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And what can we do to fix it? <br>
And what can we do to fix it? <br>
There is no perfect marketplace. <br>
There is no perfect marketplace. <br>
1 Survival of the fittest<br>
===Survival of the fittest===
:1.1 [[nomological machine]]s for nature, red in tooth and claw. <br>
:1.1 [[nomological machine]]s for nature, red in tooth and claw. <br>
::(i) {{br|The Wealth of Nations}}: {{author|Adam Smith}}’s theory assumes<br>
::(i) {{br|The Wealth of Nations}}: {{author|Adam Smith}}’s theory assumes<br>
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:::::(c) That’s a zero to negative sum game: there is some loss of thermal energy or increase in entropy. <br>
:::::(c) That’s a zero to negative sum game: there is some loss of thermal energy or increase in entropy. <br>
:::::(d) It is not iterative: <br>
:::::(d) It is not iterative: <br>
(i) it has no memory <br>
::::::(i) it has no memory <br>
(ii) eaten prey are not in a position to learn or remember. <br>
::::::(ii) eaten prey are not in a position to learn or remember. <br>
(iii) Predators don’t care about their reputation. <br>
::::::(iii) Predators don’t care about their reputation. <br>
:::::(e) Therefore it’s Gaussian: there’s no interdependence between hunting trips. <br>
:::::(e) Therefore it’s Gaussian: there’s no interdependence between hunting trips. <br>
::::(2) The commercial competition for resources is a fight between sellers to find a buyer (and vice versa). The winner gets to transact. <br>
::::(2) The commercial competition for resources is a fight between sellers to find a buyer (and vice versa). The winner gets to transact. <br>
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::::(2) Scale opportunities bring their own natural costs <br>
::::(2) Scale opportunities bring their own natural costs <br>
:::::(a) The larger the firm  the greater opportunity to wring economies from its scale. There are inflection points <br>
:::::(a) The larger the firm  the greater opportunity to wring economies from its scale. There are inflection points <br>
(i) The point where the scale opportunities are large enough to go from passive scale management to active scale management <br>
::::::(i) The point where the scale opportunities are large enough to go from passive scale management to active scale management <br>
1. Passive: obtaining natural benefits that flow from the simple fact of size (eg adding another user to a flat fee all-you-can-eat licence automatically reduces the per-user cost of the licence) <br>
1. Passive: obtaining natural benefits that flow from the simple fact of size (eg adding another user to a flat fee all-you-can-eat licence automatically reduces the per-user cost of the licence) <br>
2. Active: diverting firm’s resources and personnel towards manufacturing  scale efficiencies that don’t arise by themselves (eg negotiating law firm panel arrangements, outsourcing, offshoring <br>
2. Active: diverting firm’s resources and personnel towards manufacturing  scale efficiencies that don’t arise by themselves (eg negotiating law firm panel arrangements, outsourcing, offshoring <br>
(ii) The point where the firm is justified in deploying specific resources solely to leveraging scale. It may engage management consultants, middle managers and eventually a chief operating officer (not to be confused with head of operations – the COO is a separate function, and other departments may have their own COO Groups. Indeed the operations department could have a coo and probably only doesn’t through its own inarticulate chutzpah) <br>
::::::(ii) The point where the firm is justified in deploying specific resources solely to leveraging scale. It may engage management consultants, middle managers and eventually a chief operating officer (not to be confused with head of operations – the COO is a separate function, and other departments may have their own COO Groups. Indeed the operations department could have a coo and probably only doesn’t through its own inarticulate chutzpah) <br>
(iii) The point where the scale – leveraging organisation is itself so complex that there are opportunities to leverage its scale. So consolidating all the diaspora of COO groups into a single function, distinct from operations and the main COO function, and now big enough to have its own COO function. <br>
::::::(iii) The point where the scale – leveraging organisation is itself so complex that there are opportunities to leverage its scale. So consolidating all the diaspora of COO groups into a single function, distinct from operations and the main COO function, and now big enough to have its own COO function. <br>
:::::(b) The larger the firm the more complex it becomes. <br>
:::::(b) The larger the firm the more complex it becomes. <br>
(i) A sole trader is salesman, receptionist, janitor, legal and operations.<br>
::::::(i) A sole trader is salesman, receptionist, janitor, legal and operations.<br>
(ii) At a point it becomes necessary and desirable to hire dedicated personnel to carry out these roles.<br>
::::::(ii) At a point it becomes necessary and desirable to hire dedicated personnel to carry out these roles.<br>
1. Some (sales, trading) are risk-taking, revenue-generating roles.<br>
1. Some (sales, trading) are risk-taking, revenue-generating roles.<br>
2. Some bracket legal, operations, risk) are revenue-absorbing, risk-reducing roles. These are incentivised by means of cost reduction not revenue generation. Incentives are markedly different from sales and trading roles. <br>
2. Some (legal, operations, risk) are revenue-absorbing, risk-reducing roles. These are incentivised by means of cost reduction not revenue generation. Incentives are markedly different from sales and trading roles. <br>
(iii) There is a geometric relationship between number of components and their possible configuration. The more configurations the more scope for complexity. The more complexity the more confusion. The more confusion the more scope for fear. See below <br>
::::::(iii) There is a geometric relationship between number of components and their possible configuration. The more configurations the more scope for complexity. The more complexity the more confusion. The more confusion the more scope for fear. See below <br>
(iv) The COO Function in itself is a source of complexity. <br>
::::::(iv) The COO Function in itself is a source of complexity. <br>
:::::(c) Paradoxically, the pursuit of economies of scale in itself increasingly undermines the natural economies of scale. <br>
:::::(c) Paradoxically, the pursuit of economies of scale in itself increasingly undermines the natural economies of scale. <br>
(i) There is a natural upper bound to the effective size of the firm beyond which marginal economies drop to/below zero. <br>
::::::(i) There is a natural upper bound to the effective size of the firm beyond which marginal economies drop to/below zero. <br>
:::(iii) Firms as the vessel for the gene – an extended phenotype for the individual<br>
:::(iii) Firms as the vessel for the gene – an extended phenotype for the individual<br>
:::(iv) Firms as individual responsibility expungers. <br>
:::(iv) Firms as individual responsibility expungers. <br>
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::::(1) FEAR. This is the chief motivating factor for any individual. <br>
::::(1) FEAR. This is the chief motivating factor for any individual. <br>
:::::(a) Types of fear:<br>
:::::(a) Types of fear:<br>
(i) Fear of screwing up. <br>
::::::(i) Fear of screwing up. <br>
(ii) Fear of the known unknown <br>
::::::(ii) Fear of the known unknown <br>
(iii) Fear of remote but foreseeable contingencies – the chicken licken scenario<br>
::::::(iii) Fear of remote but foreseeable contingencies – the chicken licken scenario<br>
(iv) <br>
:::::(b) Some legitimate risks do not create fear:<br>
:::::(b) Some legitimate risks do not create fear:<br>
(i) unknown unknowns – black swans – do not create fear. It is hard to blame someone for not anticipating something that, qed, could not be anticipated.<br>
::::::(i) unknown unknowns – black swans – do not create fear. It is hard to blame someone for not anticipating something that, qed, could not be anticipated.<br>
(ii) Emergent risks – risks that only arise at a level of abstraction beyond that for which the employee is directly responsible or accountable. <br>
::::::(ii) Emergent risks – risks that only arise at a level of abstraction beyond that for which the employee is directly responsible or accountable. <br>
:::::(c) Behaviour which reduces fear<br>
:::::(c) Behaviour which reduces fear<br>
(i) Repeated tasks<br>
::::::(i) Repeated tasks<br>
(ii) Familiar tasks<br>
::::::(ii) Familiar tasks<br>
(iii) Pre-established modes of operation<br>
::::::(iii) Pre-established modes of operation<br>
(iv) Behaviour which is characteristic of most people in the organisation (homogeneity) <br>
::::::(iv) Behaviour which is characteristic of most people in the organisation (homogeneity) <br>
(v) Decisions for which somebody further up for line or across the organisation has accepted responsibility<br>
::::::(v) Decisions for which somebody further up for line or across the organisation has accepted responsibility<br>
(vi) Encouraging others to underwrite risk or collectivise /diffuse risk<br>
::::::(vi) Encouraging others to underwrite risk or collectivise /diffuse risk<br>
:::::(d) Behaviour which accentuates fear<br>
:::::(d) Behaviour which accentuates fear<br>
(i) New situations <br>
::::::(i) New situations <br>
(ii) Unhedged risks<br>
::::::(ii) Unhedged risks<br>
::::(2) REWARD. Compensation for what you do. <br>
::::(2) REWARD. Compensation for what you do. <br>
:::::(a) Generally an employee does not have an equity stake in the business (OK, OK bonuses – we’ll get on to that) <br>
:::::(a) Generally an employee does not have an equity stake in the business (OK, OK bonuses – we’ll get on to that) <br>
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:::::(c) The larger the firm the more specialised the staff, the fewer are specifically revenue generating roles. Most of a multinational Bank is infrastructure: operations, risk management, IT and increasingly middle management : infrastructure to manage the infrastructure. <br>
:::::(c) The larger the firm the more specialised the staff, the fewer are specifically revenue generating roles. Most of a multinational Bank is infrastructure: operations, risk management, IT and increasingly middle management : infrastructure to manage the infrastructure. <br>
:::::(d) Therefore only a small portion of the staff have any grounds for incentive based compensation. Some could be incentivised by cost management, but for many – risk,  legal, compliance – performance related pay is largely antithetical. <br>
:::::(d) Therefore only a small portion of the staff have any grounds for incentive based compensation. Some could be incentivised by cost management, but for many – risk,  legal, compliance – performance related pay is largely antithetical. <br>
(i) This will not stop enthusiastic general counsel arguing, in times of feast, that his legal team are skilled enablers of revenue generation, and should be compensated for the profits they help to bring in. <br>
::::::(i) This will not stop enthusiastic general counsel arguing, in times of feast, that his legal team are skilled enablers of revenue generation, and should be compensated for the profits they help to bring in. <br>
(ii) The stock reply: turning a control function into a profit and loss centre has bee  tried before. It didn’t work out so well. <br>
::::::(ii) The stock reply: turning a control function into a profit and loss centre has bee  tried before. It didn’t work out so well. <br>
:::::(e) The bonus culture. No doubt to redress the fear / reward balance, investment banks shifted towards a bonus culture throughout the eighties. <br>
:::::(e) The bonus culture. No doubt to redress the fear / reward balance, investment banks shifted towards a bonus culture throughout the eighties. <br>
(i) Many of these firms started out life as partnerships, where those bringing in the profits were personally liable for losses, and the compensation they shared was specifically the equity. These firms took advantage of regulatory change to incorporate. The partners changed their formal status (if not their titles) from partner to employee, but the compensation structure remained. While these firms encouraged equity participation (to the point of paying compensation in shares) employees main source of income was celery and not share performance. Indeed the manual dilution of equity capital in the bonus round had the typical effect of depressing share performance. In this way and in many others comma employees in these Incorporated partnerships were and continue to be systematically preferred over equity holders. The same pay structure has been adopted by competing banks which have always had a corporate structure full stop the lesson of the last 30 years has been only a mug is long banking stock .<br>
::::::(i) Many of these firms started out life as partnerships, where those bringing in the profits were personally liable for losses, and the compensation they shared was specifically the equity. These firms took advantage of regulatory change to incorporate. The partners changed their formal status (if not their titles) from partner to employee, but the compensation structure remained. While these firms encouraged equity participation (to the point of paying compensation in shares) employees main source of income was celery and not share performance. Indeed the manual dilution of equity capital in the bonus round had the typical effect of depressing share performance. In this way and in many others comma employees in these Incorporated partnerships were and continue to be systematically preferred over equity holders. The same pay structure has been adopted by competing banks which have always had a corporate structure full stop the lesson of the last 30 years has been only a mug is long banking stock .<br>
2 The nature of risks<br>
===The nature of [[risk]]===
:(a) The real risks are the ones that people don’t recognise as risks AT ALL. All significant market dislocations have come from blind spots.<br>
:(a) The real risks are the ones that people don’t recognise as risks AT ALL. All significant market dislocations have come from blind spots.<br>
:(b) Known knowns – about which firms naturally obsess, in fact are not generally risks at all, precisely because they are known knowns and are properly identified, managed and controlled.<br>
:(b) Known knowns – about which firms naturally obsess, in fact are not generally risks at all, precisely because they are known knowns and are properly identified, managed and controlled.<br>
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:::(i) Don’t cleave to the organisational structure much less the firm’s own division of responsibility for risk management, which is based on stables from which horses have already bolted<br>
:::(i) Don’t cleave to the organisational structure much less the firm’s own division of responsibility for risk management, which is based on stables from which horses have already bolted<br>
:::(ii) Therefore susceptible to present in different areas of risk management – the same risk might be partly legal, partly credit, partly market risk. Each in isolation may be containable, but combined effect less so<br>
:::(ii) Therefore susceptible to present in different areas of risk management – the same risk might be partly legal, partly credit, partly market risk. Each in isolation may be containable, but combined effect less so<br>
3 The firm as a a bulwark against the vicissitudes of the market <br>
===The firm as a a bulwark against the vicissitudes of the market===
:::(i) Humans devote much of their energy in mitigating the conditions of the free market. <br>
:::(i) Humans devote much of their energy in mitigating the conditions of the free market. <br>
::::(1) This is our evolutionary advantage. We are social, hierarchical, political animals. <br>
::::(1) This is our evolutionary advantage. We are social, hierarchical, political animals. <br>
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:::(iii) firm (cartel) and Individual (nature)<br>
:::(iii) firm (cartel) and Individual (nature)<br>
:(c) Somewhere within these tensions – in the breakdown between [[nomological machine]]s, we find the phenomenon – maybe phenomena – of nonsense jobs. <br>
:(c) Somewhere within these tensions – in the breakdown between [[nomological machine]]s, we find the phenomenon – maybe phenomena – of nonsense jobs. <br>
4 Government <br>
===Government===
:(a) Any kind of government is a tacit acknowledgment of [[Hobbes]] model. <br>
:(a) Any kind of government is a tacit acknowledgment of [[Hobbes]] model. <br>
:(b) But government also arises naturally from nature – it is a form of bulwark against the vicissitudes of nature – but the dynamic is different. <br>
:(b) But government also arises naturally from nature – it is a form of bulwark against the vicissitudes of nature – but the dynamic is different. <br>
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Rule : do not induce insecurity in your own boss, unless you can decisively act on it. If your boss thinks you are a support, you are safe. If your boss thinks you are a threat, you can be whacked at any excuse. <br>
Rule : do not induce insecurity in your own boss, unless you can decisively act on it. If your boss thinks you are a support, you are safe. If your boss thinks you are a threat, you can be whacked at any excuse. <br>
<br>
<br>
5 Form over substance<br>
===Form over substance===
:(a) Burgeoning complexity means a preference for substance over form<br>
:(a) Burgeoning complexity means a preference for substance over form<br>
:::(i) As previously rehearsed, the more complex the organisation the less likely people are to understand the substance, let alone be responsible for it. <br>
:::(i) As previously rehearsed, the more complex the organisation the less likely people are to understand the substance, let alone be responsible for it. <br>
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:::::(a) Did you check it against policy, legal developments and corresponding templates” is a harder question, but it has a yes/no answer. It functions like a checklist. <br>
:::::(a) Did you check it against policy, legal developments and corresponding templates” is a harder question, but it has a yes/no answer. It functions like a checklist. <br>
:::::(b) Did you get the right answers? Is hard to validate. <br>
:::::(b) Did you get the right answers? Is hard to validate. <br>
6 A word on checklists – eyebrow raising book of Atul Gawande. Illustrates the benefit, as well as the limitations, of form as an aide to substance. <br>
===Checklists===
A word on checklists – eyebrow raising book of Atul Gawande. Illustrates the benefit, as well as the limitations, of form as an aide to substance. <br>
:(a) A checklist is an aide memoire to assist a person carrying out a standard task to cover easily overlooked basics, rather than a certificate or means of apportioning responsibility. <br>
:(a) A checklist is an aide memoire to assist a person carrying out a standard task to cover easily overlooked basics, rather than a certificate or means of apportioning responsibility. <br>
:(b) Checklist solves for the ancient dilemma that humans are good at imaginatively solving new problems, but bad at systematically carrying out repetitive tasks. <br>
:(b) Checklist solves for the ancient dilemma that humans are good at imaginatively solving new problems, but bad at systematically carrying out repetitive tasks. <br>
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:::::: (i) lack subject matter expertise (they will be management consultants, not lawyers) <br>
:::::: (i) lack subject matter expertise (they will be management consultants, not lawyers) <br>
:::::: (ii) Are focusing purely on short term cost savings. Long-term benefits will accrue after they have gone <br>
:::::: (ii) Are focusing purely on short term cost savings. Long-term benefits will accrue after they have gone <br>
7 Escalation as a subject in itself <br>
===Escalation as a subject in itself===
:(a) Diffusion<br>
:(a) Diffusion<br>
:(b) Speed <br>
:(b) Speed <br>
:(c) Resources <br>
:(c) Resources <br>
:(d) Organisational Complexity <br>
:(d) Organisational Complexity <br>
8 Process over substance <br>
===Process over substance ===
:(a) Proof of governance was that the meeting took place and was minuted, not what was said – though records are dangerous things in hindsight, after an accident has happened, so expect great attention to be taken on the content of the minutes – the trick being to neuter their content as much as possible so that nothing sensitive or incriminating is in them – the idea being to evidence the form of governance without revealing any more than is absolutely necessary about the content of the governance. <br>
:(a) Proof of governance was that the meeting took place and was minuted, not what was said – though records are dangerous things in hindsight, after an accident has happened, so expect great attention to be taken on the content of the minutes – the trick being to neuter their content as much as possible so that nothing sensitive or incriminating is in them – the idea being to evidence the form of governance without revealing any more than is absolutely necessary about the content of the governance. <br>
:(b) Unjustified dismissal <br>
:(b) Unjustified dismissal <br>
:::(i) Substantive unfairness <br>
:::(i) Substantive unfairness <br>
:::(ii) Procedural unfairness <br>
:::(ii) Procedural unfairness <br>
9 The perils of the corporate person. <br>
===The perils of the corporate person===
:(a) Unlike a real person, the interior monologue is not private. <br>
:(a) Unlike a real person, the interior monologue is not private. <br>
:(b) Unlike a real person, a multinational firm has an utterly verbose interior monologue, everyone is shouting at the same time adding each other to conversations they don’t care to be a part of. Joel Bakan says a corporation is like a psychopath. It might be run by them – that’s plausible – but in its own personality it is more like a paranoid schizophrenic with multiple personality disorder. <br>
:(b) Unlike a real person, a multinational firm has an utterly verbose interior monologue, everyone is shouting at the same time adding each other to conversations they don’t care to be a part of. Joel Bakan says a corporation is like a psychopath. It might be run by them – that’s plausible – but in its own personality it is more like a paranoid schizophrenic with multiple personality disorder. <br>
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:::(ii) To evidence and memorialise decisionmaking. <br>
:::(ii) To evidence and memorialise decisionmaking. <br>
:::(iii) to evidence qualifications, derogations, assumptions and conditions upon those decisions. Ie to diffuse responsibility for the decision. <br>
:::(iii) to evidence qualifications, derogations, assumptions and conditions upon those decisions. Ie to diffuse responsibility for the decision. <br>
:::(iv) The key for SMEs is to articulate conditions of a qualitative (ie requiring comprehension of the subject matter) and not quantitative nature. Ie “assuming sufficiently robust operational setup to satisfy the legal and regulatory requirements”. This allows the operations SME, to whom the consultant will inevitably turn, to create her own qualitative conditions. If she is experienced, her conditions will be in the gift of a third SME, who will create her own qualitative conditions in the gift of a fourth. Eventually the trail will lead in a bureaucratic Möbius loop back to legal, and the circle of diffusion will be complete. <br>
:::(iv) The key for SMEs is to articulate conditions of a qualitative (ie requiring comprehension of the subject matter) and not quantitative nature. Ie “assuming sufficiently robust operational setup to satisfy the legal and regulatory requirements”. This allows the operations SME, to whom the consultant will inevitably turn, to create her own qualitative conditions. If she is experienced, her conditions will be in the gift of a third SME, who will create her own qualitative conditions in the gift of a fourth. Eventually the trail will lead in a bureaucratic [[Möbius loop]] back to legal, and the circle of diffusion will be complete. <br>
:(e) For employees who are part of the infrastructure rather than revenue generation – and that is most of them – there is a sharp asymmetry. <br>
:(e) For employees who are part of the infrastructure rather than revenue generation – and that is most of them – there is a sharp asymmetry. <br>
:::(i) You are not rewarded for ambition or risk taking – that is not your job. <br>
:::(i) You are not rewarded for ambition or risk taking – that is not your job. <br>
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::::(3) If the risk comes about but the firm has defended against it, again it has no value. The firm’s resulting profit and loss is flat <br>
::::(3) If the risk comes about but the firm has defended against it, again it has no value. The firm’s resulting profit and loss is flat <br>
::::(4) If the risk comes about and the firm has not defended against it, then notionally, someone is responsible. But see diffusion tactics – here the primacy of the individual’s survival instinct over the organisation kicks in. <br>
::::(4) If the risk comes about and the firm has not defended against it, then notionally, someone is responsible. But see diffusion tactics – here the primacy of the individual’s survival instinct over the organisation kicks in. <br>
10 Motivations<br>
===Motivations===
:(a) Individuals who wants to get things done that involve taking new risks or Crossing into unknown territory must develop tools and techniques for disarming natural employee risk avoidance strategies.  for example, <br>
:(a) Individuals who wants to get things done that involve taking new risks or Crossing into unknown territory must develop tools and techniques for disarming natural employee risk avoidance strategies.  for example, <br>
:::(i) Selective escalation piecemeal to different risk controllers. <br>
:::(i) Selective escalation piecemeal to different risk controllers. <br>
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:::(iii) Subject matter experts (eg lawyers) will complain that, for example, the value in a well crafted indemnity – its enforceability, its scope, its flexibility for unexpected contingency – cannot be sensibly expressed in numerical terms. The evaluator accepts this, and therefore assigns those ineffable features a value of zero. The values they can measure: is there an indemnity (yes/no) and how long did the lawyer take to agree it (what was its direct cost). <br>
:::(iii) Subject matter experts (eg lawyers) will complain that, for example, the value in a well crafted indemnity – its enforceability, its scope, its flexibility for unexpected contingency – cannot be sensibly expressed in numerical terms. The evaluator accepts this, and therefore assigns those ineffable features a value of zero. The values they can measure: is there an indemnity (yes/no) and how long did the lawyer take to agree it (what was its direct cost). <br>
:::(iv) Yet these ineffable are precisely what you pay your lawyers to provide. <br>
:::(iv) Yet these ineffable are precisely what you pay your lawyers to provide. <br>
11 Themes <br>
===Themes===
:(a) No one got fired for hiring IBM. <br>
:(a) No one got fired for hiring IBM. <br>
:(b) Corollary: no business was revolutionised by hiring IBM either. <br>
:(b) Corollary: no business was revolutionised by hiring IBM either. <br>

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