Part I-Kaos is Bad for Business
While it may seem odd that a 1960s television seems to presage where we currently find ourselves, it turns out that Mel Brooks and Buck Henry had it right with Get Smart. The two competing forces were CONTROL, headed by Chief and home of Agents 99 and 86 and KAOS, formed in Romania but incorporated in Delaware “for tax purposes”. Thomas Friedman pointed out the congruity of these competing ideologies in the context of global politics in his most recent book Thank You For Being Late but I see this dichotomy in the current domestic political situation.
From the more general business perspective, one can only term the first weeks of the Trump Administration as chaotic. Peggy Noonan, writing in her weekly Wall Street Journal (WSJ) column, in a piece entitled “In Trump’s Washington, Nothing Feels Stable”, wrote of President Trump and Congressional Republicans, “when they look at him see Chief Crazy Horse.” Leaving aside the political chaos engendered over the past two weeks, it has been as equally chaotic for US businesses. From tweeting, to mixed signals and messages to the ban on Muslims entering the US with a valid Green Card or Visa, to insulting one of our two closest neighbors - Mexico; our largest trading partner - the EU; and our most steadfast ally for the past 70 years - Australia; it has been very un-nerving time for US businesses with an international sales component or international supply chain.
Daniel Henninger, also writing in the WSJ in a piece entitled “Trumpian Shock and Awe”, said, the Muslim ban “has politicized people the administration didn’t need among the disaffected. That includes the management and employees of the entire tech industry and of many other American companies. It includes some Republicans and important staff in Congress, numerous U.S. universities and research scientists, ambivalent pro-Trump voters, and foreign leaders such as Theresa May, Angela Merkel and Enrique Peña Nieto. Not to mention the men and women now rethinking offers to take subcabinet positions after watching the public humiliation of an unprepared federal attorney in a Brooklyn courtroom Saturday.”
The markets responded poorly to the ban as well. James Stewart, writing in his Common Sense column in the New York Times (NYT), said, “Wall Street did take notice. After months of cheering the prospect of tax reform and infrastructure spending, investors sold stocks after a weekend of chaos at the nation’s airports connected to the president’s executive order on immigration. On Monday, the Dow industrials experienced the biggest one-day decline since the election, fueled by worries that a dysfunctional White House wouldn’t be able to execute Mr. Trump’s policies.”
If there was one lesson I learned from my work in corporate America, it was that business leaders did not respond well to uncertainty. The chaos engendered by the new administration by the Muslim refugee ban is far beyond simple uncertainty as it moves to truly uncharted waters. Working in the self-proclaimed Energy Capital of the World, Houston TX, this ban has been particularly problematic. Obviously a large portion of the energy industry is centered in Middle Eastern, Muslim countries or countries like Indonesia, the world’s largest Muslim country by population. Iraq and Iran both have large national energy concerns. As noted by Christopher Drew and Clifford Krauss, writing in a NYT article entitled “Immigration Order Complicates U.S. Companies’ Plans in Middle East”, said that US companies which have worked with the Iraqi government to help rebuild the country since 2003, “are irritated that their country, which is working closely with the United States to battle the Islamic State, was one of seven predominantly Muslim nations included in the 90-day immigration ban imposed by the order.”
But more than simple irritation from business leaders, there is real concern about retaliatory travel restrictions which will inevitably result from the unilateral US action. Dragen Vuckovic, President of Mediterranean International Inc., a Houston-based service company that operates across the Middle East and North Africa, was quoted in the piece “It’s tit for tat.” The article noted, “Vuckovic said he had been scheduled to travel to Iraq soon to speak to officials in the country’s energy ministry but had changed his plans” and went on to say, “I have a visa but they may not let me into the country in retaliation to Trump’s travel ban. I’m not going over there for nothing. It’s a very bad situation.”
The concerns are broader than simply the seven countries listed in the Muslim ban. It could easily and quickly spread to other Muslim countries and the resulting backlash could well be devastating for America’s short and long term business interests. The NYT piece cited to “Michael Dynan, vice president for portfolio and strategic development at Schramm, a manufacturer based in West Chester, Pa., that has supplied rigs to companies working in more than 100 countries including Iraq” who noted “tensions over the immigration order could affect American business beyond the seven countries.” Dynan stated, “My concern is retaliation, and that is just going to open things up for competitors like the Chinese. What I am scared of is there could be a backlash in other Muslim countries or in general against America. We’ve always opened our borders and been the leader in trade and exports. It’s our brand.”
The response of several companies in Houston was to ban international travel by its employees. The reason, with the chaos and uncertainty these companies did not want their employees caught in a country they could not get into or worse, get out of and be stuck in some type of limbo. This travel concern also plays into persons coming into the US, who are not from countries subject to the Muslim refugee ban, yet who may have traveled to such countries during the pendency of their current passports. Here one might consider the example of the former Prime Minister of Norway, Kjell Magne Bondevik, who was traveling under a Norwegian diplomatic passport, identifying him as a former PM, yet was detained at Dulles airport because he had traveled to Iran and had an Iranian visa in his passport. All of this in spite of contact between the Norwegian embassy and its US counterparts in Washington during the detention, explaining that Bondevik was a former PM of Norway and as such was no terroristic threat to the US.
Noonan observed, “The president and his advisers are confusing boldness with aggression. They mean to make breakthroughs and instead cause breakdowns. The overcharged circuits are leaving them singed, too. People don’t respect you when you create chaos. Prudence is not weakness, and carefulness is a virtue, not a vice.” Gretchen Morgenson, no doubt channeling her inner Bette Davis in this week’s Fair Game column, advised businesses to ‘buckle up” as it will likely be a bumpy ride.
One of the things that both Noonan and Henninger made clear in their articles was their biggest concerns were over the chaos in planning and execution. So over the next few blogs I will be exploring the failure of the administration in these most critical business functions to see what lessons both the compliance practitioner and business leader might discern. Kaos indeed.
Part II: Failures in Leadership and Management
Next consider, the Muslim refugee ban and its disastrous miss-steps by the new administration in its design, execution and delivery. Matt Kelly, writing in his blog Radical Compliance in a piece entitled “Refugee Ban: A Policy Management Disaster”, listed four leadership failures by the administration in the rollout of the ban, all of which provide some excellent lessons for any business leader who may be trying to initiate change at a company.
The first was listed as “no communication”. While Kelly conceded the President could have sold the request he was making to the American people, he failed to engage in the communication required to sell the ban. Kelly identified it as a failure of leadership because the message from the administration was “dictating orders and expecting others to obey” rather than engaging in dialogue to persuade.
The second Kelly labeled as “flawed implementation” where he stated, “Trump and his team had no plan to implement the refugee ban on a practical basis. Or, in the language of compliance-speak: they ordered a change in procedure without first having a process in place to make it happen.” This left the groups required to implement the ban completely in the dark and with “no time to implement new procedures (call them compensating controls) to handle questions from suddenly visa-less travelers around the world.” For the Chief Compliance Officer (CCO) or compliance practitioner, Kelly posed the following questions, “Imagine how the board would react to a CEO who orders a new policy, sharply at odds with institutional history and employee values, without planning for its effective implementation. If you were the compliance or audit leader at that company, counseling the board, what would you recommend they do with the CEO?”
Next is that there was no incorporation of the feedback the administration received. While it is certainly the prerogative of the administration to hold the course after the announcement, to claim as Trump did that “It’s working out very nicely” belies the facts on the ground. If you are not able or willing to take information into your decision making calculus, you miss out on a valuable set of inputs. Kelly’s final point is that this entire exercise was a “wasted opportunity” because a majority of Americans are inclined to support the President. Some other type of action, more Constitutionally focused and better explained would have probably been accepted.
James Stewart wrote about more broad and systemic failures in management in his Common Sense column in the New York Times (NYT). While echoing Kelly points on leadership, Stewart provided additional insight for the CCO, compliance practitioner or business leader in the administration’s failures around its Muslim refugee ban. Lindred Greer, an assistant professor of organizational behavior at the Stanford Graduate School of Business, said the mistakes were “so basic, it’s covered in the introduction to the M.B.A. program that all our students take.” Stewart cited to Jeffrey Pfeffer, a professor of organizational behavior at Stanford and the author of Power: Why Some People Have It and Others Don’t, who said “Trump’s executive actions as president “are so far from any responsible management approach” that they all but defy analysis.”
Jeffrey T. Polzer, professor of Human Resource Management at Harvard Business School, said, “The core principles [of leadership] have served many leaders really well. It’s really common sense: You want to surround yourself with talented people who have the most expertise, who bring different perspectives to the issue at hand. Then you foster debate and invite different points of view in order to reach a high-quality solution.” However, to do so, “requires an openness to being challenged, and some self-awareness and even humility to acknowledge that there are areas where other people know more than you do. This doesn’t mean decisions are made by consensus. The person at the top makes the decisions, but based on the facts and expertise necessary to make a good decision.”
Neither the Secretaries of Homeland Security or Defense were consulted in advance about the substance of the ban. Stewart reported, the Secretary of Homeland Security, “John F. Kelly, was still discussing a proposed executive order restricting immigration when Mr. Trump went ahead and signed it. Nor was Jim Mattis, the defense secretary, consulted; he saw the final order only hours before it went into effect.” Greer opined, “Not to consult thoroughly with top cabinet officers before deciding on the order “is insane,” since they “have the expertise and should be on top of the data. Ignoring them leads to bad decisions and is also incredibly demoralizing.”
These failures also came at the expense of another key lesson of business management - buy-in. The more people who are involved in a decision, the more people will support it and work towards its success. Stewart cited to Professor Polzer, “When people are genuinely involved in a decision and their input is heard and valued and respected, they are more likely to support and buy into the decision and be motivated to execute to the best of their abilities, even if the decision doesn’t go their way.” He went on to note, “Conversely, people who aren’t consulted feel they have no stake in a successful outcome.”
Most interestingly, and for the CCO, compliance practitioner or business leader, was the insight Stewart received when he told the persons he interviewed for the article to “ignore their views about the merits of Mr. Trump’s policies.” Their uniform response was that you cannot do so because “execution and substance are inextricably linked.” He quoted to Professor Polzer that “When you’re on the receiving end of a policy decision, the merits of the decision and the execution go hand in hand. If either one is done poorly, the outcomes will be bad. Even good plans that are poorly rolled out aren’t going to work well.”
Finally, Stewart addressed the myth that businesses thrive on chaos, noting “But every expert I consulted said there is no empirical data or research that supports the notion that chaos is a productive management tool.” He once again cited from Professor Polzer, “I don’t really know what’s going on in the White House, so I don’t feel comfortable commenting on that specifically. But I can say in general that in organizational settings, less chaos is a good thing.”
Both Kelly and Stewart ended their pieces that if such chaos was demonstrated by a business leader, that leader would likely change their tune or be shortly shown the corporate door. As a CCO, compliance practitioner or business leader, you should study both leadership and management failures by the administration in its Muslim refugee ban rollout and implementation, so you do not make the same mistakes.
Part III: Preparing for a Catastrophe
Writing in her weekly New York Times (NYT) Fair Game column, in a piece entitled “The Trump Effect: Time To Buckle Up”, Gretchen Morgenson noted, “investors are now scratching their heads trying to figure out what his presidency will really mean for their portfolios. The recent flurry of executive orders from the new president provides a taste of what may lie ahead. This much is clear to many strategists: Mr. Trump’s mercurial tendencies will bring heightened volatility to individual stocks as well as to the securities markets over all. Let’s just say that fastening your seatbelt is probably a smart move.” As Bette Davis might intone, it’s going to be a bumpy ride.
After the announcement of the Muslim refugee ban, the market rally, led by those who thought Trump might well be good for businesses, stopped dead in tracks. Moreover, stating the obvious, Morgenson wrote, “What makes this period especially difficult for investors is Mr. Trump’s apparent willingness to make big decisions without weighing the far-reaching and longer-term consequences.” Obviously the tech industry is very troubled by the visa ban and can clearly see the writing on the wall. I wrote earlier about the negative impact on the energy industry. The US travel industry could well be devastated if Trump moves his ban forward to other countries or religions and continues his verbal assaults on countries which send a large number of tourists to America.
Morgenson also wrote about other industries that could be negatively impacted by the ban and one not immediately apparent – higher learning. She said that it will impact not only those foreign students who want to come to the US to study but also US students as foreign students pay not only more than US students but they are becoming a larger part of the US collegiate student body. She said, “International students contribute mightily to the revenues at educational institutions; as such, they help subsidize other students who are unable to cover the cost of college, including those from the United States.”
These few examples and the stock market in general point to the chaos which will continue under the Trump administration. After all, he is running the Presidency exactly as he ran his campaign and exactly as he said he would do so. Do not expect any change.
Last week I wrote about forecasting as part of your compliance risk management strategy. While your business may not ever to be fully able to forecast the Trump effect on your company, there are steps you can engage in to prevent a catastrophe. Simon Kuper, writing in his Financial Times (FT) Open shot column, in a piece entitled “How to avert a catastrophe”, suggested that looking into the past to forecast a catastrophe can be fraught with peril. He cited to the well-known forecasting, done annually by Mr. Turkey who gets fed more and more through the summer and early fall, which leads the analysts to make the following forecast “based on past trends, he will keep getting fatter. Then, just before Thanksgiving…..”
Kuper looked to Nassim Taleb, author of “The Black Swan: The Impact of the Highly Improbable” for guidance on how to be better prepared for a catastrophe. Given the pronouncements via Twitter of Trump and his Executive Order, it may well serve you to incorporate these points into your forecasting and risk assessment going forward, which I have adapted for the business leader or Chief Compliance Officer (CCO). The first is the most straight forward: catastrophes will occur and they will be in different form to prior catastrophes. Be ready to mobilize. Next “don’t follow the noise” and “ignore banalities”; meaning some catastrophes unfold silently and are not covered as TV events or even stories. He advises “We now need to stretch and bore ourselves with important stuff.”
The next few suggestions are quite useful as they require the business leader, CCO or compliance practitioner to focus internally. The first is to focus on and strengthen the internal controls to give you an earlier warning that something is amiss. Review your corporate infrastructure, or as Kuper writes, “Strengthen the boring, neglected bits of the state that can either prevent or cause catastrophe.”
Kuper cited a chilling example from Eric Schlosser, author of Command and Control, who wrote that in 2013, “the general overseeing the Minuteman III intercontinental ballistic missiles “was removed from duty after going on a drunken bender” in Russia, where his exploits included “asking repeatedly if he could sing with a Beatles cover band at a Mexican restaurant in Moscow, and insulting his military hosts”. A year later, nearly 100 Minuteman launch officers were caught cheating on their proficiency exams. Then a launch officer was jailed for 25 years for running a violent street gang. These people have the keys to launch nukes. A check-up may be in order.”
If you are an international company doing business in a predominately Muslim country, now, rather later, should be the time to check your sales channels, supply chain and even such banalities as how you will move personnel safely in and out of the country in the age of Trump. What about the location of your primary customers? If it’s the EU, how do you plan to get your data out with the imminent death of Privacy Shield and Trump’s drumbeat against not only our largest trading partner bloc but some of the US’ closest allies? Have you focused your long-term growth strategy at China (in particular) or the Far East in general? You may want to take a look at how your company will continue to sustain growth with the death of TTP, the rise of China as the regional power in east Asia and a not-too-distant trade war in the offing with China.
Kuper ended his piece with two items of very good advice. His penultimate piece of advice is listen to folks who have gone through a catastrophe. While the potential catastrophes under Trump may well be of both a different quality and quantity; seek out their guidance for the process through which they weathered the catastrophe. For it is the process which determines your response. If you have a process in place and are ready to go, you at least have a fighting chance.
Finally, I will simply quote Kuper’s final thoughts in full as I found them to be powerful and, indeed, spot on. He wrote, “Be conservative. Many Americans hope Trump will “shake things up”. As Noam Chomsky says, the risk is that he will. Often it’s smarter to maintain a flawed status quo. In Taleb’s words: “Don’t mess with complex systems, because we don’t understand them.””
Part IV: The Business Response
The first weeks of the Trump administration have as certainly been a chaotic start, with a raft of announcements, Executive Orders and social media postings which have kept the business community in turmoil. While the market certainly reacted with a pro-business rally since the presidential election, the reality of the full scope the new administration seems to have taken hold. One question businesses and business leaders have struggled with is how to respond; engage or stand back?
Many in the business community felt that having a shot at comprehensive tax reform, reduced regulatory requirements, infrastructure spending or other ideas was worth some of the other baggage the new administration brought along. Moreover, many business leaders would rightly expect that the new administration would seek out their guidance on issues of great interest to the business community.
Gillian Tett, writing in her Financial Times (FT) column Finance, in a piece entitled “Businesses wrestle with a Trump dilemma”, said that companies and their Chief Executive Officers (CEOs) do need to be involved “because the crucial thing to realize is that nobody really knows where his team will end up on policy.” Steve Bannon and his crowd could take US businesses down one path and Secretary of State Rex Tillerson and the Goldman Sachs alums in the administration could take the economy down quite a different path.
One approach was detailed by Andrew Ross Sorkin in his Dealb%k column in the New York Times (NYT), in a piece entitled “A Quiet Giant of Investing Weighs In on Trump”, where he discussed a letter by Seth A. Klarman, the 59-year-old value investor who runs Baupost Group. In this letter, “Klarman sets forth a countervailing view to the euphoria that has buoyed the stock market since Mr. Trump took office, describing “perilously high valuations.”“ Exuberant investors have focused on the potential benefits of stimulative tax cuts, while mostly ignoring the risks from America-first protectionism and the erection of new trade barriers,” he wrote.”
Sorkin writes, “Klarman appears to believe that investors have become hypnotized by all the talk of pro-growth policies, without considering the full ramifications. He worries, for example, that Mr. Trump’s stimulus efforts “could prove quite inflationary, which would likely shock investors.”” The reason is that while, “President Trump may be able to temporarily hold off the sweep of automation and globalization by cajoling companies to keep jobs at home, but bolstering inefficient and uncompetitive enterprises is likely to only temporarily stave off market forces” and that “While they might be popular, the reason the U.S. long ago abandoned protectionist trade policies is because they not only don’t work, they actually leave society worse off.””
Klarman is an example of what Tett says are business people who use their voice powerfully, do not act simply as a sycophant but offer precise, hard-hitting, constructive criticism of the administrations ideas which they find objectionable from a business perspective. Moreover, she notes that it “is reasonable to support some of Mr Trump’s ideas – such as deregulation - but hate the xenophobia, and then be willing to fight that.”
This latter approach was discussed by Henry Graber, writing in Slate article, entitled “The Corporate Resistance to Trump Is Hardening”, where he described the amicus brief filed by over 100 tech firms in the ongoing Muslim immigration ban litigation. Graber wrote, “The 20-page argument, submitted by lawyers from Mayer Brown, makes the business case against the Trump order, noting the crucial role of immigrants in U.S. enterprises, including their overrepresentation among American Nobel prizewinners and patent holders. The brief also points out how the order harms U.S. companies’ competitiveness abroad, by injecting “severe uncertainty" into every level of international partnerships, from diplomacy to visas to the actual entry process at American airports.” While the brief did cite the legal basis for their position, it was primarily focused on the business impact.
Graber ends his article by stating, “But what has begun in public relations, for the moment, appears to have a more substantive backbone. The amicus brief points toward a quieter, more important epiphany in American boardrooms: that stopping Trump isn’t just good PR, but good for business as well. At least until he and House Speaker Paul Ryan cut the corporate tax rate.”
Jay Rosen, in a piece entitled “Where Do Politics End and Ethics and Compliance Begin?”, challenged the compliance profession to consider “this is a question that determines where the rubber hits the road. I am not sure that one can actually separate the two domains as politics is often looked down upon for recent decades”. I would only broaden this to a business context. While the need to speak truth to power has long existed and is a hallmark of the compliance discipline, working with the current administration would be a way to continue to have influence.
Tett ends her piece by stating there is one powerful tool, which is, in many ways, the simplest and is always available to chief executives. It is, of course, resignation if your “worst fears turn out to be correct.”
This would appear to be where the greater business community finds itself. Sometimes we will agree with the administration, sometimes we will disagree privately and sometimes we will disagree publicly. I do think the approach now is to be engaged, with the administration and other arms of the government as some actions which may be done for simple showboating may have longer term negative consequences for American business. If we do not speak up, there may not be an opportunity later.