Sunday, January 15, 2017

Albert Dunlap Style Likability: Those Who Seek Flattery Get Enemies

I will start this post with an old story. CEO of Sunbeam Corp., Albert Dunlap, known as an expert in turning around troubled firms and selling them for a profit, was sued by the SEC in 2001 for accounting fraud. He was eventually barred from serving as an officer or director in any company, plus ordered to pay investors defrauded money in a class-action lawsuit.  Albert Dunlap was clearly someone in need of flattery, not just money, as he had the classical flattery-sickness symptom of a book written to celebrate his successes (see also his picture!). How he managed things internally in each firm he led is disputed, but much was said about his intimidation of other managers, who probably would conclude that a lot of flattery and ingratiation might help their career. Of course, managers still did better than employees, because his signature move in turning firms around was mass layoffs.

An interesting detail of his downfall was that managers around him were quick to release information that helped the investigation, which is distinct from the many firms with management teams that do all they can to deter and obstruct investigators. Is there a systematic reason for this difference? Possibly. A recent article in Administrative Science Quarterly by Gareth Keeves, James Westphal, and Michael McDonald looks at what happens when managers ingratiate their CEO through flattery and other tools. Their findings are interesting. First, managers who flatter lose their liking of the CEO. Somehow when people artificially put others on a pedestal they also start looking down on them.

Second, managers who flatter may go on to undermine the CEO. The light-handed version of this is to undermine the CEO’s messages to journalists, as this research showed. The heavy-handed version is what happened to Albert Dunlap. Among other events, his comptroller reported that he had been pushing for accounting practices that crossed the legal boundary, and sales people were quick to report “channel stuffing.” Channel stuffing is to sell too many goods and selling them too early, which is not illegal in itself (the sales channel can return unsold goods, so it is safe for them), but it is illegal when the sales are accounted as if they were final.  Those were practices that the SEC (and some investors) suspected, and that meant that what looked like a turnaround in sales and profits was actually a fraudulent scheme.

Seeking flattery is never thought of as a good thing. What we now know is that it also triggers undermining, and for those who have real weaknesses – like a CEO engaged in fraud – that undermining can be very consequential.

Monday, January 9, 2017

Who Admires Martin Shkreli? How we respond to Controversies about Firms

Martin Shkreli is listed as an entrepreneur, hedge fund founder, and pharmaceutical executive. All of these are good things, at least to people who appreciate the formation of new ventures, financing of ventures, and work to improve healthcare. He has also been described as the “most hated man in America.” The trigger for this was when his company Turing Pharmaceuticals acquired the drug Daraprim, an essential drug for treating AIDS-related parasitic disease, and raised the price from USD 1,350 to USD 75,000 for a monthly course of treatment. Denouncements from individual doctors followed, then from associations, and finally the US congress and presidential candidates singled out Turing and Shkreli for critique.

High drug prices are not unusual in the US, however. The most recent top 10 list of drug prices I have seen posts two Hepatitis C treatments from Gilead Sciences at the very top, both above Daraprim. There are some differences that might explain this. First, Daraprim actually cost 13 times more in the US than in most other developed nations before the price increase, which increased the price by another 56 times. As a result, in the US patients pay 750 dollar for a pill that costs 1 dollar in Australia. Second, Daraprim is an old drug with no patent, so it could be made and sold generically – but Turing has distribution rights preventing that from happening. Gilead’s drugs are recently developed and under patent still.

But we should not make too complicated explanations of things that have simple reasons. In a recent paper in Administrative Science Quarterly, Sinziana Dorobantu, Witold Henisz, and Lite Nartey look at how society responds to controversies about firms, and they find very clear patterns. Moreover, they look at gold mining internationally, so their research is free of any specifics of the US and the pharmaceutical industry. Their explanation is simple and provocative: history and track record matter.

First, people form beliefs about firms based on how they have behaved in the past, and will lash out at firms with past misbehavior. Shkreli already had triggered a pricing controversy, so he definitely fit this pattern.  Second, the early statements from stakeholders set the tone for the rest, both because others often follow their assessment of an action as bad (or good), and because prominent stakeholders are imitated by others. Shkreli’s initial critics included Infectious Diseases Society of America, which is easily among the most prominent voices for this form of health care. Third, how people form beliefs about firms is largely a function of firm track records. Often a firm will have defenders who try to counter criticism, but friends are earned through actions. Martin Shkreli had no friends rising in defense, and no track record suggesting a reason for having any.

A true cynic might note that none of this matters, because getting 750 per pill is still a lot better than getting 13.50, or 1 dollar. But here the research by Dorobantu, Henisz, and Nartey shows that the cynic should be careful, because the stock market pays close attention to critics of the firm, and the firm loses value when it is under fire for misbehavior. In the case of Turing’s price increase, things went even further. Because drug pricing was getting legislative attention, the Nasdaq Biotech Index fell 4.4%, shrinking the value of an entire industry as a result of the actions of one company.

Friday, December 16, 2016

Lean in or Lean out? Unfair Treatment Stops Women’s Careers in Many Ways

We have by now learnt a lot about how women’s careers are held back by unfair evaluation and promotion procedures, and it gets worse at higher levels in the organization. The glass ceiling exists at some point before the executive suite, unless we are talking about the more symbolic executive offices that are seen as good women placeholders. Women know this too. A centerpiece in the discussion about women’s careers is the book “Lean in: Women, Work, and the Will to Lead” by Cheryl Sandberg, COO of Facebook, which offers career advice for women to get ahead. Many women took the recipe-like advice as a way to behave more like men, in order to the get ahead the way men do. Others asked whether title “the Will to Lead” and its focus on women’s behaviors was a way of blaming the victims of a system set up to make them fail.

It is fair to say that the discussion of that book is a sideshow for most women with careers. They care about the hiring and promotion decisions that they are exposed to, and they doubt that these are fair. That makes sense: why should they be any different from the others?  Chances are that they have been hit by unfair promotion criteria at some point in their career.

Now research by Raina Brands and Isabel Fernandez-Mateo in Administrative Science Quarterly has revealed a cruel twist on this story. In turns out that people adapt their behaviors to the fairness of the system they are in. If they are treated fairly, they will reach for opportunities. If they are given signals that they belong in a group, they seek to join it. And once you think about those two mechanisms, it is obvious what happens to women seeking executive positions. They are not treated fairly and felt to belong, and the rejections from positions that they (often) should have gained discourages them from reaching for new opportunities. After all, who plays a losing hand? Naturally this accumulates over time, because more experience means more rejections, so exactly the women best placed to become executives are most likely to think they cannot reach that level.

This is not just a story about women. Unfair treatment can hold back a group in the short run. In the longer run it creates discouragement and resentment, and the members of the group starts holding themselves back. They are leaning out of the unfair
system, looking for better places to work. The labor market gets split as they avoid the career paths with unfair treatment, and organizations need to fill their positions from an increasingly narrow and less talented pool of applicants. The firm that shows through its hiring that it has a problem with female, black, Muslim, and Hispanic job applicants will learn the long-term consequences of narrow hiring.

Sunday, December 4, 2016

Probing the Protests: Firms can learn to Avoid Activists

Often we see popular protests against firm initiatives. Recently the Standing Rock Sioux tribe and environmentalists organized protests against the planned Dakota Access Pipeline, which was scheduled to run through sacred grounds and across a river. The project has been suspended not because of protests, but because the Army Corps of Engineers blocked the measure needed for it to be legal. Could the construction backers have understood that the pipeline routing would lead to protests? In retrospect it seems obvious that an oil pipe through sacred land would be seen as a rough equivalent to an oil pipe through a church, and would lead to some anger. But the more general question is, can firms learn to avoid provoking activists?

It turns out there is research showing that such learning happens, at least for firms that are experienced with protests. An article in Administrative Science Quarterly by Lori Yue, Huggy Rao, and Paul Ingram studied the combination of two events: protests against Wal-Mart Inc. store development proposals and subsequent Target Corporation filing of store development proposals. This sounds complicated, but it is a really simple sequence. Walmart needs to file a proposal and have it approved in order to open a store (stores are big projects). After a proposal is filed, there can be protests against it (many dislike the idea of a nearby Walmart store), and Walmart can then decide whether to stop planning for the store. Walmart is known to file many proposals, and has a pattern of probing for places that are “protest-safe” by the seeing whether there is a protest or not.

But in our sequence, the next step is to see what Target does if there is a protest after Walmart’s filing. Here it gets interesting. For Target, it could be a simple rule to just avoid places with protests. In fact, they found that Target does avoid places with protests, but it was also learning in smarter ways. First, because Target knows that labor unions are uniformly unhappy with large low-price (and low-wage) department stores, it pays less attention to union-organized protests than to protests from other local groups. Second, it distinguished between protests that specifically paint Walmart as evil, versus those that are against any large store. Target is likely to enter when protests are specifically against Walmart, but to avoid places with protests against big stores. So, Target learns as much as possible from each protest.

And Target is even more sophisticated than what I just wrote. These learning patterns are what Target uses for locations that they are not familiar with, so they need to use protests to learn instead of relying on own local knowledge. If Target already has knowledge about a location, it ignores the protest and goes ahead with its own plans based on the commercial promise and its own assessment of risk.

Clearly, a corporation needs to be pretty unpopular (and to have unpopular peers) to become this good at learning from protests. And equally clearly, protests are not just temporary solutions, they are also signals that firms pay attention to and learn from. Protests have a deterrence effect, just as proposals have a probing goal.

Sunday, November 27, 2016

Kickstarting the Disadvantaged: Activism in Venture Funding

Research and news tell the same story: there is discrimination both in employment and in business. Women are few and far between among executives and founders of technology firms, and claims of bias are often made, especially in Silicon Valley. On the financing side, venture capital firms appear to disadvantage women in executive roles. #AirbnbWhileBlack is a hashtag collecting discussions of discrimination, and has led to Airbnb examining its processes for retaining hosts.

This looks like a problem for women seeking to start businesses, especially if those businesses are in industries with few women to begin with, like high technology. Even worse, the tendency to favor similar people to oneself – homophily – could make this even worse. Interestingly, a recent article in Administrative Science Quarterly by Jason Greenberg and Ethan Mollick has found a counter effect. The idea is that if a minority thinks that it is discriminated against, it will be especially supportive of its own members. It will not only favor its own, as all groups do, but it will do so in an activist way. If this happens, being recognized as a disadvantaged minority – like women in technology – will lead to better treatment, at least from members of the same minority.

Does it happen? It is not clear whether this is always true, but one good place to look is in crowdfunding, where ventures and their founders are presented to a “crowd” of any interested funder, and they in turn decide what ventures to back. And indeed, women Greenberg and Mollick found that women targeted women’s ventures for funding, and did so especially for industries were women are known to be scarce. So, women especially supported other women not in fashion or publishing, where women are frequent business founders, but in technology, where they are scarce.

This is clearly not a reason to think that discrimination will balance out. Crowdfunding is the form of funding where this type of activist support is most effective, but most venture funding is not done through crowds – and we already know that venture capital firms, for example, have mostly male executives. Also, activist funding does not have large effects when there are few women funders to begin with. So, we can conclude that this provides some relief, but it is a less fair solution than simply evaluating ventures on their merit.

Sunday, November 20, 2016

Getting the Orange out of My Head: How Respect can set Inmates Free

Organizations can have very different work environments, including differences in the respect they give to employees. Organizational cultures differ, and managers differ, in whether they see employees and valuable and how well they acknowledge this. Many organizations think that it makes a difference – notice how I used the word “employee” just now, but actually words like “colleague” and “team member” are frequent in actual work. Does this matter?

For an example of how much this can matter – in a very special context – a recent paper in Administrative Science Quarterly by Kristie Rogers, Kevin Corley, and Blake Ashforth looked at an organization that operates professional call centers as part-time work for selected inmates in prisons. Every day inmates go to work in their orange jump suits (yes, just like in the TV series). Every day they go back to the prison wing after working. But this work is not like the demeaning chain gangs that we see in some old movies; the organization (Televerde) values its inmate workers and gives them both encouragement and respect.

So what happens? The respect they get from their Televerde managers, and from customers, changes lives. They get a specialized respect based on the value of the work they do, and their performance, and this gives excitement and self-respect. They get general respect from being seen as real people with lives and accomplishments, not inmates with orange jumpsuits and numbers, and this gives ideas of a changed and improved life. Together, these two kinds of respect, and especially the general one, puts the inmate-workers on a path toward removing themselves from their identities as current and future inmates, and attaching themselves to a new identity as a professional doing legal and respected work out of prison.

It happens impressively fast. These changes were easy to see over a period of less than a year (for most it was much faster), even though the Televerde workers were still in the prison wing, with their old friends and controlling prison wardens, every day after work. As part of the identity journey, they needed to transition from their old thinking habits – the orange in their heads – to a new way of seeing themselves as part of a regular civil society that they could not yet reach because it was outside the prison walls. Remarkably, they were able to not just see their inmate identity and their worker identity as separate beings coexisting in their minds, they also could shift to a new and holistic identity that would guide their lives after they were released from prison.

Giving workers respect is seen as important also in regular organizations, with no inmate workers, but there is a certain degree of cynicism about its effect, and there are also managers who don’t think it matters. After seeing how transformative it can be under these conditions, when it is done honestly, maybe it is time to reconsider.

Monday, November 14, 2016

What If Everyone Learns From Others? Finding Fool’s Gold

So the US election ended with a Trump win and wild swings in the stock markets. The Dow Jones fell from 18,200 to 17,900. Then, less than a week after, stock prices rushed back up and passed 18,800. What happened? Let’s start with the simple observation that we were observing stock sales and buys by investors, who sell and buy for profit, and who have a lot of experience selling and buying. These wild movements were not a result of ignorance, and not a result of playfulness either. Investors chasing value drove prices down and back up, and lost and gained money. And, this was not a unique event, we are familiar with dramatic price changes as the market responds to uncertainty.

What drove these events was in fact a fundamental process that has been studied long, and we can go back to a paper by Hayagreeva Rao, Gerald Davis, and myself in Administrative Science Quarterly in 2001 to learn about it. People making decisions under uncertainty try to learn ways to reduce uncertainty. When they are looking for value, one way is to learn from others. After all, if we see someone moving toward one option, or away from it, their decisiveness could indicate that they know something that we don’t know. But people can be decisive for many reasons. They may have correct knowledge. They may have incorrect knowledge. They may be impatient. But learning from others can be very tricky when those others act on incorrect knowledge or impatience. This was known before our study.

What we found went one step further. Learning from others is especially tricky when those others learn from others. In that case, it is enough for some people to make decisions without correct knowledge. Others do the same learning from them, and then others do the same learning from those who learnt from them. And so on. See how this can make stock markets plunge, with very little basis in fact? Or increase? In fact, our research was based on stock market actors – not investors, but stock analysts. They want to cover firms that are good but overlooked, because analysts are most useful for investors if they give scarce information on valuable opportunities. But we found that when analysts were chasing valuable firms, they were in fact only chasing other analysts. And the later they were in learning from others, the less valuable were the firms they found.

This is a problem that extends much further than stock markets, though it is easier to  prove there than elsewhere. Learning from others is a good strategy as long as it is not over-used. But, those who learn from others typically don’t stop using that strategy soon enough, so at some point it becomes costly. Again and again we see people, and firms, chasing fool’s gold: opportunities that looked good to the first who entered, but only because of incorrect information.