Year: 2009

Criticism and Praise

drunkards walk

Do criticism and praise work to affect performance?

Leonard Mlodinow briefly addressed this topic in The Drunkard’s Walk: How Randomness Rules Our Lives. He explores the studies of Daniel Kahneman who was lecturing the Israeli air force flight instructors on behavior modification. Kahneman was trying to make the point that rewarding positive behavior works, but punishing mistakes does not.

One of the students called him out. He had praised people warmly for beautifully executed maneuvers and the next time they do worse. He screamed at people for badly executed maneuvers and they improve the next time. The other flight instructors agreed. But Kahneman’s research demonstrated that rewards worked better than punishment.

So what was going on?

Regression toward the mean. In a random series of events, an extraordinary event is most likely to followed by an ordinary one. Due purely to chance, it’s hard to have two extraordinary events in a row.

The fighter pilots have a certain level of ability. An extraordinarily good performance is most likely to be followed by an ordinary performance. So the praise would seem to fail to maintain the extraordinarily good performance. Similarly, an extremely bad performance is most likely to be followed by an ordinary performance, which in this case would be better than the bad performance. So the screaming criticism would seem to cause an improvement in performance.

So it appears that the criticism does some good and the praise does no good. What is really happening is a misconception of uncertainty and probabilities. The connection between actions and results is not as direct as we might think.

In compliance, we eschew lots of data. It’s good to step back every now and then to think about the implications of the data and the underlying assumptions.

The First CMBS Eligbile for TALF

DDR-Developers Diversified Realty Corp.

Developers Diversified Realty Corp. sold $400 million worth of of debt backed by shopping centers backed by 28 malls in 19 states. The offering is the first to use the Federal Reserve’s Term Asset-Backed Securities Loan Facility since it was opened to the debt in June.

Investors can take out loans from the TALF to purchase the AAA portion of the bond sale, enabling them to boost returns with borrowed cash. TALF was started in March to revive the market for asset backed securities.

The $323.5 million AAA-rated portion of the DDR offering was priced to yield 140 basis points more than benchmark swap rates. Investor demand allowed the company to reduce the spread from as much as 175 basis points.

References:

It’s Tough Being Green… And Charged With Fraud

mantria

Mantria Corporation is a “diversified and progressive business enterprise that seeks out emerging sectors with a passionate focus on sustainability and the commercialization of socially responsible products and services.” At least that’s what their website says.

The SEC says: “In reality, the only green these promoters seemed interested in was investors’ money.”

According to the latest SEC press release, green is the new fraud. The feds charged Wayde and Donna McKelvy and Mantria Corporation with defrauding investors to invest in green initiatives like a supposed “carbon negative” housing community in rural Tennessee and a “biochar” charcoal substitute made from organic waste.

The SEC alleges that the “green” representations were laced with bogus claims, and investors were falsely promised enormous returns on their investments ranging from 17 percent to “hundreds of percent” annually. In fact, Mantria’s environmental initiatives have not generated any significant cash, and any returns paid to investors have been funded almost exclusively from other investors’ contributions.

The SEC also charged Troy Wragg and Amanda Knorr along with a related company called Speed of Wealth. According to the website: “Speed of Wealth and Mantria have joined forces once again to save the environment while helping middle America secure its financial future!”

For me, I scratch my head wondering why they have all the symbols for a half dozen Chamber of Commerce sites on their webpage. I found it really odd that these included the American Chamber of Commerce in Shanghai and the London Chamber of Commerce and Industry.

I suppose slapping some labels on the webpage is supposed to add some credibility. Of those sites, only the Sequatchie County-Dunlap Chamber of Commerce lists them as members.

Mantria also state that they are an “Accredited Business” with the Better Business Bureau. It says so on their home page. When I searched the Better Business Bureau site (DC Eastern PA) for Mantria it still had them listed as an accredited business and gives them a rating of “A-. ” BB Accreditation only means that Mantria hass made a commitment to make a good faith effort to resolve any consumer complaints and paid a fee for accreditation, review and monitoring.

I also checked out the Speed of Wealth on the Denver Better Business Bureau. They have them listed as an “Accredited Business” with a rating of “A.”

Of course, none of the SEC claims have yet been proven. I wonder the Better Business Bureau monitors SEC claims?

SEC Press Release: SEC Charges Promoters of “Green” Investments With Operating $30 Million Ponzi Scheme Based in Denver Area

Is PCAOB Constitutional?

vanderbilt law review

Now that Jones v. Harris has been argued, we have to sit and wait for the decision. But there is another compliance case coming up for argument in front of the Supreme Court: Free Enterprise Fund v. PCAOB.

The PCAOB case is much sexier than the Jones case since it involves the president’s constitutional powers of appointment and the separation of powers under the Constitution. (At least as far as compliance is sexy.)

The November 2009 edition of the Vanderbilt Law Review has a quartet of articles that focus on the PCAOB case and the underlying constitutional issues:

Congress created the Public Company Accounting Oversight Board PCAOB under the umbrella of the Securities and Exchange Commission. If PCAOB is a government agency and its members are officers, then the appointment of the PCAOB is very odd. The President can appoint the SEC Commissioners, but only remove them “for cause.” Then in turn the SEC Commissioners appoint the PCAOB members.

The issues arises from the Appointments Clause of the U.S. Constitution U.S. CONST. Art. I, § 2, cl. 2;:

[The President] shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.

Are the PCAOB‟s Members “principal officers” of the United States, whose appointment must, be made by presidential nomination and Senate approval? Even if they are “inferior officers” of the United States, does PCAOB violate the Constitution‟s arrangement for the appointment and removal of such officers because they are put entirely in the hands of the SEC, an independent regulatory commission, beyond the effective reach of presidential oversight?

There are lots of interesting issues discussed in these articles and lots of interesting things the Supreme Court could do in its opinion for the PCAOB case. It could have broader implications to other government commissions, accountants and compliance professionals.

PBWorks and Real Time Collaboration

PBworks_LogoPBWorks has announced a “Real-time Collaboration Update”  which brings integrated Instant Messaging collaboration, Live Notifications (activity streams), Live Editing (rather than standard wiki asynchronous editing) and integrated Voice Collaboration with on-demand voice conferencing.

This is a big step up. Instead of being a  mere wiki, the platform now offers different ways to collaborate, but still captures the information in the platform. I assume that is one of the reasons they changed their name from PB Wiki to PB Works.

PB Wiki was the first wiki I ever used. A group used it to plan an international meeting of law firm knowledge management leaders. Now I regularly use the PB Works tools as part of GeekDad information management process.

While I was at the Enterprise 2.0 Conference in San Francisco, I spent a few minutes with a bunch of people from PB Works: Jim Groff, the CEO;  Chris Yeh, Vice President, Marketing ; Glen Hoffman, Sales Engineer; Greg lelli, Legal Sales Specialist; and Kristine Molnar, Community Evangelist.

One of the drawbacks of a wiki was the check-in/check-out process. Only one person could edit a wiki page at a time. Google Docs (and to a lesser extent Google Wave) showed us that you can have multiple people editing at the same time and speed up the collaboration process even more.

The PB Works team gave me a demo of the new tools and it was pretty cool. If you are editing a page and realize that you need input of other team members, you can summon them to the page using IM Collaboration, start a Live Editing session, and use Voice Collaboration to initiate an instant conference call. You can do this all in a fraction of the time it would take to set up a web conference, the call line, and communicate the details to everyone.

Since PBworks hosts the  information, you can be up and running in a few minutes.

The SEC is Going After the Geeks

sec-seal

First, Bernie the boss turned himself in, saying he did it all by himself. Nobody believed that, including the SEC. So the SEC went after Madoff’s right-hand man, DiPascali, and Madoff’s accountant, Friehling. Now the SEC is going after the geeks.

The Securities and Exchange Commission charged two computer programmers for their role in helping Bernie Madoff cover up the fraud at Bernard L. Madoff Investment Securities LLC for more than 15 years. The SEC alleges that Jerome O’Hara of Malverne, N.Y., and George Perez of East Brunswick, N.J., provided the technical support necessary to produce false documents and trading records, and took hush money to help keep the scheme going.

“Without the help of O’Hara and Perez, the Madoff fraud would not have been possible.They used their special computer skills to create sophisticated, credible and entirely phony trading records that were critical to the success of Madoff’s scheme for so many years.”

O’Hara and Perez wrote programs that generated many thousands of pages of fake trade blotters, stock records, Depository Trust Corporation (DTC) reports and other phantom books and records to substantiate nonexistent trading. Bernie used a separate computer internally known as “House 17” to process advisory account data. The SEC alleges that O’Hara and Perez knew that the House 17 computer was missing a host of functioning programs necessary for actual securities trading and reporting. According to the SEC’s complaint, they recognized that the trades being entered into House 17 and the account statements and trade confirmations being sent to investors did not reflect actual trades.

According to the complaint, the two geeks tried to escape from Bernie’s clutches. Apparently a salary increase of 25% and a $60,000 bonus was enough to buy their silence.

References:

Compliance Bits and Pieces for Nov. 13

Here are some stories that caught my eye over the past week:

A Morgan Stanley star falls in China By George Chen and Steve Eder for Reuters

His downfall, however, was just as precipitous. Morgan Stanley fired Peterson in December amid suspicions that he had violated the U.S. Foreign Corrupt Practices Act, a law meant to crack down on bribes being paid to public officials overseas.

Morgan Stanley, which voluntarily reported the case to the U.S. authorities, declined to comment on its specifics.

After a nine-month internal investigation, the bank has turned its findings over to the U.S. Department of Justice and U.S. Securities and Exchange Commission, which have opened their own probes, according to an investor letter obtained by Reuters.

Pin the Credit on Someone Else by Charles H. Green for Trust Matters

A willingness to pin the credit on another is a deceptively simple way to achieve several goals. First—as Rebecca’s example perfectly shows—it can often get things done faster, breaking a logjam by bringing in a third party or an appeal to authority.

Second, it signals a willingness to subordinate your own ego—something as valuable as it is rare in consultative and sales and support people. The client picks up that signal very clearly.

Third, it signals something to the credited party too. It says you recognize and value them, and that you’re willing to do them a favor. And favors invite reciprocal favors.

Fourth, that whole favor-giving thing requires a time perspective longer than the transaction at hand. By showing you’re willing to play that game, you suggest a plethora of ways to work together going forward. You can collaborate.

Just because … inspiration can come from my 4th grader by Heather Milligan of The Legal Watercooler

1. Differentiate yourself without tearing down your opponent.

2. Be friendly. People like to hire and work with people who are friendly. Yes, there is always a need for the bull-dog litigator, but be the guy or gal that your client would enjoy having a beer with, taking in a game, or hanging out until 3:00 a.m. in trial preparation.

…

EPA: Video Takedown order was about ethics, not content by Darren Goode for Congress Daily

The Environmental Protection Agency’s top lawyer says the agency is not censoring two of its California-based attorneys who posted a YouTube video criticizing the Obama administration’s backing of a House-passed climate bill. But the two attorneys were asked to either take down the video or edit out references to their work with EPA because they violated government ethics standards.

Exploring the Ethics of Swine Flu by Lauren Bloom

The answer may be for employers to stop expecting workers to come in when they’re seriously ill with a contagious disease. Unfortunately, the American work ethic (a marvelous thing in many respects) is so strong that any employee who misses more than a day or two risks being permanently branded as a slacker. That attitude needs to change. If diseases like swine flu can’t be prevented, then workers shouldn’t be punished for coming down with them.

Why Insider Trading Is Hard to Define, Prove and Prevent from Knowledge@Wharton

Generally, insider trading means profiting on “material, non-public information.” It can be committed by an insider, such as a company executive, or an outsider who gets information from an insider. Merely obtaining inside information is not illegal. A journalist, for example, can use inside sources to glean earnings data before it is disclosed and legally use it for a story. But the reporter would be breaking the law if he used that knowledge to buy the firm’s stock before an announcement drove the price up.

FCPA: Overcoming the Toughest Issues

FCPA panel

Bruce Carton and SecurtiesDocket presented this informative webinar. The panelists were:

securitiesdocket

– Hank Walther, Dept. of Justice
– Larry Urgenson, Kirkland & Ellis
– Elliot Leary, KPMG Forensic
– Phil Desing, KPMG Forensic

The panel started of with parallel international investigations. This is a new topic because for years there was no other country enforcing anti-bribery laws. There are some limitations on investigations. In particular, there is the secrecy of grand jury information. The Justice Department is willing to get a court order for the benefit of a foreign government’s prosecution.

As for self-reporting in jurisdictions outside the US, the panelists see instances of disclosures to other governments. Companies want a one stop shop for disclosure.

Due diligence on agents, distributors, and in connection with M&A activity continues to be a challenge, In a KPMG Survey, 82% respondents found performing effective due diligence on foreign agents/third parties “somewhat” to “very” challenging. Two of the three DOJ FCPA opinion releases in 2008 address merger and acquisition due diligence matters: 08-01 and 08-02.

Of course, the current global financial crisis may increase opportunities for corruption, given the greater competitive atmosphere and fewer resources being available.

You want to conduct proactive due diligence. Require the third party to fill out a Questionnaire that will include among other things, FCPA representations and warranties, disclosure of government affiliations, employment information, company ownership. Conduct media and public record searches. Also conduct due diligence evaluations on company personnel. Agreements should contain FCPA specific language, including audit rights.

In high risk countries, be sure to focus on the safety of your employees. If there is a concern for physical safety, pay and get out.

After an acquisition, make sure that you quickly roll out your policies and procedures. Start the monitoring as soon as you can.

References:

The Dark Side of Aggressive Goal Setting in the Workplace: A Shortcut to Unethical Behavior

ordonez

EthicsPoint sponsored a webinar by Dr. Lisa Ordóñez, University of Arizona, Professor of Management and Organizations in the Eller College of Management at The University of Arizona

“Applied managerial experience and hundreds of academic research studies have catalogued the positive impacts of goal setting on performance. Challenging, specific goals compared to instructions to “do your best” have been shown to increase effort, persistence, and performance. Goal setting theory has led to consultants training managers on how to use SMART (Specific, measurable, attainable, realistic, and timely) goals in their organizations. However, as Ordóñez, Schweitzer, Galinsky, & Bazerman (2009a, 2009b) point out, goals can have systematic, negative effects and can focus attention too narrowly, increase risk taking, and lead to unethical behavior.”ethicspoint-logo

These are my notes from the webinar.

Dr. Ordóñez discussed some of the findings from her research where she found that goal-setting can lead to bad results and bad outcomes.

She started with some examples of how goal-setting ended up with bad results.

Why is hard to find a cab on rainy days in New York? The cabdrivers go home early. Their goal each day is to reach 2X their cost. They reach the goal faster on rainy days, so they go home earlier. they could have made money if they worked a full day.

General Motors focused on reaching 29% of the US Market. Executives even wore lapel pins with “29” on them. They focused on hitting the number (for example offering short term incentives) and not the long term goals of the company.

Fannie Mae was looking to expand the home ownership by low-income people. That resulted in them underwriting riskier loans.

Billable hours and ethics. If management sets utilization goals, people are more likely to pad their hours.

They ran a lab experiment in 2004 that tested people on test-taking. participants checked their own work. When the goal was to “do their best” their was less cheating than when their was a specific goal for correct answers.

She raised some questions to ask before setting goals:

  • Are the goals too specific? Narrow goals can blind people to important aspects of a problem.
  • Are the goals too challenging?
  • Who sets the goal? People are more committed to goals they help to set.
  • Is the time horizon appropriate? Short term goals can hurt long term performance.
  • How might the goals influence risk taking? Unmet goals may induce risk taking.
  • How might goals motivate unethical behavior?
  • Can the goals be tailored for individual abilities while preserving fairness?
  • How will the goals influence organizational behavior?
  • Are individual intrinsically motivated? People may not like the activity anymore when their a goal tied to the activity.
  • What type of goal is most appropriate given the ultimate objective? By focusing on the goal, employees may fail to search for better strategies.

So how do you motivate employees without goals?

You don’t. You can only link to what the employee wants to the desired performance.

Goals can be effective for direct effort, they can communicate the values of the organization and are very useful for menial tasks that simply need to be completed.

She ends with a warning:

goals warning

Thanks to EthicsPoint (my company’s hotline provider) for putting on this great webinar.

References:

National Data Privacy Laws Move Forward

I'm just a bill from Schoolhouse Rock

With last week’s further revisions to the Massachusetts Data Privacy Law [Massachusetts Amends Its Strict Data Privacy Law (Yet, Again)], people are wondering if the federal government is going to step into the space and create a national standard. Most states have enacted some form of data breach or data privacy law, crating patchwork of laws across the country.

I found three separate bills moving through the legislative process: Data Accountability and Trust Act (H.R. 2221), Personal Data Privacy and Security Act of 2009 (S.1490), and The Data Breach Notification Act (S. 139)

Data Accountability and Trust Act (H.R. 2221)

This bill was in the House Committee on Energy and Commerce and referred to the Subcommittee on Commerce, Trade and Consumer Protection. They recommended it be considered by the House as a whole on September 30.

This act would requires the Federal Trade Commission to promulgate regulations requiring each person engaged in interstate commerce that owns or possesses electronic data containing personal information to establish security policies and procedures.

Personal Data Privacy and Security Act of 2009 (S.1490)

Last week, the Senate Judiciary Committee approved the Personal Data Privacy and Security Act of 2009 by a vote of 14-5, sending the bill to the full Senate for consideration.

This act would amends the federal criminal code to: (1) make fraud in connection with the unauthorized access of sensitive personally identifiable information (in electronic or digital form) a predicate for racketeering charges; and (2) prohibit concealment of security breaches involving such information.

This law would preempt state regulation in this area.

The Data Breach Notification Act (S. 139)

Last week, the Senate Judiciary Committee approved the Data Breach Notification Act by a vote of 14-2, sending the bill to the full Senate for consideration.

This act would requires any federal agency or business entity engaged in interstate commerce that uses, accesses, or collects sensitive personally identifiable information, following the discovery of a security breach, to notify: (1) any U.S. resident whose information may have been accessed or acquired; and (2) the owner or licensee of any such information that the agency or business does not own or license.  The notice must be given “without unreasonable delay” following discovery of the breach.

It also authorizes civil actions by state attorneys general to enforce the act. This act would supersede any other provision of federal law or any provision of law of any state law relating to notification by a business entity engaged in interstate commerce or an agency of a security breach.

These are just bills, so it’s hard to tell what may happen to them. The clock is ticking. The Massachusetts data security law goes into effect on March 1, 2010.