800-CEO-READ Blog: Finance and Economics

Business Books For The Current Credit Crunch

Shelf Awareness, a great site that follows the book trade, requested book suggestions that would help explain the current credit crisis.

On Friday, they ran the piece under the heading Meltdown Lit: Recommended Books for the Wall Street Debacle. Please go check out the whole piece. There are great suggestions.

Below is our original submission, which they used extensively for the article:

--The Subprime Solution by Robert Shiller

Shiller's work on housing values is well-known and originally established in Irrational Exuberance. His latest book just released in August describes pretty clearly the mortgage crisis we are in and offers some solutions to get out.

--Essays on the Great Depression by Ben Bernanke

You want some insight into what the current Fed chairman is thinking, reading his perspective on the last event of this magnitude may help understand what he does in this one.

--The Age of Turbulence by Alan Greenspan

Hearing from the latest Fed Chairman might also be useful. Many are laying the blame at Mr. Greenspan's feet. The paperback that was released on September 9th has a new chapter with his thoughts on the current credit crisis.

--When Genius Failed by Roger Lowenstein

This from a review I wrote:

"Throughout When Genius Failed, financial journalist Roger Lowenstein foreshadows the coming doom and so there is no surprise in how the story of Long-Term Capital Management ends. But what Lowenstein does best is show how blind arrogance brought down the company and almost the entire financial system. Building on the work of two Nobel Laureates and growing capabilities of computer technology, Long-Term Capital Management pushed academic theory further into real-world practice than had ever been done before, and becomes a case study for how markets defy formulaic explanation. Lowenstein’s narrative, while set in the complicated financial market of today, tells an ages-old story many will recognize." (P.S. This was peanuts compared to the current crisis.)

--Smartest Guys In The Room by By Bethany McLean and Peter Elkind

This from a review Jack wrote:

"In my research, I have not found any evidence that anybody colluded to rob the place. Smart, rich, influential men do not deliberately destroy the source of their wealth and influence. Instead, they got trapped in a nightmare of their own creation, or perhaps their own ego. Enron's failure was not deliberate; it was the result of a series of interconnected events. Can this happen again? Sure, when you have hubris at the CEO level, sales peoples’ compensation based on short term success, upper level people totally focused on growth to satisfy short term Wall Street success, an accounting system that supports this concept, and finally an accounting firm that doesn’t do a good job of oversight. Add to this a deregulated industry and watch what happens." (this sounds familiar too).

Article from Joseph A. Michelli, author of The New Gold Standard

Thanks to Joseph A. Michelli for providing this article for our blog.

Shrink Not - Adjust the sail and seek The New Gold Standard of Leadership

By Joseph A. Michelli, author of The New Gold Standard: 5 Leadership Principles for Creating a Legendary Customer Experience Courtesy of the Ritz-Carlton Hotel Company

Soaring gas prices and the US credit crunch have many business owners scurrying to reduce costs and "do more with less." But this natural and reflexive approach to economic uncertainty is often the worst path a business leader can take. In fact, while researching my recently released book The New Gold Standard: 5 Principles for Creating a Legendary Customer Experience Courtesy of The Ritz-Carlton Hotel Company, Ed Staros, a founder of the modern-day Ritz-Carlton Hotel Company noted that during difficult economic times in the 1980s many hotel chains were cutting back on flower arrangements in the lobby and not placing mouthwash in guest rooms. Ed shared. "We always believed that economic challenges didn't mean that people didn't need or want mouthwash. It meant we had to raise the standard in a quality efficient way." So, how do business leaders decide when to pull-back products or service versus expanding them, particularly when business begins to slow? For example, many marketers suggest that the best time to advertise is in a tight market, namely because fewer people are doing so (allowing you to position your product with less clutter) and because it is the time when customers need most to be reminded that you are still there.

While cost cutting may be inevitable in tighter economic cycles, I gained key insights during my conversations with the leadership at The Ritz-Carlton Hotel Company about how to avoid a scarcity mentality in challenging times:

1. When consumers face economic challenges they often place a greater emphasis on value. While many customers will "pinch pennies" and "clip coupons" to address financial hardships, they will still look for opportunities to "treat" themselves. When consumers do spend money freely they will want to experience true quality and not a watered-down or corporately scaled-back version of quality.
2. Focused excellence prevails. If cutbacks are necessary, companies can and should reallocate resources toward their core areas of excellence. To be "excellent" means resisting the urge to overreach into areas where your products or service will be mediocre. Doing a few things expertly beats doing many things adequately.
3. Inspire staff to focus on purpose and outcomes, not fulfillment and procedures. I have long believed that all business is personal. This is particularly clear in the world of luxury hotels and resorts. While most hotel companies that compete for this market segment have exquisitely clean and well-appointed facilities, the primary driver for guest loyalty emerges from the personal attention and caring of staff. From the onset of their employee selection process, leadership at Ritz-Carlton looks for underlying talent in service characteristics. They then train and certify the skills necessary for the new hires to do their jobs while constantly linking job function to the overarching purpose of the business - namely to provide for "the genuine care and comfort" of their guest.
4. Empowering the front-line saves money. While many business leaders talk about their empowered workforce, few put money behind the hype. At Ritz-Carlton, staff members (referred to as the Ladies and Gentlemen of The Ritz-Carlton) are given the authority to spend up to $2,000 per day per guest, without seeking the approval of their supervisors. This authority allows front-line workers to immediately resolve service breakdowns for guests or simply engage guests by doing something unexpected that will make the hotel stay memorable. The cost-saving nature of this seemingly risky level of financial empowerment is derived from the morale and loyalty of employees, the clear cost savings of resolving problems immediately, and the impact that this type of empowered workforce has on customers. Essentially, empowered employees consistently transform otherwise satisfied customers into fully-engaged brand loyalists that spend more and refer family and friends to the business.

In my book The New Gold Standard, I identify 5 key business principles that have allowed The Ritz-Carlton to continue to be a recognized leader in product quality and service excellence (two time winner of the Malcolm Baldridge award for service excellence). Rather than contracting or adopting a defensive posture during economic uncertainty, The Ritz-Carlton leadership stays the course with these five principles:

Define and Refine

Empower through Trust

It's Not About You

Deliver Wow!

Leave a Lasting Footprint

While concepts like empower through trust have been alluded to earlier, concepts such as "define and refine" and "it's not about you" warrant further exploration. By clearly "defining" the core components of the company's values, quality standards, and service tradition, Ritz-Carlton constantly communicates the path by which a guest's experience can be elevated, how the staff member can purposefully add value and the means by which the company will thrive. By having every staff member take time every day at every hotel worldwide to participate in a process called line-up, Ritz-Carlton leadership re-engages staff in a discussion of the overarching mission they all share. Further, by being attentive to the need to "refine" the brand so that it remains relevant in changing economic times, for evolving customer segments and in diverse international markets, leadership builds on their well-defined culture.

The "It's not about you" principle reflects the disciplined practice of listening to staff, customers, vendors and all stakeholders to constantly assure that business does not principally serve the needs and preferences of leadership. By adopting a penchant for listening to stated and unstated needs while maintaining a passion for service, great leaders produce businesses that endure. From the customer's perspective, these businesses are extensions of themselves and not commodities.

While none of us can control the winds of economic change, taking a few lessons from The Ritz-Carlton Hotel Company can help us adjust our sails to arrive at our desired destination. I welcome your thoughts about the journey...

ABOUT THE AUTHOR

Joseph A. Michelli, Ph.D., is an internationally sought-after speaker and business consultant whose clients include Bridgestone Firestone, Nokia, The Hartford Insurance Group, UCLA Health System, and USMC. Michelli has vast media experience, including television programs such as "The Glenn Beck Show" and CNBC's "On the Money," and has conducted hundreds of radio and print interviews.

Evolutionary Economics

Found this today. A Fast Company article on evolutionary economics from Michael Shermer, author of The Mind of the Market.

If the fruit of the Economic Stimulus Act of 2008 hasn't landed in your bank account yet, it's likely just a matter of time before you're throwing $600 on the bed just to see what it feels like to roll around in that much cash. The government, of course, hopes that we won't just pay bills or sock it away in savings but that we'll circulate the money back into the marketplace and thereby jump-start our sagging economy. As I write, the government is also engaged in another kind of largesse, literally printing money and offering it to banks and government-backed mortgage players Fannie Mae and Freddie Mac to stave off the continuing ripple effects of the credit crisis. Leaving aside whether those moves will reverse the current economic slump, the question is: Why do we think they might?

The answer may be found in a new science called evolutionary economics. This discipline looks at the economy as an ever-changing, complex adaptive system -- not unlike that of biological evolution. Immune systems, language, the law, and the Internet are all examples of other complex adaptive systems. They learn and grow from the bottom up. Individual elements (organisms in evolution, people in economics) interact and adapt to changing conditions. These systems are so intricate that they often look as though they've been designed from the top down. So our minds naturally infer the existence of an intelligent designer for complex life and a government designer for complex economies. This is why we instinctually look to Fed chairman Ben Bernanke, Treasury secretary Henry Paulson, or Congress and the President to fix the economy.

But there's more to it than that...

Keep reading on evolutionary economics over at Fast Company.

The train wreck that was Bear Stearns

Caption: "An August conference call fails to calm investors."

On Tuesday May 27, The Wall Street Journal begins a three part analysis of the collapse of Bear Stearns.

Buffeted by the most treacherous market forces in a generation and hobbled by indecision, the firm's leaders missed opportunities that might have been able to save the 85-year-old brokerage.

Part one was sad yet fascinating...I look forward to the next installment.

NYT review of Predictably Irrational

The New York Times Sunday Book Review had a great article on Predictably Irrational: A Behavioral Economist's Startling Insights for Irrationally Better Living by Dan Ariely. We've had several good reads on this book, one the reviewer calls "a far more revolutionary book than its unthreatening manner lets on."

Writer David Berreby tells us that:

Another sign that times are changing is "Predictably Irrational," a book that both exemplifies and explains this shift in the cultural winds. Here, Dan Ariely, an economist at M.I.T., tells us that "life with fewer market norms and more social norms would be more satisfying, creative, fulfilling and fun." By the way, the conference where he had this insight wasn't sponsored by the Federal Reserve, where he is a researcher. It came to him at Burning Man, the annual anarchist conclave where clothes are optional and money is banned. Ariely calls it "the most accepting, social and caring place I had ever been."

Obviously, this sly and lucid book is not about your grandfather's dismal science. Ariely's trade is behavioral economics, which is the study, by experiments, of what people actually do when they buy, sell, change jobs, marry and make other real-life decisions.

Berreby provides just a few of the insightful stories Ariely uses to illustrate irrationality, touching on concepts like the power of suggestion and the unfortunately common social habit of "wanting stuff we can't afford and don't need."

These sorts of rigorous but goofy-sounding experiments lend themselves to a genial, gee-whiz style, with which Ariely moves comfortably from the lab to broad social questions to his own life (why did he buy that Audi instead of a sensible minivan?). He is good-tempered company -- if he mentions you in this book, you are going to be called "brilliant," "fantastic" or "delightful" -- and crystal clear about all he describes. But "Predictably Irrational" is a far more revolutionary book than its unthreatening manner lets on. It's a concise summary of why today's social science increasingly treats the markets-know-best model as a fairy tale.

Greenspan's inspiration

Greenspan was a big fan of Atlas Shrugged -- a book some consider to be one of the most influential business books ever written.

Many have criticized the book for encouraging selfishness. Yet, Greenspan refuted it in a letter to the NYTimes in 1957:

'Atlas Shrugged' is a celebration of life and happiness. Justice is unrelenting. Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should.

You'll find he's not the only famous businessman who learned from and enjoyed Ayn Rand's novel.

p.s. If you haven't heard, Greenspan's memoir The Age of Turbulence is due out today.

Everyone Talking About Greenspan Book

The media doesn't know what an embargo is anymore. I can tell you that publishers are driven nuts when reporters start talking about a book before it comes out. With the book slated to come out Monday, Alan Greenspan's book The Age of Turbulence is the latest to fall victim to impatience.

It started with Portfolio Magazine article by John Cassidy which will appear in the October issue but showed up online earlier this week. There are vague references to the material in the book and is more of a critic of Greenspan's tenure as Federal Reserve Chairman.

The Wall Street was skipped the indirect route and featured the an extensive article on the front page of their Saturday edition. The lead is:

In a withering critique of his fellow Republicans, former Federal Reserve Chairman Alan Greenspan says in his memoir that the party to which he has belonged all his life deserved to lose power last year for forsaking its small-government principles.

In "The Age of Turbulence: Adventures in a New World," published by Penguin Press, Mr. Greenspan criticizes both congressional Republicans and President George W. Bush for abandoning fiscal discipline.

and later in the article is the stuff people are going to be interested in:

In coming years, as the globalization process winds down, he predicts inflation will become harder to contain. Recent increases in the price of imports from China and a rise in long-term interest rates suggest "the turn may be upon us sooner rather than later."

Left alone, he said, the Fed's policy-making body, the Federal Open Market Committee, can keep inflation between 1% and 2%, but that could require forcing interest rates to double-digits, a level "not seen since the days of Paul Volcker," his predecessor as Fed chairman. "I fear that my successors on the FOMC, as they strive to maintain price stability in the coming quarter century, will run into populist resistance from Congress, if not from the White House," he writes.

If the Fed succumbs to that pressure, inflation could rise from a little over 2% at present to an average of 4% to 5% by the year 2030, he writes. Ten-year Treasury yields, now below 5%, will rise to "at least 8%" with the potential to go "significantly higher for brief periods." This, he says, will lead to stagnant returns on stocks and bonds and much smaller gains in housing prices.

You are going to be seeing alot of Alan in the next couple of weeks. Here is a head start:

• Videos from 60 Minutes
• Interesting Excerpts on Leading Blog
• AP's Story on the Book

Excerpt from The Last Chance Millionaire

The following is a brief excerpt from the book The Last Chance Millionaire by Douglass R. Andrew.

The Pitcher of Water Versus the Empty Glass

When I give seminars, this is the moment that I introduce the most memorable visual aids I have ever used. Picture yourself holding an empty drinking glass in one hand and a pitcher containing water in the other. The glass represents your house. For simplicity's sake, let's say it is worth $100,000. It's an asset. Let's say you have $100,000 of cash in the bank (the pitcher) -- that's liquid wealth. The glass is empty because you have not put a penny into your house, but on paper, on a balance sheet, you would still list it as a $100,000 asset. Meanwhile the pitcher of water represents another asset -- $100,000 in cash.

What's the total amount of your assets? $200,000. What happens if you pour the water into the glass? You have reduced your assets by $100,000. You've combined $100,000 in cash to a glass already listed as an asset worth $100,000, and all you have to show for it is $100,000. You have cut your assets in half!

On the other hand, when you separate the liquid cash from the glass-sized house that is free and clear, you double your assets. That's what happens when you separate equity from your house and put it in a liquid investment. But you're not finished. Assume the empty glass-house appreciates at an average of 5 percent a year. After one year, what's the value of the empty glass? $105,000. If you pay off the mortgage on the glass (pour the water -- or money -- back into the house) what is it worth? The same $105,000 -- whether it is mortgaged or it is free and clear -- because equity has no rate of return when it is trapped in a house.

Next, pour the water from the glass back into the big pitcher. You've just removed $100,000 from your house and put it into an investment earning -- let's say -- 10 percent. At the end of the year, how much money will you have in that pitcher? Look at that! It's grown to $110,000! In your other hand is your house, worth $105,000 at the end of the same year, thanks to appreciation.

Leave the water in the pitcher.

How much have you earned by separating your equity from your house in the course of just a single year? $15,000. How much would you have earned if you had left the water in the glass? Only $5,000 -- one-third as much.

"But, but, but -- the mortgage wasn't free! I had to pay some interest." That's right, you did. Let's say the mortgage was at 7.5 percent. That's $7,500 subtracted from $15,000 for a net gain of $7,500, instead of just $5,000. You are still 50 percent ahead than if you had not removed the equity from your house. If the mortgage interest is deductible, then the net cost of the mortgage is really not $7,500, but $5,000 in a 33.3 percent marginal tax bracket. So the net profit is $10,000 ($15,000 minus a net, after-tax mortgage expense of $5,000) -- or twice as much as you made if the house was paid off!

Here's another quick analogy: Would you rather have one horse working for you or two? Can two horses work for you, even if you owe money on one of the horses?

The object of this demonstration is that no matter what else you do, when you separate your equity from your house, you increase your assets. Even though there is a charge for doing that -- the simple interest you pay on a mortgage -- it makes a whole lot of sense to take out a mortgage and use it to make your assets grow.

Do you recall the president of the bank I mentioned at the start of this chapter? What you've just done -- taken out a mortgage and used the money to make more money -- is what he did. You didn't make billions, but you made a profit in the same exact manner. By separating equity from your house, you give it the ability to earn a rate of return. Employ this strategy each year, and the profits will compound.

Copyright © 2007 Douglas R. Andrew

The Last Chance Millionaire by Douglass R. Andrew
Published by Warner Business Books; June 2007

Riding the Freakonomics Wave.

The WSJ picks on the latest economic books saying they're overlooking a more bedrock rule -- that of supply and demand (free access today). From the WSJ:

In Discover Your Inner Economist, Tyler Cowen, an economics professor at George Mason University, talks readers through economic rationales for dating (flowers work because they are expensive), charity (give to those who aren't asking) and eating well (at expensive restaurants, avoid dishes that rely too heavily on top-quality raw ingredients). But sales of other new titles that aim to explain weird phenomena in economic terms don't bode well for Mr. Cowen's book: More Sex Is Safer Sex, by Steven E. Landsburg, and The Economic Naturalist, by Robert H. Frank, have sold just 12,000 copies combined since their spring releases according to data from Nielsen BookScan, which tracks approximately 70% of retail book sales. Meanwhile, an expanded edition of "Freakonomics," which came out in October, has sold 119,000 copies since January. In his book, Mr. Cowen describes a potential explanation: a marketing principle called "scarcity of attention."

Interesting economics

If all economics classes had a professor like Robert Frank, economics might be a bit more hip. Professor Frank commences his classes by asking students to apply economics to real-world issues.

These questions and their answers now make up his recently published book, The Economic Naturalist. Over at another famous economics site you'll find a few excerpts including this one:

Why do fast food places promise a free meal if you aren't given a receipt at the time of purchase?

To deter theft, owners of restaurants and other retail establishments require cashiers to reconcile the total amount of cash collected during their shift with the total volume of sales rung up at their register...One way cashiers can circumvent this control is by neglecting to ring up a proportion of their transactions...Thus if a cashier failed to ring up a customer's $20 meal, he or she could pocket the $20 without creating an accounting discrepancy...By offering a complimentary meal to anyone who fails to receive a receipt, owners provide an economic incentive for customers to monitor cashiers for free.

What Podcasts People Are Listening To

Here is a little peak into what people are listening to on our Podcasts blog. This is a ranked list for the first four months of 2007.

1. The Elegant Solution Interview with Matt May
2. Marketing and Sales for Big Complex Selling Interview - Part 1 with Brian Carroll
3. Marketing and Sales for Big Complex Selling Interview - Part 3 with Brian Carroll and Jill Konrath
4. Everyday Greatness Interview with Stephen Covey
5. The Difference Maker Interview with John Maxwell
6. Confessions of An Economic Hitman Audio Excerpt
7. Made To Stick Interview with Dan Heath
8. Growing Great Employees Interview - Part 2 with Erika Anderson
9. Purpose Interview with Nikos Mourkogiannis
10. Growing Great Employees Interview - Part 1 with Erika Anderson

Moneyball

In Michael Lewis' brilliant book Moneyball, he tells the story of Billy Beane the GM from the Oakland Athletics. Beane is asked to present to Major League Baseball the reason his organization has been so successful with no little money spent on big name, quality baseball players. His first PowerPoint slide said.

Major League Movie about the hapless Cleveland Indians

In order to assemble a losing team, the owner distributes a list of players to be invited to spring training. The baseball executives say that most of these players are way past their prime. Fans see the list in the paper and remark, "I've never heard of half of these guys."

Our situation closely resembles the movie.

Market Inefficiencies

I have been walking around with a October issue of Fortune in my bag for months. There is a special section in the 10/30/06 edition called Secrets of Greatness. The Q&A with Michael Lewis is what has kept in my bag. The economist-turned-author has written Liar's Poker, Moneyball, and most recently The Blind Side.

This shows what a good journalist can do with the right questions. I think the lead-off sets a great tone for the whole piece:

The stars of your books typically find ways to capitalize on market inefficiencies. Is contrariness necessary for greatness?

True greatness requires an ability to respond to challenges and overcome difficulties and suffer and endure - and to think under pressure and act under pressure. America is built on ambition. And there are these little arenas of ambition in the country. There's Hollywood. There's Wall Street. There's Silicon Valley. There's Washington in politics. There's professional sports. And those arenas of ambition - they tend to become ossified. When someone walks into one of those arenas and takes it on, I find that very appealing and healthy.

Daily Dose of The Executive Almanac Part 5

Today's Dose of The Executive Almanac:

How to Deal with White-Collar Crime

"In September 2004, the Chinese government executed four bank executives for fraud totaling $15 million. The two banks involved were state-owned entities. Wang Liming, an accounting officer at China Construction Bank, was put to death, along with an accomplice, Miao Ping, for stealing 20 million yuan (about $2.4 million) from the bank. Another employee at China Construction, Wang Xiag, was executed for stealing another 20 million yuan in an unrelated case. The fourth man executed was Liang Shihan, an official at Bank of China's branch in the southern city of Zhuhai. He was accused of stealing $10.3 million.

China executes more criminals than the rest of the world combined."

Economics and Minimum Wage

David Henderson, author of Making Great Decisions In Business and Life, had an op-ed in the Wall Street Journal yesterday. It's titled If Only Most Americans Understood [sub. needed]. Making Great Decisions was a Jack Covert Selects in January and I thought I would share a small excerpt from the piece:

Most people see the issue as a no-brainer. Wouldn't it be nice to raise the wages of the lowest-earning people? Even if they understand that this will cause them to pay higher prices on goods and services, they see that as a worthwhile price to pay. But economists of various political stripes tend to oppose the minimum wage. We understand that it will help only a subset of the people it is thought to help, and will help them only a little -- while hurting some of them a lot.

The reason goes back to the second sentence quoted in the above Times editorial. In raising the minimum wage, the government doesn't guarantee jobs. It guarantees only that those who get jobs will be paid at least that minimum. But precisely by requiring this, the government destroys jobs. Someone to whom an employer was willing to pay only the current minimum wage of $5.15 might not produce enough to be worth paying, say, $7.25.

It's not all or nothing. Some of the workers currently earning $5.15 would find their wages rising to $7.25. But the marginal tasks, the least important tasks in the workplace, would no longer be worth doing, thus costing jobs. In the longer run, employers will find more capital-intensive ways of doing these tasks.

Truth and Fiction in the Business World

Fortune has a blurb on two books in their Business Life section (pg 190, 7/31/2006).

They recommend The Futurist by James Othmer. Dan Pink was telling me about this book at BEA back in May. Othmer is a Young & Rubicam exec and writes about a fictional corporate guru who suddenly realizes everything he has been saying is hogwash.

The second book is The Accidental Investment Banker by Jonathan Knee. The review claims the intrigue and drama of 24 told through the true stories of his ten years at Goldman and Morgan Stanley.

Watching the Bestseller Lists

It is very interesting to look at this week's Wall Street Journal bestseller list [sub. needed]. There are three entries on the business list outside of the regulars. This is really unusual. The list is dominated week and week out by books like Freakonomics, Blink, and Who Moved My Cheese. It makes it very difficult for new books to get on the list. So, let's look at the three new entrants and I'll give you my thoughts on why they are there.

Debuting at #2 last week and moving to #1 this week is Waiting For Your Cat to Bark? by Bryan and Jeffery Eisenberg. This is the second effort for these two. You might remember Call to Action. In this book, they are selling an idea called Persuasion Architecture. It is a customer profiling technique that is reminiscent of Meyer-Briggs Personality testing. I would attribute the location of this book on the list to Mike Drew at Promote A Book. He gets books on bestseller lists and has been involved with this one.

At number #6 is Chris Anderson's The Long Tail. We have been talking about this book for awhile and everyone in the industry expected this to be a big book. It will be interesting to see if it takes one of those semi-permanent positions on the list. You can read Jack's review here.

#15 is the interesting one this week. 48 Laws of Power is a book that has been out since 1998. Author Robert Greene writes a Machiavellian take on how to get ahead. Among the laws, "Discover Each Man's Thumbscrew" and "Strike the Shepherd and The Sheep Will Scatter." The LA Times ran a story last week on how the book is finding a strong audience in the hip-hop community. It is a fascinating article and a probable explanation for 48 Laws' visit to the bestseller list.

The only other odd item about the list (and I usually don't look this close) is seeing The World Is Flat on the general non-fcition list, but not on the business list. That discrepancy might have created the spot for 48 Laws.

Freakonomics Cover Art

I ran across this great site for book cover art. I saw the Freakonomics cover and decided to pull a couple other version for your enjoyment.

C-Level Books

I talk to lots of authors who tell me that their books are written for the chief executive officer. I often think it would would be nice if somebody took the time to talk to the others in the executive suite. Somebody must have been listening. Two new books address the evolving roles of both the Chief Financial Officer and Chief Operating Officer.

The first is Reinventing the CFO by Jeremy Hope. The author asks chief finance officers to thinking differently about their job. He says it is about more than recording transactions, managing budgets, and preparing tax returns. He lays out seven roles for the new CFO and each is explained at chapter length. The roles include Freedom Fighter, Analyst and Adviser, Architect of Adaptive Management, Warrior Against Waste, Master of Measurement, Regulator of Risk, and Champion of Change.

The second book is coming next month and is called Riding Shotgun. Authors Nate Bennett and Stephen Miles have done a ton of research into the role of Chief Operating Officer. The bottom line from their research is as they put it, "a COO is not a COO is not a COO". Companies use them differently. Sometimes they take over, sometimes they don't. The use of a COO in corporate America is dropping a bit. I find the lack of consistency really interesting. Bennett and Miles lay out the various motivations for creating a COO position, the various responsibilities a COO may have, and what you should look for during a search.

Economics Literacy

Don Moyer of thoughtformdesign writes a piece for the last page of Harvard Business Review every month. He uses graphic design to illustrate a simple business lesson. I think it is pretty cool.

In the April issue, Moyer's article is titled "Basic Training". It is a short piece about how we as businesspeople could all you a refresher course in economics. Moyer says:

In their excellent book Common Sense Economics by James Gwartney, Richard Stroup, and Dwight Lee asserts that "a nation of economic illiterates is unlikely to remain prosperous for very long." Such books are worth reading not because they introduce new thinking, but because they reinforce the foundation on which we build our own new thinking. The label "Economics 101" is generally viewed as disparaging. But who among us wouldn't benefit from a refresher course?

I would also recommend Naked Economics and The Undercover Economist. These both use great narrative to illustrate theories of the dismal science.

Long Tail Cover

Chris Anderson put the cover art to The Long Tail up on his blog last week.

We have galleys now and are reading it. The book comes out July 11th.

If you are still not on the Long Tail bandwagon, start with Chris' original piece in Wired and then get caught up on his blog.

Finance Tools

Rob Norton (former executive editor for Fortune) wrote an article in Strategy+Business on the art of finance (registration required). Describing today's finance world as being full of measurements and assessments, he suggests these seven resources for learning more:

• Against the Gods by Peter L. Bernstein
• Capital Ideas, also by Bernstein
• My Life as a Quant by Emanuel Derman
• Fischer Black and the Revolutionary Idea of Finance by Perry Mehrling
• Beyond Greed and Fear by Hersh Shefrin
• Trillion Dollar Bet
• Wikipedia

Being young and dealing with money

BusinessWeek's last issue featured two new books out about the young people in America and their money flow:

1. Strapped: Why America's 20- and 30- Somethings Can't Get Ahead by Tamara Draut


2. Generation Debt: Why Now is a Terrible Time to be Young by Anya Kamenetz

The article "Up Against It at 25" describes the books as "similar economic jeremiads, although Kamenetz is the better writer and Draut the more knowing policy maven."

What is it about America's 20- and 30- somethings that make them so strapped? "Flawed government policies that have forced many students to borrow huge sums for college", less traditional workplace benefits and "an older generation of self-satisfied baby boomers [that] will soon begin retiring, sucking up government resources."

Being in that 20- and 30- something category myself, I'm not sure I agree that it is a "terrible time to be young." It's true that education costs are at an all-time high but there are also more people graduating from college than ever before. There are still state universities, scholarships, and grants all out there for students seeking to pay less for a good education. Of course, there are also the student work programs that are dedicated to helping students finding on campus jobs.

As for the government resources, Social Security was meant to be a supplemental income; it was not intended to provide for everything. Thus, everyone in the U.S. -- not just the 20- and 30- somethings -- are in the same boat. Most of us cannot depend on these resources to get us through retirement; luckily, retirement programs such as 401Ks are implemented at most companies to help employees save for their retirement. I also believe that young people today have more access to information; thus, they are more informed about how to save properly for retirement.

While I can easily emphasize with Kamentez and Draut, I don't think that we are truly a generation of debt nor do I believe that we "can't get ahead" without changing our culture. Our generation has many benefits that no generation has previously enjoyed. We have a lot to be thankful for in spite of high education costs, government policies and retiring baby boomers.

One more book to watch for

We want to make sure you don't forget about The Long Tail by Chris Anderson. We didn't have this book on our list nor was it on the HBR list. It was a terrible oversight. The latest news is that the book's publication date is July 11th.

If you haven't gotten on the Long Tail train, you can read the original article from Wired and Chris' blog.

Forbes' Best Business Books of 2005

I thought we had seen all of the lists for 2005, but Forbes published their selections on Tuesday.

To determine the very best of the crop, we polled a dozen writers, editors and publishers from Forbes. Thirty-three books were nominated, which we then winnowed down to the five very best, with the help of the editors of Forbes magazine and Forbes.com. We did not attempt rank the top five--all of them are excellent in completely different ways. Try these tomes, and you'll be all caught up on your 2005 business reading.

Their selections are:

• The Battle For The Soul of Capitalism by Jon Bogle
• Blink by Malcolm Gladwell
• Disneywar by James Stewart
• The Moral Consequences of Economic Growth by Benjamin Friedman
• The World is Flat by Thomas Friedman

Hat Tip: BizBook Nuggets

Additional Recommended Finance Reading

We believe, of course, that every manager should read Financial Intelligence. However, as we said in the book, a good manager shouldn't just look at the numbers to understand his or her business. So, here are a few books we recommend to round out your reading list:

• A Stake in the Outcome -- What can go right and what can wrong in small, closely held businesses when equity is shared broadly.


• First, Break All the Rules -- One perspective on what people really look for in a workplace and what makes a company great to work for.


• Good to Great -- What it takes to be successful in the long term. We especially love the hedge hog concept.


• Small Giants -- A look at successful entrepreneurs who care more about success and lifestyle than revenue and growth.


• The Discipline of Market Leaders -- An understanding of the strategy behind some of the biggest and most successful companies in the last 30 years.


• The Goal -- Introduces revolutionary concepts related to managing a manufacturing company. Goldratt’s project management finance philosophy mirrors our own.

If you want to read more about finance, then try the books listed below. We've included a few about a concept called open book management, an approach to managing a company that has to do with the numbers, as well as with communication and education, and is in alignment with our philosophy.

• Great Game of Business -- The philosophy and elements of teaching everyone about the numbers, sharing them on a regular basis, and sharing equity. Some would say this is true financial transparency.


• Maverick -- An even more radical approach to opening the books, including salary information and performance reviews. Not for everyone, but the employee manual at the end of the book is worth the read.


• Open Book Management -- Great insights and stories about successful companies that opened the books.


• Relevance Lost -- An explanation of why managerial accounting has gone in the wrong direction in the last 50 years.


• The Interpretation of Financial Statements -- A look at how great investment thinkers of our time looked at financials. Buffett looked to Graham as his financial mentor.


• The Warrant Buffett Portfolio -- Lots of financial analysis, so it isn’t for everyone. But great insight into how Buffett thinks and invests.

Finally, if you want a good financial analysis text (if you really want to get in depth into the subject of finance), we recommend the book below. However, there are many more good ones out there.

Corporate Finance by Ross and Westerfield

Thanks

It has been great sharing our thoughts with you today. Feel free to contact either one of us through our websites, either www.financialintelligencebook.com or www.business-literacy.com.

A Case Study: A Business Literacy Transformation

Joe and I are owners of a consulting firm called the Business Literacy Institute. We work with mostly large companies, providing business literacy consulting and training products and services. All of our work is customized, so every program we deliver is different. The topics we teach, and the numbers we focus on, are based on the needs of the client. For some clients, we are in their catalog of courses, teaching Finance for Non Financial Managers once a quarter or so. For others, we develop programs for specific needs within an organization. In some cases, we help create a business literate workforce, creating programs for every level in the organization.

The work we did for one particular client was especially interesting because it resulted in an organizational transformation. The name of the company has been changed.

In the early 1990's a new regional vice president arrived on the west coast for ODS, Inc. She had worked in smaller regions and assumed that the work she did there would apply to this larger region. She quickly learned, however, that she couldn't connect with each individual, there were just too many. And then came the biggest shock of all—a union attempt. Although the union was not voted in, the vice president took it as a message from employees that they felt disenfranchised. Yet she knew that their teamwork and commitment were keys to long-term success. She came across the idea of business literacy, which fit with her philosophy that employees should be partners in success, and fit with ODS Inc.'s philosophy that employees are a competitive advantage. ODS Inc. already offered a strong salary and benefits package (including profit sharing). However she knew that creating a company of business people meant more than pay and benefits.

The first step at ODS Inc. was to conduct an assessment to determine employees' current level of understanding of the business. The assessment revealed, among other things, that:

• Employees didn't understand the information already being shared, although management assumed they did.


• Employees believed that their work had little impact on the success of the company.


• Middle management couldn't identify or define the organization's key numbers.

These and other findings informed the development of a business literacy program entitled "You Are the Difference," consisting of a classroom training program, Money Maps, and a communication and reinforcement process. Everyone in the organization attended a ½ day training session that included ODS Inc.'s philosophy, strategy, income statement, and key measures. After the training, managers began holding weekly meetings, setting short-term "line of sight" team goals, and posting and discussing financial results.

Today, ODS Inc. is a different organization. The word "employee" is no longer used. Everyone is a business partner. (At one branch the employees took it upon themselves to order new parking signs so that the word "employee" effectively disappeared from the facility.) Customers send e-mails to managers, using the phrase "business partner" as they describe the high level of customer service and professionalism. Profitability has risen without an increase in sales. EVA (economic value added) results have jumped to new levels. Vehicle and worker compensation costs are down. Profit sharing is at its highest ever. And, just as important, trust has increased, turnover decreased, and morale improved.

Why Do We Need ANOTHER Finance Book?

So, why did we write this book? There are a few reasons, but first and foremost, because we are true believers in what we call business literacy. We believe that everyone in organizations should understand how financial success is measured and how they make an impact. Joe comes from a more operational perspective, seeing first hand how when everyone understands the numbers, better decisions are made and the business is more successful. Karen comes from more of organization development perspective, seeing the qualitative benefits of business literacy – trust improves and motivation and commitment improve because you are treating everyone as an important part of the businesses success. So, we wanted to share our passion.

The second reason is that we felt there wasn't a book out there that was targeted directly at managers. Our firm, the Business Literacy Institute, received calls all the time asking for a recommendation for a book that a manager could read to learn about the financial side of the business. And we never found one that we loved. Some are written by accountants, and so, of course, come from that perspective. Others are focused too broadly, including general business issues as well as finance topics.

Finally, we wanted to share a key element of finance that we felt was not broadly understood, that is, that finance is an art as well as a science. So many times in organizations the accounting and finance professionals present the financial results as hard numbers, true facts, and indisputable. The fact of the matter is many numbers in financial reports are based on estimates and assumptions.

Our Translation of Sarbanes Oxley

If you step back for a moment from the specifics of Sarbanes Oxley (fondly also known as Sarbox or just SOX) and look at the big picture, the goal of the law is financial transparency. Financial transparency is the exact opposite of what Enron, Worldcom and others did. They hid the actual performance of their company from the public. Financial transparency, on the other hand, means that a reasonable investor, shareholder, and employee can review the financial statements of a business and really know what is going on. A financially transparent company wants all those interested to understand their financial position because they believe that making things clear in the financial statements leads to a stronger business. And managers and leaders in today's organizations are on the front line of creating financial transparency. It supports good business decisions and it is good business practice.

But financial transparency isn't just about numbers. It is also about ethics and accountability, and about communication and education. Financial transparency helps to address these two key issues inside a company:

• Employees must trust that management is telling them the truth, and


• There must be a common language used throughout the organization to talk about the business.

Effective corporate financial transparency can help to transform an organization around these issues. When employees, managers and leaders understand how the company makes money, how it measures financial success, and its current results and goals, trust increases and communication improves. Employees see that their work makes a difference, and managers and leaders have the opportunities to talk about the current situation and how their department or area of responsibility can make a difference in improving the results. Financial transparency, which consists of educating everyone about the numbers and then sharing the numbers on a regular basis, creates a trusting environment and a common language.

We believe that financial transparency truly does mean there is less likelihood of another Enron. It is interesting to note that virtually all of the corporate scandals were uncovered by an employee inside the company, someone who understood finance and accounting, saw that something was wrong, and spoke up.

Here is an example of a frontline employee understanding the policies of the company, and speaking up.

And here is just a little bit of background on the person who "blew the whistle" at Enron.

The Hot Topic in Finance

Yes, there are "hip" and "hot" topics in finance, including the key numbers to watch when assessing public companies. And there has been an interesting transformation over the years regarding what numbers were "hot." In the late 90's, 2000 and 2001, the key financial number everyone watched and talked about was EBITDA (earnings before interest, taxes, depreciation, and amortization). Wall Street looked for EBITDA to determine the health and potential of a company. Banks had EBITDA covenants in their corporate loan documents (some still do). EBITDA was even the hip topic of discussion at cocktail parties in the financial district.

But after the financial fraud of the late 1990s and 2000s, EBITDA is no longer the number to watch. The focus has shifted to numbers related to cash flow, with many public companies now reporting free cash flow, even though it is not a requirement to do so.

Why the change? First, Wall Street, bankers and others realized that EBITDA was easy to manipulate. Companies that were monkeying with their books simply capitalized operating expenses (expenses that normally would be charged off in the current period were instead depreciated over several years). The move made companies' EBITDA number look better, thus getting more favorable attention. Obviously, much of this constituted the fraud we have read about, and WorldCom is the poster child for fraudulent expense capitalization. Lately, EBITDA lost its position as the key number on Wall Street because it could no longer be trusted.

Second, cash is also a lot harder to fabricate than profits. Cash is what is in your bank account. That is pretty easy to verify. Investors and bankers watching over these corporations felt a bit safer looking at cash.

And finally, and maybe most important, cash is really the key element in a healthy and growing business. Warren Buffett, possibly the most successful investor, focuses on cash; and in particular on the measure he calls owner earnings. His cash-based analysis has led to 40 years of successful investing, and now Wall Street and other investors are seeing the light.

For more information about free cash flow and owner earnings, check out these sites:
http://www.investopedia.com/terms/f/freecashflow.asp
http://www.investopedia.com/articles/fundamental/03/091703.asp
http://www.investorwords.com/2084/free_cash_flow.html
http://www.buffettsecrets.com/owner-earnings.htm

You can see that The Motley Fool commented on the fact that in 2002, analysts weren't looking at it as much as they should.

Financial Intelligence -- Good Morning

Good morning to everyone. First, we’d like to say thank you to Jack and Todd at 800-CEO-READ for asking us to host the blog today. As the authors of Financial Intelligence, A Manager’s Guide to Knowing What the Numbers Really Mean, we are excited to share with you more information about financial intelligence and about creating a financially transparent organization.

To start, we’d like to share with you our paths to our philosophy, that everyone in organizations should understand how financial success is measured and how they make an impact. Karen took the academic path. It all started when she noticed that CEOs and others would always say that everyone in the organization was important to success, but they rarely told employees how they impacted success or even how success was defined. So her Ph.D. dissertation focused on that issue. And from there, she founded the Business Literacy Institute, a firm dedicated to teaching employees, managers and leaders about the financial side of the business.

Joe’s path was on the practical side. After earning an MBA from UC Berkeley, he worked at Ford Motor Company and a few others before joining a start-up business, Setpoint Inc. The two other owners of Setpoint had some bad experiences as engineers – being asked to do things that just didn’t make sense to them. When the two engineers founded this company, they decided everyone would understand the ‘whys’ of decisions, and even include employees in the process of managing the financial side of the business. Joe became the person who taught everyone about the numbers, and created the system that they use to this day to share the numbers and talk about the business every week with all employees.

Throughout the day we’ll be posting information about finance that we hope will help you lead, manage and work better.

Follow-up to "Read the Number"

Yesterday, Todd encouraged you to read The Number. Last week, Jack posted his review of it. And it's not just us that are recommending the book. It's getting a lot of buzz (especially for being a business book) and is a recommended read.

To give you another perspective of The Number and of just how much buzz is going around, BusinessWeek's January 16 issue featured a full-page review of it.

The author presented both his criticisms and his praise for the book. Here are a few highlights:

[T]his is not a typical personal finance book, thank goodness. The value of The Number lies in its conversation about getting older, insights about key questions for any financial blueprint, and, most crucial, ruminations on what makes for a satisfying life.

And finally.

To me, it's the message of Eisenberg's own story that stands out.

You can read the whole article here. The book can be found here.

This Week - 1/9/06

Good morning and welcome to a new week. There has been a plague moving through the office and I have become the latest victim. Ugh.

This week our only big event is author Karen Berman joining us. She has co-authored a book with Joe Knight and John Case called Financial Intelligence: A Manager's Guide to Knowing What the Numbers really mean. Karen will be hosting the blog on Thursday.

Have a great week!

Chapter One of The Battle For The Soul of Capitalism

I just got done posting the first chapter to The Battle For The Soul of Capitalism by John Bogle. Tom Ehrenfeld told me the book was good and that I should check it out. After reading through the first chapter, I am hooked. Bogle writes with crystal clarity. You read magazine articles talking about excessive compensation for executives, but Bogle pulls together some amazing numbers to make the case like I have not seen.

You can find the entire excerpt here. Check it out.

The Soul of Capitalism: John Bogle Interview

One of my favorite books this year is The Battle for the Soul of Capitalism: How the financial system undermined social ideals, damaged trust in the markets, robbed investors of millions—and what to do about it by John C. “Jack” Bogle, the founder of Vanguard (i.e. the pioneer of no-load index funds, which revolutionized the industry). This ambitious book requires your full attention. Bogle draws from his authority as a key player in the world of finance over the past 50 years, who has revolutionized the investment industry, witnessed huge changes, and never backed down from a fight. His book takes on the whole rotten system, and bears reading for a number of reasons.

Battle tackles the systematic rot gnawing at the effectiveness of large corporations, the power of small investors to beat the system, and the integrity of enterprise as many of us see it. Bogle cites isolates trends that other writers have noted, such as out-of-control CEO compensation, the dereliction of duty by boards, the systemic siphoning of profits away from investors by conglomerate-owned managed funds, and weaves them all together into a compelling overall argument. Not only that, but he writes wonderfully, to boot. It’s hard to argue with a book so smart and persuasive. The first chapter is available online as an excerpt. Here’s a nugget that I particularly enjoyed:

Over the past century, a gradual move from owner’s capitalism—providing the lion’s share of the rewards of the investment to those who put up the money and risk their own capital—has culminated in an extreme version of managers’ capitalism—providing vastly disproportionate rewards to those whom we have trusted to manage our enterprises in the interest of their owners. Managers’ capitalism is a betrayal of owners’ capitalism, a system that worked, albeit imperfectly, with remarkable effectiveness for the better part of the past two centuries, beginning with the Industrial Revolution as the eighteenth century turned to the nineteenth.

Earlier this fall I had the chance to do a question and answer with the man called Jack. Here’s what he said.

Q: Jack, you are one of the most influential investment figures of the past 50 years. Why have you written this book?

A: This is meant to be a lot more than a business book. It addresses this country’s role in the world, and our faltering practice of capitalism. We have turned a system of owners’ capitalism (where the idea is to earn the maximum return on the capital invested by the owners) into managers’ capitalism. In corporate America, the investor-owner is now at the bottom of the food chain, and managers are at the top. And there’s a very simple equation at stake here: the more that managers of America take, the less that investors make. This formula may not be up there with “e=mc squared,” but it is tautologically true. I say in the book that if investment returns are 7 percent annually and the system takes 2.5 percent then you are left with only 4.5 percent.

One key problem is that we’ve gone from an own-a-stock society to a rent-a-stock one, which has a terrible impact on the shareholders. When, as Larry Summers asked, was the last time you washed a rental car? Likewise, when was the last time someone voted a rental stock? The typical fund manager with all that turnover doesn’t care about real business value. And index managers, on the other hand, can’t follow that threadbare rule of ‘if you don’t like the manager sell the stock.’ Instead, they should be advocating a model of ‘if you don’t li