Schachter Blog - To Ethics and Beyond

Trickle Down Economics

2010-11-21T16:14:00.000-08:00

In my last blog, I mentioned the book “Aftershock - The Next Economy and America’s Future” by Robert Reich [Reviewed in NYT], in which he quoted some statistics revealing how income distribution was becoming more heavily weighted in favour of the top 1% of earners. The consequences are significant – as manifested by the widespread anger over the multi-million dollar salaries and bonuses bestowed on many people who are perceived to be the perpetrators of the economic meltdown. Despite my comments in a previous blog advocating talking about books one hasn’t read, I have read most of Aftershock (it is short).

The Causes of the Meltdown

According to Reich, the root cause of the 2007-9 economic meltdown is simply stated: the majority of the consumers do not earn sufficient money to consume what the economy is capable of producing. Producers cannot sell their goods and therefore must lay off employees who become even less able to consume. This creates a downward spiral in the economy.

The majority of consumers in number and buying power are lower to middle income earners. Their real income has deteriorated over the past 30 years and far too much income has been appropriated by the top few % of earners.

This is a serious problem which has already dramatically affected most if not all of us and can only be solved by major political and economic changes. The effects include the erosion of savings, lack of opportunities for our children professionally and otherwise, unemployment, education costs, downward pressure on spending for infrastructure, education and medical care, etc.

In US (similar to Canada), the average lower-middle earners’ income has not increased for approximately 30 years (adjusted for inflation). People have used 3 means to “improve” their material living standards – more women have joined the workforce, people work more hours and families have borrowed to provide for their spending. In the long run, none of these are permanent solutions, at best they are temporary stop-gaps. By the end of 2007, many people had maximized their lines of credit and exceeded their ability even to pay interest on their credit cards and mortgages, let along paying off debt or saving for the future. This triggered the sub-prime mortgage mess.

Don’t Blame the Banks

According to Reich, blaming the banks for granting easy credit and the monetization of sub-prime mortgages as the problem (as egregious as such behaviour may be) ignores the real issue - that the wealthy have appropriated the discretionary income and simply don’t have the time or inclination to spend the money.

Having already acquired much of their material desires including their second homes and recreational properties, their yachts and sports cars and other toys, etc., they still have a lot of money and want to invest it. Because the investment opportunities are limited, this gives rise to speculation; investors accept higher risks for lower returns. That creates the second problem – the resulting speculative bubble which also in time must burst.

The Wealthy Must Pay Attention

Reich’s concludes that the wealthy and powerful had better start paying attention. It is in their best interests to level the playing field to some degree. In the golden years from 1946 –75, the top 1% of the income earners got about 9% of the income; in 2007, the top 1% got 23% of the income. If the top income earners continue to bleed off such a large percentage of the income (without needing it for current expenses or savings for future needs), therefore depriving the middle and lower earners of income they actually do need for current expenses, this may well lead to social unrest, even revolt. This would certainly not be good for the rich. Just look at what happened to Marie Antoinette (of - Let them eat cake fame).

Fix It With More Progressive Taxes?

There are those, primarily the upper income group, who will argue that taxing upper income earners reduces incentive [there is little evidence in support of this] and that they are few in number that even if you were to reduce taxes on the lower-middle income earners, this will produce very little benefits. Reich. always a pragmatist, argues that because the amount of wealth now diverted to the upper income earners is so vast, re-allocating it to those who will use it for consumption will have a major beneficial effect. Additionally, the re-allocation will diminish the demoralizing deprivation of hope and opportunity experienced by the middle class.

The Great Prosperity – 1947-1975 – and the Bargain

Reich also discusses why the income distribution was much fairer from the end of WWII until about 1975. He calls that period of time the “Great Prosperity”. It followed in the footsteps of the sacrifices of WWII at which time there was a general feeling that everyone was pulling together. Despite the McCarthy Era anti-communist craze, during the Great Prosperity the government in the US was very active in enforcing “the basis societal bargain – using Keynesian policy to achieve nearly full employment, giving ordinary workers more bargaining power, providing social insurance, and expanding public investment.” (page 49)

Why was the bargain abandoned? Reich attributes the first “cause” as the loss of high paying jobs to low paying jobs due to globalization and automation. He then points out that not only did the government fail to enforce the bargain but actually did the opposite from about 1975 onwards. It “deregulated and privatized. It increased the cost of public higher education, reduced job training, cut public transportation, allowed bridges, ports, and highways to corrode. It shredded safety nets – reducing aid to jobless families with children, and restricting those eligible for unemployment insurance…”. (Page 55) Yet at the same time it reduced taxes on the topmost 1.5% of earners and capital gains taxes and boosted sales and payroll taxes.

There are many reasons suggested for this movement to deregulation and lower taxes on the rich. We have heard them all. from the libertarians to the trickle down economists. However, Reich identifies the real reason as the concentration of income, wealth and power in fewer and fewer hands – an echo from Mariner Eccles, head of the Federal Reserve Board in the mid-1930’s. This elite group protects their wealth and power, both as insiders in government (elected politicians and trusted advisors), and as lobbyists.

Coping with Real Income Decline

As the plight of the middle and lower income earners deteriorated, Reich points out that they coped using the 3 mechanisms mentioned above. They coped rather than revolting because they still held sacred their confidence and belief in the American Dream - the “rags to riches” myth - and a further belief that if you did not succeed, you were at fault rather than the cards being stacked against you. As people become disenfranchised and lose faith, and find their lives have changed for the worse despite their hard work and efforts and their kids have no opportunities because the public school system has been destroyed by under-funding and university has become unaffordable, they will begin looking for scapegoats.

Fundamental Values

Unfortunately, Reich does not question the fundamental values of a society which permits such gross distortions. For example, what are the values of a society that condones paying a school teacher $75,000 per year while bestowing $700,000,000 on the head of a failing merchant bank, or $100,000,000 on a hedge fund manager; or a company which pays a line worker $50,000 per year and the CEO $300,000,000.

Secondly what mechanisms are available to remedy this inequity? If the values held by those who have the political and economic power support the inequities, there will be no impetus to remedy them - except self-interest. Reich has no alternative but to make his pragmatic pitch because the wealthy and powerful are unlikely to give up their money and power voluntarily on the basis of compassion.

The Roadblocks to Reform

If we accept that the concentration of power and income will hinder any reasonable progress towards the required fair distribution of income which in turn will slowly end the recessionary cycle, that concentration must be diminished. This was done by government action during the trust busting era of Theordore Roosevelt circa 1900 and by the Franklin Roosevelt administration during the Great Depression circa 1936. The historical background to these government actions should be studied to determine if there is any possibility today’s governments in US or Canada are capable of passing legislation to curb or reverse the trends from 1980 to 2010. I am sceptical that government has the will or even the power to do so. If government cannot or will not act, is there some other work-around, perhaps as suggested by Reich voluntary action by those have power and economic clout in order to protect their interests?

Suggestions for Action

Reich does propose some actions which are worth considering, however unlikely they are to occur: reverse income taxes by supplementing the wages of the middle class (see proposal for giving money to low income earners in the Saturday Focus section of the Globe); higher marginal tax rates on the wealthy, wage insurance; revising funding for higher education, infrastructure projects which benefit all such as public transportation and getting money out of politics. Most of us would agree that these proposals would face very strong opposition politically and from vested interests. However, given the deficit situation in the US and Canada, it seems that higher taxes are inevitable – whether they will be achieved by higher marginal rates on the wealthy or other means has yet to be seen.

As the economic situation deteriorated in the fall of 2008 and the stock market declined precipitously, I assumed that the establishment, government and big business would do whatever was necessary to protect their interests. This meant avoiding a full economic meltdown, no matter what the cost. The bail out focussed more on Wall Street using its many avenues of influence resulting in the injection of massive funds into banks, investment banks and AIG, with the politicians rationalizing that saving them would in effect save the economy as a whole. These institutions ultimately survived with the injection of massive amounts of government aid and went on, in some cases, notably Goldman Sachs, to make more money and pay more bonuses (after paying their fines which were no more than the cost of doing business), than before. But the plight of the borrowers under the subprime mortgages in default, the middle and lower income earners who were unemployed, the drastic decrease in house values, and general stagnation of the economy has not improved, certainly not by the widely touted trickle down effect.

I have no more insight into solutions than Reich does. The experience with the Obama administration does not lend much comfort that there are any easy answers. Navel gazing about a misguided value system is not going to be a fix.

Future Blogs

For those who found “Pay More Taxes – Session 101” interesting, I did receive comments back from my friend Larry Wasserman, a mathematician at Carnegie Mellon and a devout libertarian. Needless to say, his Taxes 101 does not look anything like mine. I responded back to him with “scathing criticism” and then asked him if I was still welcome in his home in Italy. He replied: “I have lots of tax-loving liberals visit. The problem with being a libertarian is that it's lonely. The conservatives and the liberals both hate us.” More on this lively dialogue in the future.

Pay More Taxes - Session 101

2010-10-19T23:02:00.000-07:00

A couple of weeks ago N. Gregory Mankiw wrote an article for the New York Sunday Times Business Section entitled “I Can Afford Higher Taxes. But They’ll Make Me Work Less”. This article which focused on Obama's intention to roll-back the Bush Administration tax decreases on people earning more than $250,000 per year annoyed me and I am curious if it has the same effect on others. More on this below, but I begin with my trip to the Vancouver International Film Festival to see “Inside Job”, a documentary about the 2007 – 10 financial crisis, how it began, evolved and the consequences.

Inside Job describes the meltdown of 2007 –2010 (not yet by any means over) in a raw and unvarnished perspective. Judging from the fact that the same cast of characters remain on the financial stage today in charge of the banks and as advisors to Obama, the problems are likely to be repeated. Most certainly we have failed to take advantage of the crisis to do some housecleaning. A great opportunity has been lost.

“Inside Job” informs us that amongst the perpetrators of this crisis include a small number of very influential economists who have advocated and lobbied for deregulation of the financial system. Several of them are professors at Harvard and other Ivey League universities who also consult to the US administration and various wall street banks, near banks and hedge funds. The Obama administration has retained in critical positions many of the economists and advisors who were responsible for, and in many cases profited from, the policies which led to this disaster.

Take for example, Larry Summers, ex-President of Harvard and also a professor in the School of Government (Harvard) who featured prominently in the film. He was an advisor to Bush and is currently an advisor to Obama. He resigned as president of Harvard after a vote of no-confidence by the faculty:

“that resulted in large part from Summers' conflict with Cornel West, financial conflict of interest questions regarding his relationship with Andrei Shleifer, and a 2005 speech in which he suggested that the under-representation of women in science and engineering could be due to a "different availability of aptitude at the high end," and less to patterns of discrimination and socialization. Summers has also been criticized for the economic policies he advocated as Treasury Secretary and in later writings. Since returning to government in the Obama administration, he has come under fire for his numerous financial ties to Wall Street.”

There are many others but I am limited by space and time. These economists, who are to say the least disingenuous, include Mankiw as demonstated by his article “I Can Afford Higher Taxes. But They’ll Make Me Work Less”. In this article, Mankiw admits he is a professor at Harvard obviously to add some clout to his remarks. I thought I should look him up to see if he had any background on taxes or economics. Unfortunately (for him or me), anyone who writes a book titled “New Keynsian Economics: Imperfect Competition and Sticky Prices” is clearly an economist. Mankiw was also an advisor to Bush (Dubya).

Mankiw’s argument boils down to this. His income is more than $250,000 per year so he will have to pay more taxes if Obama rolls back the Bush tax reductions. He doesn’t have his own jet or Ferrari (allowing him to be piously self-righteous, even self-denying) so he can afford to pay the increased taxes. If requested to write an article for $1,000, he might not do it because the work would not be worth the pay (after tax). He provides some calculations - if there were no taxes, the $1,000 would be worth $10,000 in 30 years; with Obama’s planned roll-back and his kids would get $1,000 (after tax) in 30 years; and lastly in the current regime [assuming lower income taxes, lower medicare taxes, no deduction phaseout (whatever that is) and no estate tax], his kids would get $2,000. Conclusion – he would have twice the incentive to keep working. He says:

“Now you might not care if I supply less of my services to the marketplace — although, because you are reading this article, you are one of my customers. But I bet there are some high-income taxpayers whose services you enjoy.

Maybe you are looking forward to a particular actor’s next movie or a particular novelist’s next book. Perhaps you wish that your favorite singer would have a concert near where you live. Or, someday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist. Like me, these individuals respond to incentives. (Indeed, some studies report that high-income taxpayers are particularly responsive to taxes.) As they face higher tax rates, their services will be in shorter supply.”

Judging from this article, Mankiw is one of the entitled libertarians who figures that the emergence of Wall Street as the economic engine of the country and the simultaneous decline of the production of real things which show a much lower rate of return is progress.

No wonder we don’t trust economists. Let’s hypothesize for a moment that the additional taxes raised from people like Mankiw who, by their own admission, can afford to pay them, will be used to provide more education so we will have more doctors or orthodontists who will provide more services.

Furthermore, who are the people going to concerts, reading books and spending money on goods and services – the 1% of people who earn more than $250,000 or the 99% of people who earn less?

Where are these studies showing higher taxes will result in less productivity? Especially if lower taxes result in cuts to education and create more social conflict.

And of course, there is much more to economics than number crunching. Some economists are even paying attention to human behaviour. According to a more recent article in the NYT by David Segal (also an economist) (which refers to Mankiw):

“… a certain amount of psychological guesswork is part of an economist’s job, which accounts for the rise in popularity of behavioral economics, an effort to account for the slippery, indefinite nexus of money and humans. ‘The entire question of how emotion will change people’s behavior is pretty much outside the standard model of economics,’ said Dan Ariely, a professor at Duke University and author of “The Upside of Irrationality.””

It seems Mankiw is prepared to ignore this and cite his own preferences and anecdotal evidence plus ignoring his own bias to advocate that tax reductions should not be rolled back .

In the past few years, millions of people have lost jobs, life savings and their homes while the rich get richer – and this is no myth or whine – Robert Reich, one of the less conservative crowd advising Obama – in his new book “Aftershock: The Next Economy And America's Future” – points out that 1% of people own 23% of the wealth in US. The gap between the median income and the top 1% is growing as well, and the proportions have never been so high since 1928. The wrath of the American public is simmering and may soon boil over.

And there is the deficit or doesn’t anyone care about it anymore? More taxes could even be used to reduce it. Or is the US so far gone that there seems no point even trying to reduce the deficit?

Sure, if you are a narcissist earning $250,000, as Mankiw admits, you may be better off personally if your taxes are not raised. But I am confident that it is a lot worse for the rest of us. And eventually, the mess with catch up with Mankiw’s kids who will have to contend with a society deprived of its middle class and suffering the social strife that goes along with this. Their extra $1,000 is going to look like peanuts.

I am curious why the New York Times gives credibility or coverage to Mankiw. It is rumoured that Mankiw quit his post with the Times because the Times only pays $650 per article and that is just not enough to justify his effort if the tax cuts are not extended. I have to say, I think in the case of Mankiw, the NYT has overpaid.

Don't Read Books!

2010-10-03T17:59:00.000-07:00

I took the summer off from blogging and lost my little “ideas” notebook so I have to start from scratch. Losing my notebook was almost as devastating as losing my diary, though my diary from age 8 to 10 contained only one line.

This week in The New York Times Review of Books, Kwayme Appiah reviews “The Moral Landscape – How Science Can Determine Human Values” by Sam Harris. According to the review, “Harris heads the youth wing of the New Atheists”.

Stephen Jay Gould, the evolutionary biologist, has received a lot of attention over the past several years for his books and articles denying the existence of God.
I had heard of Gould and even read about ½ of one of his books, still in my modest science library which I bought this during my “you should learn more than physics” stage of life. Gould too is an atheist but says of science and religion – never the twain shall meet. Harris attempts to demonstrate, from the review unsuccessfully, that the facts about the well-being of conscious creatures can be derived from science, especially neuroscience.

The reference to Gould in the NYT Review of Books and the review of Harris' Moral Landscape gave me pause for thought. I thought do I really need to read either Harris or Gould?

Being a person of limited time and resources, I have often wondered whether it is better to read the reviews of books by these authors, than reading the books themselves. This likely applies more to non-fiction than to fiction. After all, reading a review of “The Girl Who Played with Fire” (originally “Men who hate Women”), is hardly the experience of reading the book – or seeing the movie (I recommend both).

I retrieved from my library - which admittedly consists of only a few selected books as most have been in storage for at least 10 years - a book by Pierre Bayard titled “How to Talk About Books You HaveN’T Read.” I noted the bookmark was inserted at page 48 whereas the book has about 150 pages; I obviously took the author to heart. Nonetheless, I recall enjoying the first few chapters.

The preface begins with:

“Born into a milieu where reading was rare, deriving little pleasure from the activity, and lacking in any case the time to devote myself to it, I have often found myself in the delicate situation of having to express my thoughts on books I haven’t read.

Because I teach literature at the university level, there is, in fact, no way to avoid commenting on books that most of time I haven’t even opened. It’s true that this also the case for the majority of my students, but if even one of them has read the text I’m discussing, there is a risk that at any moment my class will be disrupted and I will find myself humiliated.”

Would I be stretching the truth to say few of us want to be humiliated but most of us want to be interesting and well-read. At least to page 48, Bayard’s book is very amusing and I probably skimmed the chapter titles of the rest of the book Fortunately each chapter has a little key idiom beneath the chapter title, almost eliminating the need to read the text.

From a brief review of Bayard’s book:

“A must-read for anyone who cares about books.”

I feel I let the reviewer down, but not Bayard.

Book reviews are extremely useful, however, for a variety of reasons: (a) they can be interesting; (b) they serve the purpose of allowing one to talk knowledgably about a book without struggling through it; (c) if the review is bad you can avoid buying the book [after all, you have already paid for the Globe or the NYT Review of Books] and you can impress your acquaintances by telling them not to buy the book; (d) etc.

In the review of “The Moral Landscape”, I learned about Sam Harris’ 2 previous books on the same topic so no longer need to read them and also learned about Gould, so no longer need to read him either (saving at least $75 plus tax and much space in my already cluttered attic office). In fact the reviewer’s comments about the new book and the 2 previous ones are as follows:

“I found myself wishing for less of the polemic against religion, which recurs often and takes up one entire chapter — he has had two bites of that apple already, and will soon be reduced to gnawing at the core — and I wanted more of the illumination that comes from our increasing understanding of neuroscience.”

I think I will leave gnawing at the core to those with more time and reach American Science for information on neuroscience.

How is this for a page turner – “The Shadow Market – How a Group of Wealthy Nations and Powerful Investors Secretly Dominate the World”. A catchy title but a smidge too long; one wonders whether you need the rest of the book: From the review this week in the NYT:

“The trouble is the delivery. A sober book like “The Shadow Market” is never going to read like a Crichton potboiler, but it veers too far in the other direction, often sounding like a report for the Council on Foreign Relations. There is too much survey and not enough analysis.”

I think I will take a pass on this one, but good cocktail conversation depending on the crowd.

Let me be perfectly frank here. I often do not agree with positive and glowing reviews of books or movies. My friends know me as a sceptic. For example, I thought it might be fun to see what reviewers have to say about the book “A Beautiful Mind” a biography of John Nash, the mathematician who made advances in game theory, suffered a breakdown and then got the Nobel Prize. The 457 pages of the softcover version tell us much, much too much, about every minor detail of Nash’s life. I did not leave a bookmark in this book. The movie was Hollywood entertainment. From the Boston Globe:

“Superbly written and eminently fascinating.”

One review which I dug up on a google search says:

"The New York Times book review says A Beautiful Mind "reads like a fine novel." Except, a fine novel doesn't have endnotes plaguing the entire text. Sylvia Nasar must be German. If not at the end of every sentence, at least at the end of every line of thought, there lies an endnote. (The Germans are famous for documenting everything to distraction; this is not a stereotype.) The book is ridiculously over-documented. (For example, Chapter 1 alone, which is only 15 pages long, has 63 endnotes!) This is terribly distracting for me as the reader, especially considering that hardly any of the notes actually elucidates anything; just documents, documents, documents, as if it were a college thesis."

You can imagine which review I preferred. If anyone cares to borrow A Beautiful Mind, please email me.

By the way, if you are not satisfied with the short, but sweet, reviews in the NYT, you can go for the more intellectual and far, far longer reviews in the New Yorker. Not sure if anything of interest emanates from west of the Rockies.

Enough of this – if have you read Bayard’s book, you will unlikely have gotten this far in my own too fully documented blog.

Back to serious stuff next time.

Government Debt – Out of Control and What It Means to You

2010-07-01T11:19:00.000-07:00

This seems like a very esoteric subject for a blog, but the beauty of blogs is that you can write about whatever interests you.

I have been fascinated by increases in government spending, reduction of taxes and the excess consumption in North America for quite a while. Maybe since university Economics 101 where I first learned that if you don’t balance your budget, you will eventually run into serious trouble. Although the blog focusses on the United States, as the expression goes, make no mistake about it - the same applies to Canada.

In the mid 1970’s New York City was bankrupt and Richard Ravitch was appointed to fix things. He did through serious budget cutting and raising taxes, plus short term borrowing. By the mid 1990’s NYC was thriving. As Lieutenant Governor of New York State, he was asked to do the same thing recently for the State – the finances of NYS are in a shambles but he was stymied. Things have changed. Listen to him on This American Life podcast June 18 2010.

About 6 years ago I was in Los Angeles in a bar talking to my nephew and his lawyer buddies, all about 30 years old. I had just finished reading a full length article in Atlantic Magazine on the American balance of trade deficit. My nephew's group expressed virtually no concern about the deficit or what impact it could have on the US dollar, almost as though they were living in isolation from the rest of the world. And this discussion was only the balance of trade deficit, not the budget deficit.

There has been an endless amount written about deficit financing. I took a look at the Atlantic Maganzine website and found numerous articles, for example – Feb. 1989 – “Is the Deficit so Bad” by Jonathan Rauch, and Jan. 2008 - “The $1.4 Trillion Question” by James Fallows. The focus of the articles is on the balance of trade deficit but, as we can see from the plight of NYC and NYS, budget deficits present their own difficulties.

The balance of trade deficit and the budget deficit are different. The first represents the net outflow of capital from USA over the course of a year. The second is the amount by which the expenditure by government exceeds its revenues.

The balance of trade deficit results from Americans buying and consuming more foreign products than they export to other countries. The greatest part of that deficit comes from purchasing Chinese goods at a price which is much lower than they could ever be produced in the US. China has intentionally kept its currenty, the RMB, pegged low so that American consumers can afford all those Chinese made goods. Oddly, the Chinese government is saving its US dollars by buying US treasury bonds rather than spending its US dollars or investing them in infrastructure at home, All this seems like a great deal for the US until you realize that you have to pay interest to the Chinese on those treasuries and if the Chinese government ever decided it no longer wanted the greenback, the $US would suddenly collapse in value. This is not good in the long run, though US consumers are undoubtedly enjoying it in the short run. Their kids are not going to be happy campers when payback day arrives.

The budget deficit is just as bad. Governments simply don’t seem to be able to control their spending, nor are they willing to increase taxes to balance their budgets. Taxpayers refuse to elect politicians who are going to raise taxes or take away their entitlements. Greece is a perfect example of this, where in the past few months people rioted in the streets against lowering wages and reducing benefits of government workers. [More on this generally in the episode of This American Life - see above.]

The balance of trade deficit and the budget deficit have something in common. They effectively are borrowing against the future.

So everyone pretty much agrees that deficits are bad though some say "Don't Balance the Budget" - you can keep on increasing the deficit lock-step with the Gross National Product (“GNP”). That assumes your starting point is a reasonable and sustainable deficit and that you will reduce your deficit if there is a dip in the GNP or increase in interest rates (both of which are highly dubious).

The foreign holders of $US eventually have to do something with their money beside buying US Treasury Bills. The Chinese recently bought a few billion dollars of Blackstone, a US Hedge Fund, and lost much of it. [See $1.4 Trillion Question for more on this.] At a an investment seminar I attended recently, the presenter predicted foreign creditors will buy up massive amounts of property and businesses in the US, effectively triggering one of the greatest transfers of ownership of capital goods in history. The transfer would allow aging boomers to support their lifestyles, much like the reverse mortgages which give the elderly income while transferring their equity in their homes to the lender. Depending on the amounts involved, US may become more like a 19th century colony. Foreign owners will dictate how the businesses operate, what investment decisions are made and what will be produced. As the dollar drops in value, US citizens will have even less say about what happens in their own country, particularly about assets then owned by foreigners.

At least noone will be able to demonize the US as a colonial oppressor any more.

How does this apply to us as individuals. Does it have any significance? For starters, our kids may be the next generation’s second class citizens. Instead of having the highest living standard in the world, they are going to be moving down relative to people in other countries who have been more prudent about their finances and consumption. This is a different paradigm from the North America which has been the envy of the world economically and politically. Some of the dangers are that when hope and prospects fade, democracy is threatened. The tendency for men (who still dominate politics and probably will for a while yet) is towards anger and blame and this leads to conflict.

Now for the question. What are we going to do personally, apart from voting for higher taxes and fewer services and reducing purchases of HD TV’s, digital cameras, computers, appliances, BMW’s and just about everything else which is manufactured outside North America (that is just about everything because not much is manufactured in North America any more), and donating to democratic watchdogs.

Middle and upper class people are likely in denial or just not thinking about how this all applies to them. They may believe that education and their current asset base can protect them. Even today in the US, the middle class is struggling to pay for services, education and health care. They are also concerned about job security and pensions, and rightly so. According to the OECD, Education is a great investment, but protecting your asset base and the purchasing power and amount of your pension fund is more difficult.

So, going back to my previous blog, I think I got the question right but haven’t come up with any answers. I am spending my kid’s inheritance to send them to university. Like most boomers, I am working longer. I could also spend less (unlikely) or die sooner. How to invest is a problem when you live in a country which is likely to experience a decline in currency value relative to countries that are producing the goods you want and gobs of money are competing for low risk investments. I could invest in RMB (Chinese money) but China seems to be on the verge of its own bubble bursting. Real estate may be a good investment depending on rental rates, interest rates and vacancy rates, but it is too expensive and sellers are greedy. Certainly those foreign investors with all the $US and $CDN love real estate, but many of them could care less about return. The stock market has been relatively steady over the past 400 years (so say the pundits) but will the future be like the past?

My answer – build a house near the beach in the Baja, Mexico [architect's rendering - not yet reality]. I don’t have to worry about what to do with my available cash – just dump it into pesos. Then I will enjoy it with my family and friends and hope climate change doesn’t make it too hot for comfort.

Asking the Right Questions

2010-06-24T20:12:00.000-07:00

Richard Feynman was a major icon in physics for over 6 decades. This is almost an unheard of feat primarily because the careers of most physicists, even the great ones, are winding down when they are in their 40’s.

Feynman told stories – making a lot of them up - about many things and one, about his father, concerned the name of a particular bird, the Spencer’s Warbler. When he and his father saw this bird, his father named the bird in a variety of languages, then said:

“You can know the name of that bird in all the languages of the world, but when you’re finished, you’ll know absolutely nothing whatever about the bird. You’ll only know about humans in different places , and what they call the bird. So let’s stop looking at the bird and see what it’s doing – that’s what counts.”

Feynman learned to ask questions about everything; he deconstructed physics; he re-worked all propositions from their beginnings and took nothing for granted. This took time and effort but was well worth it.

In 1956, experimental physics had shown there was a serious discrepancy with theoretical physics. Theoretical physicists cherished the idea of parity conservation, in simple terms that the universe was neither right or left handed. Experimental results on a particular sub-atomic particle (Tau Lepton) could not be explained. Feynman had the imagination and courage to ask “What would be the consequences if the parity rule was wrong.” He simply asked the right question. Perhaps you had to be there, but this was a turning point in science.

In a perfect world, every assumption should be examined no matter how much time and effort it takes. In computer jargon with wrong assumptions you get “garbage in – garbage out”. Let’s look at a few examples:

Ø does electronic messaging really have value rather than just making it simpler or faster

Ø tenure in education (what purpose does it serve now)

Ø assumed probability of unusual or rare events (calculated without sufficient information)

Ø economic theories based on people acting logically (they do not)

There are an infinite number of these. Great historical figures are no longer relevant today because they made wrong assumptions. Marx and and to a lesser extent Freud are good examples.

The problem is that most of us do not have the desire, the ability or the time to research every subject, figure out if there are assumptions and then determine the validity of the assumptions. Nor to affect outcomes if we discover the assumptions don’t make sense.

Look at this example for digital cameras – there has been a continual and inexorable increase in megapixiels. Megapixels sell cameras. But if you increase in number of megapixels without increasing in the size of the card capturing the image, you get a noise problem which is detrimental to picture quality ie you have not improved anything. Instead, why not look at how to make better use of the light which enters the lens but is lost due to inefficiency. The same applies to solar panels where approximately 80% of the energy is wasted. Scientists and engineers are looking at both of these problems. They are related but I’m not sure the engineers have realized this just yet.

Looking at assumptions is fertile ground for litigation lawyers and expert witnesses. Expert reports, appraisals, business plans, and many other documents we rely on are based on assumptions. Being a critical reader and open to changes and alternatives and always questioning is the hallmark for intelligent examination of issues and will facilitate a better outcome. Like democracy, questioning and deconstructing is messy and time consuming, but there is no better system.

I confess that I have not always questioned nearly enough. Often it is only in hindsight that I realize this failure. I suppose I will have to try harder.

Blow-Outs - Deja Vu

2010-06-10T22:58:00.000-07:00

Man-made disasters never fail to fascinate us.

In the autumn of 1982 near Drayton Valley, Alberta, a town about 140 Km south west of Edmonton, Amoco Oil was drilling a sour gas well. Sour gas contains hydrogen sulphide (H2S), a very corrosive gas which combines with water to form sulphuric acid. In low concentrations H2S smells like rotten eggs. In high concentrations, humans are unable to smell it and it is deadly. Amoco had experienced a serious blow-out in the same gas field five years earlier. You can find out more about Amoco’s history of disasters on-line.

Early in the morning, troubles began at the well-head and within hours the well was out of control spewing H2S in vast quantities. This blow-out was known as the Lodgepole blow-out and was the worst blow-out in Alberta's long history of oil and gas exploration. On some days, the rotten-egg odour could be smelled as far away as Winnipeg, nearly 1,500 kilometres distant. Needless to say Edmonton and other communities in the vicinity of the blowout were in a state of serious anxiety.

Sour gas flowed at an estimated rate of 150 million cubic feet (4,200,000 m3) per day.

The H2S content of the gas was 28 per cent, and the well also produced 20,000 barrels per day (3,200 m3/d) of sulfur-contaminated, orange-coloured condensate which was emitted into the atmosphere deposited around the well-site. The well was out of control for 68 days, during 23 of which the well was not ignited. During that time H2S from the blow-out took the lives of two blow-out specialists and sent another 16 people to hospital.

In early 1983 I received a call from the Energy Resources Conservation Board, the oil and gas regulatory authority for Alberta, asking me to act as inquiry counsel for an inquiry the Board was convening to investigate the blow-out. The job entailed reviewing the events leading up to and following the blow-out, gathering evidence from Amoco, contractors on site, government departments who were responsible for disaster planning and public protection, municipalities and environmental groups. I had to cross-examine all of the people involved. I accepted and began a task that took my full time for 1 ½ years and continued until early 1984. I learned a lot about blow-outs, the oil industry and government.

I was given a relatively free hand to investigate the causes of the blow-out and the response of Government to it, the environmental damages, and ultimately to assist the Board in determining how the industry should be regulated in the future. It is ironic to note that in 1998 Amoco merged with BP.

This is obviously timely because of the current situation BP is experiencing with the blow-out of their Deepwater Horizon Well in the Gulf of Mexico. A few examples may serve to illustrate how little certain players in the oil industry, have learned about drilling and safety.

There is a lengthy front page article in the Sunday New York Times which outlines the “hodgepodge of oversight agencies that grated exceptions to the rules, allowed risks to accumulate and made a disaster more likely.”

Later in the same article:

“As early as June 2009, BP engineers had expressed concerns in internal documents about using certain casings for the well because they violated [BP’s] safety and design guidelines. There were kicks in the well more than 5 weeks before the disaster and a pipe was stuck in the well. The blow-out preventer, when tested on at least three occasions was leaking fluids."

As the headline of the article states, it was not clear who was in charge. BP could make more money by completing its drilling job quickly because it was paying a leasing fee to the rig owner, Transocean, thus creating a natural conflict of interest. The desire to cut corners and save money is not uncommon in industry. Especially when there is a perception of low risk of an event occurring without proper consideration of the consequences if the event actually happens.

As is the case in most complex industrial accidents, there are many events leading up and contributing to to the incident. The headlines and articles from Lodgepole will sound familiar to those of you who are following the Gulf blow-out: Here are extracts from some of them [I acutally got them out from storage!]

"Was Blowout Avoidable - repair equipment for the Amoco well was ordered seven hours before it blew wild...But the equipment did not arrive on time.."

"Foreman battled runaway well alone for 17 hours..."

"Mud study warned Amoco of sour gas dangers..." "Mud used before blowout less than recommended..."

"Safety tests unrecorded..." "Amoco records: vital tests not done..."

"Blowout problems minimized by firm..."

"Amoco production manager...told the inquiry the company was aware some possibility of striking sour gas existed, but reluctantly admitted no probability assessment of hitting the gas was conducted or asked for..."

"Tests not done before blowout...Amoco..records indicate that crucial safety drills and function tests were not performed in the days immediately prior to the blowout..."

"It's our secret: Amoco" - headline in reference to Amoco's refusal to disclose its emergency response plan.

Let's use the blow-out preventer (BOP) as an example in the BP blowout. The BOP is the device which is perched on top of the well head and is supposed to shut down the well if problems are encountered. In the BP case, the BOP was inaccessible, at great depth and subject to tons per square inch of pressure. It could obviously not be inspected visually.

Apart from fluid leaks in the BOP, BP chief operating officer Doug Suttles said interviews with Transocean [the owner of the rig] workers on the rig revealed crewmembers tried to activate the BOP from the rig's bridge before the fire forced them to evacuate, but the BOP did not close off the well.

Suttles also revealed that BP remotely-operated vehicles (ROVs) had hit "subsea access points" that should close the BOP, but that they also failed to trigger the mechanism to shut.

"We don't know why the BOP failed to stop the flow," he said. "Ultimately we will recover the BOP, get it to the surface and find out."

In the Lodgepole situation, the BOP was supposed to close after the drill pipe was removed. [Some undersea BOP’s have a cutting edge which is supposed to cut the pipe when the BOP closes.]
As with BP, Amoco estimated the amount of gas flowing from the well head. As with BP, Amoco’s original estimates were low. This is not surprising as the higher the estimate of the flow, the more dangerous the situation would appear to the public and regulatory authorities. As with BP, it turned out the flow was considerably higher than originally anticipated. This had dramatic consequences for Lodgepole. The Amoco engineers decided they could control the blow-out by opening the BOP, letting the drill stem drop into the drill hole, then close the BOP. They predicted the pipe would drop into the drill hole based on their estimate of upwards pressure from the flow. Needless to say they were astonished that when the BOP was opened, the drill stem shot 100’s of feet in the air, striking the rig and igniting the gas into a fiery inferno which totally destroyed the rig.

The saving grace was that when the blow-out ignited, the H2S was consumed by the fire so there was no further threat to people from breathing it. However, then the threat to the environment from the resulting emissions continued unabated.

The fire destroyed the Nabors 14E rig (worth about $8 million) in nine minutes; it also scorched 400 acres (1.6 km2) of forest. Amoco's direct costs to bring the well under control were approximately $20 million. Huge amounts of natural gas, natural gas liquids and sulfur were wasted through the disaster. Apart from the environmental and health concerns, this meant energy lost to consumers, revenues lost to Amoco, and royalties and taxes lost to government. According to a Panel’s report from the Inquiry, these and other direct costs totalled about $200 million.

In my view in the case of Lodgepole, the government and regulatory authorities acted reasonably competently. From the media reports, that does not appear to be the case before and immediately following the BP blow-out. It is perhaps easy in hindsight to characterize activity around a well-site as without direction or chaotic. There are always many participants - drillers, managers, representatives of the owner (BP), drilling mud specialists, pipe specialists, people taking out and reviewing core samples, etc. But lack of planning for a serious incident, lack of concern as the well began showing signs of trouble, inadequate disaster planning, confusion and lack of direction from management and lack of coordination amongst the various people on and off site all would clearly contribute to a blow-out. The failure to stop the blowout and deal with envirnomental and other problems following the blow-out are another story.

From the editorial questions in the New York Times:

THE RESPONSE The questions about whether BP and the government responded quickly enough, and with the right weapons, could fill a book — and probably will. Both parties seem to have underestimated the size of the spill, and neither had a coherent underwater response plan in place. Though the oil industry had experienced blowouts at shallower depths, BP’s disjointed response suggested it had given little thought to the possibility of a blowout at 5,000 feet.

In my view, the BP blow-out manifests systematic problems permitting the human failures which possibly caused and undoubtedly contributed to the consequences.

Part 1 of the Lodgepole Inquiry dealt with events and responses. Part 2 dealt with what the industry and the Board should do to prevent another disaster. In the case of Lodgepole, the inquiry spawned a generation of safety regulations that require the industry to designate hazardous drilling targets as "critical wells" and to use elaborate safety precautions at the drill site. The new regulations imposed much more stringent drilling procedures at critical wells, required specialized safety features on drilling and other equipment, and forced companies to develop detailed emergency response plans before beginning to drill.

While acting as Inquiry Counsel, I observed the vast resources the Oil and Gas Industry could bring to its operations and to its legal problems. Many commentators recognize that regulatory authorities and industry cooperate and have a “cosy” relationship which can result in compromises and tacit agreements on procedures and safety. Undoubtedly many heads will roll over the BP disaster placing the blame on those supposedly responsible for approving actions which were in accordance with accepted practice and policies and essentially condoned.

There are good players and bad players in every industry. The BP blow-out will obviously result in changes to off-shore drilling. It will cost the industry dearly – and not just the bad players. Let’s hope the changes will make drilling safer rather than merely give us the impression of safety as is the case with many of the measures implemented after 9/11 by Homeland Security.

I also believe that the good players have a corporate culture which engenders prudent, safe practices and honest open dialogue among team members and the bad players emphasize savings and cutting corners, disregard or underestimate risk and stifle dissenting opinions. It would be interesting to be a fly on the wall in the boardrooms of the major oil companies to hear their opinions on the BP blow-out and on the cost to them in the future. It is reminiscent of the Canadian Government and banks opposing the proposed international bank levy, saying why should we pay when we acted properly and in fact already paid by foregoing risky subprime mortgages and hedges.

As a personal aside, the Pembina Institute, one of the leading environmental activist NGO's in Canada was created following the Lodgepole Blowout by Rob McIntosh who was the organizer of the Drayton Valley Community in its participation in the Inquiry. Mark Lowey, a journalist who covered the Blowout, continued his career as an environmental writer and today publishes a respected news journal on environmental issues.

I was usurped by the New York Times Sunday Magazine on another aspect of this story which I was thinking about yesterday. The article entitled “Underestimating Risk – What the oil spill and the financial crisis have in common” discusses the human tendency to underestimate risk and the comparisons between the blow-out and the financial crisis - but that is to be continued.

Lawyers Jokes

2010-05-29T15:34:00.000-07:00

The devil visited a lawyer's office and made him an offer. "Here’s the deal" the devil said. "I'll increase your income five-fold. Your partners will love you; your clients will respect you; you will have a passionate affair with an associate and your wife will never find out, you'll have four months of vacation each year and live to be a hundred. All I want in return is that your wife's soul, your children's souls, and their children's souls rot in hell for eternity."

The lawyer thought for a moment. "So what's the catch?" he asked

You have probably heard this joke and variations on it. As Charles Dickens’ wrote in his famous diatribe against lawyers in Bleak House:

“The one great principle of the English law is to make business for itself. There is no other principle distinctly, certainly, and consistently maintained through all its narrow turnings.”

Although many lawyer jokes are about fees, many also convey the message that lawyers are unscrupulous, will do anything for money and have no real code of ethics.

Do lawyers really deserve to be the object of this type of ridicule? I recently published an article in our provincial lawyers publication, the Advocate, - “The Art of Reneging on a Merger”.

In my article I focus on a hedge fund, Apollo which owned a major chemical company, Hexion. Apollo wanted to buy Huntsman Chemical to merge it with Hexion. Huntsman was a family controlled publicly traded chemical company. When the fund made the offer in 2008, the deal looked rosy but soon after market conditions deteriorated and the hedge fund wanted to exit the deal. Literally billions of dollars were at stake,

By way of background, Jon Huntsman is the founder and chairman of Huntsman Chemical. He created Huntsman in 1970 and by 2000 it had become the world’s largest privately held chemical company with more than $12 Billion in revenue. Jon Huntsman is an old style businessman whose “word is his bond”. He gives generously to charity and to his community.

Hedge funds are not usually noted for their interest in anything but profit for their investors.

When Mr. Huntsman negotiated his deal with Apollo, he expected Apollo would complete. Apollo apparently thought they could get out of the deal but they underestimated Mr. Huntsman. Jon Huntsman sued Apollo, Hexion and Apollo’s bank [see my article for the full story - link above].

In 2009 Jon Huntsman wrote a book entitled “Winners Never Cheat – (even in difficult times)”. He does not mince words about lawyers in his book (p. 80):

“Shakespeare didn’t literally mean it when he said that the first thing we must do is kill all the lawyers, but you can forgive folks for smiling at the thought, given that the legal profession, collectively and with our complicity, is stripping America of personal accountability and trust. All of us, in ways large and small, partially are responsible for this erosion of integrity, but I place the greatest culpability, with notable exceptions, on attorneys – especially corporate lawyers.”

My interest in the Hexion/Huntsman situation was at first aroused by the legal strategies used by the Apollo to get out of the deal – strategies which were creative to say the least but doomed to failure. However, I soon began to wonder about the consequences of these strategies on innocent bystanders and whether lawyers should or are even entitled to take such consequences into account, or are accountable for the consequences.

The point I wish to make is that the actions of the lawyers on behalf of their clients in situations such as this can have far reaching consequences. While the lawyers for Apollo were trying to undo the Huntsman deal, management of Huntsman were undoubtedly going through hell. They had announced to their thousands of employees that Huntsman would merge with Hexion and everyone was waiting for the outcome. These Hunstman employees, watching the legal battle unfold, had no idea what the future held for them and had to live in uncertainty for the many months while the action wound its way through the courts. What if these employees had invested their pension monies and savings in their 401K’s in stock of Huntsman – and then watched as the stock price plummeted? What about the customers of Huntsman who expected the merger to occur but found their supplier deep in litigation with Apollo and Hexion. What about the damage done to business generally when parties to a contract simply refuse to comply with their obligations.

Suppose despite the action, the deal had completed (it did not). What impact would this have had on the employees of Huntsman and their attitude to their new employer?

Who should be thinking about these issues? What is the role for lawyers?

John C. Coffee Jr., a professor of law at Columbia University recently wrote a book titled “Gatekeepers – the Professions and Corporate Governance”. In the chapter entitled “Corporate Attorneys as Gatekeepers”, he reviews the history of the American Bar Association (ABA) code of ethics and the debate between academics who place justice as the first priority of the lawyer and the practitioners who place duty to client first.

Coffee describes the resistance of the ABA to creation of a code of ethics which has some moral content to it and the unflagging efforts of the ABA to resist changes to the code when events bringing lawyers into disrepute inflamed public opinion against lawyers. The ABA has been especially vocal about changes proposed by the SEC which would create any watchdog element for lawyers.

The first attempt to create a code of legal ethics in Canada came in approximately 1920. The deplorable record of law societies to create norms for lawyers’ actions and to deal with the public disenchantment (to put it mildly) with the profession especially over the last decade climaxing in the “anni horribilus” is described in a recent article by Adam Dodeck. The anni horribilus, 2006-7, included the Wirick fraud, Tory Tory lawyers dealing with the Conrad Black situation, the Lawyers are Rats article in McLeans, etc. It is interesting to note that Dodeck is somewhat optomistic about the future and is of the opinion that we are making some headway.

In my view, there are no facile or simple solutions to these moral and ethical questions. But it seems to me that if the academics are losing ground in their quest for justice, this can make the lawyers really facilitators and certainly not moral leaders. In other words, with reference to the jokes, many a truth may be spoken in jest.

Our Beloved Euro

2010-05-15T13:18:00.000-07:00

The world seems to be lurching from crisis to crisis. For those old enough to remember, we had the misery of Black Monday in 1987 when the Dow dropped almost 23%. (It fully recovered in about 6 months to the chagrin of those who sold as the market plummeted.)

In the late 1990’s, Long Term Capital Management, a hedge fund whose board included two Nobel Prize winners in economics, had to be bailed out by the US government. The fund lost $4.6 Billion after betting on the Russian ruble just before the Russian financial crisis erupted. The fund was considered to be too large to fail. Some pundits opposed the bail out because bail-outs just encourage institutions to make risky decisions in the hope they will be rescued by government. (That sounds vaguely familiar.)

Then in 2000 everyone expounded at cocktail parties about the increasing value of their stock portfolios; no one could lose money on the market. The dot-com bubble then burst.

At the height of the bubble, Nasdaq peaked at 5132; today it is at 2346. Fortunately the general market has fared somewhat better than the technology stocks, most of which were trading on future promise rather than current performance. (I exclude Nortel which taught me a painful lesson as I held all the way down, being a loyal Canadian.)

With short memories and awash with cash, by mid 2008 investors scoured the world for opportunities. “Lazy money” was attracted, like moths to the fire, to any investment that would yield 7 - 10% and was rated relatively safe by rating agencies such as Moodys or DBRS. Lazy money is money owned by people who don’t want to do their homework by analyzing the risk and security of the investments they are purchasing. There were a lot of banks, pension companies and institutions who ended up with CDO’s and subprime mortgage portfolios that became illiquid and ultimately worth only a fraction of what they cost.

Today you can invest in the Euro and Greek bonds. Is Greece too big to fail. What is the credit rating for Greek bonds. Will Germany and France save Greece, then Portugal and Spain? What about all those rioters in Athens who think they will be entitled to their benefits forever regardless whether their government can afford to pay them. What happened to the rating agencies and the EU regulatory authorities when Greece issued bonds in 2008.

The headline reads:

“Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit.”

And in the Saturday Globe and Mail, Business Section, May 15, Derek deCloet reflects on investors who are prepared to lend money to Britain (a holdout from the Euro) for 10 years at 3.74% or even worse for 30 years at about 4% simply because the rating agencies call their bonds “Triple A”. He writes:

“The biggest problem is that lazy money depends on rating agencies,” says one of the smartest debt investors I know. They shouldn’t, this person says: Rating agency analysts are typically underpaid, overworked, and the good ones are inevitably picked off by Bay Street or Wall Street firms that will pay them a lot more.

Here’s a modest prediction: Some time in the next several years, the rating agencies will be exposed again, this time by underestimating the risk in the government debt of some major economy. And, just as in the crisis of 2008-09, the investors who make the big money will be the ones who ignore credit ratings altogether and do their own homework.

I agree that we have to do our own homework, but I am really not sure how reliable my homework or my conclusions are. I predicted years ago the $US would fall because of the continuing deficit and balance of payment problems and increases, also the lack of political will to deal with entitlements. I even bought a hedge. I was right, but my timing was off. The hedge expired before I was in the money.

In 1979 the Hunt Brothers out of Texas cornered the silver market. Silver skyrocketed in price from about $5 to $50 per ounce in a year. When silver was $45 I went to the only bank selling silver intending to buy some. I needed a bank draft which I did not have at the time. There were 30 or more people, some with paper bags full of cash, patiently waiting to trade it in for silver. I thought to myself, this is probably not a good idea. And I was right for once. One lesson I have learned is that investors generally like company – if lots of other people are buying something, it must be good. With the silver play, I was a contrarian.

I am not sure how to do my homework, but it is fun speculating! In the meanwhile, my daughter is going to school in Ireland which, unlike England, uses the Euro. So I did buy some Euro’s on Thursday. But I am going to stay clear of UK Bonds.

Flatter is Better

2010-04-22T23:14:00.000-07:00

Thomas Friedman is the author of “The World is Flat” (see below) which deals with the subject of the flattening of the globe and what it means to how we perceive the world and behave in it.

The concept of “flattening” applies to organizations too.

I am generally not in favour of hierarchal systems although dictatorship in a business organization does have its advantages in terms of quick decision making and implementing those decisions. It also seems logical that the entrepreneur who is taking the risk should have the right to make decisions and impose them on others who depend on him/her.

The Sunday New York Times Business Section has a weekly column “Corner Office” in which CEO’s are interviewed about aspects of their companies and their personal development and leadership strategies. They talk about delegation, hiring, qualities which make great employees, how to get the best out of their team, etc.

In late January, Corner Office did an interview with Cristobal Conde, CEO of a software and IT Services company.

The interview begins with a question and answer:

“Q. What are your thoughts on collaborative versus top-down management?

A. Collaboration is one of the most difficult challenges in management. I think top-down organizations got started because the bosses either knew more or they had access to more information. None of that applies now. Everybody has access to identical amounts of information.”

Collaboration flattens the organization and flattening leads to collaboration. If you think collaboration is good, and I do for a variety of reasons, how do you promote it.

Though the inteview is short, Conde makes a couple of comments that, in my opinion, are relevant to managing a vibran, creative organization. He first mentions his twitter-like system which he calls Yammer, an intranet communication link which allows people to share what others are doing, share information, brag about successes – “that is what flattens the organization”.

He also describes how and why he moved from command-and-control management to delegation which involves choosing the right people, delegating to them and holding them accountable. I would add mentoring and fostering creativity as factors as well. The interview continues with:

Q. Besides the endless travel of that year, was there something else that made you shift styles [from command and control to collaboration and delegation] ?

A. Yes, it was a huge disagreement with somebody who worked for me directly, and he ended up quitting shortly thereafter. And it wasn’t that the decision that we disagreed on was so big. It was more that, to him, it just wasn’t as much fun anymore. He felt he could do more, and I was in his way. I was chasing away somebody extremely valuable, and that is when I realized I never would have put up with that myself. If you start micromanaging people, then the very best ones leave.

If the very best people leave, then the people you’ve got left actually require more micromanagement. Eventually, they get chased away, and then you’ve got to invest in a whole apparatus of micromanagement. Pretty soon, you’re running a police state. So micromanagement doesn’t scale because it spirals down, and you end up with below-average employees in terms of motivation and ability.

Conde says, his new way of management is the way to “Get world class people and keep them.”

In a business environment and world in which people change jobs, homes, careers many times in their lifetime, it seems to make good sense to try to mould your organization to do just this.

I will be travelling over the next few weeks so am posting early.

Lawyers and Anthropologists - Something in Common?

2010-04-17T09:38:00.000-07:00

I recently travelled to Merida, Mexico, to attend the annual meeting of the Society for Applied Anthropology at which my sister, Jean (Jay) Schensul, received the Malinowsky Award for lifetime achievement for her contributions to applied anthropology in writing, community activism, health initiatives, etc. Among her many achievements, Jay founded the Institute for Community Research (ICR), a non-profit society based in Hartford, Conn. Hartford has many diverse ethnic and cultural groups. ICR's mission is to collaborate on research projects with other community groups. The goal is to understand community issues and promote justice and equity in Hartford and elsewhere. Although the goal may seems ambitious, the projects are focussed, targeting very specific problems.

Over the years, Jay obtained grants for research projects on many primarily health related issues for projects in Mexico, Peru, Sri Lanka and India. Through her work, she changed the landscape of applied anthropology in the Western hemisphere. She was and continues to be a “maverick” (not quite like Sarah Palin).

While listening to Jay’s keynote address, what impressed me was her commitment to change and her insight into the systemic problems retarding change. My interpretation was that anthropologists have many skills but must learn to use them in a different way in order to effect change and stay relevant in a milieu where many disciplines compete for resources.

Staying relevant and effecting change are of universal application. Throughout my career I have frequently thought about the relevance of my work and the legal system generally and struggled to find some deeper meaning. But if you are a lawyer, until you determine the role law should play, it is difficult to determine your own part. Visionaries, like Jay, force their peers to confront the larger picture.

In her presentation, Jay pointed out the strengths of trained anthropologists, the systematic weaknesses preventing those in the field from utilizing their skills and abilities, and then described how to use technology to harness those skills and bring about change.

She started with the benefits anthropologists [for almost all you can substitute “lawyer”, “doctor” or “educator” for anthropologist] can offer, for example:
- anthropologists work locally and globally
- Many anthropologists are motivated by social justice concerns.
- Some are artist/scholars
- Anthropology is interdisciplinary
- anthropologists see things as a whole

The systemic roadblocks which prevent real and effective changes to applied anthropology [again many of these all inhibit change to other professions] include:
- archaic rules governing promotion and tenure
- funders, policy makers and schools of public health do not institute training or encourage peer review opportunities for innovative products
- lack of cooperative research efforts between schools of public health and community organizations
- failure to support Community Based Research Organizations (CBRO) or link them to universities
- disinclination to publish innovative community-useful research methods and results which are meaningful but may not meet the standards of university peer-reviewed publications

According to Jay:
“In sum, the message for anthropologists is direct: further engaged action research from university bases, advance infrastructural changes, facilitate the development of CBROs and other forms of community competence in research with social justice objectives; join academy and CBRO forces with community voices to forge and to use new knowledge that makes a difference in reducing inequities and specific disparities in health education, culture and environment; and link with local, national and global networks.

We need to join forces with the action researchers of the north and the south, the sociologists, psychologists, feminists, disability researchers, and community based participatory research for health movement. By reclaiming action research, we forge alliances with researchers all over the globe in emerging networks … concerned with critiquing science, and with producing new community based knowledge in partnership with the communities who most need it.”

She suggests utilizing electronic tools such a national network of researchers linked through a wiki, communicating about their methods and results.

“Imagine a network of activist oriented applied researchers … among them anthropologists, communicating at any point in time and from any position on the globe about inequitable situations on the ground and steps required or taken to remedy them. This is now a technically achievable fundable vision.”

Jay is saying to her cohort group that to remain relevant, to contribute, to make impacts and to preserve their professional status, they must move beyond the confines of their particular expertise and make connections with other disciplines. This requires respect for others and intellectual curiosity. One has to be able to embrace new ideas, rather than be intimidated by them. Jay challenges us to act, seek, explore, understand and progress.

How does this apply to law? Lawyers by nature are drawn to and are comfortable in a world governed by rules (and frequently resist change). We are inundated with seminars and professional literature on how to use technology for the practice of law, research, accounting, billing etc., but are frequently too busy with the day-to-day applications of the law to examine the systemic issues in the law itself and the institutions of law. The universities, law societies and the law firm models that have been around for many decades and are, by and large, accepted but are becoming outmoded and may soon be obsolete. The power of technology is largely ignored as an instrument for the advancement justice in an active participatory manner.

I hope Jay’s work is of interest to a broader audience.

Myth and Reality

2010-04-10T09:18:00.000-07:00

I am travelling to Turkey and I thought I should read about Turkey and its history beforehand. This brings me to the subject of myth and reality.

The term “myth” (Wikepedia):

… is often used colloquially to refer to a false story; however, the academic use of the term generally does not pass judgment on its truth or falsity. In the study of folklore, a myth is a religious narrative explaining how the world and humankind came to be in their present form. Many scholars in other fields use the term "myth" in somewhat different ways. In a very broad sense, the word can refer to any traditional story.

We consider ourselves rational thinkers and, as such, prefer history to myth. The Turks created their own myth, denying the genocide of the Armenians since 1915 when the events occurred. While reading “Rebel Land” by Christopher de Bellaigue, I quickly realized that even defining who is a “Turk” is a difficult proposition (that, too, may be part of the myth). De Bellaigue’s book was reviewed in the New York Times

To me, the most interesting aspect of the review is that de Bellaigue, a foreign journalist, was seduced by the Turkish myth that the
Armenian genocide never occurred. From the review:

“Notable among these are the notions that the Turkish republic is a nation-state containing no subgroups with valid claims to ethnic or political differentiation, let alone autonomy; that the country has a European and secular essence and destiny; and, more emotionally, that the achievement of Turkish nationhood was an enterprise reflective of a righteous people who to this day remain victimized by the self-interested incomprehension of the West.

In the grip of such prejudicial ideas, de Bellaigue in 2001 wrote an article for The New York Review of Books containing a blandly pro-Turkish account of the fate of the Ottoman Armenians. To de Bellaigue’s somewhat surprising surprise [sic], this excited a furious response. The controversy led the writer to a searching, shameful examination of his sources and his soul: “I had been charmed by the Turks, and perhaps intimidated by their blocking silence” about the Armenians. “I had helped to keep Turkey’s past hidden.””

Seductions are dangerous. A recent one is the myth of weapons of mass destruction in Iraq which produced deadly and far reaching consequences. The barrage of media reports, the United Nations address by Colin Powell, etc. all conspired to shape our thinking and make it more difficult to resist the Bush administration push to war.
Deconstruction of the text of myths is not a dismantling of the structure of the text, but a demonstration that it has already dismantled itself. Its apparently-solid ground is no rock, but thin air. Deconstruction takes effort and time, but should lead to a deeper understanding of any subject of study.

Myths also abound in science. Take for example the “myth” created during the 1800’s and debunked about 1890 that light was propagated through ether.
Richard Feynman, beloved by his acolytes and probably the only physicist to make major achievements in theoretical physics in each of 6 decades, reworked every aspect of physics from the basics. From “Richard Feynman: A Life in Science” by John and Mary Gribbin:

“There was another way in which Feynman lacked respect (in the best possible way) for authority, linked to his love of problem solving. He wanted to work out everything for himself, from first principles. That way he could be sure he had got it rights instead of, perhaps, wasting valuable time developing someone else’s ideas, only to find that those ideas had been wrong in the first place.”

Feynman’s most startling and amazing advances in physics derived directly from this framework of thinking. There is an excitement associated with thinking for yourself and being certain (at least as certain as you can be) of the result.
The same applies to journalism and I suggest the same applies to law and the purposes it serves. Slavish application of law without such reflection denies the possibility of a much richer approach to law, to achieving client satisfaction and understanding and to law firm management.

One problem is that we are too busy living (and sometimes to lazy) to think everything through. Not many of us can afford the luxury of deconstructing everything around us. Also this type of examination can challenge our comfortable notions about life – challenge us to change things. On the other hand, have we got our priorities right. If you are person for which the richness and texture of life is the result of creative thinking, can you afford not to focus more on why?

To be continued.

Who Needs Work?

2010-04-02T13:26:00.000-07:00

The question of who needs work and what do you do when it eludes you should be on everyone’s mind. The intrinsic value of work is so ingrained, it is almost a part of our essential identity. Without work, what is the meaning of life?
I will leave the value of work for another blog.

In this blog, I want to look at the consequences of not having work or not having enough work and how it affects us.

We have always endured fluctuations in the economy and the resulting impacts on the employment market. From the beginning of the recession in 2008, over 8.2 million jobs were lost in the US (some say more and the new jobs coming on stream were temporary, lower paying or in service sector) bringing unemployment rates close to 10%. In Canada there has been a similar experience although not so dramatic, except for Ontario where the manufacturing industry, particularly car manufacturing, has been decimated.

Unless you or someone in your family has experienced the pain of lay-offs, redundancy, early retirement or not being hired back, this all may seen a bit theoretical rather than personal but you should not be deceived. There are and will be long term effects from this recession, as there have been historically from other recessions.

The impacts have been discussed by Don Peck in his article in The Atlantic, March 2010 – “How a New Jobless Era will Transform America”.

There are many ideas in this article worth exploring. As Peck points out, young people who either lose their jobs or are unable to get into the labour market for a period of time following graduation suffer lifetime earning losses and face more severe difficulties because they must compete against fresh graduates who don’t have to explain why they have been out of work for a year. There is also downward pressure on salaries as the unemployed pool expands.

Experienced workers holding prestigious degrees are accepting unpaid internships, cutting out the new graduates from even this source of work. There are other long term consequences such as heavier consumption of alcohol and more incidence of depression throughout lifetime even for those do get jobs.

People are diminished by loss of work. Men out of work struggle to find a place in their marriages, probably to a greater degree than women.

The recession has had serious negative repercussions on law firms. Work has declined. There is downward pressure on fees. Some clients have financial problems and cannot pay or cut back on legal services, etc. These problems are simply a mirror image of the overall economic situation. Law firms, like other employers, want to protect their bottom line and the simplest way to do it, in the short run, is cut staff or implement a hiring freeze. Individual lawyers who, for the most part and despite express declarations to the contrary, “eat what they kill” ie are paid on their billings, are very disinclined to share work or reduce their take-home pay.

Law firms cannot solve the problem of unemployment or the economy. However, they must protect and foster their vital resource, their people and in order to do so have to appreciate firstly the negative impacts on their people of a recession and secondly that they must carefully examine alternatives based on both short and long term planning.

According to Jordan Furlong in an article which appears in the Canadian Bar Association website:

“It’s time for something new — a law firm that takes organizational commitment seriously and recruits people not just for skills, which are abundant in the talent pool, but also for their willingness to work, share, build, train and innovate as a team.”

I think some of the answers may be found in developing strong management and a firm culture which will promote and implement the following:
Ø proactive approach which recognizes the onset of economic problem and plans for them
Ø giving the young lawyers training and mentoring in client development – this is not an inate skill
Ø training the young lawyers to live with the stresses of the new environment
Ø promoting work sharing and demonstrably requiring it both with financial incentives and monitoring with the intent of carrying this forward as the economy improves
Ø making long term decisions to keep those young lawyers who have superior talent with the commitment by the more experienced lawyers to get in more work or to work share
Ø use time and talents of underutilized lawyers for education and community work
Ø acculturate the partners to the need to modify their financial expectations for the betterment of the firm because of the positive benefits of retaining employees over the long run

Fear Factor

2010-03-21T21:27:00.000-07:00

Ray’s Blog – March 20 2010
The Fear Factor
Let’s start with the positive. I have had a great career as a lawyer. In truth, I have enjoyed several chapters, all of which were doing legal work, but totally different – from poverty law to fighting the government, to helping the environmental movement, to business law. Each has its own reward. I have made a living.
But I have to acknowledge there are darker sides to becoming a lawyer and practising law. No – not the usual Hollywood stuff of selling your soul to the devil or compromising your values.
The darker aspect which comes to mind today is anxiety and fear
– fear of making a mistake and fear of failure. I suspect this intrudes on people working in many professions and other jobs, but in my experience it is legend amongst lawyers and articling students.
My own experience is validated by an article with appeared in The American Bar Association's *ABA Journal* entitled "Law Practice Can Trigger Stress Disorder, Says Attorney Who Now Works as Therapist" by Martha Neil. From that article:
A sense of impending doom is a common feeling for many attorneys in practice:
From the mistake made when drafting a document or taking a deposition to a transgression that you may not even be aware of yet, there's always something lurking in your consciousness to produce a feeling of being "in trouble."
For him personally, writes Will Meyerhofer, a former BigLaw associate who now works as a psychotherapist, "it got to the point for me, at Sullivan & Cromwell, that I felt my entire body clench in preparation for attack just walking through the doors of 125 Broad Street and stepping into that elevator." His post, however, indicates that law practice, in general, rather than any particular law firm, is the cause of such stress.
Most people must contend with the stresses, competition and demands of our current work environment culture those problems. But lawyers may be in a league of their own when it comes to taking fear into the workplace and incorporating it into their daily activity (and nightmares).
The anxiety and fear of making an error may begin in law school. An old movie “The Paper Chase” illustrates how an illustrious but intimidating professor at Harvard destroyed the confidence of some of his students. We hear from some mentoring lawyers “Put their feet to the fire”. “Put the fear of God in them”. It seems nothing is good enough. No mistake can be too small. Every word counts. Every question in court is critical and if you miss one, you can never go back. Once the contract is signed, the litigation begins. And on and on.
Does law attract individuals who are susceptible to this catastrophic type of thinking or does it develop and grow over time? Do the more mature lawyers, the mentors, suffer from this type of thinking so normalize it and pass it on?
Lawyers are trained to analyze every situation to the benefit of their client and often this means taking advantage of every possible interpretation of the written word, and knowing that any set of facts or circumstances can be spun to achieve the best result for the client despite the intent of the participants or, in fact, “reality”. Knowing this, lawyers live in fear of other lawyers doing just that with their work. And of course, lawyers well appreciate the intolerable experience of being sued for making a mistake, having seen their clients suffer through it. Lawyers are well aware of the current philosophy and culture in US and also Canada that if on person has suffered, someone else is responsible and must pay.
We have insurance and that should help, but I am not sure that it does. Some lawyers may believe that if they worry, they will not make mistakes as though excessive worry is a worthy preventative measure. Their inner voice says: “I have always worried a lot, never been sued, so worrying must be effective.”
I am not sure if architects, accountants, dentists, doctors, business people, teachers, etc. suffer from this syndrome. What I do believe is that this type of extreme anxiety and fear detracts a lot from enjoyment of life and cannot be very productive. Recognizing and dealing with it is important. And this means more than just putting it in a compartment and coping. It is noteworthy how many lawyers use alcohol as a coping mechanism for the stress of practice.
I think that these issues are worthy of serious, open and honest discussion in a safe environment. Law firms have mentors for articling students (called Principals). Mentors are not born great and don’t become great without training and a deep understanding of what they must do to encourage the development of their mentees. There should be a program for mentors and feedback from mentees. There are many other ways to help lawyers deal with the fear factor, but we have to start with consciously confronting the problem.

2010-03-15T09:34:00.000-07:00

Core Values

Danny Miller is the author Managing for the Long Run: Lessons in Competitive Advantage from Great Family Businesses.

Danny and I met some years ago and he and I email on occasion. His book is replete with examples describing why Family Businesses are successful. These reasons include;

- inspiring ideals
- a passion for the substantive over the pecuniary
- patience and perfectionism
- religious unorthodoxy
- Spartan parsimony
- permanent tenures
- systemic role ambiguity
- a host of other qualities almost totally ignored in traditional texts on management

The qualities he identifies as measures for success are the 4 C’s – command, continuity, community and connection.

You will recognize the names of these great family companies – Michelin, Estee Lauder, Hallmark, LL Bean, Levi Strauss, Coors, New York Times, Timken (of ballbearing fame), Microsoft, Apple, HP, Toyota, etc.

Take the New York Times, for example. It seems relatively easy to create a mission statement and core values for a great newspaper, though far more difficult to consistently apply them. Once a great company has created the mission statement and developed leadership, attracting and motivating the employees and managers is going to be a lot easier. In fact, unless a business can motivate its work force, it is not going to be “successful”. Note that “successful” means more than simply profitable.

Law firms are often created as “family companies” but usually after a generation and the original people retire and as they grow in size, they are no longer family companies. Where are the Blakes in Blakes or the Davis’s in Davis.

Nonetheless, a law firm can try to emulate the characteristics that have distinguished family companies and made them great places to work.

Law firms are curious creatures. There are some law firms that specialize in products which can inspire their workforce. For example, they may do aboriginal work, specialize in labour (either management or union), class action tort against law corporations (tobacco, breast implant, etc.), merger and acquisitions, environmental work. But in fact, most law firms don’t specialize so narrowly and many that do still look to the bottom line almost solely as a measure of success. They are also very difficult to manage for other reasons, including the independent and risk-averse nature of lawyers.

In a law firm there is little personal inheritance to pass on to the next generation – your name may remain on the door (though that too is unusual) but once you leave, you are no longer associated with the product, This is unlike great family companies which are passed on to the next generation.

Some law firms do have mission statements and personal codes of ethics and do believe in personal growth. Some have sabbatical programs, take on pro-bono work, participate in legal clinics and legal education, encourage partners and associates to do community work, etc.

For an interesting example, see Talent Without Borders

This is a story in the Globe about a law firm which has given its associates paid time off if they use their own vacation to participate in an aid program by participating in CIDA sponsored projects in non-industrialized countries. The associates mentioned went to Botswana and Vietnam.

The firm allocated $40,000 for participation in Leave for Change, …. In the end, seven employees participated, including Ms. Ghislanzoni, who volunteered in Botswana late last year, and her Edmonton colleague and marketing specialist Jenn Muir, who returned from a three-week post in Vietnam in January. (The eighth staff member became ill and could not travel.)

The result (apart from the actual work done abroad) was:

Like Ms. Muir, Ms. Ghislanzoni's experience left a positive impression of her
employer on her. “It reinforced the fact that the firm recognizes that different experiences all have different values and they all have a place in the firm,” she says. “It shows quite a bit of forward thinking and it makes me feel loyal to the firm because they supported me in something important to me.”

This is a hot topic for those who are looking for a work environment in which they can help others, enhance their own professional and communication skills, and enrich their personal lives.

I am convinced that every law firm should be looking at these issues through a different lens and discussing what can be added or changed to make working for it a truly unique and rewarding shared experience.

Crossing the Line

2010-03-09T11:19:00.000-08:00

The subject of crossing the line is fascinating. Take for example Woody Allen’s “Crimes and Misdemeanors”.

A middle class dentist of about 55 has an affair with a woman who has a borderline personality disorder. She threatens his comfortable, established life and his marriage and he “must” takes steps to put an end to the problem. In doing so, he crosses a line from which there is no return.

Mark Dreier, a lawyer who graduated from Yale (so did George Bush) and created a very prominent litigation firm in New York, was recently convicted for fraud and other crimes. He was interviewed by Bryan Burrough for an article for Vanity Fair Magazine (yes I do read it sometimes). His story which makes for great reading. He crossed the line when he ran out of money to build his own law firm, then sold a fraudulent $20M note to a hedge fund. The note was issued purportedly by a client who is a major developer in New York. The issuer of the note was fictitious; the financial statements of the issuer were pasted onto letterhead of his client’s accountant. The hedge fund did no due diligence. Dreier was going to pay it back as soon as his law firm started making money.

Within a few years, Dreier had 3 estates, an $18M yacht, millions of dollars of art and various other toys. And he had by that time increased his Ponzi scheme to over $400M.

We didn’t hear much about Dreier because the Madoff story broke just a few weeks later.

Why do some people cross the line and not others? What motivates or allows a person to cross the line. Madoff, Dreier, Liknaitsky, Q.C.- (Alberta), Melnitzer, Q.C. – Ontario Aaron Mortgage (BC)(a lawyer was involved), etc. are in a sense mundane. Their motivation, however disguised or rationalized, was to achieve status and wealth not available through legitimate means.

The story of the dentist in “Crimes and Misdemeanors” is more complicated and one which resonates because a person who is so well-intentioned and upstanding crosses the line to eliminate the threat to his family, a threat of his own creation. There are other movies which deal with spurned mistresses, most notably “Fatal Attraction”.
But Fatal Attraction is far less subtle and leaves the audience with less to think about. The male protagonist, played by Michael Douglas, is stalked by a one-night stand played by Glenn Close.

Novels and movies portray situations in which people feel compelled, despite the consequences, to do something which will destroy their lives by betraying their values, ethics or morals. The result is often devastating. It is the essence of modern tragedy.

When our lives are under any form of siege or threat, it becomes tempting to cross the line. That threat can come from as simple and innocent an event as making a mistake in handling a file and not facing the consequences squarely and immediately.

It is always most difficult to do the right thing when the consequences seem most dire to the person facing the dilemma, but to an objective observer the problem may have a relatively straightforward solution.

Life is not really a slippery slope. It is best to think about things before you cross the line than have an epiphany after you cross the line, looking back only too late with the benefit of hindsight .

Risk and Decisions

2010-02-15T12:38:00.000-08:00

Statistics are really boring for most people and almost impossible to use for almost everyone. There are lies, damn lies and statistics.

Risk on the other hand is exciting and get the amygdyla firing neurons all over the place.

In June, 2007, the opportunity to buy a choice piece of real estate in Manhattan was almost irresistible. By June, 2009, that same piece of property could easily bankrupt you. Statistics might tell you that buying is good in the long run (whatever that means) but would not really have given you much insight on when to buy. How do you calculate financial risk (ie the probability of profit over loss and in what amount)?

How do you calculate more generalized risk of a business decision? For example (See Globe and Mail) , the new CEO of Fiat, Sergio Marchionne, said of Fiat’s recent decision to expand in Russian and China:

"One of the things you can do in a period like this [2009 – 10 recession] is either throw yourself into a state of utter despair or start planning for a future that looks half-decent.”

When things are really expanding and the future looks rosy, the contrarians talk doom and gloom. When things are bad and seem to be getting worse, the contrarians are ready to buy, expand and take risk.

Another approach is to ask whether the risk associated with not making a decision or not taking some action outweighs the risk of taking action. Not taking action or accepting the status quo is a decision which entails risk, though it may not be perceived that way.

Does this have anything to do with practising law? I think it does, both from a legal perspective and discussing business decisions with clients.

A good example is found in the many articles on how to structure contract negotiations to minimize certain risks. This is prevalent in the construction contracts in which risk is allocated between the contractor and the owner (and sometimes consultants and architects) especially for matters which are unknown when the contract is entered into. However, this reduces the concept of risk to its simplest terms. The study of risk is much broader than that.

Clients may or may not think cognitively in terms of risk. Client may see their lawyer as a buffer between him and the potential risk of a deal. Any reasonable person knows that no transaction, or indeed any life experience, is wholly free from risk. But if the client sees the lawyer as a guarantor against risk ie the equivalent of investing in a Canada Savings Bond, the lawyer must approach the situation carefully. The client may not express his expectations until later. This translates into “I retained you to protect me” or “I told you I was not prepared to take any chances.”

The medical profession is constantly plagued by this syndrome and now we find doctors who will spend hours with their patients explaining in gruesome detail the possible complications and uncertainties of surgical procedures. They will use those damn statistics to emphasize the risks. Sometimes without further explanation of the risk either of the procedure or the risk of not doing the procedure. This can leave the patient with a sense of hopelessness and high anxiety. There are some doctors who use other metaphors to explain risk which may get the same point across but be more palatable and lead to a better outcome.

At least the risks associated with many medical procedures are reasonably well-known. The risks of winning or losing a legal action (or the infinity of outcomes in between) are generally not quantifiable. The risks associated with a business transaction are often very complicated and it is well known that many business people are prepared to act without full knowledge and in the absence of facts and this is what distinguishes them from lawyers who, being very risk averse, frequently want all the facts before they act.

The business lawyer will benefit by developing a better understanding of risk and how people manage risk.

Positive Reframing

2010-01-31T12:53:00.000-08:00

2009 was not a good year for a lot of people, lawyers included. Probably it was my least active year professionally during the past 25 years. There were times when I sat at my desk thinking that I should probably go biking, home, to the gym. But at the end of the year I found that my productivity and billings were actually not so bad and I had accomplished other things including giving several seminars at AHBL, writing an article (hopefully to be published soon), cultivating friendships and planning to build a house in Mexico – not bad in hindsight.

Positive reframing, ability to adapt and the courage to stay in the present are skills we can develop to get the most out of life. Take for example, Beverly Willett whose article appeared in the NYT Magazine – Jan. 17, 2010

"The past year brought about setbacks for many. For me, it signaled the end of my 25-year marriage, the loss of membership in the family medical plan and the necessity of re-entering the workplace at midlife after a long hiatus as a stay-at-home mom. The market crash gobbled up a big chunk of my modest retirement account, and the divorce litigation left me with a pile of bills.

So in November, when my friend Terry mentioned that the company she worked for needed extra help right away, I followed what had fallen in my path. At least I could earn enough to foot the heating bill for a couple of months while I spruced up my résumé.

“I guess you’d call it a fulfillment house,” Terry said, describing the company. People placed orders for merchandise over the Web or by phone, and Terry’s organization fulfilled the orders. The items ranged from T-shirts and teddy bears to coffee mugs and casserole dishes.

The following Monday I showed up for my part-time holiday job. The pay was $12 an hour, before taxes, with no health coverage, sick leave or other benefits. During the first few weeks, I sat in a chair all day and typed in orders, a far cry from my early days as a lawyer representing clients with household names.

Right after I got my first paycheck, my car broke down, and heating-oil money was diverted to the repair shop. During Week 2, the 20 to 25 hours I thought I’d be working dwindled to 13. But I called a halt to my pity party when I counted up all my friends who lost their jobs in 2009. And that’s when I began to feel satisfaction from the work I did get. Although the job involved inputting product codes and shipping data for several hours at a time, it somehow got me in touch with real people with real lives in real towns. And it gave me glimpses into worlds other than my own that, for at least the course of a workday, melted preoccupation with my own troubles.

The scrawl on some of the orders reminded me of my 79-year-old mother’s. As hard as it apparently was for some of my customers to hold a pen, they nonetheless included handwritten notes with their $4.99 orders that said “thank you.” Of course there were orders that came with requests to include personal notes on the packing slips; others came with meticulous instructions for sending identical gifts to a number of family members around the country. My own grandmother, who was proud but of modest means, cheerfully handed out $5 McDonald’s gift certificates at holiday time to an ever-expanding contingent of grandchildren and great-grandchildren. Reading these notes made me long to be back in my grandmother’s tiny living room with my own family members, all of whom now live more than 250 miles away.

By Week 4, as the holidays approached, my duties shifted into Phase 2 of the fulfillment process. That meant I took inventory, pulled puzzles and potholders and other merchandise from the shelves, constructed and packed boxes, applied postage and hauled packages to the loading dock, where U.P.S. picked them up.

Typing in orders had made my backside ache from all the sitting; after the shift in duties, I was on my feet all day, carrying, bending, lifting and crouching. But as I bubble-wrapped breakables, something else began to register with me: all the work that went into getting the parcels I’ve received over the years safely to my door.

A couple of weeks before Christmas, the bone spur on my left foot flared up so badly from all the standing that I hobbled around for two days. All my nails broke, too, and I came home at night with compound paper cuts. My grand plans of tackling my massive to-do list in the evening after I got off work quickly fizzled: it took all my effort just to cook dinner, throw in a load of laundry and ice down my lower back. But make no mistake — my employers treated me well. They paid more than others pay for the same work and made sure we hydrated and took lunch breaks. The other part-timers I worked with smiled and always offered a hand. And at the end of each day I felt that oxymoronic “good tired.”

The job has now ended, but that’s O.K. There was no way I could begin to whittle away at my substantial debt at that pay, and my physical and mental stamina make me a better sitter than a stander. But I needed to get back on my feet, and this was a way to start.

Even with all my years raising a family and working long hours as an attorney, I can say I’ve never worked so hard in all my life. And yet it might turn out to be the best job I’ve ever had."

Beverly Willett is a freelance writer living in Brooklyn.

Measuring "Value"

2010-01-18T12:55:00.000-08:00

According to the “Outliers” (Malcolm Gladwell), you need about 10,000 hours to become expert. This can apply to piano, theoretical physics or law. At 4 hours per day, 300 days per year, this will take 8 1/3 years.

That is daunting. With some help, maybe it is possible to do it in 8,000 hours.

Stephen Hawking’s book “The Brief History of Time” is one of the world’s best sellers and least read books. According to 20th century physics, on the quantum level, time is reversible, ie the laws of physics apply forwards or backwards in time. On the macroscopic level time goes forwards (at least that is our perception and a cruel one). The “arrow of time” has been subject of much debate in the domain of physics. But I doubt if we would have many meaningful conversations on everyday life unless we implicitly assumed time moves inexorably only in one direction – ie forward.

Lawyers sell their time so there is a direct linear relationship between time and money. For lawyers and other professionals like accountants and architects, time is money.

Unfortunately for those of us who are slaves to this clock and have been doing time records for 20 or 30 years (regrettably even more for me). time and money have become interchangeable, in fact synonymous.

Mastercard’s advertising is truly ingenious – zoom in on a kid playing hockey - $2.00 for the puck, $25 for the stick, $200 for the skates, - watching your kid score a goal is priceless – but for everything else there is Mastercard.

If you spend each of your 5 –6 days a week in the office attributing to each hour a price, what is the price of the hour you spend watching your kid play hockey, or piano or for that matter, you playing piano.

What happens if you can’t allocate value to activities which are not “productive” ie cannot be billed out. Or if you can only prioritize activities based on monetary value.

Here is a link to an article from the New York Times in which the writer struggles with this issue. He expresses it much more eloquently and subtly than I can.

Legal Mentoring

2010-01-09T12:59:00.000-08:00

The following article recently appeared in the New York Times.

The Children of Cyberspace: Old Fogies by Their 20s
By Brad Stone, published January 9, 2010

This article deals with technology. A comment which interested me was that there are now mini-generation gaps rather than merely generation gaps. According to Wikipedia (but with a disclaimer that there is no substantiation) gender gaps means:

"The term first became popularized in Western countries during the 1960s and described the cultural differences between the young and their parents."

Although some generational differences have existed throughout history, because of more rapid cultural change during the modern era differences between the two generations increased in comparison to previous times, particularly with respect to such matters as musical tastes, fashion, culture and politics. This may have been magnified by the unprecedented size of the young generation during the 1960s, which gave it unprecedented power, and willingness to rebel against societal norms."

If a generation is about 20 years, that leaves a couple of generation gaps between me and some of the articling students. A frightening but challenging thought. The generation gap and technological advances present formidable obstacles to the "elder generation".

We (i.e., me) are so immersed in today's problems and the urgency and deadlines imposed by practice, we have even less time to contemplate the multitude of ways in which the legal world will change and we are far removed from the cultural and even physical technological changes. This is a problem which is likely faced by young lawyers too - too little time and too much to do. How are we to plan for the future while struggling to keep our heads above water today.

As a mentor, I wonder if my experience will be relevant to the practice of law as it inevitably evolves over the next 20 - 30 years?

The teenagers of the '60's and '70's thought the experience of their parents was irrelevant at best and counter-productive and tainted at the worst. I can say this with confidence having grown up in that long-ago era.

Being an optomist, I assume that I have some valuable or at least interesting ideas, stories and experiences for young lawyers.

So the purpose of this post is to invite the reader to think about how lawyers practice law, how they use technology (or don't), how they communicate within their office, with their peers and with their clients, and whether they are anticipating those inevitable changes. Also what it is that the older lawyers can communicate to newly called lawyer that they may perceive as valuable and interesting.