The Spirit Level: Why Greater Equality Makes Societies Stronger

In The Spirit Level, English social scientists Richard Wilkinson and Kate Pickett make a comprehensive case, supported by statistical evidence, that the root cause of the majority of society’s health and welfare problems is social inequality — the degree of differences in income, and thus status, between the richest and the poorest citizens in the land. They conclude that social metrics cannot be improved using piecemeal efforts that target specific problems; improvement requires comprehensive policies designed to reduce inequality. The evidence supporting the insidious effect of social inequality is laid out with forensic skill, and the correlations are quite astonishing.

The levels of trust that people have in each other in more egalitarian countries, such as Sweden, Norway, Finland, and Japan, are twice as high as they are in more unequal countries, such as the U.S., Portugal, and Singapore; similar results appear when U.S. states are compared with one another. Mental illness, drug abuse, life expectancy, homicide rates, obesity, school dropout rates, incarceration, and recidivism — the evidentiary bell tolls like a prosecutor’s indictment — all show similar correlations.

The causal dynamics proposed by the authors run something like this: People in unequal societies are insecure about their status. They engage in all kinds of dysfunctional behavior to counter this pervasive sense of inferiority: having babies young and out of wedlock; eating fast food; taking drugs; asserting their status through violence; and, in the dysfunction’s most benign manifestation, consuming goods at a much higher rate than people in egalitarian societies. Some of the effects of low status may even be hardwired into our physiology, with mothers in socially deprived circumstances delivering premature, underweight babies, whose subsequent health problems boost infant mortality statistics. More generally, it seems, those who live in unequal societies pursue quantity, whereas those in more egalitarian countries focus on quality.

The authors’ recommendations of what should be done to remedy inequality are provocative, but not nearly as persuasive as their data. They suggest that taxation policies that level disparate pre-tax incomes and social policies that discourage large income disparities in the first place are equally effective. More radically, they claim that wealthy countries have reached the limits of what economic growth can do for their welfare and that no-growth polices are feasible and sustainable. Such ideas are likely to encounter knee-jerk rejection in many quarters, but the incontrovertible evidence of the close correlation between inequality and social malaise will not go away. We may not agree with the solutions, but we can’t deny the problem.

Originally published in Strategy + Business on August 24, 2010

Human: The Science Behind What Makes Us Unique

By Michael S. Gazzaniga
Ecco, 2008, 464 pages

For centuries, anyone who looked at a globe could see that the east coast of South America fit rather neatly into the west coast of Africa, leading some to argue that they had once been part of the same land mass. But the theory of continental drift was not accepted until the 1960s, when plate tectonics provided a geologic mechanism for the phenomenon. The new paradigm was broadly accepted almost overnight, at least by all those scientists who did not have a heavy investment in the old one.

We may be on the cusp of a similar paradigm shift in our understanding of human behavior. For centuries we have known that humans do not behave rationally in economic terms, but only now are the neurological mechanisms underpinning our behavior becoming clearer. Michael S. Gazzaniga, the director of the University of California at Santa Barbara’s SAGE Center for the Study of the Mind and author of Human: The Science Behind What Makes Us Unique, brings us up to date on this potential shift with the latest discoveries and authoritative thinking from a number of fields, including neuroscience, anthropology, and evolutionary psychology.

The book is divided into four parts, dealing with the neurological differences between humans and chimps, the social world in which we evolved, the many aspects of our humanity, and breaking the constraints of our bodily existence. Its two principal takeaways: First, the brain is not a blank slate on which culture writes its programs. The “modular brain” hypothesis suggests that far from performing like a general-purpose computer, the human brain is a collection of many special-purpose modules that have evolved to cope with problems from our ancestral past. Second, the brain is intensely social in its origins and functions. Several hundred thousand years ago, individuals who cooperated with one another could solve problems together and survive much better than those who didn’t.

The brain may not even “think,” explains Gazzaniga. It may be more like a memory and prediction machine that functions by retrieving and applying patterns learned from the past to new situations. We are capable of “autocueing,” recalling memories independent of the current situation, and we can make predictions by using information that is only contingently true (for example, if it’s Friday, the garbage will be picked up). These two skills give us the ability to create deep analogies and complex models of the world.

This new, emerging view of the brain’s modular nature, together with its many adaptations and improvisations, complicates the organization of the book. The author’s task is made all the more difficult by the book’s encyclopedic scope, which covers everything from brain structure to the role of music and aesthetics in our ability to think. As a result, it is not a smooth read. But if you want an introduction to the topic from someone who has been at the forefront of the new paradigm, you can do no better.

Originally published in Strategy + Business on May 25, 2010

How the Mighty Fall and Why Some Companies Never Give In

By Jim Collins
HarperCollins, 2009, 240 pages

There is much to criticize about the business book genre: Many of the books are articles that don’t merit expansion; loose use of metaphor by many of their authors is gratuitous; many seek to explain everything, but predict nothing; and far too often, they are full of unfalsifiable truisms. But it is unusual to be able to level all these criticisms at a single book, especially one by such a deservedly prominent management writer as Jim Collins.

Collins opens How the Mighty Fall and Why Some Companies Never Give In on a defensive note by apologizing for the shortness of a book that began life as an article and has been expanded to 123 pages, to which a voluminous appendix and footnotes that consist mostly of press clippings have been added.

The defensive tone continues as it becomes apparent that Collins’s purpose is to explore the fall from grace of some of the companies previously held up as paragons of success in his worthy bestsellers, Built to Last: Successful Habits of Visionary Companies (with Jerry I. Poras; Harper Business, 2004) and Good to Great: Why Some Companies Make the Leap…and Others Don’t (Harper Business, 2001). These events do not negate his prior research, he adds, since it was designed to explain why companies become great, not to predict which ones would continue in that state. He does not consider the thought that their subsequent poor performance might represent a natural, statistical regression to the mean.

After a ritual acknowledgment that correlation is not the same as causation, Collins proceeds to raise a “disease” called hubris to the level of a causal principle. According to the author, there are five stages of organizational decline: hubris born of success, undisciplined pursuit of more, denial of risk and peril, grasping for salvation, and capitulation to irrelevance or death. These descriptions are a catchy way of punctuating corporate decline, but although they may be obvious in hindsight, they are murky in prospect. A sustained effort can be accurately characterized as either “persistent” or “obstinate,” for example. It all depends on the outcome of the effort — before that, it’s just a matter of opinion.

Some of the book’s lists, which contrast adaptive with maladaptive behavior, are frankly an insult to the reader’s intelligence. Should you “create momentum with a series of good decisions, supremely well executed, that build one upon another” or “destroy momentum with chronic restructuring and/or a series of inconsistent big decisions”? Umm…. The closing paean to the indomitable spirit of Winston Churchill is embarrassing and worthy only of the self-help community.

Throughout this chronicle of corporate collapse, Collins implies that if only the fallen firms had stuck to the principles articulated in his previous books, they would have remained great. Never mind that Clayton Christensen’s careful research on disruptive innovation suggests that in some circumstances Collins’s “hedgehog concept” of sticking close to one’s customers can be seriously flawed. If a framework explains everything but predicts nothing, then surely it suggests that the future is contingent on much more fine-grained issues than can be captured with coarse-grained principles abstracted from the past.

Originally published in Strategy + Business on February 23, 2010

Smart Growth: Building an Enduring Business by Managing the Risks of Growth

By Edward D. Hess

Columbia University Press, 2010

Edward D. Hess, professor of business administration and Batten Executive-in-Residence at the University of Virginia’s Darden School of Business, has a heretical thought: Growth may not be good. In Smart Growth, he questions the four major assumptions behind the conventional wisdom of corporate success, which he calls the “growth mental model” (GMM): that businesses must grow or die, that growth is unequivocally good, that growth should be smooth and continuous, and that quarterly earnings are the primary measure of success. In addition, he supplies a series of trenchant questions for managers to ask themselves about how, why, and even whether their firms should grow.

In nine crisp chapters, Hess demonstrates that the GMM is neither possible in practice nor feasible in theory, and that attempts to meet its demands can create insurmountable obstacles to corporate sustainability. His arguments are supported by a series of case studies showing that growth is usually uneven and episodic — impossible to sustain for more than relatively short periods of time. Thus, attempts to “implement” the GMM result either in profitless growth, especially through acquisitions, or in ersatz earnings produced via a wide variety of financial manipulations. To test whether the concept of the GMM is supported by theoretical perspectives on growth, Hess turns to economics, organizational strategy and design, and biology. He finds that neoclassical economics is the framework that is most sympathetic to the GMM, but its assumptions do not hold up in the real world; that the strategic and design perspective offers little support for the GMM; and that biological theories are notable for the stress they put on the limits to growth. So there is little support for the conventional wisdom in theory.

Hess’s conclusion is that corporations should aim for sustainable or “smart” growth by asking some key questions, especially regarding the resources most needed to support such growth. Following economist Edith Penrose’s resource-based theory of the firm, he contends that the true limit to growth is usually defined by the capabilities of the firm’s managers — supporting this argument with the well-documented case of Starbucks’s overreach, in which the rapid expansion in the number of stores caused liabilities to rise precipitously and diluted the value of the brand.

All this makes good sense. The only shortcoming may be the author’s failure to examine why the GMM is so robust in the face of all the evidence against it. Is it because there are large constituencies in the economy that generate revenue by pushing the GMM and thriving on the turmoil it creates? If so, is there a need for public policy addressing it? And what risks do firms run if they eschew the flawed GMM in favor of smart growth?

Originally published in Strategy + Business on August 24, 2010

The Rational Optimist: How Prosperity Evolves

By Matt Ridley
HarperCollins, 2010

In The Rational Optimist, Matt Ridley makes a lengthy, breezy, almost Panglossian case for what he calls rational optimism regarding the future of the human race. He is impatient with the doomsayers, whom he calls apocaholics, and is unable to explain their widespread appeal. He has considered the evidence dispassionately, he claims, and concludes that our future is bright, even if our prospects dim on occasion.

Ridley’s basic thesis is sensible enough. Economic prosperity derives not from natural resources, but from trade and the division of labor, and the specialization and innovation that they breed. This catallaxy, as he terms it (borrowing a word coined by Austrian economist Friedrich Hayek to describe economic exchange), is a bottom-up, self-amplifying process that has been operating with increasing vigor ever since the Stone Age. Innovation is limitless, and top-down attempts to control or even suppress it are misguided and counterproductive.

Ridley bolsters his conclusions with evidence drawn from the last 50,000 years, showing that not only have we never had it so good, but our prospects can only get better. In his view, climate change is an over-hyped bogeyman — locally disruptive, but globally beneficial — and the conditions of people in economically underdeveloped nations will generally improve as they are saved by their “entrepreneurial vitality.”

This case for global optimism is quite compelling, so what’s not to like? One problem is that people don’t live their lives at this coarse-grained scale; their concerns are for their families, jobs, and communities. If you live in a city that has been destroyed by an earthquake, the fact that the human race will survive is of marginal comfort.

Ridley himself should be highly aware of this reality. A respected science writer and a libertarian, although not necessarily of the right-wing variety, he is also a British aristocrat and the recently ousted non-executive chairman of Northern Rock, a British mortgage lender that collapsed in 2007 and was bailed out by the Bank of England to the tune of £16 billion (US$32 billion). He barely mentions this bump in the road other than to express his regret at the lender’s near demise and to explain that his employment contract precludes him from discussing it. This is an unfortunate constraint, because although the author considers exchange the most important social dynamic, he should have at least as much to say about two other essential social dynamics — trust and hierarchical power.

Ridley does note, as an aside, that his experience with Northern Rock has made him mistrustful of capital and asset markets and governments. Certainly, the current case for optimism at the level of the global financial system is far from compelling; perhaps former Intel CEO Andy Grove made a stronger case when he suggested that only the paranoid survive.

Originally published in Strategy + Business on August 24, 2010

The Curse of the Mogul: What’s Wrong with the World’s Leading Media Companies

By Jonathan A. Knee, Bruce C. Greenwald, and Ava Seave
Portfolio, 2009, 318 pages

The media business has long been the home of outsized egos and shrunken returns on investment. Shareholder returns for the largest media conglomerates, which include Rupert Murdoch’s News Corp., Sumner Redstone’s Viacom, Disney, and Time Warner, have significantly underperformed the S&P 500 over the past 10 years. Three media experts — investment banker Jonathan A. Knee, Columbia Business School finance professor Bruce C. Greenwald, and consultant Ava Seave — explain why this gap exists in this meticulously detailed and documented study.

The basic theme of The Curse of the Mogul is that effective strategy can be developed and implemented in an industry only when certain opportunities for competitive advantage exist. These sources of advantage lie in economies of scale, the ability to hold customers captive, systemic cost benefits (such as network effects), and government protection. The authors contrast these with the “sham” sources of advantage that are touted so often by the moguls — deep pockets, the greatest number of brands, creative and managerial talent, and first-mover advantages. They go on to show that the large-scale parts of the media business that the moguls have generally chosen to enter — those with global reach and blockbuster content — are precisely those in which advantage is either minimal or unlikely to be surrendered by the creative talent who generate it. The authors contend that at the other end of the value chain — local retail distribution of the content — the existing competitive advantage of conventional publications is being swiftly eroded by digital media.

Because opportunities for effective strategies are limited by the absence of true competitive advantage, the authors suggest, the moguls should focus on the efficiency of their operations, something for which they have shown little taste or talent. The authors point to the example of mogul Lew Wasserman, who produced excellent shareholder returns by creating a focused factory in MCA/Universal. Between 1959 and 1990, Wasserman’s company produced an average annual return of more than 15 percent, compared with the 5 percent annual increase in the Dow Jones Industrial Average. His disciplined management practices sound like those of regular businesses, with controlled compensation, tight budgets, and an emphasis on consistent day-to-day performance. But, according to the authors, Wasserman’s devotion to the bottom line is in sharp contrast to the contempt in which many modern moguls hold the “number crunchers” and “pencil pushers” as they pursue “vision” and “strategy.”

This book is unusually fine-grained in its arguments and detail, reflecting the deep experience of the authors and the extensive research they conducted. One may question their sweeping claim that digital media always reduces the ability to create competitive advantage, but their arguments have to be taken seriously. Their advice to the moguls: Focus less on growth and more on industry restructuring; keep your business local and focused; stress efficiency; stifle your ego; and, if all else fails, die with dignity. This last piece of advice is the one least likely to be taken. Given their track record, the media moguls are very unlikely to go gentle into that good night.

Originally published in Strategy + Business on May 25, 2010

Gods at War: Shotgun Takeovers, Government by Deal, and the Private Equity Implosion

Gods at War is Steven M. Davidoff’s take on the factors that drive and sustain deal making, with particular attention to the last decade and the role of government, as both deal regulator and deal maker. Davidoff, who is a professor of law at the University of Connecticut and the “Deal Professor” on the New York Times DealBook blog, is superbly equipped to write on this subject and does not disappoint. He has written a lucid, topical guide to many of the deals that made headlines in the last few years.

The author sets the stage by identifying six boom-to-bust takeover waves during the past 100 years or so. The first began with the formation of corporate trusts in the late 19th century and ended with the crash of 1907. The second wave was triggered by the spending boom in World War I and ended in 1929 with the Great Depression. The rise of conglomerates was the main feature of the third wave, from the 1960s to the mid-1970s, until it ended with repeated recessions. Its successor, fueled by junk bonds, ran from the late 1970s to the late 1980s, when it was felled by the savings and loan scandal. The fifth wave coincided with the dot-com bubble, and the sixth wave followed hard on its heels with the rise of private equity and global transactions, only to implode in the crash of 2008. This review not only offers a valuable perspective but also underlines the historically pervasive role of leverage in deal making and the breathtaking inability of regulators to prevent abuses before they occur.

In addition to providing a broad scope, Davidoff skillfully drills down into the details of deals, teasing out the effect of nonfinancial elements — such as personality, politics, public opinion, and the roles played by lawyers and advisors — in deal success. He also clearly explains such arcana as material adverse change clauses and reverse termination fees. In his discussion of the role and power of “government by deal,” he explains how securitization allowed banks to separate reward from risk by making the eventual payback of the loans they extended someone else’s problem. Davidoff shows how Bear Stearns overleveraged itself and relied far too much on short-term debt and trading profits, and why traditional governance systems were incapable of monitoring the situation. Only government regulation and a reform of the federal takeover code, he concludes, can create better deal architectures for transactions.

Davidoff says that some acquisitions can make money for buyers as well as sellers, but he acknowledges that the distribution of the rewards is broad, with every deal made in heaven matched by a deal from hell. When it comes to takeovers, the rule is caveat emptor, and this book should be required reading for every CEO contemplating a deal.

Originally published in Strategy + Business on May 25, 2010

The Road from Ruin: How to Revive Capitalism and Put America Back on Top

Originally published in Strategy + Business on August 24, 2010

By Matthew Bishop and Michael Green
Crown Business, 2010

In The Road from Ruin, two Englishmen have attempted to combine a serious, balanced book on the root causes of the financial crisis and the Great Recession of 2008–09 with suggestions on how to remedy the situation and prevent such crises from happening again. The book’s introduction, which serves as an excellent executive summary, suggests that in the aftermath of the crisis, safe passage can be navigated between the opposing ideological perils of Karl Marx and Ayn Rand if fresh thinking is substituted for sloganeering.

In the book’s first part, the authors — Matthew Bishop is the U.S. business editor and New York bureau chief for the Economist and Michael Green is a London-based writer who taught economics at Warsaw University — identify five misconceptions about how the optimistic system of capitalism works: that financial bubbles are anomalies, that government should not bail out the financial sector in times of crisis, that financial symptoms should be addressed rather than economic causes, that the economy will recover naturally, and that tougher regulation is needed. In the five chapters that make up this first half of the book, they explain the role each misconception played in the cascade of events that led to the meltdown.

The authors identify the fun damental cause of the financial crisis as global trade imbalances that were created by the United States’ persis tent trade def icits and sustained both by the dollar’s status as a reserve currency and the reluctance of countries such as China to allow their currencies to appre ciate. The result was a flood of U.S. dollars that drove up asset prices, especially housing, and re duced yields to investors. This created an ideal environment for financial inno vations that offered high yields secured by ever-rising real estate prices.

The authors supply numerous examples from the past to reinforce their conclusions. Although the writing is lucid throughout the book, these five chapters are by far the best. They conclude with four conditions that must be met if capitalism is to survive: containment of systemic risk, protection of consumers and investors, streamlining of regulation, and international coordination of policy actions.

The second part of the book starts strongly, with coherent critiques of the concept of “economic man” and of the efficient market hypothesis. The authors argue convincingly for the creation of a regulator of systematic risk, as opposed to institutional risk, and for a new version of the 1944 Bretton Woods Agreement, which set the course for a high degree of global economic coordination after World War II.

But not all of the authors’ recommendations are as sound. For instance, they approvingly cite the MBA Oath developed by students in Harvard Business School’s class of 2009 (and taken by nearly half of the graduates), which affirmed that “greed is not good.” The authors appear not to recognize that this Boy-Scouts-in-the-brothel approach to regulation ignores the profoundly corrupting context that is Wall Street and the overwhelming power of incentives to shape human behavior and how it is rationalized. Worse still, the oath focuses attention on individuals rather than systems, making the same error that regulators and all those using value-at-risk calculations made during the run-up to the crisis, namely, measuring the risk exposures of a firm in isolation without accounting for what might happen if all firms were taking the same risks.

Similarly, the authors’ discussion of “philanthrocapitalism” (also the title of their previous book), which suggests that the efforts of a few wealthy individuals can help capitalism recover its “soul,” seems naive. This idea is curiously divorced from the realities of U.S. politics and power, and the difficulties of protecting consumers and institutions from both each other and themselves.

The Management Myth: Why the Experts Keep Getting It Wrong

By Matthew Stewart
W.W. Norton & Company, 2009, 352 pages

Matthew Stewart, a peripatetic American who writes with an English accent, is a former management consultant with a doctorate in philosophy from the University of Oxford. Hitherto a writer of philosophical tracts, he has produced a highly readable take on the business of management in The Management Myth: Why the Experts Keep Getting It Wrong.

Stewart seeks to address a number of questions in the book, including a professor’s puzzled question about consulting: “How can so many who know so little make so much by telling other people how to do the jobs they are paid to know how to do?” Some other questions he tackles: Is business a profession? Do managers need to be trained in a discipline of business management? Why do business schools exist? In the process, he raps sharply on many of the idols of management and finds them hollow.

Unable to find a job in philosophy upon his graduation from Oxford, Stewart turned to management consulting. Over the next 10 years, the consulting company, which he does not name (but which some Web reviewers have identified as the Mitchell Madison Group), took off like a rocket and then exploded in a civil war. After that experience, Stewart decided to catch up on the history of management thought, which he covers here with a discerning eye and a sharp mind. The result is funny and erudite by turns as Stewart weaves together history, theory, and practice, and slowly reveals his personal story, which adds just the right amount of suspense.

Matthew Stewart divides the book into four phases of management thought: the measurement and efficiency movement pioneered by Frederick Taylor, the human relations school begun by Elton Mayo, the strategy phase spearheaded by Igor Ansoff, and the excellence movement triggered by Tom Peters and Bob Waterman. In his iconoclastic, slightly jaundiced view, Stewart maintains that “hucksters” (Taylor), “charlatans” (Mayo), “obsessives” (Ansoff), and “preachers” (Peters and Waterman) have featured prominently throughout the history of management thought and continue to play significant roles in its development.

Stewart’s bottom line is that management is a neglected branch of the humanities and is better studied as part of a revitalized liberal arts program that embraces mathematics and economics more heartily than at present. His rationale and his critique of the current status of the management field are trenchant, and his writing style and a marvelous feeling for a phrase make them even more compelling.

Stewart declares that management science was never a science; it was a program aimed at the legitimization of managerial power through the application of pseudo-technical solutions to social, moral, and political problems. The widespread application of one such pseudo-technical solution, the shareholder-value model, “has induced executives to engage in asset stripping — destroying the long-term productive potential of a corporation for the sake of short-term stock market gains.” The process at a more general level has resulted in “a demolition of the trust on which society is founded.” The author has all the zeal of a reformed consultant, but in your heart, you know he may be right.

Originally published in Strategy + Business on February 23, 2010

Beating the Commodity Trap: How to Maximize Your Competitive Position and Increase Your Pricing Power

By Richard A. D’Aveni
Harvard Business Press, 2010, 208 pages

In Beating the Commodity Trap, Richard D’Aveni, professor of strategic management at Dartmouth’s Tuck School of Business, presents the results of research into how to escape from commodity traps, the undifferentiated doom to ward which competition relentlessly sweeps all products and services. The author’s classification of the dynamics that lead to commodity traps is a novel and helpful way of looking at a perennial threat to the sustainability of all organizations.

D’Aveni’s chief tool for identifying commodity traps is the price/benefit trade-off graph, which he uses to map the competitive product offerings in specific markets. Typically, the resulting plot creates a line, on which products with low prices and minimal benefits are at the bottom left corner of the graph and those with higher prices and more benefits ascend toward the upper right corner. Over time, firms can reposition their products along this line, but actions of their competitors can change the slopes of the lines themselves, disrupting incumbents and tipping them into a commodity trap. When the line flattens (so that novel features no longer command premium prices), an organization on the right-hand side of the graph is in real trouble. Worse still, economic downturns can accelerate these changes and make the resulting traps much more difficult to escape.

Having charted 30 markets in this way, D’Aveni reports that he has identified three kinds of commodity traps, each with unique dynamics. Deterioration occurs when low-cost firms enter a market with low-benefit offerings — the cheap, fast fashion retailer Zara is an example. Proliferation occurs when competitors attack with new price/benefit combinations that trap an incumbent in the middle range, the way Harley-Davidson has been flanked by the Japanese motorcycle manufacturers and high-end makers like Victory and Big Dog. Finally, escalation occurs when one player begins offering more benefits for the same or lower price, squeezing everyone in the marketplace. Apple, with its range of iPod offerings, is a classic example of this ploy.

D’Aveni explains how to spot traps before they damage your business, identify the relevant commod itization pattern, and either escape the trap, destroy it, or use it to your advantage, with each stratagem il lustrated by examples. As is the case in many academic analyses, the graphs look elegant and the post hoc logic behind the achievements of those who have successfully dealt with commoditization challenges is compelling. But it would be nice to have finer-grained, real-time accounts of exactly how managers and their organizations responded to the threats they encountered, rather than being shown their achievements as if they had used the rational, analytical model suggested by the author. (Richard Pascale’s famous twin Harvard Business School cases on Honda’s entry into the U.S. motorcycle market showed the value of contrasting a paradigmatic analysis of an event with its narrative counterpart.)

Nevertheless, D’Aveni’s conceptual frameworks are an elegant and useful way of understanding what happened in the past. Now a narrative companion volume is needed to help us appreciate exactly how it was done.

Originally published in Strategy + Business on April 19, 2010