Companies & Industries

Brooksley Born and the Power of an Opposing Idea


What managers can learn from the former CFTC chair's campaign. She warned the OTC derivatives market was in trouble, but no one took heed, and a crash followed

"If she just would have gotten to know us…maybe it would have gone a different way" said Arthur Levitt, former chairman of the SEC, in an excellent 2009 Frontline episode titled The Warning. The 'she' Levitt refers to is Brooksley Born, former Chair of the Commodity and Futures Trading Commission (CFTC), who waged an unsuccessful campaign to regulate the multitrillion dollar derivatives market, whose crash helped trigger the recent financial collapse.

Ms. Born, the first female president of the Law Review at Stanford, the first female to finish at the top of the class, and an expert in commodities and futures, was brought in by the Clinton Administration to run the (CFTC), a little known regulatory backwater. Soon after assuming the reins, she became aware of the over-the-counter (OTC) derivatives market, a rapidly expanding and opaque market, which she attempted to regulate. According to Frontline, "Her attempts to regulate derivatives ran into fierce resistance from then-Fed Chairman Alan Greenspan, then-Treasury Secretary Robert Rubin and then-Deputy Treasury Secretary Larry Summers, who prevailed upon Congress to stop Born and limit future regulation." Put more directly by NY Times reporter Timothy O'Brien, "they...shut her up and shut her down."

Ms. Born's distinctness (training as a commodities and futures lawyer, her perch at the CFTC, likely her woman-ness) was her value proposition; it was also her demise. To be fair to Greenspan et al, their resistance was not surprising. According to psychologists Hillel Einhorn and Robin Hogarth, "we [as human beings] are prone to search only for confirming evidence, and ignore disconfirming evidence." In the case of Ms. Born, it was the 90s, the markets were doing well, the country was prospering; it's easy to see why the powerful troika rejected her disconfirming views. Throw in the fact that the disconcerting evidence was coming from a 'disconfirming' person, as Levitt intimates, and they were even more likely to disregard the data. Ms. Born quotes Michael Greenberg, the Director of the CFTC under her, as saying "They say you weren't a team player, but I never saw them issue you a uniform."

We like ideas and people that fit into our worldview, but there is tremendous value in finding room for those that don't. According to Paul Carlile and Clayton Christensen, in The Cycles of Theory-Building in Management Research, "It is only when an anomaly is identified—an outcome for which a theory can't account that an opportunity to improve theory occurs."

So what can we do when we're faced with such anomalies?

Be aware of our tendency to reject 'disconfirming evidence'. As an equity analyst, I continually dealt with disconfirming data. One instance, in particular, I had made a carefully considered, albeit unpopular call, in downgrading media conglomerate Televisa (NYSE: TV). The risk, however, was that I would become anchored to my view, embracing data points that supported the sell, rejecting those that argued for a buy. In this case, I didn't. Rejecting disconfirming evidence is often behind the tendency to hang on to winners (or losers) too long.

Recognize signals of positive/negative bias. When friends and associates suggested to Janna Taylor that she start her own tutoring business in Manhattan, she became defensive, with remarks such as "There's no way I can do it." Perhaps when we become defensive, it's a signal that we've uncovered an important anomaly. Ms. Taylor's Mindfull Tutors is now thriving. Certainly it's easier to hear disconfirming evidence from people we know and trust.

Encourage the anomalies. When our employees provide feedback that a product isn't working, do we encourage this feedback, or shut it down? Will the Senate (on both sides of the aisle) welcome the opportunity to better articulate their views on healthcare with the election of Senator Scott Brown, or simply embrace him because he's one of 'us' (whoever 'us' is), or shut him down, because he's not?

Whether running a business, government, or our lives, when we encounter disconfirming ideas or people, perhaps they'll just be an annoyance which we can flick away. If we find ourselves more than annoyed—defensive, even dismissive—and we're smart, we'll stay with the people and the ideas that we find so disturbing, analyze the anomaly, and wonder at this disconfirming evidence. So the next time you get that 'one of these things is not like the other' urge to shut someone or something down, why not instead sit down with them and listen.

Whitney Johnson is a founding partner of Rose Park Advisors, Clayton M. Christensen's investment firm. Previously, she was a double-ranked Institutional Investor analyst at Merrill Lynch covering both telecom and media in the emerging markets.

Best LBO Ever
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus