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fat tax

Should You Announce How Fat Workers Are?

A shockingly serious proposal has been floated to first persuade (and later possibly compel) publicly traded companies to disclose to shareholders quite literally how fat their employees are.

Also, how much they drink, how well they sleep and how stressed and depressed they are.

This proposal, advocating what is known as a fat tax, shouldn’t even merit a discussion among rational businesspeople, and yet here we are, discussing it. Even Harvard Business Review (HBR) is discussing this.

Why? Because the well-financed, well-organized cabal behind this fat tax proposal include corporate names like Johnson & Johnson, PepsiCo, Humana, Merck, Novo-Nordisk and Unilever. The leader of this group is a South African insurer called Discovery Health.

If you guessed that any critique written by me would also implicate Ron Goetzel, you would be correct. Despite having now himself admitted that most wellness programs fail, he is the one justifying this entire scheme by claiming that wellness programs increase stock prices — even though they don’t. We’ve already offered a completely transparent analysis to the contrary.

He also made a rookie mistake in his own analysis. The stock prices of companies in his study diverged greatly in both directions from the averages, and he didn’t rebalance existing holdings annually. It’s simple compounding arithmetic. Suppose the stock market rises X% a year. If every stock in your portfolio increases at that rate, you’ll match the averages. However, if half your stocks increase 2X% a year while the other half don’t appreciate at all, and you don’t rebalance, you’ll beat the averages. Simply by doing nothing.

Goetzel’s study appeared right before the fat tax proposal was floated at Davos. No coincidence here — Discovery Health (the sponsor of the Vitality Institute) cites the study as a basis for wanting shareholders to “pressure” companies into disclosing the number of fat employees they have. And the more fat employees a company has, the more shareholders will insist on wellness programs, thanks to this study. Johnson & Johnson and Discovery both sell wellness programs, while Merck and Novo-Nordisk sell drugs for various wellness-related conditions.

We urge reading the HBR link in its entirety to see why a fat tax would be even worse than it sounds. Some highlights:

Most importantly, though – and you don’t need Harvard to learn this – it’s just not nice to stigmatize employees for their weight or other shortcomings unrelated to job performance. Basic human decency should have been taught to this cabal a long time ago.

We’ve pointed out many times in ITL that these wellness people were absent the day the fifth-grade teacher covered arithmetic. This proposal suggests that they were also absent the day the kindergarten teacher taught manners.

2 Heads Are Better Than 1, Right?

Everybody knows that two heads are better than one. We’ve known it since kindergarten, where we were taught that cooperation, collaboration and teamwork are not just socially desirable behaviors-they also help produce better decisions. And while we all know that two or more people working together are more likely to solve a problem or identify an opportunity better than one person doing it alone, it turns out that’s only true sometimes.

Ideally, a group’s collective intelligence, its ability to aggregate and interpret information, has the potential to be greater than the sum of the intelligence of the individual group members. In the 4th century B.C., Aristotle, in Book III of his political philosophy treatise Politics, described it this way: “When there are many who contribute to the process of deliberation, each can bring his share of goodness and moral prudence…Some appreciate one part, some another, and all together appreciate all.”

But that’s not necessarily how it works in all groups, as anyone who has ever served on a committee and witnessed groupthink in action can probably testify.

Groups are as prone to irrational biases as individuals are, and the idea that a group can somehow correct for or cure the individual biases is false, according to Cass Sunstein, Harvard Law School professor and author (with Reid Hastie) of Wiser: Getting Beyond Groupthink to Make Groups Smarter. Interviewed by Sarah Green on the HBR Ideacast in December 2014, Sunstein said that individual biases can lead to mistakes but that “groups are often just as bad as individuals, and sometimes they are even worse.”

Biases can get amplified in groups. According to Sunstein, as group members talk with each other “they make themselves more confident and clear-headed in the biases with which they started.” The result? Groups can quickly get to a place where they have more confidence and conviction about a position than the individuals within the group do. Groups often lock in on that position and resist contrary information or viewpoints.

Researcher Julie A. Minson, co-author (with Jennifer S. Mueller) of The Cost of Collaboration: Why Joint Decision Making Exacerbates Rejection of Outside Information, agrees, suggesting that people who make decisions by working with others are more confident in those decisions and that the process of making a judgment collaboratively rather than individually contributes to “myopic underweighting of external viewpoints.” And even though collaboration can be an expensive, time-consuming process, it is routinely over-utilized in business decision-making simply because many managers believe that if, two heads are better than one, 10 heads must be even better.

Minson disagrees: “Mathematically, you get the biggest bang from the buck going from one decision-maker to two. For each additional person, that benefit drops off in a downward sloping curve.”

Of course, group decision-making isn’t simply a business challenge–our political and judicial systems rely and depend on groups of people such as elected officials and jurors to deliberate and collaborate and make important decisions. Jack Soll and Richard Larrick, in their Scientific American article You Know More than You Think, observed that while crowds are not always wise, they are more likely to be wise when two principles are followed: “The first principle is that groups should be composed of people with knowledge relevant to a topic. The second principle is that the group needs to hold diverse perspectives and bring different knowledge to bear on a topic.”

Cass Sunstein takes it further, saying for a group to operate effectively as a decision-making body (a jury, for instance) it must consist of:

  • A diverse pool of people
  • Who have different life experiences
  • Who are willing to listen to the evidence
  • Who are willing to listen to each other
  • Who act independently
  • Who refuse to be silenced

Does that sound like a typical decision-making group to you? When I heard that description, I immediately thought of Juror 8 (Henry Fonda) in “12 Angry Men”–a principled and courageous character who single-handedly guided his fractious jury to a just verdict. It is much harder for me to imagine our elected officials, or jury pool members, or even the unfortunate folks dragooned into serving on a committee or task force at work, as sharing those same characteristics.

The good news is that two heads are definitely better than one when those heads are equally capable and they communicate freely, at least according to Dr. Bahador Bahrami of the Institute of Cognitive Neuroscience at University College London, author of “Optically Interacting Minds.” He observed: “To come to an optimal joint decision, individuals must share information with each other and, importantly, weigh that information by its reliability.”

Think of your last group decision. Did the group consist of capable, knowledgeable, eager listeners with diverse viewpoints and life experiences, and a shared commitment to evidence-based decision-making and open communication? Probably not, but sub-optimal group behavior and decisions can occur even in the best of groups. In their Harvard Business Review article “Making Dumb Groups Smarter,” Sunstein and Hastie suggest that botched informational signals and reputational pressures are to blame: “Groups err for two main reasons. The first involves informational signals. Naturally enough, people learn from one another; the problem is that groups often go wrong when some members receive incorrect signals from other members. The second involves reputational pressures, which lead people to silence themselves or change their views in order to avoid some penalty-often, merely the disapproval of others. But if those others have special authority or wield power, their disapproval can produce serious personal consequences.”

On the topic of “special authority” interfering with optimal decision-making, I recently heard a clever term used to describe a form of influence that is often at work in a decision making group. The HiPPO (“Highest Paid Person’s Opinion”) effect refers to the unfortunate tendency for lower-paid employees to defer to higher-paid employees in group decision-making situations. Not too surprising, then that the first item on Sunstein and Hastie’s list of things to do to make groups wiser is “Silence the Leader.”

So exactly how do botched informational signals and reputational pressures lead groups into making poor decisions? Sunstein and Hastie again:

  • Groups do not merely fail to correct the errors of their members; they amplify them.
  • Groups fall victim to cascade effects, as group members follow the statements and actions of those who spoke or acted first.
  • They become polarized, taking up positions more extreme than those they held before deliberations.
  • They focus on what everybody knows already-and thus don’t take into account critical information that only one or a few people have.

Next time you are on the verge of convening a roomful of people to make a decision, stop and think about what it takes to position any group to make effective decisions. You might be better off taking Julie Minson’s advice, electing to choose just one other person to partner with you to make the decision instead. Seldom Seen Smith, the river guide character in The Monkey Wrench Game by Edward Abbey, was obviously a skeptic when it came to group decision-making, but he may have been on to something when he declared:

“One man alone can be pretty dumb sometimes, but for real bona fide stupidity, there ain’t nothin’ can beat teamwork.”

Is the Big-Name Firm the Best Bet?

When I moved my securities litigation practice to a regional law firm from “biglaw,” I made a bet. I bet that public companies and their directors and officers would be willing to hire securities defense counsel on the basis of value, i.e., the right mix of experience, expertise, efficiency and price — just as they do with virtually all other corporate expenditures — and not simply default to a biglaw firm because it is “safer.”

My bet certainly was made less risky by the quality of my new law firm (a 135-year-old, renowned firm that has produced past and present federal judges and is full of superior lawyers); by discussions with public company directors, officers and in-house lawyers; by my observations and analyses about the evolving economics of securities litigation defense and settlement; and by my knowledge that I could recruit other talented full-time securities litigators to join me in my new practice.  But I was still making a bet.

Well, so far, so good — my experience has confirmed my belief. So, too, did a recent article titled, “Why Law Firm Pedigree May Be a Thing of the Past,” on the Harvard Business Review Blog Network, reporting on scholarship and survey results indicating that public companies are increasingly willing to hire firms outside of biglaw to handle high-stakes matters. The HBR article frames the issue in colorful terms:

“Have you ever heard the saying: ‘You never get fired for buying IBM?’ Every industry loves to co-opt it; for example, in consulting, you’ll hear: “You never get fired for hiring McKinsey.” In law, it’s often: “You never get fired for hiring Cravath.” But one general counsel we spoke with put a twist on the old saying, in a way that reflects the turmoil and change that the legal industry is undergoing. Here’s what he said: ‘I would absolutely fire anyone on my team who hired Cravath.’ While tongue in cheek, and surely subject to exceptions, it reflects the reality that there is a growing body of legal work that simply won’t be sent to the most pedigreed law firms, most typically because general counsel are laser-focused on value, namely quality and efficiency.”

The HBR article reports that a study of general counsels at 88 major companies found that “GCs are increasingly willing to move high-stakes work away from the most pedigreed law firms (think the Cravaths and Skaddens of the world) … if the value equation is right.  (Firms surveyed included companies like Lenovo, Vanguard, Shell, Google, Nike, Walgreens, Dell, eBay, RBC, Panasonic, Nestle, Progressive, Starwood, Intel and Deutsche Bank.)”

The article reports on two survey questions.

The first question asked, “Are you more or less likely to use a good lawyer at a pedigreed firm (e.g. AmLaw  20 or Magic Circle) or a good lawyer at a non-pedigreed firm for high stakes (though not necessarily bet-the-company) work, assuming a 30% difference in overall cost?”

The result: 74% of GCs answered that they are less likely to use a pedigreed firm, and 13% answered the “same.”  Only 13% responded that they are more likely to use a pedigreed firm than other firms.

The second question asked, “On average, and based on your experiences, are lawyers at the most pedigreed, ‘white shoe’ firms more or less responsive than at other firms?”

The result:  57% answered that pedigreed firms are less responsive than other firms, and 33% answered they are the “same.”  Only 11% responded that pedigreed firms are more responsive than other firms.

The survey results ring true and are reinforced by other recent scholarship and analysis on the issue, including a Wall Street Journal article titled “Smaller Law Firms Grab Big Slice of Corporate Legal Work” and an article featured on www.law.com’s Corporate Counsel blog titled “In-House Counsel Get Real About Outside Firm Value.” As all three articles emphasize, skyrocketing legal fees are a notorious problem. And corporate executives are increasingly becoming attuned to this issue. Indeed, during the in-house counsel panel discussed in the Corporate Counsel article, a general counsel noted that in explaining outside counsel costs to the CEO and CFO of his company, “it’s very, very difficult … to say why someone should [bill] over $1,000 per hour . . . It just doesn’t look good.” The problem is especially acute in securities class action defense, in which the defense is largely dominated by biglaw firms with high billing rates and a highly leveraged structure (i.e. a high associate-to-partner ratio), which tends to result in larger, less-efficient teams.

Now, as the economy has forced companies to be more aware of legal costs, including the fact that using a biglaw firm often results in prohibitively high legal fees, it is unsurprising that companies are increasingly turning to midsize firms. According to the WSJ article, midsize firms have increased their market share from 22% to 41% in the past three years for matters that generate more than $1 million in legal bills. Indeed, both Xerox’s general counsel and Blockbuster’s general counsel advocated that companies control legal costs by using counsel in cities with lower overhead costs.

Some companies, and many law firms, see securities class actions as a cost-insensitive type of litigation to defend: The theoretical damages can be very large; the lawsuits assert claims against the company’s directors and officers; and the defense costs are covered by D&O insurance.

But these considerations rarely, if ever, warrant a cost-insensitive defense. Securities class actions are typically defended and resolved with D&O insurance. D&O insurance limits of liability are depleted by defense costs, which means that each dollar spent on defense costs decreases the amount of policy proceeds available to resolve the case. At the end of a securities class action, a board will very rarely ask, “Why didn’t we hire a more expensive law firm?” Instead, the question will be, “Why did we have to write a $10 million check to settle the case?” Few GCs would want to have to answer:  “because we hired a more expensive law firm than we needed to.”

That takes us to the heart of the HBR article: “Do we need to hire an expensive law firm?” After all, in a securities class action, the theoretical damages can be very large, often characterized as “bet the company,” and the fortunes of the company’s directors and officers are theoretically implicated. Certainly, when directors and officers are individually named in a lawsuit, their initial gut reaction may be to turn to biglaw firms regardless of price, if they believe that the biglaw brand name will guarantee them a positive result.

Biglaw capitalizes on these fears. But, of course, hiring a biglaw firm does not guarantee a positive result. The vast majority of securities class actions are very manageable. They follow a predictable course of litigation and can be resolved for a fairly predictable amount, regardless of how high the theoretical damages are. And it is exceedingly rare for an individual director or officer to write a check to settle the litigation. Indeed, the biggest practical personal financial risk to an individual director or officer is exhaustion of D&O policy proceeds because defense costs are higher than necessary.

Lurking behind these considerations are two central questions: “Aren’t lawyers at biglaw firms better?” and “Don’t I need biglaw resources?”

“Aren’t lawyers at biglaw law firms better?”

Not necessarily. That’s the main point of the GC survey discussed in the HBR article.

To be sure, there are excellent securities litigators at many biglaw firms. But the blanket notion that biglaw securities litigators are more capable than their non-biglaw counterparts is false. And it’s not even a probative question when comparing biglaw lawyers to non-biglaw lawyers who came from biglaw. In the WSJ article, Blockbuster’s general counsel, in explaining why his company often seeks out attorneys from more economical areas of the country, pointed out that many of the attorneys in less expensive firms came from biglaw firms. Many top law school graduates and former biglaw attorneys practice at non-biglaw firms, not because they were not talented enough to succeed at a biglaw firm, but for personal reasons, including: a desire to live in a city other than New York, the Bay Area or Los Angeles; to find work-life balance; to have the freedom to design a better way of defending cases; or to develop legal skills at a faster pace than is usually available at a biglaw firm.

There obviously is a baseline amount of expertise and experience that is necessary to handle a case well, and there are a number of non-biglaw lawyers in the group of lawyers who meet that standard. One easy way to judge the quality of firms is by reading recently filed briefs of biglaw and midsize firms. While this type of analysis takes more time than simply looking up a lawyer or law firm ranking, it will be the best indicator of the type of work product to expect from a firm. As with all lawyer-hiring decisions, the individual lawyer’s actual abilities, strategic vision for the litigation and attention to efficiency are key considerations. A lawyer’s association with a biglaw firm name can be a proxy for quality, but it does not ensure quality.

Indeed, the opposite can be true — by paying for the biglaw expertise and experience of a particularly accomplished senior partner (the partner likely to pitch the business), companies often end up with the majority of the work being done by senior associates and junior partners. A company should consider the impact of the economic realities of biglaw vs. non-biglaw firms. Senior partners at biglaw firms, with higher associate-to-partner ratios, must have a lot of matters to keep their junior partners and associates busy, and thus necessarily spend less time on each matter — even if they have good intentions to devote personal time to a matter. Biglaw firms’ largest clients and cases, moreover, often demand much of a senior partner’s time, at the expense of other cases. And given the reality that partners practice less and less law the more senior they become, it is fair to question whether they are the right people for the job anyway. In contrast, senior partners at non-biglaw firms typically have fewer people to keep busy and have lower billing rates — which means that they can spend more time working on their cases, and they spend more time actually practicing law.

Further, for smaller and less significant projects that should be handled by associates, and should not require the higher billing rates of partners, biglaw is similarly unable to offer a cost-effective solution for companies. Associates at biglaw firms typically have less hands-on experience than their counterparts at mid-sized firms. In litigation, for example, biglaw associates generally spend their first few years solely on discovery or discrete research projects. The result is that many projects that could be handled by a junior or mid-level associate at a mid-sized firm would have to be handled by a senior associate or junior partner at a biglaw firm. So, even putting aside differences in billing rates between a fifth-year biglaw associate and a fifth-year midsize firm associate, going with a biglaw firm typically means that projects are being assigned to attorneys too senior (and accordingly too costly) to be handling the assignments.

Don’t I need biglaw resources?

There are two primary answers. First, from both a quality and an efficiency standpoint, securities litigation defense is best handled by a small team through the motion–to-dismiss process. Before a court’s decision on the motion to dismiss, the only key tasks are a focused fact investigation and the briefing on the motion to dismiss. As to both, fewer lawyers means higher quality.

If a case survives a motion to dismiss, most firms with a strong litigation department will have sufficient resources to handle it capably. That, of course, is something a company can probe in the hiring process. There are cases that necessarily will require a larger team than some mid-size firms can provide. However, such cases are rare, and it is often the case that biglaw firms, in an effort to maintain associate hours at a certain level, will heavily staff associates on discovery projects such as document review. While the exceptional case will require a team of more than around five associates, for the most part discovery can and should be handled most efficiently by a team of contract attorneys supervised by a small team of associates — or by utilizing new technologies that allow smaller teams to review documents more efficiently and effectively.

Second, as reflected in the HBR article’s discussion of GCs’ answers to the second question, there isn’t a correlation between a firm’s pedigree and its responsiveness — which is a key facet of law firm resources. Indeed, responsiveness is a function of effort, and it stands to reason that non-biglaw firms will make the necessary effort to give excellent client service.

The bottom line of all this is simply common sense: Within the qualified group of lawyers, a company should look for value — the right mix of experience, expertise, efficiency and cost — as it does with any significant corporate expenditure.

Am I Good Enough?

Interesting question, right? Actually, it’s probably the most asked question by top performers. Further, it’s a question a lot more managers should be asking themselves. It’s the kind of attitude that works well in any competitive environment — sports, business or the game of life itself. The heart of the issue is really not am I good enough, but have I done all I can do to be as good as I can be?We have just come through some of the toughest economic times most of us have ever experienced. And we know we are not all the way through them yet. Many of my business colleagues are still trying to decide what strategic approach to apply to 2011. So, I am offering up here some thoughts on one very strategic move for 2011 — keep getting better.

There are some stimulating thoughts to consider for our strategic thinking along this line that appear in an article in the current Harvard Business Review — “Are you a Good Boss or a Great One?” The authors point out that most managers stop working on themselves at some point in their career. They seldom ask themselves, “How good am I?” or “What do I need to do better?” unless they are shocked into it. When did you last ask those questions? It seems it does not occur to most managers to ask that question. I strongly urge my colleagues to take charge of this incredibly important responsibility and don’t wait for the shock stimulus — take the initiative.

Recently I was leading a workshop that included a discussion on forced ranking, a concept made popular by Jack Welch while he was at GE. The process involves ranking a group of employees into performance levels graded A, B or C. The concept carries with it the idea that we should be helping the B’s and C’s move up a performance grade and expand the opportunities for the A’s. In other words, keep getting better. Where I have seen the concept in practice — in business literature or in live business settings, I observe it is the direct reflection of the commitment of the organization’s leadership.

The concept of always getting better ought to be on the leadership team agenda pretty regularly — I suggest monthly. Why? Because unless the leaders of the business keep emphasizing it — and doing it — it is so easy to get lulled into a malaise of false comfort.

I cannot help but think of Coach John Wooden (UCLA basketball) when thinking about always getting better. It was one of the main elements of his coaching philosophy. Not surprising, most of his wisdom on the basketball court applies to everyday living. Here is one of his many maxims that not only resonates with always getting better but reinforces some of the most effective leadership thinking: Success comes from knowing that you did your best to become the best that you are capable of becoming. That is one of the most critical ingredients for continued success on or off the court. Wooden coached his teams to be prepared and to focus on their performance capabilities. Then they would be prepared to face their opponents, regardless.

So, regardless of what the economy brings our way this year, I would argue our best strategy is to keep getting better. Here’s a closing John Wooden thought to support always getting better. Coach Wooden did not focus on winning. He focused on preparation. He taught that if his teams were better prepared than their competition, the right outcomes would be there. It’s tough to argue with ten national championships and 40 winning seasons.

Authors
Hal Johnson collaborated with Kurt Glassman in writing this article. Kurt Glassman is an executive consultant, founding partner and president of LeadershipOne.