Tag Archives: BP

Goldman Sachs and the Need for Hangings in the Village Square

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Are public hangings an essential feature of capitalism? Or, can we trust in principle based morality?

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This is not a trivial question. The child like and pseudo religious belief that the free market will, by itself, right all wrongs in time, a belief adhered to by Alan Greenspan and other groupies of Ayn Rand, is at the heart of our financial crisis and the crisis of capitalism. This Greek tragedy was played out at Enron, Lehman Brothers, and now Goldman and BP. It is the failed reliance on “rational self-interest” as a moral code.

The question is whether corporate executives are capable of adhering to principled behavior, behavior that supports a good other than their own, in the absence of punishment of significant severity to balance out the significance of potential rewards for unprincipled behavior.

Extreme rewards cause the mind’s eye to be severely out of focus and nothing serves as well to focus the mind as the anticipation of hanging in the village square at sunrise. So it appears that we must periodically publicly execute an executive to assist us to become principled. It would be nice if they didn’t make themselves such convenient and obvious targets.

I have been in the corporate world long enough to know two things: most executives are principled and do seek to adhere to fundamental values; and, there are companies and there are subcultures in which the value of “winning” as defined by financial performance alone, completely overwhelms any other morality.

On June 10th Goldman Sachs stock hit a one year low after another report of legal problems. This time the SEC is investigating a mortgage investment Goldman bundled and sold in 2006. They were already investigating possible fraud involved with an investment Goldman created called Abacus, a CDO, that was allegedly set up to enable Paulson & Co. to take short positions against this basket of what they believed to be distressed mortgage securities, while at the same time marketing this to their customers.

Goldman Sachs CEO Lloyd Blankfein

This was obviously not set up on the Deming philosophy of “delighting” your customers. If you are selling something you have created to your customers while at the same time betting against it, you are shafting your customers and you are, therefore, not trustworthy. The morality of this is simple.

What proves to me, beyond a reasonable doubt, that Goldman has not learned the lessons of principle centered leadership is not the above charges. It is the pathetic game being played with a Congressional Commission investigating Goldman’s dealings.This week the Wall Street Journal reported that…

A commission probing the financial crisis denounced Goldman Sachs Group Inc., saying the firm first dragged its feet over requests for information then dumped hundreds of millions of pages of documents on the panel.

This is an old and tired lawyer’s trick: You want documents? OK, here is a truckload of documents. See what you can find! And the investigators are so overwhelmed with irrelevant documents that they never find what they are looking for. As the police tell young thieves everyday, “If your not guilty, why are you running away and making yourself look guilty?” The Goldman legal team is either tacitly admitting guilt or is too dumb to know what “guilty” looks like.

The virtual collapse of every major Wall Street financial firm was not sufficient to awaken the spirit of moral conduct or the sensibility of moderation. The intervention of the government, required to prevent the collapse of the entire financial system, allowed many of these executives to obfuscate their own participation in the events that led up to that disaster and caused their minds eye to be blurred to consequences of their own behavior.

Before I was a parent, and a student of behavior modification and the power of positive reinforcement, I was convinced that I could raise my children without ever resorting to the “old way” of punishment for bad behavior. Nothing humbles one as well as parenting. I did resort to punishment, sparingly, as I realized that even the most superior children (my own!) occasionally needed to experience the pain associated with misconduct. But, you hope that as one matures, the intellect takes over, and the ability to adhere to moral principles, religious or otherwise, will be sufficient to keep behavior within acceptable control limits.

But, I fear that the more one is paid into the millions, the more one develops a childlike need to test the limits of the environment, to exceed the bounds of what is obviously “right conduct” until one once again one must contemplate the significance of a well constructed scaffold erected in the village square.

Lean Politics: Give Up Ideological Waste

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The environmental disaster in the Gulf of Mexico is in part the result of political/ideological waste. Lean management focuses on the elimination of waste from manufacturing and other processes. Lean managers develop a keen sense for what adds value and everything else is waste.

I normally do not comment on politics in this blog, but in this instance I must. Our politics have been dominated by the left/right, big government/little government, politics and debate. Most of this debate is an entire waste! It is adolescent nonsense that belongs, and will end up, in the historical trash bin!

Maria Bartiromo’s (CNBC) Logic:

This debate has made us crazy. On Friday I was watching Maria Bartiromo on CNBC. The DOW was dropping more than 300 points because the jobs report had revealed a lower than expected rate of private sector job creation. She commented that the low rate of private sector job creation proved that government policies were failing. So, the failure of the private sector to create jobs is, in the mind of this free enterprise advocate, the fault of government to do more to create private sector jobs. This despite hundreds of billions of tax dollars spent to save the private sector banking institutions, saving GM and all its suppliers, and lowering taxes on small businesses. Why isn’t creating private sector jobs the responsibility of the private sector?

Somehow the failure of BP to stop the leak from their own well becomes the burden of the President who knows nothing about oil exploration or production and can’t possibly know how to stop the leak. We blame the government for the failure of the private sector to operate in a safe manner while at the same time arguing for less government regulation and control.Every conservative politician on the Gulf Coast is now arguing for the Federal Government to do more to rescue their beaches and business, not to do less. The libertarians would argue for virtually no regulation and letting the free market sort it all out. How many Gulf disasters would it take for consumers to put BP out of business or force their stock holders to give up their dividends?

There is some mass schizophrenia when it comes to the role of government and the private sector. This madness is a complete waste of resources and is itself responsible for many of our problems. It is past time to get beyond this madness.

Both the BP disaster and the collapse of the banking system have proven the need for effective government regulation – not more or less – better. Not waste, but value-adding actions. I have no doubt that we did not need more inspectors or more money spent at the Minerals Management Service that regulates the safety of offshore oil drilling. But, we did need regulators who were focused on serving the public good, not serving those who may violate safety and put the public at risk, as was BPs practice! Why didn’t the government do its job in administering justice to a serial criminal whose behavior has been well known and widely reported? In recent years BP killed thirty workers in its operations before the Deepwater Horizon explosion killed eleven:  From ABC News…

BP’s safety violations far outstrip its fellow oil companies. According to the Center for Public Integrity, in the last three years, BP refineries in Ohio and Texas have accounted for 97 percent of the “egregious, willful” violations handed out by the Occupational Safety and Health Administration (OSHA). The violations are determined when an employer demonstrated either an “intentional disregard for the requirements of the [law], or showed plain indifference to employee safety and health.” OSHA statistics show BP ran up 760 “egregious, willful” safety violations, while Sunoco and Conoco-Phillips each had eight, Citgo had two and Exxon had one comparable citation.

Can anyone seriously argue that we do not need government regulation of the oil industry’s environmental and safety practices? Can anyone seriously argue that we do not need regulation to prevent excessive risk and transparency in the banking industry? Or, effective pharmaceutical regulation, food labeling, traffic laws, or a national defense?

What we need is effective government action, not too much of it, not too little of it, but effectiveness. Of course, we would all like to pay as few taxes as possible. Of course, we do not want government bureaucracy inhibiting business formation or innovation. Of course, we all want small government. But, we want a government that utilizes its resources well; that does its job in the most effective manner with the least wasted resources.

In the corporate world we do not argue whether we should have management or not. We do not argue whether we should have accounting or not. We accept the need for “governance”. But, we know that management and accounting can be efficient or wasteful. Why can’t we focus our political debate on creating effectiveness of government, not whether government is good or bad? Ronald Reagan famously said that “Government is not the solution. Government is the problem!” It was one of those incredibly simplistic comments that created a demon one group could rally around. Demonizing has been a favorite tool of politics and demagogues since the beginning of time. Government is not the demon. Poor government, ineffective government, wasteful government, is the problem. The opposite is the solution.

It is time to get beyond the adolescent ideological nonsense of “government good”, “government bad.” The entire discussion is cultural waste. Let’s get lean and eliminate it and focus on what is important… the effective enforcement of practical regulations that protect the public safety, while encouraging business creation and innovation. Effective rules and referees do not destroy, but enable, great competition in sports. This should be the goal of every politician. As citizens, it is this that we should be demanding from our politicians and from our political discourse.

Larry Miller

www.lmmiller.com

Decision Making Chaos on the Deepwater Horizon

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I have long been an advocate for team decision-making, but more importantly, for decision-making appropriate to the situation. It appears clear now that the Deepwater Horizon, the Transocean drilling rig under contract with BP, suffered from poorly designed decision processes.

The Wall Street Journal reported recently that

“The chain of command broke down at times during the crisis, according to many crew members. They report that there was disarray on the bridge and pandemonium in the lifeboat area, where some people jumped overboard and others called for boats to be launched only partially filled.

The vessel’s written safety procedures appear to have made it difficult to respond swiftly to a disaster that escalated at the speed of the events on April 20. For example, the guidelines require that a rig worker attempting to contain a gas emergency had to call two senior rig officials before deciding what to do. One of them was in the shower during the critical minutes, according to several crew members.”

An important consideration when establishing team decision-making processes is to clarify which decisions should be command, which consultative, and which should be consensus decisions.

Acknowledging the legitimacy and critical need for effective command decision making is the only way to gain an acceptance for the situational appropriateness of consultative and consensus decisions. In any environment in which there is a potential for crisis it is essential that there is a well defined and well rehearsed command decision process. It is insane that a rig worker attempting to contain a gas emergency would have to call two senior rig officials before deciding what to do. That is the equivalent of a marine on the ground in a combat zone coming under fire and having to go two levels above to get instructions to take action. That is a certain way to get your marines killed and lose a war. It was a certain way to get eleven rig workers killed, also.

Soldiers on the ground are trained to take action, to take initiative, to improvise, and are drilled in those actions that require instantaneous responses. Bureaucratic control is not the same as effective command. In a crisis it must be assumed that the means of communication are incapacitated, that individual leaders have been cut off from the action on the ground. Those who can and must act must know that they are expected to take initiative and they must be trained in the appropriate responses.

You can use consultative and consensus decision making to arrive at the best procedures… long before the crisis. In the crisis, everyone must know who in command, who can take action, and what action must be taken immediately. This is a good time for every organization to study this negative case and use it as an opportunity to review your own crisis management procedures.