Tuesday, June 26, 2012

The firing of the president at the University of Virginia

People have been scratching their heads, trying to understand why and how the University of Virginia’s (UVA) board fired its president, Teresa Sullivan, for what appeared to be arbitrary reasons, and with little consideration for process. For those who have not been following the story, the board’s Rector, Helen Dragas, polled each board member by phone to assess if they would support firing Sullivan, who had been in the role for only two years. When Dragas found that a majority would, she called Sullivan and asked for her resignation, telling her that she had lost the board’s support. Faculty and students responded with considerable anger to what looked like an arbitrary and imperious decision.

Needless to say, the board’s process was exceedingly clumsy. Faculty members and students felt blindsided, and for several days the board could provide no clear rationale to any of its publics for why its members had dismissed Sullivan so suddenly. The earliest report of the firing, published in the Chronicle of Higher Education, suggested that the board wanted a president who could lead with the spirit of “strategic dynamism,” a phrase that certainly lacks precision and led people to think that the board was foolish enough to be influenced by business fads.

As the story unfolded it became clear that the board worried that Sullivan was too much the “incrementalist.” She had spent her first two years developing a new budgeting process for the university, while board members thought the university needed a transformational leader who, most importantly, could take them into the world of online learning. Hence the term “strategic dynamism.” We are left with two questions; why they “really” fired Sullivan, and why in such a clumsy and almost self-defeating manner? One hypothesis is that the answers to both of these questions are one and the same.

Prior to the firing, there was much reporting in the general press about the “breakout” of online learning from what was once a curiosity, relegated to for profit-universities looking to make money, to one embraced by elite institutions; namely MIT, Harvard and Stanford. Most dramatically, this past March, Stanford engineering professors, Peter Nerving and Jennifer Widom, offered two online courses in machine learning and artificial intelligence, both of which attracted between them over a quarter of million students around the world. The students in Widom’s class collectively viewed 290,000 videos, took 10,000 tests, asked 224 questions and gave 2000 replies. As one journalist wrote, “although the students do not get Stanford credit for their work, they gain access to faculty and Stanford Engineering’s most popular computer science courses.” Subsequent to this breakout event, MIT and Harvard committed $60 million to develop and offer free online courses. In addition, two other Stanford professors who helped develop the computer platform used for the university’s online courses, formed a company called Corsera.

One hypothesis is that this flurry of activity in online learning constitutes a “sentinel event.” This kind of event concatenates several long-term trends that heretofore have operated below the social radar. The event crystallizes the potential meaning of these trends when taken together, and highlights how they might disrupt organizations, status hierarchies and marketplaces The trends themselves appear obvious in retrospect; for example, in this case, the proliferation of high speed internet connections, the ability to process and manage large scale data bases, years of experimenting in online learning, the rise of the middle class throughout much of the developing world, and an entrepreneurial culture which is reshaping university life. We knew about all of these when considered separately. We just did not appreciate their power to change our situation when taken together.

The meaning of a sentinel event is invariably linked to both feelings of excitement and anxiety. Stanford’s online courses excited observers because they suggested that students everywhere have access to the best pedagogical materials, regardless of social class, ethnic group or geography. But they also created substantial anxiety because they suggested that the universities and colleges could be “dis-intermediated.” Might students in the future pursue certificates of competence in particular skills or subjects rather than degrees from institutions; particularly if elite institutions backed these certificates, and guaranteed that they were using the best pedagogy and assessment methods?

This mixture of anxiety and excitement shapes our response to the sentinel event. But when anxiety predominates, for example we feel unprepared to cope with developments the event portends, the event may stimulate apocalyptic thinking; the experience that, “the world as we know it is changing.” Many decades ago Alvin Toffler, in his classic text, characterized this experience as “future shock.”

One question is, how does future shock shape executive decision-making? The term “shock” is suggestive. A shock overwhelms our senses, and in response we become desensitized or numb. When we are desensitized our thinking becomes imprecise and impressionistic, and we lose sight of some of the commonsense connections between cause and effect -- a process that psychologists call dissociation. This is similar to the hysteric’s thought process, and of course it makes sense that when we succumb to apocalyptic thinking, we become something like hysterical. 

So one hypothesis is that UVA board members were gripped by apocalyptic thinking; that the sentinel event stimulated in them the belief that the world, as they knew it, was changing, and that they responded hysterically. This could account for both the conviction they felt that Sullivan had to be dismissed -- they still refuse to back down despite the protests-- as well as for the clumsy way in which they fired her. This hypothesis gains some additional credence when we consider that some of those who protested her firing responded hysterically as well. Thus for example, in protesting the dismissal, the university’s provost said, “I know I find myself at a defining moment, confronting and questioning whether honor, integrity and trust are truly the foundational pillars of life at the University of Virginia.”

We are naturally led to ask if these hysterical responses are arbitrary or unfounded. The answer depends on two factors, is the sentinel event really a sentinel, and if it is, is the institution vulnerable?  I am inclined to answer yes to both, that the hysteria, while unhelpful is not arbitrary, and that UVA is vulnerable. While some commentators have suggested that the issue of online learning is trivial, “an individual professor’s hobby,” “other universities offering a few online course for free,” the fact is that the MIT Open Courseware Initiative has published instructional resources online for 2,000 courses since 2001. Similarly, 41 million users visited the online site, “Kahn Academy,” in the last 18 months. The site houses a library of 3,000 videos providing instruction in a wide array of technical courses such as math, finance and economics. In addition, UVA is quite vulnerable since it has lost the bulk of its state funding and it cannot rely on tuition increases to fund its development costs.

Sullivan defended her record as an “incrementalist” on the sensible grounds that you cannot order faculty around, that you can’t lead “top down.” As she wrote, “Corporate-style, top-down leadership does not work in a great university. Sustained change with buy-in does work." But if you believe in the apocalypse, this argument only reinforces the conviction that the institution is at risk. There is no time for “buy-in.” Sullivan’s defense becomes paradoxically an argument for her dismissal, not against it.

One prediction is that we are in for many more of these “future shocks,” and that our leaders are vulnerable to apocalyptic thinking and thus hysterical decision-making. How can we prepare for the future without succumbing to the anxieties it creates?

Tuesday, June 19, 2012

Rajat Gupta's trial and conviction

The jury has just convicted Rajat Gupta, once the head of the iconic consulting firm, McKinsey, of insider trading. After his retirement from McKinsey, Mr. Gupta got seats on the boards of Goldman Sachs and Proctor and Gamble. The prosecutors in his trial presented evidence linking his presence at board meetings to phone calls he made to his co-conspirator, the hedge fund head Mr. Rajaratnam, and to trades the latter promptly executed to make money on the inside information Gupta had presumably relayed.

The prosecution presented no wiretaps of Gupta tipping off Rajaratnam. Instead, the jury was persuaded by the circumstantial evidence that when, for example, the Goldman Sachs board, at the depth of the financial crisis, made a decision to accept an investment of $5 billion from Warren Buffet, Gupta, as his cell phone records show, called Rajaratnam immediately after the board meting had adjourned. Within minutes, the latter bought Goldman stock just before the market closed. Needless to say, Goldman stock rose after the news of Buffet’s investment went public. Indeed, Mr. Rajaratnam was himself convicted of insider trading a year ago, based on actual wiretaps of conversations he had with other co-conspirators. He was sentenced to 11 years in prison and fined $93 million.

Absent a wiretap in which Gupta and Rajaratnam are talking about how to profit from the inside information to which Gupta had access, it is impossible to know if Gupta is actually guilty. What is striking however is that Gupta himself made no money from Rajartnam’s trades. In fact, in 2009 he lost money, some news sources suggests as much as $10 million, on a venture capital fund, called Voyager, that he and Rajaratnam had co-founded. Moreover, Gupta had a sterling reputation as an advisor to the most powerful companies and governments in the world. As one of his investment partners described him, “Rajat is sui generis, there’s no one else quite like him on the planet. He’s extremely smart, he has an unbelievable Rolodex. If I went to the South Pole, I could call Rajat, and if he didn’t know someone directly, he’d call someone who did.” His status, his  standing. the sense of his reliability, even generosity,  seemed secure. If he is guilty, we are compelled to ask, “What more could he possibly want?

I can only speculate. But I am drawn here to the distinction between the management consulting business and world of finance and investment. The big story from the early nineties until the Great Recession is the story of risk, finance and investment. It was the period in which the United States became the “risk society.” The risk society grew up around a methodology for pricing and distributing risk across many asset classes by using derivatives and options. These instruments enabled banks to shield themselves from the vagaries of money markets, increasing their ability to provide millions of dollars of instant liquidity to institutional markets. This propelled the growth of new ventures. Of course, the methodologies for pricing risks could also backfire.  For example, the AAA tranches of mortgage-backed securities were not as safe as was calculated. This mis-pricing unleashed bankruptcies, defaults, and as is evident in Europe, considerable social unrest.  We do live in a risk society.

There are two other distinctive features of the  risk society. First, successful risk taking is disproportionately rewarded. This is one reason that the stock market grew so rapidly until the Great Recession. Second, the risk society gave rise to a culture of entrepreneurship. Talented young people who might have once become doctors, lawyers, accountants and consultants were now eager to start or join start-ups.

This risk society and its associated culture has been on balance a creative one, witness the rise of Google, Facebook, and the second coming of Apple. This may be one reason as the chart below shows, that the US still has the most productive economy in the world, even as it has lost manufacturing jobs, become a service economy, and weathered a housing bust. 

One hypothesis is that Gupta felt excluded from the settings and culture of the risk society. Management consulting is a service business. Mckinsey’s brand enabled it to charge for its labor costs plus a markup while relying on a continuing stream of referrals and requests from old and new clients. In other words, it faced minimal market risk, and little execution risk. It was close to a “cost-plus” business. Gupta in this sense was sidelined, away from the action. Indeed, as a management consultant myself, I experienced a period in which business consulting had a certain “glamor.” The best graduates of the top business schools wanted to join the top management-consulting firms. But starting in the mid nineties, the world of entrepreneurship became much more glamorous. 

Facing these developments perhaps Gupta's prior accomplishments seem in retrospect less meaningful to him. This may explain why he started “New Silk Road,” a venture capital fund committed to investing in Indian companies with growth potential. He could join his passion for helping his native country with his desire to play in the world of risk and reward. He was not looking for more money -- there is little indication that he was greedy -- but rather for more meaning.   

Of course this remains speculative. It does not give a complete account of why he might have crossed the line and conspired with a colleague. Perhaps, despite his accomplishments, he may have felt unprepared to compete in the world of risk and so came to rely excessively on a colleague, who prior to his own indictment and jailing, appeared to be one of the most successful hedge managers in the United States.

It is always puzzling to learn that very successful people are unsatisfied with their accomplishments. Psychoanalysis reminds us that a person performs in front of two audiences, one external, our actual friends, colleagues and family members, and the other internal. Freud described the internal audience as the “ego ideal,” This inner voice is the precipitate of the voices of parents and other authority figures, as we have internalized them .The ego ideal is a positive force when it stimulates us to achieve. But it can also be source of shame, when according to our own internal and sometimes overly strict standards, we have failed. This sense of shame implicates our identity, we are no longer sure of who we are. One can imagine how, to avoid feeling this kind of shame,  a person might cross the line. If this is true, we are presented with a case in which Gupta, seeking to avoid the shame from within, shamed himself in front of the people he most valued.