Book reviews – Compliance Building

Weekend Book Review: In Fed We Trust

It is only fitting that I am writing this book review on a Sunday. In Fed We Trust: Ben Bernanke’s War on the Great Panic starts off by telling about the importance of a few Sundays in 2008. In March, there was the Sunday when the Federal Reserve announced an unprecedented action to lend $30 billion to JPMorgan Chase to buy Bear Stearns. There was the Sunday in August when the Federal Reserve and the Treasury Department decided to seize Fannie Mae and Freddie Mac. Of course, there was the Sunday in September when they allowed Lehman Brothers to fail. There was the Sunday when Bank of America agreed to take over Merrill Lynch.

David Wessel tells a story about Ben Bernanke’s rule of the Federal Reserve deciding to do “whatever it takes” to protect the U.S. economy from the incredible economic threat of those Sundays. The story takes us through what it missed, what it did, what it didn’t do, what it got right and what it got wrong during the “Great Panic.”

During Alan Greenspan’s term as chairman of the Federal Reserve we mostly watched as he and the Board decided whether to raise interest rates or not. Most of the country thought that was the extent of what the Federal Reserve did. During Bernanke’s term we saw the incredible power of the Federal Reserve to create vast sums of money out of thin air.

One of the key takeaways from the book is that is very difficult “to get the politics, the policy and market reaction all right at the any one point in time.” That was a quote from former Secretary of the Treasury Henry Paulson shortly after leaving office.

The book is sometimes short on its depiction of events. The one that stuck out the most was the short description of the Merrill Lynch discussion by Bank of America’s Ken Lewis and Joe Price. The New York Attorney General tells a more interesting tale in his indictment of the Bank of America executives.

But of the book provides terrific insight into the events of the Great Panic. (That’s the term the Wessel uses.) During the full-court press of forcing the largest banks to take TARP money, it’s Merrill Lunch’s Thain that asks how taking the TARP money would affect government controls on executive compensation. As we later find out, Thain became one of the poster boys for the banks’ failures with executive compensation.

In the end, as we all know, mistakes were made. The Federal Reserve did not always get the politics, policy and market reaction right.

But what if Bernanke had not been a student of the Great Depression? What if he had not taken bold steps? I think the economy and the country would be much worse off.

Weekend Book Review: Sonic Boom by Gregg Easterbrook

You may know Gregg Easterbrook from his previous book The Progress Paradox (one of his six books) or his articles in The Atlantic. I know him mostly from his hobby: writing the Tuesday Morning Quarterback column on ESPN.com.

Sonic Boom tries to look beyond the current recession. Easterbrook looks ahead to what to expect after we make our way out. He sees the continued growth of globalization, interconnectedness and technology improvements. That should lead to greater prosperity, knowledge growth, instability and financial distress.

Easterbrook starts off Sonic Boom by using the Chinese city of Shenzhen, with its population of 9 million. But thirty years ago, the city did not exist. In 2007, it sent out 21 million containers, making it the fourth largest port in the world.

His next example grabbed me because it revolves around Waltham, Massachusetts, which is just down the street from me. He even calls my alma mater, Brandeis University “an outstanding institution”. Waltham is an example because it was the home of the first modern factory in the US. (I wrote about this is an article for Wired: GeekDad Visits the Charles River Museum of Industry & Innovation.) Waltham went through some tough times as it went from being a center of manufacturing to center for high tech and venture capital.

The book continues by focusing on a city and the how globalization has affected each. There is disruption, innovation, loss, growth, distress, and gain. Easterbrook then uses the example to launch into further discussion.

All of the turmoil in the job markets makes employer-sponsored health-care a bad fit. “It’s ridiculous that our cell phones work wherever we go but our health-care coverage does not.”

Yes, globalization is displacing manufacturing jobs from the United States. But you also need to look at the advances in efficiency and technology that reduce manufacturing jobs. The US made 106 million tons of steel in 2007 with 159,000 workers. That is more than the 91 million tons of steel made in 1977 with 531,000 workers.

Globalization is also bringing peace. A few decades ago the world’s two most important countries had horns locked trying to destroy each other. The US and USSR had nuclear missiles aimed and fingers on the button. We would not even send athletes to the other’s hosting of the Olympic Games. Now the two most important countries are the US and China. We are locked “cooperative competition” of trade and finance.

Sure, China has a long way to go towards democracy and human rights. But the country is much better than it was 30 years ago.

If you have read Tuesday Morning Quarterback, you will encounter some familiar stories. You will also find the writing familiar as he has weaved some of these tales of economics into his football column.

Is Easterbrook right? Do I agree with everything he writes? Well, even Kurt Warner throws a few incomplete passes.

If you like football, then you should also read his Tuesday Morning Quaterback column on ESPN.com. I enjoyed reading Sonic Boom and recommend that you read it. With only one meaningful football game left this season, you’ll need something to read in the off-season.

Disclosure: Most of the links above are Amazon affiliate links.

The Drunkard’s Walk, The Butterfly Effect and The Black Swan

The “drunkard’s walk” refers to the Brownian motion, the seemingly random movement of particles suspended in a fluid. The original thought was that you might be able to calculate the movement by measuring and calculating the interaction. It proved impossible. There are too many factors and too many interactions.

Small changes in a system can dramatically affect the outcome. This is the butterfly effect. The origin cam from a meteorologist who was using a computer model to rerun a weather prediction and one of the numbers he used was shortened from six decimal points to three decimal points. The result was a completely different weather scenario. It’s not that a butterfly can cause the problem. It’s that a seemingly inconsequential random event can lead to a big change in an outcome.

Leonard Mlodinow addressed this topic in The Drunkard’s Walk: How Randomness Rules Our Lives. (I mentioned the book previously in Criticism and Praise.) There is much more randomness in our lives than we give credit.

We poorly understand the effect of randomness.

He explores his concepts using the backdrop of Pearl Harbor. In hindsight there were many signs pointing to the eventual attack. “In any complex string of events in which each event unfolds with some element of uncertainty, there is a fundamental asymmetry between past and future.” It’s nearly impossible to predict before the fact, but relatively easy to understand afterward. We have seen the same 20/20 hindsight with the 9/11 attacks.

That’s why it is easy to explain why the weather happened three days ago, but have trouble getting the weather forecast right three days into the future.

Mlodinow never mentions it, but for me the next step is the theory of the Black Swan. How do you end up with high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations?

Combining the Black Swan with the Drunkard’s Walk and the Butterfly Effect, you see that a combination of small events can lead to an over-sized outcome. We get used to being able to calculate and measure so many things. There will always be factors that we miss, or overweight or underweight.

Not to be depressing. The Drunkard’s Walk leaves you feeling in less control than when you started. But there is a factor you can control: the number of chances that you take. “Even a coin weighted toward failure will sometimes land on success.” Keep flipping the coin.

The Drunkard’s Walk is worth reading if you deal with risk.

Are You Trying to be a Trust Agent?

Yes? Then you have probably already read at least part of Trust Agents: Using the Web to Build Influence, Improve Reputation, and Earn Trust, the new book from Chris Brogan and Julien Smith.

Most likely, you are wondering what a “Trust Agent” is supposed to be.

“Trust agents have established themselves as being non-sales-oriented, non-high pressure marketers. Instead, they are digital natives using the web to be genuine and to humanize their business.”

The main premise is that cultivating “trust” will enable you and your business to succeed. They talk about creating this trust using social networks and online media. Be a trust agent and people will gravitate towards you when they need something, and then trust you with their information and leads. The book combines some theory, with the author’s success stories, other relevant examples and actionable suggestions.

Unfortunately, I found big chunks of the book to miss the mark for my involvement on the web. My original jump into the web was to see how these tools would work as knowledge management tools inside an organization. I found these web 2.0 tools were well ahead of the enterprise tools. My approach in using the web is for personal knowledge management.

These tools (including this blog) are for me to find the information I need to succeed at my job and to organize that information for reuse. I use web tools for selfish reasons. They are really good at helping me collect information. That others can leverage my work is a by-product. That these tools allow me to stay connected with colleagues is a by-product.

Some of that stems from the nature of my job and my company. We don’t use the web to advance our corporate image. As the chief compliance officer I am not trying to sell anything, ever.

But I do like staying connected with my colleagues and peers. There are many more people outside your organization who do what you do or have the information you need to succeed, than there are inside your organization.

Trust Agents is about creating social capital. I think it could just as easily be called: “Don’t be a jerk online.” They go into a lot more detail than that and come up with six characteristics of Trust Agents.

1. Make your own game.

Try new ways of doing things. Stand out from the crowd. First movers have an advantage. They quote Warren Buffet on when to enter a market: “Be fearful when others are greedy, and be greedy when others are fearful.”

2. Be one of us.

Be part of the community. Don’t be the self-promotional jerk in the community who is continually handing out business cards and asking for business. Contribute to the community. You need to give first if you want to receive. The more you give, the better.

3. Use the Archimedes Effect

Archimedes propositioned that if he had a long enough lever and a fulcrum on which to place it, he could move the world. Leverage your message.

4. Try to be Agent Zero

Cultivate your personal networks and recognize their value. Connect with good people. Connect between different groups.

5. Become a human artist.

Learn how to work well with people and help empower people. You need to learn the etiquette and start off by listening to the community before you burst in with a full head of steam.

6. Build an army.

You can’t do it alone. You need to find people who are willing to collaborate with you.

If these concept resonate with you, then it is worth your time to read the book. If you are just starting out with web 2.0 tools you should heed the lessons in the book. Even if you are a wily veteran, you will find some useful information in this book.

Trust Agents is a bit uneven at times. In places it reads more like a collection of blog posts instead of a coherent narrative. Some of their ideas are better flushed out than others. Those six characteristics don’t have equal weight.

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This is the first book I’ve read in 2010. You can look back at the books I read in 2009.

Whales and Compliance

I was surprised to be thinking about compliance while I was reading about whales. Sure, I eat, drink and sleep compliance. But there are some lessons that compliance professionals can learn from the study of whales.

This came up while I was reading Watching Giants: The Secret Lives of Whales by Elin Kelsey.

My original interest in the book was its intersection between parenthood and whales. During college I took a class at the New England Aquarium on marine mammals taught by world-renown experts. The class was fascinating on many levels. As a parent, well, I find parenting itself interesting.

Whales are incredible species, reliant on breathing air, but needing to dive the depths of the ocean for food. For example, as the book points out, a blue whale opening its mouth to take in a school of krill is the biggest biomechanical event to happen on the planet. The scale of a whale’s life is well beyond the scale of humans. If you read about the parenting life of whales, I think you will be hard-pressed to believe that we have hunted many of these species to the brink of extinction.

Getting back to the compliance side of things, whales are hard to study. Fraud, corruption and misdeeds are hard to study. Whales spend over 95% of their time outside the boundary of human observation. The deeds that compliance professionals are looking for are also, for the most part, outside of our perception.

The compliance lesson that resonated with me was that we should not assume that we can see is truly representative of what is actually happening beneath the surface. We need to understand our perspective. What we can see and what we cannot see. When you look beneath the surface, something unexpected may be happening.

If you are looking for a good book to read, try Watching Giants: The Secret Lives of Whales.

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.

Blink and Compliance

I am a little late to the game when it comes to reading some of Malcolm Gladwell’s books. Last week, while on vacation with the family, I managed to read Blink: The Power of Thinking Without Thinking.

The book is about rapid cognition, the kind of thinking that happens in a blink of an eye. What is going on inside our heads when during rapid cognition? When are these quick judgments good and when are they not? What kinds of things can we do to make our powers of rapid cognition better?

The book left me with a bunch of little tidbits of information. Gladwell illustrates each of his points with interesting narratives. In the process he makes several insightful points about the nature of rapid human decision-making. Sometimes, over-thinking a problem results in bad decisions. Our first instincts are often correct, if we have a clear picture of what is happening and our perception.

But often that clarity is missing. One example is the difference in selecting elite musicians when the audition is conducted behind a screen, rather than in full view. In the past thirty years since screened auditions have become commonplace, the number of females in the top U.S. orchestras has increased five-fold. Even though the judges were not overtly discriminatory, their first impressions from seeing a woman, the color of her instrument and the way she played had an unconscious negative effect on the judges.

There are lessons in this book for compliance professionals.

Snap judgments are often correct when they come from clarity and experience. But they can also easily be corrupted. Be aware of the situation, the person you are dealing with and the environment around you.

Sometimes too much information can cloud your decision-making. Gladwell finds an example in how an emergency room should handle potential heart attack victims. Typically, doctors try to gather as much information as possible and then make an estimate of whether the chest pain is a heart attack. Instead, they found that three factors were key to determining if chest pain is a heart attack. By focusing on these three factors, the correct diagnosis rate rose from 75%-89% correct rate of diagnosis to 95%.

Experience is clearly the most important factor in developing a strong snap judgment and practice is key in developing that expertise.

Social Networking for the Legal Profession

I just finished reading Social Networking for the Legal Profession by Penny Edwards and Lee Bryant. They were nice enough to send me a copy.

Penny and Lee used a few quotes from me, referred to some of my writings and used some of my social networking activity as examples. That poor judgment aside, the book is otherwise a great report on how legal professionals can take advantage of online networking tools.

The book contains practical examples and strategies. They explore the use of the tools externally as part of your marketing and business development efforts. They also explore the use of them internally for operations, communication, and knowledge management 2.0. They present a good road map with lots of options for an organization to chose among.

They start with the basics and run through a survey of the social networking sites most useful to lawyers: LinkedIn, Avvo, blogs, Facebook, Twitter, Legal OnRamp, Martindale-Hubbell Connected, JD Supra and many others.

It is not all kumbaya. The report takes into account the risks and challenges you must overcome to make implementation a success. They spend significant time talking about the culture challenges. They also explore the security, privacy and compliance issues.

Penny and Lee point out the paradigm shift with these tools. Unlike previous generations of collaboration tools, these 2.0 tools target individual benefits rather than the benefits to the organization as a whole. They focus on what’s in it for the individual. The benefits to the larger organization are a by-product. There is less emphasis on standardization and centralization.

The focus on standardization and the collective benefits was what knowledge management got wrong. The big central databases of knowledge management were useful to the organization as a whole, but provided little benefit to the individual contributor. They did not want awards or financial compensation (not that more money wouldn’t hurt), but wanted a way to help organize their own stuff in a way that was useful to them.

Unlike past generations of software, most of the innovation is coming from the consumer space. Free tools on the web are far ahead of enterprise systems. IT departments are constantly being asked why its so easy to search on Google or publish on the web, but so much harder to do so inside the law firm. If you want to know how these tools can help you inside your organization, you need to try them outside your organization.

There is a great chapter on the benefits of networking tools used inside the organization and how to achieve great benefits.

The book is expensive. The Ark Group gave it a cover price of £245. It is a great book and worth the price. If you are interested, I was given the details of a discount offer, taking $115 off the price, making it $285 plus $10 shipping. The details are on the US publicity flyer for Social Networking for the Legal Profession (.pdf).

You can read more from Penny, Lee and others at Headshift on the Headshift blog.

I thought I would also share links to some of my material that Penny and Lee cite in the book:

Free and Law Firms

I just finished reading Chris Anderson’s new book: Free: The Future of a Radical Price. Given that I am a lawyer, I kept thinking about how his concepts apply to law firms.

Let me say a few things up front.

First, this is an excellent book that will make you think about how these concepts apply to your business. For my prior employer, a large law firm I saw lots of trends in the book.

Second, I am part of an example that Chris uses to defend his hypothesis: GeekDad. Chris started GeekDad as the parenting blog for Wired magazine. The blog is led by Ken Denmead as editor who gets a nominal retainer. The rest of the contributors are unpaid volunteers writing for a magazine conglomerate that makes good money selling ads on GeekDad. I am one of those volunteer contributors. (You can see my name in the list of core contributors in right-hand column.)

Third, Chris does not take the position that everything should be free. He merely points out that more things now can be, thanks to the reduced costs of computer power, storage and networking.

Fourth, I paid for the book out of my own pocket. Free, the book is not free. Free, an ~~abridged~~ audio version is free online.

The Long Tail

Free is an extension of his previous book: The Long Tail. In that book he showed how the sale of large quantity of less popular titles can collectively sell as much as the few popular titles. You can make this work when you have cheap storage. Free takes the next step of what happens when your marginal production costs get close to zero.

There are many studies that show there is a big difference between something costing very little and something costing zero. Therefore you will attract a bigger audience if you round down. With electronic distribution, the marginal cost for adding the next customer is close to zero. So Chris says round down.

How Do You Make Money?

Chris outlines 50 different ways that you can make money even when you are giving away some of your product. Chris does not advocate giving away everything, just some of the things when the marginal cost is close to zero. One of the big distinctions is whether your product is atoms or bits. Atoms are expensive to produce and distribute. Bits are not.

He divides the idea of Free into four categories: cross-subsidies (give away the razor, sell the blade); advertising-supported services (from radio and television to websites); freemium (a small subset of users pay for a premium version of something, supporting a free version for the rest); and non-monetary markets (in which participants motivated by non-financial considerations develop things like Wikipedia and GeekDad).

Freemium is the model that Chris seems most in favor of. You give away a limited version of the product, but charge for the full version, add-ons and enhancements. SocialText just adopted that model for their wiki product: Free for 50. You can use a limited version of the product with up to fifty people at no charge. That freemium model got me using it.

Information is Expensive but Wants to be Free

Chris quotes Stewart Brand:

On the one hand information wants to be expensive, because it’s so valuable. The right information in the right place just changes your life. On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time. So you have these two fighting against each other.

What about law firms?

Let’s look at the most extreme examples, Orrick, Herrington and Sutcliffe‘s free business formation contracts and Wilson Sonsini’s Term Sheet Generator. There’s no cost to use the forms and no registration required to download them. Businesses can use them free. Other lawyers can use the forms as if they were their own and use them to serve their own clients. But the free product may help capture business. There are big segments of the legal market that can’t afford to hire these firms. Now, a business using these may be more likely to use the firm because some of the work has already been done. The firms could charge far less to review a completed form than if the firm were to begin the incorporation from scratch. It may offer them a competitive advantage if opposing counsel presents them with one of their own forms.

But those examples are new and few.

There is an incredibly common freemium model adopted by almost every law firm: Client Alerts.

When you had to mail these alerts there was a dollar cost associated with that distribution. To better phrase that, there was a stamp cost associated with distribution. Now distribution are costs are minimal. The costs are the same whether you email it to 500 people or 50,000 people. The same is true with viewing it on the law firm’s website.

I think it is quaint that some law firms still use the “client alert” label. I get more alerts from firms that do not represent me, than I do from the firms that do represent me.

Lawyers and their firms are giving away this valuable legal insight in the hopes that you will hire them to represent you in a matter related to the information in their publication. They use the publications to showcase their expertise, but in the process give away some of their substantive knowledge.

The book is worth reading. You should start thinking about how free may affect your business.

References:

Malcolm Gladwell’s review of Free in The New Yorker: Priced to Sell
Anderson’s respone to Gladwell: “Dear Malcolm, Why So Threatened?
GeekDad – Wired’s parenting blog
Nice but Tricky from The Economist
Free and the Future of Publishing by William Landay
Mark Cuban: When you success with Free, you are going to die by Free
Seth Godin: Malcom is Wrong

Weekend Book Review – The Nine

You would expect a book about the inner workings of the United States Supreme Court to be dry and boring. I did, which is why this book has been sitting unread in my book pile for months.

Surprise! I found this book to be very interesting and entertaining.

The Nine: Inside the Secret World of the Supreme Court was written by Jeffrey Tobin, a staff writer for The New Yorker and a senior legal analyst at CNN. Toobin guides us through the last twenty years of court history by focusing on individual justices and their roles in some of the most controversial cases.

It is not an unbiased view of the justices. Tobin paints a very flattering picture of the centrist Justice O’Connor. In Toobin’s view Rehnquist has little interest in the reasoning even of his own opinions. He paints Antonin Scalia as the brilliant but pugnacious. Stephen Breyer is portayed as an optimist with an unrealistic belief in his powers of persuasion. Justice Kennedy comes across as pompous. Thomas seems bitter and angry. Ginsburg is charming and briliant. Stevens stands as the last bastion of liberalism on the court. Souter is a hermit living in the woods of New Hampshire who has never plugged in his television.

Toobin also portrays a bumbling Clinton administration putting its appointees on the Court. In comparison, the Bush White House ran its candidates past the religious right for their approval on social issues.

I am lawyer, so I may find the working of the Supreme Court more interesting than non-lawyers. Maybe my view is tainted, but this is one of the best books I have read in many months. I think you should add The Nine to your reading list.