Management Secrets of the Grateful Dead

I was never a Deadhead but the MBA in me perked up at this article’s title in The Atlantic. Not one to tinker with perfection, I kept it for this blog post.

Who knew?

The Dead incorporated and pulled board members  from the band, its road crew and other members of their organization. They rotated the CEO position.

The ran a profitable merchandising division and “peace and love notwithstanding did not hesitate to sue those who violated their copyrights.”

They made the strategic decision to let fans tape their shows, which on one hand gave away recording revenues, but on the other, widened their audience. They figured (rightly) that “a ban would be unenforceable, and anyone inclined to tape a show would probably spend money elsewhere, such as on merchandise or tickets.”

A management professor quoted in the story called the Dead’s approach “strategic improvisation,” and observed that people are eager to attend his lectures on the band. “People are just so tired of hearing about GE and Southwest Airlines.”

It’s one of the most profitable bands of all time.

John Perry Barlow, the group’s lyricist cum-Fellow at Harvard Law School’s Berkman Center for Internet and Society, observed

What people today are beginning to realize is what became obvious to us back then — the important correlation is the one between familiarity and value, not scarcity and value…if I give my song away to 20 people, and they give it to 20 people, pretty soon everybody knows me, and my value as a creator is dramatically enhanced.

So perhaps it’s karma, not just deliciousness, that made Wavy Gravy and Cherry Garcia bestsellers for Ben & Jerry’s?

Prompts for Professionals

• If you’ve read this far, it probably has something to do with the novel nature of the subject. Try something refreshing for your next blog post or newsletter.
• The article said that the band pioneered ideas and practices that have been embraced by corporate America, most famously the Dead’s intense focus on its most loyal fans. Ask your blog or newsletter readers  what they would like you to do in addition to or instead of what you’re doing for them now. If you don’t, someone else will.
• The University of California at Santa Cruz is curating the band’s archive of commercial recordings, videos, press clippings, stage sets, business records and correspondence using a form of crowdsourcing. They’ll post as much as possible online and let Deadheads contribute what they know about the items. If you don’t have a blog, get one and start crowdsourcing best practices, war stories, whatever. If you work at it, your blog could become the go-to place for existing and prospective clients to search for answers and community.  I do this with my occasional posting of WORST communications practices by financial professionals — people inevitably chime in.

Sink AND Swim

Yesterday I asked a question about attitudes toward individuals filing for bankruptcy protection.

Today I want to point to an article in The Atlantic’s June 2009 edition titled, “Sink and Swim” wherein the magazine’s business and economics editor Megan McArdle argues that a relatively lenient American system of debt forgiveness is actually good for our economy:

“America leads the developed world in bankruptcies because for more than a century, we’ve worked hard to build the best—and, not coincidentally, the most generous—bankruptcy code in existence. We didn’t do it by design, but in fits and starts; the hodgepodge of innovations that have helped systematically ensure that debtors get a fresh beginning were as much the brainchildren of grasping creditors as of beleaguered debtors. Nonetheless, our system works so well that other nations are trying to move away from their harshly punitive treatment of insolvent debtors, and closer to our free-and-easy, all-is-forgiven model.

“Our leniency toward those with unsustainable debts helps not only profligate debtors, but the rest of us as well. Less onerous bankruptcy procedures boost rates of entrepreneurship: reduce the cost of failure, and people become more willing to take risks. America’s business environment is much more dynamic than that of Europe or Japan, for many reasons—and our generosity to capitalism’s losers is one of them.”

Debtor’s prison, anyone?

It seems most people want at least a pound of flesh from the insolvent.  Let’s see how that works by looking at Dubai, a country with no concept of bankruptcy.  As soon as you leave your job in Dubai, your employer has to inform your bank. If you have any outstanding debts that aren’t covered by your savings, then all your accounts are frozen, you are forbidden to leave the country and they throw you in prison.

Yep, that’s just what we need — more people in prison sucking up public monies for their upkeep instead of trying to start businesses and raise their families on the outside.

Prompts for financial and legal professionals:

• Based on what you’ve seen with your clientele, are we each just a job loss or serious illness away from insolvency?
• Are any of your clients asking if they should liquidate their 401-ks to stave off a bankruptcy filing?  Under what circumstances do you think this is a viable strategy?
• What should our schools do about the lack of financial literacy in America?  What can be done about the financial  illiteracy of adults?
• Has this recession in any way made you re-examine your professional views on the Bankruptcy Reform Act of 2005?

Green Tax Code?

Thanks to The Atlantic’s July-August edition, I took a brief walk through the US political-environmental history of my adult life.

For me, it started with President Carter’s much-derided “sweater address” to the nation, in which he suggested we lower our thermostats.  I recall vaguely the buzz about the White House’s unsightly solar panels. Even as a high schooler I paid attention to the news.

What I didn’t understand at the time was how much reliance this country puts on the tax code to affect behavior — individual,  corporate and regulatory.   Hence today’s post and writing prompts for bloggers & newsletter publishers.

Saw-blade growth

Quoting the article: “Plotted on a graph, the history of clean-energy production in the United States resembles the blade of a saw, rising and falling each time subsidies came and went. Japan, Germany, Spain, and Denmark show smooth, upward-sloping yield curves, a reflection of consistent government policy.”

Reliance on venture capital

Long excerpt:

The nature of venture-capital investing, which involves placing many bets in the hope that a few pay off, helped create today’s array of clean technologies. But venture capitalists have been unable to replicate the explosion of growth in the Internet sector, because they aren’t big enough to compete in the $5 trillion U.S. energy market. Google required only $25 million in venture capital to become the company it is today. A large wind or solar facility can cost upwards of $500 million just to get started. “When you’re talking power infrastructure, you’re talking thousands of tons of steel and glass and giant turbines,” says Peter Le Lièvre, the co-founder of Ausra. “All the investors in Silicon Valley combined cannot put $500 million into a project.”

This poses a problem. Venture capitalists can bring an idea from the lab to pilot scale. But sooner or later the limitations of their balance sheets kick in. Many start-ups have made it this far only to die searching for additional financing. Venture capitalists have a term for this. They call it the “Valley of Death.”

The nut of the problem traces all the way back to Jimmy Carter’s choice of tax credits as the vehicle for subsidizing renewable energy. Direct grants would have been simpler. But Congress had recently changed the federal-budget process to keep closer track of how much money was being spent. It suddenly became easier to spend indirectly, by manipulating the tax code. Although no one realized it at the time, Carter’s decision to use tax credits lit the very long fuse on a bomb that detonated last fall and nearly took down the entire renewable-energy industry in America.

The trouble with tax credits (my emphasis added) is that in order to make use of them, you must owe taxes, and most start-ups struggling toward profitability do not. So while a company looking to build a wind or solar facility would qualify for valuable benefits, it had no means of realizing this “tax equity.” The work-around was to partner with someone who did, someone large enough to finance a $500 million facility and profitable enough to incur a large tax bill. Having witnessed two decades of busts and bankruptcies, traditional U.S. banks wanted no part of this. European banks, going by their more positive experience, were comfortable funding large renewable projects, but didn’t qualify for U.S. tax credits. The perversity of the government’s incentives demanded a big balance sheet, huge profits, and an indifference to risk. Enter Wall Street.

Investment banks and hedge funds stepped in to fill the void, engineering tax-equity vehicles with suspiciously complicated-sounding names, like “partnership flip structure” and “inverted passthrough lease,” to exploit the tax benefits. These deals amounted to financing agreements for large infrastructure projects, given in exchange for tax credits, often worth hundreds of millions of dollars, that could be applied against profits earned primarily on other investments (like mortgage-backed securities). For renewable-energy companies, tax-equity deals meant life or death: the combination of credits could offset two-thirds of the capital cost of a project. Companies like Lehman Brothers, Wachovia, and AIG became an integral part—even the integral part—of the renewables industry, because the utility-scale projects they financed produce the overwhelming majority of clean energy in the United States.

Basing the entire system of federal incentives on tax equity had two weaknesses, one that has always been clear and another that became clear only recently. Forcing renewables companies to route government support through Wall Street, thereby sacrificing a portion of it, was needless and inefficient. But it also tied the industry’s fate to that of the financial world’s most aggressive players. Just as Wall Street bankers bet that housing prices could never fall and got wiped out when proved wrong, Congress seems never to have imagined that Wall Street might someday have no profits and need no tax equity. Early last year, the multibillion-dollar tax-equity universe consisted of 18 providers. After September’s record carnage, the number dropped to four. Credit froze, and most projects ground to a halt. All of a sudden, not just a few start-ups but the entire renewable-energy industry was staring into the Valley of Death.

Financial and Environmental Writing Prompts

• Do you agree with Raj Atluru, managing director of the venture-capital firm Draper Fisher Jurvetson, when he claims that the stimulus bill save renewables?  Here’s The Atlantic:

“To fill the tax-equity gap, the stimulus provides $32.7 billion in direct grants and another $134 billion in loan guarantees to attract new investors to large projects. To impose stability, it extends a variety of tax credits by anywhere from three to eight years. Most striking of all, it instructs the Department of Energy to invest directly in promising cleantech companies (though the payoff comes in jobs and environmental gains, not equity). By a stroke of his pen, President Obama made a federal agency the world’s largest venture capitalist. When the official in charge of the program appeared at a Santa Barbara energy conference in March, he was mobbed by eager CEOs.”

• Is it inefficient to force renewable companies to route government support through Wall St?
• What do you think about the Department of Energy now essentially becoming the world’s largest venture capitalist?
• Comment on this claim: “American capitalism—even when it’s working—is not without its limitations, one being that promising ideas rarely get funding if their commercial potential lies beyond venture capitalists’ 10-year investment horizon.”
• Do you agree that The Energy Department research budget has never recovered from Reagan’s cuts?
• Do you have statistics to back up or dispute this claim? “People in cleantech circles often point out that the electric utilities spend a smaller portion of revenue on research and development than pet-food companies do. “

Greenfinger?

With the G8 coming to agreement on climate change, The Atlantic’s article “Moving Heaven and Earth” is timely.  In it, I learned a new vocab word, “Anthropocene,” coined in 2000 to describe the period of time when humans began changing the world’s climate and ecosystems.

I also learned about large-scale projects that are designed to “deform the Earth intentionally, as a way to engineer the planet either back to its pre-industrial state, or to some improved third state.”  These projects fall under the term “geo-engineering”and give me the creeps.

Following is a brief overview of the strategies followed by writing prompts for bloggers and newsletter publishers (but they can also be used for conversation starters at the neighborhood pool party).

Gas the planet

For those who saw Blade Runner, the red skies envisioned by this strategy will be familiar.  Imagine factories whose sole occupation is pumping out sulfur dioxide.  During the day all that aerosolized pollutant would shield the planet from the full blast of the sun and would often redden the sunsets.  Cost estimate: $100billion compared to an estimated annual $1t to cut carbon emissions through traditional means.

Churn the seas

The National Center for Atmospheric Research’s plan calls for a fleet of 1500 ships constantly churning sea water and spraying it high enough for the wind to carry it to the clouds, making them whiter and fluffier, which in turn enables them to better reflect the sunlight. Cost: $600m up front plus $100m annually.

Frisbees

An astronomy and optics professor at the University of Arizona proposes shooting Frisbee-sized ceramic disks at the gravitational midpoint between Earth and Sun to provide a huge sunshade and keep the planet in a perpetual state of annular eclipse.  Cost: Several trillion (the technology doesn’t exist).

No international treaty needed

The trouble with treaties is the incentive to cheat, but with geo-engineering any one country could act alone.  “Instead of a situation where any one country can foil efforts to curb global warming, any one country can curb global warming on its own.  Pumping sulfur into the amosphere is a lot easier than trying to orchestrate the actions of 200 countries  — or for that matter, 7 billion individuals…”

The article contemplates a possible “Greenfinger” who might implement geo-engineering with the single minded focus of  the James Bond villain, Goldfinger. “There are now 38 people in the world with $10b or more in private assets…theoretically, one of these people could reverse climate change all alone.”  Even a poor country like Bangladesh could afford to take unilateral action to reduce the chance their low-elevation coastal zones would wash away in global-warming-induced rising seas by pumping out sulfur dioxide.

Cut carbon emissions

There is almost universal agreement by climate scientists that we’re better off reducing carbon emissions than going into geo-engineering.  Lots of ideas there too, including capturing emissions in giant cooling towers, but the problem is where to put all that captured carbon.  One idea is to inject it into the “right kind of geological structure” that would be deep enough to keep it there.

Another reduction strategy for reducing the carbon dioxide we currently produce is blooming plankton, which thrives on it.  Some envision offshore plankton forests to replace those no longer on land.  Problem is, the dead algae would produce methane, a greenhouse gas that’s 20 times stronger than carbon dioxide.

The article concludes with the suggestion that we “keep investigating geo-engineering solutions but make quite clear to the public that most of them are so dreadful that they should scare the living daylights out of even a Greenfinger.”

A note on language

As I wrote in May, people don’t respond as well to negative as they do positive language.  For example, the founder of ecoAmerica observed “When someone thinks of global warming, they think of a politicized, polarized argument. When you say ‘global warming,’ a certain group of Americans think that’s a code word for progressive liberals, gay marriage and other such issues.”

Further, in another Atlantic Monthly article by Yale psychologist Paul Bloom, “Although it might be hard to think about the person who will occupy your body tomorrow morning as someone other than you, it is not hard at all to think that way about the person who will occupy your body 20 years from now. This may be one reason why many young people are indifferent about saving for retirement; they feel as if they would be giving up their money to an elderly stranger.”

Bottom line for environmental communicators: find a way to couch messages in positive language; ground them firmly in the present.

Environmental and Financial Writing Prompts

• If you have working knowledge of these or other geo-engineering strategies, please leave a comment with links.  You might consider comparing and contrasting those you know with those in The Atlantic’s article.
• Refer to the post I wrote about Prince Charles’ Rainforest Bond proposal. Given what one rogue nation could do to gas the planet with sulfur dioxide, perhaps it makes sense to pay rainforest countries for the services their natural resources offer to the health of the planet and every living being.
• Given the state of venture capital, by what means can environmental entrepreneurs fund their work?  Is there something between governmental support and venture capital?  With so many unemployed financial mathemeticians looking for something to do, this seems a worthwhile problem to ponder.
• How can funding and regulation work together to protect the entire world from a Greenfinger or rogue state?

Beware the Fart Joke

Catching up on reading this week at the beach, including past issues of my favorite magazine, The Atlantic.

The November 2008 edition carried a fascinating article that touched on neuroeconomics, or the neurophysiology of economic decisions. I love this stuff.

According to Yale professor of psychology, Paul Bloom, “…remembering something is easiest while you are in the same state in which you originally experienced it. Students do better when they are tested in the room in which they learned the material; someone who learned something while he was angry is better at remembering that information when he is angry again; the experience of one’s drunken self is more accessible to the drunk self than to the sober self. What happens in Vegas stays in Vegas.”

Bloom’s research underscores why effective business communications need to take people to an emotional place in order to cement the message. Warren Buffett did this well in his 2009 annual letter to shareholders when he drew a parallel between derivatives and venereal disease:  “Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with.”

If that gives you a creepy feeling, the Oracle from Omaha met his objective; he hates derivatives.

More Buffett bon mots:

• Tony and I feel like two hungry mosquitoes in a nudist camp. Juicy targets are everywhere.

• By year end 2007, the half dozen or so companies that had been the major players in this business had all fallen into big trouble. The cause of their problems was captured long ago by Mae West: “I was Snow White,but I drifted.”

• If merely looking up past financial data would tell you what the future holds,the Forbes 400 would consist of librarians.

• The tennis crowd would call my mistakes “unforced errors.”

• Upon leaving, our feelings about the business mirrored a line in a country song: “I liked you better before I got to know you so well.”

• Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.

Advice for speakers

Back to Paul Bloom in The Atlantic story,  “Good smells, such as fresh bread, make people kinder and more likely to help a stranger; bad smells, like farts (the experimenters used fart spray from a novelty store), make people more judgmental. If you ask people to unscramble sentences, they tend to be more polite, minutes later, if the sentences contain positive words like honor rather than negative words like bluntly. .. All of these studies support the view that each of us contains many selves-some violent, some submissive, some thoughtful-and that different selves can be brought to the fore by different situations.“

Next time you’re delivering a presentation, keep this in mind.  The oft-repeated advice to open with a joke should be tempered by what you just learned about neurophysiology — don’t make it a fart joke.

The System is Rigged

“Jane”  is a Bank of America SVP and a friend of twenty years. I jumped at her invitation for a weekend on the North Carolina coast with her family.  She drove while I read from May’s Atlantic Monthly, featuring a couple of excellent articles on the economy.

Any time we go on a road trip there’s about thirty pounds of reading material in the car “just in case.” Over breakfast she’ll grab one section of the paper and I another, or we’ll take different magazines and debrief each other when something gets our back up.  We pass hours like this on the beach every summer. Everyone should have a Jane in their life — the mental stimulation will surely keep Alzheimer’s at bay.

In The Atlantic’s feature article, “Why I Fired My Broker” Jeffrey Goldberg got my attention right out of the gate with this statement  “…my crucial mistake was believing that the brokers and wealth managers and cable-television oracles who make up the financial-services industrial complex actually had my best interests at heart.”

Jane and I are an interesting duo.  I couldn’t be more committed to self-employment and she’s been committed to the same company her entire career.  I tell her I love that phrase “financial-services industrial complex” and Jane shudders, then reminds me of a tour of duty she did in BofA’s credit card division  after it acquired MBNA and how slimy it made her feel going to work everyday.  My skin crawls. Jane doesn’t appreciate the potshots being taken at bankers these days, but she’s clear eyed about the evils of credit card marketing.

She says, “Keep reading.”

The article routinely skewers Merrill Lynch and other so-called financial advisors who really can’t give financial advice anymore.  Jane, who had reason to believe until very recently that she could fund part of her childrens’ college educations through BofA stock options, couldn’t disagree with this observation by Larry Gellman:

“If the head of Merrill Lynch and every other investment firm had their way, no individual broker would ever recommend an individual stock or bond to a retail client again. They have essentially gotten out of the brokering-and-advising business and gone all in on the ‘wealth management’ business. The new model is to gather assets from wealthy people and then place those assets with a whole bunch of managers who will manage different pieces of it in diversified styles so you don’t lose it all at once. And by the way, people with less than $10 million need not apply. People like you are in a sort of purgatory because no one would ever come out and tell you that he doesn’t want your business anymore,” he said. “You had to figure that out by yourself.”

We chewed on that for a bit. Jane’s worked in just about every division of the bank, including wealth management.  She’s a sort of corporate MacGyver who moves from implementation to implementation, always delivering  on impossible deadlines and defying handwringers.  She’s familiar with the next fellow  interviewed,  Seth Klarman, whom Goldberg says turned $27m into $14b, and quotes as saying “The average person can’t really trust anybody. They can’t trust a broker, because the broker is interested in churning commissions. They can’t trust a mutual fund, because the mutual fund is interested in gathering a lot of assets and keeping them.  And now it’s even worse because even the most sophisticated people have no idea what’s going on.”

Jane snorts, “No shit.”

At a certain point in Goldberg’s article the expert who makes the most sense is a guy who runs a survivalist camp that teaches people to live off the grid.  Cody Lundin says  “ Wall Street has always been an illusion. Now it’s an illusion that’s crumbling. Wall Street is like someone who’s having heart trouble. It’s in constant need of resuscitation, but after a while, it just doesn’t work anymore. People think that Bernard Madoff was unique, that he was an illusion, but he’s just an extension of the same illusion, the same con game.”

Jane’s been quiet for awhile now, most unusual.  So when I’m done with the article  I don’t forge on to the next one as is our custom.  I have people skills.

She sighs and says, “I’m gonna turn on the radio for awhile.” Game Over.

Financial Services Writing Prompts (aside from the obvious)

• Are people better off putting their money in an index fund than relying on the “financial-services industrial complex”?
• Will the deflated 529 plans  lead to a different scheme for funding higher education?
• Where are all those financial advisors going to work now?  All those financial mathematicians?
• At what point did you realize the (financial) emperor wasn’t wearing clothes?  What steps did you take?  Are you taking?