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Facts that Lead to Doing the Wrong Thing

January 23rd, 2009

Economic Volatility, part 3: Antagonists

(Summary, January 13th Salon)

Economic volatility is common (see Chart: the Volatile Economy in the prior post for set of examples). So are its effects– common like the common cold sapping one’s energy. But it is not reliably common; when we look at failures which are caused by, or at least happen concurrently with, extreme volatility, we can easily see why we are blindsided and often don’t know what hit us.

I believed Drucker in 1998 when he that the Asian collapse–one of the most severe economic events of that decade–was clearly foreseeable a year in advance. So for me this mortgage/housing collapse was clearly foreseeable. I sold my house in 2004 and largely cleared out of the stock market in 2007.

Drucker could foresee collapse. Others foresaw the mortgage collapse; stocks, too, although they were the extreme minority. But if I could successfully anticipate both, then what happened to Bear, Lehman, Merrill, Wachovia and others who made losses of such size as to wipe out their profits, indeed their companies?

I know the standard reaction to acting to economic foresight. In 40 years of involvement in turnarounds, startups, and workout, I can say that almost all happened because people failed to look, failed to see, or failing to act accordingly.

Drucker’s assertion did not alter the actions of these firms. Who and what stood in the way, antagonists to his insight?

Take no comfort in the charge that this disaster was caused by greed, stupidity, or insufficient regulation. (As early as 2001 Congress was warned of this developing disaster and warned many times after. They did not act other than to ridicule the testimony.) These companies employ the smartest, best-educated, and most experienced men and women. When they made the argument for getting in and staying, it was on the basis of reported profits, marshaling the facts, and delivering proof.

These are irrefutable, it seems.

Contrary arguments are met with skepticism, ridicule, and cloture. And why not? Who can dispute the need and duty for profits or successfully argue that less profit is better? And since contradiction depends on seeing the future, it fails on the test of facts. There are no facts about the future. And if proof is offered; there is none that is contrary. Those who take a contrary position prudently hide what they are doing — not for advantage but for the avoidance of criticism. Finally, then since proof is what others are doing, try to explain how your lower profits, compared to competition, should make shareholders and employees feel good about lower stock prices and reduced compensation.

Larry Bossidy, former CEO of Honeywell, declared there is no higher form of management than facts. I agree.

If facts are management, then the burst of these bubbles time will happen again, just as they’ve happened again and again in history. “Don’t be greedy or stupid, regulation is watching” will not work because it will not see. But if the solution is leadership–acting on what is clearly foreseeable–not management, what we need is cover for the leader.

I won’t bother to go through what the experts did say. To be sure it was impressive in content, detailed in analysis, and grounded in hard reality. But I will tell you what has been said by owners confronted by the same choice of present reality versus future uncertainty:

- You can’t time these things.

- Things have changed. They are different now – a paradigm shift.

- What we are doing works and will work.

- It won’t happen again.

- There is no evidence.

- You can’t run a business on speculation about the future.

- I can’t do anything about it anyway.

- It won’t affect us.

- I can’t ignore what my competition is doing.

Greenspan said in testimony before Congress, “I made a mistake in presuming that self-interests of organizations, specifically banks and others were such as that they were best capable of protecting their own shareholders and their equity in the firms.” His statement is enough to make the wise and humble lay awake at night wondering what they are missing.

To this I add: In decisions made according to the “highest form of management” the hard calculus of current profits will censor the softer, intellectual argument of future uncertainty. However, the antagonists are refutable; their model is flawed and incomplete, and the recent evidence is buried in the wreckage of the mortgage crisis. Like gold, it is hard work and worth digging out.

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Our next salon continuing the theme of Economic Volatility will offer the means of cover for the owner who is a leader. Though there is much to commend the continued use of the business model, I will point to where it falls short.