What's Up, Doc?: The Schuler Solutions Leadership Blog by A. J. Schuler, Psy. D.

GNP Not the Whole Story

2007-05-31T06:14:00.000-07:00

Today from the AP:

Economy Has Worst Growth Since 2002

By JEANNINE AVERSA
The Associated Press
Thursday, May 31, 2007; 9:09 AM

WASHINGTON -- The economy nearly stalled in the first quarter with growth slowing to a pace of just 0.6 percent. That was the worst three-month showing in over four years.

The new reading on the gross domestic product, released by the Commerce Department Thursday, showed that economic growth in the January-through-March quarter was much weaker. Government statisticians slashed by more than half their first estimate of a 1.3 percent growth rate for the quarter.

The main culprits for the downgrade: the bloated trade deficit and businesses cutting investment in supplies of the goods they hold in inventories.

For nearly a year, the economy has been enduring a stretch of subpar economic growth due mostly to a sharp housing slump. That in turn has made some businesses act more cautiously in their spending and investing.

The economy's 0.6 percent growth rate in the opening quarter of this year marked a big loss of momentum from the 2.5 percent pace logged in the final quarter of last year.

Federal Reserve Chairman Ben Bernanke doesn't believe the economy will slide into recession this year, nor do Bush administration officials. But ex Fed chief Alan Greenspan has put the odds at one in three.

The first-quarter's performance was the weakest since the final quarter of 2002, when the economy recovering from a recession. At that time, GDP eked out a 0.2 percent growth rate. Economists were predicting the first-quarter performance this year would be downgraded, but not as much as it did. They were calling for a 0.8 percent growth rate pace.

GDP measures the value of all goods and services produced in the United States. It is considered the best measure of the country's economic fitness.

In more encouraging economic news, the Labor Department reported that fewer people signed up for unemployment benefits last week. New filings dropped by 4,000 to 310,000. That suggests the employment climate is weathering well the economy's sluggish spell.

Many economists believe the first quarter will be the low point for this year. They expect growth will improve but still be sluggish.

The National Association for Business Economics predicts the economy will expand at a 2.3 percent pace in the April-to-June quarter.

In the first quarter, there was a larger trade deficit than first thought. That ended up shaving a full percentage point from the GDP. Businesses cut back on inventory investment as they tried to make sure unsold stocks of goods didn't get out of whack with customer demand. That lopped off nearly a percentage point to first quarter GDP.

Those were the biggest factors behind the government slicing its initial GDP estimate released a month ago by as much as it did.

The sour housing market also restrained overall economic activity. Investment in home building was cut by 15.4 percent, on an annualized basis, in the first quarter. However, that wasn't as deep a cut as the 17 percent annualized drop initally estimated. And, it wasn't as severe as the 19.8 percent annualized drop seen in the final quarter of last year.

Even so, there is no doubt that troubled housing market is one of the biggest problems for the economy. Although some businesses tightened the belt in the first quarter, consumers did not. That helped to prevent the economy from stalling out altogether.

Consumers boosted their spending by a 4.4 percent growth rate in the first quarter, the most in a year. Consumer spending accounts for a major chunk of economic activity.

Some economists wonder how much interest consumers will have in continued brisk spending, however, given rising gasoline prices that have topped $3 a gallon in many markets. More money spent filling up the gas tank leaves less to spend on other things.

The chart up top shows income inequality in the U. S. over time. We now have a very top heavy economy, and average figures showing generally rising GNP mask the fact that the middle and lower ends of the income distribution scale are falling behind while the top 10% is cleaning up. Economists tend to pretend this doesn't matter because average GNP is up overall, but things don't work that way in societies.

The AP article above shows how consumers have so far been bailing out the economy, and it includes the necessary dose of economic happy talk to persuade people that the sun will come out tomorrow. But people will ignore the reality of their own lives for only so long.

The U. S. economy is in a very precarious position, as our current pattern of income distribution is unsustainable. We're close to the possibility of a new social, cultural and economic equilibrium in the U. S., where the establishment elites who have been benefiting most from the last 20 years of social and economic policy may no longer find themselves so influential. That's what happened during the New Deal under Franklin Roosevelt, where you see the big dip in the chart above. If we keep in the track we're headed in, then we're headed for another one of those radical shifts.

I'd like to say my peers in the intelligentsia understand this and will think more about how to support widespread prosperity, but I see the opposite going in the opposite direction. Businesses and economists are trying to cash out as best they can under the current equilibrium before the change comes, trying to support the status quo for as long as they can. Well, that's one way to go, but it's not sustainable, and it won't support our long term economic and social health.

This Makes Sense

2007-05-29T06:17:00.000-07:00

For a while, the U. S. posture was to refuse to negotiate with Iran, but the U. S. had not good BATNA (best alternative to a negotiated agreement). Any hope for nuclear non-proliferation and a reduction in international destabilization due to Iranian funded armed groups in the Middle East begins with the U. S. engaging the players who can make deals. What's more, the enforcement of any possible future agreements relies on international cooperation, and the U. S. has so damaged its credibility internationally that a refusal to negotiate weakens, rather than strengthens, U. S. leverage.

All of this is to say the decision by the U. S to negotiate directly is a good one. Good negotiation of course relies on good execution, so who knows what will happen now, but the decision to sit at the table, at least, was a good one.

Here's the news story today:

U.S., Iran Open Dialogue On Iraq
Diplomats Call Meeting Positive; More Talks Likely

By John Ward Anderson
Washington Post Foreign Service
Tuesday, May 29, 2007; A01

BAGHDAD, May 28 -- The United States and Iran held their first official high-level, face-to-face talks in almost 30 years Monday to discuss the deteriorating security situation in Iraq, and officials emerged generally upbeat about the renewed dialogue, suggesting additional meetings were likely.

In briefings to reporters afterward, the chief negotiators -- U.S. Ambassador to Iraq Ryan C. Crocker and Iran's ambassador to Baghdad, Hassan Kazemi Qomi -- said the talks focused solely on Iraq and did not stray into the contentious areas of Iran's nuclear program or the recent detentions of four Iranian American citizens by Tehran.

Underscoring the crux of the security problem here, a suicide bomber detonated a truck loaded with explosives at one of Iraq's most revered Sunni shrines, the Abdul Qadir al-Gailani mosque in central Baghdad, shortly before talks concluded. The blast killed at least 19 people and wounded 69, raising fears of a retaliatory cycle of sectarian bloodshed similar to what happened last year when a Shiite shrine was bombed in Samarra. More than 1,000 people were killed in sectarian violence following the Samarra mosque attack in February 2006.

The article emphasizes the talks are focused on Iraq, which is valuable in its own right. The U. S. has inserted itself on the side of the Sunni's in Iraq's current civil war against the Shia sympathetic to Iran. The U. S. has done this to try to play some rearguard action as Iran's regional influence has skyrocketed in the wake of the backfired U. S. decision to invade Iraq. Aside from the wisdom of the U. S. taking a side on behalf of the Sunnis (in solidarity with the Sunnis of Saudi Arabia, playing to another regional U. S. ally), the decision itself to enter talks is a wise one.

One of my students wrote a good final paper last fall about the utterly failed U. S. posture toward international negotiations and relations, and from a purely rational negotiations point of view, it's impossible to disagree.

I don't like to bring politics into my teaching, or my business, but the news is what it is, and people learn by applying concepts to real practice, or, failing that, real cases. If people are watching the news, they can learn more about good negotiation if people like me, who believe conflict can be very good and very productive if managed and channeled appropriately, speak up.

Social Networkong Trend Continues

2007-05-27T06:58:00.001-07:00

Social Networking sites like Facebook and MySpace are popular, but not terribly focused. As the Internet continues to function as a means through which people connect with each other, look for more affinity and interest sites to emerge. The tensions will be all about which communities allow the most flexibility, which makes advertisers hinky, since they want control and antispectic spaces to help propel their branding. Ultimately, the advertisers will go where the people are, and people online don't like fetters.

From the NYT:

But along with the recent purchase of a social network design firm, Five Across, the deal will give Cisco the technology to help large corporate clients create services resembling MySpace or YouTube to bring their customers together online. And that ambition highlights a significant shift in the way companies and entrepreneurs are thinking about social networks.

They look at MySpace and Facebook, with their tens of millions of users, as walled-off destinations, similar to first-generation online services like America Online, CompuServe and Prodigy. These big Web sites attract masses of people who have dissimilar interests and, ultimately, little in common.

The new social networking players, which include Cisco and a multitude of start-ups like Ning, the latest venture of the Netscape co-creator Marc Andreessen, say that social networks will soon be as ubiquitous as regular Web sites. They are aiming to create tools to let ordinary people, large companies and even presidential candidates create social Web sites tailored for their own customers, friends, fans and employees.

“The existing social networks are fantastic but they put users in a straitjacket,” said Mr. Andreessen, who this week reintroduced Ning, his third start-up, after a limited introduction last year. “They are restrictive about what you can and can’t do, and they were not built to be flexible. They do not let people build and design their own worlds, which is the nature of what people want to do online.”

Social networks are sprouting on the Internet these days like wild mushrooms. In the last few months, organizations as dissimilar as the Portland Trailblazers, the University of South Carolina and Nike have gotten their own social Web sites up and running, with the help of companies that specialize in building social networks. Last month, Senator Barack Obama unveiled My.BarackObama.com, a social network created for his presidential campaign by the political consulting firm Blue State Digital.

Read the whole article to get a flavor of what's going on with this trend.

Know Your Adversary

2007-05-26T07:47:00.001-07:00

Today's negotiation lecture - sure to be a controversial one - comes from Internet writer Ian Welsh. Here's an excerpt:

America needs to stop treating its enemies as EVIL and MONSTROUS and HITLER. It needs to stop assuming that just because a movement is Islamic, it can't be negotiated with. It's not just that demonization often leads to horribly immoral acts, it's that it often leads to very bad foreign policy and to blowback which hurts the U S's interests.

And above all, Americans need to start seeing the world through the eyes of their enemies. They need to understand why others often hate them. Understanding something, in the US, is often taken as excusing it. Being judgmental comes before judging, and as soon as a regime is labeled “evil” suddenly they can't be talked to. (The definition of evil, of course, is very flexible. The Saudis and Egyptians, who supplied most of the money and men for 9/11 are good American allies, after all.) But “evil” isn't an analytical framework, and all it does is close down opportunities to actually have peace. Organizations like Al-Qaeda and Hezbollah have much less in common than they have differences, but in American discourse you'd never know that.

At Wharton, we teach "information based bargaining." We know from research that the most successful negotiators are those who ask the most questions, who can see the world frmo the other party's point of view.

It's impossible to ignore as I read the papers that the United States, my home country, is really very bad at this, and it works against the country's own interests.

2007-03-19T10:24:00.000-07:00

It's getting really ugly out there.

I've been writing on and off about the real estate bubble and what it means for the wider U. S. economy. I learned during the dot.com stocks bubble not to trust what I hear on CNBC but to trust my gut as a psychologist who can spot a frothy, "irrationally exuberant" market.

This is a very well written story, but the bottom line is we may be well in line for a major economic correction as the subprime lending market collapse ripples out far and wide.

I've also done some writing about what I smell as the coming major political realignment coming in the country, for which business people need to be prepared. Here's a snippet from the article linked above (emphasis added):

The sub-prime and overall mortgage carnage is now likely to lead to a financial crisis whose cleanup and bailout costs will make the S&L bailout bill look like spare change. We are only at the beginning of this fallout but, already, several proposals and bills in Congress have been submitted to help millions of sub-prime homeowners on the verge of bankruptcy and foreclosure. The prospect of millions of homeowners thrown homeless on the street is already shaking politicians of every stripe. The relatively modest bailout envisaged by the first bills currently proposed in Congress will mushroom into a much bigger fiscal bailout of homeowners, borrowers and lenders once the garbage of sub-prime, near-prime and pseudo-prime toxic waste spreads around the economy and likely leads to a hard landing recession that will cause a much bigger financial and banking crisis.

Given the fallout and real, social and financial costs of this disaster the political blame game will soon start. So it is important to make sure that the self-serving spin game that accompanied the game of those who happily ignored since last summer the looming housing, mortgage and economic mess will not be repeated again. Powerful political and financial interests will spin their self-serving ideological spin on who is to blame for this mess. Specifically be ready for a cabal of supply side voodoo ideologues - from the Wall Street Journal editorial page (and its invited op-ed writers) to hacks (calling them economists would be an insult to my profession) such as Arthur Laffer, Steve Hanke and other assorted voodoo religion priests - to start spinning a tale blaming government regulation and interference for this disaster that has instead its core in the lack of sensible government regulation, not the existence of such regulation. In the meanwhile powerful financial interests that repeat the mantra – or better the proof-less dogma - of unregulated free markets and do not like any – even sensible – supervision and regulation of the financial system will happily blame government action – rather than their own reckless greed and stupidity - for this disaster while happily demanding and receiving billions in bailout funds from the same government that they so happily disdain. This will be the most appalling form of corporate welfare: privatize the profits in good times and socialize the losses in bad times.

This fairy tale spinned by free market supply side voodoo fundamentalism zealots will blame the otherwise appropriate current Congressional action on predatory lending for being one of the main causes of the credit crunch that will lead to a painful recession (as the WSJ editorial page recently claimed) while forgetting that predatory lending practices developed by free unregulated markets created the toxic waste that is subprime and near-prime mortgages.. This voodoo religion cabal will also incorrectly blame regulators – whose true blame was being asleep at the wheel for six years while being drugged by a philosophy of “laissez-faire” non-interference with free markets while this free market garbage was being originated – for now finally starting to crack down on monstrous “free market” practices such as zero downpayments on mortgages or NINJA (No Income, No Jobs and Assets) loans; this cabal will thus now blame regulators for “destroying” the sub-prime and near-prime mortgage market with their intervention into “self-regulating free markets”. The same voodoo economics religion priests has and will incorrectly blame the “easy” Fed monetary policy – rather than the lack of any sensible regulation of credit and mortgage market lending – for creating the housing bubble and letting it fester for too long. It will also incorrectly blame the GSEs for creating “moral hazard” via guarantees of mortgages and thus causing this mess when, instead, the GSEs largely got out of the subprime business in the last few years - and let the free market flourish to originate this toxic waste – when politicians and policy makers started to bash the GSEs for their “excessive” role in the mortgage market

[snip]

In summary, lack of sensible supervision and regulation of banks, mortgage lenders and other financial institution – partly induced by an ideology of free market fundamentalism – has been the core cause of this private sector created disaster, not excesses of regulation or of government policy. Thus, to minimize the fiscal costs of cleaning up this mess, use of public funds should be carefully managed and targeted to help the true victims of this mess – borrowers duped by predatory lending practices – while avoiding any bail-out of the culprits of this mess. Privatizing profits in good times while socializing losses in bad times is another form of reckless corporate welfare that generates moral hazard while fostering new bubbles. Ideological supply side voodoo zealots should not be allowed to spin a tale where evil government intervention caused this disaster. And the private sector institutions and investors that indulged in this unregulated reckless behavior should take their losses. Market economies are the best economic system but they work properly when private greed, manias, panics, stupidity and recklessness is tempered by sensible supervision and regulation. And may the unfolding mortgage disaster bury once and for all the neo-con supply side voodoo economics religion of unregulated free markets fundamentalism.

Heya, Stranger

2007-03-19T10:21:00.000-07:00

Ok, I've been busy, and am embarrassed by how little content I've been creating and posting.

I'm not sure its going to get consistently better for me, that I'll have time to do as much content creation as I have been able to do in the past, but I'm dipping my toe back in today and hoping for the best.

The good news I've been busy in a good way, and there have been no health problems or any other such reason for my relative absence.

So, hello again!

Chugging Along

2007-01-31T08:58:00.000-08:00

First of all, my apologies for the infrequent updtaes. I'm silly busy.

Today's news: consumers kept chugging along at the end of 2006:

Economy Grows 3.4 Percent in 2006

By Howard Schneider
Washington Post Staff Writer
Wednesday, January 31, 2007; 11:04 AM

U.S. economic growth accelerated in the final months of 2006, as strong consumer spending and an increase in exports helped boost the economy despite a steep downturn in the residential housing market.

Commerce Department figures released this morning show that Gross Domestic Product increased 3.4 percent in 2006, faster than the year before and despite a sharp dip in growth last summer. Gross domestic product is a broad measure of the goods and services produced by U.S. workers and capital.

Growth in the last three months of the year was especially strong -- an annualized pace of 3.5 percent, led by a 4.4 percent jump in personal consumption and a 10 percent increase in exports.

[snip]

The latest Commerce Department figures may quell speculation among analysts that the housing downturn would inevitably slow the economy as a whole and prompt the Fed to consider a rate decrease. With labor markets tight, incomes growing and economic growth on track, the bank will have little incentive to change course.

"The very good news is that the recession in housing continues to have a very limited impact on the rest of the economy," said Nariman Behravesh, chief economist with the Global Insight consulting firm. "The Fed has the economy where it wants it."

Some analysts say the housing downturn is in fact taking its toll -- and will continue to do so. Spending on housing, they note, fell at a nearly 20 percent annual rate in the last three months of the year compared with the year before, and subtracted more than a full percentage point from the estimates of growth for the period.

A run-up in business inventories also dragged down the economy's performance.

Though all of that was offset by strong consumer demand and exports, Ian Shepherdson, chief U.S. economist for the High Frequency Economics consulting firm, said he expects the Commerce Department to revise its growth estimates downward in coming weeks.

And he said that while Federal Reserve bankers will be "happy" that their current interest-rate decisions have kept inflation in check while sustaining growth, the first months of 2007 will be "much softer."

I'm still on the skeptical side that the fundamentals of the US economy can keep away a recession, but so far, consumers have not taken the folding of their real estate assets as hard as I had expected. Bad me! Good thing I'm not an economist or a pundit, though I must confess, I've never seen a business pundit take a career hit for being wildly wrong about anything, ever.

Are You A Teacher?

2007-01-11T07:52:00.000-08:00

This is a recurring theme in my executive coaching: are you a "problem solver" or are you a "teacher?"

Executives who see themselves as problem solvers fix things but can't scale their efforts. There are always more problems to solve in the world than what you can get to. Some see that as job security, but that's elusive: your security and productivity go up exponentially when you can teach people how to solve problems, or even better, teach people how to teach others to make decisions and solve problems. Be a builder of systems, not just immediate solutions.

You'd be surprised how many executives with classroom type leadership training or year of experience think they know this when they actually don't. The art of converting moments of interaction with direct reports into teaching opportunities is too little studied and deployed. It takes a real knack for understanding your people, how they learn, how they feel, who they are. Any number of leaders are, truth me told, more interested in themselves than others.

So, what do you do?

Small Business, the Minimum Wage and Health Care

2007-01-11T07:39:00.000-08:00

A bill passes the U. S. House:

Rise in minimum wage OK'd by House
Utah representatives are divided along party lines; Senate plans tax breaks for businesses

By Robert Gehrke

The Salt Lake Tribune Article Last Updated: 01/11/2007 12:54:35 AM MST
WASHINGTON - The U.S. House voted Wednesday to raise the minimum wage to $7.25 an hour, although Utah's Republican members voted against the bill.
"It's an issue that makes for some nice political rhetoric, but it actually hurts the people that we're trying to help," said Rep. Rob Bishop, R-Utah. "This bill will increase unemployment among the least skilled and lowest paid workers, including high school and college-age kids, and will increase costs for small businesses and consumers."

But Rep. Jim Matheson, D-Utah, who voted for the measure, said he doubts the doomsday scenarios painted by opponents of the wage increase. The House vote calls for a $2.10 increase in three steps over two years.

"I really don't think it's going to eliminate jobs. My gosh, the $5.15 wage was set years ago. It's long overdue," he said.

The U. S. Chamber of Commerce and other large groups are opposed to this, but this does nothing to hurt my small business clients. If people really wanted to help my small business clients, they'd move to. . .. wait for it. .. a single payer health care system that got private insurers out of basic care.

Health care premiums are really a drag on small business growth and job creation. But right now, all the insurance companies have an incentive to do is to weed out the people most likely to need care, all the while raising rates. Then, we all end up paying more because the uninsured get the most expensive care imaginable: emergency care, which we all pay for anyway, but now they're sicker than they would have been if we had dumped everyone into one big risk pool, creating a kind of Medicare for everyone. We already have a de facto universal health care system, it's just an insanely inefficient one. Insurance rates o down when risk is pooled over ever widening groups, but we've been narrowing our groups by weeding out the sick and pushing the resultant higher expense onto the insured. We get so little bang for our health care buck it's ridiculous, and it hurts our economy, and small businesses get hurt the most.

But the U. S. Chamber will never take this position, because on the national level, it represents big business, not small business, no matter what its rhetoric may be.

Quotes of Note

2007-01-11T07:34:00.000-08:00

"Humanitarianism needs no apology. ... Unless we ... feel it toward all men without exception, we shall have lost the chief redeeming force in human history." -- Ralph Barton Perry

"It takes as much energy to wish as it does to plan." -- Eleanor Roosevelt

"Don't forget to love yourself." -- Soren Kierkegaard

Negotiation: Universal Health Gets Spanked

2006-12-06T17:09:00.000-08:00

In Las Vegas, Universal Health Services locked out its nurses after being unable to reach a collective bargaining agreement with them regarding staffing practices and levels. Las Vegas is experiencing a great shortage of nurses, and the company owned hospital wanted concessions about staffing levels, among other things. The nurses are represented by the SEIU (Service Employees International Union) .

This was not a strike. Once the sides failed to reach an agreement, the governor stated they should put another 30 days into negotiations. The nurses agreed, but Universal Health did not. They locked the doors and brought in replacement nurses from out of state. This is pretty standard anti-union hardball as practiced throughout much of America. Usually, firms fire potential organizers before a union even takes hold.

The nurses, led by the SEUI, fought back very effectively. They picketed outside the hospital, chanting about safety, their care and worry for their patients, and the importance of maintaining safe nurse to patient ratios. As it turns out, some statistics suggest the staffing ratios sought by management lead to predictable rises in hospital casualties, so the nurses were able to get publicity for their action by framing their priority as patient health and safety. Person on the street interviews on the news showed very sympathetic nurses coming across as very concerned about their patients. Having defied the governor's moratorium, bringing in out of state labor, the company looked very bad locally. Las Vegas is a pretty strong union town.

Universal Health system overreached and laid an egg. They did not predict the nurses under the SEIU would be so able and nimble in creating a wide audience for the company's actions, embarrassing management and framing the issues in terms of patient safety and health. They tapped into a more widespread feeling of middle class insecurity in America as well, which drove much of the midterm congressional elections results last month. Democrats won 35 races and lost none, and the Democrats who won were mostly economic populists sympathetic to labor.

The SEUI just organized a very sucessful janitor's strike in Houston, Texas, of all places, winning major concessions from property managers after police ran over protester's with their horses and locked protester's in jail with bonds higher than those meted out to murderers and rapists.

The political and social climate is changing in the US, and widespread lack of confidence with leaders who represent the corporate establishment is spreading, encompassing the Bush administration's monumentally failed international policy and often unpopular CEO's in corporate boardrooms. I don't think most of my clients and friends in corporate America realize how much the ground is shifting away from the generally pro-corporate direction of the country since the first election of Ronald Reagan as president in 1980. Most of today's senior executives have never known a powerful populist movement from the left in their lifetimes, but we have the makings of one brewing, like a swirling tropical storm off the coast that could become a major hurricane, hitting Washington DC and many corporate boardrooms very hard. How hard? It's too early to tell.

After taking a real beating in the press, Universal backed down, brought the nurses back to work and is resuming contract negotiations, but the momentum and leverage have shifted to the nurses, and the SEIU. They deployed classic negotiation techniques by 1) building leverage using a powerful positioning statement defining the terms of the conflict, 2) appealing to a wider audience and 3) applying standards to the dispute that tapped in powerfully to the interests of the public for safe hospital services. Universal and its labor consultants got spanked.

Stay tuned.

Fed Pumping Money into the Economy

2006-11-21T08:59:00.000-08:00

This is a very good catch, and an underreported story. The Federal Reserve in the US is surreptitiously pumping money into the economy, fueling cash available for speculation. This is propping up the economy in the near term, especially in light of the contuing decline of the housing market, but it may not be sustainable. The Big Picture blog has the details. Bottom line:

This is a classic case of "ignore what they are saying, because what they are doing is speaking so loud:" While the Federal Reserve has been reporting rather flat money supply growth in M2 (blue line), in reality they have been dramatically increasing the cash (red and blue line) available for speculation.

Hence, that sloshing sound you heard. They have been providing the fuel for the rally, the huge M&A activity, the explosion in derivatives -- even the eye popping Art auctions are part of the shift from cash to hard assets. It is just supply and demand -- print lots of lots of anything, and that thing becomes increasingly devalued. It works the same for cash as it did for Beanie Babies.

Its not just the increase in Money Supply that should be concerning to investors -- its the misdirection about it. If Money Supply matters so little, as Fed Chair Bernanke has been out explaining to anyone who will listen, why pray tell has the Fed been working those printing presses overtime?

Given M3 increases, its no wonder the European Central Bankers laughed at the suggestion.

Concession Obsession?

2006-11-17T10:39:00.000-08:00

Just a quick observation about something I see rather often among negotiators who really like to compromise.

Of the five core negotiating styles (competitiion, avoidance, accommodation, compromise and collaboration), all have their place. Some are better to deploy in some situations than others, depending on the magnitude of the stakes involved and the degree to which the negotiating parties will retain a relationship of some sort following the bargaining process.

I myself have a default bargaining style of accommodation with a strong follow up of collaboration. This means I'm very good at understanding and looking out for the other party's interests, but I will also assert myself to get my interests addressed as well. I tend to keep relationships intact. I'm experienced enough to behave very competitively as the situation warrants. Other people have other strengths, and they are all useful.

Of all the bargaining styles, the one I deploy the least is compromise. I don't like to just split the difference if I can avoid it. I'd rather change the scope of the issues somehow to work around the arbitrary middle ground, and I'm also a bit pigheaded and passionate about standing up for a solution I think is right. I never argue for something I don't believe in, and when I believe in it, I'm all in.

Whatever my own biases, compromise (or "split the difference") is a good strategy at the end of a bargaining process just to get a good deal done, but the people whose first tendency is to compromise tend not to do very well as bargainers.

Why?

They are very susceptible to giving up their own goals very quickly, and very often, they soften their counteroffers before they even gain a concession from their counterparts. There's more than one way of negotiating against yourself. There's nothing wrong with setting ambitious goals: in fact, you should do so. But if someone comes at you with a fairly aggressive, but more or less credible, bid or offer, stick to your guns. Don't soften your counteroffer, making an implicit concession up front. Let the process work for you. Don't concede if the other side is not also conceding, or else, expand the field of issues in play so that you can get something else you want, perhaps something more valuable to you, in exchange for your concessions.

Compromise is a good secondary strategy for any bargaining situation. But the other approaches are almost always better primary strategies, depending on the stakes and on any future relationship interests.

Economic Populism in America is Back

2006-11-15T06:59:00.000-08:00

I mentioned before the elections that economic populism looked like it would be a winner, if the polls were right. The polls were right and Democrats won big. In my home state of Virginia, George Allen lost to former Secretary of the Navy under Reagan Jim Webb, a Democrat, who is very much of the economic populist mold. He has an editorial in today's Wall Street Journal:

ELECTION 2006
Class Struggle
American workers have a chance to be heard.

BY JIM WEBB
Wednesday, November 15, 2006 12:01 a.m.

The most important--and unfortunately the least debated--issue in politics today is our society's steady drift toward a class-based system, the likes of which we have not seen since the 19th century. America's top tier has grown infinitely richer and more removed over the past 25 years. It is not unfair to say that they are literally living in a different country. Few among them send their children to public schools; fewer still send their loved ones to fight our wars. They own most of our stocks, making the stock market an unreliable indicator of the economic health of working people. The top 1% now takes in an astounding 16% of national income, up from 8% in 1980. The tax codes protect them, just as they protect corporate America, through a vast system of loopholes.

Incestuous corporate boards regularly approve compensation packages for chief executives and others that are out of logic's range. As this newspaper has reported, the average CEO of a sizeable corporation makes more than $10 million a year, while the minimum wage for workers amounts to about $10,000 a year, and has not been raised in nearly a decade. When I graduated from college in the 1960s, the average CEO made 20 times what the average worker made. Today, that CEO makes 400 times as much.

In the age of globalization and outsourcing, and with a vast underground labor pool from illegal immigration, the average American worker is seeing a different life and a troubling future. Trickle-down economics didn't happen. Despite the vaunted all-time highs of the stock market, wages and salaries are at all-time lows as a percentage of the national wealth. At the same time, medical costs have risen 73% in the last six years alone. Half of that increase comes from wage-earners' pockets rather than from insurance, and 47 million Americans have no medical insurance at all.

Manufacturing jobs are disappearing. Many earned pension programs have collapsed in the wake of corporate "reorganization." And workers' ability to negotiate their futures has been eviscerated by the twin threats of modern corporate America: If they complain too loudly, their jobs might either be outsourced overseas or given to illegal immigrants.

This ever-widening divide is too often ignored or downplayed by its beneficiaries. A sense of entitlement has set in among elites, bordering on hubris. When I raised this issue with corporate leaders during the recent political campaign, I was met repeatedly with denials, and, from some, an overt lack of concern for those who are falling behind. A troubling arrogance is in the air among the nation's most fortunate. Some shrug off large-scale economic and social dislocations as the inevitable byproducts of the "rough road of capitalism." Others claim that it's the fault of the worker or the public education system, that the average American is simply not up to the international challenge, that our education system fails us, or that our workers have become spoiled by old notions of corporate paternalism.

Still others have gone so far as to argue that these divisions are the natural results of a competitive society. Furthermore, an unspoken insinuation seems to be inundating our national debate: Certain immigrant groups have the "right genetics" and thus are natural entrants to the "overclass," while others, as well as those who come from stock that has been here for 200 years and have not made it to the top, simply don't possess the necessary attributes.

Most Americans reject such notions. But the true challenge is for everyone to understand that the current economic divisions in society are harmful to our future. It should be the first order of business for the new Congress to begin addressing these divisions, and to work to bring true fairness back to economic life. Workers already understand this, as they see stagnant wages and disappearing jobs.

America's elites need to understand this reality in terms of their own self-interest. A recent survey in the Economist warned that globalization was affecting the U.S. differently than other "First World" nations, and that white-collar jobs were in as much danger as the blue-collar positions which have thus far been ravaged by outsourcing and illegal immigration. That survey then warned that "unless a solution is found to sluggish real wages and rising inequality, there is a serious risk of a protectionist backlash" in America that would take us away from what they view to be the "biggest economic stimulus in world history."

More troubling is this: If it remains unchecked, this bifurcation of opportunities and advantages along class lines has the potential to bring a period of political unrest. Up to now, most American workers have simply been worried about their job prospects. Once they understand that there are (and were) clear alternatives to the policies that have dislocated careers and altered futures, they will demand more accountability from the leaders who have failed to protect their interests. The "Wal-Marting" of cheap consumer products brought in from places like China, and the easy money from low-interest home mortgage refinancing, have softened the blows in recent years. But the balance point is tipping in both cases, away from the consumer and away from our national interest. . .

That's most of the article, but it's an exerpt, per copyright law. What's old is new again, folks, and the Repoublicans are not likely to gain back the House or Senate in 2008.

Why?

On the House side, the Dems won big: they needed 15 seats for a majority, and they got double that, mostly in already Democratic states where the have other majorities. That means those seats won't flip back easily. On the SEnate side, of the 33 seats up for reelection next time, 21 are Republican. That means Republicans will be on defense. What's more, after majority control flips, people form the former majority tend to retire, so expect some open seats with no incumbents for Democrats to shoot at in the Senate next time. Congressmen must seek reelection every two years, but Senators get six year terms. Get used to a Democratic Congress, folks.

Right now, the $2 billion corporate lobbying industry in DC is trying to find ways to do business with Democrats, and to be sure, there are Democrats who want to take campaign money from big business. But then again, that's not the same as getting policy guidance and for the first time in who knows when, even the social conservatives among the Democrats seem to be pretty united on the pro-labor and economic populist issues Jim Webb articulates above.

Smart business will see what's coming and adjust. I've seen this coming for a while and have been writing about it. If you've been a regular reader, this is no surprise to you.

Trust is Badly Damaged; Accountability is "In"

2006-10-30T06:24:00.000-08:00

This editorial today describes much of what I've been sensing and writing about lately. I've added some emphasis in spots:

In 1995 Francis Fukuyama came out with a book called "Trust," in which he argued that a society's capacity for cooperation underpins its prosperity. The same year, Robert Putnam's famous article, "Bowling Alone," lamented that the United States was depleting its stock of precious social capital. The question of trust -- in government and also in communities -- preoccupied politicians too. "It Takes a Village," Hillary Rodham Clinton urged in the title of her 1996 book, which became a best seller.
You don't hear much about trust these days. Instead, we want accountability.
You see this most viciously in politics. In the mid-term campaigns, nobody has time for trust. The name of the game is to hold opponents accountable by attacking their records -- for failings real or imagined. If the Democrats capture one or both chambers, it will be largely because they promise to hold the president accountable.
This reflects a shift somewhere around 2003 or 2004. In the 1990s, after academics and pundits began talking about trust, the nation did actually become more trusting. The share of Americans saying they trust government "most of the time" or "just about always" rose from 21 percent in 1994 to 56 percent in 2002. Equally, elections became less abrasively focused on accountability. In 2000, according to John Geer of Vanderbilt University, a relatively low 40 percent of the messages in presidential TV spots were negative, down from 47 percent four years earlier.
But some time after the Iraq invasion, these trends reversed. In 2004 the share of Americans saying they trusted government fell to 47 percent, and this month a CBS News-New York Times poll put it at a rock-bottom 28 percent. Meanwhile Geer's measures show that in the 2004 election negative messages jumped to 50 percent of the total, and he guesses that this year's congressional races are the most negative in history.
There's been a similar change in corporate America. In the late 1990s, the new thing for corporate managers was to trust ordinary employees. Company hierarchies were flattened so that people in the middle could demonstrate initiative rather than suffocating under bureaucratic controls. In 1999, the Harvard Business Review reported that 30,000 articles on trusting and empowering middle managers had appeared in the business press over the previous four years.
That paradigm ended in 2002 with Enron, WorldCom and dozens of lesser corporate scandals. Suddenly nobody wanted to trust managers; they wanted to audit them. Instead of the era of management empowerment, we entered the era of mandatory online ethics training. Meanwhile private-equity firms are raising record sums to take over companies on the premise that incumbent managers need to be kicked rather than trusted.
[snip]
But trust, when not abused, is nonetheless an asset. Accountants, lawyers and online training sessions impose costs on businesses; it would be cheaper to trust people if that were possible. Likewise, as Marc Hetherington of Vanderbilt University has demonstrated, government is constrained if nobody trusts it. The Great Society programs were possible because Americans trusted government in the 1960s; the creation of the Medicare prescription drug program arguably reflected the peaking of trust in government in 2003. But Bill Clinton's health care reform was thwarted in the low-trust early 1990s, and nobody now trusts government to modernize entitlements. Meanwhile President Bush had enormous foreign policy momentum in 2002-03 because Americans trusted him. Thanks to the Iraq mess, Americans are now focused on holding Bush accountable, and his options are limited.
There are powerful reasons trust tends to decline and accountability advances. Mobile societies tend to have weak bonds; the Internet makes it easier to hold people accountable and encourages acerbic negativity. And the absence of trust can feed on itself. Leaders function under stifling oversight; this causes them to perform sluggishly, so trust continues to stagnate. But occasionally there is a chance to escape this trap: A shock causes trust to rise, leaders have a chance to lead and there's an opportunity to boost trust still further.
We've recently had a double opportunity. The boom of the 1990s boosted trust in business; the 2001 terrorist attacks boosted trust in government. But CEOs and politicians abused these gifts with scandals and incompetence. Such is the cost of corporate malfeasance and the Iraq war: Precious social capital is destroyed by leaders' avarice and hubris.

How Do You Know When You Staff Needs More To Do?

2006-10-27T08:36:00.000-07:00

Winds of Change: Business and the US Political Season

2006-10-27T08:09:00.000-07:00

The housing market numbers show significant cooling, as I and many others have been observing for some time, but the Fed seems to feel hopeful that inflation will not be much of a threat. Bulls point to the stock market's recent gains and describe scenarios involving that delicate, rare unicorn named "Soft Landing." Bears point out the current stock market highs still represent low annualized rates of growth over the first six years of this century, based on historical standards, and fret that consumers by and large have not benefited from recent stock market gains. Poll numbers seem to validate the notion that economic gains are not felt to be widespread at all.

All of this is fueling a furious political season in the US, as we head in to Congressional elections in less than two weeks. Republicans, ever the friends of our big business lobbyists here in DC, are poised for a bad, bad year, struggling to sustain control of at least one house in the US Congress. Pent up frustration among Democrats could lead to a lot of investigative ugliness for Republicans over issues like war profiteering on the Iraq war and other fronts. The Democrats will not likely have the power throughout congress to get new legislation passed and signed by the president, but they will probably promote highly popular working and middle class issues like a minimum wage increase, college student loan assistance and some form of universalized health care. In truth, many businesses are ready to take health care expenses off their income statements while having the country as a whole benefit from cost reductions through economies of scale, though specific industries will remain in opposition to any such changes.

What this election will probably bring with it a new phase of economic populism, whereby the middle class in America begins to see its interests more in line with the interests of working people and less in line with CEO's and big business. The benefits of economic growth are not being widely felt, and the Republican Party has been badly hurt by it international failures and misguided fantasies through the Iraq occupation. The public seems in no mood to sustain such international adventurism.

These political probabilities will have economic impacts. In the short term, the markets will likely be fretful in the face of rising Democratic power, and lobbying firms here in DC are rushing to find connected Democrats to hire after years of keeping Democrats in exile. But in the longer term, the Democrats have been the more fiscally responsible party (judging by the last 20 years), as surprising as that may seem to many, and better US debt management will, as ever, soothe the markets. One thing I hear from Democrats, Republicans, big business types, grass roots populists, basically everyone, is this: the status quo cannot hold and the current direction of US society will change.

But which way will things turn? That's anybody's guess, but the trends I discuss in this earlier article will, for my money, bring about more destabilization of the status quo, rather than less. Unless the telecoms and their allies in congress succeed in regulating the Internet against net neutrality, a new age of savvy information elites from anywhere in the world will continue to make news, disseminate video, set the agenda, change politics and change the ways that businesses operate. Google has become a highly accessible social memory and historical record, and this makes for much more populist accountability to those who traditionally hold and wield power. YouTube, recently sold to Google, allows anyone to create highly accessible video content. Anyone who's viewed videos on this website has seen YouTube video.

But What About Inflation?

2006-10-18T06:23:00.000-07:00

Here's what I just got in my inbox from the Wall Street Journal's online alert system:

NEWS ALERT
from The Wall Street Journal

Oct. 18, 2006

U.S. consumer prices tumbled last month on the back of a steep slide in energy prices, but the underlying inflation rate accelerated to its highest annual rate in over a decade, which should keep Federal Reserve officials on edge about inflation risks in the economy. The overall consumer price index decreased 0.5% in September, the biggest drop since November 2005, the Labor Department said. Excluding food and energy, the CPI advanced 0.2%.

This threatens the perfect economic storm scenario I've been fretting and writing about for a few months now: a recession triggered by the housing market collapse with the return of higher inflation. "Stagflation" is a word I remember well from my youth. Energy prices won't stay relatively low as they are at the moment, either. Low gas prices may very well represent a temporary artifact of the U. S. political cycle, with elections in early November: a bit of a gift from the international oil industry to help keep a very friendly U. S. administration in power. Do I sound cynical? I live in the DC metro area.

Economy Watch: Housing Market Still Falling

2006-10-18T05:58:00.000-07:00

As I've discussed before, the residential real estate boom has been responsible, directly and through indirect effects (related industry services and growth, consumer confidence and wealth effects) for almost half of the U. S. post-2000 stock market correction growth. In that context, two new news items suggest the correction in the housing market is not yet done: a continuing, disturbing bit of news for the economy.

First, an item about new home sales from the relatively more stable Washington DC area housing market. Notice that, in the example cited, it's not just the middle or lower bands of the housing market, which had been the most affected in the DC metro area this year, but a defaulted purchase in the upper range of the market:

House Sales In Region Increasingly Called Off
More New-Home Buyers Are Canceling Contracts

By Tomoeh Murakami Tse
Washington Post Staff Writer
Wednesday, October 18, 2006; A01

NVR Inc., the region's largest home builder, said yesterday that four out of 10 of its new-home sales in the Washington area were canceled last quarter, making it the latest builder to report that more buyers are backing out of deals.

Around the Washington market, cancellation rates have tripled in the past year, to 17 percent, according to researchers at Hanley Wood Market Intelligence. In August alone, that meant about 250 cancellations. In its most recent earnings report, builder Toll Brothers Inc. said cancellations in the quarter that ended in July had more than doubled, to 18 percent nationally, while numerous builders said in interviews that their cancellations locally had increased.

Developers and builders say buyers are abandoning five-figure deposits on their future homes because they cannot sell their existing homes or did not sell them for nearly as much as they had counted on.

In an effort to reverse the trend, builders are helping buyers sell their old houses, delaying closing dates or offering favorable loan terms -- or even cash, beyond the free decks and plasma televisions they have been using to try to lure customers since the housing market began cooling a year ago.

For instance, both Pulte Homes Inc. and Toll Brothers here are offering "home staging" services -- that is, help for buyers who want to polish their existing homes to sell them. Pulte will give its customers up to $2,000 toward such services. Toll Brothers is also covering up to six months in mortgage payments for the new homes if buyers take out the loan through the company. The idea is to give buyers room to sell their old homes, a company representative said.

It is difficult to put a price tag on how much in incentives builders are giving to buyers with existing contracts because they tend to be worked out on a case-by-case basis. But both cancellations and builders' efforts to stop them have generally been more prevalent in markets where prices increased rapidly during the housing boom, including Washington.

With little success in selling their home and a settlement date rapidly approaching on a new $900,000 house in Clinton, Irica and James Cheeks last month decided to walk away from that dream house and their $60,000 deposit.

Second, there's this speech from San Francisco Reserve Board President Janet Yellen. For those of you who need a translation, "behind the curve" means the statistics we have don't yet reflect how bad it is out there:

Of course, housing is a particularly interest-sensitive sector, and, as we know, it already has shown clear signs of cooling. Frankly, the pace of it has been a little surprising. Nationally, housing permits are down noticeably—by more than 20 percent—from a year ago. In addition, inventories of unsold houses are up significantly, sales of new and existing homes are off their peaks, and surveys of homebuyers and builders are showing much more pessimistic attitudes.

The national data on residential investment reflect all of these developments and enter directly into the calculation of real GDP growth. After adjusting for inflation, (real) residential investment dropped at an 11 percent annual rate in the second quarter following two small declines in the prior two quarters.

The California data, not surprisingly, show even more softening in the housing market. For the first half of this year, quarterly average home sales in California are down nearly four times as much as they are nationwide, and new housing activity also has slowed more dramatically in the state and in the Bay Area. The local exception is the San Jose-Santa Clara area, where the decline in new single-family housing permits this year has been more moderate, presumably because of the relative strength of the Silicon Valley's tech firms.

According to some of our contacts elsewhere in this Federal Reserve District, data like these are actually "behind the curve," and they're willing to bet that things will get worse before they get better. For example, a major home builder has told me that the share of unsold homes has topped 80 percent in some of the new subdivisions around Phoenix and Las Vegas, which he labeled the new "ghost towns" of the West. Though the situation isn't that bad everywhere, a significant buildup of home inventory implies that permits and starts may continue to fall and the market may not recover for several years. While builders remain hesitant to cut prices so far, and instead offer sales incentives, price cuts at some point in the future seem almost inevitable.

Indeed, we have already seen that the pace of house-price appreciation has clearly moderated, and there are signs that it may continue. For example, one indicator we have been following is the Case-Shiller house price index, which is based on house price data in ten large urban markets—three of which are in California, by the way. Beginning in May of this year, futures contracts on this price index began trading, and they show house prices falling at about a 6 percent annual rate by the end of this year. Though this is still a very new and pretty thin market, the results are interesting and suggestive.

Significant movements in house prices can be an issue for economic activity. Just as the run-up in house prices provided some support for consumer spending, slower increases, and especially outright decreases, could weaken that support. For example, back when house prices were rising so fast, people saw that more and more equity was being built up in their houses, and they might well have felt that they could afford to spend pretty freely. In economic terms, this is called the "wealth effect." In addition, with instruments like home equity loans, refinancing, and so on, households have found it much easier to pull money out of their rising house values to support their spending. Now, with the pace of house-price appreciation slowing, of course, their equity is not rising so fast anymore, which may weaken the growth in consumer spending. In California, the impact of a vanishing wealth effect might be quite significant because over the past year the state has seen a more rapid deceleration in housing prices than the nation. In fact, two northern California metropolitan areas, San Mateo and Sacramento even reported declines in house prices over the past year.

There are those who believe business investment will make up for these downnward trends in the economy. I have yet to comprehend the argument, hear from my clients or ever witness in practice a cycle when businesses significantly increase capacity in a down market. Who's going to buy the new stuff?

Quotes of Note

2006-10-18T05:34:00.000-07:00

"What is man but his passion?" -- Robert Penn Warren

"A purpose of human life, no matter who is controlling it, is to love whoever is around to be loved." -- Kurt Vonnegut, Jr.

"To go against the dominant thinking of your friends, of most of the people you see every day, is perhaps the most difficult act of heroism you can have." -- Theodore H. White

Moving to China

2006-10-17T06:00:00.000-07:00

Two articles from today's New York Times highlight deals from Western companies to access markets in China. The first comes from Wal-Mart:

Wal-Mart Said to Be Acquiring Chain in China
By DAVID BARBOZA and MICHAEL BARBARO

SHANGHAI, Tuesday, Oct. 17 — Wal-Mart Stores, the largest retailer in the United States, is laying the groundwork to become the biggest foreign chain in China with the $1 billion purchase of a major retailer here, according to people briefed on the deal.

The move represents a large step for Wal-Mart’s strategy in China, allowing the American retailer to more than double its presence in a country that, despite its size and growing middle class, remains largely untapped by foreign retailers.

Though the size of the acquisition — of a Taiwanese-owned supermarket chain called Trust-Mart — may be modest for Wal-Mart, it is a critical one because the Chinese market is becoming much more pivotal in the retailer’s overall international strategy. For Wal-Mart, China represents an opportunity to tap a vast and fast-growing market abroad at a time when the company’s sales are lagging elsewhere and it has run into obstacles to expansion at home.

“China is the only country in the world that offers Wal-Mart the chance to replicate what they have accomplished in the U.S.,” said Bill Dreher, an analyst at Deutsche Bank Securities.

The second involves Viacom:

Viacom to Provide Content to Leading Chinese Web Site
By DAVID BARBOZA

SHANGHAI, Oct. 17 -- Viacom, one of the world’s biggest media companies, said today that it had struck a deal to provide television and music video content to Baidu, one of China’s biggest and fastest-growing internet companies.

The alliance between Viacom’s MTV Networks and Baidu.com, one of the world’s most trafficked web sites, is the biggest effort so far to introduce American television and entertainment programming into China.

The deal comes just two months after MTV Networks -- which produces the MTV music video channel as well as Nickelodeon and popular cartoon programs like Sponge Bob Square Pants -- formed a similar alliance with Google to distribute ad supported clips over the internet.

Viacom officials say they are moving aggressively to digitize their entertainment content and funnel it onto the internet, mobile phones and other devices, putting its entertainment at the fingertips of people in every part of the globe.

“This is an extraordinary milestone for us,” said Bill Roedy, the head of MTV Networks International. “This gives us an amazing opportunity to tap into a new market. This is a direct link to the No. 1 portal in China.”

I have no idea how good these deals are on the merits, based on their business models and terms. Time will tell. But as I emphasize with my negotiation students, deals operate on two simultaneous levels: 1) the structural and strategic merits and exigencies of the situation, and 2) the human, cognitive and emotional realities of the player(s) involved.

From a cross-cultural relations perspective, I'll be interested to see how well these very different cultures are able to work together through the operational complications of strategic alliances. In the West, we are not as good at building and sustaining business ties through relationships as they are in China, and we rely more on contracts and the law to encourage compliance and commitment. Once the negotiators are done, and the operations people must make this work in order to derive sustainable value from these joint enterprises, mistakes and miscomminications are more likely to occur.

As I say, time will tell.

Steve Martin (The Jerk): "And that's all I need!"

2006-10-13T08:41:00.000-07:00

Decades later, this still really cracks me up. Someday, I may deconstruct some of the real smarts in this movie, but let's just say for now, I've seen rags to riches to bust cycles, for large groups and for individuals, and Martin's sendup of wounded, grandiose, even narcissistic pride is pure genius. Of course, his child-like comedic character is likable, and not everyone I've seen come through such time is, shall we say, likable. But a lot of people who go through it are good folks, even if they do get to like the taste of their own koolaid too much:

Negotiations Case: Whither North Korea?

2006-10-12T12:50:00.000-07:00

The case of North Korea and its nascent nuclear program presents the rest of the world with few immediate options, and no good confrontational options. This is, at its current equilbrium, like a crisis negotiation:

by Bruce A. Wind 10/95
[Officer Wind is a member of the Seattle, WA, Police Dept. Hostage
Negotiations Team.]

Incidents involving barricaded subjects, hostage takers, or persons threatening suicide represent especially trying and stressful moments for law enforcement personnel who respond to them. Officers first responding to the scene must quickly assess the totality of the situation, secure the area, gauge the threat to hostages or bystanders, and request additional units as appropriate. Crisis negotiators must establish contact with subjects, identify their demands, and work to resolve tense and often volatile standoffs without loss of life. Special Weapons and Tactics (SWAT) teams must prepare to neutralize subjects through swift tactical means. Field commanders assume ultimate responsibility for every aspect of the police response.

North Korea is a desperately poor, totalitarian country whose leader is not an irrational actor. He's a power made despot, but he's not irrational. The US signalled to its "Axis of Evil" enemies that it will invade and depose a regime if that regime cannot defend itself with a nuke. The US is bogged down in an occupation of Iraq with no good end in sight, is threatening Iran (Axis of Evil member number 2) and has left North Korea (member number 3) alone precisely because it was not so weak a target as Saddam's Iraq. It is rational, therefore, for Iran and North Korea to pursue nuclear weapons development for self-defense. This is not rocket science.

So, now North Korea is in a fearful frenzy and is trying to leverage its nuclear development to get dialogue with the West on more favorable terms, including more economic support and an end to sanctions. Waving around a nuke is like holding the rest of the planet hostage. The only responsible course, from a pure power analysis, is to engage with North Korea through a policy of negotiation, dialogue, reassurances and international cooperation aimed at containment. I come at this not through any partisan political analysis, but purely as an expert in negotiations and my understanding of how to de-escalate crisis scenarios.

Freedom, Privacy and Social Instability in the Information Age

2006-10-04T12:08:00.000-07:00

It's no secret the Internet Age brings with it tremendous destabilization, along with great potential for losses of privacy. In the West, we're constantly now struggling, on all fronts, to sort out what principles of privacy and freedom we need to translate and update for the Information Age. The U. S. Government struggles to gain access to information for security purposes, but the Consitituion includes civil protections that require court review and warrants prior to searches. Historically, lack of strict protections for citizens leads to totalitarian abuse of power by governments. "Trust us" is not a sufficient guarantee of a free society. Unchecked, unaccountable power leads to unmitigated abuse, always and everywhere throughout history.

Other institutional holders of concentrated power - large corporations - also struggle in the new playing field to determine how to use information, and the power information access confers, appropriately, as in the HP scandal story quoted below.

The Internet does enable small groups of people to organize in ways they could not do easily in the past. It also makes citizen publishing of content, news, news analysis, video and so forth far more possible, without having to sell content to an establishment media filter reliant on advertising and establishment goodwill for survival.

For example, American politicians have been rocked and lost power due in no small measure to citizen based Internet activism. In my home state, incumbent Senator George Allen's reelection campaign has gone into a nosedive following the Internet publication of a home made video of him calling a an American born twenty-something of Indian descent a racial epithet. The masses are using the tools of the Information age to shift the balance of power against established institutions, and it's no surprise the institutions are fighting back. I've previously written about the net neutrality issue, and that's political fight represents a major front on this social fault line in the Information Age.

Privacy. Information. Power. And here we come to today's HP story (emphasis added):

Five to Face Charges in HP Scandal
By Ellen Nakashima
Washington Post Staff Writer
Wednesday, October 4, 2006; 1:58 PM
California's attorney general is preparing to file criminal complaints today against ousted Hewlett-Packard Co. chairman Patricia C. Dunn and four others for their roles in the Hewlett-Packard Co. spying operation that surfaced last month, according to sources close to the case.
The criminal complaints are expected to be filed in Santa Clara County Superior Court in California against Dunn; former HP ethics director and senior legal counsel Kevin Hunsaker; and three HP outsiders, including Boston security contractor Ronald R. DeLia and two private investigators, Bryan Wagner, of Littleton, Colo., and Matthew DePante, whose firm is in Melbourne, Fla.
All five will be charged with four felony offenses under California statutes. The offenses include obtaining phone records under false pretenses; unauthorized access to and use of computer data, identity theft; and conspiracy to commit the crimes. They carry penalties of $10,000 and/or imprisonment for up to three years.
Attorney General Bill Lockyer has been investigating the case for weeks.
The charges stem from an extensive HP spying operation that involved impersonating people to obtain their phone records. The two-phase operation began in 2005 and ended in spring 2006, under Dunn's direction, and was designed to identify who inside HP or on its board was leaking confidential company information to reporters.
The charges will come just days after Dunn, Hunsaker and HP Chief Executive Mark V. Hurd appeared before a congressional investigative subcommittee to answer questions about the methods the company used to find out who was leaking information to the news media. Those methods included lying to get phone records; following or watching board directors, journalists and their family members at home and at conferences; and conducting a "sting" operation on a reporter. In one instance, investigators placed tracer software in an e-mail to a reporter to try to track who she communicated with.
The criminal charges will be the first lodged in the case, which is also being investigated by the FBI.
Dunn, 53, resigned at the request of the board last month. A breast cancer survivor, she is battling stage 4 ovarian cancer and was due to begin chemotherapy today.
Dunn told the House subcommittee last week that she had been assured the phone records used to help identify who was leaking HP information to the media were obtained illegally.
Documents HP submitted to the House Energy and Commerce oversight and investigative committee, however, show that Dunn was told in June 2005 by HP's Boston security contractor, DeLia, that he was securing personal phone records of directors and journalists by means of "pretext."
Pretexting involves impersonating someone to obtain their phone records. In addition to violating California laws, it is a violation of federal wire fraud statutes, according to former federal prosecutors.

Security, privacy, liberty, free societies, fair markets, concentrated social power versus populist power. The issues are the same for every generation, and we're in new global, social territory together. The HP story is pretty crazy, but I can guarantee you this is not unique stuff. HP has not been the only big player doing this, because there are a number of boutique corporate security firms competing in precisely this kind of market.

Feedback to a Non-Competitive Bargainer

2006-09-27T08:11:00.000-07:00

It's been a tough month to find the time to write a lot. I'm teaching a negotiation class to MBA's at Wharton, aside from all my other projects, and it's both great fun and very time consuming.

My students write weekly journal entries about their experiences in practice negotiation sessions. I use these journals to enter into a coaching dialogue with my students. For my feature article on this month's email newsletter, I want to quote some feedback I gave to one student, a very sweet and talented person whose natural style is not very competitive. I wanted to quote it because I have frequently given much this same feedback to others, and many newsletter subscribers may find it useful:

What you're experiencing is the power of the expectations game - your beliefs and expectations - on the outcome. Here's the psychology of how this may have played out for you: 1) "I'm too nice." 2) "I fear losing." 3) "She offered a good price - yay! I can relax." 4) "I had better throw another higher number out there." 5) "If I don't get my new number it's okay because I'm already ahead of where I feared I might be. I didn't lose." 6) "She can have her number."

If this is accurate, then by beginning with a fear based narrative, you set yourself up with an implicit goal: don't lose. Well, that makes sense: you're not a competitive type. But it's also true that, in life, you will sometimes be negotiating on behalf of others, and even if you're not competitive, very caring, relationship based people can adapt their expectations by recognizing 1) their needs and wants are as legitimate as anyone else's: you would not relax your attempt to help another, so why shortchange yourself? and 2) in many situations in life, the deals you strike will impact others, whose needs and wants are important, who rely on you to stand for them. Sometimes, non-competitive people can find the motivation to compete because they want to be able to serve others well. Maybe this will work for you, and maybe not, but I offer this set of ideas as a way to perhaps help you reframe your approach to negotiation, so that you can use your admirable relationship-based negotiating skills to maximum effect. There is much potential in you there.

We can go through the mechanics of the situation analysis of the bargaining interaction as you have done, and I think all your observations are on point. I have little to add other than to validate your thinking. But on another level, working to make technical adjustments will only go so far if you cannot find within yourself the space to believe that getting the best deal you can is a good thing. When we enter these situations "not to lose," poor outcomes are the habitual, self-fulfilling result. I will point out and emphasize, however, that you did very well getting the other side to make the first offer in this case (since your did not have an informational advantage going into the bargaining process). Well done.
I hope you take all this in the spirit in which it is intended. I'm quite pleased with your learning and progress. Keep it up! If my thoughts here feel off base to you, I certainly defer to your own knowledge of yourself as the final word: I don't know you well and am responding in large part through the lens of much of my experience working with many people over the years.

What's Really Propping Up The Economy

2006-09-16T07:37:00.000-07:00

From Businessweek. This is just the beginning of the article. It's worth a whole read:

What's Really Propping Up The Economy

Since 2001, the health-care industry has added 1.7 million jobs. The rest of the private sector? None

COVER STORY PODCAST

If you really want to understand what makes the U.S. economy tick these days, don't go to Silicon Valley, Wall Street, or Washington. Just take a short trip to your local hospital. Park where you don't block the ambulances, and watch the unending flow of doctors, nurses, technicians, and support personnel. You'll have a front-row seat at the health-care economy.

For years, everyone from politicians on both sides of the aisle to corporate execs to your Aunt Tilly have justifiably bemoaned American health care -- the out-of-control costs, the vast inefficiencies, the lack of access, and the often inexplicable blunders.

Slide Show >>

But the very real problems with the health-care system mask a simple fact: Without it the nation's labor market would be in a deep coma. Since 2001, 1.7 million new jobs have been added in the health-care sector, which includes related industries such as pharmaceuticals and health insurance. Meanwhile, the number of private-sector jobs outside of health care is no higher than it was five years ago.

Sure, housing has been a bonanza for homebuilders, real estate agents, and mortgage brokers. Together they have added more than 900,000 jobs since 2001. But the pressures of globalization and new technology have wreaked havoc on the rest of the labor market: Factories are still closing, retailers are shrinking, and the finance and insurance sector, outside of real estate lending and health insurers, has generated few additional jobs.

Perhaps most surprising, information technology, the great electronic promise of the 1990s, has turned into one of the biggest job-growth disappointments of all time. Despite the splashy success of companies such as Google (GOOG ) and Yahoo! (YHOO ), businesses at the core of the information economy -- software, semiconductors, telecom, and the whole gamut of Web companies -- have lost more than 1.1 million jobs in the past five years. Those businesses employ fewer Americans today than they did in 1998, when the Internet frenzy kicked into high gear.

ATTITUDE SHIFT
Meanwhile, hospitaL administrators like Steven Altschuler, president of Children's Hospital of Philadelphia, are on a hiring spree. Altschuler has added the equivalent of 4,000 new full-time jobs since he took over six years ago, almost doubling the hospital's workforce. To put this in perspective, all the nonhealth-care businesses in the Philadelphia area combined added virtually no jobs over the same stretch.

Altschuler plans to add 3,000 more employees over the next five years as the hospital, one of the nation's leading pediatric centers, spends $1.7 billion to expand. Next up is a new 1.2 million-square-foot research facility that will be packed with well-paid scientists and support staff. "Health care is the major engine for the economy of the city of Philadelphia," says Altschuler.

The City of Brotherly Love is hardly alone. Across the country, state and local politicians, desperate for growth, are crafting their economic development strategies around biotech and health care. California will pour $3 billion into stem cell research over the next 10 years, and other areas are on the same path. "Our downtown business leaders and politicians have traditionally considered health care as a cost center, not as an economic engine," says Baiju R. Shah, a former McKinsey & Co. consultant who runs Cleveland's BioEnterprise, a nonprofit founded four years ago to stimulate the local health-care and bioscience industries. "But people are waking up."

What they're waking up to is the true underpinnings of the much vaunted American job machine. The U.S. unemployment rate is 4.7%, compared with 8.2% and 8.9%, respectively, in Germany and France. But the health-care systems of those two countries added very few jobs from 1997 to 2004, according to new data from the Organization for Economic Cooperation & Development, while U.S. hospitals and physician offices never stopped growing. Take away health-care hiring in the U.S., and quicker than you can say cardiac bypass, the U.S. unemployment rate would be 1 to 2 percentage points higher.

Almost invisibly, health care has become the main American job program for the 21st century, replacing, at least for the moment, all the other industries that are vanishing from the landscape. With more than $2 trillion in spending -- half public, half private -- health care is propping up local job markets in the Northeast, Midwest, and South, the regions hit hardest by globalization and the collapse of manufacturing (map).

Health care is highly labor intensive, so most of that $2 trillion ends up in the pockets of workers. And at least so far, there's little leakage abroad in terms of patient care. "Health care is all home-produced," says Princeton University economist and health-care expert Uwe Reinhardt. The good news is that if the housing market falls into a deep swoon, health care could provide enough new jobs to prevent a wider recession. In August, health-services employment rose by 35,000, double the increase in construction and far outstripping any other sector.

John Maynard Keynes would nod approvingly if he were alive. Seventy years ago, the elegant British economist proposed that in tough times the government could and should spend large sums of money to create jobs and stimulate growth. His theories are out of fashion, but substitute "health care" for "government," and that's exactly what is happening today.

Make no mistake, though: The U.S. could eventually pay a big economic price for all these jobs. Ballooning government spending on health care is a major reason why Washington is running an enormous budget deficit, since federal outlays for health care totaled more than $600 billion in 2005, or roughly one quarter of the whole federal budget. Rising prices for medical care are making it harder for the average American to afford health insurance, leaving 47 million uninsured.

Moreover, as the high cost of health care lowers the competitiveness of U.S. corporations, it may accelerate the outflow of jobs in a self-reinforcing cycle. In fact, one explanation for the huge U.S. trade deficit is that the country is borrowing from overseas to fund creation of health-care jobs.

There's another enormous long-term problem: If current trends continue, 30% to 40% of all new jobs created over the next 25 years will be in health care. That sort of lopsided job creation is not the blueprint for a well-functioning economy. One solution would be to make health care less labor-intensive by investing a lot more in information technology. "Low productivity in health is mostly a product of low investment," says Harvard University economist Dale Jorgenson.

For now, though, health-care hiring is providing a safety net in areas where manufacturing and retailing are no longer dependable sources of jobs. Take Johnstown, Pa., a town that once hummed with activity from local steel mills, coal mines, and nearby factories. As most of these businesses closed, the town emptied out, going from a population of 63,000 in 1950 to 23,000 today.

Now, Conemaugh Health System, with about 5,000 workers, is the biggest employer in town. "Everyone has a Conemaugh parking sticker on their car," says Linda D. Suter, 48, who's in her second year at the nursing school Conemaugh operates. Suter's dad worked at a factory in a nearby town, now closed, that made backyard swing sets for kids.

Frank Kosnowsky sold appliances at the Sears (SHLD ) in Johnstown for 10 years, starting right out of high school. But he got fed up with the way the company was changing and started thinking about going to nursing school. "One day I had a disagreement with my boss, and the application went right in," says Kosnowsky, 29. "I wanted something that had a future." He worked part-time at Sears while he went to nursing school. Now, three years later, he's the first and only male nurse working at Conemaugh's neonatal intensive-care unit -- a career far different than that of his coal miner dad.

Suter and Kosnowsky live smack in the middle of the "Health Belt" that stretches from New England down through New York and Pennsylvania, across the Midwest and down through most of the South. These are areas where health care has been the major source of job growth over the past five years.

Nowhere is that truer than in Cleveland. There, Cleveland Clinic, with 29,000 employees, is the biggest employer by far. Next-largest is another hospital system, University Hospitals Health System, with 21,600 staffers. Then comes insurer Progressive Corp. (PGR ) and KeyCorp., each with fewer than 10,000 workers in the area. Cleveland Clinic's performance is pretty good for an outfit that started in 1921 with four docs in a building they planned to turn into a hotel if their vision didn't pay off.

Beyond its immediate employment tallies, the Clinic has a huge multiplier effect on the local economy. CEO Dr. Delos M. Cosgrove says it supports perhaps 75,000 jobs in all in the area, ranging from Clinic staffers to workers at hotels and restaurants -- which patients and their families use in more than 2.9 million patient visits per year -- to 3,000 suppliers to the Clinic.

Only a few years ago manufacturers were Cleveland's job engines. Companies such as machine-tool giant Warner & Swasey Co. don't even exist anymore. Conglomerate TRW was sold in 2002, and parts of it moved away. Fittingly, the Clinic now occupies its former headquarters, which TRW donated.

Health care has been one of the few economic bright spots in the Detroit area, too. Nancy M. Schlichting heads the sprawling Henry Ford Health System, founded by the great man himself in 1915. Schlichting is overseeing the construction of a new 300-bed hospital in West Bloomfield, Mich., a suburb of Detroit, which will eventually generate the equivalent of 1,200 full-time jobs. This expansion comes at a time when Ford Motor Co. (F ) is considering big layoffs.

Then there's North Carolina. Since 2001 it has seen a total job increase of 24,000, or 0.6%. Meager enough -- but take out the 60,000 jobs added by health care, and the state's jobs would have decreased by 36,000. Employment in manufacturing, retailing, trucking, utilities, and information all fell. And construction added only 5,000 jobs, a mere fraction of health care's contribution.

Oddly enough, the retirement meccas of Florida and Arizona are among the least dependent on health-care jobs for growth. Over the past five years the two states have gotten only 10% and 15%, respectively, of their new jobs from health-care services -- hospitals, doctor's offices, and nursing homes. Phoenix showed a job gain of 240,000, but only 30,000 were in health care. That's partly because the influx of elderly has been balanced by a rise in younger workers, too.

Is the health-care economy a good deal for workers? It is for Patricia A. McDonald, a second-year student nurse at Conemaugh. Before going to nursing school, McDonald, 46, sold insurance door-to-door, often driving close to 1,000 miles a week in rural areas to make cold calls. Her take in sales commissions was $35,000 to $40,000 a year, but that was before deducting expenses. Registered nurses in the Johnstown area, by comparison, are paid an average of almost $43,000 -- with no traveling. "This will be much better," says McDonald.

Unlike many other industries, health care offers a full range of jobs, from home health aides making very low wages through technicians and nurses making middle-class salaries up to well-paid doctors. On average, annual pay in private health services is $43,700, slightly above the private-sector average of $42,600.

World Oil Prices Down

2006-09-11T06:04:00.000-07:00

My friend Hale Stewart sends the following today via email:

Gas prices are coming down for several reasons:

1.) The end of the Israeli -- Palestinian conflict.

2.) High US inventories of oil, gasoline and other oil derivatives.

3.) The end of the summer driving season.

4.) The EU/Iran chief negotiator announced today that "misunderstandings" with Iran were cleared up. I have no idea what that means. This is a big event because the Iranian situation has created a floor in oil prices for the last 6 months or so.

A drop in oil prices will ease inflationary pressures in the US. This will encourage the Federal Reserve to maintain its "wait and see" attitude regarding US interest rates.

However, it's always important to remember the oil market is extremely volatile. A random event could completely change this scenario. In addition, the oil market is technically oversold right now, implying a rebound to the previous floor of around $70/bbl may be in the cards.

An easing of inflationary pressures will be more than welcome as the domestic US housing market corrects itself. Hoefully, consumer confidence won't become too battered, though it's already been showing signs of deterioration.

Quotes of Note

2006-09-08T07:17:00.000-07:00

"Do not look back in anger, or forward in fear, but around in awareness." -- James Thurber

"Every man has a right to his opinion, but no man has a right to be wrong in his facts." -- Bernard Mannes Baruch

"We should be careful to get out of an experience only the wisdom that is in it - and stop there; lest we be like the cat that sits down on a hot stove-lid. She will never sit down on a hot stove-lid again - and that is well; but also she will never sit down on a cold one anymore." -- Mark Twain

Pop! Goes the Housing Market

2006-09-06T06:01:00.000-07:00

Well, I'm back from the Labor Day weekend. For those of you in the United States, I hope you enjoyed the late summer holiday. Now's it's back to documenting the housing market slowdown in the US. This is from Bloomberg today, with emphasis added in bold:

U.S. Home-Price Gains Slow as Housing Slump Deepens (Update4)
By Kathleen M. Howley

Sept. 5 (Bloomberg) -- U.S. home-price growth slowed during the second quarter from a year earlier in the sharpest three- month plunge on record, according to a government report issued today that indicates this year's housing slump is deepening.

"The wheels are coming off the housing market,'' said Scott Anderson, an economist at Wells Fargo & Co. in Minneapolis.

Prices for single-family homes rose an average of 1.17 percent during the period, compared with 3.65 percent growth in the second quarter of 2005, according to a report issued today by Office of Federal Housing Enterprise in Washington. The drop was the biggest since the agency began keeping records in 1975. The report doesn't give an average price, only the percent of change.

The quarterly slowdown came during the "spring selling season,'' when about half of a year's home sales typically occur, suggesting the housing market may be slowing more rapidly than economists including Anderson initially predicted. In 2005, the last of five record years for home sales and price gains, the second quarter was the strongest, according to Ofheo data.

"The housing market is cooling in a very significant way,'' Ofheo Director James Lockhart said in today's report.

Five states showed price declines during the quarter, led my Michigan, down 0.72 percent, Massachusetts, falling 0.44 percent, and Maine, dropping 0.2 percent. The biggest gainers were New Mexico, up 4.22 percent, Oregon, rising 3.99 percent, and Idaho, increasing 3.78 percent. New York rose 0.9 percent and New Jersey gained 1.85 percent.

Overstating Gains?

The housing sector may be weaker than the report indicates because the index excludes condominium and luxury home sales, said Robert Mellman, an economist at JP Morgan Chase & Co. in New York. The index measures changes of values for single-family properties that have loans bought or securitized by Fannie Mae or Freddie Mac. It excludes houses that have mortgages higher than $417,000, the maximum allowed in 2006 for loans bought by the government-chartered companies.

"To the extent that pricing at the high end of the market and pricing for condos are especially weak, the Ofheo index may be overstating price gains,'' Mellman said in a note to clients.

Sales of existing houses and condominiums declined to an annual rate of 6.69 million in the second quarter from a 7.19 million pace a year earlier, the National Association of Realtors said on Aug. 15. The median price for a condominium dropped 0.3 percent to $225,800 from a year ago, the first decline on record, while the median for a single-family home rose 3.7 percent to $227,500, the slowest pace in six years.

Contracts Plunge

Contracts to buy previously owned homes plunged in July by the most since the terror attacks of September 2001, the real estate trade group said in a Sept. 1 report. Its index of signed purchase agreements fell 7 percent to 105.6 after no change in June.

Home sales and construction account for 6 percent of the U.S. gross domestic product, said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut. Adding ancillary purchases such as new furnishings and renovations, the housing sector influences as much as 23 percent of GDP, according to the Joint Center for Housing Studies at Harvard University in Cambridge.

Rising home prices also spur consumer spending by loosening the wallets of homeowners who feel wealthier as their net worth increases, said Drew Matus, economist at Lehman Brothers Inc. in New York.

Consumer Spending

"If you believe consumers are spending some of the money they think they're getting from their homes, then you can anticipate if those home prices level off or fall,'' that consumer spending growth may slow, Matus said.

Benny Goodman: Sing Sing Sing

2006-09-02T10:46:00.000-07:00

A bit of an old swing classic, with drum work by Gene Krupa and Harry James doing a trumpet solo:

The Housing Bubble, Illustrated

2006-08-29T06:44:00.000-07:00

This graph comes courtesy of the New York Times Week in Review section. Click on the link in the previous sentence for a larger, viewable version. The graphic is presented without further comment.

Also, there have been some believers in fairies and unicorns who have been predicting that corporate capital investment will offset losses in consumer confidence and spending to save the economy, once the housing bubble crashes and consumers find out they can no longer afford their overextended lifestyles. Yeah, right. All my clients boost capital investment when people are not buying stuff and inventories pile up. Then they cut me checks that bounce and I find new clients.

Seriously, I'm trained in psychology, not economics or finance, but I've become more aware of how my training and experience make me at least as competent to offer comment on these things as the so-called experts are. Markets are just the accumulated actions of people and their perceptions, and that's a matter of psychology. People are not rational and information is never perfect.

I did not see the stock bubble-burst coming, not really, in 2000. That was back when I believed what I heard people say on CNBC.

Now I know better.

Real Wages Fail to Match a Rise in Productivity

2006-08-28T06:19:00.000-07:00

The New York Times is now reporting on something I've been writing about on this blog. The article spends a fair amount of time musing over the political implications of all this, but I've deleted that stuff from the quoted article below. This is not a political blog, and the point I'm trying to highlight is economic, even if it has political implications.

I've added a little bit of bolded emphasis to a little bit below, but my main point is one I've made before: in the (in my view, highly likely) event of a forthcoming recession, there is not so much economic resilience through which to weather it in America because the last expansion has benefited only a very few Americans:

By STEVEN GREENHOUSE and DAVID LEONHARDT

Published: August 28, 2006

With the economy beginning to slow, the current expansion has a chance to become the first sustained period of economic growth since World War II that fails to offer a prolonged increase in real wages for most workers.

[snip]
The median hourly wage for American workers has declined 2 percent since 2003, after factoring in inflation. The drop has been especially notable, economists say, because productivity — the amount that an average worker produces in an hour and the basic wellspring of a nation’s living standards — has risen steadily over the same period.
As a result, wages and salaries now make up the lowest share of the nation’s gross domestic product since the government began recording the data in 1947, while corporate profits have climbed to their highest share since the 1960’s. UBS, the investment bank, recently described the current period as “the golden era of profitability.”
Until the last year, stagnating wages were somewhat offset by the rising value of benefits, especially health insurance, which caused overall compensation for most Americans to continue increasing. Since last summer, however, the value of workers’ benefits has also failed to keep pace with inflation, according to government data.
At the very top of the income spectrum, many workers have continued to receive raises that outpace inflation, and the gains have been large enough to keep average income and consumer spending rising.
In a speech on Friday, Ben S. Bernanke, the Federal Reserve chairman, did not specifically discuss wages, but he warned that the unequal distribution of the economy’s spoils could derail the trade liberalization of recent decades. Because recent economic changes “threaten the livelihoods of some workers and the profits of some firms,” Mr. Bernanke said, policy makers must try “to ensure that the benefits of global economic integration are sufficiently widely shared.”
[snip]
“Some people who aren’t partisans say, ‘Yes, the economy’s pretty good, so why are people so agitated and anxious?’ ” said Frank Luntz, a Republican campaign consultant. “The answer is they don’t feel it in their weekly paychecks.”
[snip]
Economists offer various reasons for the stagnation of wages. Although the economy continues to add jobs, global trade, immigration, layoffs and technology — as well as the insecurity caused by them — appear to have eroded workers’ bargaining power.
Trade unions are much weaker than they once were, while the buying power of the minimum wage is at a 50-year low. And health care is far more expensive than it was a decade ago, causing companies to spend more on benefits at the expense of wages.
Together, these forces have caused a growing share of the economy to go to companies instead of workers’ paychecks. In the first quarter of 2006, wages and salaries represented 45 percent of gross domestic product, down from almost 50 percent in the first quarter of 2001 and a record 53.6 percent in the first quarter of 1970, according to the Commerce Department. Each percentage point now equals about $132 billion.
Total employee compensation — wages plus benefits — has fared a little better. Its share was briefly lower than its current level of 56.1 percent in the mid-1990’s and otherwise has not been so low since 1966.
Over the last year, the value of employee benefits has risen only 3.4 percent, while inflation has exceeded 4 percent, according to the Labor Department.
In Europe and Japan, the profit share of economic output is also at or near record levels, noted Larry Hatheway, chief economist for UBS Investment Bank, who said that this highlighted the pressures of globalization on wages. Many Americans, be they apparel workers or software programmers, are facing more competition from China and India.
In another recent report on the boom in profits, economists at Goldman Sachs wrote, “The most important contributor to higher profit margins over the past five years has been a decline in labor’s share of national income.” Low interest rates and the moderate cost of capital goods, like computers, have also played a role, though economists note that an economic slowdown could hurt profits in coming months.
For most of the last century, wages and productivity — the key measure of the economy’s efficiency — have risen together, increasing rapidly through the 1950’s and 60’s and far more slowly in the 1970’s and 80’s.
But in recent years, the productivity gains have continued while the pay increases have not kept up. Worker productivity rose 16.6 percent from 2000 to 2005, while total compensation for the median worker rose 7.2 percent, according to Labor Department statistics analyzed by the Economic Policy Institute, a liberal research group. Benefits accounted for most of the increase.
“If I had to sum it up,” said Jared Bernstein, a senior economist at the institute, “it comes down to bargaining power and the lack of ability of many in the work force to claim their fair share of growth.”
Nominal wages have accelerated in the last year, but the spike in oil costs has eaten up the gains. Now the job market appears to be weakening, after a protracted series of interest-rate increases by the Federal Reserve.
Unless these trends reverse, the current expansion may lack even an extended period of modest wage growth like one that occurred in the mid-1980’s.
The most recent recession ended in late 2001. Hourly wages continued to rise in 2002 and peaked in early 2003, largely on the lingering strength of the 1990’s boom.
Average family income, adjusted for inflation, has continued to advance at a good clip, a fact Mr. Bush has cited when speaking about the economy. But these gains are a result mainly of increases at the top of the income spectrum that pull up the overall numbers. Even for workers at the 90th percentile of earners — making about $80,000 a year — inflation has outpaced their pay increases over the last three years, according to the Labor Department.
“There are two economies out there,” Mr. Cook, the political analyst, said. “One has been just white hot, going great guns. Those are the people who have benefited from globalization, technology, greater productivity and higher corporate earnings.
“And then there’s the working stiffs,’’ he added, “who just don’t feel like they’re getting ahead despite the fact that they’re working very hard. And there are a lot more people in that group than the other group.”
In 2004, the top 1 percent of earners — a group that includes many chief executives — received 11.2 percent of all wage income, up from 8.7 percent a decade earlier and less than 6 percent three decades ago, according to Emmanuel Saez and Thomas Piketty, economists who analyzed the tax data.

Fed Chief Punts, Orders Pina Colada

2006-08-25T09:24:00.000-07:00

When one has no clue what to do, it's best not to do or say anything notable or quotable. Fed Chairman Bernanke followed that rule today. Instead of signaling anything about monetary policy, he gave a political speech:

Mr. Bernanke didn't comment on monetary policy, instead addressing issues concerning the "unprecedented" pace of global economic integration, giving traders who delayed their end-of-summer vacations for the speech -- just in case the Fed chief dropped any bombshells -- the all clear to abandon ship.

"The market didn't get any sense of direction from Bernanke," said Hugh Johnson, chief investment officer at Johnson Illington Advisors. A lack of major economic or corporate news has left "the markets very directionless," he said.

Well, at least we can all enjoy our Labor Day vacations. Oh, and speaking of Labor Day, what did Bernanke have to say in his homily (bloldface emphasis added):

The current episode of global economic integration is moving at an unprecedented pace, forging the basis for productivity growth and a reduction in global poverty, Federal Reserve Chairman Ben Bernanke said Friday.
But in prepared remarks to global monetary officials and private-sector economists, he urged policy-makers to make sure the benefits of globalization are widely shared in order to stem protectionist sentiment.

"Economic and technological changes are likely to shrink effective distances still further in coming years, creating the potential for continued improvements in productivity and living standards and for a reduction in global poverty," Mr. Bernanke said in a speech to the Federal Reserve Bank of Kansas City's annual conference in Jackson Hole, Wyo. (See the full text of Bernanke's prepared remarks¹.)

The subject of this year's event is globalization and its effect on policy. Mr. Bernanke's speech is his first at Jackson Hole since becoming Fed chairman in February.

He didn't address the economic and monetary policy outlook in his prepared speech. The Fed earlier this month paused its two-year tightening campaign with the Fed funds rate at 5.25%. Economists increasingly think the funds rate will peak there, though upcoming inflation and employment reports will be critical in determining the outcome of the September Fed meeting.

Mr. Bernanke noted in his speech that globalization, for all its benefits, leads to some dislocation among certain workers and firms, and "the natural reaction of those so affected is to resist change, for example, by seeking the passage of protectionist measures." He noted that current global tensions and terrorism risks also threaten to constrain globalization.

It's a frequent theme in my writing that I don't regard the notion of the "social responsibility of business" to be a punchline. I'm not a University of Chicago guy. I'm a Wharton guy. I do think that part of responsible business calculation involves assessing the impact of business decisions on people, their lives and their communities. I'm not an anti-WTO protester type, and neither am I one to evaluate strategic business options soley on the basis of what can be reflected numerically on an income statement during a given quarter.

Bernanke's speech is fine, and I expect that over the long term, globalization should lead to reduction in poverty, but if it does so, it won't be because of any magical invisible hand, it will be because leaders make responsible decisions about how to disseminate prosperity while simultaneously promoting safe and healthy working conditions, etc.

When we abdicate moral responsibility or thinking to some magical free market ideology, we take ourselves off the hook. There is always regulation. The fight is always over who benefits from the regulation, and whose voice is heard when the regulations are decided. Living within spitting distance of Washington, DC, perhaps I have fewer illusions about this than many others do.

It is highly profitable in a given quarter or year for businesses to seek out virtual slave labor across the world, and to fight against any trade barriers or regulations that might limit or blunt such exploitation. Making such virtual slave labor available bids down mass market wealth internationally, and the result is weakness in Western economies.

That's why the Fed is in such a bind today: the housing market is busting, the American middle class is weak and not highly prosperous in real terms by historical standards, consumer confidence may very well go south, and there's not a lot of broad economic strength or capital distributed throughout the population to forestall an ugly recession, especially when global energy prices may be set for continuing inflation due to diminishing global reserves and international instability. The Fed is flirting with that old bugaboo, stagflation, and rather than make any market signals, today we get a political speech.

Nothing's been solved, but hey: I, for one, hope to enjoy a lazy end of August.

You May Be Smart, But Can You Do This?

2006-08-24T08:29:00.000-07:00

Coffee breaks gets weirder and weirder. . .

Um. . . About That Soft Landing. . .

2006-08-23T08:12:00.000-07:00

Empasis added to the original AP text via bolded type:

Existing Home Sales Drop in July
By JEANNINE AVERSA
The Associated Press
Wednesday, August 23, 2006; 10:35 AM
WASHINGTON -- Sales of previously owned homes plunged in July to the lowest level in 2 1/2 years and the inventory of unsold homes climbed to a new record high, fresh signs that the housing market has lost steam.
The National Association of Realtors reported Wednesday that sales of existing homes and condominiums dropped by 4.1 percent in July from June to a seasonally adjusted annual rate of 6.33 million. That was the lowest level since January 2004.
The latest snapshot of housing activity was weaker than analysts anticipated. Economists were forecasting the pace of sales to fall to 6.55 million.
"The housing sector is fragile," said David Lereah, the association's chief economist.
The median price of a home sold last month was $230,000. That was up just 0.9 percent from the same month last year and marked the smallest year-over-year increase since May 1995. The median price is the middle point, where half sell for more and half sell for less.
The inventory of unsold homes in July rose to a record high of 3.86 million. At the current sales pace, it would take 7.3 months to exhaust that overhang. That is the longest period to exhaust the supply of home since the spring of 1993.
On Wall Street, the weak housing report dragged stocks down. The Dow Jones were down 8 points in morning trading.
By region, sales dropped by 5.4 percent in the Northeast. They fell by 5.9 percent in the Midwest and 1.2 percent in the South. Sales declined by 6.4 percent in the West.
Wednesday's report shows that the bloom is off the rose.
For five years running, home sales had hit record highs as low mortgage rates lured buyers. But the housing sector has lost steam this year as mortgage rates have gone up and would-be buyers have grown cautious amid high energy prices and a slowing economy.
Against that backdrop, the Federal Reserve earlier this month decided to halt a rate-raising campaign that had pushed interest rates steadily higher over the last two-plus years to fend off inflation.
The Fed's goal is to raise rates sufficiently to thwart inflation but not enough to hurt the economy.
One of the things that Federal Reserve Board Chairman Ben Bernanke and his colleagues are watching closely is the housing slowdown. If home prices and sales were to crash, that could spell big trouble for the overall economy. Thus far, Bernanke has said the market's slowdown has been fairly orderly and smooth.
Lereah said he still expects a "soft landing" for the once high-flying housing sector. But he urged the Fed to leave interest rates alone and refrain from bumping them up again _ as some analysts have said is a possibility.
The housing sector's transition from a red-hot market to a cool one has important implications for the overall economy.
Consumers who watched their homes rise rapidly in value over the last several years felt wealthy and more inclined to spend. They also borrowed against their homes _ treating them like ATMs _ to support their spending ways.

Two words to the Fed: good luck. Spit on the end of that thread all you want: stuffing it through that needle won't be easy. Soft landing? All the inside analysts are already acknowledging there will be no such thing. This talk about a "soft landing" is moving beyond the wishful thinking stage to the level of propagandistic confidence building. I don't think it's going to work.

One other thing: those median home sales statistics hide a reality of this market: the high end of the real estate market is not feeling the pinch the way the middle band is. The weight of this bursting bubble is being borne by the middle class and working people. Luxury spending is healthier than mass market spending. Since real wages have been stagnant over the recent (ahem) "recovery," and set to remain so, consumer confidence has been bouyed entirely by the real estate market wealth effect. Now with that mirage evaporating, the middle class and just-making-it working families are feeling the pinch the most. Luxury home sales are actually distorting the numbers through that median home sales figure. In other words, this AP article is painting a rosier picture of what's happening out there than is really the case.

Business Travellers and Data Security

2006-08-22T08:23:00.000-07:00

Here's an eye-opener. Be a little paranoid about your data when you travel and use business center computers and wireless networks:

Web Surfing in Public Places Is a Way to Court Trouble

By Susan Stellin

Any business traveler who has logged on to a wireless network at the airport, printed a document at a hotel business center or checked e-mail messages at a public terminal has probably wondered, at least fleetingly, “Is this safe?”

Although obsessing about computer security is a bit like worrying about a toddler — potential hazards lurk everywhere and you can drive yourself crazy trying to avoid them — the fact is, business travelers take certain risks with the things they do on most trips.

“If you go into the average hotel and sit down in the business center and have a look at their computer, I’m sure you’ll find some interesting things that people shouldn’t have left behind,” said Paul Stamp, a security analyst with Forrester Research.

“The first step companies need to do is to educate people about how valuable the data is and also how small the circles are in which they travel,” he said, noting how loudly many people discuss business on cellphones, without a thought for who may be nearby.

Or what may be in the air. Robert Vamosi, a senior editor with the online technology publisher CNET, said wireless networks at airports — or for that matter, hotels or cafes — are not as secure as most people think.

“Someone may have some software on their computer that allows them to look at all the wireless transactions going on around them and capture packets that are floating between the laptop and the wireless access point,” he said.

These software programs are called packet sniffers and many can be downloaded free online. They are typically set up to capture passwords, credit card numbers and bank account information — which is why Mr. Vamosi says shopping on the Web is not a great way to kill time during a flight delay.

“Where I’d draw the line is putting in your bank account information or credit card number,” he said, adding that checking e-mail messages probably is not that risky, but if you want to be cautious, change your password once you are on a secure connection again.

That said, if you gain access to your corporate network through a V.P.N., or virtual private network, you are safer using public hot spots, because your data is encrypted as it travels between Gate 17 and your office’s server, where it is decoded before going to its destination.

In other words, your communications are automatically encoded by software on your computer so the data looks like gibberish to anyone trying to intercept it. If your company does not offer a V.P.N. for employees working away from the office, there are services you can subscribe to for about $10 a month that do the same thing.

Michael Sellitto, a graduate student studying international security at Harvard, said that even though he encrypted any sensitive data on his laptop, he planned to sign up for a service like HotSpotVPN to add another level of security when he is traveling, especially when using poorly protected networks at cafes and hotels.

“The problem is, the really good people have written sniffer programs so that the less-sophisticated people have access to the same technology,” Mr. Sellitto said. “Say a Microsoft Word document gets transmitted. The sniffer program will collect that and someone could open it up on their computer.”

While it is hard to say how likely it is that someone is lurking on a public network, many public networks do not have adequate security.

Last fall, InfoWorld magazine published an article about a security researcher who managed to collect more than 100 passwords, per stay, at hotels with lax security (about half the hotels she tested).

Gathering reliable statistics about security breaches is notoriously difficult, since companies are reluctant to reveal this information. Still, the most recent computer crime and security survey, conducted annually by the Computer Security Institute with the Federal Bureau of Investigation, found that the average loss from computer security incidents in 2005 was $167,713 per respondent (based on 313 companies and organizations that answered the question).

As Jim Louderback, editor of PC Magazine, noted, the statistics may not matter given the problems one data breach can cause.

“Even if it’s 1 or 2 percent,” he said. “You don’t want to run that risk.”

Using a public computer can also mean courting trouble, because data viewed while surfing the Web, printing a document or opening an e-mail attachment is generally stored on the computer — meaning it could be accessible to the next person who sits down. (To remove traces of your work, delete any documents you have viewed, clear the browser cache and the history file and empty the trash before you walk away.)

“You also run the risk that somebody has loaded a program on there that can capture your log-ins and passwords,” Mr. Louderback said, recalling an incident a few years ago when a Queens resident was caught installing this type of “key logger” software on computers at several Kinko’s locations in New York.

One way to foil these programs, which record what you type and can send the transcript to a hacker, is to use a password manager like RoboForm. This $30 software encrypts all your user names and passwords for various Web sites, then enters the data at the click of a mouse when you are prompted to log in.

Chuckles: Will Ferrell Spoofs an Apple Ad

2006-08-21T07:22:00.000-07:00

I couldn't resist:

Does Money Buy Happiness?

2006-08-17T05:49:00.000-07:00

Not according to this Wall Street Journal column (online subscription required):

In recent years, economists and psychologists have turned their attention to "happiness research" -- and the results are a little disturbing if your life's goals are a bigger paycheck and a fatter nest egg. Money alone, it seems, just doesn't buy a whole lot of happiness.

• It's all relative. To be sure, high-income earners often express greater satisfaction with their lives. In a 2004 survey, 43% of those with family incomes of $90,000 or more reported being "very happy," versus 22% for those with incomes below $20,000.

But the truth, it seems, is messier than such surveys suggest. Yes, if you live in poverty, more money can bolster your happiness.

"But once you're safe and warm and fed, it makes surprisingly little difference," says David Schkade, professor of management at the University of California at San Diego. "Once you get to the lower-middle class, then it takes a lot of income to make a difference. Income does matter, just not as much as people think."

Indeed, despite rising standards of living, just 30% of Americans described themselves as "very happy" in the late 1990s, down from 34% in the early 1970s, according to a study by economics professors David Blanchflower and Andrew Oswald that appeared in the Journal of Public Economics in July 2004.

Faced with this sort of data, researchers have speculated that our happiness is influenced not by our absolute level of wealth and income, but rather by how our financial situation compares with friends and colleagues.

[snip]

This raises the question: If more money won't make us much happier, what will? Here are four pointers.

• Keep your commute short. Tempted to use your latest pay raise to buy a big house in a distant suburb? Don't do it.

While we often adjust amazingly well to life's hardships, commuting is an exception. "You can't adapt to commuting, because it's entirely unpredictable," says Daniel Gilbert, author of "Stumbling on Happiness" and a psychology professor at Harvard University. "Driving in traffic is a different kind of hell every day."

• Choose time over money. Cutting back the hours you work will likely leave you happier, even if it means less pay.

What about the fall in your standard of living? It may hurt less than you imagine. True, you are thrilled when you buy a new car. Soon enough, however, the good feelings fade and you're taking the new car for granted. Academics call this "hedonic adaptation."

• Think carefully about how you spend your dollars. While a new car may not boost your happiness for long, maybe a trip to Europe would.

"Money itself doesn't make you happy," Prof. Gilbert says. "What can make you happy is what you do with it. There's a lot of data that suggests experiences are better than durable goods."

The car might seem like the better purchase, because it has lasting value. But, in fact, it sits in the driveway, slowly deteriorating. "Experiences don't hang around long enough to disappoint you," Prof. Gilbert says. "What you have left are wonderful memories."

• Use your leisure time wisely. Surveys show that leisure is better for your happiness than work. But much also depends on how you spend your leisure time.

Passive activities like watching television usually don't make folks as happy as eating. A good meal, in turn, doesn't rank quite as highly as active leisure activities, such as socializing with friends.

"Going to a dinner at a nice restaurant, where you're going to see friends and eat good food, is one of the best combinations," Prof. Schkade says. "The French know what they're doing, when it comes to how to enjoy a good meal."

Distributed Versus Centralized Leadership

2006-08-11T09:35:00.000-07:00

I've been meaning to write about this for a while, but haven't because I need to sit and focus to work out my ideas. But then I realized, that's what writing is for!

Some ideas:

The rise of information technology has made information available to the widest reaches of organizations.
Such information used to be the sole possession of a management class of experts.
These experts made decisions for organizations because they had the necessary information. They tended to control the actions of their organization members more directly. That's what "supervision" was all about: watching over someone, from the latin roots of the English word.
I'll call this model of organization Centralized Leadership, emphasizing decisions made by experts who watch over and control the actions of others.

So, far. so good. This is pretty familiar territory for a lot of people. Now there's more:

But in the information age, there is now too much information for any one person to be the sole expert anymore. Front line organization workers now know more about how to do their jobs than their supervisors often do, and they have access to information systems that enable them, potentially, to make meaningful decisions once made only by managers and supervisors.
This changes the role of management to what I'm calling a Distributed Leadership model. Leaders in the new environment are no longer the highest subject matter experts with all the information. Information systems now hold and distribute information relevant to decision making. Effective leaders in this environment are now the coaches who teach organization members the best approach to decision making, informed by organizational priorities, strategy and values.

Even this is relatively familiar territory, so far. But what is this "Distributed Leadership" idea?

Because front line organization members have access to information and are making decisions, not only do they obtain decision making guidance and coaching from their managers, but they perform something of the same role for each other. Mini-experts ask other mini-experts for help and guidance all the time, especially when they work closely together.
In other words, the function of leadership is no longer the wholly owned role of the manager or boss in an organization chart. The practice of good leadership - the guidance and development of others in support of peak performance toward some larger, organizational goal - is now distributed throughout the organization.
The distinction, therefore, between designated "leaders" and those who are led in an organization is becoming less meaningful due to the continuing implications of making more decision relevant information available to those anywhere in an organization.

This then has the following implication:

Therefore, the most successful leaders in organizations where information is highly distributed (a category that now includes most modern businesses) are those who can not only guide others in making wise decisions with the information available to them, but those who can also guide others in the practice of distributed, lateral leadership.
Accordingly, the best managers and supervisors now define their role as one where they must teach team members to recognize and encourage the talents and abilities of those around them, fostering each other's mutual growth.

Conclusion:

The most effective information age leaders are coaches and teachers of peer-leadership practice among their direct reports. The Information Age is an age of Distributed Leadership for the most effective leaders and organizations.

This Guy Wouldn't Quit

2006-08-07T06:03:00.000-07:00

Recent Expansion Shows Weakest Job Growth in 40 Years?

2006-08-04T07:51:00.000-07:00

Via email, from Hale Stewart. If his analysis is correct, and we're coming off the weakest job expansion in 40 years, then the US economy is rather vulnerable and not so very resilient, should the fall of the housing market have a real effect on consumer confidence, coupled with inflationary pressure:

From the BLS:

Total nonfarm payroll employment increased by 113,000 in July, and the unemployment rate rose to 4.8 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Job gains occurred in several service-providing industries, including professional and business services, health care, and food services. Employment also rose in mining. Average hourly earnings rose by 7 cents, or 0.4 percent, in July

So, once again the official number comes in low. This has been a consistent trend for this entire expansion. But how does this expansion stack up? Maybe it's really a good recovery from a historical perspective.

Well - no. From a historical perspective, this expansion has the worst record of job creation in 40 years.

Below are the beginning and ending dates for every economic expansion since 1961. I have not included the first expansion after 1981 because of the second contraction which occurred shortly after the end the first recession. In addition, I have included the beginning number of establishment jobs, the end number of establishment jobs, total jobs gained and the compound rate of establishment job growth for each expansion. The information comes from the Bureau of Labor Statistics website.

2/61 - 12/69
Beginning number of jobs: 53,556,000
Ending number of jobs: 71,240,000
Total Jobs Created: 17,684,000
Compound rate of establishment job growth: 3.283%

11/70 - 11/73
Beginning number of jobs: 70,409,000
Ending number of jobs: 77,909,000
Total Jobs Created: 7,500,000
Compound rate of establishment job growth: 3.43%

3/75 - 1/80
Beginning number of jobs: 76,649,000
Ending number of jobs: 90,800,000
Total Jobs Created: 14,151,000
Compound rate of establishment job growth: 3.56%

11/82 - 7/90
Beginning number of jobs: 88,770,000
Ending number of jobs: 109,773,000
Total Jobs Created: 21,003,000
Compound rate of establishment job growth: 2.8%

3/91 - 3/01
Beginning number of jobs: 108,542,000
Ending number of jobs: 132,504,000
Total Jobs Created: 23,962,000
Compound rate of establishment job growth: 2.01%

11/01 - ?
Beginning number of jobs: 130,883,000
Ending number of jobs: 135,343,000
Total Jobs Created: 4,460,000
Compound rate of establishment job growth: .71%

Notice there are two expansions of shorter duration that created 1.7 times and 3.2 times the number of establishment jobs as the recent expansion.
Because all of these expansions lasted various lengths of time, the compound rate of job growth is the best way to compare one expansion to another.

Music: Sarah Vaughn

2006-08-04T05:49:00.000-07:00

Longtime subscribers to "What's Up, Doc?" will know I've often recommended music or done little movie reviews. Here's a little classic Sarah Vaughn from 1951. Have a great weekend!

Economy Watch: Why the Real Estate Obsession?

2006-08-02T09:07:00.000-07:00

The Big Picture answers the question:

Mortgage Apps drop 29% Y-Y

We were recently asked why we have become so "Real Estate obsessed."

That's the wrong question. Given how significant Housing has been to job creation and consumer spending, the right question is "Why aren't you more obsessed with Real Estate."

Let's look at the most recent mortgage data as an example: This morning, the Mortgage Bankers Association (MBA) released its Weekly Mortgage App Survey (week ending July 28) called the Market Composite Index. Its a measure of mortgage loan application volume.

The most recent data showed a sequential decrease of 1.2% (seasonally adjusteded) -- the lowest the index has been since May 2002. It was the 3rd straight week of slumping overall mortgage activity, despite interest rate declines over the same timeframe.

On an unadjusted basis, the Index decreased 29.0% compared with the same week one year earlier.

Hence, our obsession.

Mortgage apps are but one of many indicators of the ongoing housing market slowdown. New Home Sales were down 11% in the past year, while Existing Home Sales were down 8.9%. Both Housing starts (down 11%) and Home Builders' Sentiment Index (down over half -- off 41 points in the past year to 39) to levels also suggesting a dramatic cooling in Real Estate.

As the same blog pointed out last year, half of new American jobs created during the most recent wave of growth have been real estate related. Rising home values have fueled consumer confidence through the famous wealth effect, but if that fades, based purely on consumer emotion and perception, consumer spending could cool quite notably. Every American industry, and the world economy, will feel the effects.

Content is King (Again)

2006-08-02T06:29:00.000-07:00

The Wall Street Journal is reporting that AOL has made a strategic shift to give away AOL software and email accounts in order to keep people interfacing with the Internet under the AOL umbrella of brands. This shift has been a long time coming, as sales of Internet access through AOL were sinking. That means the company that built its brand on providing Internet access has officially become a content and advertising sales company. Content is, once again, king.

Because content is king, the keepers of the cables and infrastructure on the Internet - the telecoms like Verizon and at&t - want to be able to chop up differential, preferred ease of access to premium-paying content providers, leaving small players, innovators and non-profits in the sloooooow lane. That's what the whole fight about "net neutrality" is about. If the telecoms get their way, further suppressing small business innovation by letting the big players get preferrred access to future customers, expect many more American businesses to suffer what Ford is now experiencing as time goes by. Unfortunately, however, many big boardrooms don't think about the long term as clearly as they review the short term.

Here's a little piece of the Wall Street Journal article today (online subscription required):

Time Warner Swings to a Profit,
Announces Major Shift at AOL

A WALL STREET JOURNAL ONLINE NEWS ROUNDUP
August 2, 2006 9:09 a.m.

Time Warner Inc. said it swung to a profit in the second quarter after it recorded a charge for settling securities litigation a year earlier, and the company announced that AOL will give away email accounts and software to broadband users in a major strategy shift aiming to draw more advertising dollars.

For the quarter, the New York-based cable and media concern reported net income of $1.01 billion, or 24 cents a share, compared with a year earlier, when the company posted a loss of $409 million, or nine cents a share, on a litigation-related charge. Its cable-and-networks segment led profit growth.

Time Warner said its adjusted operating income before depreciation and amortization, which now includes the impact of the Adelphia acquisition, will rise by a low double-digit amount.

Time Warner's cable-television business grew, thanks to more high-speed Internet and digital-phone customers, offsetting weakness at AOL. Advertising, though a relatively small part of AOL's revenue, saw a 40% boost in the second quarter, while the unit's overall revenue declined 2%.

"We've listened to our customers, and many of them want to keep using these AOL products when they migrate to broadband -- but not pay extra for them,'' said Jeff Bewkes, Time Warner's president and chief operating officer.

Toyota Passes Ford in US Sales

2006-08-01T17:52:00.000-07:00

Well, I've been writing about the influence of rising energy costs on US consumers, and about the growth opportunities for businesses that help the trend toward green products, even reducing carbon emissions. Enter Toyota, winning in the US based on fuel efficiency. And Ford continues to flounder. Now comes this from Bloomberg:

Toyota Passes Ford, Leads Asian Brands to U.S. Record (Update2)
Aug. 2 (Bloomberg) -- Toyota Motor Corp. outsold Ford Motor Co. in July to rank as the No. 2 automaker in the U.S. for the first time, helping Asia-based companies win record market share as buyers shift to fuel-efficient models.

Toyota, which trails only General Motors Corp. in global sales, sold 241,826 vehicles in the U.S., up 12 percent from a year earlier, and 427 more than Ford. Gains of 6 percent for Honda Motor Co. and 6.2 percent for Hyundai Motor Co. helped the Asian companies boost their market share to 41.4 percent from 33.1 percent a year earlier, according to Bloomberg data.

``It's a different world. GM by itself used to have half the U.S. market,'' said Walter McManus, director of the University of Michigan's Office for the Study of Automotive Transportation. ``Sales are being driven by fuel costs, fuel efficiency, passenger cars. Toyota, and Honda to a lesser extent, added trucks but kept solid portfolios of cars.''

Toyota has benefited this year from demand for fuel- efficient cars such as the Corolla and Scion models and RAV4 small sport-utility vehicles as gasoline prices have stayed near $3 a gallon. As Toyota prepares to add capacity to build about 500,000 more cars and trucks in North America, GM and Ford are cutting a combined 60,000 U.S. union jobs and closing 26 locations to try and halt losses in the region.

The US is losing the innovation battle by failing to accept reality: energy costs are not going to come down much over the longer term unless new technologies are created. And yet, the oil lobby fights tooth and nail for any regulatory giveaways it can get to maintain its death grip on windfall profits and federal giveaways for as long as it can. I see a lot of this, with my proximity to Washington DC, in ways many people just don't see. The selfish, protectionist instincts of big American businesses are killing innovative American business writ large.

Real leadership accepts reality, and actualy leads businesses in directions that not only serve profits and shareholders, but the common good. These are not and need not be divergent goals. We used to know that in American business, historically. But now, American business has lost much or all of its former good sense. I agree with Leo Hindery: America's leadership class in business has lost its moral compass. It's good business to do, well, good business.

Here's an example of another well paid for, well lobbied giveaway to the oil lobby, passed by the US SEnate, but not yet cleared through the House of Representatives. The Gulf coast is so overdeveloped, with so few wetlands left intact, that another big hurricane season (as predicted) could bring more havoc and death again this summer. More offshore drilling will only weaken the Gulf Coast area's coastal integrity. From the Wall Street Journal (subscription online required):

Senate Clears Gulf-Drilling Bill,
Setting Up Showdown With House

By LAURA MECKLER
August 2, 2006

WASHINGTON -- The Senate approved legislation that would open 8.3 million acres in the Gulf of Mexico to oil-and-gas exploration, splitting with the House over the scope of new drilling and casting final passage into doubt.

A House-passed energy bill would allow drilling up and down the Pacific and Atlantic coasts, 356 million acres in all, lifting a moratorium that has been in place for a quarter-century. Senate Democrats vowed to block any compromise, insisting that the House accept the Senate version.

The Senate bill passed 71-25, with supporters saying it will increase domestic supply and ultimately drive down the price of gasoline. "In this case, the benefit so outweighs the risks... that we should have a stampede, not a vote," said Sen. Pete Domenici (R., N.M.), chairman of the energy committee. The oil and natural gas available has "USA stamped all over it," he said, but "we have been sitting idly by year after year saying no, no, no because we want a moratorium to protect against something that needed no protection."
Lengthy negotiations produced a measure that could clear the Senate -- where drilling bills have died in the past. The bill provides protections for Florida, barring any drilling within 125 miles of the state's coastline, with the buffer zone even greater in some areas. It allows Louisiana and three other Gulf states -- Texas, Mississippi and Alabama -- to share in energy-production royalties for the first time; at present, the money goes entirely to the federal government.
That money will be "so important" in helping rebuild and secure the coastline, said Sen. Mary Landrieu (D., La.), who helped pull the deal together.

Senate Majority Leader Bill Frist engineered the debate to bar any amendments to the bill, denying lawmakers the chance to try to attach conservation and other measures to the legislation.

Opponents objected to the royalty provisions, which would provide tens of millions of dollars for coastal restoration, saying it was a windfall for four states at the expense of the others. Sen. Mark Dayton (D., Minn.) called it "nothing more than a special-interest boondoggle."

Over the next 10 years, the measure would generate $1.5 billion in royalties, according to an estimate by the Congressional Budget Office. The federal government would keep half, with 37.5% going to the Gulf Coast states and 12.5% going to land- and water-conservation funds in all 50 states.

The measure drew opposition from environmentalists, who want to keep the drilling restrictions in place to protect fragile coastlines. It was supported by business groups, who argued that additional supply will bring down prices.

Quotes of Note

2006-08-01T08:21:00.000-07:00

"Self-pity in its early stages is as snug as a feather mattress. Only when it hardens does it become uncomfortable." -- Maya Angelou

"If you practice an art, be proud of it and make it proud of you . It may break your heart, but it will fill your heart before it breaks it; it will make you a person in your own right." -- Maxwell Anderson

"Not to engage in the pursuit of ideas is to live like ants instead of like men." -- Mortimer Adler

More From the Bears

2006-07-31T19:09:00.000-07:00

Another thoughtful and provocative ecomonic analysis site. These ideas run in tandem with what I posted just below. As I say, I am by nature an optimist, but these underlying economic dynamics are hard to ignore (emphasis added):

My views – elaborated in several ways since last October- are still, even after the recent market turmoil, well out-of-consensus. There is still out there the wishful-thinking view that the current turmoil is a temporary blip and, thus, a buying opportunity rather than the beginning of a bear market. Consensus still argues that the US will grow at 3% in Q2 and for the rest of the year; and that global economic growth will remain sustained. I beg to disagree on all fronts. Let me elaborate my bearish views (that have not changed much since last October; so no Monday morning quarterbacking here).
I have been saying for a while that in 2006 Three Ugly Bears will scare the growth Goldilocks in the US and abroad. The Three Bears are: first, higher inflation –both core and headline – leading to higher interest rates in the US and the rest of the world; the era of cheap money feeding asset bubbles is over. Second, an oil and commodity price shock that is stagflationary for both the US and all other oil importing countries. Third, the fizzling out – to avoid saying bursting – of the housing bubble in the US and in many other economies where this bubble fermented for too long via the drug of easy liquidity. The US consumer is altogether shopped out, over-indebted, with negative savings and now bombarded with high oil prices, fluttering housing and rising short and long rates. The poor consumer also suffers from a slumping labor market generating a pathetically low number of jobs, flat real wages and suffering of the redistribution of income from labor to capital (as the profit share of the economy has surged); on top of it all, the equity market downturn has negative wealth and consumer confidence effects. Thus, real consumption growth in Q2 will be a meager 2% and, since consumption is 70% of consumption [sic - I think he means GDP], Q2 growth will be at best 2.5% and falling towards 2% - if not lower – by Q4.

Hat tip to my friend, attorney Hale Stewart.

Economy Singin' the Blues?

2006-07-31T18:43:00.000-07:00

I highly recommend the blog, The Big Picture. In five paragraphs as part of a larger post, they capture what's going on now in the US economy, and it ain't pretty. In the world of blogs, it's a trite cliche to say "read the whole thing," but still, sometimes it applies:

Let's review: Why might we think these numbers make so little sense to begin with? We know (at least those of us who have been paying attention) that the economy has been unusually Real Estate dependent this cycle. We have seen a vastly disproportionate amount of new job creation come from the Real Estate complex (including agentsm, mortgage brokers, etc.) We also know that the Housing market has cooled dramatically -- those of us paying attention also saw the beginnings of this as long ago as August 2005.

Further, we know that by just about every historical measure, this has been the weakest job creating recovery cycle in the post WWII era. We have previously noted that the unemployment rate is down due to NiLFs: Not In Labor Force. Barron's described it as "the incredibly shrinking labor force, a phenomenon that's largely responsible for the deceptively modest unemployment rate." The labor participation rate touched is near 15-year lows.

Using other measures that include these slackers, unemployment is actually much higher than the reported 4.6%: The well respected Liscio report noted the actual number could be much higher of a jobless rate. If one includes the so-called marginally attached workers and part-timers who really want to be working full time, the unemployment rate weighs in at a formidable 9.4%.

Jobs that we are creating by and large have been paying less and offering weaker benefits than the jobs they have replaced. (This is a factor in the negative savings rate, but let's save that discussion for another time). One notable exception to the weaker pay has been the home construction industry. These jobs have been relatively high paying. The sector has been a major source of new job creation, from real estate agents to mortgage brokers to Loews and Home Depot.

It should come as no surprise that as the entire sector has cooled, so too has the jobs creation associated with it. We now have the biggest inventory of new and existing homes for sale we have seen in nearly a decade. Realtors have said that home sales are now a 'buyer's market'. New home builders are witnessing the rise of a Ghost Housing Market, where specualtors walk away from their down payments, rather than close on a property which has declined significantly in price.

Tip to this blog via email from my friend Hale Stewart.

More Gloomy News

2006-07-31T11:30:00.000-07:00

First up, is NASDAQ crashing?

The NASDAQ 100 has been crashing since May 8th, but has anybody noticed? Since the NDX topped at 1,721 on May 8th, three days before our last Hindenburg Omen, the NASDAQ 100 has crashed 15.94 percent. It is down nearly 18 percent since its January 11th top, and is down 12 percent for the year.

Then, on the heels of my post on Friday, the New York Times weighed in with this over the weekend:

July 29, 2006

Housing Slows, Taking Big Toll on the Economy
By VIKAS BAJAJ and DAVID LEONHARDT

The housing industry — which largely carried the American economy through the tribulations of the 2000 stock-market crash, a recession and climbing oil prices — has lost its vigor in recent months and now has begun to bog down the broader economy, which slowed to a modest 2.5 percent growth rate this spring.

That was a sharp comedown from the 5.6 percent growth rate of the first quarter, the Commerce Department reported yesterday, caused in part by the third consecutive quarterly decline in spending on houses and apartment buildings, after several years of rapid growth.

“It hasn’t slowed down a little bit — it has slowed down a lot,” said Doug McCraw, a developer who has scrapped his plans for a 205-unit condominium tower in a neighborhood just north of downtown Fort Lauderdale, Fla. “Anybody who did not have a shovel in the dirt has chosen to wait till the market settles.”

The housing slowdown is perhaps the clearest effect of the Federal Reserve’s two-year campaign of raising interest rates in a bid to tap the brakes on the economy and reduce inflation. That campaign has been largely successful, with the decline happening gradually while other parts of the economy, mainly the corporate sector, pick up much of the slack.

“Housing is going from being far and away the most important contributor to growth to being a measurable drag, and it’s happening gracefully so far,” said Mark Zandi, chief economist of Moody’s Economy.com, a research company. “But there’s now a growing and measurable risk that things don’t go according to plan.”

The biggest risk, economists say, is that the optimism that fed the real-estate boom will reverse dramatically. The number of homes for sale has surged in recent months, particularly in once-hot markets, like the Northeast, Florida, California and parts of the Southwest. As builders delay land acquisition and construction it could reduce employment and spending in the coming months.

More broadly, just as rising housing prices during the boom added to Americans’ sense of wealth and well-being — encouraging them to spend more on a variety of goods and services — the reverse could dampen sentiment and lead consumers to pull back on their purchases.

While the fate of housing prices has received far more attention recently than real estate’s role as an engine of job growth, the sector has also become one of the country’s most important industries. Residential construction and all the activity that swirls around it — mortgage lending, renovations and the like — account for roughly 16 percent of the economy, making it the largest single sector, slightly bigger than health care.

For much of the last five years, housing — along with health care — was also one of the only reliable generators of jobs. From the start of 2001, when the Fed began cutting its benchmark rate to steady a faltering economy, until early last year, the housing sector added 1.1 million jobs.

The rest of economy lost 1.2 million jobs over the same period, according to an analysis by Moody’s Economy.com.

Housing continued its rapid growth last year, and other industries began hiring in far greater numbers than they had been, creating the healthiest national job market since 2000. In the last few months, though, three pillars of the housing sector — homebuilders, mortgage lenders and real-estate agencies — have stopped adding to their payrolls, and overall job growth in housing has begun to slow.

In South Florida and Las Vegas, where contractors until recently complained that they could not find enough workers to begin work on many projects, developers are scrubbing plans for new condominiums because they cannot sell enough units to get construction financing.

Mr. McCraw, the developer in Fort Lauderdale, said slowing condo sales and a 35 percent jump in the cost of construction materials like steel, copper and concrete convinced him to shelve his project. He is now considering building office space, where demand remains strong, or simply waiting for two years.

In Las Vegas, cranes are still busily at work on new casino projects but dozens of gleaming condominium towers that were slated to sprout up a few miles from the Strip are not likely to be joining the city’s neon-bedecked skyline soon. John Restrepo, a real estate consultant in the city, estimates that only about 7 percent of the 60,000 condominium units that were announced and under construction as of the first quarter of the year are actually being built today.

Among the high-profile projects that were scrapped is Las Ramblas, an 11-building, $3 billion condominium and hotel complex being developed by the Related Companies and Centra Properties and had investors like the actor George Clooney.

“The period of irrational exuberance we saw in ’04 and ’05 and the gold rush fever has gone away,” Mr. Restrepo said.

The Commerce Department said yesterday that housing investment fell at an annual rate of 6.3 percent last quarter, after dropping less than 1 percent in each of the two previous quarters. It grew at roughly 9 percent a year during the previous three years.

That sound you hear in the background is just the mortgage lenders knocking wood and buckling down. Soon enough, when the less sophisticated of the many recent homebuyers see their ballooning ARMS force them from their homes, selling into a down market, those same mortgage lenders may not want to answer unscreened phone calls from former clients for a while.

Let's hope the worst does not happen: think happy thoughts!

Stormclouds on the Economic Horizon

2006-07-28T07:32:00.000-07:00

I'm an optimist by nature. I really am. But I'm also not a fantasist, and I'm getting much more sensitive to what appear to me to be delusional bouts of happy talk in society and the markets.

Is anyone here old enough to remember the nasty word, "stagflation?"

Check this out from the Associated Press today (emphasis in bold added, see commentary below):

Economy Slows Sharply, Inflation Heats Up
Friday July 28, 9:57 am ET
By Jeannine Aversa, AP Economics Writer

Economy Slows Sharply, Inflation Heats Up in 2nd Quarter, Commerce Department Says WASHINGTON (AP) -- The economy's growth slowed sharply in the second quarter, logging just a 2.5 percent pace as consumers tightened their belts and spending on home building nose-dived. Inflation, however, shot up.
The latest snapshot of gross domestic product released by the Commerce Department on Friday showed that the overall pace of economic activity in the April-to-June quarter was less than half that of the January-to-March quarter, when the economy zipped along at a 5.6 percent annual rate, the fastest in 2 1/2 years.

Gross domestic product measures the value of all goods and services produced within the United States and is considered the best barometer of the country's economic standing.

"The economy has significantly throttled back but inflation pressures are developing more fully," observed Mark Zandi, chief economist at Moody's Economy.com

On Wall Street, though, stocks rallied on the hope that slowing growth would convince the Federal Reserve to take a break from raising interest rates. The Dow Jones industrials were up 84 points and the Nasdaq gained 25 points in morning trading.

The second-quarter's performance -- which reflected the bite of high energy prices and rising interest rates on people and businesses as well as a cooling in the once red-hot housing market -- was weaker than the 3 percent pace analysts were forecasting.

The 2.5 percent pace was the slowest since a 1.8 percent growth rate in final quarter of 2005, when the economy was suffering fallout from the devastating Gulf Coast hurricanes.

Even though the economy cooled in the second quarter, inflation heated up.

An inflation gauge closely watched by the Federal Reserve showed that core prices -- excluding food and energy -- jumped at a 2.9 percent annual rate in the second quarter -- far outside the Fed's comfort zone. That was up from a 2.1 percent growth rate in the first quarter and marked the highest inflation reading since the third quarter of 1994, when core inflation rose at a 3.2 percent pace.

The inflation reading was taken before the latest run-up in energy prices. Oil prices hit a record closing high of $77.03 a barrel on July 14. Gasoline prices also have marched higher, topping $3 a gallon in many areas.

In a separate report from the Labor Department, employers' costs to hire and retain workers picked up in the second quarter, a development that also could raise some inflation concerns.

Compensation costs -- including wages and benefits -- rose by 0.9 percent in the April-to-June period, up from a 0.6 percent increase in the first quarter. Economists were calling for a 0.8 percent rise.

Although Federal Reserve Chairman Ben Bernanke said he is concerned about rising inflation, he told Congress last week that the Fed believes moderating economic activity will eventually lessen inflation pressures.

That assessment raised hopes on Wall Street that the Fed might take a breather in its two-year-old rate-raising campaign at its next meeting, on Aug. 8. Some economists, however, continue to predict that rates will be bumped up again at the August meeting to ward off inflation; after that, they think the Fed may move to the sidelines.

The report comes as President Bush is getting low marks from the public for his handling of the economy, according to a recent AP-Ipsos poll.

With energy prices and borrowing costs rising, consumers turned cautious in the second quarter. They boosted their spending at just a 2.5 percent pace, down from a 4.8 percent growth rate in the first quarter. Much of the weakness was in consumers' appetite for big-ticket goods, such as cars and appliances.

Businesses also tightened the belt.

Spending on home building was cut by 6.3 percent in the second quarter, the deepest dip in nearly six years -- since the third quarter of 2000. Rising mortgage rates are clipping demand.

Businesses sliced spending on equipment and software at a 1 percent pace, the first cut in just over three years.

Government spending also was more subdued, growing at a pace of just 0.6 percent in the second quarter, compared with a 4.9 percent growth rate in the first quarter. The federal government cut spending in the second quarter, while state and local governments boosted spending.

As the economy has moderated, so has job creation.

For the April-to-June quarter, employers added an average of 108,000 jobs a month, the government reported earlier this month. That's down from the average of 176,000 a month for the January-to-March period.

Along with the latest GDP report, the government issued annual revisions that showed economic growth was slightly less than previously estimated for 2003, 2004 and 2005. The main reason for the downgrade: business investment in computer equipment and software wasn't as strong as previously thought.

As a result, the economy last year grew by 3.2 percent, rather than 3.5 percent. In 2004, economic activity expanded by 3.9 percent, instead of 4.2 percent. And in 2003, the economy's growth was 2.5 percent, versus 2.7 percent.

The revisions also showed that core inflation rose by 2.1 percent for all of 2005, a tad higher than the 2 percent reading previously estimated. Core inflation for 2004 was unchanged at 2 percent but was pushed up a notch to 1.4 percent for 2003.

Growth is becoming more anemic and prices are going up. This comes on an economic foundation in the US where middle class earnings have remained flat in real terms while the highest income brackets have accumulated wealth to a degree not seen since the Gilden Age in American history. I'll have to link to the data on that in a future post; I don't have time to get it right now.

Oh, I put that third quarter, 2000 in bold for a reason: that was just before the last recession we experienced here in the U. S.

When you look at our national debt and fiscal irresponsibility, coupled with the very real threat of a not-so-soft landing in home value deflation, and the stratification of income across the U. S. population, you have the conditions for potentially major realignments in politics and culture, and therefore on regulations on business. Don't shoot the messenger: the political polls tell much the same story.

The Fed is in a bind on interest rates, because there is price pressure upward, fed in part by energy costs not about to go down and global instability in the Middle East. If the Fed raises rates, given slow growth and the threat on home values (so many ARM's out there financed the housing boom, ready to cut lose with new rates), many people can find themsleves priced out of their mortgages, forced to sell in a down market. If the Fed ignores inflationary pressures, prices and input prices may continue to rise.

Watch consumer confidence, because the wealth effect created by rising home vales has fueled much of our apparent growth these last few years. If that evaporates, look out. Oh, and one more thing: new job numbers are usually under the baseline of 150,000 per month, not over, and that does not account for the very large historic increase in the number of people not even in the labor market anymore. They're not counted in the unemployment figures, but they still exist. And even the new jobs created tend not to be jobs with security, health insurance or other benefits of the caliber the middle class anjoyed during the twentieth century post-war boom period, when wealth was far more evenly distributed across the population.

This here optimistic bull has become more than a bit bearish. As I have time in the future, I'll link to more source material to illustrate the points I'm making here. As this is generally a leadership blog and a business blog, not an economist's blog, my focus on these matters is secondary. Still, I try to stay informed.

SEC Announces New Exec Compensation Rules

2006-07-27T09:23:00.000-07:00

The new rules include greater depth of disclosure of the value of stock options, in the wake of the backdating options scandals (that's fraud, for those keeping score at home).

I'm of two minds on this. On the one hand, I understand and actively preach about the difference in productivity and organizational performance top leaders make. On the other hand, I'm of the studied belief that we don't actually reward leadership merit and performance as much as we reward loyalty and longevity among those of us with strong connections. We talk a good game about merit in our executive ranks, but we usually talk about it for other people, particularly the higher we are on the Fortune 500 ladder. Some of us are fat cats who desperately need a diet. We're not entitled to multi-million dollar incomes just because we've been around a while and have gone to the right schools.

This is from today's Wall Street Journal (online subscription required):

SEC Issues Rules
On Executive Pay,
Options Grants

Backdating Scandal Leads Agency
To Force Increased Disclosure;
Other Perks Will See Light of Day

By KARA SCANNELL and JOANN S. LUBLIN
July 27, 2006; Page C1

For the first time since the options-timing scandal mushroomed this year, federal regulators laid out requirements directing companies how to disclose their grants of stock options.

The new rules won't bar corporate boards from giving executives options at propitious times, but would instead shine a spotlight on such practices through increased disclosure. The guidelines are part of a sweeping overhaul to executive-pay disclosure the five-member Securities and Exchange Commission approved yesterday in a unanimous vote.

The rule takes effect in proxies filed by companies whose fiscal years end after Dec. 14. It will force companies to provide a total compensation figure for each of its top five executives. That number can be used to compare compensation across companies and industries.

SEC Chairman Christopher Cox has made revamping executive-pay disclosure a priority, so investors have a better handle on perquisites, deferred compensation and stock-option grants, payments that have been shrouded in fine print or not disclosed. To win the support of business groups, though, he has been careful to avoid the appearance of trying to set executive pay.

Some groups were hoping the SEC would go further, and had lobbied the SEC to require companies to give shareholders an advisory vote on executive pay.

"We're giving shareholders the information, but we're not giving them any power to take action on that information," said Richard Ferlauto, director of pension-investment policy for the American Federation of State, County and Municipal Employees in Washington. Investors, he added, haven't gained any power "to moderate pay that's not deserved."

[snip]

The SEC is investigating about 80 companies that may have "backdated" or timed the option grants to executives to benefit their payout. Options offer the right to buy stock at a specified "exercise" price, usually equal to the market price on the date the options were granted, so backdating them to a date when the price was low makes them potentially more valuable.

Last week, federal authorities filed civil and criminal securities-fraud charges against the former chief executive of Brocade Communications Systems Inc. and another executive, while a third faces civil charges. The three are accused of boosting the potential value of the options and concealing millions of dollars of compensation expenses from shareholders.

Companies will now be required to include a table with the value of the options on the date of the grant, and the closing market price on that day, if it is greater than the exercise price.

The reason for this table is to highlight any attempt by companies to give executives options priced below the value on the date they were granted. If there is any difference, companies will need to explain how they arrived at the exercise price. The murky disclosure on this topic is one issue that has arisen in the recent probes.

"As a result, compensation practices are going to change," predicted John Olson, a senior partner at Gibson, Dunn & Crutcher in Washington who advises corporate boards. "You will see fewer option grants, less out-of-cycle option grants and more careful monitoring by boards and compensation committees" of option usage, Mr. Olson said. SEC officials "are using a disclosure standard to impact corporate behavior."

For instance, he said, certain boards may restrict their CEOs' authority to dole out sizable option awards to new key employees below senior management, and increase board involvement in such decisions.

The intensified focus on option-award timing also may persuade more companies to take a tougher tack on when options can be given. They will have to disclose, for instance, whether management usually gets grants several weeks before the release of quarterly earnings.

"To the extent companies didn't have a formal policy in the past, they're going to have to have one, because investors will expect that," said Mark Borges, a former SEC official who now is a principal at Mercer Human Resource Consulting in Washington.

In addition to the option disclosures, the new rule will require companies to explain in plain English the rationale behind compensation decisions. They also will need to disclose pay incentives, unless a company can demonstrate the information is confidential or competitive.

And companies will have to disclose perquisites paid to executives if they exceed $10,000 in the aggregate. The rule will also call for the inclusion of two new tables, one to disclose pay to directors and another that would require the pension and retirement benefits owed to each of the five named executives.

Fish Story: The One that Got Away

2006-07-26T10:29:00.000-07:00

If you come home with a story about the great, big fish you caught and fought for an hour before a shark ate it on the way into the boat, you do well to have it on tape.

Smart People Can Do Dumb Things

2006-07-26T05:46:00.000-07:00

This excerpt is from today's Wall Street Journal (subscription required). It's a nice follow up to the previous article on executives and ego.

Smart people do dumb things most particularly when their egos get in the way. Pride goeth before the fall. I see this in my negotiations consulting frequently: highly competitive people can be more intent on winning than they are in strategic good sense. That said, we all make mistakes. Some, like this one, can be expensive indeed:

Great Buyout Tactics
Don't Guarantee Success
July 26, 2006; Page C1

Tactical brilliance isn't the same thing as smarts.

When Boston Scientific swooped in to bid for heart-device maker Guidant late last year, it looked like one of the savviest moves in the recent takeover boom. Johnson & Johnson had agreed to buy Guidant and then lowered its offer dramatically as its target struggled with defects and recalls for its implanted heartbeat defibrillators.

Jim Tobin, Boston Sci's frank chief executive, explains how the deal went down this way: J&J "didn't see something other than that they could buy it for less than they agreed to pay in the first place. There was no grand strategy. That opened the door for us and we stepped in." In short, J&J executives "painted themselves into a corner."

Boston Sci, on the other hand, had a clear line of attack: "The game theory from our point of view was that they might not come back at all given that they were limited" by their low-ball bid, Mr. Tobin says.

In the view of Wall Street, J&J had bungled the negotiation badly. In December, I agreed¹, writing that the company's bidding tactics were "myopic and greedy." The argument went that now Boston Sci either would win Guidant or force J&J to pay more and look foolish while doing so.

Who looks foolish now? Losing Guidant seems like the better outcome. Usually it's absurd to declare an acquisition a success or failure within the first several months. Boston Sci closed its $27 billion purchase of Guidant only in late April. But there's little question that investors have lost faith. Guidant has had more recalls since the acquisition, and growth in the defibrillator market has tapered sharply. Further, concerns about the safety of drug-coated stents -- tiny metal scaffoldings that prop open arteries -- have mounted.

J&J was either smart or lucky or a little bit of both. And its investors are much better off. Since the deal closed in late April, Boston Sci's stock has cratered 26%. J&J's stock is up about 6% in that time, and it got an unusually rich $705 million breakup fee when the deal fell apart.

Questioning the wisdom of the acquisition puzzles Mr. Tobin. Knowing then what we knew now, would he have taken over Guidant? "Absolutely," he says. "The issues that have arisen so far -- we've been in this only 90 days -- were known in due diligence in advance. They are exactly what we expected." The stock's performance, he adds, "would indicate we have surprised some people and I don't understand how that could be true."

Already Wall Street is bracing for disappointing numbers from the combined company. The company now is expected to earn $1.57 a share in 2008, down from the average analyst estimate of $1.65 three months ago, according to Reuters Estimates.

Right after it outmaneuvered J&J, Boston Sci forecast that its revenue would rise between 12% to 14%, resulting in as much as $12.3 billion in 2008 and $13.8 billion in 2009. Bernstein Research now expects that revenue will be $10.6 billion in 2008 and $11.1 billion in 2009.

Mr. Tobin concedes the defibrillator market has slowed more sharply than expected: "If there is one surprise in this, it is the overreaction of the marketplace." He expects the market to bounce back.

There are many lessons for Wall Street here:

Don't be dazzled by short-term tactical masterstrokes.

Twelve Questions Great Bosses Ask

2006-07-24T07:57:00.000-07:00

I originally published this content in this "What's Up, Doc?" newsletter from the archives, and it retains my copyright. You can find more newsletters at this link on my business home site. Actually, there's a lot of free, "how-to" content for leaders on the site, and there's a search feature as well, on the lower right side of any page. I thought I should share it on the blog since I am so often asked about it.

I recently compiled this list to help a client, and now, all of you benefit! Great bosses get the answers to these questions and remain in close enough contact with their direct reports to know the answers and how they may change. The main point is to create an open, trusting dialogue over time with your direct reports. The value of what you learn through these questions should be obvious, but less obvious is this: by using these questions to create a trusting relationship, any boss is in a much stronger position to make corrections that stick and shape ongoing performance. At the end of the day, your effectiveness as a leader is based on your ability to help people improve performance and learn. Use this question list to guide your efforts.

1. What do you enjoy most in your current work?
As a boss, you’re not obligated to assign only work that your people will enjoy. However, it is to your advantage to know what they enjoy. They will tend to do best what they enjoy most. Peak performance is your friend.

2. What do you enjoy least in your current work?
Again, just because someone may not like a task, it may need to be done. If it’s a core part of the job, then perhaps the person is not best for that job, and should be helped to find another position. If work assignments can be distributed through a team so that people can do what they most enjoy doing without sacrificing overall quality, then you win. Take note of what people dislike doing.

3. Who influenced your career choice, and how?
You should know why and how your people came to make their career choices? By default? Out of genuine interest and passion? You also want to know the best ways to influence your people, so knowing who has influenced them in the past, and how, is to your advantage. But of course, you have a responsibility to use your understanding responsibly, not manipulatively, or against your employees’ interests. Also, before you can help people move forward with their future, you need to know how they got to be where they are today. Understanding history is important.

4. From whom did you learn to become and behave like a professional?
This is another in a series of role model related questions. If you want to have a beneficial influence on your people, for their good and the good of your organization, you have to know what style and type of personal influence works best for each of your best reports. Also, by dealing with your people as professionals, and talking about professionalism, even for jobs that are considered to be of low status, you can inspire your people to think of themselves as “professionals,” and to act accordingly. You can also open up a continuing conversation of what it means to be and act like a professional, making job performance a matter of personal pride. Of course, to talk about this credibly, you had better be consistent and worthy of imitation in your own professional comportment.

5. Who have been your primary role models? What did you really admire about them?
When you learn what your people admire about the most influential people in their lives, you learn about their values. Different traits will come up for different people on your team. When you seek to understand what motivates each of your people, you had best have insight into each person’s unique values systems. A blanket corporate approach to “values” will only go so far. Great bosses motivate their people based in individual understandings of each team member.

6. Who in your life has taught you the most? What was it about that person's communication style that really worked for you?
The first part of the question helps you to establish a connection with your direct employees as people, not just as workers. If you want to be a great boss, your people need to feel you respect and understand them as people, and not just as means to some corporate or organizational end. The second part of the question is key for you if you want to know how best to communicate effectively with each team member.

7. How do you think you learn best?
Most people don’t know how to answer this question, as they have never thought about it. So , you can offer multiple choice answers:

a. Demonstration and observation
b. Personal, independent trial and error
c. Talking, asking questions, hands-on coaching
d. Reading
e. Audio resources such as tapes, CD’s, etc.
f. Traditional classroom training or seminars (this is not likely to be the best option for anyone!)

If your job as the leader is to help your people learn and adapt as your organization grows and adapts, don’t take a one-size-fits-all approach to helping your people learn. And guess what? It’s your job to help your people learn. Great bosses are teachers, or at the very least, they make sure their people have access to the people and resources (sometimes other team members) they need to learn. It’s not primarily the responsibility of someone in a human resources or training department to see that your people are learning: it’s your responsibility as the boss.

8. How can I become more effective in helping your success?
Ask this question a lot. The first time you ask, you may get no response: not many employees really believe there will be no consequences to saying something to the boss that could be interpreted as criticism. Great bosses are more interested in being effective than in appearing to be right. Ask the question, and listen. Everyone knows you’re not perfect, so get the information you need to be better, even when the employee you ask may be difficult or unreasonable. Just asking does not obligate you to agree, but you’ll never learn about your blind spots as a leader if you shut your eyes and ears. Even unreasonable people can see things about authority figures that may need attention.

9. In ideal circumstances, how often should I check in with you just to see how you are doing?
One person’s micromanagement is another person’s support. Find out the preferred mix for each person. On balance, you should use your time as a reward for those who do well, and minimize the degree to which you are always making corrections to your weakest performers. If they are that weak, they are in the wrong job. But still, you should know what the right mix is for each team member’s style, and learn to adapt your style accordingly. Some managers are more active with oversight by nature, and some like to be very hands off. Extreme styles in either direction are problematic, and the best style is to take an individualized approach.

10. What do you feel you do best?
Always give your people a chance to brag to you. They like to have the chance to say what they think they do well. You might learn something you don’t know, and your people will derive intrinsic satisfaction from your implicit act of listening to and recognizing their strengths. Besides, no one will listen to you about areas you think they can improve if they don’t think you understand what they do well.

11. Who is the best "boss" you ever had? What about that person made him/her the best?
It should be obvious why this question is good for great bosses to ask. If another boss has been successful, it’sbest not to have to reinvent the wheel when learning to lead each of your team members. Model your style, as much as you can, based on what you hear.

12. In what ways would you like to grow more?
You can break this out in a few dimensions:

a. Technical skills or certifications?
b. Communication skills?
c. Language skills?
d. Customer service skills or conflict resolution abilities?
e. Learning how to be a better mentor or guide to other team members or new employees?
f. Listen for, but don’t prompt for, a desire to grow in management responsibilities.

Be sure you know what your people want to learn. Compare this with what you would like them to learn. Help them get the learning experiences they need, especially if you can tie extra, rewarding learning experiences with high performance. Extra learning should be a perk you offer to your best people, to reward them, to help your organization grow through its people, and to show weaker performers that the way to get your time and attention is to deserve it through their actions.

The Destabilizing Influence of the Internet

2006-07-22T07:49:00.000-07:00

No doubt I'll be returning to this subject, because the effects of Internet access on existing power structures in business, culture, media and government are just in their beginning stages. Here's the latest manifestation of the story that I've come across, in the quoted article below.

The questions, for Western societies in particular, include how much we believe in free speech and open societies? Are open societies ultimately in the interests of business (to me that answer is a resounding "yes!")? Are we ready for the way the Internet is transforming society the way the advent of the printing press did, or will we take steps (as the U. S. telecom lobby is now doing, to create new revenue streams and protect established markets) to discriminate against access to non-obscene content, ideas, products and services that cannot pay a hefty preferred-distribution fee?

Here's the article snippet, with my bolded emphasis added (notice the home address of this site is through blogspot):

July 22, 2006
India Calls It a Technological Error, but Blog Blockade Continues
By Somini Sengupta

NEW DELHI, July 21 — After two days of angry inquiries and charges of government censorship, the Indian government took a step Thursday toward explaining a mysterious blockade on personal blogs, calling it “a technological error” that would be repaired soon.

In an e-mail message sent early on Thursday, India time, an official at the office of the Consulate General of India in New York said the order to block a handful of Web sites, including the popular blogspot.com, which plays host to thousands of personal blogs, had been prompted by the discovery of a site that contained what the official called “two impertinent pages” rife with material considered to be “extremely derogatory references to Islam.”

In an effort to stave off potential sectarian violence, the official said, the government’s Department of Telecommunications instructed Internet service providers to block access to the two pages. “Because of a technological error, the Internet providers went beyond what was expected of them, which in turn resulted in the unfortunate blocking of all blogs,” the official explained.

As of Friday, however, the sites remained blocked.

The consulate’s response came a day after a number of news articles on the matter appeared in the American news media, including The New York Times and The Wall Street Journal. It remained unclear why, despite repeated efforts, officials at the Department of Telecommunications in the capital, New Delhi, refused to provide any explanations for the blockade earlier this week.

The blockade has sown anger and confusion among Indian bloggers, who accuse the government of censorship and demand to know why their sites have been jammed.

Among the speculations that had been offered was that certain blogs could be used by terrorists to coordinate operations.

The terrorism issue gets muddy, given the tools governments are now using to sift through all digitized communications, including voice data, to flag targeted keywords for review by counterterrorist, government intelligence agencies. This has brought great controversy in the U. S., since the 4th Amendment to the Constitution requires a court order for the monitoring of citizens' interactions, and apparently this has not been happening. Internationally, there is no real prevailing law.

The potential for the abuse of surveillance power, unchecked in the hands of a state, is there for the taking. History ( ahem!) provides a clear guide on the matter. And yet, societies seek security, and commerce benefits from stability. While there's a lot of money to be made from war, perpetual war tends not to benefit anyone, including the business community. Unstable international markets and unpredictable energy prices are bad for most businesses and economies.

The systems for protecting otherwise open societies, free speech, innovation and commerce in the Internet age are not yet established. My main point, however, is that the Internet, and blogs like this one, apparently now barred in India (where I do have newsletter subscribers), are raising new questions and destabilizing established institutions and systems of authority.

This does not even begin to adress when online sites and communities form with the specific purpose to monitor and criticize a given company. That's a new headache few businesses are prepared to comprehend. Now, potentially, everyone online has the power of the "printing press," with no barriers to entry.

That's a new world order indeed.

(The image above is of Gutenberg's printing press)

Backdated Stock Option Indictments

2006-07-21T06:20:00.000-07:00

As discussed here, we should be cleaning our own house. This story and permutations of it are not going away. There will be more stories like this:

2 Are Charged in Criminal Case on Stock Options
By Damon Darlin and Eric Dash

SAN FRANCISCO, July 20 — Federal prosecutors on Thursday filed the first criminal charges against executives in a mushrooming investigation into the possible manipulation of stock options.

Gregory L. Reyes, the chief executive of Brocade Communications until January 2005, and Stephanie Jensen, the vice president for human resources until 2004, were each charged in a criminal complaint with one count of securities fraud. Prosecutors said the two doctored the minutes of board meetings, job-offer letters and other documents to make it appear that employees were granted stock options at an earlier date, when the share price of Brocade was lower.

The Securities and Exchange Commission also filed a civil complaint, which named Brocade’s former chief financial officer, Antonio Canova, as well as the other two executives. (Mr. Canova, who resigned in December 2005, was not named in the criminal case.)

The criminal complaint is the most significant step yet by investigators in what is shaping up to be a large-scale scandal in the corporate world. Corporations — from small technology companies like Altera and Mercury Interactive to industry giants like UnitedHealth — have been ensnared in investigations into whether their executives or boards improperly granted stock options at attractive prices.

Now that prosecutors in San Francisco have fired the first volley, many lawyers said they expected a flurry of indictments to follow.

“I think we’re going to see a quick succession of cases,” said Scott S. Balber, a lawyer with Chadbourne & Parke who would not say whether any of his corporate clients had been contacted by regulators regarding the backdating of options.

I can't wait to hear the howls of outrage when more draconian regulations come. When we won't police ourselves effectively, we invite outside political forces to do it for us. That would require focusing on more than just quarterly earnings. Can we walk and chew gum simultaneously?

Chuckles: Schizophrenic Pooch

2006-07-20T20:39:00.000-07:00

Funny, in a weird way.

Leadership and Ego

2006-07-20T09:56:00.000-07:00

For this month's featured column, let's take a look at the complex topic of leadership and what we commonly refer to as "ego." What is a healthy leadership ego? How much ego is "too much" ego? What about not having enough ego? Here are some thoughts, based on a few hundred formal assessments and my work with coaching clients:

Confidence versus Arrogance
In English, the word "ego" is used to connote a range of things. It can be used in a positive, perhaps more clinical context ("healthy ego") and in a negative, perjorative context (too much or overbearing) "ego." This confuses the conversation and tends to confuse people's thinking on the subject. Before we even get rolling on the topic of ego, it's important to point out these divergent uses of the word "ego." In this discussion, I mean by ego a person's sense of the self and one's own capacities. A healthy ego for a leader includes a great deal of self-confidence, where confidence assumes a kind of unassumed and unexamined, default position in the world. . . a reflex one does not have to cultivate or self-consciously assert. This level of confidence in the ideal leader goes above and beyond what is common and still healthy among the vast majority of people. However, this same level of uncommon self-confidence will sometimes be perceived as arrogance by others, and sometimes they will be right. In fact, we label as "arrogance" any manifestation of self-confidence we find unpalatable. We may or may not be right in perceiving a strong ego that way. Sometimes our perceptions say more about us than they do about those we may observe.

Competitiveness and Ego
Competition is good. Leaders like to compete. They like to set benchmarks and goals for themselves and others, preferring measurement against external standards to assessments based on mere activity or effort. Confident people like to compete. On the other hand, competitive people whose drive to compete leads them to burn bridges or lack empathy for other people, perhaps even devaluing others and their talents, make poor leaders. It's not that strong leaders don't like competition, but strong leaders also possess the interpersonal awareness and skills to know how to compete in ways that do not undermine or break trust with others. Strong leaders hate to lose and may not always be graceful losers, but they learn to temper their reactions so as not to break faith with others. This is always a complicated balance to sustain for any strong leader. The bottom line is, healthy egos prefer competition and external standards through which to measure - and improve - performance.

The Desire to be "The Best"
I've never met a strong leader who did not strive to be the best at what they do. Healthy egos may not advertise that they want to be the best, or that they believe they are the best, but more often than not, this is what high perfomers believe or strive to become. I've heard some people suggest that this drive to be the best is necessarily a sign weakness or insecurity, but it's not. True, some insecure people try to overcompensate for a lack of talent by pushing too hard to do what they cannot, but the difference here is in the amount of talent at one's disposal, not in the actual desire to be the best.

The Wisdom to Know How to Be the Best as Leader
Strong leaders aspire to be great leaders and therefore study how to improve. As they discover that they become better leaders by surrounding themselves with highly talented people who are probably more talented in one or another area of performance than they are themselves, leaders accept the need to help others shine while connecting and guiding collective effort. This means that great leaders have a very strong ego but are willing to sublimate that ego to developothers' talent and shine the spotlight on other highly able people. While there are good leaders with less competitive fire who find it easy to shine the spotlight on others, encouraging them and promoting their growth, they tend not to bring about the very best results. They just lack the drive, the fire in the belly, to do so. On the other hand, highly competitive people don't always find it in themselves to sacrifice some degree of attention, the need to be seen as the star, in order to become the best leaders who make other people great. Those who possess both the drive to be the best and the wisdom to sublimate their desire to be noticed make the best leaders. That takes a kind of wisdom to manage one's own ego toward productive ends.

Gender and Leadership Ego
In the West, we accept women as leaders a bit more than is generally done elsewhere, but even here, we're subject to common misperceptions and biases regarding women as leaders. Strong competitive, bold behaviors exhibited by men are often labelled and perceived quite differently when they are exhibited by women. We are less tolerant of a strong, competitive leadership egos among women than we are among men. Some women do possess the drive to be the best, and in my experience, women are no less talented as leaders than are men, even if they may face more significant social hurdles to establish credibility as leaders. Thankfully, more women are overcoming the habit of underestimating their own talents as generations pass. We know from research that current leaders are more likely to identify and mentor young talent that reminds them of themselves, and so, when current leaders are mostly men, this means men get fast-tracked more than women do. When some men mentor women, the dynamics of gender can make a minfield of the process, especially when some men really have. . . other agendas in mind. It's very helpful for strong, accomplished women to mentor other women, though it's certainly possible for men to mentor women as well. It just requires a greater degree of self-awareness on the part of the male mentor, and a semsitivity to the special barriers to social legitmacy women face when taking on leadership roles.

Did Gandhi Have A Big Ego?
Anyone who believes the fate of his country rests on whether or not he eats has a huge ego. And yet, Gandhi is seen as humble, and rightly so, for he put the interests of the people of his country above his own survival, and carried himself with great self-effacement of demeanor. I use this example to illustrate something about a leader's ego: strong leader's have huge self-confidence, and yet, they put their competitive energy and passion to the service of higher ends involving people or causes greater than themselves.

Are Selfish Ends Bigger than Larger Goals?
This brings us to my final point about great leadership ego: no matter how confident a leader may be in himself and his talents (or herself and her talents, let's not forget!), the most effective ones channel their efforts to causes and missions greater than their own personal ambition. People will follow a strong, moderately selfish leader out of convenience or self interest, but people will (in some cases, literally) walk thourgh fire for leaders with strong values and ethics whose mission is ultimately to serve others in some fashion. A healthy, strong leadership ego is at once self-aware without being highly self-regarding. People know the difference. They always know the difference.

We Should Be Cleaning Our Own House

2006-07-17T12:41:00.000-07:00

In America's executive suites, we should be cleaning our own house. Only a minority of us are corrupt, but we all know that dicey or illegal shenanigans are fairly commonplace: who's kidding who?

However, we won't clean our own house, because historically, we never do. These things go in cycles. What's going to happen? New political movements and regulations will step in to do the job, roughly, often clumsily, with a good deal of overreaction. And it will be our own fault.

From the New York Times:

July 17, 2006
Study Finds Backdating of Options Widespread
By STEPHANIE SAUL

More than 2,000 companies appear to have used backdated stock options to sweeten their top executives’ pay packages, according to a new study that suggests the practice is far more widespread than previously disclosed.

The new statistical analysis, which comes amid a broadening federal inquiry of the practice of timing options to the stock market, estimates that 29.2 percent of companies have used backdated options and 13.6 percent of options granted to top executives from 1996 to 2005 were backdated or otherwise manipulated.

So far, more than 60 companies have disclosed that they are the targets of government investigations, are the subject of investor lawsuits or have conducted internal audits involving the practice, in which options are backdated to days when the company’s shares trade at low prices. They include Apple Computer, CNet and Juniper Networks.

Last week, the United States attorney in San Francisco announced a task force to investigate the backdating of options, which appears to have been particularly popular in Silicon Valley during the 1990’s dot-com boom. The study found that the abuse was more prevalent in high-technology firms, where an estimated 32 percent of unscheduled grants were backdated; at other firms, an estimated 20 percent were backdated.

An author of the study said the analysis suggested that the disclosures so far about backdated stock options may be just the tip of the iceberg.

“It is pretty scary, and it’s quite surprising to see,” said Erik Lie, an associate professor of finance at the Tippie College of Business at the University of Iowa.

Professor Lie said the findings were so surprising that he asked several colleagues to check his numbers. Together, they concluded that the numbers probably erred on the low side.

The study by Professor Lie and Randall A. Heron, of the Kelley School of Business at Indiana University, was posted Saturday to a University of Iowa Web site. Using information from the Thomson Financial Insider Filing database of insider transactions reported to the Securities and Exchange Commission, the two men examined 39,888 stock option grants to top executives at 7,774 companies dated from Jan. 1, 1996 to Dec. 1, 2005.

The findings were based on an analysis of whether share values increased or declined after option grant dates. “Half should be negative and half should be positive,” said Professor Lie. “That’s the underlying logic.”

But the analysis revealed that the distribution was shifted upward.

“This is not random chance. It’s something that’s manipulated, clearly,” said Professor Lie.

Of the companies examined, 29.2 percent, or 2,270, had at some point during the period manipulated stock option grants, the study estimated.

Recommended Film: Walk the Line

2006-07-05T12:05:00.001-07:00

You can find a whole bunch of links to film reviews of Walk the Line here.

I finally saw this on DVD last week. It's a pretty straight up biopic. It follows the narrative conventions of the form, and so could have been hackneyed or cliched but for its strong performances.

My father took me to see Johnny Cash with June Carter Cash in. . . maybe 1978 or '79 or so. I was just a kid, but I remember the show. The film adapts his life, taking liberties with chronology and many details, but it does a good job.

Of course, the depiction of the characters is a bit sanitized, but that happens whenever you fictionalize the life of a real person. Real people are complex, and the narrative arc of success-failure-redemption of the movie's plot nevertheless captures something true, however familiar, about human nature.

I want to dwell on that for a moment in the wake of my post last week about Richard Scrushy, wherein I advised him to get his life right, reform himself and own up to his crimes. I see this with many talented people, people of genius even, of whom Cash was one: they can often fall prey to their own demons in a big way. I don't know why that is, and though I've studied creativity a good deal, I will simply say great talent or intelligence does nothing to immunize a man or woman from great foolishness, even sometimes criminality. Some err through malice, others simply through idiocy, self-absorbtion or some tragic moral blindness.

Cash's empathy as a songwriter flowed from his basic sense of fairness, identification with the little guy and his humanity, and he was able to use these abilities to accept help when it was offered so he could get himself beyond his addictions. Good for him. I've known leaders who have been able to do the same after making big mistakes, either in their personal lives or their professional lives. But it takes a willingness to learn from failure and to accept a degree of dependence on someone you can trust for change to come. Executives are notorious for refusing to accept such perceived weakness, but the ones who really become great are not so afraid.

Today we learn that Ken Lay died in his Aspen, Colorado bed after robbing a whole lot of people of their money and their livlihoods through his company's wholesale fraud. He had been convicted but not yet sentenced. I don't know if he ever had resolved to get his moral house in order, and in my experience that's a decision that takes deeper root as a person dedicates himself to follow that path after failure. But Ken Lay never paid for his crimes, other than in legal fees.

Richard Scrushy has a chance to begin to turn things around. I never bet that a person will change: the safest bet in any case is that any given person will not change at all. But in the general case, I know that some people do. I've seen people do it and it can be quite inspiring. That's why movies like Walk the Line are popular, not simply because they tell a tale about popular cultural icons, but because they include a message that none of us, no matter how flawed, is beyond hope.

The Rise of Europe: UK and Germany Make Nice at World Cup

2006-07-01T09:11:00.000-07:00

From the New York Times:

July 1, 2006

At World Cup, No More World War for British and Germans

By RICHARD BERNSTEIN

BERLIN, June 28 — World War II, which, of course, officially ended six decades ago, seems in a way to be finally over as the World Cup unfolds in Germany and the English and Germans are full of praise for each other.

It was only a few weeks ago as the World Cup neared that British officials were issuing stern warnings to Germany-bound English fans against mocking the Germans by giving Nazi salutes, goose stepping, and so forth.

And it does not seem so long ago that the 1996 European Championship was being played in Britain, and the English tabloids printed pictures of tanks and Nazi helmets and headlines like "Let's Blitz Fritz!"

There have been almost no serious examples of that sort of thing this time, just as there has been relatively little of the British hooliganism that some were predicting a few weeks ago would be a common danger to German lives and property.

Instead, there have been scenes like the one described the other day by the newspaper Stuttgarter Zeitung, after a melee in which some 300 English fans in Stuttgart were taken into custody, and there were some fights between English and German fans. "What the headlines missed was the gigantic party only a hundred meters away, where fans from the island were partying peacefully with Germans," the paper reported.

Then there was the account, received by the British Embassy in Berlin a few days ago, about a group of English fans who set out to burn the German flag until some other English fans stopped them.

"If Germany were a woman, England would be her late admirer," the newspaper Bild Zeitung's British correspondent wrote this week, characterizing the view of Germany filtering back to England, "someone who, out of ignorance, nearly let this beauty slip through the net."

According to The Sunday Times, which used the words "young, lively, anarchic and brilliant" to describe Germany: "It seems as though the British suddenly want to make up for all the nasty slander of the past."

The new, informal British-German treaty of peace and friendship is all part of the good mood in Germany as the World Cup unfolds, a mood that is part relief that none the potentially diplomacy-shaking bad things — hooliganism, terror attacks, infuriating security precautions, mammoth traffic jams — have taken place on a wide scale, at least not yet.

But when it comes to Germany and Britain, of course, one is talking not only about a history of devastating wars that find a way of being refought over and over in the newspapers and in popular opinion, but also one of the fiercest soccer rivalries on the planet.

In a much-remembered final in 1966, West Germany lost to England on an English shot that the referee said had crossed the line but that the Germans felt rather strongly had been blocked. After that, and until 1994, England reached the final stages of the tournament four times, and three of those times was knocked out by Germany.

Then came the ferociously contested European Championship of 1996, when the tabloids went to town on Germany's wartime past, to such an extent that the editor of The Daily Mirror, which published five pages of faked pictures of the German team wearing World War II helmets, publicly apologized for going too far. In any event, to the disappointment of the English fans, Germany knocked their team out in the semifinals and went on to win the tournament.

It isn't that everybody is behaving well. There have been plenty of English fans singing the 10 German Bombers song — in which the Royal Air Force knocks all the planes down — and a few hundred British fans have been arrested for rowdiness. But mostly there has been a sense of delighted discovery of Germany by the English, who have expressed surprise that Germany is not a country of leather shorts and humorless people who work all the time and even approach their pleasures, like soccer, with grim determination.

"The British press has to be here, and they are confronted with reality," Cornelia Naumann, program director of the British-German Society in Berlin, said. "That's the basic point. When you are far away you can project so many of your stereotypes on another country or person and there's no reality test. Now there is a test and the Germans are doing quite well," she added.

"There's an assumption that the English and Germans don't get on, but I've always thought this was exaggerated," Jonathan Brenton, head of media at the British Embassy in Berlin, said. "The truth is we work together very well."

In the international business community, we know the EU has its problems coming together, but the longer term trend is toward greater cooperation and economic growth. Cooperation makes for economic and political strength, and that's good for business. As investors survey the prospects for the EU's future, small signs like this one of new generations eschewing old animosities matter. Politics follows popular cultural movements, and not vice-versa.

It helps that Europeans are making a new assessment of geopolitics, as polls reflect. American geopolitical isolation, loss of moral standing, militarism and out-of-control debt don't strengthen American prospects, as economic allies subtly band together to fill the competitive vacuum created by loss of U. S. standing. My international business friends and colleagues all note how Americans are received quite differently abroad now than they were ten years ago. In international contexts, when there are fewer clear rules in place to enforce contracts, trust and ad hoc security bonds are necessary to make business deals work. Loss of American stature and trust are bad for American business.

It's great to see old wounds begin to heal between the UK and Germany. I'm not trying to build up the small signs noted in this story to be more meaningful than they are, but they do in my estimation betoken a growing trend. Furthermore, though the article does not mention it, the notable decline in American popularity in Europe is part of the backdrop of this story, without doubt. American business leaders should take note.

Leadership Means Taking Ethical Responsibility

2006-06-30T06:40:00.000-07:00

From today's Wall Street Journal (online subscription required):

Scrushy Is Convicted in Bribery Case
Prosecutors Savor Victory
Over HealthSouth Ex-CEO
After '05 Fraud Acquittal
By VALERIE BAUERLEIN
June 30, 2006; Page A3

HealthSouth Corp. founder Richard M. Scrushy was convicted of paying $500,000 in bribes in return for a spot on a state regulatory panel, a victory for the federal government a year and a day after it failed to pin a massive accounting fraud at the health-care company on him.

The guilty verdict on all six charges against the 53-year-old Mr. Scrushy, including bribery, conspiracy and mail fraud, could put him behind bars for as long as 20 years, though the judge has wide discretion on sentencing. Prosecutors and defense lawyers are likely to argue over how to weigh factors such as Mr. Scrushy's background and the size of the contributions for which he was convicted. Sentencing isn't expected until this fall at the earliest.

The Montgomery, Ala., jury also convicted former Alabama Gov. Don Siegelman on 10 political-corruption-related counts, six of them linked to Mr. Scrushy. During the two-month trial, prosecutors alleged that Mr. Scrushy arranged two hidden $250,000 payments to a lottery campaign backed by Mr. Siegelman, who put the then-chief executive of HealthSouth on a board that approves hospital-construction projects. The charges weren't related to the accounting fraud.

It wasn't clear what swayed jurors after 11 days of deliberation, or ended a deadlock that emerged last week. Mr. Scrushy's defense team clearly failed to win over the jury with its strategy of comparing him to civil-rights icons who suffered injustice. In his closing argument, Fred D. Gray, who represented Rosa Parks when she was arrested in 1955 for refusing to give up her seat on a Montgomery bus, quoted a favorite Biblical passage of Martin Luther King Jr., adding that an acquittal of Mr. Scrushy would mean that "justice will run down like water and righteousness as a mighty stream."

Federal prosecutors denounced the rhetoric as a racially motivated attempt to influence the jury of seven African-Americans and five whites, the same composition as the jury that acquitted Mr. Scrushy last year. They alleged that Mr. Scrushy had used his money and power to gain political influence that helped fuel HealthSouth's growth. Mr. Scrushy was forced out at HealthSouth when the accounting fraud surfaced in 2003.

Charlie Russell, a spokesman for Mr. Scrushy, said the former HealthSouth CEO was "shocked" by his conviction.

Naturally, he'll file an appeal. ButI'm guessing his Houdini days are over. When he talked his way out of a conviction last year, against all courtwatchers' odds, that was a surprise. This verdict isn't.

This is a business and leadership blog. Leadership in my view requires ethical conduct. True, it's possible to be a very effective corrupt, destructive or even evil leader: history's pages are replete with examples. I don't claim to be perfect or to have led a perfect life, but the best thing for Mr. Scrushy to do is take his medicine, admit what he's done wrong, take responsibility and change his ways.

Prosecutor's do get things wrong, and what he's been accused of doing may not exactly correspond with whatever wrong he's done. But in the bigger picture, there doesn't seem to be any doubt he's been quite the accomplished crook. Now that he's been convicted, in spite of a very well financed defense, it's time to get a little more real and a bit more humble.

Leadership, of course, means not committing crimes in the first place. Scrushy's apparent failure to take personal responsibility says to me he's unreformed and unworthy of future leadership responsibility. Maybe he'll be exercising some leadership in the penitentiary courtyard.

In what looks like a growing theme for my recent writings, let's take another look at his crime: he was convicted of half a million in bribes to corrupt a regulatory agency. Rather blunt, but we all know that we in the business community have been buying regulatory access, through legal and some illegal menas, for a long time. We have the money; corporate profits are through the roof nationwide. Politicians want money and they write the rules. We make deals consumers don't see or understand, deals smaller competitors can't fight against because they lack our financial leverage and access to politicians.

We tell ourselves we have to do it to protect our shareholders and companies. But the regulatory, anti-competitive protection we buy (telecoms against net neutrality), the corruption we abet in the public sector. . . these things carry costs. Squelching inovation husst the larger economy and community; it 's the startups and renegades who fuel new innovation and industry creation. Corruption scandal after corruption scandal will eventually bring about anti-corporate backlash in the electorate: it's happened in American history before. I suppose, like Scrushy, we could decide to get away with all we can for as long as we can, but I think American business would better serve itself by taking a step back to think about the common good.

That, of course, would require leadership, and given the incentives we have in place for CEO's to maximize only short term profits, I doubt we'll reform until the need for change is mandated to us. Just like Scrushy, we'll be "shocked" at our (social and political) "conviction."

Ford Motor Company Struggles to Survive

2006-06-29T12:30:00.000-07:00

Excerpt from the Wall Street Journal (online subscription required):

Ford's Chief Cites Hurdles to Turnaround Push

Chapter 11 'Not an Option,'
But SUV Sales Slide More;
S&P Cuts Rating Further

By JEFFREY MCCRACKEN
June 29, 2006; Page A3

Ford Motor Co. is running into a stronger head wind than the auto maker anticipated a few months ago, a development that is stressing the "Way Forward" turnaround plan it unveiled in January, Chairman and Chief Executive Bill Ford said in an interview.

The latest blow came yesterday when Standard & Poor's cut its rating in Ford debt deeper into "junk" territory. S&P cut Ford debt one notch to single-B-plus from double-B-minus, saying it believes "2006 would be a more difficult year for Ford than previously anticipated." (See related article.¹)
In an interview that took place yesterday before the rate cut was announced, Mr. Ford dismissed any talk that bankruptcy was a threat, saying "it's not an option."
He said his family's company has no interest in taking itself private, despite reports that the company has studied doing so amid a falling share price and a flurry of private-equity-backed deals.

Mr. Ford said his company is planning to build fewer gasoline-electric hybrid vehicles in the future than planned, and instead is "rejiggering" the mix it expects to build of hybrids and flexible-fuel vehicles that can accommodate alternative fuels like ethanol.

Since Ford detailed its plan, auto-industry conditions have gotten tougher than the Dearborn, Mich., company planned for, he acknowledged. The tougher treading contrasts somewhat with rival General Motors Corp., which faces similar declines in U.S. market share and reported a $10.6 billion loss last year but since has made some progress in reducing costs.

Ford's shares fell to a 52-week low yesterday of $6.36, down 18 cents, or 2.8%, at 4 p.m. in New York Stock Exchange composite trading, while GM's shares rose 76 cents, or 2.9%, to $26.66.

Mr. Ford said sales of sport-utility vehicles have fallen off faster than planned because of the recent run-up in gasoline prices. That hurts Ford because trucks and SUVs make up more than half of its sales. Prices of metals, plastic and other materials have also risen faster, he said.

This actually makes a decent companion piece to the previous post. Oil prices per barrel are not going to return to any stable levels below $70, and may continue their steady rise as worldwide extraction costs continue to increase due to diminishing yields from reserves and wells. At the same time, demand is increasing for highly fuel efficient vehicles and options that drastically reduce carbon emissions. Detroit has been caught flatfooted as foreign import to the U. S. are once again running circles around the dmonestic producers, who bet on SUV's to the max. I took a cab ride in Las vegas recently, my first trip in a hybrid. It ran extremely well, with very nice pickup. Was it made in Detroit? Are you kidding?

The U. S. auto industry has long relied of favorable regluatory protection to sustain itself in the face of competition, and it's fat, bloated and inefficient. Many heavy indistrial businesses prefer to hire lawyers and lobbyists to protect market power, but protection from innovation always creates an eventual bubble in the competitive environment. Competition will come, though it can be held off a long time. What's good for quarterly earnings in the short term is often not good for the business.

Ford continues to teeter on the edge. Tick-tock, tick-tock. Then again, my father used to sell Fords in the 70's and 80's, and they didn't seem much stronger back then. Is there such a thing as a good business that "succeeds" forever on the brink of failure, even bankruptcy?

Science, Business and Climate Crisis

2006-06-29T11:41:00.000-07:00

The AP reports that the new film An Inconvenient Truth gets the science right. I saw the film last weekend, and basically everywhere I turn, I see validation for the film's science from scientific quarters. The controversy around climate change is a political controversy and a business controversy.

From the AP:

WASHINGTON (AP) -- The nation's top climate scientists are giving "An Inconvenient Truth," Al Gore's documentary on global warming, five stars for accuracy.

The former vice president's movie -- replete with the prospect of a flooded New York City, an inundated Florida, more and nastier hurricanes, worsening droughts, retreating glaciers and disappearing ice sheets -- mostly got the science right, said all 19 climate scientists who had seen the movie or read the book and answered questions from The Associated Press.

The AP contacted more than 100 top climate researchers by e-mail and phone for their opinion. Among those contacted were vocal skeptics of climate change theory. Most scientists had not seen the movie, which is in limited release, or read the book.

But those who have seen it had the same general impression: Gore conveyed the science correctly; the world is getting hotter and it is a manmade catastrophe-in-the-making caused by the burning of fossil fuels.

"Excellent," said William Schlesinger, dean of the Nicholas School of Environment and Earth Sciences at Duke University. "He got all the important material and got it right."

The scientific argument on this is over and done. The political fight is, shall we say, heating up. There's loads of business opportunity and job growth possible in developing solutions to market: the necessary technologies to turn the emergency around already exist.

Oil companies and their allies will fight and finance opposition to political change tooth and nail to protect their industries and shareholders. Unless popular will overtakes them, they'll win, at least in the short term. Long term if nothing is done, we all lose, and long term could be just the ten years we have to turn this around, according to informed opinion. If another big hurricane hits the U. S. this year, all bets on the political dynamics are off. If the stakes weren't so high, I'd say, grab some popcorn, it's going to be quite a fight.

Quotes of Note

2006-06-29T11:33:00.000-07:00

"When someone asked Abraham Lincoln, after he was elected president, what he was going to do about his enemies, he replied, 'I am going to destroy them. I am going to make them my friends.' "
Abraham Lincoln

"Great souls endure in silence."
Friedrich von Schiller

"Since the general civilization of mankind, I believe there are more instances of the abridgment of the freedom of the people, by gradual and silent encroachments of those in power, than by violent and sudden usurpations."
James Madison

Howdy, Cousin!

2006-06-22T06:58:00.000-07:00

According to CNN today, people in China are now able to buy access to genetic testing that would tell them if they are descended of 5th Century B.C . social philosopher Confucious.

I can save them their money.

If Steve Olson, author of Mapping Human History, is correct in the research he has assembled and detailed, we can all empirically trace a common genetic ancestor within 1,600 years of human history.

That's right: the genetic record shows that all humans walking the earth today must have some common ancestor within 1,600 years, and in many cases, less time than that (for example, people descended from the same country of origin are more likely to show less idiosyncratic genetic variation, and so will likely have more recent common ancestry).

It is therefore a mathematical certainty that not only all living Chinese, but all living people, share some degree of genetic descendence from Confucious, and anyone else who lived more than 1,600 years ago.

The genetic test in China costs about 1,000 yuan or about $125.oo US. Copies of Olson's book now sell at Amazon for under $5 new and used.

Do I know how to find you a deal or what? Oh, and one more thing:

Howdy, cousin!

What Do You Want to Be When You Grow Up?

2006-06-21T06:48:00.000-07:00

I was talking to a young friend recently who was sorting out for himself what he wanted to do with his career after finishing his four year degree. I pointed out to him that when I was at that stage in my life, I had no real idea what I wanted to do. Here are some things to point out to recent graduates:

Figure Out What You DON'T Want to Do
Nowadays, there are so many options open to recent graduates, given the information glut we wade through every day, it can be hard to know what you want to do. The trick in life is to get paid for what you love to do, and it just so happens the things you love to do are probably the things you do best anyway. That's where our talents lie. It follows, therefore, that knowing what you really don't want to do, because it just rubs you the wrong way, helps you narrow the field of what your future should probably hold.

Give Yourself Some Time
I admire people with the focus in life to know what they want to do from a young age. I was not one of them. It's taken me a number of years to grow into my prime niche, and I had to find my way by trial and error (and more error). I've made progress by doing what seemed to me to be the next correct step, and I made up my business as I went along. I met great people, learned from great people and carved out a way of using my talents in ways that my clients seem to appreciate and value. Every experience along the way has been helpful to me, and I've learned more from my failures perhaps than from my successes.

Make an Aptitude for Change One of Your Core Competencies
In this modern, global economy, change and potential dislocation are the norm. The question is not "what your career will be," but what your "careers will be." I know many professionals who make unanticipated changes during their mature years. I have forty years behind me, and while I expect to continue to do what I am doing in some form or other, my company allows me the flexibility to take on new kinds of projects as I learn and grow. Most people work for other people and companies, so they need to be flexible enough to keep learning, remaining open to new things, because change will come, and it won't always announce it's arrival in advance. If you can make a penchant for adaptability one of your core abilities, you will have the best chance to succeed at any point in the life cycle of your career(s).

Make Lots of Friends
The other key part of success in an age of dynamic dislocation is to cultivate a wide array of friends and contacts in many walks of life. Social capital is real capital. Don't just get to know people who you think can help you in the short term: you may develop a reputation for being solely self-interested, which can hurt you in the long run. Get to know all kinds of people. Find out what they like to do, what interests them, what they take pride in. You never know when that understanding may help you put other people together in a way that helps them both. When you build up a lifetime of doing things like that, many people will be interested in helping to catch you before you fall when unwelcome change comes your way. And it will.

Find Mentors Who Help You Cultivate Your Strengths
The best mentors are not the ones who tell you, "This is how I did it," though experience from others is helpful. Role models count for a lot. But beyond that, the best mentors ask questions like, "What's been your best recent success? What made it successful? What were you doing that you enjoyed the most? What did you learn along the way? What could you have done better? What do you think your strengths are?" Those are just a few. In other words, the best metors help you discover your own way to success, rather than offering you their way. If you can find people like that, hang on to them. Wisdom is always more valuable than mere information.

Good luck, recent graduates!

Enron and Corporate Culture

2006-06-15T09:00:00.000-07:00

I wrote this article a couple of years ago, before the Enron litigation had run its course. Since Enron has been in the news again, and since the arcticle is still popular on my business web site, I thought I'd share it on the blog:

We are still learning the facts about Enron’s corporate culture. But even now, it seems clear that the strengths and limitations of Enron’s culture led to its demise.

Individuals are responsible for their actions. As I write this article, it is not yet clear who did what, who knew what and whether or not any laws were broken at Enron. But unethical or illegal individual actions are sometimes symptoms of systemic problems, and Enron’s systems of accountability, oversight, ethical disclosure and corporate priorities were seriously flawed.

Enron’s corporate culture best exemplified values of risk taking, aggressive growth and entrepreneurial creativity. These are all positive values. But these values were not balanced by genuine attention to corporate integrity and the creation of customer - and not just shareholder - value. Because the Enron corporate culture was not well grounded, a single scorecard - maximized price per share of common stock - became its reason for being, and even its positive values became liabilities.

Enron’s corporate culture also seemed to embrace a value - massive size - that is not so much a value as it is a strategy through which to achieve a larger mission. This dedication to sheer size, left unchecked, made the company prone to use of its size to bully and intimidate those who, for example, questioned some its balance sheet practices. Enron became arrogant.

Once the values of risk taking and creativity led to more and more aggressive partnership arrangements to maximize share value and, for example, hide debt, the company failed to check its “creativity” with an equal commitment to integrity. I’ll bet many insiders came to believe Enron could not fail to grow - the company promoted the myth of its own invulnerability so effectively. That must have made it easy, at some point, for decision makers to secure risky partnerships with Enron stock, betting that the stock would never fall.

But then the bubble burst from the overheated, overvalued marketplace, and many of Enron’s speculative ventures sank. But as the market began to fall, so too did Enron’s stock, and then creditors required more than Enron stock as payment or security. The actual financial tools and processes were far more complex than this, but Enron essentially fall apart by a complex process of “margin calls.”

But before the end, it became more and more apparent to insiders that the bottom was falling out, which then led to more and more aggressive measures to prop up stock values by whatever means necessary - Enron’s corporate culture did not change. Corporate officers deceived shareholders and employees, as part of a pattern that apparently had developed, incrementally, over time.

But the death spiral had already begun, and Enron’s collapse became as inevitable as its true believers had once presumed its success to be.

As reports from inside Enron come out, it appears that many people were aware of the company’s questionable financial practices - aware also that Enron’s corporate culture was out of control. Whistle blowers are never very common, but a corporate culture that makes it hard for ethical objections to be heard - or which fails to take them seriously - is a corporate culture that is already failing. Otherwise ethical people remain silent when they see the most highly rewarded people in an organization are the ones who commit some of the worst violations.

That’s important, because one way to describe a corporate culture is that is is made up of the sum of the personalities of those people who are selected, promoted and rewarded in an organization. When a corporation fails to select for integrity in leadership, it certainly won’t find it there later.

Corporate officers at Enron seem at best to have been neglectful of their responsibilities for oversight, or, at worst, outright criminal and abusive in their levels of greed and deception. It takes a special person to blow the whistle in such an environment.

All of this was preventable, long ago, but Enron failed to create a sustainably successful corporate culture that included values such as customer service, or maximizing customer loyalty and satisfaction, which would have balanced the company’s overemphasis on pure, short-term stock price.

But even more important, Enron’s corporate culture had evolved so that it only paid cosmetic attention to integrity. That is and was the responsibility of the Board of Directors and the executive officers of the company. A well tended garden is never choked by weeds.

And that’s how corporate culture matters: the attention we pay to corporate culture pays dividends in creating sustainable growth and profit. Enron’s failure to create the right kind of corporate culture ultimately killed it.

For a video post-mortem on Enron and what went wrong, check out this link. Brad DeLong's perspective is admittedly political, but then, there's no apolitical stance in economics, actually, and his is an informed and intelligent perspective. He argues against the notion that Enron had been brought down by the actions of a few rogues, consistent with my old analysis, relating Enron's fall to a fundamentally flawed, corrupted corporate culture.

Big Business versus Small Business?

2006-06-14T09:36:00.000-07:00

I'm still studying the whole net neutrality debate.

The big telecommunications companies argue they need to be able to put tollbooths on the Internet to create VIP fast lanes for access and eyeballs to those who can afford to pay. My friends in the industry argue the industry needs this regulatory change from the original founding rules of the Internet for American telecoms to survive. We're talking here about AT&T and Verizon, among others.

On the other hand, creating a multi-tiered online world fundamentally changes the Internet. My business, for example, is a small one, but anyone can find my web site who searches for the content I provide. Some of my content is quite popular and has organically risen to the top of some Google searches in the marketplace of ideas. I never paid for that placement. But if the telecoms get their way, I'll be pushed aside by the big name consulting houses, relegated to greater obscurity, because I won't have the business scale to pay for preferred access.

It won't just be me, of course. Any smaller, innovative business will suffer if the telecoms succeed in gutting net neutrality from the law. The executive branch has already changed the regulations at the telecom lobby's bidding, and now Congress is wrestling over putting net neutrality back into the law. Telecom lobbyists are lining up and spending money to fight this, and a broad alliance that includes Google, Craig's List, Paypal and political groups on the left and the right are fighting a populist campaign against the telecoms.

It's clear that net neutrality is good for consumers. For example, when somone in your family is sick, you can do research for health care information from public organizations not biased to sell you one solution or another. But if net neutrality goes away, you'll likely be steered when you look for answers to information sites that are really just advertising their own agendas. On the other hand, the telcos argue that a failed telco industry is also bad for the country, though I have not examined the financials and industry dynamics to know how seriously threatened they may be. I have to admit, some of the public relations campaign the telcos have been running looks dishonest: they argue against "regulating" the Internet, when it has always been subject to rules or regulations. They just want the regulations tilted in their favor, away from the way the Internet has always functioned otherwise.

No matter what, it seems the net neutrality fight is pitting big business against small business. As one who strongly favors innovation, I tend toward the small business side. Smaller businesses create the most jobs and stengthen the economy (in this case, small businesses include, in my mind, those with a few hundred million in revenue, as opposed to multibillion dollar big guys). If the big telcos can't handle the competition, is that small business' fault? The Internet was built with much public investment. I get that the telcos may need some form of public help or regulatory assistance, since the nation's communication's infrastruture is really like the highway system of the new century. But gutting net neutrality seems like the wrong way to assist the telcos, giving them additional regulatory favoritism, in my opinion. They already write the laws through their lobbyists. Who stands up for small and medium sized businesses? I sure don't see the U. S. Chamber of Commerce doing it.

What do you think?

Always Be Curious

2006-06-07T16:36:00.000-07:00

CNN reports today scientists have found a rock in Arizona that may depict and ancient artistic rendering of a large supernova, visible in 1006. Imagine what such a thing must have sparked in the minds os a people accustomed to observing the world around them, especially the skies!

Did they think of the sky as a dome? Were the stars and planets to them evidence of the gods? The CNN article does not tell us anything about the presumed culture that produced the art, but some things (to me, anyway) are certain.

First, it has always been the nature of our species to be curious, and to wish to record that which fascinates us. Second, science advances our understanding of the world around us, but it is up to ourselves to give our lives and work meaning.

I encounter many working people who struggle to find meaning in their jobs and careers. Furthermore, we live in an age of much economic and social dislocation on a global scale. Seeing multiple systems of meaning fight for dominance among groups of people can be highly unsettling. Those who succeed the most in deriving pleasure and enjoyment from their work are the ones who remain curious, and who remain willing to imbue their efforts with meaning, no matter what others around them may think or say.

How Cheap is the Market?

2006-06-06T05:59:00.000-07:00

With the Fed apparently trying to engineer a soft, slow devaluation of the dollar so as not to destablize the U. S. "wealth effect," real estate driven economy (we'll see how that works out), it's interesting to take a look at the market again. P/E ratios based on trailing earnings suggest decent values, by historical standards:

This is the first part of a two part series asking the question, "How cheap is the market right now?"(part II is here).

The answer might surprise you. It certainly raises some very interesting questions as to what cheap is, the importance of having a long term perspective. It also begs the question of how much patience long term investors have when it comes to thinking about various metrics.

The question itself involves a combination of data analysis and opinion. To fully explore this issue, we will listen to two different perspectives on the subject: One says the S&P500 is cheap, the other asks, how much cheaper might it get?

For part one, we go to Eddy Elfenbein of Crossing Wall Street: Eddy observes "S&P 500 is now trading at just under 16 times trailing operating earnings. The P/E ratio hasn't been this low since October 1995." Note that he references actual trailing earnings. This is more accurate than using forward forecasts, which tend to be very wrong at key turning points.

New Comments System

2006-06-05T20:49:00.000-07:00

I saw some friends tonight at the annual Wharton Club of DC dinner, which honored Marshall Chawla, Geoff Corbett and Elizabeth Duggal: friends all, and most deserving honorees.

I also learned how much people HATE the embedded default comments system here, so I''ve installed another system I hope you'll all find easier.

Let me know how it works. Unfortunately, the comments already left are no longer visible, so we're now dealing with a clean slate.

Are Young People Lazy and No Good?

2006-06-02T06:53:00.000-07:00

No.

I get a version of this question in many of the management programs and speaking engagements I do. Executives and managers lament that they don't find the same work ethic among younger people they believe they had themselves when young.

Some of this is nostalgia bias: we always tend to bathe memories of our own youth in a glorious, romantic light.

Some of this is sample bias: the executive audiences to whom I speak are made up of people who probably were more oriented toward acheivment than were their peers when they were young. That's how they got to be where they are today.

It's fashionable for older, wiser leaders to bash the young, but it's entirely off base. Consider this Business Section headline, from today's New York Times: "Big Bonuses Still Flow, Even if Bosses Miss Goals." The article goes on to say, in part:

Four more top executives of the Las Vegas Sands, which owns the Venetian Resort Hotel and Casino, received more than they should have. The total in excess bonus payments for the five men was $2.8 million.

The compensation committee of the board conceded that it had made an error. But it said that "the outstanding performance of the company in 2005" justified the extra money, and it allowed the executives to keep it.

Shareholders of Las Vegas Sands did not fare as well. The value of their holdings fell 18 percent last year.

As executive pay packages have rocketed in recent years, their defenders have contended that because most are tied to company performance, they are both earned and deserved. But as the Las Vegas Sands example shows, investors who plow through company filings often find that executive compensation exceeds the amounts allowed under the performance targets set by the directors.

Executives of companies as varied as Halliburton, the military contractor and oil services concern; Assurant, an insurance company; and Big Lots, a discount retailer, all received bonuses and other pay outside the performance parameters set by the boards of those companies.

It is the equivalent of moving the goalposts to shorten the field, compensation experts say.

"Lowering the hurdles is especially disconcerting because very often the goals are not set all that high to begin with," said Lucian Bebchuk, professor at Harvard Law School and author with Jesse Fried of "Pay Without Performance." Mr. Bebchuk said shareholders should be especially alert to increases in bonuses because more companies were shifting away from stock options and into cash incentives.

Some employment agreements actually stipulate that they will provide bonuses even if company performance declines. The agreement struck in 2004 by Peter Chernin, president and chief operating officer of the News Corporation, entitles him to a bonus even if earnings per share fall at the company. If earnings rise by 15 percent in any given year, Mr. Chernin's bonus is $12.5 million. But if they fall 6.25 percent, Mr. Chernin's bonus is $4.5 million, and an earnings decline of 14 percent translates to a $3.52 million bonus.

These kinds of articles get written all the time. As income disparity across the population increases in the United States, they will continue to be written. Real middle class wages have been flat for a long time, and the middle class wealth effect brought about by rising real estate values is tailing off. Enron executives Ken Lay and Jeffrey Skilling have now been found guilty of multiple felonies by a jury. If workers, and even middle managers, are a bit disaffected, that disguntlement comes from within a larger social and economic context.

Young workers oftentimes don't trust their working institutions, and that lack of trust comes from a recognition that entry level workers are expendable as jobs move overseas. Perceiving no loyalty from their employers, young people behave more like economic free agents ready to jump at any better opportunity. That, to many executives, looks like a lack of commitment, even like laziness. But taking care of themselves first by not becoming too attached to their jobs is, for many young people, a rational survival strategy in a global economy.

I'm not saying top executives are bad. I'm not saying young people are bad. I'm not saying all top executives or executive compensation systems are corrupt or flawed, though I am pointing out that this idea is continuing to gain momentum in the wider U. S. culture. I'm not saying anyone is bad! I'm saying scapegoat thinking is typically lazy and self-serving.

I appreciate the desire to find simple answers that confirm our first reactions, but it's simply not true that young people today are any less talented or motivated than the rest of us were when we were young. Human nature has not changed. If you offer young people a real opportunity to grow, show them their talents and efforts matter to your organization, and in particular, to their direct supervisors, they will run through brick walls for you. Just as many of us did when we were young.

I see this in my work for clients on mentoring systems all the time. You have to select the right people for the right jobs, and then, if you want high productivity and loyalty, you have to invest time in your talent. On the other hand, if your business treats its people like cogs in a machine, making little allowance for the expression and understanding of individual people's talents, you'll get just what you expect. We can all congratulate ourselves for being young go-getters once upon a time, but how, exactly, does that help our businesses?

Quotes

2006-05-31T06:13:00.000-07:00

"Intolerance of ambiguity is the mark of an authoritarian personality." -- Theodor Adorno

"Remember not only to say the right thing in the right place, but far more difficult still, to leave unsaid the wrong thing at the tempting moment." -- Benjamin Franklin

"Character consists of what you do on the third and fourth tries." -- James Michener

The Green Wars

2006-05-30T14:50:00.000-07:00

I'm passingly familiar with the issues surrounding global energy use, peak oil and the need to move economically to sustainable energy sources. Some people say there is a global climate change crisis, some deny it.

As one with a scientific background, but not a background in ecological science, I can't say from direct study who's right. But I have looked at the issues enough to know a couple of things: the unanimous verdict of the scientific community in the science journals is that global climate change is a real, man made emergency. I'm also hearing from some insurance industry contacts that they believe it and are trying to make plans: they can't keep underwriting many coastal areas and businesses the way they have in the past, based on recent risk assessment history.

The New York Times offers this bit as part of a series:

When Timberland, the outdoor clothing company, studied ways to reduce its carbon emissions four years ago, it weighed several options: building a wind farm in the Dominican Republic, buying power generated by renewable resources and setting up a vast bank of solar panels at one of its distribution centers in Ontario, Calif.

It chose to do all those things, but that was the easy part. When Jeffrey B. Swartz, Timberland's president and chief executive, considered how much carbon dioxide was produced in making leather for the company's famous boots, the answer came as a surprise.

"As it turns out, the vast majority of the greenhouse gases associated with manufacturing leather comes from cows in the field," Mr. Swartz said. "Yes, methane."

While Timberland figures out how to reduce these emissions — it is examining ways to change the feed for cows — the company has already cut its greenhouse gases by 17 percent from their 2002 level and aims to become carbon-neutral by 2010 by offsetting its emissions through renewable or alternative energy sources.

Americans are increasingly recognizing that the effects of carbon emissions on global warming are a serious problem, but there are no rules in the United States regulating heat-trapping gases comparable to those that most other developed countries have adopted under the Kyoto Protocol. Some United States businesses, though, are responding for a variety of reasons anyway: to satisfy customers or shareholders who worry about the environment, to improve their public image or to drive down their energy costs. In addition, some states and local authorities have stepped in to try to curb their contributions to global warming.

For Timberland, while it shares the concerns over global warming, it's mostly a matter of dollars and cents. As Mr. Swartz put it: "What idiot will leave costs on the table? I hope it's our competitors. I get paid to create value."

But reducing carbon emissions is no easy task.

Scientists, economists, environmentalists and a growing rank of business leaders warn that corporate America needs to move more quickly or it will face the consequences: higher energy prices, a potential cost for carbon pollution and, eventually, products that will have trouble competing globally because other countries are reducing emissions.

The United States is responsible for a quarter of all the carbon dioxide sent into the atmosphere each year. It has not ratified the Kyoto Protocol, the treaty on climate change that went into effect last year for more than three dozen countries in Europe and elsewhere, that set targets and timetables for cutting emissions.

If consumption of fossil fuels continues at today's pace, the Energy Department predicts that carbon emissions in the United States could rise to more than eight billion tons by 2030 — 38 percent above current levels — as energy use keeps growing.

"This is a huge challenge for American businesses, particularly those trying to compete internationally," said Adam Markham, executive director of Clean Air-Cool Planet, an advocacy group in Portsmouth, N.H. "Most of the rest of the developing world has a legislative mandate to curb emissions, but in the United States, in many cases, there is no real reason for companies to act."

The major energy companies are pushing back hard, through advertising and lobbying, against these trends. But the green wars are here to stay for American and global businesses. I expect we'll be hearing more, not less, about this. Politicians and demagogues can say what they will, but my business sources tell me carbon emissions and sustainable energy will be huge priorities at the beginning of this century. There's room here for innovative, smaller companies to lead the way in the development of sustainable energy models and technologies that the big players lack incentives to explore in earnest.

It's Annual Subscriber Survey Time

2006-05-28T16:09:00.000-07:00

Last May we had our first annual subscriber survey, and it's that time again.

Though this blog is open to the public, since we've just kicked it off, anyone here is probably already a subscriber to "What's Up, Doc?". Please take 10 minutes to complete the survey to help me understand your interests, topic preferences, etc.

Click here to take the survey!

The Paradox of Leadership Power

2006-05-28T06:56:00.000-07:00

"What's Up, Doc?" Volume 6, Number 5, May, 2006

Understanding People = Power
The more you rise in repsonsibility in any organization, the more your people skills become paramount. That's because getting things done through people requires an understanding of human styles of thought, emotion, talent and motivation. People are not robots or computers. So, in order to move groups of people to effective action, you simply must understand people. Leadership requires you to understand how individuals think, what makes each person tick. That's what it takes to develop leadership power.

Reading People Requires Emotional Intelligence
The concept of Emotional Intelligence is a little fluid, but it encompasses our ability to understand what makes people tick. The main idea here is that understanding others is an area of intelligence, susceptible to learning, just as any other area of knowledge or growth can be. In my experience and through all my studies in psychology (you can learn more about me here), I know that all human growth, from cradle to grave, happens in the context of positive relationships. We seldom if ever overcome our blind spots in emotional intelligence through reading a book. We learn as we get feedback from people we can trust, who have our best interests at heart, like family members or close friends - maybe even a boss. Even if you feel you've achieved a breakthrough from a book, it probably was prompted by some interaction with another whereby you became aware of a need for growth, and you then sought out some writing to help you make sense of your experiences. Learning is socially mediated.

Emotional Intelligence Requires Self Awareness
To be able to understand the motivational styles and personalities of others, we need first to understand ourselves. Other people are not motivated as we are. They think differently, organize their worlds differently in their minds, and have different patterns of feeling. Before you can even begin to develop a "language" through which to understand others, you'll need to understand yourself more and more. Then you can possibly begin to learn how others differ from you. The weakest leaders I see in my consulting work believe there's not much they don't know about themselves or others, and yet, each of us is far more complex in our programming than the computer you see in front of you. Wilfull ignorance of yourself or others weakens your leadership power, and you'll make lots of mistakes from which you'll never learn. To grow in emotional intelligence, you'll need to form the habit of looking in the mirror to understand your own patterns of thinking and emotion.

Self Awareness Requires Vulnerability
Here's the hard part: the best way to learn about your blind spots - and we all possess blind spots - is to get feedback from people we trust. That means being able to hear what we by definition don't want to hear. This is personal feedback. Now, no one should open himself up to abuse, so it's important to have trusted people who can tell us what they think in a helpful way. But to allow ourselves to be that open, we need first to be vulnerable, to let our defenses down. That rubs many leaders the wrong way, because we tend to think power comes from conviction and an outward posture of strength that renounces vulnerability. Bzzzzt! Wrong. There are times to be resolute, of course, but learning and growth require an openness to the right kind of feedback. Closing yourself to the wisdom others might be able to offer you is the height of foolishness.

Power Therefore Requires the Willingness to Become Occasionally Powerless
So here we have the paradox: growing as a powerful leader requires you to become occasionally powerless, in the sense that you must open yourself to hearing things about yourself you don't want to hear, from people you trust. That process never stops. I encounter many executives who decide that such feedback is necessary early in one's career, but not later. As Hall of Fame baseball manager Earl Weaver said, "It's what you learn after you know it all that counts!" When you stop learning, you stop growing.

Global Economies Require Even Greater Emotional Intelligence
More and more, the business world requires us as leaders to interact with people from different cultures. Well, it can be tough enough to understand individual diffrences in thinking and motivation within our own cultures, but then, when we need to translate what we know onto experiences with those from a different culture, it gets that much harder. Imagine running Apple software on a PC. The basics of computing are the same, and human nature does not change, but we don't all grow up with the same "operating systems." Global economies make it even more critical to develop leadership power through regular pit stops to being powerless. Leading and succeeding in a global environment requires even greater emotional intelligence in leaders.

Intransigence is Your Enemy
As I've mentioned already, deciding you know all you need to know means deciding to place a ceiling on your leadership effectiveness. I encounter many good people with great potential to take the next step as leaders who nevertheless act as if an openness to growth is for "other people." It's a shame, because businesses really grow, innovate and seize opportunities when great leaders create the conditions for others to become the best they possibly can be, and that begins with the leaders themselves.

On a final note, I'm still putting this blog site together, and learning how it should be done. Somewhere in the main architecture of the site template I need to create a link to my business site, where you can find many articles in the archives, with a search box tool to help you navigate. In the meantime, here's a link to the mother ship.

Welcome!

2006-05-28T06:44:00.000-07:00

Welcome!

This is my first post since moving over to a blog format. I hope subscribers to "What's Up, Doc?," the Schuler Solutions Newsletter, will find this to be a convenient format. I'll use this web site to post future issues in the "What's Up, Doc?" series. Feel free to use the comments section to discues questions or air opinions about the ideas offered here.