Marina Gorbis's Blog, page 1582

How Share-Price Fixation Killed Enron

In December, 2001, just prior to filing for bankruptcy, Enron Corporation had approximately $2 billion in cash and no debt coming due. Despite its infamous financial chicanery, it still appeared to be a viable, profitable firm. So why did Enron go bankrupt? Was it because of the fraud, or was there another reason?

At the annual conference of the Association of Certified Fraud Examiners late last month, former Enron Chief Financial Officer Andrew Fastow, who served six years in prison for his part in Enron's deceptions, offered an explanation. In a keynote speech, he said Enron went bankrupt because of "decisions" made in October 2001. He didn't say which decisions. But after hearing Fastow speak twice to my Financial Statement Accounting class and reviewing independent evidence, I think I have good idea. It appears that Enron's final fatal mistake was to try to support its stock price instead of living up to key contractual obligations required to maintain its credit rating.

Enron owned the largest natural gas pipeline system in the U.S., was the largest trader of natural gas and electricity, owned the largest wind power company, and owned a large electric utility in the Northwest. These divisions all generated consistent earnings and cash flows. Enron also owned two "prospective" businesses: Enron Broadband (the first company to offer live video streaming and one that was establishing the largest "cloud storage" system at the time) and Energy Services (providing services to help other companies make their facilities more energy efficient) that weren't producing earnings but weren't a significant drain on the company in late 2001 and, at least with hindsight, represented significant opportunities. The company also had three divisions — Water, International, and Merchant Investment — that were saddled with underperforming and over-valued assets.

What caused Enron to go bankrupt?

What caused Enron's bankruptcy was, quite simply, the loss of its investment-grade credit rating. Without investment-grade status, counter-parties in its trading business (its largest and most profitable segment) either refused to trade with Enron or demanded collateral (which Enron could not post). The loss of the investment-grade designation also accelerated other debt maturities.

So, what caused Enron to lose its investment grade rating? Were the problems at International, Water, and Merchant Investment too big to overcome? No. Were the rating agencies aware of Enron's oft-maligned financing structures? Yes. Did the rating agencies understand that the acceleration of debt maturities brought on by a downgrade could cause a bankruptcy? Yes.

Enron was rated BBB+ (or the equivalent) by all three rating agencies, which typically include all off balance sheet debt when determining a rating. Enron had created multiple non-consolidated Special Purpose Entities (SPEs) that were levered 97/3, meaning $97 of debt to each $3 of equity. Enron's court-appointed bankruptcy examiner estimated the SPEs comprised $14 billion of off-balance sheet debt. Adding the SPEs to Enron's balance sheet would cause Enron to lose its investment-grade rating.

Enron's solution was to alter the nature of its SPEs. A typical SPE requires a company to make cash payments to the SPE if its assets fall in value. Enron created Contingent Equity Vehicles (CEVs) wherein Enron pledged to issue new equity, rather than cash, in the event of asset impairment. By way of illustration: including the CEVs on the balance sheet adds $14 billion to assets and $14 billion to liabilities. In the worst-case scenario of a 100% impairment of the CEVs' assets, Enron's assets and equity (retained earnings) would then fall by $14 billion. However, Enron then could essentially convert the $14 billion CEV debt into equity by issuing new shares. The net result is a drop in assets and debt (equity falls with the decline in assets but goes back up with the issue of new equity) to Enron's exact balance sheet position without the CEVs. This is why the rating agencies could exclude the SPE debt.

The key feature of these CEVs is that they required Enron to issue the new equity, and they required the lenders and other counterparties to accept new equity in lieu of cash. Firms are often unable to issue new equity at just the moment they need it most, but here Enron could. In essence, these financing structures were a "fail safe" designed to ensure that Enron's balance sheet remained investment grade.

Enron's unpleasant choice

As the value of the assets in the SPEs became impaired, Enron faced an unpleasant choice: issue new equity as promised, thereby diluting current shareholders and causing a drop in stock price, or risk a loss of Enron's investment-grade rating and potentially destroy the firm.

Enron's CEO at the time, Ken Lay, decided against issuing the stock (and against living up to the financial structure created by Fastow), apparently believing that (a) dilution would cause an even greater loss of confidence than would the impairment of Enron's balance sheet from including the SPEs and (b) the rating agencies would back down. Instead, the rating agencies downgraded Enron, the trading operations were forced out of business, $4 billion of debt was accelerated, and Enron was forced to file for bankruptcy.

The stability of share price is a metric many managers and investors look at when evaluating the "quality" of a firm. However, in situations where a firm must maintain access to capital markets (e.g. a rapidly growing firm) or must maintain an investment-grade rating for contractual or business purposes (e.g. a financial firm), trying to manage a firm's stock price is clearly secondary to maintaining its credit rating (i.e. it is imperative to maintain the trust of the rating agencies). The financing structures built to protect Enron in just such an event were unwound. Ironically, the company's bankruptcy might have been avoided had Enron lived up to the promises in those oft-maligned financing structures.

Avoid the Deadly Temptations that Derail Innovators

Any promising new initiative — a stand-alone business venture or an innovation in an established organization — hits roadblocks and unexpected obstacles. Recently I've advised entrepreneurs and innovators about a different, seemingly better, dilemma: pop-up opportunities that look like short cuts to success. Too often, these turn out to be deadly temptations.

Consider these cases (with names disguised to protect confidentiality):

Bill's venture capital-backed business concept was to operate a new revenue-producing service for large U.S. professional organizations. In its first year, the venture landed two almost-committed pilot sites and a prospect pipeline for a multi-billion-dollar market. But almost at the same time, Bill was offered a lucrative deal to build a similar service for an English-speaking country outside the U.S. Feeling that the money was good and the chance to show credibility to U.S. customers even better, Bill took the deal, brushing aside numerous challenging differences and departures from his model. Then he was offered an even bigger international site in a developing country eager for American know-how, in partnership with a U.S. organization that could also be a customer. His financial backers urged him to take it — it would mean more revenue, fast. Suddenly Bill was in a different, less appealing business, jeopardizing building the U.S. business.

In this story, that giant sucking sound you hear is the draining of time and energy from the core business by tempting almost-related opportunities. The danger comes from possibilities that are close enough to be plausible but take attention away from the building the main business and don't prove the concept anyway.

Mary's temptations were slightly different but had similar consequences. She started a non-profit organization with lavish foundation funding and a high-profile board in order to spread an innovation in health care. This was a situation devoutly to be wished for by most social causes, but it proved limiting and almost fatal to Mary's project. The staff proliferated without clarity of purpose, and the organization became insular, looking inward and feeling they must be at the top of their field. Other groups courted the organization because it could bring funding, not because of a commitment to the innovation. Soon the goal became how to raise money, not how to support and improve the innovation. The organization took some government contracts to provide a somewhat-related but more routine service. Donors became confused about what the organization did. Private funding declined. The venture was in peril.

Ironically, these problems come along with looking like you might succeed. Investors, donors, potential partners, or bosses shower temptations on entrepreneurs who show promise. Joe's first wildly successful conference, accompanied by highly creative marketing, drew offers to him from investors who wanted to back him to go national, people who wanted to hire him to popularize their work, and companies that wanted him to be a distributor for merchandise sales. Joe was dazzled by the big-name people interested in him. But none of this built Joe's brand. The graveyard of startups is filled with innovators lured by glamour to let others take over their concept before it was fully developed.

In the western classic The Odyssey, Odysseus put wax in his sailors' eyes and tied himself to his boat to avoid being tempted by the sirens and lured into lethal rocks. In her new book Sidetracked, my HBS colleague Francesa Gino outlines ways to handle more contemporary distractions. Entrepreneurs who want to avoid the deadly temptations I identify here can take these actions:

Establish principles by which opportunities will be judged. Creating new initiatives benefits from the flexibility to improvise, as I've written, but boundaries and direction ensure that efforts add up in a coherent way and can be replicated and scaled. Strategy is what you don't do, not just what you do, as my HBS colleague Michael Porter has said.

Prove the concept you want to prove. Most people are concrete thinkers who will assume that a project is whatever they first see — why Bill's strategy for a prototype was very risky. It's important to build into the first model at least one glimmer of everything you anticipate for the full product, while screening out anything that doesn't signal future aspirations. For example, if you want corporate partners eventually, get at least one before you start. If you want to reach full potential in the domestic market, hold off on international forays. Sometimes walking away from money is smart strategy if it comes with unrelated requirements.

Control your identity. Put the right words around the project, and stick with them. Observers often reduce innovations to familiar elements, using language they already have, but which might not fit the initiative, leading to offers of distracting opportunities when the core business isn't understood. One innovation group developed a glossary of terms to be used, and words to be avoided. The same group also declined an investment from a source that would have sent misleading signals about the business the venture was in.

Don't lean insular. Innovators can lean in so far that they become insular. talking only to those that agree with them or flatter them. Was Kodak's demise precipitated by being Rochester-centric, where they were top of the heap, rather than mingling more in Silicon Valley where people had different views of the future of photography? Bill, Mary, and Joe were so flattered by money that they didn't check with outside experts who would have warned them of the dangers ahead.

In short, to get to where you want to go, ignore the deadly temptations that might spring up on an innovation journey. Stay focused on the purpose and the destination.

Smaller, More-Homogeneous Research Groups Are More Productive per Researcher

Research organizations like to increase team size to bring in new ideas, but a study of 549 research groups shows that in teams consisting of people from multiple disciplines, the published output per researcher in 13-person groups was 42% lower, on average, than in five-person groups, says a team led by Jonathon N. Cummings of Duke University. The greater the heterogeneity in disciplines, the less effective it was for groups to increase their size. In interviews, team members in large, heterogeneous groups complained of lack of familiarity and personal chemistry with colleagues and problems in communication, the researchers say.

Alarming Research Shows the Sorry State of US Higher Ed

It's dismaying how easy it is to screw up college.

I don't know exactly when, why, or how it happened, but important things are breaking down in the US higher education system. Whether or not this system is in danger of collapsing it feels like it's losing its way, and failing in its mission of developing the citizens and workers we need in the 21st century.

This mission clearly includes getting students to graduate, yet only a bit more than half of all US students enrolled in four-year colleges and universities complete their degrees within six years, and only 29% who start two year degrees finish them within three years. America is last in graduation rate among 18 countries assessed in 2010 by the OECD. Things used to be better; in the late 1960s, nearly half of all college students got done in four years.

Have graduates learned a lot? In too many cases, apparently not. One of the strongest bodies of evidence I've come across showing that students aren't acquiring many academic skills is work done by sociologists Richard Arum and Josipa Roksa and summarized in their book Academically Adrift: Limited Learning on College Campuses and subsequent research.



Arum, Roksa, and their colleagues tracked more than 2300 students enrolled full time in four-year degree programs at a range of American colleges and universities. Their findings are alarming: 45% of students demonstrate no significant improvement on a written test of critical thinking called the Collegiate Learning Assessment (CLA) after two years of college, and 36% improved not at all after four years. And the average improvement on the test after four years was quite small.

Consider a student who scored at the 50% percentile as a freshman. If he experienced average improvement over four years of college, then went back and took the test again with another group of incoming freshmen, he would score only in the 68th percentile. The CLA is so new that we don't know if these gains were bigger in the past, but previous research using other tests indicates that they were, and that only a few decades ago the average college student learned a great deal between freshman and senior years.

These declines in learning and graduation rates come during a time of exploding costs. the Pew Research Center found that the price of a private college education tripled between 1980 and 2010, and that average student loan debt for bachelor's degree holders who had to borrow was more than $23,000 in 2011. This debt is not dischargeable even in bankruptcy, and is certainly not erased if you fail to graduate.

Smart students from affluent homes and elite colleges and universities continue to do really well, but the rest of higher ed is sliding backward. Why is this? As was the case with the sub-prime crisis and subsequent economic meltdown, there is plenty of blame to go around. Many non-elite colleges have seen their enrollments jump in recent decades without similar increases in budgets, so resources per student have declined.

It also seems, though, that colleges in general have stopped asking students to work as hard, and the students have been more than happy to take them up on that offer. Arum, Roksa, and their colleagues document that college students today spend only 9% of their time studying (compared to 51% on "socializing, recreating, and other"), much less than in previous decades, and that only 42% reported having taken a class the previous semester that required them to read at least 40 pages a week and write at least 20 pages total. They write that "The portrayal of higher education emerging from [this research] is one of an institution focused more on social than academic experiences. Students spend very little time studying, and professors rarely demand much from them in terms of reading and writing."

Here's my advice to recent high school grads (and their families): don't be part of this shameful and lazy bargain. Resolve to work hard, take tough classes, and graduate on time. Many changes are necessary in higher ed, most of which will take a great deal of time. But the most effective interventions can start the day you show up on campus. Crack the books, find good teachers, and take the education part of your education seriously.

Arum and Roksa found that at every college studied some students show great improvement on the CLA. In general, these are students who spent more time studying (especially studying alone), took courses with more required reading and writing, and had more demanding faculty. So the blueprint is here. Please take my advice and spend some time this summer thinking about how you'll put it into action.

The Curse of the B Team

You've just walked out of your boss's office after a talent review session. At the end of the meeting, you received a clear message: although your organization is performing well, your boss believes you have a "B team" with no clear successor to your position — and you're expected to do something about it. But what isn't immediately clear.

Most managers know how to manage and coach individual B players, solid performers unlikely to rise within the organization. However, dealing with a team composed of all B players is one of the most problematic tasks a manager can face. The challenges stem from the fact that B players are blocking key developmental positions, that is, those most useful in developing the skills and experience of a successor or other upwardly-mobile staff. And teams of people who stay in the same job for a long period of time tend to become static, as their members become comfortable with the status quo and less open to change and new ways of doing business. What makes the B team phenomenon so difficult to address is that you're dealing with a group of sound performers who are experienced, often committed to the best interests of the company, and, in the case of technical experts, difficult to replace. As a result, many managers are reluctant to take steps to deal with the situation. So, with your boss's admonition ringing in your ears, how can you upgrade your team and still be fair to your people, many of whom are loyal performers?

The short answer is that ultimately you'll need to free up some positions on your staff in order to bring in new blood from the outside or promote high-potential talent from within. As a starting point, I suggest that you define the mix of skills and experience someone would need to take your place and lead your organization into the future. Years ago, I worked with a senior executive who told me — quite honestly, I believe — that his most important responsibility was developing someone who could do his job better than he could. Not as well. Better. Behind his comment lay the notion that as the company grew, jobs became more complex and new skills sets were required. Depending on your role and the company's strategic priorities, that might include global experience, driving innovation, or making and integrating acquisitions.

Next, identify the positions in your organization that have the greatest developmental "pop" — the ones most useful in developing the skills and range of perspective your successor will need. These are the jobs you'll need to open up since they are critical training grounds for your job. By contrast in most organizations there are positions that require deep technical expertise or place a premium on the execution of established strategies. Having a B player makes sense in such assignments, as, for example, lead actuary in an insurance business or head of a large shared services group.

Once you have identified these critical developmental positions, work with the incumbents in those jobs to help them find other assignments within the company where they can contribute and add value in new ways. This can be challenging but is not impossible. For example, I have seen long-tenured people rotate from a staff role at headquarters to a field office or into the company's charitable foundation. Also, consider whether any of your supposed B players is a diamond in the rough who's been mis-categorized — someone who with coaching and the right set of experiences could emerge as an A player and possible successor.

Some managers fall into the trap of playing the hand they were dealt — that is, working exclusively to develop the people they inherited when taking over a new team. It's a serious trap I've seen even very senior executives fall into. In some conservative organizations it's the path of least resistance for managers if bringing in people from the outside is viewed as controversial and upsetting to existing staff. Over time such managers lose perspective on how their team members compare to talent available in the marketplace.

The remedy is straightforward but requires both time and effort. To counteract this tendency, devote time to getting to know people outside your organization by working with a recruiter or joining a professional or industry group, both to find new talent and calibrate your current team members' talents. By meeting people outside the company, you'll expand your frame of reference, and often you'll begin to view your existing staff through a new lens — and be less willing to accept performance or behavioral deficiencies that seemed acceptable in the past.

Turning a B team into a high-performing group with the requisite mix of A and B players — including at least one potential successor — demands time, finesse, and the willingness to have sometimes uncomfortable conversations with people, some of whom have been loyal lieutenants.

The major variable you control is time, so if you're leading a B team, the time to start addressing the situation is now.

The Two Questions to Ask Before You Innovate

The project team had certainly prepared for the workshop. Its members had a carefully constructed PowerPoint document, replete with facts and figures that showed the attractiveness of what we'll call the booming management-training market in China (details have been disguised to protect the client's confidentiality). Embedded video clips showed potential customers raving about the offering the team had recently piloted. A meticulously constructed business plan showed how the venture could thoughtfully expand into six major cities in China.

Yet, the presentation highlighted a critical gap between the team and its senior management sponsors. Executives immediately began asking questions about why the team was focusing on only six cities. The team responded by saying that its model required substantial marketing and a large local staff. Smaller cities just couldn't support that overhead. Executives pressed, asking the team to figure out how to reach 100 cities. Team members assumed that meant going back to the drawing board to develop a business model that would be profitable in smaller cities. And that meant, they thought, sharply lower investments in marketing and smaller staff.

I stopped the meeting and asked the project leader and lead executive sponsor to write on a piece of paper what each thought the project's primary strategic intent was.



"Create a business that generates attractive profits and has margins that are at or above corporate levels," read the project leader's note.

"Grow our brand presence in China," read the executive sponsor's note.

Now the disconnect was clear. While it was very clear what the team planned to do, its members hadn't verified their assumptions about why they were going to do it. Certainly, the end goal of many innovations is to generate financial returns. But, as this team found out the hard way, there are other reasons to innovate as well, such as boosting employee morale, having social impact, or bolstering a brand.

And whether or not achieving financial returns is the goal, the other thing the innovators should have taken care to clarify before starting to innovate was how the effort would be measured. And here they should be pushing to be as precise as possible. What are ultimate revenue targets? By when? What do operating margins have to be?

It's perilously easy for corporate innovators to skate past the why and the how, particularly those working in new-growth groups or incubators. Just as Tim Robbins told Morgan Freeman in The Shawshank Redemption to either get busy living or get busying dying, corporate innovators feel the urgent need to get busy innovating, or have their existence questioned.

One mechanism some companies use to deal with this problem is to have each team complete a charter before it starts to work, detailing the project's strategic intent (the why), specific goals (the how), strategic options that are on and off the table, critical uncertainties, project resources (both people and money), identification of who is responsible for making which decisions, key strategic milestones, and the next project checkpoint.

One final piece of advice: be wary of well-intentioned executives who express discomfort about approaching innovation in a structured way or about placing boundaries on innovation efforts. It feels good to say, "We're open to anything," but in my experience, it's never true. Make sure you're clear about the rules of the game from the beginning — particularly the why and the how — to save time and rework later.

The Dinosaurs of Cannes

Every year in late June, the global advertising community descends on Cannes, France for the Cannes Lions Festival the glitzy awards show that celebrates the best work in the industry. It's a sight to behold, with 11,000 agency folk, clients and technology companies from every corner of the earth coming together in one place. There's constant buzz with provocative conversations, parties galore and a show of amazing creativity.

Yet, this year it felt a bit like the Roman Empire during the Age of Caligula, one of history's most tyrannical leaders. Don't get me wrong — I love a good party. But, while the industry is partying, all on the client's dime, the world around us is radically changing as digital technology evolves the way we all communicate.

The contrast really becomes evident when some of the advertising industry's luminaries take the stage. One of my favorite moments came during an on-stage conversation between George Lois who created several powerful covers for Esquire, including the iconic one featuring Muhammad Ali as St. Sebastian, pinned by arrows, and Lee Clow. The discussion was fun and lively but the last line threw me for a loop: Lois ended the session by saying, "At the end of the day, it's about finding clients who let you do great work. And if they don't let you do great work, fuck 'em."

It was right out of an episode of Mad Men.

As you walked down the Croisette the rest of the week, you could see lots of dinosaurs basking in their glory while asking what all the furry and feathered things running around at their feet and flying around above them were.

Evolution could be seen in real time.

Earlier in the week, I had the honor of speaking at a session called "What Will Advertising be When it Grows Up?" with Gareth Kay, Chief Strategy Officer of Goodby, Silverstein and Paul Bennett, the Chief Creative Officer of IDEO and moderated by Jimmy Maymann, CEO of Huffington Post. All three had a unique and provocative point of view on how the industry must act to stay relevant as the world changes around us.

From my point of view, there are two issues at the core of this evolution. First as an industry, the fundamental way agencies charge is not aligned with their clients' needs. Charging by the hour incentivizes agencies to go slower and put more manpower on an assignment. We need to be aligned on common performance indicators with clients to ensure our method works. While some in the industry wish that we could remain as creative free spirits with our clients as patrons, clients are becoming so squeezed — and so focused on ROI — that that model isn't sustainable.

Secondly, we're one of the very few creative industries that codifies who gets to be creative by putting "creative" in their title. Other types of creative companies, like IDEO, expect everyone to be creative. We need to let go of this arrogance and allow creativity to come from everyone and everywhere.

Addressing these two issues requires a massive shift — and to make it happen we need to start by letting go of our self-image of being makers. "Making" is at the core of what the industry has historically done — from conceiving a campaign to executing and placing it. That made a lot of sense in a pre-production world, where we had one shot to get the perfect image on film.

Today, in our post-production world where everything can be tweaked, edited and shared after it's been made, our roles must change.

Instead of being executors of communication campaigns, we must become inventors, architects and conductors. The brands we all love see themselves that way. Nike and Apple, for example, don't really make anything. They invent products but leave it to their vendors to build them — vendors who they can change at the drop of a hat. It's much better to be an Apple than a Foxconn.

Looking around the industry there is reason for hope. Winston Binch and his team at Deutsch LA have started Inventioni.st helping brands invent products and processes instead of just making ads.

Likewise, Stefan Olander at Nike continues to be an inspiration as he helps architect what it means to be a sports company by building communities and platforms instead of just designing shoes.

Lastly, we've been on a journey at Victors & Spoils to establish an environment where amazing creativity can come from anywhere. Sometimes it's from our internal teams or ad experts but equally it can come from a brand's fans, followers and other customers, cultural wild cards (artists, social media pundits and thinkers) and teams inside the brand itself, including members of the marketing and product design teams.

What's the future of Cannes?

In recent years, the festival seems to be looking squarely into the past, buzzing about what happened last year and even last decade, longing for the Mad Men era and the dinosaurs that once roamed La Croisette. As in any environment some species will go extinct while others with new and better approaches will rise up. While that might seem scary, this kind of evolutionary creative destruction is essential for any creative industry to survive — and thrive — as the world around it changes.

Going forward, Cannes needs to become less of a glitzy gathering for self-congratulation and more a congregation of creative minds working to figure out the future — more TED than Academy Awards. While the festival will remain a central event in the industry, it must move beyond simply celebrating creativity in advertising to applying creativity to the industry's broad challenges. At the end of the day, creativity is the best tool for solving business problems. Having an annual event to discuss and embrace it will be an important driver of change.

See you next year in Cannes.

The Fatal Flaw with Anger Management Programs

Handling conflict is one of the most difficult aspects of any manager's job. In the 30 years I've worked with C-level executives, I've noticed that playing King Solomon to warring colleagues has gotten even harder, thanks to the "anger management" programs designed to eradicate intense emotions in the workplace. Too many of these programs deliver the message: "Just don't get angry" — usually after someone has already had a bout of rage.

But telling people not to feel anger — or sadness, or frustration, or stress — doesn't actually make those intense feelings go away. It backfires. You can never legislate "good behavior" long term since all that does, at best, is achieve is behavioral compliance with rules; at worst it intensifies a pending outburst of natural/normal emotions.

It turns out that adults are, in this respect, not much different from toddlers: Push a kid to do something, and he'll resist. Psychologist Leon Festinger, working in the mid-1950's, began the formal study of how we come to feel what we feel in what is known as cognitive dissonance research. He might as well have call his research, "If you force people to comply, they never internalize attitudes consistent with their actions." Festinger exposed volunteer subjects to two experimental conditions in his studies. Both groups were given loathsome tasks — for example, sorting spools of thread — and then asked to tell a waiting subject who would be tested after they were finished (actually a confederate of the experimenters') that the task was enjoyable, stimulating, fun, and the like. 50% of the subjects were paid $20.00 — a fortune in 1956 — to advocate a viewpoint they did not believe, while the remaining 50% of the subjects were given only $1.00 -then, as now, bupkis.

In these so-called forced-compliance studies, Festinger and countless other researchers found that when performance "inducements" were excessive — i.e. you were made an offer you could not refuse — subjects' views about the tasks they performed were as expected (as measured by post-experimental surveys): Negative. However, when performance inducements were minimal ($1.00) subjects' attitudes about the loathsome tasks change to move in the direction of their statements.

Why would this be so? If you have no explanation for acting a particular way -"I'd never lie for just a measly dollar..." — you account for your behavior(s) by attributing it or them to internal attitudes. But when "forced" to behave a certain way —"Anyone would fib for two sawbucks..." — the impetus for your action is obvious and external, so you need not infer that an internal orientation of yours caused what you did.

This process is why mice forced to behave when the cat is patrolling play like crazy when that cat is away. Ditto for kids in play groups and workers under constant surveillance versus those who work in companies that employ honor systems.

Abstaining from something that is forbidden is not the same thing as not desiring to engage in it. You create well-socialized people who respect others by either (1) providing resources to help them resolve "antisocial" feelings, or (2) providing skills training for coping with stressful circumstances.

HR managers seeking to reduce the impact of anger and other intense emotions at work should remember that a human emotion, once unleashed, is like toothpaste: You can never get it back into the tube. Thus, it's infinitely more adaptive to use what's out there as best you can rather than struggling undo what's already been done.

How Startups Overcome the Capital Gap

Imagine you're a first-time entrepreneur with an unvalidated business idea and no track record of making money for investors. You may have another kind of track record, such as working successfully at a large company. Or you could be a young entrepreneur, fresh out of college, ready and raring to get yourself launched.

Unless you are willing to bootstrap yourself to some degree of validation of your concept, and can convince investors that there is real demand for what you offer, and a really large market, no one will write a check. Certainly not VCs. Not even, these days, angel investors.

You can go to an incubator and potentially try to convince them to write a $15-$25K check to get your idea off the ground. However, the best incubators also look for large, venture fundable business opportunities.

Let's suppose your idea is a good, viable business idea, but not a billion dollar market opportunity. What do you do then?

Now consider this.

There are many more $5 million, $10 million, or $20 million business opportunities out there than billion dollar ones. Those don't fit the VC model, but if you build a $15 million-a-year business that generates 30% profit year-over-year, what's wrong with that picture?

In the fall of 2007, I met Sridhar Vembu, CEO of Zoho. At that time, no one had heard of him. He was flying under the radar of Silicon Valley. Sridhar had a small network management tools business that basically functioned as a highly profitable cash cow. It was not an earth shattering idea. But it gave him cash to play with.

And play he did. He decided to go after Salesforce.com with a Software-as-a-Service Customer Relationship Management product at a price-point that was one sixth of what Salesforce.com, the market leader, charged. He offered the product to small businesses, and customers lapped it up.

VCs started chasing him from every corner of Silicon Valley. Acquisition offers started floating in. Fast-forward to 2013: Zoho is a $200 million dollar a year company. It has been built without outside capital, entirely.

If you analyze this case study, what strikes you is that Sridhar's first business idea was not fundable. He bootstrapped it by selling to customers as early as he could. He grew the business organically, with revenue and profits, not outside capital.

But once the business started generating decent profits, Sridhar decided to go after a potentially bigger opportunity.

The moral of the story is that even an entrepreneur with a smaller idea that is not fundable can build a great company. The initial cash needs to come from revenues, not financing. But later, as the business finds its stride, generates profits, it can offer the opportunity and cash for pursuing a bigger idea.

Let me tell you another story, that of Cableorganizer. A husband-wife team in Fort Lauderdale, Florida has built an e-commerce business selling cable organizers and closed 2011 at $16 million. No venture capital. Not even any kind of bank financing. Just blood, sweat, and tears. Read their story. Yes, it's mundane. Business, fortunately or unfortunately, is terribly mundane. And for some, terribly exciting when hard work yields customers, revenues, and profits.

And the reality is that most of the other 99% entrepreneurs who are constantly getting rejected by investors, grows their businesses in this mode.

So, ask yourself what have you been doing for the last six months? Chasing customers? Chasing Investors?

Remember that Customers = Validation, Revenue, Cash, Valuation, Fundability

And that Investors = Distraction from chasing customers

Now is a good time to reinforce:

Entrepreneurship = Customers + Revenues + Profits. In this equation, outside financing is Optional.

Note one thing, here. Both of these case studies are of companies that have bootstrapped themselves to positions of great strength and negotiating leverage. They CAN raise money now. In the case of Zoho, the best VCs of the Valley would write a check in a nano-second. In the case of Cableorganizer, banks would be delighted to finance their inventory and working capital to help accelerate growth.

So there is really no capital gap if you have a proven business model and execution capacity.

The capital gap is during the early stages, when the risk is really high. When business model, customer demand, and the entrepreneur's own execution capability is unproven.

To be precise, the capital gap is in the sub-million dollar revenue level.

That is the gap that Capitalism 2.0 needs to fill: getting entrepreneurs to a million dollars in annual revenue.

Look Who's Distracted Now

When acclaimed hedge fund manager Paul Tudor Jones revealed his opinion that women become much less effective as stock traders or investors once they have children, he was, in a sense, suggesting that the distraction of motherhood—a distinctly feminine condition—exceeds that of other attention-siphoning activities. I was reminded of how, almost thirty years ago, I heard that someone at my investment firm asked in a meeting whether I could simultaneously be a good fund manager and a good mother. Putting aside the absurdity of an executive wondering out loud whether any father can possibly juggle both his job and his parenting, these comments raise important concerns. Are mothers at work more distracted than non-mothers, men, or fathers, and, if so, is there anything we can do about it?

Many studies about work concentration have shown that a variety of life changing events, conditions, and behaviors affect our ability to focus. Concentration lapses occur more frequently when people are falling in love, having an affair, getting divorced, substance abusing, worried about a sick child or a dying parent, or even happily married but building or buying a new house, one of the most stressful situations of all.

But, is there any hard evidence that women are more easily distracted than men? According to one study from BYU that used self-reported data, women between the ages of 30-49 do report more trouble concentrating than other groups, citing factors including childcare concerns. However, women may be more honest in their self-evaluations than their male peers, or in jobs more prone to distraction—part-time workers and service workers were both more likely to be distractible at the office, as opposed to male-dominated professions like construction. (The lesson here may be as simple as: You're much more focused when your job involves making sure not to drop a 2x4 on your foot.) Finally, the least distracted cohort was women over 60, who presumably would not be in the workforce—particularly at high levels—unless they worked through a few of the tougher years. Most damning, other studies failed to confirm the BYU results, as have those observing how teenage attention disorders, which are almost twice as common in teenage boys as girls, may carry forward into adulthood.

Having worked full time through the years when my children were young, I recognized that I needed to apply some energy every work day to family matters. But I can also attest that when I attended investor conferences in the 80s,and a group of participants (not including me) would rush off to strip clubs or a line of cocaine, they were almost exclusively men. Call me naïve, but I consider that a distraction.

No employer expects that any of its staff, regardless of rank or gender, is focused on her or his job all day without interruption. My father-in-law, who was a very astute small business owner, used to tell me (only half in jest) that the very best anyone could hope for was four solid hours a day of total effort, himself included. Professor Cathy Davidson of Duke, in a 2011 HBR interview, defined the maximum length of uninterrupted human concentration as 20 minutes, before we need some break, whether to space out check our email. In addition to the constant attention-grabbing matters of love, children, sickness, and death, we now, of course, have the rise of technology-related distractions, which some decry as the great enemy of concentration.

According to entrepreneur and Google Ventures partner Joe Kraus, "We are creating and encouraging a culture of distraction." He bemoans the obsession with checking our smart phones and fruitless efforts to multi-task, which he describes as simply switching focus very quickly from one thing to another—reducing rather than increasing productivity. We rely on constant stimulation from texts and emails to not only fill gaps in our time alone but also to avoid or delay getting down to work on projects at hand. The oxymoronic concept of being physically present but mentally absent on the job has been dubbed "presenteeism." Of course, if we can't actually focus solidly for more than twenty minutes at a time, we require distractions, whether they are actively initiated, such as texting or calling, or passively absorbed, such as listening to colleagues banter.

If our existing level of distraction, already an office mainstay, is rising at an alarming rate, as Joe Kraus suggests, or if social media is only an incremental and not entirely destructive new distraction, what are some tools to improve our concentration?

Keep a to-do list with the suggested time allotment for that task. If you cannot go over an hour without checking new emails or texts, break the effort into manageable chunks of time. It's the equivalent of "hold my call" but applied to other communications as well.

Provide positive feedback on work done in a timely manner. Everyone loves a compliment. If colleagues see how appreciative you are, they will want to repeat the performance again. A little positive reinforcement goes a long way.

Stop obsessing about responding to all digital communications immediately. Almost all can wait twenty minutes, and almost none require immediate answers. Unfortunately, we have trained ourselves, our loved ones, and our co-workers that it is permissible not to plan ahead, since we can be reached in a moment's notice. Let's try to retrain ourselves and think ahead so that we don't have to interrupt a stream of thought and respond to a last-minute request.

Realize that the benefit from thorough and thought-engaging effort is more valuable than the satisfaction of a reputation for instantaneous accessibility. I am guilty of the latter and vow, regardless of how hard it is, to start following my own advice. Hold on a second; I just received a text.