Author's Blog

“The Mess at UBS”: Subprime Losses and the Halo Effect

       Swiss banking giant UBS is getting plenty of attention from the press – and most of it for the wrong reasons — following a $18.4 billion write-off from subprime mortgage securities   In its March 3 issue, Business Week ran a feature story titled “Behind the Mess at UBS.”  According to BW, the worst may not be over – future write-downs are likely.  More grim news may be ahead.

 

       So it was not surprising that Swiss Radio contacted me last week to speak about UBS and its performance.  The interviewer’s first question was about the general tendency for high performers to falter in subsequent periods – were UBS’s losses one more example of how yesterday’s heroes become tomorrow’s bums?  Was this proof that UBS had feet of clay after all? 

Meg Whitman and the "Skype hype"

      In a recent issue of The Economist, eBay CEO Meg Whitman is taken to task for the recent $1.4 “impairment write-down” related to the acquisition of Skype.  Just two years after forking over the massive sum of $2.6 billion to buy the internet phone company, eBay has written off more than half the sum. 

      But The Economist doesn’t stop there.  It quotes Ms. Whitman’s own lessons of good business judgment:  first, to pay attention to details;  second, in the world of the internet, to bid early, boldly and pre-emptively high;  and third, that “the price of inaction is far greater than the cost of a mistake.”  Good in theory, perhaps, but together they led eBay to make a blunder with Skype – bidding early, boldly, but it turns out, excessively, to the tune of $1.4 billion.  Quite a price to pay for slavishly following principles.

Three dreaded words: "Research shows that ..."

I'm just back from the meetings of the CIPD -- the Chartered Institute of Personnel Development -- the UK's largest HR conference.  People Management, a leading HR publication, summarized events with a daily edition, and the one I picked up yesterday, Sept 20, had some interesting reading.

    

      One article was titled “Engaged staff vital for performance.”  In it, Jane Hanson, HR director at First Direct, a hugely successful internet bank, was quoted as saying she "believed that staff engagement was the key factor in the recent success of the bank, which has seen profits grow by 30 percent in five years.”  Ms. Hanson noted, however, that the factors which were most important for engagement were sometimes surprising:  “Research showed that what mattered most to our people was such things as having fun at work, making good friendships, our brand identity, and the way we support families.”

    

      Ah, those three dreaded words:  “Research shows that…”   Invoking these words conveys credibility – after all, we did some research and you didn’t, so we must know what we're talking about.  But unless we’re talking about good research – well designed, with solid data, and appropriate inferences drawn from the data – we may be kidding ourselves.

A Little Clarity about Corporate Social Responsibility

The Sept 8-14 issue of The Economist runs an article, "In search of the good company," about Corporate Social Responsibility (CSR).  It mentions a new book by Robert Reich, former labor secretary under Bill Clinton, who apparently has done a 180-degree turn about CSR -- he used to urge companies to pursue socially responsible actions, but now believes that expecting companies to do so is not only futile, but diverts attention from the responsibility of the government to attend to social issues. 

In The Halo Effect, I show how the conventional wisdom -- that CSR leads to profitability -- is poorly done and inconclusive.  First, it is easy to attribute enlightened management to companies that are performing well -- that's an example of the halo effect.  But even if we conduct a longitudinal study and look

Top Brands -- Nice Headline, Doubtful Logic

I took part of the summer off -- but now it's back to work, and back to blogging.  One item in my mailbox that deserves note is the August 6 issue of Business Week, with its annual ranking of Top Brands.  BW usually presents this article with a big splash on its cover  -- but this year the story is found midway in the issue, beginning on p.56, while the cover is given over to a story about "The Pet Economy" and features a rather imposing bulldog.  Maybe BW is losing a bit of confidence in the way it evaluates brands?  That would be a step in the right direction, as its approach appears to be flawed.

Once again, BW has worked with a company called Interbrand to identify and rank the Best Global Brands.  The top five include Coca-Cola, Microsoft, IBM, GE, and Nokia, and are followed by Toyota, Intel, McDonald's, Disney, and Mercedes.  These are well-known companies with strong images, which is what brand is all about, no?  Who could argue with a list like this?

"The Four Principles of Enduring Success"? Not Very Likely!

The July-August 2007 issue of Harvard Business Review has a lead article titled “The Four Principles of Enduring Success” by Christian Stalder of Innsbruck University.  It's the latest effort by business researchers to identify the principles of high performance in business, and it's worthy of examination on a website that is interested in clear thinking about business performance. 

    

First, a personal note.  I met Mr. Stalder at the meetings of the Strategic Management Society last autumn in Vienna, where he heard me discuss some of the themes in The Halo Effect.  He is a smart and well-intentioned man.  Recently, Mr. Stalder kindly sent me a link about the article, and since then we have corresponded about the methodology he used in his study.  In addition to the HBR article, there is expected to be a book coming out in the future.  So perhaps there is a way for my comments, below, to sharpen the study and improve the validity of its claims.

Some Common Questions from the Audience

While I've been away for much of the last month -- which explains the silence on the blog scene for a while -- I've had the chance to make several presentations to groups of managers.  The good news is that the ideas in The Halo Effect are very well received.  It is also interesting to see the sorts of questions and comments I get.  A few questions have come up in more than a few settings, so I'll list them here, with the sort of answers I give.

Question:  Many of the books you criticize have gathered extensive historical data.  Are you saying we can’t learn from experience?

    

Answer:  Not at all – it’s very important to learn from experience, but we have to be sure to learn the right lessons!  We can only draw solid lessons if we base our analysis on valid data, not data that are biased or prone to the halo effect.  The problem in so many studies that claim to look at the experience of other firms is that the data they rely on are from sources strongly shaped by performance. 

Replies from Peters and Porras, but no comment from Collins

The Reuters article by Helen Chernikoff, published on June 7, is to my knowledge the first time that a reporter contacted for comment the authors of some of these books I critique.  It’s most interesting to see the replies!

    

Here’s what Ms. Chernikoff wrote:

     “Peters, one of the authors of In Search of Excellence, said that while his book does contain a list of recommendations, ‘It is not prescriptive in the sense that it says if you do this, you alone will have a great company.’

     “Porras, who said he has read part of The Halo Effect, notes that Built to Last explicitly warns readers against drawing conclusions about cause and effect from its examples.

     “Collins declined to comment on The Halo Effect.”

As for Tom Peters’s reply, readers of my book will know that I am fairly charitable about In Search of Excellence.  For all the

So, Professor, what about Toyota?

On my recent trip to India, I presented the key ideas in The Halo Effect at a gathering of business people.  Among the points I discussed is what I call the Delusion of Lasting Success – the mistaken notion that companies can, by following a set of steps, achieve long-term high performance.  That was, of course, the main idea behind Collins and Porras’s Built to Last – where they made the claim that there exists a blueprint for lasting performance. 

In fact, such a blueprint only appears when one makes mistakes of research design (selecting companies that have been successful for many years) and then makes mistakes of data (gathering data that are tainted by the halo effect.)  The result is a mistaken claim that what has been observed led to that performance; in fact, the causality is backwards – companies selected for lasting success tend to be described according to a common set of principles.  The facts are rather different: extreme performance in one period is regularly, and almost inevitably, followed by less extreme performance in a next period, a phenomenon known as regression toward the mean.

Taking the Right Lessons from DaimlerChrysler

Now that the DaimlerChrysler saga has ended with a whimper – Daimler paying $678 million for Cerberus Capital Management to take Chrysler off its hands – the critics have had been quick to lay blame.  Analysts and journalists tell us that the $36 billion deal to buy Chrysler was a mistake from the start.  It was a blunder, a misadventure based on miscalculation and arrogance.  How could a German luxury car maker imagine it could make a success out of Chrysler, a Detroit-based company that turned out cars and trucks?  What could Daimler’s executives possibly have been thinking? 

Such post-mortems are pure Orwellian revisionism, a re-writing of history to make events appear sensible and coherent.  In fact the truth was more complex.