Learning from a law firm's difficulty

The New York Times carried several short articles on the crisis facing the law firm Dewey &Amp; Leboeuf. As of March 28, 38 of its 300 partners had defected to other law firms, and the chairman of the firm, Steven H. Davis, had been stripped of his title.

The proximate cause of the crisis was the firm’s difficulty in paying its partners tens of millions of dollars in deferred compensation. The firm resulted from the 2007 merger of two old-line law firms. Indeed, the “Dewey” name comes from the estimable Thomas Dewey, the one time governor of New York State and the Republican Party nominee in the 1948 presidential election against Harry Truman. After the merger, the firm shifted strategies by hiring superstar lawyers, or rainmakers, from other firms and promised them multimillion-dollar payouts.  When the financial crisis hit, its revenues could not finance these promises, resulting in the deferred compensation.

It is important to see this story in its historical context. Old-line law firms thrived in part because they were protected from market forces. The firm as an institution represented a certain level of probity and trustworthiness. Clients who sought out the firm were buying and relying on its institutional standing. The rainmaker was less salient. Beginning in 1977, when the Supreme Court struck down laws barring law firms from advertising, they became increasingly market place creatures.

One can see this as a progressive development. The old-line law firms got business by relying on class and ethnic ties. WASP firms served WASP clients, Jewish firms served Jews, and lawyers from upper class families served clients from their communities. This arrangement precluded competition and was in this sense unfair.

The growth of advertising was the first signal that law firms would in the future compete largely on the basis of talent, ambition and drive, by attracting those partners who could generate high billings. As law firms were “marketized,” the client’s focus and commitment also shifted from the firm to the rainmaker.  The Dewey law firm in this sense was making up for decades of lost time. This may in fact be one explanation for its hasty accumulation of promises, which it could not keep.

Management theorists have described the “hollowed” out corporation where all but a select number of core functions such as sales or R&D are retained, and the remaining functions are outsourced. We can also think of this hollowing out as psychological. Perhaps the modern or post-modern law firm may be an extreme version of a new kind of institution, or a call it the “not-institution,” in which employee’s ties to one another are incidental and instrumental. This is one reason that law firms can collapse quickly. After a few rainmakers leave, other partners lose faith in the firm as an economic engine, and feeling no ties to one another, abandon ship. This is also why partners in law firms are so sensitive to differences in compensation, and why conflicts over compensation can precipitate a firm’s collapse. There is no other way, other than through money, to express regard, or to experience gratitude. It is the pure form of what Karl Marx once called the “cash nexus.” 

One question is whether or not the “not-institution” is indeed a model for the future of all organizations. (Indeed, my colleague Mal O’Connor is writing a book about this). Law firms are unique in some ways. Lawyers are often worn down by the interminable conflicts over money and property that they are called upon to adjudicate, contest or settle.  In this sense, the law firm becomes what we call in psychoanalysis, “a bad object,” a representation in the mind of a setting where people are at their worst -- hateful, greedy, and without grace. This is another reason why lawyers have limited emotional ties to the firms in which they work.

But three decades of market reform and deregulation in the West may be setting the stage for the psychologically hollow organization writ large. If so, one question is whether and how people will experience a sense of belonging. Perhaps, this is one way to understand why politics in the United States has been polarized. Perhaps, as organizations are hollowed out and working relationships are rendered instrumental and incidental, people feel psychologically worn out. They express their fatigue and resulting anger by joining with others and  making a different group the “bad object.”

Thinking strategically

I continue to read with pleasure Daniel Kahneman’s book, Thinking, Fast and Slow. Kahneman distinguishes between two modes of thinking; System 1 and System 2. System 1 is our story telling mind, always looking to create coherence even where none exists. System two is our analytical mind, able, with training, to think statistically and to ferret out cause and effect through scientific reasoning.

One question is what kind of thinking does “thinking strategically” entail. Consider the challenge American intelligence officials face in assessing the threat posed by Iran’s nuclear intentions. “Intention” is the key word. The facts that must be discerned are not facts in the usual sense of the term. Neither “intention,” nor “capability,” another essential feature of Iran’s potential threat, exists anywhere in any material sense. They certainly can’t be counted in the way we count money, births or accidents. All we have are indicators of intention and capability, not the subjects of interest themselves. This means that we can assess, intention and capability only through interpreting the indicators. Is interpreting the province of system 1, system 2, both, or neither? 

System 2’s statistical prowess is not helpful here. As Kahenman reminds us, statistical reasoning depends on measuring the “base rate,” the rate at which some fact, for example, car accidents per year, occur relative to a base rate, for example, the number of car -miles driven in a year. But there is no base rate for the situation Iran posses. We cannot identify the 100 other instances in which Iran posed a threat. We might decide to include threats posed in the past by other enemies, but then we face the question of whether or not these other examples are in fact similar. Many decades ago, the great management thinker, Raymond Hainer, argued that as we are called upon to process more and more information, our methodology for making sense becomes more “existential,” in the sense that each case is unique.

Psychoanalysis has a lot to say about interpretation however. Perhaps, as many critics have suggested psychoanalysts have erred in considering every patient to be unique. This prevents them from using statistical methods to assess their effectiveness as psychotherapists. But this stance has also been the basis for the way in which psychoanalysts take a non-judgmental view of each patient, a stance that promotes therapist-patient collaboration. 

This non-judgmental stance may also have lessons for how to interpret. Psychoanalysis emphasizes two requirements that are often in tension with each other. The “good enough” psychoanalyst tries to imaginatively inhabit the world of the “other, in this case, the world of the patient, without at the same projecting onto the patient his or her own emotional biases -- always a risk when we try to understand the emotional life of another person. System 1, because it privileges vividness, makes us susceptible to projection.  Instead, the psychoanalyst must take a stance of “dispassionately imagining,” the patient’s situation.

“Dispassionate imagining” may also be a good rule of thumb for understanding an enemy’s intention. Intelligence officials must “get under the skin” of their Iranian enemies without at the same time projecting onto their enemies their own satisfying fantasies- for example that Iran is monolithic and that all its leaders are evil.

Here is another piece of supporting evidence. The management researcher, Scott Armstrong compared the usefulness of role-plays to expert opinion in making predictions. If for example, he wanted to predict the outcome of a salary negotiation between football players and the teams’ owners, he asked experts to make a prediction, and he also had people role play the negotiation. Surprisingly, the outcomes of role-plays on average beat expert predictions. One interpretation is that people in the role-plays imaginatively inhabited how players and owners each experienced the situation, something experts could not do, perhaps because they favored one party over the other.   

The great military strategist Sun Tzu, a favorite of many business strategists and management theorists, argued that one does not defeat the enemy per se, but the enemy’s strategy. But the strategy is the result of the enemy’s intentions and capabilities. So the work of interpretation is ubiquitous and essential to our security. Is it the province of System 1, System 2, both or neither? Perhaps this manner of dividing up the cognitive domain is insufficient if it does not allow us to understand so important an activity as interpretation.

Jeffrey Immelt and GE

The Wall Street Journal carried an article this past week on the change in management philosophy at GE. GE under Jack Welch was the quintessential conglomerate. It had divisions in unrelated industries such as media (NBC), finance (GE capital), and aircraft engines. Welch prized general managers who had no special expertise in a particular industry. He force-ranked executives, and fired the bottom ten percent each year. He shed companies if they were not at the very top of their industrial sectors. He was a leader in cost-cutting, firing so many employees, that he was called “neutron Jack,” after a neutron bomb which presumably killed people without demolishing buildings. Under Welch’s leadership the conglomerate’s primary task was to grow shareholder value, not serve customers or satisfy the needs of diverse stakeholders.

Nonetheless, the conglomerate as a corporate form was and remains controversial. Born in 1960s and simulated by the conception of the corporation as a portfolio of businesses, it came under attack by corporate raiders in the 1980s who bet, it turned out correctly, that many conglomerates were worth more broken up into their separate divisions, than held together.

Was Welch’s GE therefore the exception? From 1981 to 2001, under his leadership, the stock split 5 times so that a share worth about $57, in 1981 was worth $2300 at the end of 2000. But as the following graph shows the value of this same share dropped precipitously during the Great recession

 

In retrospect it appears that GE capital, a financial services company and a core part of the firm, enabled GE to profit handsomely from the financial sector’s disproportionate share of the overall economy’s profits. But it became a millstone around GE's neck when this selfsame sector collapsed after the housing market crashed.   

The conglomerate once promised to be the solution to the difficulty of growing companies organically based on their historical strengths. After all competition, anti-trust laws, and the size of the market were barriers. Instead the company would grow by acquisition. But in light of the raiders’ successes and the fall in value of one share of GE,  it appears that organic growth, however, challenging may still be the best way to grow.

Indeed, Jeffery Immelt, Jack Welch’s successor has refocused the company on organic growth, and this brings in its wake a changed corporate culture. Under Welch, ambitious senior executives rose to the top by gaining experience leading companies in a wide range of sectors. Their tenures were short, they focused on profits rather than revenue, they did not know their top customers very well, they uprooted their families frequently, they developed no deep industry expertise, and with the forced ranking system, they competed with each other.

Under Immelt, by contrast, ambitious executives must develop industry expertise, stay in leadership positions for a longer time, know their top customers intimately, rely on market breakthroughs to grow revenue, and focus more attention on creativity, and less on re-engineering operations to reduce cost. Welch had turned GE’s storied R&D organization from a cost to a profit center, so that it could no longer undertake research on behalf of the whole company. Immelt has rebuilt the R&D organization. In addition, Immelt has softened the impact of the forced ranking system. The purpose of Welch’s most important meeting, “Session C” was to evaluate GE’s top several hundred managers. Immelt’s top meeting is the “Commercial Council” for developing breakthrough ideas. 

As these contrasts suggest, organic growth relies on the connections that executives build and sustain with each other, their employees and their customers. In the pure conglomerate these ties count for much less. In this sense, the pure conglomerate mirrors the pure market. But even in companies that grow organically executives still compete with each other for scarce capital, for visibility and for the limited number of positions at the very top. Competition and cooperation are both spurs to progress. Perhaps one reason executives take up the challenge of organic growth with ambivalence and with difficulty is that they do not know to how sustain a culture based on both cooperation and competition. This requires, it would seem, a certain level of psychological sophistication and skill. Does Immelt have what it takes?

Julie Taymor and Spiderman

The New York Times carried an article about the lawsuit between Julie Taymor, the one time director of the Broadway musical, “Spiderman: Turn off the Dark,” and her collaborators and producers. For readers who do not know the backstory, Taymor directed a play which was 9 years in the making, cost $65 million to produce before it opened, opened far after the original opening date, and was panned by critics. Taymor was replaced as director, and the musical was rewritten substantially. The story, once conceived as a mythical enactment of a person with frailties who faces the possibility of greatness, was simplified greatly. It became closer to the cartoon story of Spiderman, with the added thrill of seeing Spiderman fly through the theater on a harness.  It went from the mythical and magical to the spectacle. As a spectacle it is doing very well, particularly attracting first time theatergoers who visit New York. The investors may yet earn their return and then some.

This story sheds some light on the psychology of work and creativity. There is no doubting Taylor’s genius. Indeed, she won the Macarthur Genius award in 1991. Rooted in the tradition of using puppets in theater, she developed a style that integrated fact and fantasy, not unlike the way in which Cirque du Soleil presents its dancers and acrobats. Her Broadway musical, the Lion King, her movies, such a Frida, and Titus, her delightful production of The Magic Flute, which served well to introduce children to opera, are all without a doubt artistic achievements. So how and why did she fail?

I think one possible answer may lie in the ideas of "subordination" and "projection." To create theater on a mythical scale Taymor developed a flying apparatus to be used during some two-dozen flying episodes in the play. At rehearsal, two performers were injured during separate demonstrations of a slingshot technique meant to propel them across the stage. Christopher Tierney, who played Peter Parker/Spiderman, was seriously hurt when he lost his footing and toppled off a platform.

One question is why Taymor persisted in using these dangerous methods. How could a musical, which is after all a product designed and produced to make money, be so important? Of course, one answer is that it was a piece of art.  But while we accept that artists should sacrifice themselves for their art, we are less sanguine when they sacrifice others, particularly when the injuries are physical rather than psychological.  

A different answer may be that Taymor saw here own efforts as mythical. Talking at a TED conference during the period of her travails with the production, she told the audience about her risky and frightening experience hiking on volcano in Hawaii. Likening it to her journey through the production of Spiderman she said, “I am in the crucible right now. It is my trial by fire. It's my company's trial by fire. We have survived because our theme song (in the musical) is 'Rise Above.’'' This quote suggests that she linked her experience of her struggle with the musical to the theme of struggle and achievement in the musical. She, like Spiderman was a person with frailties aiming for out of the ordinary achievement.  This suggests in turn that she may have grown uncomfortably close psychologically to her own creation.

What is wrong with that? One conception of work and creativity is that as producers and artists we must at some point subordinate to the work itself. While we create the work of art, its own logic soon drives its evolution. This is not unlike the way in which good novelists find that their characters speak through them rather than they speak for their characters.  One theory holds that this quality of subordination gives rise to the experience of flow. In a state of flow one is without ego, and a person becomes an extension of the work itself.  Perhaps Taymor could not subordinate to the production process, and the musical remained too much an extension of her own ambitions. Indeed, some observers believe that the Greek chorus she introduced to comment on the play as it unfolded, represented her own voice. Because the production was too much about her, she may have experienced lapses of judgment, for example trying to transform a cartoon into a myth.

There is one more issue to consider. Taymor had her roots in puppeteering and in the use of masks, a technique she used to great effect in The Lion King.  Puppets and masks work through the principle of projection. By definition, they do not look like anything real, but it is their very unreality that releases the viewer's fantasy. They provide a space for the viewer’s active participation. But in Spiderman, Taymor sought verisimilitude, to make it look like Spiderman was actually flying, rather than to help viewers see Spiderman as if he were flying. By forgoing the powers of projection, she reduced her reliance upon her viewer’s creative powers. Instead, she inserted the Greek Chorus --eliminated in the revised production-- to tell the viewers what they should be seeing.   

Perhaps if the musical was not mythical, the story of Taymor’s failure is mythical. Could it be the story of “hubris,” the fatal flaw that punishes us for over-reaching?  In addition, it may also be a story about collaboration, not in the sense that Taymor and her partners separated with acrimony, but in the sense that products, whether in the arts or in commerce, depend for their success on the collaboration between producer and user.