Comments

1. Boards MUST tie pay to performance - Enron-like Directors must be punished

2. And MUST prevent shareholder Enron-esque losses & meltdown

3. $200M severance packages MUST tie to performance - a new hire guarantee of such is radically perverse [and yet is it required in the hyper-competitive CEO new hire market place???]

Posted by sean_$3million at January 9, 2007 11:36 AM

Thought I saw Malcom Gladwell on 51st St in Manhattan a few months ago. Was just a guy 'copping' his look.

Posted by Scott Segal at January 9, 2007 12:00 PM

It seems people hide important information in excess words in other places, too. See http://www.facilitatedsystems.com/weblog/2006/04/licensers-just-say-it.html and http://www.facilitatedsystems.com/weblog/2006/04/more-on-eulas.html. I don't know whether they do that because they don't know how to write clearly or because they do know how and want to write unclearly.

Posted by Bill Harris at January 9, 2007 6:36 PM

Malcolm Gladwell has a real gift for taking complex issues and writing about them in a way that is both readable and enlightening, and I would urge everyone to read this piece. (He had another one last fall on the pension crisis which I thought was magnificent.)

By noting that the information that brought Enron down was in plain sight, Gladwell raises some issues to me about the proportionality of the sentences that Skilling et al received. Granted they may have been guilty of greed, hubris,and arrogance - but they also may have been as "guilty" of incompetence as they were of malfeasance. Maybe it was willful ignorance: easy not to look too close if you're making all that money.

Posted by Maureen Rogers at January 9, 2007 8:29 PM

Gladwell's excellent article cites and draws on another excellent article: A Pox on Both Your Houses: Enron, Sarbanes-Oxley and the Debate Concerning the Relative Efficacy of Mandatory vs. Enabling Rules, by Jonathan R. Macey, of Yale Law School. Despite the title, it's well worth the read (it's where Malcolm got the Cornell MBA students story from, and it speaks about the interpretation of data as being the part of our economy that fell down--a point very similar to Gladwell's).

I thought one of Macy's most interesting comments is about the structural impediments we put in the way of free markets punishing an Enron. The signals were there, as Gladwell and Macy point out: why didn't people who could have made money exploiting the data go in and short them?

For one thing, we have policies that make it much more profitable, and easier, to go long than short. To begin with, risk is inherently limited investing long, but unlimited for shorts. But ou policies exacerbate this. Interest is deductible for long investors, but not for shorts. And most of all, there's the no-sale-on-a-downtick rule.

Then there's the institutional biases against the demand side of data analysis; they were corrupted. Why were 95% of analyst signals "buy" vs. "sell"? Because the analysts' value per se were small beer compared to the transaction-based fees banks could get in return for positive recommendations.

The one hopeful thing in both these articles is the idea that a big part of a solution is right at hand, familiar to us: simply giving smart money a clear shot at a bloated fraud. Why bring on a ton more prohibitive chinese wall regulations when you turn loose a short-seller to do the execution for free?

Posted by Charles H. Green at January 9, 2007 8:54 PM

Data does not equal information

People's ability and motivation to explore data in depth is the same as their ability to make deep long term management decisions.

Posted by PaulH at January 10, 2007 3:36 AM

In the intel community, we call it "Security By Obscurity." It's basically the needle-in-a-haystack approach, and as Tom & Gladwell pointed out, all the information in the world isn't very useful unless it's useful...

My old boss used to say we're moving into an age when everything is a sensor and nothing makes sense. I recently ordered Ambient Findability (by Peter Morville) in hopes of learning more about how to tackle this issue... I think Amazon shipped it to me yesterday - I can't wait to dive in.

Posted by Dan Ward at January 10, 2007 9:13 AM

I've always had this childlike dream of typing in the middle of a massive and serious report a statement like ‘I love you darling' just to see if anyone notices!

Having seen Board Meeting Agendas in healthcare that are typified by the number of inches thick I can vouch for the wonderful comment from Dan "Security By Obscurity" - we all know that is sadly true.

Who was it who said something on the lines of if it can't be explained on one side of A4 it is not worth saying?

Posted by Trevor Gay at January 10, 2007 11:38 AM

Tom

I posted about this on my blog last week and I am still intriged by Malcolm's point. Could it be that, in fact, all the data was public knowledge and people were too blind to see it?

I love especially the final story in the New Yorker piece about the Cornell University class that researched S.E.C. filling and annual reports and publishing 23 pages of analysis with the final decision to "Sell." This was in the Spring of 1998 and the report is still available on the university's web site.

Malcolm has a great way of making us look at things differently, not unlike George Carlin does.

Thanks,
Jack

Posted by Jack Covert at January 10, 2007 5:51 PM

Sean - surely the problem is that whatever you tie executive pay to, the risk is they will make short-term or wrong or even illegal decision to manipulate the scheme. I think one of the problems is that we search for an exact formula when so much of it is about intangibles. It would be a brave Remuneration Committee that said, "We've looked at the numbers and they're good / bad / average so here's some bonus but we've also assessed your performance in terms of succesion planning, your management of investor relations, our confidence in your performance etc etc and we're making a small / large / average payment on this basis." viagra prescription uk

Trevor - did you hear about the legal draftsman who got divorced in WW2 by UK Parliament? He wrote a clause into some emergency war legislation making his divorce legal and when the legislation went through pretty much on the nod, the guy was legally divorced. I don't know if it was allowed to stand, but...!

Posted by Mark JF at January 11, 2007 3:39 AM

Jack, yeah, the Cornell vignette was fabulous.

Posted by tom peters at January 11, 2007 1:18 PM

1 Great story Mark and I am not surprised

2 I wonder what else we could get away with legally

3 Maybe I could write in a legal document that Sean agrees to pay ‘front liners’ in the NHS 1 million dollars each :-)

Posted by Trevor Gay at January 11, 2007 2:00 PM

I don't see any sinister information overload. I see the democratic splendor of rich resources. In any domain or venue, from library to web to email inbox, we must learn how to discern, choose, and delete or avoid.

Information is always difficult to navigate and trust, but when there's more, it's better for free thought and possibilities of truth.

Posted by steven e. streight aka vaspers the grate at January 11, 2007 10:38 PM

And yet today's Enron was caused by the exact opposite - not enough information, not enough transparency into the toxic bad debt. Result: no one could price it, no one could trace its kudzu-like tentacles reaching far and wide across the global economy, no one could stop the death spiral feedback loop of bad debt/lower credit ratings/high capital reserve requirements/lower stock price/stock shorting, all leading to a potential $700 billion bailout.

Posted by Outtanames999 at September 24, 2008 10:24 PM