Duly Noted: Solving the Principal-Agent Problem in Firms:The dumbest idea in the world?

This article in Forbes argues that a new book by the Dean of Rotman School provides an antidote to the rampant excesses of modern day capitalism.  The principle swipe is against the landmark paper (over 29000 Google Scholar citations)  by Jensen and Meckling on both the prevalence of the principal agent problem in the governance of firms and the various solutions to overcome it – including creating incentives that maximize shareholder value.  Quoting Jack Welch, former CEO of GE, the article says that maximizing shareholder value is the dumbest idea in the world.  I my self am not sure if this is THE dumbest idea in the world – in fact there are many more that would easily surpass P-A problem resolution – but I am sure this will ignite a debate about why firm’s exist – what is the best governance mechanism for them and the role of economic theory and action in our lives.  I for one need to go back and read the article and then read the book.


Are Executives Dumb? Or Do We Blame the Fog of War?

Megan McArdle, a writer for The Atlantic Magazine, has a nice piece discussing if stupidity should be blamed for some of the choice decisions made by executives. Using the Netflix flub - she wonders:

But how do we get from “that was a bad idea” to “Reed Hastings doesn’t understand what business he’s in?”  When internet commentators see odd behavior that they don’t understand, why do they assume that the most parsimonious explanation is that management must be a bunch of drooling morons?

 I mean, Reed Hastings did manage to build this rather large and successful business that killed off one of the most successful retail operations of its day.  It’s possible that he just sort of did this by accident.  But is this really the most likely explanation?  That he didn’t understand the first thing about how people watched movies, or how to run a business?
The available evidence seems to indicate that at some point, Reed Hastings was a smart guy.  Smart enough to count to twenty with his shoes on. Smart enough read pages 1-15 of the kind of introductory strategy text where they solemnly tell you to figure out what business you’re really in.  Smart enough to grind Blockbuster into a pile of gleaming blue-and-white sand while launching a streaming service so popular that it now accounts for something like 20% of peak-load internet traffic.  If you want to write an article on how he’s a big fat idiot who couldn’t find his ass with both hands in the dark, then you should probably have a theory of the transition between these two states of Reed Hastings.  Did he suffer a stroke?  Start dating distractingly gorgeous supermodels?  Has he been licking the paint chips in his gloriously restored Victorian mansion?

I too have been guilty many time at looking in the rear-view mirror and wondering what the executives were smoking?  Megan’s point is that we are not giving the executives the benefit of the doubt – that these decisions are sometimes made with a limited choice set and very limited information.  On the other hand I wish we could put data flight recorders in the C-Suite – this way we would know for sure that a problem was preventable and avoidable and entirely based on bad human judgement and decisions making –> case-in-point the Air France 447 disaster.


#OWS 2011 = Paris Commune 1789

A shot across the bow in the New Criterion by James Panero:

For those of us who watch from the sidelines, the Occupy Wall Street movement may appear sympathetic to our own concerns. At the very least, it seems to offer a safety valve for others to vent their frustrations. Yet the history of idealistic occupations suggests this will also end poorly, with a polarized public and the movement collapsing in ruin.

Like the Commune, Occupy Wall Street is about the perfection of itself rather than the reform of others. This is a reason that the Occupationists differ from other protesters who go home at the end of a long march. For the Occupation, the tents do not come down until perfection is attained or destroyed.

The heart of OWS is therefore in its internal mechanics, especially its strictly “non-hierarchical” code of conduct. The manifestations of this code might appear foolish, but they emerge from a formula meant to challenge if not supplant our current system of government with the Occupation’s own forms of egalitarian command and control, a formula that grOWS ever more doctrinaire and insular for those who practice it. Many of these devices are still being developed in the “General Assemblies” of Occupationist cells. OWS already employs several to limit open speech, especially when the purity of the Occupation is confronted by the impurities of our existing laws and precedent.

 

From my perspective the reason why the “free/open source” movement succeeded is because they stopped protesting and started coding – i.e. they focused on developing solutions.  Richard Stallman created two brilliant hacks – the GPL – an IP license that allowed sharing & GCC – the compiler.  Solutions not protest!


Margin Call: A movie on strategy and investment banks and morality

Over the weekend I had a chance to watch Margin Call a movie ostensibly about the 2008 financial crisis and the choices made by one fictional investment bank. It was a gripping and fascinating movie. In strategy terms this movie is all about defection from relational contracts.  Under what circumstances do investment bankers burn bridges with other bankers so that they can save their own hides? And even more amazingly do you knowingly sell crappy assets to parties you have been doing business with for a very long time?  Even more compelling is the entire investment banking and financial industry based around finding the sucker who will take your bad assets off your books?  The movie is deep and complex in many ways and it will take me a while to process it all – but if you have watched the movie – would love your comments – and if you have not watched the movie – go see it and lets discuss it here…


May the best meme win: On the origins of #OWS

So I am sure there will be many dissertations and journal articles written on the strategy and tactics behind #OWS and various #tahrir movements.  Interesting to me are the origin stories – how certain things actually get catalyzed – specially those that require distributed collective action. Today the New York Times has a nice story on how #OWS got started.  Particularly of note  is the role played by Adbusters magazine and foundation to actually catalyze the movement and create the meme around it:

On July 13, he (Mr. Lasn)  and his colleagues created a new hash tag on Twitter: #OCCUPYWALLSTREET. They made a poster showing a ballerina dancing on the back of the muscular sculptured bull near Wall Street in Manhattan.

For some people they were just words and images. For Mr. Lasn, they were tools to begin remodeling the “mental environment,” to create a new “meme,” the term coined by the evolutionary biologist Richard Dawkins for a kind of transcendent cultural message.

“There’s a number of ways to wage a meme war,” Mr. Lasn, whose name is pronounced KAL-luh LAS-en, said in an interview. “I believe that one of the most powerful things of all is aesthetics.”

<…continued..>

Mr. Lasn has long believed that Wall Street and vast corporate wealth have sent the United States into what he calls “terminal decline.” But unlike many people involved in the protests, he also has specific goals he would like to see reached. He wants to see, among other things, “a Robin Hood tax” on all financial transactions, a restoration of the Glass-Steagall Act that erected barriers between banking and investing, a ban on certain types of high-frequency trading and the overturning of the Supreme Court ruling in the Citizens United case.

Mr. Lasn said that he and Micah White, a senior editor who helped start Occupy Wall Street, are in regular contact with some prominent protesters but insists they have no interest in a continuing leadership role, nor is it their job to speak for the movement, even if Adbusters would like some credit for starting it.

“This is what Adbusters has done for the past 20 years, to come up with these memes and to propagate them,” he said. “That’s what it’s all about: may the best memes win.”

I really think the last statement is very interesting as it relates to the role of “meme” production in getting collective action going.  More generally, in this case, we have a more than 20 year old organization that is in the business of generating memes – one way or another – to get their message across.  All of a sudden – with the confluence of technology, proof from other foreign locales, and general economic conditions – this meme takes off – massively – to the point the people are getting arrested, hurt and pepper sprayed – for the sake  of the meme.

So a question to our dear readers – Was #OWS just bound to happen one way or another – with or without the help of Adbusters? Or was the meme generation capability important and necessary for this to work?


Can There Be Strategy in Distributed Movements? Linux and #OWS

An an ongoing research puzzle for me has been how distributed movements, open source|wikipedia, mobilize collective action and get individual incentives and actions aligned.   Is the apparent lack of “strategy” a virtue or a vice?  For example, Linus Torvalds, founder of Linux, has  argued that “brownian motion” drives Linux development:

<From: Linus Torvalds
Subject: Re: Coding style – a non-issue
Date: Fri, 30 Nov 2001 16:50:34 -0800 (PST)

On Fri, 30 Nov 2001, Rik van Riel wrote:
>
> I’m very interested too, though I’ll have to agree with Larry
> that Linux really isn’t going anywhere in particular and seems
> to be making progress through sheer luck.

Hey, that’s not a bug, that’s a FEATURE!

You know what the most complex piece of engineering known to man in the
whole solar system is?

Guess what – it’s not Linux, it’s not Solaris, and it’s not your car.

It’s you. And me.

And think about how you and me actually came about – not through any
complex design.

Right. “sheer luck”.

Well, sheer luck, AND:
- free availability and _crosspollination_ through sharing of “source
code”, although biologists call it DNA.
- a rather unforgiving user environment, that happily replaces bad
versions of us with better working versions and thus culls the herd
(biologists often call this “survival of the fittest”)
- massive undirected parallel development (“trial and error”)

I’m deadly serious: we humans have _never_ been able to replicate
something more complicated than what we ourselves are, yet natural
selection did it without even thinking.

<….later in thread…>

A strong vision and a sure hand sound like good things on paper. It’s just
that I have never _ever_ met a technical person (including me) whom I
would trust to know what is really the right thing to do in the long run.

Too strong a strong vision can kill you – you’ll walk right over the edge,
firm in the knowledge of the path in front of you.

I’d much rather have “brownian motion”, where a lot of microscopic
directed improvements end up pushing the system slowly in a direction that
none of the individual developers really had the vision to see on their
own.

And I’m a firm believer that in order for this to work _well_, you have to
have a development group that is fairly strange and random.

To get back to the original claim – where Larry idolizes the Sun
engineering team for their singlemindedness and strict control – and the
claim that Linux seems ot get better “by luck”: I really believe this is
important.

The problem with “singlemindedness and strict control” (or “design”) is
that it sure gets you from point A to point B in a much straighter line,
and with less expenditure of energy, but how the HELL are you going to
consistently know where you actually want to end up? It’s not like we know
that B is our final destination.

In fact, most developers don’t know even what the right _intermediate_
destinations are, much less the final one. And having somebody who shows
you the “one true path” may be very nice for getting a project done, but I
have this strong belief that while the “one true path” sometimes ends up
being the right one (and with an intelligent leader it may _mostly_ be the
right one), every once in a while it’s definitely the wrong thing to do.

And if you only walk in single file, and in the same direction, you only
need to make one mistake to die.

In contrast, if you walk in all directions at once, and kind of feel your
way around, you may not get to the point you _thought_ you wanted, but you
never make really bad mistakes, because you always ended up having to
satisfy a lot of _different_ opinions. You get a more balanced system.

So the question for me has been if this is just an accidental feature of a distributed movement or can we actually drive collective action this way?
The recent emergence of #OWS provides an interesting case study unfolding in real time. Fast Company has a nice entry about how the movement came about:

And not posting clear demands, while essentially a failing, has unintended virtue. Anyone who is at all frustrated with the economy–perhaps even 99% of Americans–can feel that this protest is their own.
 

So is this the way to develop strategy?


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