demoralizing results.  The demoralizing results usually hit the organization in the near term–and those can be papered over by savvy executives.  The demoralizing results hit the shareholders at a later date.  The crackpipe of layoffs-as-an-accounting-measure, once given to the market, investors, or–and I hope this isn’t your company–executives, is hard to get away from; and done (as Yahoo seems to be doing) without rhyme or reason, it can kill companies.

Ask Al Dunlap.  Well, no, don’t ask him.  Ask people who worked at Al Dunlap’s companies.

Never let a false comparison drive you to manage by math.  Never let an “easy” index comparison let you get away from the fundamentals of whether that index actually fits your business.

Beware false benchmarks. They can destroy you.

Don’t Waste Your Life: Overcome The Endowment Effect

Never, ever let your current situation adversely define your future situation.

Here’s a quick hit in the spirit of Saturday and “Coffee and a Do Not.”

How often do you “stick” where you are not because it’s the best place, but because it’s “your” place?

You keep a crappy job, or a good job within a crappy culture.

You keep a car that constantly breaks down.

You own stocks that have been perennial losers.

Perhaps you are business owner that keeps holding onto an underperforming management team, or a set of underperforming businesses.

In really nasty situations, you stay close to bullies, abusers, cheats, and other ugly people because they are the ones you’ve grown up with.

It happens to all of us.

The explanation

In social psychology is a cognitive bias known as The Endowment Effect.   In short and simple words, this effect means that, as humans, we have a tendency to value things we currently own more than we would value them if they were somebody else’s.

A bird in the hand is worth more than a bird in the bush.  But worse, even when faced with a better bird right in front of us we keep the bird in the hand.

That car you have that constantly breaks down?  You’d never buy it from someone else, because better ones are on the market right now.

That crappy job you’ve stayed in for years?  You’d never take it again if you knew what you know now because, again, better ones are on the market right now.

That loyalty you feel to that clearly unethical leader?  You’d criticize anyone else who did that because you know better.

But, these are yours, and so you ascribe higher value to them–in many cases defending them irrationally–than you otherwise would.

The impact

The result of the endowment effect isn’t all bad.  It allows us to have some comfort in difficult times.  How many times have you heard people justify their current awful situation as a “blessing” when pretty much anyone else would say it was a curse?  That is, at least partly, the endowment effect in action.  Loyalty has some roots in this effect, and loyalty can be good…to a degree.

But, on the downside, the endowment effect has a highly insidious effect on your career, finances, relationships, etc.

It causes you to let your current situation define more of your future situation than it should. 

That’s right, you “stick” in bad situations, investments, relationships, and jobs longer than a “smart” person would, because your brain is wired to make it so.

Why else do people look back on years working for a particular leader and say “what was I thinking?”

The truth is, they weren’t thinking.  They valued where they were, irrationally so.

How to guard against it

I’m not one who believes that absolute objectivity is either possible or really a good thing.  We have emotional and irrational ties to everything; and in general they help us to function.


Because this particular bias can cause you to waste valuable years of your career (or, even valuable time repairing a crappy car), you and I need to watch out for its effects.

The best way to guard against the endowment effect is to think.   Yeah, that’s right, just think.   Stop for a minute and ask yourself if you are valuing the abuse you take, or the ethical stretches you have been ordered to execute, more than a sane person on the outside would.

Stop for a minute and ask yourself whether you’d be better off making a trade.  That works whether we are talking investments, jobs, subordinates, superiors, or that priceless artwork you own.

You guard against the endowment effect by considering a trade.

A parting, and partly personal anecdote

One of the very interesting people I had the opportunity to work with and then know for years was the famous “genius” of American football, Bill Walsh.

Bill was famously effective as a general manager in the NFL–that is, he was great at making personnel decisions.  In fact, he made a lot of very high profile athletes very angry by trading them to other teams while they were still “good” players. Bill wanted to trade players a year before their production fell off.  This facet of Bill Walsh’s approach was chronicled nicely in the recent NFL Network documentary Bill Walsh a Football Life.

A famous aspect of Bill’s objectivity was that he asked his staff what they thought Joe Montana’s trade value was…during Joe Montana’s prime.  Joe Montana, for those who do no know, was and is one of the greatest quarterbacks in the history of the NFL.  Bill was willing to test the market for his quarterback–the lynchpin of his offensive gameplan–while his quarterback was still building a hall of fame resume.

Bill didn’t suffer from the endowment effect, at least in his player personnel decisions.

I guess I should call it a privilege to be a guy who was recruited by, hired by, and cut by Bill.  You knew where you stood.

As brutal as that seems, and I’ll write on the brutality of NFL talent management at some point in the future, sometimes we need to adopt a little bit of that mindset to protect ourselves.

Where does the endowment effect show itself in your life and experience?  Please share…

The New England Patriots and Uncanny Perfection

As the New England Patriots may be showing, the best evidence of a poseur, cheat, or a fraud is uncanny perfection.

This article is about how outlying behavior without explanation demands scrutiny. Perfection, or near perfection (especially if neatly calculated) is so uncommon as to be an indication of ill-dealing.

The NFL’s New England Patriots are only a prop. This applies to all of us.

Watch out for it.

Logical links to prior thoughts on this topic

Last year, I wrote on the use of Bayes’ Rule to uncover when enough evidence was enough to make a decision.

Link: When Enough is Enough

The thesis in that one was that one powerful indicator of deviant behavior or a long history of slight deviances were equally enough evidence to underpin a decision to promote, accelerate, or move on.

Last week, I wrote on the interesting (to me) ethical questions raised around the New England Patriot’s winning big while allegedly cheating in the AFC Championship game.

Link: Deflated Footballs and Minor Ethical Lapses

Many, many people claimed, and still claim, that the alleged cheating didn’t matter because it didn’t affect the outcome of the game.

My point was that process matters.

Nothing new there.

Now, there’s a fascinating bit of information on the New England Patriots that has come out that brings another ethical insight to light that combines these two theses.

Today, I get this link in my inbox. It’s an article picked up by and written by a sports handicapper named Warren Sharp.

The link is to an analysis of team fumble rates in the NFL under different conditions. In a nutshell, it says that the New England Patriots have an uncanny and longstanding ability to avoid dropping the football. Here’s the operative quote:

Based on the assumption that fumbles per play follow a normal distribution, you’d expect to see, according to random fluctuation, the [fumble rate] results that the Patriots have gotten over this [2010 – 2014] period, once in 16,233.77 instances.

To quote Lloyd Christmas’ question: “So, you’re telling me there’s a chance?”

Yes, but a shockingly remote one.

The bigger chance is that the Patriots are different from other teams. They have figured out a competitive advantage. Conjoin that with the newest revelation of potential cheating by deflating balls, and a clear history of cheating in the franchise in the past, and?

The most likely explanation is that they have been cheating for years, acquiring a competitive advantage that is as immense as it is unlikely.

This isn’t about a single game whose outcome didn’t matter…But rather about longstanding, likely ill-gotten gains.

Sound familiar? Enough is enough.

Because it’s a global audience…a digression for the un-versed…

For those who aren’t versed in the cheating accusations against the Patriots, let me give the one sentence explanation:

The Patriot’s alleged use of deflated footballs would enable better grip by those players who handle the football, resulting in better control–especially in wet or slippery conditions–when throwing, catching, or running with the football and therefore a lower probability of drops, fumbles, and subsequently turnovers.

For those who don’t know, an American Football team’s turnover margin (that is the net number of times the ball is relinquished to or recovered from opponents through error) in a given game is an extremely powerful indicator of win likelihood. An advantage in grip on the ball is therefore significant.

The shocking, interesting, and applicable analysis

Mr. Sharp, in the midst of multiple cuts at the data, compiled this view of the NFL offenses’ fumble rates per play from scrimmage. I’m reproducing it here for commentary. The analysis is fully Mr. Warren Sharp’s.

Fumbles are the small circles, fumble rates (per play) are the orange boxes. New England is on the far right. Two things you notice immediately:

First, that New England (the far right side team) has a fumble per play rate that is in the stratosphere. They have a fumble every 187 plays. That’s truly exceptional (as the chart shows).

Second, as the article outlines, is that the next three best teams–the ones who even approach being outliers–are dome teams.

Not only is New England great at protecting the football, but they also do it better than teams with structural advantages that New England doesn’t have.

All of this is over a very long period of time (5 years) so “noise” should be shaken out of the analysis to a large degree.

Impressive? Yes. Fraudulent? Probably.

What the message is…

Such an analysis has real world applicability beyond the game of American Football. And, I’ll tell you why: If I told you that a team was so good at a key aspect of the game over the long run so as to be a near statistical impossibility, and then told you they had possibly been caught cheating in a way that would directly affect that aspect, what would be your conclusion?

The Patriots’ out-performance on fumbles is striking. Especially when you consider the conditions they often play under (in New England and outdoors). It’s akin to a company in a mature, commodity industry constantly and significantly outperforming companies in high value added, high growth industries. It can happen easily over the short term, and could possibly happen over the long term if the company were doing truly special things within the rules; but it deserves some scrutiny.

Statistical, financial, job performance, or any other kind of perfection should raise your fraud antenna in the first place. Combine it with observation of ethical “grayness” and you’d better watch out.

The message is that practical perfection should be applauded, but also scrutinized. The more perfect your investments, subordinates, or superiors are, the more you ought to ask the penetrating questions on why. The moment you observe lying, cheating, stealing, or (note this) aggressive isolation of people who decide to ask questions; you should be careful.

That isolation point is an important one: Remember when Jeff Skilling at Enron called an investment analyst an “asshole” on an investor conference call? The analyst only asked a practical question: Why couldn’t Enron produce a balance sheet?

Here’s a link to that episode.

It’s a fascinating moment in the unmasking of a fraud.

Interesting isn’t it?

This is especially important if you are the senior executive or board member who is benefitting from current ethical grayness.

Earnings look too perfect? Ask the question.

Reports on operations or people or sales too rosy? Ask the question.

I can assure you that Robert Kraft, owner of the New England Patriots, now wishes he would have asked a few questions over the past few years.

3 practical applications

I guess there’s a message here for people looking to ferret out or avoid being entangled within a fraud…Look for the quiet successes–individual or organizational–that lack any semblance of failure. Perfection is great, but not common.

A few more points:

  • Watch out for “tsk tsk” behavior by those who benefit from the perfection. Righteous indignation is the first and scariest refuge of the fraudster. When you ask someone about their methods, and they give you the “how dare you” act, you have a powerful indication. The Patriots tried this early last week, but the situation quickly got beyond their control.
  • Statistics matter. If someone is “perfect” or winning by a lot and can’t really explain what they are doing so well, take that as a hint. A “perfect” executive likely buries a lot of skeletons. A company with “perfect” financial performance likely carries a lot of fat or a lot of creative accounting. The Patriots’ statistics show how creative they are, we just don’t know how (yet).
  • Observations matter. Ask around. If others indicate ethical grayness exists in the historical record; or they simply won’t talk, you probably have your answer. Closed ranks or a history of crushed complaints provide you the indication you need. The Patriots were branded cheaters years ago, and such a track record will be in the record during this current “scandal.” If you are a board member or executive, all you have to do is ask, but you might have to ask the second order question… There have been no ethical complaints? What if the environment is such that nobody would dare complain? Go to the source at least once or twice at decade.

I have no particular axe to grind when it comes to the New England Patriots. I do, however, think that there are lessons to be learned from the “Deflategate” scandal both in the behaviors of the Patriots franchise and in the peculiar reactions to it by fans and pundits.

The Patriots’ statistical “perfection” is starting to look more and more like a fraud, and while it pales in comparison to famous frauds like Enron, Worldcom, Tyco International, or AIG; it provides some of the same human elements that all these others had in common.

The lesson? Be vigilant, especially when things are too perfect.

What’s Your White Whale?

The types of goals we set, and the manner in which we pursue them, have consequences for us and for the people around us.

“…to the last I grapple with thee; from hell’s heart I stab at thee; for hate’s sake I spit my last breath at thee…”

– Captain Ahab, in Moby Dick by Herman Melville

And like that, a captain lost his life, a ship, and all men aboard save one left to tell the tale.

Call him Ishmael.

Focus, intensity, and drive are all fantastic things. Identifying a goal and driving toward it can differentiate a professional in the earliest stages of their career. Such drive and focus is valuable for teams, organizations, and yes, families.

But it is in how we define our goals that we establish our course and set sail.

Sometimes…sometimes we choose goals that–when played out–are destructive to us and to those around us. They are outwardly worthy, and inwardly virulent.

The more senior we are, the more influence we have, the more damage we can do.

Ahab did this when he let a blinding, to-the-marrow hatred of a monstrous white whale cause him to lead his men to the edge of the earth and ultimately to death. He took his ship off its profitable whaling mission to pursue an obsession, a blood vendetta against a big mammal that took his leg.

Of course, you or I would never do that, right? Ahab is fiction.

Well, not really.

The way we define our goals–or help execute the goals others define for us–defines us; and the more driven we are in achieving misguided goals, the more destructive we can be. We might not kill our crew, but we could very well kill an organization, a partnership, or a marriage.

Take a moment and think: Do you harbor a goal like Ahab’s lust for killing the white whale?

Worse yet, have you, as a board member, senior executive, or manager, provided people with incentives to pursue a white whale goal?

A white whale goal is one of two things: In its first and simplest guise it’s an obsession. It is a goal that is so deeply held and so exclusively pursued that its pursuit alone is destructive to relationships, damaging to professionalism, and ultimately distracting from real performance. A foolish, simpleminded pursuit of money, power, position, prestige, image, “winning,” or–wait for it–the moral or intellectual high ground are all examples.

Yes, that last one is a doozy that we too often forget or forgive. Self-righteousness blows up as many relationships as most any other thing listed.

In its second guise, a white whale goal can be a misguided goal propagated by proxy, where boards and senior leaders provide a framework of thinking (for example “grow profits”) without guidance on and transparency in boundaries, value, or values; or with specious accounting and accountability.

This second version of the white whale can lead both to brutal decisions by middle managers “just doing their jobs” and to baffling decisions in the ranks where people struggle for clarity. All the while the board and senior managers maintain the real innocence of propagating “good” goals. Or, at least, they maintain plausible deniability.

The epitome of these two types of white whales playing out–an obsession that leads to a vicious goal by proxy–is the assassination of St. Thomas Beckett of Canterbury.

King Henry II, obsessed with the church as an interference, is reported to have said “will no one rid me of this turbulent priest?”

After which, of course, somebody did; to the ignorance of the historical significance of the act.

But, the King didn’t order the martyrdom of a future saint…Did he?

You as a senior executive didn’t really order the curtailing of investment in pursuit of current earnings…Did you?

You didn’t handicap the sales team by introducing turgid administrative tasks in the name of greater openness and transparency…Did you?

You didn’t order leaders to take unacceptable safety and fire risk by curtailing costly planned outages and maintenance…Did you?

Surely, there are honest-to-goodness unintended consequences; and then there are white whales.  Sometimes they are hard to tell apart. Foolish or obsessive pursuit and propagation is the sin qua non of the white whale.

Remember Enron?

Consider the Enron scandal. The tragedy of Enron was equal parts a criminal lack of professionalism (which has been well publicized and rises to the level of obsession for some people involved) and a broad based propagation of and adherence to financial frameworks and incentives that many people in the ranks knew made no sense–misguided goals.

This second part gets missed and dismissed, especially as the Enron case recedes into memory as a quaint blip preceding the global financial crisis of 2007-’08.

The second aspect–the misguided goal set–is actually the most important aspect of the Enron case for professionals to consider these days.

A good example of the incentive issue was where “mark to market” thinking led leaders to be paid handsomely on the modeled Net Present Value of development projects, but not on the actual fulfillment of the projects themselves. Baffling? Yes. Still, senior management–operating within a framework endorsed by auditors, consultants, and board members–defined the goals. Those goals played a big part in destroying the company.

Sure, a few Enron employees went to jail and many professionals were sullied forever; but the true “crime” that gets missed is how top down incentives drove otherwise professional people toward behaviors that they wouldn’t have even paid themselves for.  They were white whale goals acted on by proxy.

That is perhaps the best test of a white whale by proxy. Would you pay yourself to fulfill the incentive set you have?

White whale goals by proxy are usually present when you hear people lament that they are “just doing their job,” or “doing what they are told,” or “doing what they get paid to do,” or in the worst of the worst cases “protecting the company.”

Massive autocracies and ignominious genocides stand on the shoulders of white whale goals by proxy, particularly when they are proxy to an obsessed leader. Let’s not participate in or propagate them.

What do some simpler ones look like?

To keep this closer to home, here are a few modern goals that can become white whales in our professional lives, and a brief explanation of why:

1. A superlative image and “personal brand” – The phony focus on image in the mold of “fake it ’til you make it.” If pursued as an end in itself, vs. an outcome of a life of substance, then…well, it’s a deleterious focus on a goal that is ultimately not merely self interested, but selfish in a harmful sense.

2. Great pains for small wins – The dominance of the clean desk, starched shirts, pursuit of dominance on every point in the negotiation. Basically, this is idealizing stuff that doesn’t matter. In WWII U.S. Army slang, foolish adherence to critical standards on things that didn’t matter to the mission was known as chickenshit. I’m not sure what it is called now, but whatever it is it’s damaging to the mission and morale.

3. Rent-seeking – Seeking wealth without the creation of wealth. Placing defense of title, position, and income ahead of principle and value. Jerry Pournelle’s Iron Law of Bureaucracy puts in pithy words this white whale; and provides an explanation for countless managers’ sometimes oddball behaviors: They defend the bureaucracy at the expense of the mission. It’s a classic white whale. Similarly, acting purely on incentives without regard to the value they create (or destroy) can be a white whale goal as outlined in the Enron case. This is often the case when incentives are based on individual drivers (like revenue growth or headcount or output) in isolation that systemically create no value.

4. Temporal goal misalignment – Addressing the “now” without a focus on the “later” or vice versa. How often do we see short term decisions made that have a readily measurable, net negative long term impact; but that are characterized and lauded as magnificent wins. So, you closed the deal and got paid. Was it a good deal for shareholders and employees–the people who live with the longer term decisions? Interestingly, the opposite is the case as well: Many bankrupt companies lie foundered on the rocks of “long term investment.” How often do we see 5-year plans that lack a 1 or 2-year plan component?  The white whale lies in the lack of explicit balance.

5. Vengeance – I’m just going to go ahead and list it because, well, I started with Captain Ahab; and this was his issue. Pursuing personal vendettas, particularly those that drag your organization, family, or friends along with you; is the ultimate in white whale thinking. 9 times out of 10, the bitter pursuit of revenge against other people or other organizations only serves to take your eye off the ball. To be clear, this doesn’t mean simply the pursuit of crushing vengeance a la Ahab. It can also be as simple as an overweening need for one-upmanship or the constant need to be seen as ahead of the object of your bitterness. All this is wasted motion when it comes to life and performance.

So what?

Knowing whether you are pursuing a white whale is tough. Generally, the white whale looks like a worthy goal to the person obsessed with it.People who are genuinely obsessed can’t generally be reasoned with. But, they can be removed from their position…and, that’s worth pondering.

The best way to spot a white whale is to lay out the “True North” that everyone agrees to–what winning really looks like from a fiduciary, professional, and values standpoint; and then to identify how far off that azimuth your immediate goals are.

White whales pop out easily at that point as twisted and torqued visions of winning. They link to True North via paragraphs of logical backflips instead of a sentence fragment of concise clarity.

Like any other blind spot, these goals require reflection on your own part to spot. They also require willingness to tolerate a person or two in your midst who will challenge your view, your goals, your passions, and your obsessions. That person might be a trusted friend, a mentor, a pastor, or–if you are lucky–a spouse. In a really functional team, it can also be a subordinate or a peer.

In any event, you have to listen to them.

The gist of Melville’s story about Ahab and his hatred of the whale was that Ahab destroyed everything and everyone around him in pursuit of a definitively odd goal: Revenge against the single whale that took his leg.

There were many other whales in the ocean.

But, the white whale did him and his crew in. No–strike that–Ahab’s obsession with a white whale goal did it.

Don’t let a white whale–yours or somebody else’s–do you in.

What are some examples of white whales from your own professional, political, or personal lives?

Activist Investors and How to Handle Them

Activist investors may become more active–spurring management to focus and accelerate.


Fortune’s Paul Hodgson filed this article yesterday about how activist investors are becoming even more active.

It’s a good read that summarizes the influence of activist hedge funds and the like; and how that influence is growing into the Fortune 500-sized company space.

Hodgson’s point of view is that we should look for more activism because, well, it works.  Success breeds success.

His defining quote is at the end of the article:

Boards are crumbling in front of the [activists] because the value released by changes they are forcing through is making it more likely that other shareholders will support them.

It really is that simple. If an activist like Carl Icahn can campaign for eBay to sell PayPal, and subsequently “unlock” trapped value, then so be it.

Recently, there has been a spate of debate and discussion about how activists can create incentive misalignment.  In a letter to the editor of the Wall Street Journal yesterday, reader Jonathan Kaufelt laments the lack of incentive alignment in the Dow Chemical Board of Directors case.  You may recall that there has been an ongoing discussion of whether activist investor Daniel Loeb’s scheme to pay his director nominees for near term stock appreciation is conducive to good governance.

A reasonable person could say that such incentive structures are problematic more for their mis-allocation (not all directors hold the incentives) than for their mis-alignment. There might be a temporal conflict with fiduciary duty, but it’s not clear that the conflict is one that other shareholders would mind (which would be the point of Hodgson’s Fortune article).

In other words, the activists may be amplifying existing incentives to boost near term stock performance; but might not be an issue to those who own the company.  This gets into a more existential view of value creation and “long term” investing where the question is whether a shareholder’s objective ought to be to maximize value of holdings today (the “activist” vision) or to create an investment vehicle for all time (the “investor” vision).

On those things, reasonable people can disagree.  In the case of a public company, it’s reasonable to say that all shareholders ought to be ready to vote with their feet–or sell orders as the case may be.

Another view–my view–is that activists, by stirring the pot, actually serve a purpose that should normally be served by right functioning boards in the first place:  They sharpen management’s focus on value creation vs. sleepy backslapping boondoggles.

For CEOs and boards, the best prevention program for the pains of activism is–wait for it–to act like an activist.  Ironically, activists often create the pressure of scrutiny where it should have already been.

I welcome your thoughts…