Bernie Madoff’s name was back in the news recently with the announcement that a settlement was reached between the New York Mets owner Fred Wilpon and the Trustee of Madoff’s victims for $162 Million. The one question that has still not been answered to people’s satisfaction is how did the SEC probe miss the fraud that Madoff was perpetrating for so long?    

We may never know what really went on at SEC in how they viewed Madoff, but one can better understand the dynamics that probably played out between Madoff and the SEC investigators from reading Scott Snook’s book titled “Friendly Fire.” This book is about an incident in Iraq that took place in the 90s when NATO was enforcing UN's no-fly zone in Norther Iraq to protect the Kurds.  In the incident two F-15 pilots shoot down two American helicopters, killing 16 soldiers.

The book offers explanation of this tragic  incident from multiple lenses, including, individual, group dynamics and organizational, but the group dynamics is quite relevant to Madoff  and SEC since it sheds light on how decision-making can get impaired when there is an informal power structure that develops.  

The picture we get about the probe that SEC conducted about Madoff's hedge fund is that it was not that thorough or aggressive.   The part in Snook’s book where he looks at the group dynamics among the AWACS crew in the friendly fire incident offers explanation on how the SEC investigators might have viewed Madoff and the whole investigation.

This group dynamics is so common that we see it every where, but very common in sales, on Wall Street and in athletics (most recently, with Penn State Football), where the  imbalance of power results in catastrophic decision-making failures.

According to Snook’s book, the AWACS crew officially outrank the F-15 Pilots; however, there is an informal ranking system that has developed in the Air Force over the years where the F-15 Pilots outrank the AWACS crew. This becomes apparent when the AWACS crew  do not challenge the F-15 pilot's visual sighting of two Iraqi helicopters and show deference to them since the F-15 Pilots are considered  the "Top Guns."

During the patrol, the AWACS crew, instead of challenging the F-15 lead pilot when he misidentified the Iraqi helicopters, the AWACS crew were blown away with the pilot's knowledge of the Iraqi helicopters when he corrected himself from spotting two "Hip" helicopters to two "Hind" helicopters.  Obviously, the F-15 pilot was confused, but the AWACS crew did not pick it up or ask for further confirmation from the pilot and/or the wingman.  

To bring this back to Madoff, someone in the SEC probably told, most likely, low level SEC  investigators to snoop around Madoff's hedge fund to see if there was any wrongdoings going on.  We will never really know what level of importance was given to this investigation at the highest level, or was it assigned as just another routine “sniff” test.  If the SEC was just going through the motion, then the investigators probably were not focused on looking for any irregularities.  

Though SEC had more power, there was an informal power structure that  had developed where Madoff was the "King" of Wall Street. The SEC investigators were probably in awe of Madoff based on the reputation he had built over the years on Wall Street.

The investigators probably saw what they wanted to see, which was nothing.  Even if they had any suspicion, they were not  going to go deep looking for anything irregular,  in case nothing turned up and risk getting good jobs on Wall Street after leaving SEC.  This is often a big  motivating factor when there is an imbalance in power.  Madoff could hurt them where it really hurts.  

It is too easy to say that SEC didn't find anything. I don't think they ever wanted to find anything. They just went through the motion of meeting ("I mean investigating") Madoff.  

The main point of this is  that these types of decision-making failures are common because of the culture and the informal hierarchical structure that gets developed over the years. You probably see it around you at home, work, and organization.  We don't get to the bottom of why no one saw it unless it results in deaths, scandal or a major fraud.

 

What can companies learn from this incident?  Let your superstar pick the manager under whom he wants to work. Is this a good model for corporation?  

For those who  have not been following the New York Knicks since “Linsanity” faded away, the team has come under  hard times. They had lost six in a row (till last night) and looked totally out of sync on the basketball court.  They lost their cohesion that had existed for two weeks.  

This loosing streak started just about the time Carmelo Anthony, Knicks superstar guard/forward, came back from his groin injury.  The team that looked cohesive suddenly started playing like a bunch of “pick-up” street players.  

When Anthony was healthy, the offense flowed through him and his first option was to shoot, so the team’s success clearly rested on his ability to score a lot. He is a scorer and  that’s the role he is comfortable with.  If the opposing team shut him down, then the team really struggled. The team was not winning with this style of play.

With injury to Anthony and other players, Coach D’Antoni, left with no alternatives, inserted Jeremy Lin (guard brought up from their development league) into the starting lineup. When the offense flowed through Lin, his first option was to pass, so other players got open shots or easy short baskets as the opposing team converged on Lin from penetrating to the basket.  This is the offense Coach D’Antoni liked to play.  Unfortunately, Anthony does not like to play this style of game.

This difference in the coaching style led to Coach D’Antoni resigning yesterday, since Anthony is  a superstar and the management had made a big investment in getting him to New York. In basketball, superstar is more important than a coach. 

This highlights a very important lesson in the corporate world.  If you are going to  bring in a superstar, make sure he gets to select the manager, since that relationship is very important for  productivity and  exceeding company’s objectives.  If that relationship does not work, then lot of time and resources will be wasted and the company will fail to capitalize on opportunities.

We are living in a superstar world today.  You have a very small window of opportunity to capitalize on opportunities and without a superstar, it is hard to win.   

Is this an anomaly or have we seen this before?

Very few people remember this today, but Michael Jordan, the great Chicago Bulls superstar, had lot to do with Phil Jackson becoming the coach of the Chicago Bulls.  When Jordan first joined the Bulls, the coach was Doug Collins and  was fired after the team was eliminated in playoffs in his first year. Jordan did not feel comfortable playing in Collins’ system where the offense did not flow through Jordan.  

That changed when Phil Jackson became the coach.  Jordan became the superstar and ended up winning six championships.

So next time when you bring in a superstar on your team, don’t make him work with a manager he did not select, otherwise you will pay a very steep price.  

As I was watching the primary result from Alabama and Mississippi last night, it reminded me of a funny incident that I saw long time ago at the US Open  when John McEnroe was playing a match against Ramesh Krishnan from India.

Ramesh Krishnan was an excellent  finesse player but did not have a powerful serve that McEnroe was used to returning.  McEnroe was really struggling against Krishnan and lost the first set. During the second set, McEnroe’s woes continued as he was still having difficulty returning Krishnan’s slice serve.  McEnroe had enough and lets out a big yell like a maniac:

“EVEN MY GRANDMOTHER CAN SERVE FASTER THAN HIM, AND I STILL CAN’T RETURN IT.”

McEnroe did gather himself afterwards to win the match and advance to the next round.

The time has come for Mitt Romney to do the same with the following yell I have crafted for him:

“THESE GUYS CAN’T EVEN GET ON A BALLOT IN SOME STATES, AND I STILL CAN’T PUT THEM AWAY.”

After that he will gather himself,  win and  advance to face off against Obama.  Unfortunately Mitt Romney is not John McEnroe, so we are in for a 5-set match and who knows how this will end.

Why is it that we seem to run into catastrophic decision making failures on Wall Street, large corporations, government and military every few years?  Why are we not learning from past failures to mitigate future failures?

When a failure or crisis occurs, we tend to blame it on greed, incompetence and/or corruption.  We seem to go through the perfunctory routine, after a failure or crisis,  of having a congressional investigation followed by new regulations to prevent that  failure from occurring again to gain people's confidence in the organization, till, of course, the next failure or crisis occurs.

After the stock market crash of 1987 one would have thought that we would never again come close to the brink again. Yet, since then, we have had the Savings & Loans Crisis, dot-com bust, Long Term Capital Management (hedge fund) failure, accounting scandals that led to the collapse of  Enron and other companies, and, the “mother” of all failures, the financial meltdown resulting from the housing bubble.

Since these failures keep happening, there has to be an explanation for all this.  It can’t be always explained away as result of greed, incompetence and/or corruption.  As it turns out the explanation for these failures is not that simple.

To better understand this, one has to look at the work done by Diane Vaughn in her seminal book, “The Challenger Launch Decision.”  When the Challenger space shuttle blew up in 1986 shortly after the launch, the cause was attributed to the O-ring erosion resulting from cold temperatures at Cape Canaveral, Florida.. The media blamed the explosion on the faulty decision to launch the shuttle.  Even the Rogers Commission that investigated the explosion came to a similar conclusion and barely covered what may have led to the faulty decision.

People were satisfied that the cause was identified and that it was highly unlikely that future explosion will occur  from an O-ring erosion or launching the shuttle in cold temperature.  People and the media moved on with their lives, but not Diane Vaughn.  

Diane Vaughn, a sociologist, wanted to focus on what led to that launch decision, and went back from that fateful decision to look into NASA’s culture and how it evolved that may have contributed to the explosion.  She went beyond the technical cause of the failure and looked into NASA’s organizational structure and behavior and the change that led to the failure.  This exhaustive and meticulous research took her nine years.  

She attributed the cause of the Challenger accident to a theory she coined the “Normalization of Deviance.” Normalization of Deviance is said to occur when a large-scale organization over time starts accepting small risks which leads to their taking bigger risks that  subsequently results in a catastrophic decision making failure. Since this takes place over a long time, it is essentially invisible and no one person or one event is responsible for the failure.  The main cause of a failure is the the culture that has become established over time.  

During her research Vaughn found that NASA did every thing by the book.  There were redundancies built in to mitigate risks. There was no evidence of  groupthink, and no one  individual made the fateful decision.  Everything NASA did for the Challenger space shuttle  launch was consistent with what they had done on previous launches. Everything NASA did was routine.

This highlights the insidious nature of  Normalization of Deviance, since it is invisible and routine and Vaughn points out in her book that NASA fell into the trap where  “unexpected became expected became accepted.”  

NASA did not initially expect O-ring erosion.  When they were discovered in early missions, engineers thought it was an anomaly.  But then it happened again.  Gradually it came to be expected.  Engineers didn't seem concerned since they felt there was sufficient redundancies built in to prevent a failure.  They gradually now accepted the O-ring erosion. At this point they had crossed the Rubicon on preventing a catastrophic decision-making failure.  

This explains why it is so difficult to prevent catastrophic decision-making failures on Wall Street and large corporations. They keep taking bigger risks to satisfy the board, investors and high expectations such that it eventually leads to a failure. People don’t see anything wrong with what they are doing.   

Are there current examples of any Normalization of Deviance in the making?  I believe there are at least three that could lead to major crisis.

First one is our rising deficit and debt, which has bee going on for some time and we, collectively, focus on it for a short time, make some quick fixes and then move on. Yet,  the deficit and debt keeps rising unabated.  Eventually, this will result in a major catastrophe that is not going to be the result of any one person, or one event, but the culture of accepting deficit and debt that we have come to accept.  Where was the outcry when the debt reached $1 trillion.  Now we have come to accept the debt as it approaches $16 trillion. There is still no sense of urgency.  Since Wall Street is rising, people are betting with their money that this will not lead to any crisis.  

The other major Normalization of Deviance is the coarsening of our politics where it is impossible to reach compromise on major issues.  The genesis of this could be attributed to when the Republican party  became a majority in the House during President Clinton’s administration.  Since then it has become extremely difficult to reach a compromise on major issues, such as immigration, debt reduction, education, infrastructure spending, reforming the tax code, etc.  

To highlight how difficult it is to reach a compromise, Ronald Reagan agreed to a $1 of spending cut to a $1 of tax increase with the Democratic Congress  to save Social Security.  When President Obama, during the negotiation for raising the debt limit, offered a $3 of spending cuts to $1 of tax increase, the Republican Speaker of the House, John Boehner,  rejected the offer because he could not get the support from his party.  During a recent GOP Presidential debate on Fox News, when a hypothetical 10/1 split was offered to the GOP Presidential candidates, not a single candidate raised his or her hand that he or she would accept that deal if it was on the table.  

Just when we thought that Wall Street will finally learn from their numerous failures, a resignation letter by a Goldman Sachs Vice President, Greg Smith,  published in New York Time on March 14, 2012 titled "Why I am leaving Goldman Sachs" shows that nothing has been learned.  It is as business as usual.  The author point that the secret sauce of Goldman Sachs was its culture of teamwork, integrity, humility and focus on the customer.  This has now degenerated to focus on money only.  The author feels that the new culture imperils the survival of Goldman Sachs and because of its interdependence the overall financial market. 

Normalization of Deviance is a very important theory that clearly explains why we keep having major large-scale decision-making failures and why it is so difficult to prevent it from occurring. When the next crisis occurs, we will undoubtedly discover that it was in the making for a long time and we just never gave much thought that it would ever occur.  It will again be devastating and will rush to apply a quick fix and then move on.  The problem is that we may not be able to come up with a fix if the failure proves to be so intractable.  

Source for this Blog:

The Great Courses, “The Art of Critical Decision Making,” from the Teaching Company; lectured by Professor Michael Roberto. 

There are boat load of advice on questions to ask during an interview when you are looking for a new job.  I am not going to add to that list, but I will give you one question you definitely don’t want to ask if you just want a job.

You only ask this question if you are looking  to make a difference.  You know your stuff, done your research, come up with ideas and insights and developed a compelling message.  Are you now just going to settle? 

If your situation is dire, then it is quite understandable that you may have to settle for a short time.  But you are not the type of person who is willing to settle any more because you are different and want to make a difference.

You are what companies absolutely need today to grow.  You are innovative, creative and passionate.  Your type of workers start companies or  looking to make a difference at other companies.

This is the question you will ask at the end of your interview, since there is nothing to ask after this question.

Remember the advice Miles gives to Joel in the movie "Risky Business.":
Joel, you wanna know something? Every now and then say, "What the f*ck." "What the f*ck" gives you freedom. Freedom brings opportunity. Opportunity makes your future. 


I will put a spin on this for your last question: If you can’t ask it, you can’t do it.  

“What would happen to your company if you don’t hire me?”  Stop and don't clarify and observe the reaction.

Is this arrogant?  No if you have done your due diligence and really believe that you can make a difference.  Think about  it, would we hire a President who did not exude that kind of confidence that he can make a difference in a positive way?  

You believe you can make a difference and have the insight and a plan to make a difference.  If the company  does not believe it, then you are not the one they are looking for.  Don’t waste your time. Time to move on.  

However, If the company is sold, then the interview is over and you got your dream job.