InReview – Issue 70

Denial: Why Business Leaders Fail to Look Facts in the Face — and What to Do About It by Richard S. Tedlow. New York: The Penguin Group, 2010. viii, 261 pp.

Richard Tedlow is the Class of 1949 Professor of Business Administration at Harvard Business School. Two of his previous books have been selected by BusinessWeek as a top 10 business book of the year, including Andy Grove (2006) and Giants of Enterprise (2001).

Tedlow provides a series of historical vignettes from companies large and small through a common powerful lens: What happens when leaders knowingly deny the truth or unwaveringly commit to seek out and respond to the truth? He recognizes that companies can fail for unavoidable reasons, or for reasons other than denial when failure is avoidable (e.g., incompetence), but his focus is on leaders who know the truth and in a variety of ways choose to ignore it.

Some respond well when confronted with difficult data (Johnson and Johnson, Intel), some falter badly (IBM, Ford), some never recover (Sears, Firestone), and some simply disappeared (A&P, while still in business in a regional area, was acquired in 1979). I found it hard to believe that in 1950, A&P was the Wal*Mart of its era, the No. 3 corporation in the U.S. It is now a bit player in the high-volume, low-cost market it invented.

The concluding chapter brings home valuable summary points. One is the recognition that while denial may come at a crisis point, the seeds of denial were generally sown in the culture of the organization many years before. In some of his cases, there was no crisis point at all. “The A&P was not destroyed by fire. It rusted,” he writes (p. 77).

Listening is a key point, as is listening to contrary voices. In the glory days of General Motors, Tedlow writes, Alfred Sloan said to his staff, “’Gentlemen, I take it we are all in complete agreement on the subject here.’ Heads nodded. Sloan continued, ‘We postpone further discussion of this matter until our next meeting, to give ourselves time to develop disagreement and perhaps gain some understanding of what the decision is all about,’” p. 209.

A sign that a company has stopped listening? He adds, “Sears … did what Coca-Cola did … when they became idea-free zones. They build big buildings.”

The case studies are painful, insightful, well written, and laced with insight and humor. Every business leader should read this book. And because denial works at every level of a business, in any organization, even in a family, everyone should read this book. I highly recommend it.

Reviewed by Al Erisman

◊ ◊ ◊ ◊ ◊

The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care by T.R. Reid. New York: Penguin Press, 2009. 278 pp.

T.R. Reid is a longtime correspondent for The Washington Post, and its former bureau chief in Tokyo and London. He is also a commentator for National Public Radio, and has written several books.

Reid became interested in health care systems for a very personal reason. The diagnosis and proposed procedure to repair an aching shoulder sounded expensive and painful with an uncertain outcome. So over the next year, he was examined in 10 languages at health care facilities around the world, with the help of a grant.

At each stop, he had his shoulder examined and a treatment (or no treatment) recommended. He also took the time to examine the foundations of health care in the individual countries he visited and to compare these systems with the American system. The book is a documentation of that journey.

The primary areas where he focused in the book are France, Germany, Japan, the United Kingdom, Canada, and India, but there are references to other stops he made. Here are some of the conclusions from his study:

  • Other health care systems in the world are not the same, but are rooted in what the values of the people of that country.
  • Except for the U.S., health care systems in the developed world provided access to health care for all.
  • Many in the U.S. label health care for all as “socialized medicine,” but Reid found the German system, for example, far less socialized than the American system.
  • Only in the U.S. can a person die for lack of access to health care, or go into bankruptcy seeking health care solutions.
  • The U.S. prides itself in having the best health care in the world, but the data does not support that conclusion when measure by outcomes (longevity, infant deaths, quality of life).

Reid is able to tell this story with enough human interest to smooth the intake of a great deal of statistical data and research results. He is often confronted with the cost argument (“we just can’t afford such a system”). So he provides the data to show that the U.S. spends far more per person on health care than any other country in the world in spite of the fact that many don’t have access and the outcomes are not at the top consistent with the expenditures.

His big conclusion is that this is a moral question more and needs to be handled as such. Further, because such systems are rooted in the values of the country, it would not be possible to simply transplant another system to America. But he recommends that we learn from the other systems as we put our own together.

I read this during the health care debates in this country earlier in the year and was disappointed that few seemed to look honestly at the data, or considered the issue from a moral viewpoint. Anyone with a strong opinion about the U.S. health care system should read this book and consider that facts beyond the emotion. I highly recommend this book.

Reviewed by Al Erisman

◊ ◊ ◊ ◊ ◊

The Big Short: Inside the Doomsday Machine by Micheal Lewis. New York: W.W. Norton Company, 2010. xviii, 266 pp.

Michael Lewis is the author of 14 books, starting with Liar’s Poker in 1989.

Others have taken on the task of writing a timeline of events as the global economic crisis unfolded. This one is more personal in the motivations behind the transactions, from selling subprime mortgages to creating and selling CDOs. It is also more technical, and darker than other accounts I have read.

The personal nature of the story starts with Lewis’s own experience:

“The willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grown-ups remains a mystery to me to this day. I was twenty-four years old with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall,” p. 1.

The remainder of the book includes quirky, poignant, and embarrassing stories about Wall Street leaders.

It also includes detailed descriptions of the synthetic CDOs that for some reason were rated AAA. In the midst of his explanation he inserts this interesting footnote:

“Dear Reader: If you have followed the story this far, you deserve not only a gold star but an answer to a complicated question,” p. 77.

Lewis devotes a significant amount of analysis to describing why the risk models used to justify and rate the various products were totally wrong. They were based on the history of mortgages that had nothing in common with the types of mortgages now being packaged and sold.

Mostly, however, the book is dark. Usually when we think of exploitive business leaders, we think of people who are seemingly unaware of those who get hurt by their actions, and most authors have described the financial crisis in this way.

But Lewis says lenders knew of the plight of their borrowers, and didn’t care. “In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $724,000,” p. 97. This is in the chapter titled “How to Harvest a Migrant Worker.”

Many of the borrowers were no better. A nurse (who worked for Eisman), along with her sister, bought one townhome after another, leveraging each one from the equity growth of the previous one. They owned six before the market crashed and they lost everything.

The Wall Street leaders had no regard for the rating agencies: “ ‘Guys who can’t get a job on Wall Street get a job at Moody’s,’ as one Goldman Sachs trader-turned-hedge fund manager put it,” p. 98. And they had no regard for their trading partners or the law: “’The more we looked at what a CDO really was, the more we [realized], that’s fraud. Maybe you can’t prove it in a court of law. But it’s fraud.’ It was also a stunning opportunity,” p. 129.

I admit I was depressed after reading this book. The characterization of ruthless bankers, mortgage institutions, and borrowers describe a world gone mad. But then I remembered other books of Michael Lewis: Next and A New, New Thing. In both cases, dramatic tales of excess were presented as if they were normative, when in fact they were simply dramatic tales of excess. Perhaps, in part, that is what is going on here. Maybe all of Wall Street should not be painted with such a broad brush. I personally know some exceptions. But how many?

This piece of the truth is disturbing indeed, and suggests that mere financial reform through legislation is not enough. This is painful to read, but important.

Reviewed by Al Erisman

◊ ◊ ◊ ◊ ◊

The End of Wall Street by Roger Lowenstein. New York: The Penguin Press, 2010. xxv, 339 pp.

Roger Lowenstein is a contributing writer for The New York Times Magazine, a columnist for Bloomberg, and a former writer for The Wall Street Journal for more than a decade. This is his fourth book.

Few in the world are immune to the effects of the global economic crisis. Understanding the causes is important both for recovery and for safeguarding the future economic systems in our globally interconnected world. Roger Lowenstein takes on the task of explaining the forces that got us to this point, starting with early warning signals, through the subprime mortgage lending practices, the creation of collateralized debt obligations, and the apparent loss of purpose by so many financial institutions.

Many discussions I have read on this subject want to point the finger for the problem at the left (the desire to see home ownership extended to everyone, even those who can’t afford it; it’s all President Obama’s fault) or at the right (the greedy bankers who exploited those receiving loans and investors seeking a higher return by investing in very complex derivatives; it’s all President Bush’s fault). Lowenstein, to his credit, addresses fault on all sides. He offers insight through a readable, carefully nuanced account.

He also shows how information technology has contributed to the problem by creating complex instruments that neither the people who create and sell them, nor the people who buy them, can fully understand. And risk was just not understood. He said,

“What truly failed was the postindustrial model of capitalism. The market’s tools for measuring risk simply did not work,” p. 287.

Another strength of this book is its thoughtful conclusion. The author’s constructive suggestions would make great discussions for groups of people who see the issues in decidedly different terms. One of my favorite quotes in the book comes near the end:

“The proper end of Wall Street is to oil the nation’s business; it became, in the bubble era, a goal in itself, a machine wired to inhuman perfection,” p. 297.

My only disappointment is that he didn’t discuss the political viability of some of his proposals, and I fear this will be their downfall.

For those who have read other books on the subject (I have previously reviewed The Subprime Solution, Too Big To Fail, and have another review in this issue of The Big Short) you will find some redundancy as similar key issues are unpacked. But this one would be a great place to start for someone without that background, and a worthwhile supplement to any other perspective. I highly recommend this book.

Reviewed by Al Erisman