Issues & Opinions

This just in (1:07PM CST)

NEWS ALERT
from The Wall Street Journal

Oct. 28, 2007

Merrill Lynch CEO Stan O’Neal has decided to leave the firm in the wake of $8.4 billion in write-downs and an unauthorized overture to Wachovia, a person familiar with the matter says. An announcement on his departure could come today or Monday morning, this person said.

FORE MORE INFORMATION, see:
http://online.wsj.com/article/SB119359304744274091.html?mod=djemalert

And the sub-prime mess gets its first big scalp.

Yesterdays Saturday WSJ included a piece of Breakingviews commentary entitled “O’Neal Leads Race for Exit”, with the provocative subtitle “Merrill Chief Speeds Past Citi’s Prince, Bear’s Cayne On Endangered CEO List”.

Mr. O’Neal has, to all appearances, done a fine job at Merrill, recent events excluded. He’s also been amply rewarded.

Is he being turfed (let’s not pretend to believe he made this decision himself) because of the mortgage-based losses? Not directly, it seems. In no particular order:

• Over the years (see WSJ article first linked), he’s had “issues” with competition for control, and has left numerous enemies alive to snipe at him from elsewhere
• He spoke with Wachovia about a merger, absent board approval - major faux pas, even if he “owned” the board
• He announced expectations of a $5 billion write down several weeks ago, but reported an actual $8.4 billion write down

The first of these makes for good gossip fodder amongst the denizens of the Street, I’m sure, and one can surely find unrequited antipathy for the CEO of any large firm, if one looks hard enough. Unless the jilted former executives have tight ties to current board members, however, they’re unlikely to have directly affected the calculus on this one.

The second of these is quite unseemly - he’s reported to have no severance arrangement in his employment agreement, but would do well ($200 million+) in the event of a change of control. If he assumed his position had become otherwise untenable, that Merrill was in deep, deep trouble, or both, the approach to Wachovia would be understandable, if still strategically and logically dubious. Appearance of a money grab is bad, emulating Britain’s Northern Rock by being seen to need help in the worst way is even worse. Either of these would be a firing offense to any competent board of directors.

Of the last item, the best thing to say might be “If you don’t know, don’t say. And if you don’t know, don’t say you don’t know, either”. Wall Street firms, particularly those with trillion dollar balance sheets, and double-particularly those run by former CFOs (the post from which Mr. O’Neal made his bones) are supposed to know what their balance sheets look like at all times. The income statement? Yeah, that’s important, but the balance sheet, and the value of items therein, isn’t supposed to be subject to nearly as much interpretation as is the income statement.

If, as CEO, you violate the first maxim above, forecast a result, and get lucky, so be it. But if you do so and miss the number within weeks, you’ve also violated the second maxim, and have shown your lack of control of the business. Pretty obviously, in a business that relies on sound risk management, this too is a firing offense.

It also stands the chance of raising the curtain on one of Wall Street’s alleged dirty secrets - the fact that they pull valuations out of thin air. Two pieces at a favorite site of mine, Going Private, touch on this subject. The first “Liquid Reflections“, discusses in some detail the innards of the CDO market. The second, an earlier piece entitled “Anatomy of a Meltdown?” describes an entirely plausible framework in which a debt market participant might easily misprice its holdings, while trying to outrun a presumed short-term disruption in the market. If Merrill’s forecasting innumeracy happens to be related to having had a “fluid” model for pricing its holdings, Mr. O’Neal won’t be the last to leave, and any new CEO (Fink/Thain/whomever) will have to be seen to be dealing aggressively with the fact that asset valuations seem to be whatever traders want them to be at any given time.

Should that happen, it has implications far outside Merrill’s walls.

Oh, and that Breakingviews commentary’s closing line?

But if he does go, it might throw attention back on the race for second place.

Let the race resume, because this melodrama has several acts yet to play, but it seems unlikely at this point that, regardless of moves in the prices of assets under their management, Messrs Cayne & Prince will repeat the mistaken actions of Mr. O’Neal.

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Today’s WSJ, in the Business Technology section, juxtaposes two pieces on the hypergrowth of digital information, discussing its reasons, its effects, and some responses to the growth.

The first piece is a straightforward and informative mini-whitepaper, entitled “Cutting Files Down to Size“. It mentions the efforts of Chevron and Credit Suisse to control their information, primarily through implementation of new tools, new methods, and new employee work habits. There’s something about an information base that’s presently 1.2 petabytes in size, potentially growing by 57% per year, that can focus the minds of management. Add to that the million email messages per day that the 59,000 employee Chevron claims to process, and you’re talking some serious data. So much data, perhaps, that’s it’s not even possible to glean the information from it. A veritable flood.

The primary solutions discussed are conceptually simple:

• Get people to pay attention to the amount by which they’re increasing the deluge
• Put systems in place to eliminate redundancy, such as using Microsoft’s well-reviewed SharePoint server, ensuring that even the worst PowerPoint slide decks are only stored once
• Admitting, and getting data creators to admit, that not all information is equally valuable

All excellent steps, though both expensive and difficult to implement. Totally aside from the grotesque knock-on effects of continually increasing technology infrastructure to store all new information, the real benefit from such efforts is to remove potential sources of background noise; the unimportant, the duplicative, and the no-longer-operative. “Data” is both easy and not intrinsically valuable - it’s “information” that’s both difficult and valuable, and too much data can obscure the information. Best of luck to the contestants in slaying their particular dragons.

The companion piece, on the same page, in Lee Gomes’ “Talking Tech” column was the more intriguing of the two. Entitled “Computers Should Be Taught To Let Certain Memories Go“, it contained an interview with Harvard KSG professor Viktor Mayer-Schoenberger, and was among the more thought-provoking pieces in the entire day’s paper.

Mr. Mayer-Schoenberger’s thesis is this:

Human beings … weren’t designed to remember everything we ever learned, and sometimes are better off when we forget. Computers, he adds, should as a result be taught to let some memories go.
…
We are biologically hard-wired to selectively remember. But in moving into a digital age, we are now surrounding ourselves with tools that have inversed (sic) that.
…

How does this make life different?

In the predigital age, we might have called someone who knew a person we were interested in learning about, got them to tell us about the person. And we would get a quick picture — but not a complete and comprehensive picture of each and every piece of communication or behavior that the person did over the past 20 years. I think we have lost something by moving from that sort of short encapsulation toward a complete picture that provides us with all the details, the sort that over time, we as a society, and as human beings, tend to forget.

But what’s the problem with that?

Things that happened 10 or 15 years ago might have happened to a different person. Therefore, we should put less weight on what we did 15 years ago than we would do now. In the past, our brains did this automatically for us by forgetting it. But we haven’t been able to develop another evolutionary method, another method by which we can weigh things that happened further in the past differently from those that happened more recently.

(ellipses mine)

Interesting theory, and one that makes some rational sense. I can’t speak for anyone but myself on the subject, but I’m surely not the same person today as I was 15 years ago, and would want any judgment of me weighted more on the current me than the one from decades ago.

The (mild) shocker in the piece, however, was this, his prescription for a solution:

My proposal is that we have a law that mandates that software coders build into software a better ability for people to let their digital tools forget, if they so wish. Right now, both Windows as well as Mac OS have a huge amount of meta data that they keep track of for each file that we use: “Date Created,” “Owner,” and so on. So I suggest that we add another type of meta data: “Expiration Date.”

Conceptually, he has a point - that would be at least a potential solution to the problem he’s laid out. Why the rush to what I can guarantee would be massively ineffectual legal efforts, I wondered? For starters, I presumed it’s because he’s an associate professor with Harvard’s Kennedy School of Government, whose faculty, perhaps by definition, thinks more abstractly and less rationally than, say, Harvard Business School’s must. Then I visited his faculty page at KSG:

…He advises businesses, governments, and international organizations on regulatory and policy issues. He holds a bunch of law degrees, including one from Harvard, and an MS (Econ) from the London School of Economics.

That explains it. Ignoring any questions about how many law degrees one can effectively use, the “bunch” he holds appear to have been enough to outweigh any pragmatism learnt at LSE.

Addendum - 5/14/2007 Having read Dr. Mayer-Schönberger’s paper, Beyond Copyright: Managing Information Rights with DRM, it’s clear that his definition of the problem and the solutions that can mitigate it don’t translate well into a “20 questions” format.

Digital rights management is, as the title indicates, at the heart of his thinking, and for anyone who puckers at the thought of DRM, his paper provides an excellent antidote to reflexive rejection of the concept.

I thank the professor for pointing me to the paper, and am better informed for having read it.

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Interesting title, from a story in yesterday’s WSJ.

Short answer? “Yes, in some cases, if the company’s really, really tiny.”

Slightly longer answer? “Are you nuts?”

The article centers around the management practices in place at a company called Ternary Software Inc.

During a recent strategy meeting at Ternary Software Inc., a programmer criticized the chief executive’s new incentive plan for employees. An hourlong discussion ensued, in which several participants, including the CEO, critiqued the proposal. Ultimately, all six participants agreed to handle incentives differently.

That part was crucial: Ternary runs itself as a democracy, and every decision must be unanimous. Any of Ternary’s 13 other employees could have challenged the incentive decision and forced it to be revisited.

…

The 19-person Exton, Pa., company has a policy-setting team of seven people, including two frontline workers elected by their peers. The team is linked to smaller groups through the company that ultimately give all employees a voice. The team meets to set policy for two hours once or twice a month.

The article’s author cites instances of similar management practice, including Honest Tea Inc., of Bethesda, MD and Continuum Inc. from West Newton, MA. She also includes, for comparison, I guess, Google, which

…prides itself on an egalitarian culture that includes weekly updates from executives who field questions from employees.

As though that’s somehow applicable.

The article goes on to include quotes from several b-school professors, including this from Ryan Quinn, a management professor at the University of Virginia’s Darden School who says:

…these companies typically are willing to sacrifice some short-term profit to pursue innovation or other goals. Mr. Quinn says unorthodox practices can succeed at large and small companies, but says he has never seen a company like Ternary, that strives for unanimous agreement.

Note, he didn’t say that this practice can succeed at large and small companies, just that unorthodox practices can. Like, for instance, having everyone wear a funny hat on alternating Fridays. So, overall, his response strikes me almost as a polite way of asking “Are you nuts?”

An additional bit of insight, from Harry Katz, dean of Cornell University’s School of Industrial and Labor Relations, goes a bit further:

…[he] doubts a system like Ternary’s could work on a large scale. In bigger companies, “there’s an inevitable conflict of interest between managers and employees,” Mr. Katz says.

The article also provides several other instructional views life within Ternary. Two excerpts:

Ternary’s path to workplace democracy wasn’t painless. The company, founded in 2001, first tried to draft a mission statement by consensus in 2004, when it had grown to more than a dozen employees. The meeting lasted two days and ended as participants too exhausted to continue arguing agreed in principle to run the company as a democracy. An attempt the next year to create a salary system by consensus was no better. But Mr. Robertson persevered, guided by two out-of-print books about a Dutch management technique called “sociocracy” or “dynamic governance.” He has dubbed Ternary’s system “holacracy” and has begun marketing it as a managing style.

I’ll let the dripping irony in that passage speak for itself.

The meeting where the incentive scheme was discussed was typically busy. The team rejected Mr. Robertson’s proposal to replace the profit-sharing program with an “ad hoc bonus system” based on performance, formulating a new plan that would keep the profit-sharing program and introduce monthly bonus incentives. The group also assigned the CEO new responsibility for spurring growth, gave the sales manager more authority to negotiate contracts, and decided to bill clients by the day, rather than by the hour.

Technology chief Anthony Moquin, one of the founders of the company, said his gut reaction to the billing change was that it was simplistic. But he accepted it, saying, “We can try it and see how it works.”

That’s a common refrain at Ternary. Managers don’t look for an ideal solution, merely a workable plan that looks like progress. Employees who don’t like the results can seek a seat at the next strategy meeting or ask a member of the policy group to revisit the issue.

(emphasis mine)

Funny when you read it that way, it sounds like it should be a whole lot less interesting to the owners or managers of a company. In effect, it eliminates the value of any management role, including that of the CEO:

“It takes getting beyond your ego,” says Mr. Robertson, who, as one of the founders of the company, has the CEO title but little typical CEO authority.

And it brings into question why you’d even have the title, let alone give it to someone.

The story goes on to explain how the company has benefited, in tough times, from having the flexibility to get all employees to agreement on issues like pay cuts. Quite uplifting, if you’re exceptionally light and aren’t running a for-profit business.

Left unsaid, in the story itself or the comments from the professors, a couple of things.

• Ternary isn’t Google, and whatever else you might say of Google, you won’t say they’re managerially incompetent or have created a company incapable of growth.
• Not only does the typical company have conflicts of interest between managers and employees, the typical company, particularly one larger than 19 employees, has conflicts between employees and employees, as well as between managers and managers.
• It might be horrible to contemplate, and even more horrible to enunciate, but not all employees have as much to add to any given decision-making process as the others.
• In any event, the dynamics of watering down decisions by making sure they’re universally approved results in watery decisions, catering to the lowest and loudest common denominator.

No offence to managers, employees, or Ternary Software, Inc. itself, but I’ll be anxiously awaiting the future WSJ story about how Ternary grew and found the limits of what is essentially an intellectually lazy, confrontation-free, feel-good management style that doesn’t strive for excellence, instead only for “a workable plan that looks like progress”, and then jettisoned it as laughably unworkable.

Unfortunately, though I think you can already see where I’m going here, Ternary seems quite unlikely to ever grow too awful much, constrained as they are by a system that enforces crushing mediocrity, even in a small company like theirs.

As Professors Katz and Quinn intimated, unorthodox isn’t bad, but there are a lot of things that can work in small companies which would be impossible at scale. Paying for everything on the owner’s personal credit card is an excellent example. Keeping all your invoices and receipts in a shoebox is another. And, with all due respect to the admirable goal of “giving workers a voice”, so is the practice of pretending they’ve each got something crucial and important to say about the company’s direction, or that, in the event of failure, your fallback position is that “at least we all agreed on the strategy”.

Sorry, but not all opinions matter equally, and without accountability for failure, there cannot be success in any non-trivial enterprise, including Ternary’s. The time spent in search of universal approval of all decisions, and of making sure that every last person is happy and contented, is time wasted. And yes, this metaphor can be extended to the broader social and political realm, but I’ll spare you that for now.

(all ellipsis above, mine)

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