When the Elites become tone deaf

Source: Daily Telegraph

The #Brexit vote will have a major impact on Britain, EU, NATO and the West more broadly. The 52-48 majority voting to leave the EU — like many recent US presidential elections — shows a country deeply divided.

The Telegraph’s map shows how London and a few other city centers voted strongly for the EU, while the rest of England voted decisively against the EU. (As the Guardian notes, Labour voters at the edges of London and Liverpool voted against the city center).

Before the results were in (HT: NY Times), pro-EU columnist John Harris wrote Thursday in the Guardian

The UK is now two nations, staring across a political chasm
Leave voters aren’t lemmings jumping off a cliff, and the left urgently needs to understand their choices.
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Two nations, in short, are staring at each other across a political chasm.
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Even those who understand that something seismic is afoot among predominantly working-class voters are still too keen on the idea that they are gullible enough to be led over a cliff by people with whom they would actually disagree, if only they knew the facts. But most people are not really being “led” by anyone. In my experience, Farage, Boris Johnson and Michael Gove et al are viewed by most people with as much cynicism as the people fronting the remain campaign. Moreover, this argument is dangerously redolent of that lousy old Marxist trope of “false consciousness”, whereby people enthusiastically following the supposedly wrong cause are only a speech or poster away from enlightenment, and a sharp left turn.

We need to face up to two things. First, a lot of people want out of the EU because they are worried and angry about the consequences of the free movement of people, and in that sense they have made their choice rationally. Second, even if Farage, Johnson and Gove would doubtless use Brexit as an opportunity to further our journey towards an essentially sink-or-swim society, there are plenty of working-class voters who would probably go along with that.

Meanwhile, pro-Brexit James Bartholomew made a similar point today in the Spectator

Britain’s great divide
The referendum has exposed a huge rift between the metropolitan elite and the rest
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Every election is divisive, but none has pitted rich against poor like this one. The social divide has been far more dramatic than the divide between the two main political parties. In general elections, the professional and managerial classes favour the Tories by a margin of four to three. The difference is nothing like as marked as the social divide in the referendum vote. As a generalisation, the split has been between the educated ‘haves’ on one side and the working class on the other. The Remainers found ways of making this point — casting themselves as cosmopolitan and ‘open’ against the crude and (presumably) closed-minded Leavers.

I came across quite a bit of scornful self-righteousness among the rich Remainers. In one street of private houses, a woman repeatedly shouted at us: ‘You’re all bonkers! Get out! You are not wanted here!’ A prosperous-looking man at the doorway of his private house informed us that immigration was a good thing and was economically necessary: the implication being that those who seek controlled immigration are both anti-immigrant and ignorant of the economics of the matter. His irritated parting shot was: ‘I hope you lose!’

The divide shows how changes brought about by globalisation and large-scale immigration have affected different classes in contrasting ways. For the ‘haves’, it has been a boon. The Notting Hill crowd now has cheap, highly qualified Polish builders, well-educated Polish cleaners and perhaps a Romanian nanny for their children. They go to Caffè Nero and are served by polite Italians. They feel deliciously international and open-minded while enjoying cheaper, better services than they otherwise would.
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At the other end of the spectrum was Gladys, who I met at the door of her council house on Monday. She was reluctant at first to say which way she was voting. She got her council house in 1975 after two years waiting for it. But now she worries for her sons and grandchildren. How are they going to afford somewhere to live? The cost of mortgages just goes up and up, she said.
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Gladys was not xenophobic or racist. What bothers her isn’t immigration, as such, but the government’s inability to respond to immigration and the resulting shortage of housing and school and hospital places. The rich folk across the road could get round these problems. Hector and Harriet could go to a private school if necessary. If there was a two-week wait to see their NHS GP, they could go private. They have already got their own flat or house, which has gone up nicely in value, thank you very much.

Both reminded of whjat Peggy Noonan — a moderate Republican and former Reagan speechwriter — wrote in February:

Trump and the Rise of the Unprotected
Why political professionals are struggling to make sense of the world they created.
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I keep thinking of how Donald Trump got to be the very likely Republican nominee. There are many answers and reasons, but my thoughts keep revolving around the idea of protection. It is a theme that has been something of a preoccupation in this space over the years, but I think I am seeing it now grow into an overall political dynamic throughout the West.

There are the protected and the unprotected. The protected make public policy. The unprotected live in it. The unprotected are starting to push back, powerfully.
The protected are the accomplished, the secure, the successful—those who have power or access to it. They are protected from much of the roughness of the world. More to the point, they are protected from the world they have created. Again, they make public policy and have for some time.

I want to call them the elite to load the rhetorical dice, but let’s stick with the protected.

They are figures in government, politics and media. They live in nice neighborhoods, safe ones. Their families function, their kids go to good schools, they’ve got some money. All of these things tend to isolate them, or provide buffers. Some of them—in Washington it is important officials in the executive branch or on the Hill; in Brussels, significant figures in the European Union—literally have their own security details.

Because they are protected they feel they can do pretty much anything, impose any reality. They’re insulated from many of the effects of their own decisions.

One issue obviously roiling the U.S. and western Europe is immigration. … It is of course the issue that made Donald Trump. Britain will probably leave the European Union over it.
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If you are an unprotected American—one with limited resources and negligible access to power—you have absorbed some lessons from the past 20 years’ experience of illegal immigration. You know the Democrats won’t protect you and the Republicans won’t help you. Both parties refused to control the border.
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Many Americans suffered from illegal immigration—its impact on labor markets, financial costs, crime, the sense that the rule of law was collapsing. But the protected did fine—more workers at lower wages. No effect of illegal immigration was likely to hurt them personally.

It was good for the protected. But the unprotected watched and saw. They realized the protected were not looking out for them, and they inferred that they were not looking out for the country, either.

The unprotected came to think they owed the establishment—another word for the protected—nothing, no particular loyalty, no old allegiance.
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What marks this political moment, in Europe and the U.S., is the rise of the unprotected. It is the rise of people who don’t have all that much against those who’ve been given many blessings and seem to believe they have them not because they’re fortunate but because they’re better.

You see the dynamic in many spheres. In Hollywood, as we still call it, where they make our rough culture, they are careful to protect their own children from its ill effects. In places with failing schools, they choose not to help them through the school liberation movement— charter schools, choice, etc.—because they fear to go up against the most reactionary professional group in America, the teachers unions. They let the public schools flounder. But their children go to the best private schools.

This is a terrible feature of our age—that we are governed by protected people who don’t seem to care that much about their unprotected fellow citizens.

And a country really can’t continue this way.

In wise governments the top is attentive to the realities of the lives of normal people, and careful about their anxieties. That’s more or less how America used to be. There didn’t seem to be so much distance between the top and the bottom.
Now is seems the attitude of the top half is: You’re on your own. Get with the program, little racist.

My European history isn’t very good, but the French Revolution happened in part because the Elites became tone deaf. (IIRC it was also a factor in the Russian and Chinese revolutions, although both involved a well-organized grab for power by one faction against another). In a democracy, we get to have our elections via ballot box — as long as the system isn’t rigged. In that regard, such a vote is a triumph (and not a failure) of the system of democracy that England pioneered in the 2nd millenium.

Source: Financial Times

Web standards exist for a reason

Back at the end of the browser wars — i.e. the late 20th century — it looked like Microsoft had won and Netscape had lost. A number of Windows-centric shops designed their websites for Internet Explorer, either in terms of full functionality (“works best with Internet Explorer") or actual access (“requires Internet Explorer”). Microsoft encouraged this by promulgating APIs for Visual Basic, .Net and DirectX and the like.

Fast forward to today. Over the past five years, Microsoft’s desktop market share has been in a freefall. Statcounter — the widely cited arbiter of browser usage — chronicles how Google Chrome has come from nowhere to take share from IE and (to a lesser degree) Firefox (heir to Netscape’s customers and developers). At 55% in January 2010, the IE share is now under 22%:

When you include all platforms — tablets, mobile phones and consoles — the news for Microsoft is even worse — with an IE share of 13.5%:

Yes, as a Mac owner this was particularly galling, since Microsoft had a Mac version of IE (as one MS employee pointed out to me) only as long as it served its purposes during the browser wars. MS discontinued IE for OS X in 2003. Fortunately, with IE now a small fraction of the web audience, it no longer matters — except at one site crucial for business professors, as I discovered today working on a paper.

The Virtue of Bad Design
One of the more popular proprietary business databases is called Thomson One, from Thomson Corporation (later Thomson Reuters). For entrepreneurship scholars (like me), the most relevant content is VentureXpert, a database of investments by VCs, angel networks, corporate VC and other private equity investments. This data is used by PWC and its partners to announce their quarterly VC funding stats at the PWC MoneyTree site.

Unfortunately, Thomson One is only compatible with Internet Explorer. Worse yet, it is not supported (and doesn’t fully work) with any version of IE greater than IE 8 (as documented by IT support desks at Wharton, Harvard, Columbia, and other schools).

Internet Explorer 8 was introduced in 2009 and last updated in February 2011 (almost five years ago), just before IE 9 was released in March 2009. IE 8 is not compatible with Microsoft’s current desktops, laptops, tablets or mobile phones, which require Internet Explorer 10 or 11. StatCounter estimates the November 2014 market share of IE 6+7+8 at 4.03% of the desktop market.

For Windows users, there is an IE Tab plug-in that helps Chrome and Firefox imitate IE, but not all the Thomson One features are available in this emulation mode.

Customers Lose, and (So Far) Thomson Still Wins
So to recap, here is where we are:

• The virtue of the web (particularly HTML 4+) is interoperability between browsers.
• One or more IT architects at Thomson Corp. decided years ago to lock their database to specific features of one browser, rather than support Internet standards.
• Those features are so non-standard that they are not supported by Microsoft browsers released since March 2011.
• The company has done nothing to upgrade their site to support the 96% of the world that uses other browsers.

I'd like to think that whoever made this architecture design error was fired for his (it was most likely a he) mistake, but that would assume a level of IT competence that the legacy team of Thomson Corp has not yet demonstrated. (Meanwhile, other Thomson Reuters sites seem to work with a wider range of IE versions and in some cases even have a mobile client).

One thing that is clear is that Thomson Reuters is pretty confident of their monopoly position in this particular niche: if not, their customers would be defecting in droves, and fixing this broken IT infrastructure would finally become a priority. I’m not holding my breath (on either competence or customer orientation suddenly breaking out).

Punishing your captive shareholders

Although public companies are not as accountable as they should be, in the long run failure or malfeasance has consequences. Managers who treat shareholders badly get fired, or people dump the shares — depressing them enough to bring in a raider who will shake things up.

Unfortunately, nothing like that happens when it comes to accountability in government agencies, as this week’s semi-shutdown makes clear.

The Office of Personnel Management (an Executive Branch agency) encouraged agencies to shut off their websites when the shutdown came. The Census Department, NASA and Park Service are offline, although the Library of Congress and IRS (despite previous threats) are still functioning. Julian Sanchez of the Cato Institute referred to this as an online “Washington Monument Syndrome.”

For anyone who’s run a business and is IT literate knows that it costs more money to take down a site than to leave it up. How many sites have you seen that haven’t been updated in weeks, months or even years? For many sites, the government could be shut down for 3 or 6 months and the content would still be available and useful if they left the servers running.

At Reason, Brian Doherty notes the irrationality of this approach:

If the “inessential” public-facing Web pages are hosted on the same systems you’ve got to keep up and running for other “essential” back-end purposes—meaning you don’t get to save the security or electricity overhead— then the cost of having IT go through and disable public access to the “inessential” sites could easily be higher than any marginal cost of actually serving the content. But the guidance here seems to require agencies to pull down “inessential” public-facing content even when this requires spending more money than leaving it up would. In the extreme case, you get the bizarre solution implemented on the FTC site: serve the content, then prevent the user from seeing it!

Or, as my local paper quoted one expert:

To many, the website shutdowns have the feel of politics. Public relations expert Erica Holloway of Galvanized Strategies, who works with clients on their websites, said it makes no sense to shut down the sites otherwise.

“To withhold information from the public that the public has a right to have is wrong,” Holloway said. “And if there is no budgetary reason behind it, if it isn’t monetary, then it looks like what it is: A giant temper tantrum.”

But since the tantrum included hiring people to put up barricades at the World War II memorial —“to make life as difficult for people as we can” — I guess we shouldn’t be surprised.

In a parliamentary system such as our European friends enjoy, such tantrums have consequences: it's hard to imagine David Cameron or Andrea Merkel pulling such a stunt. But with a fixed-term (and term limited) executive such as in the US or Mexico, it’s apparently feasible (if not desirable) to punish one’s shareholders.

Rewarding failure: blame it on the ex-wife

While Americans are used to paying large bonuses for failure, it’s not as common in Europe. Apparently Helsinki newspapers are alight with the controversy over the $25 million bonus Nokia plans to pay CEO Stephen Elop for halving the company’s market cap.

Elop’s failure has been long in coming. When Nokia announced its Windows strategy in February 2011, I (admittedly) mixed my metaphors:

Nokia CEO (and Microsoft veteran) Stephen Elop had already prepared the troops with his “burning platforms” memo, lambasting his new employer for how it failed to respond to the iPhone and Android challenge.
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Elop has jumped off the burning oil platform into a ship that’s adrift and has a hold filled with water.
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The sign of a troubled company is multiple Hail Mary passes in a row. … Nokia needs to fix its execution rather than throwing more Hail Mary passes than even Doug Flutie ever completed.

Twenty months later, the results were even more obvious:

Still, let’s not put too fine a point on it: Elop’s gamble to bet the company’s future on switching to the Windows Phone platform has been an absolute disaster. … Nokia has been more successful at killing Symbian — by starving new releases — than getting people to buy Windows Phones. In fact, as late as Q2, Nokia was still selling more Symbian than Windows phones.
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[R]ealistic is the advice from former Apple Europe president Jean-Louse Gasée: fire Elop and switch to Android. If Nokia’s board believed in accountability, they’d lower the axe after the end of the Christmas quarter, but more likely they’re going to limp along until they can no longer deny the reality of Elop’s failed platform strategy.

Now the Helsingin Sanomat reports in Finnish and English that Nokia is begging Elop to reduce the bonus, but Elop is blaming his estranged wife for why he can’t (won’t) do so:

Helsingin Sanomat has learned that Risto Siilasmaa, Chairman of the Board of mobile telephone manufacturer Nokia, has held discussions with former CEO Stephen Elop on either cancelling or reducing his bonus of €18.8 million.

In the discussions, Elop has brought up the fact that he has filed for a divorce from his wife. If he were to agree to relinquish his final compensation of €18.8 million during the divorce proceedings, he might still be required to pay half of the value of the bonus to his wife.

Siilasmaa does not want to comment on the matter.

AS CEO OF NOKIA, Elop travelled around the world constantly. His family lives in the United States, in Seattle, Washington.

Elop has an apartment in Helsinki, but most of his time has been spent on work-related travel. His family includes his wife Nancy and their five children.

The HS speculates that Finland might have jurisdiction over the divorce, but that seems unlikely. Instead, Elop filed for divorce Aug. 1 in King County (i.e. Seattle), and Washington State is a community property state, which means (barring other contractual arrangements) Nancy Elop is entitled to 50% of everything her husband earned during their 20+ years of marriage.

So now Elop’s failure as a CEO deserves to be rewarded because of the failure of Elop’s marriage? The one-good-failure-deserves-another warrants recognition for creativity, but not a $25.4 million (or $12.7 million) prize.

Leaks to HS are intended to put the Nokia board in the best light, by comparing Elop to his peer group — CEOs of other failed mobile handset companies:

THE PAYOUT to the CEO is exceptionally large by Finnish corporate standards.

However, compared with the golden parachutes of Nokia's international competitors in similar situations, Elop's bonus is not particularly large.

Motorola Mobility's CEO Sanjay Jha was promised a final bonus of €47 million when Motorola's telephone operations were bought out by Google.

Thorsten Heins, CEO of Research in Motion, which manufactures Blackberry telephones, is set to be paid €41 million if the purchase offer made on Monday by investors is implemented.

Tero Kuittinen of Forbes argues that Nokia’s contract with Elop gave him a powerful incentive to run the company into the ground:

According to changes implemented in 2010, Elop was entitled to immediate share price performance bonus in case of a “change of control” situation… such as selling of Nokia’s handset division. Curiously, his predecessor [Olli-Pekka] Kallasvuo had no such clause in his contract. This adjustment meant that unlike previous CEOs, Elop was facing an instant, massive windfall should the following sequence happen to take place:

• Nokia’s share price drops steeply as the company drifts close to cash flow crisis under Elop.
• Elop sells the company’s handset unit to Microsoft under pressure to raise cash
• The share price rebounds sharply, though remains far below where it was when Elop joined the company.

Should this unlikely chain of events ever occur, Elop would be entitled to an accelerated, $25M payoff. Through some strange coincidence, that very sequence of events actually did happen to take place between 2011-2013. Practically instantly after Elop was handed his contract. Can you imagine how Nokia’s board must have giggled when they realized what had occurred? They had created a strong incentive for the new CEO to drive down the company share price, sell the core business to Microsoft and then collect $25M – and this actually happened!

Empowerment brings economic growth

There is no doubt that some are better equipped than others to navigate the challenges of the 21st century. Our purpose is not to fear or deny those inequalities – in resources, or skills, or confidence – but to understand and overcome them.

This is not a matter of more spending or more government. It requires putting members of the public in charge of their own destiny so we can prevent problems rather than just mitigating them. Such people-led politics is the way in which we save money and secure better outcomes for all. Radical and difficult to implement though it may be, it is the progressive future for which we fight.
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Education policy has been defined by an obsession with who is running schools, when our children need preparation for a digital economy where “jobs for life” no longer exist.
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With the pace of change in the global economy, no one can take his or her job for granted. … As the economist Adam Lent argues, the means of production are increasingly in the hands of workers. Starting a business once required considerable capital outlay. Now broadband and a PayPal account will do. Our youth embrace this. In 1998, just 17 per cent of 18-to-29-year-olds wanted to start a business –now it is 30 per cent.

This ethos hasn’t been created just by the rise of the internet. The new enterprising spirit is no more defined by new hardware than the 1980s were defined by fax machines. This is a grass-roots, pioneering mindset – and it can be harnessed by the left.

Stella Creasy, MP (Labour) for Walthamstow
New Statesman, September 18, 2013

Roberts Court: Ends justify the means, Part 3

Gay marriage supporters are celebrating their two big wins Wednesday, after the Supreme Court (in effect) overturned California and Federal laws restricting same-sex marriage.

In the California case, Chief Justice John Roberts again used a clever legal twist to get the result he wanted in the narrowest possible way. The first and most famous example was declaring the Obamacare individual mandate a tax (even though the legislative history emphasized it wasn’t a tax, and supporters had not defended it as a tax).

On Monday, a 7-1 majority limited the ability of universities to use race in affirmative action — not by banning (as some wanted) but by imposing new tests that will have to be interpreted by the courts. The decision left analysts puzzling over what it means, but universities expecting a series of expensive lawsuits challenging their policies until the Supreme Court gives clearer guidance many years from now.

Then in the California Proposition 8 case, a 5-4 majority in effect upheld gay marriage by denying the Prop 8 supporters a right to defend their proposition after the (pro-gay marriage) governor and attorney general declined to do so. In dissent, California-born (Stanford graduate) Anthony Kennedy attacked the decision as gutting the initiative process, installed by California progressives in the early 20th century. As Kennedy wrote:

The Court’s opinion disrespects and disparages both the political process in California and the well-stated opinion of the California Supreme Court in this case. … The California Supreme Court, not this Court, expresses concern for vigorous representation; the California Supreme Court, not this Court, recognizes the necessity to avoid conflicts of interest; the California Supreme Court, not this Court, comprehends the real interest at stake in this litigation and identifies the most proper party to defend that interest.
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In the end, what the Court fails to grasp or accept is the basic premise of the initiative process. And it is this. The essence of democracy is that the right to make law rests in the people and flows to the government, not the other way around. Freedom resides first in the people without need of a grant from government. The California initiative process embodies these principles and has done so for over a century.
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In California and the 26 other States that permit initiatives and popular referendums, the people have exercised their own inherent sovereign right to govern themselves. The Court today frustrates that choice by nullifying [for lack of standing] a State Supreme Court decision holding that state law authorizes an enacted initiative’s proponents to defend the law if and when the State’s usual legal advocates decline to do so.

Conservatives (who wanted Prop 8 upheld) such as WSJ columnist John Fund were predictably upset by the Roberts approach. But then so was Kevin Drum, a blogger who covers  “civil liberties, gay rights” for the left-wing magazine Mother Jones. After quoting Kennedy’s dissent that “gets at the core problem here,” he wrote:

In California, it's routine for the people to pass initiatives that neither the governor nor the legislature supports. In fact, that was the whole point of the initiative process when it was created. In cases like these, of course the governor and legislature are going to decline to defend the law in court. With today's decision, the Supreme Court is basically gutting the people's right to pass initiatives that elected officials don't like and then to defend them all the way to the highest court in the land.

To me, this has neither the flavor of justice nor of democratic governance, regardless of whether I like the outcome.

As Kennedy, Fund and Drum correctly note, the decision has reduced the accountability of politicians, weakening (if not undoing) the ability of voters in 26 states to practice direct democracy.

In all three cases, it appears the Roberts Court (or at least the chief justice) has moved the US legal system away from a key principle articulated by John Adams, one of the revolutionary founders, our first vice president and the principle author of the 1780 Massachusetts Constitution. In 1774 Adams wrote that a key principle of the English legal system was “a government of laws, and not of men.” Using technicalities means that courts, not voters or legislators, will be deciding what is allowed and not allowed in our republic.

Nokia: bad news without end

Like other CEOs of struggling companies, Stephen Elop has an unenviable job. He took over Nokia in 2010 when his predecessor had been unable to arrest the company’s decline.

Still, let’s not put too fine a point on it: Elop’s gamble to bet the company’s future on switching to the Windows Phone platform has been an absolute disaster.

In quarterly earnings announced Friday, the company lost €4 billion for the first 9 months of 2012 — nearly a billion of that in the 3rd quarter — versus €0.4 billion lost in the same period of 2011. This is not a one-time blip: here months ago, Nokia also lost money and announced massive layoffs.

Smartphone sales have been falling since 2010, but the major collapse came this year as the company phased out its Symbian handsets. AllAboutWindowsPhone.com (née AllAboutSymbian.com) published the damning chart:

Nokia has been more successful at killing Symbian — by starving new releases — than getting people to buy Windows Phones. In fact, as late as Q2, Nokia was still selling more Symbian than Windows phones.

The only uptick in smartphone sales in Q3 came because during Q3, the company has rebranded its S40 (now “Asha Touch”) as a “smartphone” platform. Whether or not the new classification is accurate, it doesn’t reduce in increased sales and highlights how far the company has fallen since its 2010 peak.

It seems like the assumptions behind the Windows bet were flawed. Nokia (or at least Elop) hoped that being the big fish in the Windows pond would be better than slugging it out in the Android market.

Yes, Nokia (at least for now) has the majority of WP sales, but that's not much. The assumption was that Windows Phone would be competitive with Android and iOS, but so far it isn’t. Q3 numbers won’t be out until next month, but in Q2 WP was #5 at 3.5%, after Android, iOS, BlackBerrry and Symbian. Meanwhile, the transition has been managed in such a way to kill its Symbian cash cow before the customers embraced its new products.

For years, Nokia was the world leader in both smartphones and handsets. Now Samsung is selling almost 3x as many Android smartphones as Nokia is selling for WP, Symbian and S40. If Nokia isn’t ready to compete with Samsung, maybe it should just close the handset business and focus on infrastructure.

More realistic is the advice from former Apple Europe president Jean-Louse Gasée: fire Elop and switch to Android. If Nokia’s board believed in accountability, they’d lower the axe after the end of the Christmas quarter, but more likely they’re going to limp along until they can no longer deny the reality of Elop’s failed platform strategy.

Picking a CEO: narcissists need not apply

Narcissism is rampant among high achievers, whether movie starts, business executives or politicians. It seems like the more successful some people get, the more they surround themselves with bootlickers who cater to their ego rather than tell them what they need to hear.

Writing on the HBR blog, executive headhunter Justin Menkes recalls the advice he gave a CEO looking to groom a potential successor from among his high-achieving subordinates.

How do you know when someone can make the leap from high performer to CEO? There is one driving factor that determines the answer: narcissism.

Those selected for development have one universal trait in common: They are by definition high achievers. But there is a difference between those superstar achievers that can make the leap to CEO and those that will implode: To what degree do they feel invigorated by the success and talent of others, and to what degree does the success of others cause an involuntary pinch of insecurity about their own personal inadequacies? Only an individual who feels genuinely invigorated by the growth, development, and success of others can become an effective leader of an enterprise. And it remains the most common obstacle of success for those trying to make that leap.

Menkes has a checklist from the Narcissistic Personality Inventory:

• Are the individual's relationships with others based on honest, intimate exchanges, or are they formed using a dynamic that regularly reinforces the narcissist's role as a "hero"?
• Does the individual often talk about how his star qualities make him distinct from his peers?
• Does he like to be the center of attention?
• Does the remark, "I insist on getting the respect that is due me," resonate with his worldview?

All of these items play to a twisted egocentrism that assumes the world exists for the benefit of the high achiever. But if eliminating narcissists from consideration is necessary, IMHO it is not sufficient.

A related predictor of failure that I’ve seen time and time again is an insular approach to gathering information, getting advice and making decisions. It seems to be the single best predictor of failure among US presidents — where the raw power being wielded causes senior aides to jealously (and zealously) guard their access. (Cases in point: Nixon, Carter).

So yes, the narcissist has a particularly pathological form of reality denial. But if a leader can’t deal with the world as it is — rather than how he or she imagines it to be — the final outcome is going to be the same.

Gambling with OPM

From the San Jose Mercury News, Sunday December 18:

If state Treasurer Bill Lockyer, union leaders and the state's largest government employee retirement funds have their way, they'll continue betting against the odds. It's not surprising. It's not their money at risk. They won't have to cover the losses. Taxpayers will.

Last week, a study led by Joe Nation, a Stanford public policy professor and former Democratic assemblyman from Marin County, made explicitly clear the magnitude of the risk. He found that there's a better-than-even chance we're going to lose the wager.
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The assumption about the investment returns is critical. The higher the expected return, the less money must be contributed now. But here's the kicker: If investments don't meet expectations, the employer -- the taxpayer -- must make up the entire shortfall. The employee has no risk.

So labor groups typically push for high return-rate assumptions. That means less pressure on workers and employers to kick in more now, and that frees up government funds to hire workers and pay for salaries and benefits. But unrealistically high assumptions mean we're shortchanging the system, creating a debt for future taxpayers.

Currently, the UC system uses an annual assumed rate of return of 7.5 percent, while CalPERS and CalSTRS use 7.75 percent. Defenders say those rates are based on past performance. Nation, like many academics, thinks they're irresponsible. Investment guru Warren Buffett has called them "crazy."
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Nation, using CalPERS' own data going back as far as it would provide, 1982, ran statistical simulations to forecast the odds of meeting several investment targets. He found there was only a 42 percent chance of meeting or exceeding our current wager on the 7.75 percent rate.
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Here's another way of thinking about it: Assuming future annual returns of 7.75 percent, the three pension systems combined were short $143 billion, or $11,703 for each California household. At a more realistic 6.2 percent investment assumption, they're short $291 billion, or $23,852 per household. Thus, the higher assumptions hide the magnitude of the problem.

The temptation to spend Other People’s Money is irresistible, especially when you can legally bind others to spend the money in the future.

Our system is supposed to provide checks and balances to prevent such problems. But public employees pay more attention to (and contribute more money to) state and local elections than do the average voter. An additional problem in California is that with 8 year term limits, many politicians don’t worry about tomorrow because they expect to be long gone (in Congress, a local mayorship, lobbying or private practice).

What have we learned?

A decade ago, the dot-bomb era was ending, and with it the destruction of billions of dollar of investor wealth.

Three years ago, the financial markets were collapsing after the popping of a housing bubble fueled by subprime lending and liar loans.

Today, Groupon raised $700m in an IPO in “the largest IPO for a U.S. Internet-related firm since Google Inc. raised $1.66 billion in August 2004.”

The stock rose 30% in first day trading over its offering price, although it dropped 13% since its opening price of $30. The total shares traded Friday were 142% of those issued — meaning on average every share was sold once and 40% of shares were sold twice. Presumably some of that comes from the “greenshoe” of the offering bankers flipping their shares in addition to their $50 million in fees.

Today, Groupon has a market cap of over $16 billion.

In its S-1, Groupon claims competition is not an issue:

If there's a question I've received from Groupon skeptics more than any other, it's, "how will you fend off the competition—especially massive companies like Google and Facebook?" I could give a dozen reasons to bet on Groupon, but it's impossible to predict the future or the actions of others. Well, now the sleeping giants have woken up—and the numbers are showing that what was proven true with literally thousands of other competitors is just as true with the incumbents of the Internet: it's kind of hard to build a Groupon. And since anyone with an Internet connection can track the performance of our competitors, I can be more specific:

• Google Offers is small and not growing. In the three markets where we compete, we are 450% of their size.
  
• Yelp is small and not growing. In the 15 markets where we compete, our daily deals are 500% of their size.
  
• Living Social's U.S. local business is about 1/3rd our size in revenue (and smaller in GP) and has shrunk relative to us in the last several months. This, in part, appears to be driving them toward short-sighted tactics to buy revenue, like buying gift certificates from national retailers at full price and then paying out of their own pocket to give the appearance of a 50% off deal. Our marketing team has tested this tactic enough to know that it's generally a bad idea, and not a profitable form of customer acquisition.
  
• Facebook sales are harder to track, but are even less significant at present.

Normally, we’d wonder how much the shares will fall after the other 96% come out of lockup. However, insiders have already dumped $943 million in shares after capturing 84% of the VC proceeds. So perhaps the large insiders will be patient, holding out for a higher price in the long run.

Or maybe there is no long run. The company lost money for the last four quarters, and by some measures it was technically insolvency before the IPO. As Villanova business professor Anthony Catanach told CNBC:

The picture is even worse if you consider the significant intangible assets recorded by the company (goodwill, intangibles, deferred taxes, etc.).  We still don’t have any reported evidence of the cash generating ability of these “assets”, so future write-downs may be forthcoming.

If you deduct these assets, to get a tangible equity number, the insolvency picture is even clearer.
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We still worry about all the red flags that are being ignored.  For example, with all the restatements (revenue, CSOI, etc.) and amendments, this delivers a powerful signal about the quality of internal controls over financial reporting, as well as the competence of the finance function at this company.

What else are we not seeing in the numbers?  Recent senior management turnover does not help, and the rapid growth adds more concern to the internal control issue.  And the working capital deficit (current liabilities greater than current assets) raises further concerns. 

Wikipedia tells us that 1637, a single tulip bulb sold for 10x average annual wages.

A century ago, philosopher George Santayana said: “Those who cannot remember the past are condemned to repeat it.” Nowadays, few philosophers make it to Wall Street, let alone invest in the market, which is why the “wisdom of crowds” is often the “madness of crowds.”

HP matters, Leo didn't

In the latest example of its incompetence, HP’s board of directors fired CEO Léo Apotheker, the same man it inexplicably hired less than a year ago after it fired its most financially successful CEO in a generation.

Into his place comes HP board member (and former eBay CEO) Meg Whitman, who told All Things Digital:

I took this job, because HP really matters to Silicon Valley, to California, to this country and to the world. …This is an icon and the place where the initial spark to create Silicon Valley came from and I am resolved to restore it to its rightful place.

At one level I agree with and admire Whitman. My work as an HP subcontractor in the 1980s and 1990s paid for my house, and I have nothing but respect for the company’s historic role in creating Silicon Valley. Twenty years ago, HP was the best in several segments that mattered. However, the company has largely faded to irrelevance in the past decade: first in some declining businesses, and second, third or worse in growth businesses.

On the other hand, Whitman (seconded by chairman Ray Lane) is promoting the spin that Apotheker was axed because he was a bad communicator. He certainly was awful — more suited for a top-down command and control German bureaucracy (NB: SAP) than an innovative Silicon Valley pioneer. But there was nothing in the latest news to suggest that Whitman is going to repudiate the series of bad decisions promulgated by Apotheker.

In particular, the HP of Apotheker was exactly the opposite of that of Mark Hurd — which was completely consistent with the (controversial) vision of his predecessor Carly Fiorina. A $125 billion company with 300,000 employees can’t turn on a dime — or even as quickly as an aircraft carrier.

As the seventh CEO since 1999, I could easily see Whitman lurching HP into yet another direction with yet another strategy and yet another reorg and yet another grand acquisition and divestiture strategy. This is — and I have to say it — the woman who inexplicability spent $2.5b to buy Skype to complement her online flea market.

Thanks to generous union spending — and daunting party registration figures — Whitman (like Fiorina) failed in her effort to become an elected California official last fall. However, while her skill set is better suited to being appointed HP CEO than being elected governor, I’m not sure the former job is any easier. (I say this as California continues to imitate Greece-style deficit spending without the public employee cutbacks that the latter has reluctantly embraced.)

So running HP is not (as the AllthingsD interview suggests) about better communication skills, or meeting with executing on Apotheker’s inexplicable (and apparently irreversible) $10b acquisition of Autonomy, an obscure UK software company. Nor is it about building upon the unmatched legacy and once vaunted brand name.

It’s about deciding what HP’s unique competencies are, and how they are relevant to today’s highly commoditized, slow growth IT market. Even badly run, the State of California is guaranteed to exist for another 150 years, but the same cannot be said for a private company. Executing an IBM-style turnaround — rather than a Dell or DEC-style slide into oblivion — is longshot prospect for any executive.

Now that HP has a new CEO, it needs a new board. As I wrote a month ago, HP’s board consists of

Two insiders, three private equity investors, a failed startup technologist turned investor (Mark Andreessen), a former consumer products exec (Meg Whitman), execs of two failing telecom companies, the CEO of a successful software lock-in business, CEO of a major consulting company, chairman of a specialty chemicals business, and Larry Elison’s longtime sidekick (turned nemesis and Kleiner Perkins managing partner).

In many ways, it resembles the Apple board during the Jobs-free interregnum, where being on the board was the best job many of these people had ever enjoyed. Apparently others are finally joining Vitaliy Katsenelson of Seeking Alpha and me in noticing the board that can’t shoot straight — as this Reuters article Thursday:

Interviews with insiders, former executives and experts paint a picture of an ever-changing roster of board directors who lacked a good grasp of the company's fundamentals and vacillated over what its business should be.

Having a weak board has suited the goals of the last six HP CEOs, but shareholders have been cheated out of a fair return for their investment. If Whitman is really going to save HP, she needs to swap out the indecisive with actual competence. There should be others that share her (nominal) passion for saving this Silicon Valley legend, rather than just enjoying the sinecure. Let’s see if the institutional investors also push for a better board, or merely mark time for the opportune moment to dump their shares.

But in upgrading the board, Whitman and HP also need to confront a fundamental strategic question that the company has been avoiding for a decade: is it an enterprise company like IBM, or a consumer company like Apple? It has not been effective competing with either. Instead, it become the leader in low-margin consumer PCs — a business both IBM and Apple eschewed and Apotheker said HP should dump.

So where will HP lead? I’m guessing it will try to get there by acquisition, but the next acquisition will have to be transformative, unlike 3Com, Palm, Autonomy — or for that matter, Skype.

HP's acts of desperation

Since last week’s huge news about HP I’ve been hoping to write something, but I was traveling and didn’t time to collect my thoughts. Even after five days, the news still doesn’t make sense, other than as the death throes (or at least mortally wounded throes) of a once-great giant.

Yes, HP has serious problems. It’s been unable to find a decent CEO since its founders (NB: Apple, Microsoft). Simultaneously chasing both Dell and IBM, it caught and passed Dell for a prize it no longer wants, while it seems unlikely to ever catch IBM (at least in my lifetime).

The HP board and CEO Léo Apotheker seem incapable of dealing with the current challenges. It has come to having HP’s chairman bad-mouthing Apotheker’s predecessor for “under-investment” in the core business.

But this is only the latest desperate effort in more than a decade of throwing one Hail Mary pass after another. Its $1.2b purchase of Palm and webOS was (as predicted) a major mistake. It allowed the (previously dying) Palm cellphone business to die, and meanwhile the efforts to establish the TouchPad as a viable iPad rival has failed miserably (much like RIM) with Best Buy selling less than 10% of those ordered and HP writing off $1 billion in losses on the webOS hardware business — most of that on the TouchPad.

Yes, a couple of things make sense from the announcements. Yes it’s time to cut the losses on the webOS acquisition (Perhaps claiming it has a future as a consumer embedded OS postpones the inevitable write-down, but competing against a no-royalty embedded Linux will be difficult at best.)

And at some level, the divorce of the low margin PC business from the potentially high margin software/services business has a business logic. Mark Hurd was the right man to run the commodity business while Apotheker prefers higher margin services, and neither was suited to run both together in a single company.

The problem is that the current HP is a conglomerate of the leading commodity PC maker, the leading (increasingly commoditized) printer maker, and a hodgepodge of largely second-tier software and services businesses.

Under Hurd, the company had embraced commoditization — executing on Carly’s Compaq acquisition and doing an exemplary job of competing in commodity markets. The only cost was the heart and soul of Bill and Dave’s company, ripping it out as the company shed workers, perks and the exemplary culture that once inspired Steve Jobs and Steve Wozniak.

Then the HP board panicked over Hurd’s poor judgement and forced him out, replacing the successful commodity numbers weenie with just the opposite: a software guy that was presiding over the dying SAP franchise. Apotheker had not solved SAP’s problems — coasting on the inertia of its once-invincible lock-in rents in the BPR segment — so he was rewarded with the reins of Silicon Valley’s oldest and most storied company.

A completely different CEO meant a completely different strategy, which in turn requires a different portfolio of businesses. (It also requires different competencies up and down the line, which the latest moves pointedly do not address.)

Even if exiting PCs now makes sense, as others have noted HP has completely bungled the planned PC spinout. IBM’s decision to sell its division came as a bolt from the blue with the buyer already announced. Apparently HP shopped the PC business and didn’t get its desired price, so now the uncertainty around the PC division (the born-again Compaq) will cause it to hemorrhage customers and market value until it’s finally dumped.

In the end, I have to lay the current problems on the board, which brought us the infamous spying scandal, melodrama over the last 3 CEO appointments and of course forcing out its best directors, Tom Perkins (of Kleiner Perkins fame) and George Keyworth. As Perkins noted in a 2007 video and his memoir, the board groupthink forced out any dissenting view — which (to further mangle metaphors) is a recipe for marching lockstep over a cliff.

Who’s on the board? Two insiders, three private equity investors, a failed startup technologist turned investor (Mark Andreessen), a former consumer products exec (Meg Whitman), execs of two failing telecom companies, the CEO of a successful software lock-in business, CEO of a major consulting company, chairman of a specialty chemicals business, and Larry Elison’s longtime sidekick (turned nemesis and Kleiner Perkins managing partner).

Oddly, while the board has exemplary gender diversity it lacks the obligatory university professor or president. I suspect Intel benefitted greatly from the advice of longtime director David Yoffie — even if I didn’t always agree with his analysis. (If HP goes looking for an academic, Tim Bresnahan of Stanford has understood the economics of platform businesses longer than anyone.)

Apparently I’m not the only one fed up with the HP board. After the 20% drop in HP stock Friday, fellow Seeking Alpha contributor Vitaliy Katsenelson wrote:

Anger and frustration are the two emotions pulsing through my veins as I write this. HP (HPQ), once the symbol of innovation, is being dismantled by its high-pedigreed board and the CEO of the hour. … [In] the early 2000s, when Carly Fiorina, then CEO of HP, engineered the HP merger with Compaq. … [N]ine years and two CEOs later HP has announced that the PC business, the one it so desperately wanted just a decade ago, is too hard a business and that it will look for ways to get rid of it. Almost in the same breath HP announced that it will kill WebOS devices, a business it acquired in April 2010 for $1 billion; and management, possibly missing the irony in those two announcements, went ahead and announced another acquisition, which this time will for sure transform the company.
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I don’t need to have a great imagination to envision another conference call in August 2015, where a new CEO decides that the software business is too difficult, and HP needs to come back to its roots (maybe going back to making calculators) and will spin off the software business into a new company, take an enormous charge, and then maybe announce an acquisition that the same highly pedigreed board will rubber-stamp.
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HP’s stock sold off not because the company disappointed Wall Street but because Wall Street grew tired of the overpriced “must-have” acquisitions. Wall Street has smartened up and assumed that this acquisition, as with many other “transformative” acquisitions, will do nothing of the sort.

I’d like to hope that HP will turn around some day, but I can’t see how to get there from here. It would require an entirely new board, one with more winners than losers and more big company operating experience. HP and its board are too big to be threatened with a hostile takeover, and so will muddle along — acquiring baubles with the shareholders’ checkbook — without a coherent long-term strategy or market niche.

Accountability in K-12

A local K-12 charter school is proposing to expand its footprint in Santa Clara County with another 20 schools in the next seven years.

Rocketship Education has achieved impressive results (a state API of 925 in one elementary school) by doing something we take for granted in private industry but is never talked about in education: improving labor productivity. The school uses technology to automate rote learning, and then applies the savings to hire better teachers and give them more time to work with students.

In addition to its unprecedented business model, Rocketship also proposes unprecedented accountability — agreeing to surrender charter licenses if its API falls below 775.

The liberal Mercury News was gushing in their editorial endorsement Wednesday of the company’s proposed plans. And on Wednesday night, parents spoke in support of its proposal while school districts argued for business as usual:

In an emotional public hearing that contrasted different approaches to school reform, the Santa Clara County Board of Education on Wednesday heard heartfelt pleas for more high-achieving charter schools serving poor children, while local superintendents cautioned against moving too fast.

"Parents across Santa Clara County deserve more options," said parent Kevin Ngo, noting that his daughter's kindergarten year in the charter school Rocketship Los Sueños "exceeded our expectations."

He and several others spoke to support an application by Rocketship Education to open 20 charter elementary schools by 2017 near the worst-performing schools in Santa Clara County. It's an ambitious proposal that could make the charter operator the fourth-largest school district in the county. Palo Alto-based Rocketship aims to eliminate the achievement gap, the gulf between the highest-and lowest- achieving students.

Meanwhile, school districts and teacher union oppose the proposed expansion — presumably because they care more about losing resources to competing schools rather than improving education outcomes for local kids.

The final vote is due Aug. 10 on the plan to open new schools starting in 2013.

John Sculley, a refreshingly honest screwup

The blog Cult of Mac has an interview with former Pepsi salesman John Sculley in which he admits he was in over his head during his decade as Apple CEO of Apple Computer (1983-1993), as part of a larger interview praising the genius of Steve Jobs.

When I was writing the final draft of my dissertation almost exactly a decade ago, I credited Sculley with almost single-handedly destroying Apple. He lacked the technical skills and management abilities to make the operational decisions necessary to run the company, and then he doubled down when he named himself CTO in March 1990. As I wrote back in the summer of 2000:

Sculley was right in judging that this job was crucial to Apple’s innovation strategies. But he apparently did not consider how engineers would react to being led by a Wharton MBA whose previous job had been marketing soft drinks — let alone the possibility that he was technically over his head. As late as July 1992, when asked what he would have done differently, Sculley’s first response was that he would have become CTO even earlier:

I would have taken on the job of chief technology officer years ago. I wish I’d done that, and not waited so long. I should have done that probably when Steve Jobs left [in 1985]. The problem is, I didn’t know enough about the computer industry then, I’d only been in it a few years, and I’m not sure I could have succeeded at it then. But I waited too long on that one, and it should have been at least two years earlier (Yoffie 1992).

Sculley’s tenure as chief technical officer brought disaster, not only with the money wasted on unused technologies, but also the opportunity cost of technologies not developed and the hemorrhaging of invaluable software engineers.

Perhaps the biggest mistake was as CTO he encouraged most of the best software engineers to go to the “pink” team and then on to Taligent — while others left for General Magic — working on products that never shipped and with most never returning to Apple.

In his 1999 book, former Apple consultant (later FrontPage entrepreneur) Charles Ferguson wrote:

I had seen John Sculley up close as he wrecked Apple. Sculley was a reasonably smart, charming man. But he had an enormous ego, he knew virtually nothing about technology, and he was competing against Bill Gates, who was obviously much smarter, tougher, and more committed. Watching Sculley go up against Gates was rather like watching a rich playboy who was ordering his yacht to attack a carrier battle group.

In the recent Cult of Mac interview, Sculley makes it clear that he didn’t know how much he didn’t know:

I didn’t know really anything about computers nor did any other people in the world at that time. This was at the beginning of the personal computer revolution, but we both believed in beautiful design and Steve in particular felt that you had to begin design from the vantage point of the experience of the user.

Yes, few outside Xerox or SRI understood the implications of a GUI-based personal computer — or the idea that a computer would be primarily used for information processing rather than calculating — but there were plenty of people who knew a lot about computers. In 1983, Apple was six years old, the PC was 8 years old, and larger computers had been around for decades. (At that point, I’d been programming computers for over a decade.)

Jobs’ first choice for CEO was Don Estridge, creator of the IBM PC, who was posthumously named person of the decade in 1991 by PC Magazine. Estridge would have been a brilliant choice, but he decided to stay at IBM, and then was among 135 people killed two years later when a Delta L-1011 crashed at DFW.

Instead, Apple chose Sculley, who then forced out Jobs and remained CEO until sacked himself in 1993. He never ran another tech company again, although he served as a consultant, investor and board member for various startups.

Even if in 1983 Sculley didn’t know what he didn’t know, at age 71 he’s now following Harry Callahan’s maxim:

Looking back, it was a big mistake that I was ever hired as CEO. I was not the first choice that Steve wanted to be the CEO. He was the first choice, but the board wasn’t prepared to make him CEO when he was 25, 26 years old.

They exhausted all of the obvious high-tech candidates to be CEO… Ultimately, David Rockefeller, who was a shareholder in Apple, said let’s try a different industry and let’s go to the top head hunter in the United States who isn’t in high tech: Jerry Roach.

They went and recruited me. I came in not knowing anything about computers. The idea was that Steve and I were going to work as partners. He would be the technical person and I would be the marketing person.

The reason why I said it was a mistake to have hired me as CEO was Steve always wanted to be CEO. It would have been much more honest if the board had said, “Let’s figure out a way for him to be CEO. You could focus on the stuff that you bring and he focuses on the stuff he brings.”

Remember, he was the chairman of the board, the largest shareholder and he ran the Macintosh division, so he was above me and below me. It was a little bit of a façade and my guess is that we never would have had the breakup if the board had done a better job of thinking through not just how do we get a CEO to come and join the company that Steve will approve of, but how do we make sure that we create a situation where this thing is going to be successful over time?

My sense is that when Steve left (in 1986, after the board rejected his bid to replace Sculley as CEO) I still didn’t know very much about computers.

Even if Sculley has no career to protect, such a personal sense of accountability is refreshingly candid. In religion, philosophy and literature, both enlightenment and redemption come to those who fully repent of their mistakes.

Now if we could only get failed politicians (and past presidents) to do the same

Time for the US "stress test"

In one of the last issues of my FT subscription, Gillian Tett called attention to the American empress and emperor who’ve been bucked naked for years.

After noting the planned “stress test” for European banks, Tett wrote:

But on the other side of the Atlantic, there is another black hole which badly needs to be discussed – this time in America’s huge government-sponsored enterprises, such as the housing giants Fannie Mae and Freddie Mac, and the interlinked Ginnie Mae and the Federal Housing

So far this year, this GSE issue has attracted scant political attention. Indeed – and astonishingly – the 2,300 page financial reform bill that President Barack Obama signed this week barely mentions these institutions at all.

She notes that the US has already spent $145b of taxpayer money to bail out Fannie and Freddie. However, given the large and ongoing exposure of both Fannie and Freddie to bad debt, the future bill ranges from a low of $390b (the CBO estimate) to almost a trillion dollars. The reality is, nobody knows.

So is there any chance of seeing a proper “stress test” on this exposure? Or exit strategy? Don’t bet on that soon. … Nevertheless, behind the scenes – and almost against the odds – there is now pressure building for a proper debate.

She notes two alternatives: privatization of the GSEs, or shifting to an explicit (and limited) financial guarantee.

She concludes:

Personally, in an ideal world, I would favour the first set of ideas, namely full privatisation. After all, it seems profoundly bizarre to have the state underpinning housing so deeply, in a country that espouses free market ideals. But, in practical terms, the second route is probably the only realistic platform for reform now. And if the state subsidy could at least be defined – and limited – that would certainly be a vast improvement on the current status quo.

After all, if there is one thing we have learnt in the past two years, it is that sooner or later investors tend to panic when they see a bottomless black hole of losses and fiscal fudge. That is why Europe is doing these stress tests today. But the fact that Washington has not yet learnt that lesson in relation to the GSEs is disappointing, to say the least. There now badly needs to be a proper debate about Fannie and Freddie – if not a public stress test too.

I love Lucy

Reading in my soon-to-be-discontinued FT subscription, Lucy Kellaway this morning offered bold and brilliant advice to managers around the world:

My appraisal of job appraisals: get rid of them
Lucy Kellwaway On Work

Last week an e-mail went round the office touting for suggestions on ways to improve our performance appraisal system. My suggestion is dead easy and dirt cheap: get rid of the whole thing and replace it with nothing at all.
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Over the past 30 years, I have been appraised three dozen times – as banker, journalist and non-executive director. ….

But never have I learnt anything about myself as a result. I have never set any target that I subsequently hit. … The norm is a harrowing hour’s conversation during which you are forced to swallow an indigestible mix of praise and criticism referring to long-ago events, which leaves you demotivated and confused on the most basic question: am I doing a good job?

After citing all the problems, she goes on to quote Samuel Culbert of UCLA’s Anderson School, who advocated abolishing all evaluations. Apparently Culbert was on the radio last week, promoting the paperback edition of his book Beyond Bullsh*t. His alternative: a regular 1-on-1 relationship talk in which both parties talk about what’s working and what’s not.

It sounded like a great argument. In fact, from my experience as a manager and an entrepreneur, I loved the argument when he made it in the Wall Street Journal two years ago. The arguments also resonate with Bob Sutton of Stanford, who’s blogged about the topic in May and February of this year.

(Here I am only talking about appraisals in private firms. In institutions such as universities some sort of formal periodic appraisal is clearly essential to assure accountability and fairness prior to granting lifetime employment.)

However much I agree with Lucy, Sam and Bob, it seems like tilting at windmills to hope that performance appraisals will ever go away. The reasons are numerous: institutional isomorphism, bureaucratic inertia, HR norms or just the usual fear of litigation. Still, some entrepreneurial companies (as Sutton hints) may be able to find a way to tweak or supplant the obviously flawed system with a real mechanism for providing feedback, motivation and accountability for the average worker.

REALLY scary Google privacy invasion

Anyone who uses the Internet has come to terms with how little privacy they have in the face of Google’s quest to know everything about everyone everywhere. Whether it’s IP address, or cookies, or being logged in, Google knows what you’re searching and probably can associate it to something about you.

A few of us lazy (or incredibly cheap) Internet users have consented to even more privacy invasion by letting Google read our mail in perpetuity. (If Yahoo let me use their email for POP and SMTP, I’d be using my 12-year-old Yahoo account rather than my newer Gmail account.)

However, in all of these cases there is an element of consent. If I don’t like Google’s spying, at least I could switch to Microsoft or Yahoo’s or someone else’s.

So far, I’m even willing to believe Google — even if several sovereign countries will not — when they say they didn’t do anything with all the data they gathered with their Wi-Fi wardriving that somehow got programmed into their Street View spying.

However, there’s one place where I draw the line on trusting Google: Google’s recent admission that it’s considering bringing facial recognition to its search engine. As reported in the Financial Times,

Google executives are wrestling over whether to launch controversial facial recognition technology after a barrage of criticism over its privacy policies.

Eric Schmidt, chief executive, said a series of public disputes over privacy issues had caused the management team to review its procedures and the launch of new technologies. According to Google executives, facial recognition is one of the key topics of internal debate.

Mr Schmidt said: “Facial recognition is a good example...anything we did in that area would be highly, highly planned, discussed and reviewed. When you go through these things, you review your management procedures.”

If facial recognition were integrated with free Internet search, this means that 2 billion people with a cellphone — or 300 million Americans or 5 million people in my metropolitan area or 100,000 in community — could, at any time, snap a picture and then look me up. Unless I prevent everyone I’ve ever met from putting my photo on the web — and take all the existing ones down — there’s no way to opt out of this invasion of privacy.

More to the point, half of the population (male) could look up the other half of the population (female) and then— aided by WhitePages.com or other address lookup services — become a really creepy and determined stalker. If that doesn’t creep you out, think about your sister, daughter, niece, granddaughter or someone else. In recent years, there have been too many kidnap-murders of girls and young women to ignore this possibility.

Google has had the technology since its 2006 acquisition of Neven Vision. Privacy worries forced it to back down from including it in Google Goggles last year.

Other companies — two Swedish and one Israeli — are demonstrating tools for such searches, and trying to license their technology to bigger firms. The latter claims to have identified 52 million people.

What is really troubling is that Google is demonstrating the same hubris about privacy that it did with stealing copyrighted material (whether GooTube or the book project). As the FT reported:

[Schmidt] would not rule out any eventual roll-out, saying: “It is important that we continue to innovate.”

In fact, the “continue to innovate” is almost identical to Bill Gates’ “freedom to innovate” rationalization for Microsoft being above the law during the peak of its power a decade ago.

It is this arrogance that has long worried Google observers, since the company seems so sure of its internal compass — perhaps because its employees are so much smarter than the unwashed masses — that it has tended to have a tin ear to external criticism.

Author Randy Stross confronted this very issue in a talk upon the release of his book Planet Google almost two years ago. As Prof. Stross told an San José Library audience:

The only time I am going to be most worried about what Google is doing is when they offer bland reassurances. [I’m not worried] when they agonize publicly — here are the issues for us, here [is why we] are agonizing — which is what they did when they confronted the question about what to do with the Chinese governments demand that they censor results for certain search terms.
…
As long as they do that, I think they can hold to “don’t be evil” but if they revert to standard corporate speak with the rote reassurances, this is a company that as I fear will know more about us than any entity — private or public — in the world. I don’t want to hear reassurances; I want to see them worry about my worries.

And if they don’t worry about my worries, what then? Depend on some foreign government or a grandstanding congressperson or attorney general to do the right thing? Hardly a comforting thought.

Why Meg will fail

Despite the efforts of SnapTrack billionaire Steve Poizner, it looks like this time next month Meg Whitman will be the GOP nominee for governor. Winning the general election against (ex-governor) Jerry Brown will be a dual-negative campaign of Whitman and her allies attack Brown and his allies — and vice versa.

But suppose that Whitman won, and turned her eBay/P&G experience into becoming the head government executive of the world’s 8th largest economy with 37 million people (more than 21 of the 27 EU countries)? In a state trying to rival Greece for deficit spending, Whitman promises her business experience will bring fiscal sanity and solve the intractable structural budget problems. Instead, what I think will happen is that — given hostile legislators and state employees — the bureaucracy would outwait her, if not destroy her.

Instead of real reform, we’ll get the classic “Washington Monument Syndrome,” the ability of a bureaucracy to make highly unpopular and visible cuts rather than getting rid of waste or reducing the size or scope of government.

This was brought home by two utterly transparent (and largely successful) efforts here in San Jose. The city parks managers are cutting park hours with orders from on high to make them as visible as possible — despite open skepticism about the logic of the cuts.

Meanwhile, the San Jose Unified School District is putting employees on unpaid furloughs, totaling one week next fall. The union (which reluctantly agreed to the cuts) wanted the furloughs to be held on Wednesdays — the most visible and inconvenient possible time for parents. The school board said no, but they did give parents a week of furlough/student vacation in October — rather than starting school a week later (Aug. 23 vs. Aug. 16).

San Jose is blessed with one of the most competent politicians I’ve seen in 30 years of following politics, Mayor Chuck Reed. He is largely respected by friends and foes for doing what he said he would do and showing real budget discipline. (He doesn’t appear to be running for higher office, which is always a good sign.) While not business as usual, Reed is no outsider: he lived in the city for 20 years and a council member for six years.

If Reed is unable to prevent the Washington Monument Syndrome in a city of 1 million that he knows so well, what hope does Whitman have? She has no government experience, no allies, no way of reaching down through the layers of the California bureaucracy — and, of course, a hostile media that will amplify the attacks on her reform efforts.

So while it’s nice to believe that a knight in shining armor will ride to save California, it isn’t going to happen. And if someone can get elected but not fix things, I’m not sure what other path out there is.

Update, Tuesday 9am: From the Lex column of the Financial Times, May 18:

Always eager to deflect blame for fiscal lapses, state officials have pointed the finger at a small but growing market for municipal credit default swaps. … The first and loudest protests have come from – surprise, surprise – the state with the highest CDS prices, California. Treasurer Bill Lockyer has expressed indignation that prices imply California is riskier than many developing nations. With its intractable deficit, dysfunctional politics, powerful unions, inability to devalue and taxpayers who can decamp to states with lower taxes and better services, the CDS market may be right.

Plugging chronic deficits with bonds carrying the lowest credit-rating of any state has forced California to accept yields implying a default risk mathematically equivalent to the CDS prices Mr Lockyer considers inflated. But they are, of course, two sides of the same coin.

More and worse government

From Peggy Noonan’s WSJ column Saturday:

We are at a remarkable moment. We have an open, 2,000-mile border to our south, and the entity with the power to enforce the law and impose safety and order will not do it. Wall Street collapsed, taking Main Street’s money with it, and the government can’t really figure out what to do about it because the government itself was deeply implicated in the crash, and both political parties are full of people whose political careers have been made possible by Wall Street contributions.

Meanwhile we pass huge laws, bills so comprehensive, omnibus and transformative that no one knows what’s in them and no one—literally, no one—knows how exactly they will be executed or interpreted. Citizens search for new laws online, pore over them at night, and come away knowing no more than they did before they typed “dot-gov.”

It is not that no one’s in control. Washington is full of people who insist they’re in control and who go to great lengths to display their power. It’s that no one takes responsibility and authority. Washington daily delivers to the people two stark and utterly conflicting messages: “We control everything” and “You’re on your own.”

All this contributes to a deep and growing alienation between the people of America and the government of America in Washington.
…
Why does the federal government do this? Because so many within it are stupid and unimaginative and don’t trust the American people. Which of course the American people have noticed.

The latest in outsourced political criticism, as a cost saving measure in these difficult financial times.

Economic freedom saves lives

The Chilean earthquake has been on my mind since I turned on the TV Saturday morning. It demonstrates the life-and-death benefits of a functioning economy, society and political system, conclusions reinforced by an email I received Tuesday from one of the friends I made during my 2008 trip to Santiago.

As a native Californian, the collapsed freeways in Santiago — while the rest of the city survived intact — reminded me of similar photos from the three major California earthquakes during my lifetime: 1971, 1989 and 1994.

Here earthquakes are a way of life. Just before lunch on Wednesday, my 5th floor office swayed due to a 3.4 earthquake 9 miles away. Since becoming a state, California has eight major earthquakes:

• Ft. Tejon (LA), 1857, 7.9
• Hayward (Bay Area), 1868, 6.8, killing 30
• Owens Valley (Eastern Sierra), 1872, 7.4, killing 27 and leveling the town of Lone Pine
• San Francisco, 1906, 7.8, killing more than 3,000 people
• Long Beach (LA), 1933, 6.4, killing 115
• Sylmar (LA), 1971, 6.6, killing 65
• Loma Prieta (Bay Area), 1989, 6.9, killing 63 and causing $6 billion in damage
• Northridge (LA), 1994, 6.7, killing 60 and causing more than $13 billion in damage

The major quakes in the 20th century brought dramatic improvements in California’s building codes to make new construction among the safest in the world. One place that’s comparably prepared is Japan — and the other is Chile.

The Christian Science Monitor compared California and Chile’s preparation in an article Monday. While it’s much less wealthy, Chile has had stronger earthquakes that California in the past 200 years, including the strongest earthquake of the 20th century — if not recorded history — the 9.5 earthquake of 1960.

Bret Stephens of the WSJ noted Tuesday that Chile’s 8.8 earthquake was 500 times stronger than Haiti’s but the death toll was 1/200th as large. His explanation:

Chile also has some of the world's strictest building codes. That makes sense for a country that straddles two massive tectonic plates. But having codes is one thing, enforcing them is another. The quality and consistency of enforcement is typically correlated to the wealth of nations. The poorer the country, the likelier people are to scrimp on rebar, or use poor quality concrete, or lie about compliance. In the Sichuan earthquake of 2008, thousands of children were buried under schools also built according to code.

He attributes this outcome to Chile’s economic growth, which in turn he credits to the success of Friedmanism. However, I think Chile’s successful institutions run deeper than that.

However you slice it, Chile is a unique bastion of freedom in South America if not the Western Hemisphere. In January, it became the first Latin America country to join the OECD. According to the latest WSJ study, its economic freedom is slightly behind the US and slightly ahead of the UK. According to Transparency International, corruption is nearly as low as for the US, ahead of Spain and far ahead of the rest of the continent (except Uruguay). By fiscal measures, it’s the best run country in the hemisphere.

On Tuesday night, I got an email from one of those friends in Chile — ironically, an American expat from Texas who (unlike the Chileans) had never experienced a major quake before. Nathan Young wrote:

It was definitely a traumatic experience for us all, and probably the scariest of my life. I awoke right before it hit … In a matter of seconds the bed started softly shaking. As Chile is on a major fault zone, I thought nothing of this as it is quite a frequent occurrence. However, that lighter shaking quickly progressed into violent throws. I live in a 20 story apartment building on the 8th floor and the entire complex began swaying back and forth, moaning and popping, it was deafening. Glasses were breaking, windows rattling, walls splitting, I felt the entire building was about to fall down on me. I was able to scramble to make my way awkwardly to the front door and got down the stairs to the first floor when it finally stopped.
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I am amazed at how quickly the Chilean economy is getting back on track. In the top 10 for largest earthquakes of all recorded time, and yet two days later everyone returned to work, with the majority of supermarkets open for service as well.
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Overall I have been very impressed with the way the government and economy itself is recuperating. Most of the city already has electricity again, though looting is taking place in some of the same older and poorer parts of town. I was at a lunch with some friends today and while we were there some hoodlums taking advantage of the chaos and began robbing many of the stores in the central part of Santiago. They shut down the majority of that sector and began patrolling with cops and dogs afterwards.
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Have some friends here for a wedding that we actually ended up celebrating that same Saturday after the earthquake. Quite a bit more somber though and the reception was discontinued, though it was good to try and begin reflecting and advancing.

Far from the devastation, the FT reached a similar conclusion about the country’s resilience — first to the global recession and now the earthquake:

[Chile] withstood the global slowdown far better than many of its neighbours because of the policy of saving profits from sky-high copper prices. It has some $16bn of that cash still available – about 12 per cent of GDP – which will provide a handy reserve as Sebastián Piñera, new president, sets about rebuilding the roads, bridges, ports and 1.5m homes affected.
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“Chile should have no problem financing things. It has fiscal savings and international financial institutions are ready to finance Chile, whose leverage is very low,” said one analyst at a bank in Buenos Aires who declined to be named.

So transparency, accountability, strong political and economic institutions don’t just provide economic growth — they save lives. If not from earthquakes or hurricanes, then from tropical diseases, basic sanitation, and infant mortality. Other countries that aspire to the OECD and developed country status have an excellent role model, whether they realize it or not.