Best Business Books 2009by Clive Crook, Charles Handy, Phil Rosenzweig, Ayesha Khanna andParag Khanna, Judith F. Samuelson, Catharine P. Taylor, Steven Levy,and James O’Toole

from strategy+business issue 57, Winter 2009 reprint number 09407

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NO MATTER WHAT THE FUTURE

holds, the Great Recession of2008–09 has had a seismicimpact on the global businesslandscape and has called intoquestion its philosophical andsystemic foundations.

Certainly, it has been keenly felt among publishersand booksellers. In May 2009, year-to-date sales ofprofessional books in the U.S. were down 6.8 percentfrom the year before, according to the Association ofAmerican Publishers. The recession also colors thewriting — and the reading — of this year’s s+b bestbusiness books essays in ways both obvious and subtle.

The most direct manifestation is evident in theappraisal by Financial Times commentator Clive Crookof the books that seek to make sense of the recession,its implications, and its ramifications. In barely morethan a year, the business section has become crowdedwith such books, but with the story still unfolding,none of them yet are comprehensive. Crook’s picksprovide the multiple levels of perspective needed toappreciate the recession’s many facets.

Ayesha Khanna, managing director of HybridRealities, and Parag Khanna, New America Founda-tion senior research fellow, team up to review books on

the changing topology ofglobal business. They findchanges in regional tradingpatterns and increasingly dy-namic emerging economiesthat will challenge any estab-lished player — all evidence

of an ongoing shift in competitive power that is sure toaccelerate if the U.S. economy remains stagnant.

As one might expect, our management and leader-ship essays are rife with recession links. In the former,Judith F. Samuelson, the founder and executive direc-tor of the Aspen Institute’s Business and SocietyProgram, searches out books that reveal the recession’ssilver lining: its challenges to outmoded ways of think-ing about management and governance. In the leader-ship essay, Charles Handy, whose memoir was one of2008’s Top Shelf selections, mines books on topics asdiverse as America’s Puritan settlers and the BuddhistTzu Chi movement for insights into how to beginmending the torn fabric of leadership.

The University of Denver’s Daniels College ofBusiness professor James O’Toole grounds his reviewof this year’s best biographies in a hefty tome about a19th-century prime mover, John Stuart Mill, whoseadvocacy of free markets and private ownership res-

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Illustrations

byGuy

Billout

onates amid the dramaticgovernment response tothis economic crisis. IMDprofessor Phil Rosenzweigreturns for an encore per-formance in the strategycategory, pointing us to-ward books on intellectual property and dynamic capa-bilities in an effort to identify enduring strategicadvantage. Rosenzweig also recommends a new bookon Enron that takes us back to the last recession andexplores the perils of stretching any strategy too far.

Marketing maven Catharine P. Taylor is back aswell, with a proposition that should raise executive eye-brows: Branding is becoming an open source endeavor.She calls out Twitter — the subject of almost as many

new books as the recession— as one of the leadingtechnological mechanismsenabling this phenomenon.Steven Levy, senior writer atWired and newcomer to ourpages, broadens the thesis by

reviewing books that explore the disruptive power oftechnology and what happens when companies such asMySpace don’t heed that power.

This year’s best business books help us understandcurrent conditions and chart a secure course forward.With luck, next year’s best books will offer similarinsight into a recovery of historic proportions.

— Theodore Kinni

3 THE MELTDOWNA Wealth of ExplanationsClive Crook

8 LEADERSHIPMeans to a Greater EndCharles Handy

13 STRATEGYThe Capable andthe FailedPhil Rosenzweig

18 GLOBALIZATIONWestern Dominancein DeclineAyesha Khanna andParag Khanna

23 MANAGEMENTIn Search of theSilver LiningJudith F. Samuelson

28 MARKETINGBranding Goes ViralCatharine P. Taylor

32 TECHNOLOGYDisruption 2.0Steven Levy

37 BIOGRAPHYUnconventional LivesJames O’Toole

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AWealth OF

Explanationsby Clive Crook

HE DEFINITIVE ACCOUNT OF THE FINANCIAL

meltdown of 2008–09 has not been written,and cannot be just yet because the story is

unfinished. A degree of stability returned to financialmarkets this summer, but the system is still stressed andnobody can be sure what will happen next. The broadereconomy shows signs of recovery, but unemployment ishigh and likely to rise further, a prospect with politicaland economic implications still unknown.

By the autumn of 2009, only a small part of thehuge fiscal stimulus deployed against the downturn inthe U.S. had made itself felt. In monetary policy, theFederal Reserve and its counterparts intervened to sup-port the banking and credit systems in new ways and ona wholly unprecedented scale. To call these interventions“unfinished business” would be putting it mildly.Meanwhile, not just the future is uncertain. The nextsurprise could change our understanding of what hashappened so far, as earlier shocks already have.

Never mind: A crop of new books on the subjecthas already come to market. All were written underthe pressure of short deadlines and fast-changing cir-cumstances — and, as you might expect, many wereworthless on arrival. But there are some splendidexceptions. The best books from this first crop are fineby any standard.

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David Wessel, In Fed WeTrust: Ben Bernanke’s War onthe Great Panic (CrownBusiness, 2009)

Mark Zandi, Financial Shock:Global Panic and GovernmentBailouts — How We Got Hereand What Must Be Done toFix It (2nd ed., FT Press, 2009)

John B. Taylor, Getting OffTrack: How GovernmentActions and InterventionsCaused, Prolonged, andWorsened the Financial Crisis(Hoover Institution Press, 2009)

Gillian Tett, Fool’s Gold: Howthe Bold Dream of a SmallTribe at J.P. Morgan WasCorrupted by Wall StreetGreed and Unleashed aCatastrophe (Free Press, 2009)

William D. Cohan, House ofCards: A Tale of Hubris andWretched Excess on WallStreet (Doubleday, 2009)

Richard A. Posner, A Failureof Capitalism: The Crisis of ’08and the Descent intoDepression (HarvardUniversity Press, 2009)

Gerald F. Davis, Managed bythe Markets: How FinanceRe-Shaped America (OxfordUniversity Press, 2009)

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Among the successful books, the range of explana-tions for the crisis is wide. Some focus on economic pol-icy, others on closely reported tales of greed and fallibil-ity. One locates the root cause in the triumph of financeover manufacturing in the United States. Another askswhether capitalism itself stands condemned. Just as thecrisis had no single source, there is no single way to besttell what happened. This makes it hard to say whichbook is best. Nonetheless, if forced to choose just one, Iwould pick David Wessel’s In Fed We Trust: BenBernanke’s War on the Panic — an excellent work on acrucial aspect of the story, and one that addresses myprofessional interest in economic policy.

The Fed’s-Eye ViewWessel, the Wall Street Journal ’s economics editor, tellsthe story from the point of view ofpolicymakers in the Department ofthe Treasury and the Federal Reserve,and especially that of Ben Bernanke,the Fed’s chairman. The book isbeautifully written and a grippingread throughout. Although Wesselprovides enough context to make thecrush of events intelligible, unravel-ing causes is not his main concern. InFed We Trust is about how the keyofficials coped, usually none too con-fidently, with the torrent of disastersthat began in 2008. The cast includesBernanke; Henry Paulson, who wasTreasury secretary in the Bushadministration when the crisis broke; Timothy Geithner,president of the Federal Reserve Bank of New York whenthe emergency started and now Barack Obama’s Treasurysecretary; and many others in cameo roles.

Wessel’s telling arouses sympathy for all the mainplayers. Mistakes were made, to be sure, but they werenot obvious errors at the time. These leaders all did theirbest in extremely trying circumstances. Still, some of theprincipals emerge looking better than others.

Wessel is not much impressed with Paulson, argu-ing that his trader mentality — instinctive more thancalculating, inclined to abrupt and unpredictablechanges of position — was ill suited to the problem.Greater consistency was needed. No doubt, but was any-body inside or outside government supplying that at thetime? George W. Bush is also somewhat unfairlyimpugned for choosing to take a backseat. When you

recall that his rare interventionson the subject unsettled marketsmore than calming them — that deer-caught-in-the-headlights affect was enough to panic anybody — youmight thank him for recusing himself as often as he did.

It is hard to disagree with Wessel’s criticisms of AlanGreenspan, Bernanke’s once-lionized predecessor at theFed. If any official should have acted to avert this crisis,either by raising interest rates sooner to choke off thecredit boom, or by bringing subprime mortgages understricter regulation, it is he. Again, though, one shouldremember that Greenspan was little criticized on eitherscore while the bubble was inflating. As recently as2007, the politicians and commentators now pilloryinghim were cheering him on.

Many would say that Geithner faltered in his earlydays as Treasury secretary. He start-ed under a cloud because of his dif-ficulties during confirmation; hewas ridiculed for his first lamenta-ble performance for the cameras;and his previous position at theNew York Fed implicated him inthe mess. Lately his stock has risen,and he will not be displeased withWessel’s essentially sound take onhim. The book treats him kindly,calling him calm and coherent, andwell prepared to lead by his experi-ence from earlier financial crises.

Wessel touches on wider issues,but he keeps the focus on the Fed.

This emphasis guarantees the book an extended shelflife, because the salience of the Fed is only going togrow, not just in the domestic economy but interna-tionally as well. The awkward unwinding of the Fed’sfinancial interventions, its role in managing the dollarand the external deficit, the new duties envisaged for itin the Treasury’s blueprint for financial regulation, andthe disenchantment of many in Congress with the wayit has performed — raising the possibility of strongerexternal oversight, which Bernanke opposes strenuously— all put the Fed at the center.

A Myriad of CausesIn Fed We Trust is superb, but if you want a briskoverview of the whole story, Wessel’s book is not it. Herethe honors go to the new edition of Financial Shock:Global Panic and Government Bailouts — How We Got

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Here and What Must Be Done to Fix It, by Mark Zandi,the chief economist of Moody’s website Economy.com.

As he finished work on the first version in the sum-mer of 2008, Zandi wrote, “The worst of the crisisappears to be over.” Not long after, the authorities madetheir fateful decision to let Lehman Brothers go bank-rupt. That decision, which most observers now regard asa terrible error, shut the credit system down and precip-itated the full fury of the crisis.

This gives Zandi reason to argue — as he does, inthis revised edition — that the Lehman decision “turneda serious yet manageable financial crisis into an out-of-control financial panic.” Yet in Zandi’s view, althoughmistakes were made, they were not inexplicable ordownright stupid. His retelling of his own mistaken pre-diction seems to inoculate him against the 20/20 hind-sight to which most authors on this subject fall prey. Hewrites with a keen sense of the complexities that con-fronted policymakers. He is level-headed and fair.

Of all the books in this review, Zandi’s ranges most

widely over the economic causes of the meltdown. He dis-cusses the sources of the surge in subprime lending; theAmerican obsession with home ownership; the tax breaksthat promote borrowing of all kinds; the roles of financialengineering, loan securitization, and exotic financialinstruments; attitudes toward risk; the role of the ratingagencies; monetary policy before and after the creditcrunch; fiscal policy; regulatory policy — you name it.

Lacking the flair of a David Wessel, Zandi nonethe-less writes clear, straightforward prose and puts thisbewildering mass of material in some kind of order. Heends with a 10-point checklist of actions we can taketo avoid the next crisis. The seventh one is “FixSecuritization, Don’t Scrap It.” That is, regulate thecomplex repackaging of assets more carefully, don’t reg-ulate it out of existence. This is characteristic of Zandi’scalm approach. He does not hyperventilate. He recog-nizes the benefits that modern finance has brought, aswell as the damage done in this crisis.

Before we leave books that concentrate on causes,John B. Taylor’s Getting OffTrack: How Government Actions

and Interventions Caused, Prolonged, and Worsened theFinancial Crisis deserves honorable mention. It is as nar-row in its focus as Zandi’s is wide, concentrating almostexclusively on interest rate policy before the crisis, andarguing that this is where the critical mistake was made.Taylor disagrees, for instance, that the Lehman decisionwas the pivot on which everything turned. He is not evenvery interested in subprime mortgages — they were asymptom, in his view, not the cause. Everything wentwrong for one simple reason: the Fed abandoned its tried-and-true rule for setting interest rates — a rule, it so hap-pens, thatTaylor, a senior fellow at the Hoover Institutionand a Stanford University professor, first formulated.

The Taylor rule was devised as a recommendation tocentral banks, and was later seen as a way to predict howthe Fed actually will behave. It says that central banksshould set interest rates equal to one and a half times theinflation rate, plus half of the gap between actual andpotential gross domestic product, plus 1. So if inflation is5 percent and the output gap is 3 percent, the rule says

to set the short-term interest rate at 10 percent: one anda half times 5, plus half of 3, plus 1. From the late 1980sonward, deliberately or otherwise, the Federal Reservefollowed the rule. Earlier this decade, it stopped.

Aiming to speed the recovery from the previousrecession, the Fed cut interest rates in 2002 and keptthem low even when the Taylor rule said to raise them.Hence the boom in house prices, hence the boom inmortgage borrowing. Taylor presents a simulation thatshows what would have happened with “normal” inter-est rates: no meltdown.

This mono-causal explanation is not altogether per-suasive. A once-in-a-half-century crisis, which this is,must be a perfect storm of multiple forces. A lot has to gowrong at once; otherwise, such wrenching events wouldbe commonplace. Yet Taylor believes in the one truecause. Questionable as this approach may seem, in fact hemakes a powerful case. At the very least, he establishes thecentrality of monetary policy earlier in the decade amongthe various causes, a perspective that is lacking in manyother accounts. Extra marks for brevity, too. The maintext runs just 60 pages. They are well worth reading.BEST09BOOKS

“Fix securitization, don’t scrap it,” Mark Zandi writes.Regulate the complex repackaging of assets

more carefully, don’t regulate it out of existence.

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A Fly on the WallFool’s Gold: How the Bold Dream of a Small Tribe at J.P.Morgan Was Corrupted by Wall Street Greed andUnleashed a Catastrophe, by Gillian Tett of the FinancialTimes, and House of Cards: A Tale of Hubris andWretched Excess on Wall Street, by William D. Cohan,investment banker turned financial writer, zoom in,minutely reporting a fragment of the action, hoping toclarify the bigger picture, ever in search of a rippinggood yarn.

Tett turns the microscope on the elite team ofbankers at JPMorgan that in the 1990s developed a fam-ily of new financial instruments — credit default swaps,synthetic collateralized debt obligations, and other so-called credit derivatives. These were seen as a way tomanage risk more effectively, and to spread it around.Investors could fine-tune their expo-sure in more sophisticated ways,diversifying their risk or concentrat-ing it, according to what made sensefor them.

As these derivatives caught on,financial engineers at other firmsmarried them to recent innovationsin mortgage finance. Mortgage debtcould now be sliced and diced, andthe pieces traded every which way.The breakthrough was combiningdebt securitization and credit deriva-tives. Soon the traditional mortgageloan — lender, borrower, document-ed income and assets — was regardedas passé. The new technology encouraged the spreadof much riskier arrangements, extending even to “ninja”loans (no income, job, or assets) that came close tosanctifying fraud. But the risk was always under control,you see, because those guys at JPMorgan really knewtheir stuff.

In a way, they did. Tett explains that despite comingup with the new techniques and selling them to others,the firm consistently exposed itself much less to the dan-gers, as they proved to be, than did more adventurousoutfits such as Bear Stearns and Lehman. Partly for thisreason, she has been accused of being too sympathetictoward her sources at JPMorgan. That was not my feel-ing. These people were not evil, and in a way, that is thepoint. They worked insanely hard and had brains tospare. They saw themselves as pioneers — getting rich,to be sure, but doing it by inventing a marvelous new

technology, not by gulling any-body. However, despite thebrains, the work, and the good intentions, the risk gotout of control.

In House of Cards, Cohan does for the team at BearStearns what Tett does for JPMorgan — but with atighter focus on the instant of Bear’s demise and every-thing that brought the firm to that point, plus amped-up disapproval of the principals. These characters mightnot actually be evil, but, in Cohan’s telling, they are cer-tainly disagreeable: brash, bullying, loudmouthed, foul-mouthed, and oozing testosterone — reminiscent of thesociopaths described by Michael Lewis in Liar’s Poker:Rising through the Wreckage on Wall Street (Norton,1989), the seminal work (forgive the expression) of thisgenre. Of course that book was a fabulous, irresistible

read, and so is House of Cards.Cohan’s sourcing is especially

impressive. The book is richlydetailed and brilliantly constructed.Its only real flaw is that the BearStearns failure no longer seems assignificant as it did pre-Lehman.That is an odd thing to say, admit-tedly. At any other time, the collapseof a once-mighty investment bankwould have been regarded as a mon-strous shock in its own right. Fromwhere we stand now, it looks like alesser part of the story.

Fundamental Systemic Flaws?Moving to the opposite extreme, two books zoom outwider even than Zandi’s encompassing perspective. Theytake in more than mere issues of economic manage-ment, and ask questions that are bigger still.

Richard A. Posner’s A Failure of Capitalism: TheCrisis of ’08 and the Descent into Depression tries to saywhat kind of calamity this really is — is it a breakdowncaused by structural flaws in the market system, or theend result of an orgy of individual greed and irrational-ity? One could always say it was both, but Posner takesthe more intriguing line of arguing it was the former andnot the latter. The people involved were no more or lessrational than usual, he says; on the whole, they actedin their own best interest. The problem is that an out-right depression — for that is what we are in, accordingto Posner — is so rare an event that investors cannotsensibly take account of it. “The profit-maximizing

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businessman rationally ignores small probabilities thathis conduct in conjunction with that of his competitorsmay bring down the entire economy,” he writes.Through the systemic vulnerability of the market econ-omy, individual rationality conspires to cause a collectivenervous breakdown.

It is an interesting argument, though not in myview a very convincing one. You can pick any of theother books mentioned here for instances of outrightindividual irrationality — ninja loans, for one; debt val-uation models that returned “cannot compute” whenasked to contemplate a fall in house prices, for another;the list is long. A Failure of Capitalism is indispensablenonetheless, for Posner’s trademark intellectual vitalityand his tireless instinct to start a quarrel. And it is apleasure to find that a public intellectual of Posner’samazing productivity — he seems to publish a bookevery six months — is still capable of surprising his read-ers. Despite his free-market instincts, his book confrontsthe limits of the market system.

The most scholarly book of the bunch, with duerespect to Posner, is Gerald F. Davis’s Managed by theMarkets: How Finance Re-Shaped America. Davis is aprofessor of management at the University of Michigan,with particular interest in sociology and finance. Hesteps back farthest of all, and asks whether the crisis is asign that finance has vastly outgrown its proper place inthe U.S. social and economic system.

This is an excellent question, and Davis deservesgreat credit for trying to answer it in a serious way. Hisbasic argument is that “twentieth century Americansociety was organized around large corporations, partic-ularly manufacturers, and their way of doing things. It isnow increasingly organized around finance — not justparticular Wall Street banks, but finance as a model ofhow things are done.… The consequences of tying thewell-being of society to financial markets have becomestarkly evident.” Even aside from the immediate crisis,in Davis’s view, those consequences are mostly grim.

This is a valuable and novel perspective. Seen fromhigh altitude, things look different. You see features ofthe economic and social landscape that escape yourattention at ground level. Davis explains how manyaspects of U.S. society shaped themselves around thetraditional large corporation, and especially aroundmanufacturing: a settled career pattern; lifetime employ-ment with a company pension to follow; the phenome-

non of the company town; thecompany as welfare state, almost.

Then, thanks partly to information technology, finan-cial services gradually gained the societal upper hand.The sector made the most money, offered the highestsalaries, and attracted the best talent — and prospered inpart by breaking down the traditional structures.

Today, Davis argues, an individual’s prospects inwork and in retirement are tied less to the fate of onelong-lived company than to the vagaries of financialmarkets. This is a shift as profound as the transitionfrom farming to manufacturing, though as yet much lesswell understood. One consequence is economic insecu-rity, a problem writ large in the current crisis (which isitself a product of the hegemony of finance).

The book is too gloomy for my taste, although inthis it conforms to the current mood. And Davis ex-presses a faith in good government that strikes me asnaive. But Managed by the Markets gave me more foodfor thought than any of the other books mentioned inthis review. In the past 20 years, finance did indeed tri-umph over other modes of enterprise in the U.S. andelsewhere. This was, as Davis says, a momentous shift.To the victor went the spoils, with far-reaching socialand economic consequences. In contemplating thewreckage of the crisis, one should follow Davis’s exam-ple, and ask whether this was either inevitable or desir-able, and what, if anything, we might learn from it.

Because the crisis is not yet over, many of the lessonsmust be tentative. But one certain casualty of the melt-down — as nearly all of these books, in their differentways, confirm — is credulous faith in self-regulation.This has been the principle underlying financial regula-tion in recent years. Financial institutions need to besupervised, went this credo, but what they do is socomplicated, and the regulator’s powers necessarily socircumscribed, that firms must be trusted not to dothings reckless or stupid enough to put themselves injeopardy. What we have learned is that, as a group,financial institutions cannot be trusted even that far —and when they put themselves in harm’s way, the rest ofus share in the consequences.

The credo was right about the difficulties of regulat-ing effectively. But that will no longer serve as an excuse.Governments will have to try harder. After this crisis,they will no longer be able to stand aside. +

Clive Crook (clive.crook@gmail.com) is a senior editor of theAtlantic, a columnist for National Journal, and a commentator forthe Financial Times. He was formerly a deputy editor at theEconomist.BEST09BOOKS

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Greater Endby Charles Handy

F EVER THERE WAS A TIME WHEN LEADERSHIP

was badly needed and sorely tested, it was duringthe 12 months after October 2008. The financial

crash that almost became a catastrophe was a self-inflict-ed wound. It did not need to happen. There were warn-ings enough from concerned observers of troublesahead, but those in positions of power in leading orga-nizations paid no heed until it was too late.

As financial journalist GillianTett put it in her bookFool’s Gold: How the Bold Dream of a Small Tribe at J.P.Morgan Was Corrupted by Wall Street Greed andUnleashed a Catastrophe (Free Press, 2009; see “A Wealthof Explanations,” by Clive Crook, page 3), the “socialsilence” around the explosion of derivatives, and aroundthe wealth and influence of the banking cadre, encour-aged financiers to regard their activities as detached fromthe rest of society, until they became “like the inhabi-tants of Plato’s cave, who could see shadows of outsidereality flickering on the walls but rarely encountered thatreality themselves.” Nor did they show interest in look-ing outside. Too many leaders, ensconced in their talltowers, insulated themselves from the world they weresupposed to be serving and forgot what they were about.

Lesson from Our ForefathersThe best reminder of that underlying purpose comesfrom a book by brothers Kenneth and William Hopper— Kenneth, an engineer in business in the U.S.;William, an investment banker in London. The PuritanGift: Reclaiming the American Dream amidst Global

Kenneth Hopper and WilliamHopper, The Puritan Gift:Reclaiming the AmericanDream amidst GlobalFinancial Chaos (revised ed.,I.B. Tauris, 2009)

Warren Bennis, DanielGoleman, and James O’Toole,with Patricia Ward Biederman,Transparency: How LeadersCreate a Culture of Candor(Jossey-Bass, 2008)

Edgar H. Schein, Helping: Howto Offer, Give, and ReceiveHelp (Berrett-Koehler, 2009)

Alan Deutschman, Walk theWalk: The #1 Rule for RealLeaders (Portfolio, 2009)

C. Julia Huang, Charisma andCompassion: Cheng Yen andthe Buddhist Tzu ChiMovement (Harvard UniversityPress, 2009)

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Financial Chaos may have escaped notice when firstpublished in 2007 because of its unusual title, but thisyear’s paperback with a new preface by that wise manRussell Ackoff deserves rediscovery at this critical time.“Puritan gift” refers to what the authors describe as theUnited States’ superb managerial culture as establishedby the descendants of the country’s early settlers. Thosesettlers sought to create God’s kingdom on earth in NewEngland in the 17th century. As businessmen they alsoneeded to earn a return on capital but saw no conflictbetween the two. Profit to them was the means to agreater end.

The Puritan gift, therefore, is that rare ability to cre-ate and manage organizations that serve a useful purposein society. As the authors note, it later inspired the cre-ation of a federal political culture that enabled 13 obscurecolonies at the edge of the civilizedworld to transform themselves, withthe passage of time, into a greatpower. This managerial culture waseven successfully transplanted toJapan under the U.S. occupation afterWorld War II and turned a poorcountry lacking natural resources intothe second-richest in the world.

It was, the Hoppers suggest, theUnited States’ gift to the world untilsometime around 1970, when profit-and-loss accounting began to takepriority, a time they describe as “theyears that the locust ate.” It was thenthat the cult of the expert and the riseof the so-called professional manager shifted the focus ofmanagement to money as the measure that mattered, forself and organization. The elevation of shareholder valueas the main criterion of business success mistook themeans for the ends, a classic category error for logicians,but a calamitous strategic mistake for leaders. This errorwas compounded when managerial reward was tied toshare value.

The Puritan Gift, this year’s best leadership book, ispartly a history of American business, but it is also alament for the decline of the collegial style of leadershipthat drove what the authors call the “great engines ofgrowth and prosperity” and that was replaced by the“imperial” rule of the professional CEO in so manycompanies. It is a reminder of what made the U.S. great

and a heartfelt plea for its recall.The other four books I have

selected for this review do not pretend to be as all-encom-passing as The Puritan Gift, but they provide insights intoimportant aspects of the leader’s role. The first deals withthe need for truth (or candor, as the authors call it) inorganizations, something that has been badly missing oflate. The second is a primer on helping, a key facet of agood leader’s work. The final two provide vivid and valu-able examples of leadership in practice, largely but notwholly drawn from business organizations.

Leadership and TruthWarren Bennis, Daniel Goleman, and James O’Tooleare three of the most influential management thinkersaround. Accordingly, Transparency: How Leaders Createa Culture of Candor, their combined take on the keychallenges facing business today, has to be taken serious-

ly. The book takes the form of threeindividual essays, one by each of themain authors.

Bennis looks at the conse-quences of what Thomas Friedmanhas described as the flattening oforganizations, made possible bynew technologies. As information,and with it power, is shared morewidely, communication across theorganization as well as verticallybecomes ever more crucial.Openness and honesty are essen-tial. But being honest in an organi-zation is more difficult than itsounds. People hoard information,

indulge in groupthink, tell their bosses only what theythink they want to hear, and ignore facts that are star-ing them in the face. As Bennis points out,“Technologies change. Human nature doesn’t.” Thebook, he says, is about “the things that have matteredsince the new technology was the flint and the long-bow — courage, integrity, candor, responsibility.”

In his eloquent and moving essay, O’Toole arguesthat “speaking truth to power is, perhaps, the oldest ofall ethical challenges.” To make his point, he refers thereader to classics of literature — to Sophocles’ Antigone,John Osborne’s Luther, and Robert Bolt’s A Man for AllSeasons, the story of Sir Thomas More. O’Toole is at hisbest in bringing these texts to illuminate our currentcondition, but he also cites contemporary organizationssuch as FedEx and Motorola. The prime responsibilityof leaders, he argues, is to create “a culture of candor”BEST09BOOKS

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in which they are constantly “willing to rethink eventheir most basic assumptions through a process of con-structive dissent.” The culture must be one in whichevery individual is encouraged to speak the truth,because only then can proper trust be established —trust that is the basis of all effective leadership but alsothe most elusive and fragile of things, so hard to estab-lish, so easy to lose.

Transparency is a slight book, carefully crafted andeasy to read. The messages may be as old as time, butthey are no less important for that. Of course, thosemessages are easier to deliver than to act on, and theauthors refrain from offering specific recommendationsfor action. They don’t need to. To tell the truth is all thatone has to adhere to, even when it hurts, and that ex-ample has to come from the top.

Leadership as HelpingEd Schein knows a lot about organi-zations. He has been working withthem, advising them, studying them,and, yes, helping them and many oftheir leaders for decades. Helping:How to Offer, Give, and Receive Helpis a small book that is his reflectivesummary of what works in a helpingrelationship and how to make it hap-pen. He is uniquely qualified to dothis, combining, as he does, a knowl-edge of sociology, anthropology, andsocial psychology, as well as longyears of teaching executives at theSloan School of Management at MIT. (Schein was mythesis supervisor 40 years ago, at MIT, and has been agood friend ever since, so I have firsthand experience ofhis help.)

Helping, Schein points out, takes many forms. Helists 30 helping situations, including a boss givinginstructions to a subordinate, a stranger giving trafficdirections to a tourist, and a child showing a parent howto play a computer game. Further, he draws heavily onhis experience helping his wife cope with breast cancerover 25 years, involving periodic visits to hospitals andhome care, with all the different relationships involved.

And help, as Schein points out, is not limited toone-on-one situations. Group effort and teamworkoften hinge on the degree to which members performtheir roles properly in accomplishing the group’s task:“We do not typically think of an effective team as

being a group of people whoreally know how to help eachother. . .yet that is precisely what good teamwork is —successful reciprocal help,” he writes. Schein also lists 27synonyms for helping. One way or another, it seems, weare helping or being helped most days of the week. Thebook is therefore a practical guide to everyday life, aswell as an invaluable guide for all those who have someresponsibility for others, be they students, subordinates,or clients of one sort or another.

Schein’s main thesis is that all human relationshipsare a mixture of economics and theater, because they allinvolve what sociologists call “status positioning” betweenthe parties involved in any social interaction, whether for-mal or informal. It is human to want to be granted thestatus and position that we feel we deserve, no matter how

low or high that is, and to want to dowhat is appropriate to the situationand the occasion. If we get it wrong,the relationship doesn’t work. A verysimple example: If a child fails to saythank you, a social expectation hasnot been met and the child is repri-manded. We also intuitively andalmost unconsciously measure inter-actions by how much we have gainedor lost, compared to our expectations.Thus, for a helping interaction towork, each party needs to be clearabout the role each is playing, and allparties’ expectations of the outcomehave to be similar.

After explaining the many pitfalls of helping —why well-intentioned advice is perceived as criticism,how the different social rules in individual cultures cre-ate unintended offense, how a tone of voice or form ofaddress can alter a relationship in an instant — Scheinoffers seven principles and 18 tips, because this is, aboveall, a book of practical help.

These often sound obvious but, as the examplesdemonstrate, we often ignore his principles amid thedaily course of life, taking for granted relationships andexchanges that may not be what they seem. We get lazy.I found this little book a salutary reminder of too manylapses on my part, while it also explained why some ofmy well-intentioned attempts to help only led to wors-ening relationships. Any aspiring leader would do wellto review his or her own behavior in the light of this veryuseful guide.

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Leadership by ExampleAlan Deutschman is a journalist, which is fortunate forus, the readers, because not only does he write fluentlyand vividly, but he tells stories, which is what all goodjournalists do. Walk the Walk: The #1 Rule for RealLeaders is a compendium of stories taken from the inter-views he has conducted with leaders over the past 20years, most of them in business but some, equally rele-vant and revealing, from the worlds of sports and poli-tics. Deutschman’s subjects range from Jeff Bezos ofAmazon.com to Barack Obama in the first week of hispresidency, from FedEx to the Florida Gators, NelsonMandela, and the Greensboro Four, whose lunchtimesit-ins in 1960 helped to jump-start the desegregationmovement in the United States.

The stories make for compelling reading, par-ticularly because they are not allpaeans to the individuals profiled.Deutschman is critical of quite afew leaders, including CaliforniaGovernor Arnold Schwarzeneggerfor talking the talk about energy andthe environment but continuing toown a fleet of five Hummers. Thefact that, in response to criticism,Schwarzenegger got General Motorsto retrofit one of the vehicles torun on hydrogen and another onbiofuel was not helpful, suggestsDeutschman, because neither fuel isreadily available to his constituents.Obama, too, comes in for some mildcriticism for not leading enough by example inthe very early days, although he is praised for many ofhis initiatives.

Deutschman uses his stories to make a point, or sev-eral points. He starts with the statement that “the mostcrucial role of a leader is establishing and instilling theone or two values that will be most important for anorganization or a movement or a community.” There arealways a multitude of values that are important — thehard part is making the trade-offs between them inorder to focus on one or two. He castigates Coca-Colafor its list of six goals and seven values, many of whichare potentially contradictory: Were “people” moreimportant than “profit,” and where did “integrity” comein the pecking order?

It is, Deutschman says, onlywhen you walk the walk that you

reveal the ranking of your values. He describes theresponse of Martin Luther King Jr. when he wasattacked by Roy James, a Nazi sympathizer, inBirmingham, Ala., in 1962. King staggered back undera rain of blows, but dropped his hands and refused tofight back. He turned the other cheek. He walked hiswalk, lived his teaching, and so demonstrated that oth-ers, too, could live by his principles. Deutschman con-trasts King’s behavior with stories of corporations andchief executives that have ignored their declared valuesand principles when it suited them to so do or whenthey went along with the prevailing customs of their indus-try, most flagrantly in the case of the airline compa-nies. Deutschman labels them lemmings, those who fol-low the herd rather than setting their own standards.

Deutschman distills his long list of stories into aseries of principles. Although theseare obvious, like so much in the lit-erature of leadership, it is the storiesthat bring them to life. My recom-mendation would be to read the sto-ries and make a note of the ones thatresonated most with your own situ-ation, underline the simple messagethat they contain, and then resolveto act on it or, as Deutschmanwould say, to walk your walk.

Inspired by CompassionThere is only one story in C. JuliaHuang’s Charisma and Compassion:Cheng Yen and the Buddhist Tzu Chi

Movement, but it is a remarkable one and a vivid exam-ple of Deutschman’s advice to live your values. VenerableMaster Cheng Yen, now 72 years old, is an unassumingTaiwanese Buddhist nun who founded a worldwidesocial welfare movement with more than 10 milliondevotees in more than 30 countries, 5 million of themin Taiwan itself and the majority of the remainder in theUnited States. This remarkable organization, the TzuChi Foundation, which started as a tiny grassrootswomen’s charitable group in 1966, now runs three state-of-the-art hospitals in Taiwan, a university, and a televi-sion station, as well as an international relief organiza-tion that provides money and provisions to those affect-ed by disasters, including the tsunami in Sri Lanka,Hurricane Noel in the Dominican Republic, and floodsin Indonesia and the Midwestern United States. ChengYen has been nominated for the Nobel Peace Prize andBEST09BOOKS

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is well known as a Buddhist peace activist. She was alsoidentified by Business Week as an entrepreneurial star.

Cheng Yen’s leadership story started in 1966 whenshe was visiting a sick friend at a hospital and noticed apool of blood on the floor. She was told that anAboriginal woman had miscarried because, after beingcarried for eight hours by her family to the hospital, shewas refused treatment without the NT$8,000 deposit(then about US$400). When Cheng Yen learned thatthe woman had died, she resolved to start a mission todefray medical costs for the poor. She began by mobiliz-ing the resources of her disciples in her local Buddhistcommunity, asking them to make baby shoes to sell andalso to place NT$0.50 (about US$0.025) each morningin a bamboo container before doing the daily groceryshopping. In one month the daily practice of “50 centsto save one human life” had started to spread, and anorganization of sorts was born.

It was a heart attack she suffered in 1978 thatprompted Cheng Yen to create a hospital so her relief

work would continue after her death. The organizationtherefore had to change; a Buddhist nun, with a follow-ing of monastic disciples and laity, whose goal was tocollect money to supplement the medical costs of theneedy, now had to raise money for a modern hospitaland create the necessary organization to build and runit. Task forces, boards of governance, coordination meet-ings, and organization charts began to appear. ChengYen was careful to enroll the time and talents of profes-sionals (not necessarily Buddhists), but she personallychaired all the important committees.

By 1999, the organization had evolved into fourbasic missions — charity, medical care, education, andculture. The hospitals, university, and relief organiza-tions are set up as regular nonprofits, albeit with somedistinguishing features — e.g., the hospital offers freecare for Buddhist monastics and the poor, and the uni-versity requires a one-year foundation course in “TzuChi Humanity.” The whole organization is financed, inaddition to the fees it charges, by tiny regular donationsfrom its 10 million devotees, many of whom also workas volunteers. It is overseen by a small headquarters

in the original monastic buildingknown as the Abode, whereCheng Yen resides.

I once had the privilege of meeting Cheng Yen.Thistiny, wafer-thin woman was not one’s image of a charis-matic leader, but it was clear from everyone I met thatshe was greatly revered. It was also plain that she wasvery much in control of the huge organization shehad created. She follows all the precepts of AlanDeutschman, even literally walking the walk withmonthly tours around the island of Taiwan to visit herorganizations. A well-staffed publicity organization,including the 24-hour television station, keeps themembership attuned to her values and her thinking —vital for the finances of the whole venture. Of course,the challenge for any charismatic leader is, What hap-pens when he or she goes? Cheng Yen has attempted toanswer that by institutionalizing her mission, but herpersonal appeal may be hard to match.

The story of how this frail woman could build such

a successful and far-reaching organization is an illustra-tion of just how much a dedicated leader and an inspir-ing mission can accomplish. It is an apt illustration,albeit from a far different belief system, of The PuritanGift. The book itself is neither slim nor easy to read,written more for students of the Buddhist tradition thanfor practicing managers, but it is worth the effort inorder to understand the true secrets of leadership. +

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A Buddhist nun,with a following of monastic disciples,now had to raise money for a modern hospital and

create the necessary organization to build and run it.

Charles Handy (candehandy@aol.com) is a writer and socialphilosopher living in London. He is the author of many books onwork, life, and organizations, the latest being a memoir, Myselfand Other More Important Matters (AMACOM, 2008), which was aTop Shelf selection in last year’s Best Business Books.

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57THE CapableAND THE Failedby Phil Rosenzweig

N A YEAR WHEN THE MARKET VALUE OF THE FORTUNE

500 fell by 37 percent and profits plummeted by 85percent, conventional strategy books seem beside

the point. Keys to guaranteed success? If only there weresuch a thing. Delivering high performance? Not verylikely. Effective strategic planning? JPMorgan Chase &Company’s CEO, Jamie Dimon, said that he didn’t

know any company that was following its three-yearstrategic plan or even its one-year forecast; companieswere operating strictly on a month-to-month basis.

Yet if the current crisis affords us one thing, it’s thechance to stand back and reflect on eternal questions ofstrategy: How should we lead companies in competitivearenas where success is relative, not absolute; where tech-nologies change rapidly; where profits attained in onetime period are eroded in the next? What’s the best wayto drive companies forward when they have to run fasterjust to stay in the same place (a phenomenon describedby William P. Barnett in last year’s best book on strategyas “Red Queen competition”)?

With these questions in mind, a few new strategybooks stand out from the pack. They would be good inany year, but in the present environment they have thevirtue of reminding us what it takes to achieve and sus-tain high performance.

Legal MonopoliesThe year’s best strategy book is The Invisible Edge:Taking Your Strategy to the Next Level Using IntellectualProperty, by Mark Blaxill and Ralph Eckardt, formerly ofBoston Consulting Group and now running their ownpractice. Intellectual property (IP) often brings to mindpatents and lawyers, but this notion is far too limited. Infact, IP is about much more than patents; it also encom-passes trademarks, copyrights, and brands, as well astrade secrets, which are aspects of knowledge kept safelyaway from the eyes of competitors. Seen this way, theentire field of knowledge management is essentially themanagement of intellectual property. IP isn’t a legal issuebut rather a business issue, and, as the authors point out,far too important to leave to the lawyers.

Blaxill and Eckardt maintain that companies withthe highest returns tend to have advantages that effec-tively limit competition. “As we know, when competi-tors smell profits they come running, so without some

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Mark Blaxill and RalphEckardt, The Invisible Edge:Taking Your Strategy to theNext Level Using IntellectualProperty (Portfolio, 2009)

David J. Teece, DynamicCapabilities and StrategicManagement: Organizing forInnovation and Growth (OxfordUniversity Press, 2009)

Malcolm S. Salter, InnovationCorrupted: The Origins andLegacy of Enron’s Collapse(Harvard University Press,2008)

I

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form of protection, those companies will quickly copythe innovations and drive the profits (for both the inno-vator and themselves) down to nothing.” The authors’thinking is linked closely to the industry analysis frame-work pioneered by Harvard Business School professorMichael Porter, which emphasizes the importance ofdifferentiation as a defense against rivals. “Intellectualproperty,” Blaxill and Eckardt write, “represents smallmonopolies.”

If the authors left matters there, they would add lit-tle to earlier discussions. Much of this terrain was cov-ered by Hiroyuki Itami in Mobilizing Invisible Assets(with Thomas W. Roehl; Harvard University Press,1987), and the ability to apply knowledge without losswas addressed by Carl Shapiro and Hal R. Varian backin Information Rules: A Strategic Guide to the NetworkEconomy (Harvard Business Press,1998). The Invisible Edge takes thediscussion a step further by analyzinghow companies can protect knowl-edge-based capabilities and retain thebenefits for themselves.

The key argument is captured ina refrain that echoes throughout thebook: Innovation without protection iscorporate philanthropy. All too often,Blaxill and Eckardt argue, managersemphasize innovation without con-sidering how to capture its benefits.They essentially make a unilateraldonation to others. The authors ex-plain: “Simply put, when businessesinvest in intellectual assets they need to protect the fruitsof their investment in the form of intellectual property.Only with the appropriation of ownership rights, andnot the creation of the asset itself, does an investmentprovide competitive advantage.”

Blaxill and Eckardt identify three ways to secure thebenefits of IP: control, collaborate, and simplify. Controlis the most obvious and easily understood. The successof the Gillette Company (a subsidiary of Procter &Gamble) is often ascribed to its business model: Giveaway the razors and make money on the blades. Thisstrategy sounds clever, until we realize that it affords lit-tle protection from rivals and can hardly explainGillette’s high performance over so many years. Yes,Gillette has been a relentless innovator, but more impor-tantly, it has protected its innovations with a blizzard ofpatents. The Fusion and Fusion Power razors, to men-

tion the most current examples,are protected by no fewer than30 U.S. patents that cover the blade geometry, bladecoating, blade guard, pivot mechanism, trimming blade,blade retaining clips, handle design, grip design, systemdesign, cartridge design, cartridge connection, cartridgedispenser, and more. Several of these elements have mul-tiple patents.

Beyond control, companies can capture the benefitsof IP through collaboration with others. The ToyotaMotor Corporation’s network of suppliers is a widelyacknowledged source of competitive edge; less wellknown is its extensive array of complementary patentsand cross-licensing deals that make the idea of imitationdaunting to rivals. By dispersing IP among a networkof firms with which it collaborates closely, Toyota gains

a competitive superiority that iseven more difficult for others toovercome. Far from yielding its IPadvantage by working with otherfirms, Toyota cements its IP advan-tage through its network.

Finally, since complexity adds tounwieldy coordination tasks, thethird approach, simplify, emphasizesthe benefits of setting industry stan-dards. Here the authors explore thetrade-offs between open and closedarchitectures, showing how openarchitectures can bestow benefitson companies that set the rules forthe interfaces and interdependencies

among components in a product design. As a primeexample, Blaxill and Eckardt describe IBM’s successwith the System/360, which set a standard that otherplayers in the industry were forced to follow. Theparadox: Simplicity, far from leading to imitation andirrelevance, can lead to a profitable position of networkcentrality.

The Invisible Edge is not without shortcomings. Theconcept of IP can be made so broad as to explain any-thing that confers advantage, and any success can some-how be attributed to IP. Furthermore, too much space isdevoted to Facebook, perhaps an appealing examplegiven its recent success, but surely an atypical examplegiven that it has yet to establish a clear business modelable to produce a stream of profits. Yet on balance,Blaxill and Eckardt have produced a fine book that isboth insightful and timely. It sets forth a strong intellec-

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tual premise but is aimed at a practitioner audience. Ifanything, the authors’ subtitle sells their book a bitshort. The Invisible Edge isn’t merely about taking strat-egy to the next level. Intellectual property is central tothe formulation and execution of a successful strategy atany level. And by the end of the book, it is hard to imag-ine a successful strategy that isn’t solidly backed up bythe protection of intellectual property.

The Importance of What You DoWhat enables companies to develop the innovationsthat are essential to protect? For that, we turn to a sec-ond book, Dynamic Capabilities and Strategic Man-agement: Organizing for Innovation and Growth, byDavid J. Teece, longtime professor at the University ofCalifornia at Berkeley. The book is not based on origi-nal research or empirical findings,and indeed has relatively few exam-ples of specific companies. It is morea collection of articles, written overmany years, capturing an evolutionin thinking by one of the mostaccomplished academics in the fieldof strategic management.

To Teece, “the field of strategicmanagement has been stranded forsome time with a framework thatimplicitly assumes that industrystructure (and product marketshare), mediated by enterprise behav-ior, determines enterprise perfor-mance.” The target of his concern isclear. Michael Porter’s framework, anchored in industri-al organization economics, conceives of the firm as ablack box and ignores its inner workings, neglecting thevital role of managerial decisions. Unsatisfied with thisapproach, Teece looks inside the firm and sees it as aset of distinctive capabilities. Companies are notable notfor the positions they occupy in an industry landscape,but for the things they actually do: how they learnfrom their environment, how they combine ideas as theyseek to develop new products, how they deliver servicesto customers, how they develop the talents of employ-ees, and more. Further, these many capabilities differfrom company to company because of the deliberateactions of managers. In Teece’s vision, understandingmanagers and the decisions they make is central to

understanding company strategyand performance.

Moreover, in a competitive market economy, capa-bilities must be constantly reinvented and reapplied iffirms are to maintain high performance. Last year’s capa-bilities are inadequate; new combinations are necessary.Thus, writes Teece, dynamic capabilities form the foun-dation of competitive advantage, for “the extent towhich an enterprise develops and employs superior(nonimitable) dynamic capabilities will determine thenature and amount of intangible assets it will create.”

How do managers renew their firm’s capabilities?First by sensing new opportunities in a shifting landscapeof competition and technology, and then by seizingopportunities through managerial initiatives, which inturn lead to reconfiguring capabilities. In all this, themanager plays a central role: Resources do not effortless-ly combine and recombine to create new capabilities,

but are manipulated by the actionsof managers who function as in-ternal entrepreneurs. Teece scoldsthose who build models of strategyon theoretical foundations thatemphasize market structure butoverlook the importance of manage-rial behavior: “The cavalier treat-ment of entrepreneurship and man-agement in economics stems in partfrom a failure to understand theimportance of managing organiza-tions and the absence of well-developed and well-functioningmarkets for intangibles and otheridiosyncratic assets.”

Dynamic Capabilities and Strategic Management is asuccinct statement of what has come to be the prevail-ing academic school of thought in the field of strategy.It’s not hard to see why. In a world where profits erodethanks to increasingly intense competition, or so-calledhypercompetition, only the ability to continually gener-ate distinctive capabilities is likely to lead to success. Yetone of the criticisms that can be leveled against TheInvisible Edge can be raised here, too. Viewed in retro-spect, successful companies can always be said to havemastered dynamic capabilities, whereas failed companiescan always be said to have been unable to satisfactorilysense, seize, or reconfigure. A second-order question ofvital importance is not entirely resolved: What can bedone to improve our ability to generate distinctive capa-bilities, not just once, but over and over — and defygravity as long as possible?BEST09BOOKS

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Strategy FailedThe importance of managerial decisions in strategybrings us to Innovation Corrupted: The Origins andLegacy of Enron’s Collapse, by Malcolm S. Salter, theJames J. Hill Professor of Business AdministrationEmeritus at Harvard Business School. On a superficiallevel, the demise of Enron is a story of dishonesty andreckless behavior, made possible by a lack of internal andexternal oversight. It’s tempting to blame Enron’s execu-tives for arrogance, greed, and hubris — the same expla-nations offered for so many Wall Street failures in thepast year. And to be sure, Jeffrey Skilling, Andy Fastow,and the late Ken Lay make excellent villains. But Salter,a veteran observer of the world of management, looksbelow the surface.

The tale of Enron is not a story about them, hewrites, but about us. “After decadesof studying the practice of manage-ment, I am convinced that veryfew of us who live in the world ofcompetitive product markets andunforgiving capital markets havenot encountered the managementbehavior and business policies thatbecame so toxic at Enron,” hedeclares. “As self-interested individu-als, we are also all susceptible toincentives that improve our eco-nomic well-being and tempt person-al opportunism.. . .”

Salter’s main interest is in prob-ing the failures of governance atEnron, including the lack of strong board oversight andthe dereliction of duty by watchdogs and auditors. Yetthe collapse of Enron is also very much a story aboutstrategy. It offers an object lesson in the possibilities andperils of extending success in one industry to others, andhow managers respond when their strategies go awry.

Salter wisely notes that the executives involved didnot set out to be dishonest or to defraud. In its earlyyears, Enron was innovative and successful by any objec-tive standard. During the early 1990s, Ken Lay andJeffrey Skilling recognized the trading opportunity inthe newly deregulated market for natural gas anddevised a business model that was insightful and novel.The key insight was that Enron could play an interme-diary role without owning physical assets, namely plantsand pipelines. The result was an “asset-light” model fortrading natural gas.

Building on this early suc-cess, Enron began to look forareas where it could replicate its business model. OneEnron executive claimed, “Anything we want to inter-mediate, we can.” By that logic, the key to Enron’s suc-cess was not its knowledge of the gas trading industry orof any other particular industry, but rather a set ofcapabilities that could be applied in any trading domain— the more fluid and complex the better. As Enronreported in its SEC filings, it believed “skills developedin merchant energy services could yield operatingefficiencies for Enron and other participants in thedeveloping bandwidth market.” Finding this argumentpersuasive, investors and bankers were eager to provideabundant resources to finance Enron’s growth.

Over the next years, Enron made repeated attemptsto apply its business model of inter-mediation in new domains, includ-ing electricity trading, broadbandtrading, electricity generation, andwater. Yet every attempt to extendthe model into new domains turnedout to be a failure. Salter’s conclu-sion, based on an extensive readingof Enron finances, is that it is doubt-ful the company earned its cost ofcapital in any of these new business-es. “In retrospect, both the strategicand economic logic of EES [EnronEnergy Services] look highly ques-tionable,” he writes. “Neither funda-mental economics nor managerial

capabilities could support Skilling’s hopes of extendinghis energy-based business model down the value chainfrom sales to utilities, to sales to consumers. Skilling’s bigbet on retail energy did not come close to being viable.”Yet with massive incentives to show ever-increasing top-line and bottom-line growth, Enron executives devisedquestionable, and eventually illegal, ways to maintain anillusion of success. The end was inevitable, and it cameswiftly in 2001.

With the benefit of hindsight, it’s easy to say thattrading electricity and broadband is fundamentally dif-ferent from trading natural gas, and that Enron’s busi-ness model could not bring value to new industries. Butthat’s in retrospect. Whether the limitations should havebeen visible at the time is by no means certain. For cor-porate strategists, the most difficult questions are, Towhat extent can existing capabilities be applied in new

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domains? How certain should we be before committingresources to move ahead? What are the warning signsthat a strategy is not working successfully? And perhapsmost troubling, in the event of poor returns, what arethe consequences — to the firm and to the manager —of admitting failure?

Toward this end, Salter seeks to distinguish betweenoptimism, which can help performance and have “sur-vival-enhancing effects in business,” and hubris, whichhas “survival-destroying effects.” But in our daily lives,optimism and hubris are terms we bestow after knowingthe outcomes. If a firm performs well, we infer thathealthy optimism was present; in the event of failure, weinfer hubris. For the strategist, such ex post facto attri-butions are insufficient. Salter tries to offer a few guide-lines: “Certainly, investments in new gas pipelines, gastrading, and even electricity trading — areas in whichEnron had operating experience — should be consid-ered intelligent gambles, which are well accepted as nor-mal activities in business. However, investments pursued

without relevant operating experience; without deep,specific knowledge on the part of project overseers atcorporate headquarters; and without effective risk con-trols — such as the aforementioned electric powerprojects and the excursions into water and broadbandbusinesses — crossed the line into the zone of recklessgambles.” Fair enough, but perhaps it still prompts thedeeper question, How much relevant experience andhow much specific knowledge is needed before weundertake a new strategic initiative? Strategy alwaysinvolves making commitments in conditions of uncer-tainty, and risks can never be fully obviated.

One legacy of the Enron disaster is a spate of newrules concerning corporate oversight, governance, andthe independence of auditors. Such rules are important,but Salter argues that “the irony of that legacy is that thenew rules cannot — by themselves — prevent Enron-style debacles, because they do not address many of thecauses of the company’s breakdown.” For a cure, hepoints us not in the direction of greater regulation, but to

principles of responsible leader-ship found in Philip Selznick’sBEST09BOOKS

1957 classic, Leadership in Administration: A SociologicalInterpretation (Row, Peterson), and its emphasis on prin-ciple and a sense of ultimate consequence. Perhaps,despite our fondest hopes to engineer superior resultswith strategic formulas, we are best off reading a 50-year-old leadership book.

Which brings us back to the current crisis. In thefinancial meltdown, it’s tempting to search for booksthat promise to create profits amid turbulence or turnadversity into advantage. The three books reviewed hereremind us of timeless themes in strategy, yet each offerssomething new. The Invisible Edge addresses IP as a coreissue of differentiation, but emphasizes the need toprotect what we create, whether through control, col-laboration, or simplification. Dynamic Capabilitiesreminds us of the need to look within the firm andexamine the ways that organizations sense changes,seize opportunities, and reconfigure capabilities, all inresponse to the actions of managers. And the story ofEnron in Innovation Corrupted makes clear how hard it

is to know how far we can extend core capabilities andwarns us that the impulse for high performance can beperverted without proper oversight. Strategic decisionscan never be reduced to exact formulas. They requirea sense of balance and perspective to guide choicesunder uncertainty. +

Perhaps the most troubling question is, In the eventof poor returns,what are the consequences — to thefirm and to the manager — of admitting failure?

Phil Rosenzweig (rosenzweig@imd.ch) is a professor at IMD inLausanne, Switzerland, where he works with leading companies onquestions of strategy and organization. He is the author of The HaloEffect...and the Eight Other Business Delusions That DeceiveManagers (Free Press, 2007).

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WesternDominanceIN Declineby Ayesha Khanna and Parag Khanna

HE BEST BOOKS ON GLOBALIZATION THIS YEAR

offer insights into three directional trends thatare changing the topology of global trade and

influence: the deepening of regional ties across emergingmarkets; the continuing rise of powerful new globalplayers; and, finally, the intractability of risk factorsinherent in emerging markets and regional networks,and how best to analyze them. Indeed, as the UnitedStates loses its hegemony as the primary engine of glob-al growth, the new drivers of growth deserve intenseexamination.

New Ties That BindTraditionally, the West has myopically viewed globaliza-tion from the perspective of how its influence has spreadeastward, but globalization also entails the deepeningof economic, political, and demographic ties betweenany two regions, not just between the countries in theOrganisation for Economic Co-operation and Develop-ment (OECD) and the rest of the world. The simulta-neous rise of the economies of China and the PersianGulf region, for example, is no coincidence. They areintimately connected and contributors to one another’srising prosperity, as skillfully described in this year’s bestbook on globalization, Ben Simpfendorfer’s The NewSilk Road: How a Rising Arab World Is Turning Away

Ben Simpfendorfer, The NewSilk Road: How a Rising ArabWorld Is Turning Away fromthe West and RediscoveringChina (Palgrave Macmillan,2009)

Nandan Nilekani, ImaginingIndia: The Idea of a RenewedNation (Penguin Press, 2009)

Nirmalya Kumar, with PradiptaK. Mohapatra and SujChandrasekhar, India’s GlobalPowerhouses: How They AreTaking On the World (HarvardBusiness Press, 2009)

Ian Bremmer and PrestonKeat, The Fat Tail: The Powerof Political Knowledge forStrategic Investing (OxfordUniversity Press, 2009)

Robert P. Smith, with PeterZheutlin, Riches among theRuins: Adventures in theDark Corners of the GlobalEconomy (AMACOM, 2009)

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from the West and Rediscovering China.Simpfendorfer, a Royal Bank of Scotland economist

based in Hong Kong, has the unique vantage point ofhaving worked in Damascus and Dubai, as well as inmany countries in East Asia. He uses the southernChinese city of Yiwu as a microcosm for the reopeningof the Silk Road. Until recently an out-of-the-way vil-lage, Yiwu is a revealing node because its residents maketheir fortunes selling cheap “made in China” goods tothe developing world, not to the U.S. and Europe.

Yiwu’s rise as a trade center — its annual trade fairdrew 3 million visitors in 2007 — and the repaving ofthe Silk Road are due in part to the United States’ harshresponse to the attacks of September 11, 2001.Difficulties getting U.S. visas forced Arabs to take theirbusiness elsewhere at the very time they were amassingcapital from high oil prices. Thegrowing demand for oil from Indiaand China provided a natural alter-native, and Gulf-Asia trade bur-geoned. Saudi Arabia’s oil exports toChina hit US$31 billion in 2008,and China’s exports to the Arabworld pulled even with those of theU.S. at about $50 billion, a trendembodied in the sprawling DragonMart on Dubai’s outskirts (the largesttrading hub for Chinese goods out-side the Chinese mainland) andChinese car dealerships in Damascus.

This new Silk Road is not onlyslicked with oil, it is technologicallyenhanced through multilingual B2B websites such asAlibaba.com, which have dramatically lowered the costsof trade between the Persian Gulf and China. And it isreinforced by the migration of labor; at least 10,000Chinese work on building oil terminals in Saudi Arabiaon the coast of the Red Sea. This also means that 10,000potentially idle young Saudi men are not working at oilterminals, something for which China may eventuallysuffer political blowback. But for now, China’s baggagein the Arab world remains very light, unlike the Gulfregion’s conflicted relationships with the U.S. and otherWestern nations.

Shifts in trade are usually followed by shifts infinance, and here the evidence Simpfendorfer offers isequally revealing. Arab and Chinese businesses continue

to court one another’s sovereignwealth funds, looking for capital

infusions and building trust, while many U.S. compa-nies and markets look more and more like dry holes.Even before the economic crisis struck in 2008, Gulfcountries had begun a gradual shift of foreign exchangereserve holdings to euros, and the European Union is inthe final stages of free-trade negotiations with the GulfCooperation Council. China has also telegraphed itsdesire to diversify investments and currency reservesaway from the U.S. dollar, in essence signaling a certainideological unity with its new Arab partners.

The political ties on the new Silk Road are evidentin the frequent reciprocal summits to which SaudiArabia’s King Abdullah and China’s President Hu Jintaobring planes full of executives eager to sign deals.Oil trading, foreign investment, arms deals, and the rhet-oric of diplomatic alignment are all part of the mutual

reinforcing.In using the Silk Road as a

metaphor, Simpfendorfer remindsus that the trade networks betweenthe Middle East and Asia date backcenturies, illustrating how globaliza-tion is not an entirely new phenom-enon either. He also points out thatthe Silk Road was in fact plural; itwas many routes in multiple direc-tions. Much like the new worldorder, it had no single center.

The New Silk Road is a windowinto the deepening commercial andcultural ties that define globalizationoutside the Western domain. English

may be the necessary global language, but it’s insuffi-cient to understand and capitalize on today’s multi-directional globalization. Simpfendorfer’s first-personobservations plausibly sketch the many individualthreads that will likely be woven together to createtomorrow’s geopolitical alliances.

India’s Bid for Economic LeadershipIt is remarkable how in the past few years the analyticalperspective on globalization has shifted from West-ernization to the rise of two Asian giants. The literatureon Asian globalization has also matured; the overlysimplistic language of “Chindia” is gone, with eachnation now being treated as a confident competitor inits own right — and it is India that has gained ground,at least in publishing-volume terms, over the past year.

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tic portraits of India’s rise that glossed over its crumblinginfrastructure, fractious politics, and impoverishedmasses, in Nandan Nilekani’s Imagining India: The Ideaof a Renewed Nation, we finally have an inspiring yetbalanced account that takes these challenges head on.Nilekani, the hero of Thomas Friedman’s The WorldIs Flat: A Brief History of the Twenty-first Century (Farrar,Straus and Giroux, 2005), a former co-chairman ofIT giant Infosys and now a cabinet minister in theIndian government, knows that for India to achieveglobal respectability, the success of firms like Infosysmust spread to companies throughout India. As a CEOand statesman, he elegantly glides between national his-tory, entrepreneurial autobiography, trend forecasting,and public policy — taking the attitude that “what’sgood for India is good for Infosys” and focusing onhow to improve access for all Indiansto health, education, jobs, andinfrastructure. (Also see Nilekani’s“India’s Demographic Moment,”s+b, Autumn 2009.)

Although so much of the talkabout the Indian market opportu-nity revolves around the “bottom ofthe pyramid,” Nilekani wants toshrink the pyramid’s base by growingthe middle class while also ensuringa dignified and sustainable life forthose who are worse off. The twinfoundations of this strategy are ITand the promotion of English-language education above all else.Exuding a confidence that rivals China’s pronounce-ments about its economic future, Nilekani states, “Wecan, first of all, reasonably assume that within a fewyears we should be able to have ubiquitous connectivityto cover every Indian home, hamlet and town.” Suchambition is coupled with a detailed strategy for harness-ing an emerging demographic dividend created throughthe combination of economic growth and a boom in thenumber of working-age people. This will create tremen-dous business opportunities for foreign firms and Indianentrepreneurs alike, particularly in products such as low-cost computers and PDAs.

To realize this vision, Nilekani says, universitiesmust be stripped of ideological dogmas and producemore experts in health care and alternative energy; infor-mal and non-unionized labor must be empowered asservice distributors; and more states must follow the

business-friendly model of thestate of Andhra Pradesh, whichfeatures India’s best highway system and emphasizescompetition instead of subsidies.

The recent electoral victory of the CongressParty–led alliance ought to mean greater support for andconfidence in India’s ability to establish more such zonesof innovation. The India of the past, where entrepre-neurs were considered “devious capitalists” and com-puters referred to as “job-eating machines,” is beginningto look like the U.S. of the 1990s, whereas Nilekani’sIndia of electronic ID cards and e-governance is provingto be a progressive experiment worthy of investors’attention. After the book’s publication, Nilekani leftInfosys to become chairman of the Unique Identi-fication Authority of India, a $6 billion smart-card proj-

ect aimed at providing Indians withpersonal ID cards.

Where Nilekani championsIndia as a market destination,Nirmalya Kumar, Pradipta K.Mohapatra, and Suj Chandrasekharfocus on the nation’s growing statusas a player in the global arena andthe effect this will have on the nextphase of globalization. Their book,India’s Global Powerhouses: HowThey Are Taking On the World, offersa deeper look at the way India’smajor multinationals are pursuingglobalization on their own terms.Kumar, a marketing professor at the

London Business School, and his coauthors argue thatthese firms, which include the Birla andTata groups, canleverage vast assets and tolerate high debt-to-equityratios to complete international deals, such asTata Steel’s2006 acquisition of Anglo-Dutch steelmaker Corus andthe 2007 merger that created ArcelorMittal, the world’sleading steelmaker.

Based on extensive interviews with deal makers inmajor Indian firms, the authors’ case for eventually see-ing more Indian companies (as opposed to Chinesecompanies) among the top multinationals rests on argu-ments similar to those of Nilekani — namely thatIndians’ command of the English language and comfortwith diverse, multiethnic workforces result in relativelyfrictionless outbound acquisitions. The fact that out-bound investment surpassed inbound investment forthe first time in 2006, a major turning point for “Brand

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India,” lends credence to this reasoning. Further, theyexpect to see Indian companies competing globally in agreater variety of industries. Indeed, this well-selected setof cases, which includes Hindalco’s global aluminumempire and Suzlon’s international windpower supplychain, demonstrates that India has already branched outbeyond IT and manufacturing, with biotech and othersectors certainly on the near horizon.

Both Imagining India and Global Powerhouses seeIndia as a rival to China in the global arena, competitivethanks to its younger demographic profile, English pro-ficiency, and higher-value finished goods. The fact thatIndian companies have proven that they can pull offmultibillion-dollar acquisitions overseas gives them anadditional advantage. Many questions remain, however:Will India’s publicly traded companies be allowed tohold high levels of debt? What willhappen when the country’s domi-nant family-owned model is con-fronted with international manage-ment practices — and scandals onthe magnitude of Ramalinga Raju’sbillion-dollar fraud at SatyamComputer Services? India hasreached well beyond its borders, buta turbulent global economy meansthat there is no guarantee of smoothprogress.

Risk and Reward in New MarketsMajor Western firms, such as Coca-Cola and GM, have reported greaterprofits overseas than at home for almost a decade now,and global expansion into faster-growing economiesseems essential to all First World companies that canafford it. But even though emerging and frontier mar-kets, such as Sri Lanka and Romania, are undoubtedlythe next major globalization story, they are volatile andunpredictable. Yet few companies take political risk seri-ously. Most either rely on experts and “insider advice” orsimply ignore the subject as too complex and intangibleto integrate with day-to-day strategy.

In this sense, Ian Bremmer and Preston Keat’s TheFat Tail: The Power of Political Knowledge for StrategicInvesting is long overdue. The authors, both at the pres-tigious consulting firm Eurasia Group, draw on years oftop-level advisory experience to provide the first accessi-

ble and rigorous treatment ofpolitical risk for business execu-

tives. “Fat tail” is a statistical term that refers to a bumpat the end of a distribution curve where there is addedrisk, but the likelihood that a particular event will occur“appears so catastrophically damaging, unlikely to hap-pen, and difficult to predict, that many of us choose tosimply ignore it. Until it happens.” The authors’ mainpoint: Black swans, as Nassim Nicholas Taleb calls them,can be political as well as financial.

Such is the volume’s tone as it takes the readerthrough a wide variety of events that wreaked havoc incapital markets, including the Russian ruble devaluationof 1998, the 2003 PDVSA oil strikes in Venezuela, the9/11 terrorist attacks, and the passage of the U.S.Sarbanes-Oxley legislation in 2002. Indeed, as shown bythe critical firestorm that forced state-owned ChinaNational Offshore Oil Company to withdraw its bid to

acquire Unocal in the U.S. in 2005,local political sensitivities impactinvestments everywhere, even in theUnited States.

Bremmer and Keat turn theamorphous notion of risk into a cat-alog of former secretary of defenseDonald Rumsfeld’s oft-quoted“known unknowns” and “unknownunknowns,” covering warfare, en-ergy supply disruptions, terroristattacks, coups and civil wars, expro-priation and breaches of contract,currency controls and defaults, glob-al warming and demographics, and,of course, corruption. Along the

way they offer sensible resilience mechanisms to preparefor such events (e.g., risk mapping, data collection,scenario analysis), ensure continued operations (e.g.,personnel location), and hedge strategic bets (e.g., jointventures).

But lest we begin to believe that political risk is fullymanageable, Robert P. Smith’s Riches among the Ruins:Adventures in the Dark Corners of the Global Economy(written with Peter Zheutlin) provides a stark reminderthat “frontier markets” can be a euphemism for thechaotic Third World. Smith, the founder and managingdirector of the Turan Corporation, which specializes inemerging-market sovereign debt, takes us on a tour ofplaces where he says you have to “hold on to your wal-let and your life”: El Salvador, Guatemala, Iraq, Nigeria,Russia, Turkey, and Vietnam.

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Bloomberg terminals, sovereign debt–trading middle-men like Smith relied on chutzpah and instinct to deter-mine bond prices and find trusted money changers. Forsuch financial swashbucklers, understanding people wasas important as, if not more important than, under-standing markets. Clearly, improvisation was Smith’sgreatest gift: He carried large volumes of cash interna-tionally, set up local holding companies to collect debts,and sent alias-named proxy lawyers to scout for contactsand information — anything to get the job done.

Even as the sovereign debt trade has grown into a$1.7 trillion industry conducted by multinational banksand investment firms, Smith’s characters are alive andwell today, just dressed better and using BlackBerrysinstead of rotary-dial telephones. After reading thisbook, one wonders how Arab and Chinese investorsdescribed by Simpfendorfer will treat the frontier mar-kets of Uzbekistan, Afghanistan, and Pakistan that liebetween them on the New Silk Road.

Smith witnessed every incident in The Fat Tail tax-

onomy, from arbitrary currency controls to coups toexpropriations. His implicit reminder is that emergingmarkets are a long-term investment. It’s a reminder thatwould have been worth hearing in late 2008, when theworldwide flight of capital to safety caused foreign directinvestment in the developing world to plummet. Manyanalysts threw the baby out with the bathwater, and theU.S. became the default market of choice even at nearzero percent yield on Treasury securities. But, in fact, byApril 2009, the Wall Street Journal was already reportinga surge in emerging market indexes. Growth had notgone negative, and foreign exchange reserves and highsavings rates combined to restore stability.

This isn’t to say that recoveries are permanent.Smith’s description of Russia in 1997, when he andothers bought in heavily on the assumption that Russiawas too big to fail, inadvertently reminds us of Russiain 2007: too dependent on high oil prices and withweak regulations and enforcement. Just over a decadeago, the Russian stock market lost 75 percent of itsvalue; in 2009, it has lost at least 60 percent. Emergingmarkets can always submerge again.

In the evolution fromSmith’s boots-on-the-groundadventures to Bremmer and Keat’s more detached,methodological approach, an interesting mutual appre-ciation appears: Smith thinks that his adventurous tac-tics are no longer relevant in a world of real-time, elec-tronic information, yet Bremmer and Keat argue thatlocal political knowledge is still essential to staying aheadof the curve. In other words, paying more attention todata is not enough — good instincts are also essential tofiguring out all the unknowns.

A Warning to Established PlayersAn unmistakable conclusion that we share with all thebooks featured in this essay is the assertion that the U.S.has lost its status as the preeminent driver of globaliza-tion. Thus, we predict that two trends will typify thenext phase of globalization: First, stronger regionalismin terms of deepening economic integration in areassuch as East Asia, Latin America, and the Arab world

will be driven by local powers such as China, Brazil, andSaudi Arabia. Second, the global playing field for firms,capital, and strategies will become much more level asWestern companies lose the automatic edge they onceheld in trust and credibility. (See “Capturing the AsianOpportunity,” by Andrew Cainey, Suvojoy Sengupta,and Steven Veldhoen, s+b, Winter 2009.) Companies inemerging and frontier markets may not become globalleaders in their own right, but they will surely be power-ful players in their own domains and beyond. +

The global playing field for firms, capital, and strategieswill become more level as Western companies lose theautomatic edge they once held in trust and credibility.

Ayesha Khanna (akhanna@hybridrealities.com) is managingdirector of Hybrid Realities, a research and strategy consulting firm,and author of Straight Through Processing for Financial Services:The Complete Guide (Elsevier, 2008).

Parag Khanna (khanna@newamerica.net) is a senior researchfellow at the New America Foundation and author of The SecondWorld: How Emerging Powers Are Redefining Global Competitionin the Twenty-first Century (Random House, 2009).

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today. Radical change is upon us, the systems we knewand believed in have fallen apart, and whether we arecorporate leaders or employees, fund managers orinvestors, laid off or relatively secure, the uncertaintyand contradiction evoked in the quote are probablyfamiliar feelings.

Indeed, it is hard to imagine a more dispiriting sub-ject to write about than business management duringthis year of business failures, plunging corporate profits,and public distrust. Some writers have handled this chal-lenge by dissecting the failures and extracting their les-sons; others hold up the shining examples of survivors orfind fixes for our problems.

The authors of the books in this review are of thelatter variety. They perceive, as did Dickens, that even inthe midst of the chaos and despair brought about byradical change, there is always the hope for somethingbetter and the possibility that new opportunities are hid-den in the upheaval and destruction.

I agree, and it is more than optimism that steeredme in this direction; it is the conviction that the prevail-ing ethos of management has reached a tipping point.After more than a decade of making the case for inte-grating corporate profitability and social value in a newsustainable business model, I’m finding that people areready for a conversation about the purpose of business,the definition of business success, and the time frame formeasuring that success. In fact, the conversation isalready taking place, in corporate settings and businessschools, among leaders, employees — and business writ-ers. The books I have chosen see the potential, enhancedby the destruction around us, for making daring changesin the way we manage our companies and in the way welook at the role of business.

Here’s Your Burning PlatformIn this year’s best management book, The Upside of theDownturn: Ten Management Strategies to Prevail in theRecession andThrive in the Aftermath, Geoff Colvin, sen-

Geoff Colvin, The Upside of theDownturn: Ten ManagementStrategies to Prevail in theRecession and Thrive in theAftermath (Portfolio, 2009)

Henry Mintzberg, Managing(Berrett-Koehler, 2009)

John C. Bogle, Enough:True Measures of Money,Business, and Life (Wiley,2008)

George Friedman, The Next100 Years: A Forecast for the21st Century (Doubleday, 2009)

IN Search OF THE

Silver Liningby Judith F. Samuelson

T WAS THE BEST OF TIMES, IT WAS THE WORST OF

times, it was the age of wisdom, it was the age of fool-ishness, it was the epoch of belief, it was the epoch of

incredulity, it was the season of Light, it was the seasonof Darkness, it was the spring of hope, it was the winterof despair, we had everything before us, we had nothingbefore us....

The descriptive start of Charles Dickens’s A Tale ofTwo Cities, a story of the havoc that revolutionarychange wreaks on the lives of people, seems eerily apt

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ior editor-at-large for Fortune, argues that tough timesare the right time to make big changes in an organiza-tion. “Step one in every consultant’s advice on how tolead change is ‘Create a burning platform,’” writesColvin. Well, here it is, he adds. The “platform really isburning. If ever people were ready to be led toward newways of doing things, they are now.”

Doing things differently will be crucial to businesssurvival in this century, Colvin asserts, pointing out thatthe world has already begun to change in “several big,long-lasting ways.” These changes include a reduction inconsumption to the historic norm as consumers pay offmountainous debts, and a cultural shift toward thrift.“Forces in today’s society are already being adapted toclothe thrift in modern dress,” he writes. “One is envi-ronmentalism; the mantra of ‘reduce, reuse, recycle’ is aformula for saving money, whilewasting resources is not only person-ally profligate, it also harms everyoneby hurting the planet.” The dualanxieties of health-care costs andimpending retirement for a large seg-ment of the population will also fuelthis shift, and Colvin sees trauma-tized consumers and investors beingrisk averse for a long time to come.

Government will play a muchlarger role in the new world order,especially the regulatory sector, saysColvin. A few years after HurricaneKatrina, when “government lookedincompetent while business rode tothe rescue,” the opposite view has taken hold: “Businessscrewed up, government steps in.”

Whether you subscribe to that view or not, Colvinthinks that the faster and more effectively managersrespond to these changes, the more likely their compa-nies are to do well. What do managers need to do? Tobegin with, says Colvin, managers must avoid fallingback on outdated models in their rush to respond totoday’s stresses. For example, they should not “obeyancient instincts from the industrial age” and treat work-ers as expendable. The best companies and leaders willtake a more enlightened view, says Colvin, using theopportunities created by the downturn “to begin prac-tices they should have been using, to improve the qual-ity of their people, to increase employees’ loyalty andmotivation, to build the culture.”

One of those not-to-be-missed opportunities is get-

ting compensation and incen-tives right. It’s time to jettisonpay programs that encourage executives to take highrisks by limiting the negative consequences. Colvin sug-gests following the example of companies like Deere &Company, where incentives are based on economic prof-it, which includes capital costs, and bonuses are paid outover four years and subject to cancellation if perform-ance is not up to par, a system that Deere CEO RobertLane told Colvin he likes because “it encourages long-term thinking.”

Which brings up another opportunity afforded bythe downturn: freeing managers from providing earn-ings guidance to the investment community. Colvindescribes earnings guidance as a game that has de-veloped so gradually that “those in its midst may have

trouble seeing how insane it hasbecome.” (As one of the developersof the Aspen Institute’s 2007 AspenPrinciples, a series of signatory state-ments promoting long-term man-agement and value creation strate-gies, I agree. The principles advocatethat companies stop providingshort-term financial guidance alto-gether.) Companies such asGlaxoSmithKline and Unilever havesuspended guidance, and Colvinsuggests that the time is right forothers to follow suit: “While sud-denly ceasing guidance in goodtimes may alarm investors, they

understand that in a historic recession even the bestcompanies can’t predict results a year down the road.”

Colvin also sees this as a good time for managers toconsider environmental initiatives, despite the conven-tional view that going green is a luxury a company canill afford in a downturn. He argues that “seeing the busi-ness from an environmental perspective can be a greatidea in distressed times because it can reveal cost savingopportunities that had previously been invisible.”

The author also recommends going against the con-ventional practice of immediately cutting spending inR&D and advertising during down times, citingresearch showing that companies that continued toinvest in these areas during the 1990–91 recessionretained their competitive advantage and became topmarket performers, undercutting many managers’ asser-tions that the stock market would “punish them for

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spending more and cutting less than competitors duringa recession.” (See “Profits Down, Spending Steady:The Global Innovation 1000,” by Barry Jaruzelski andKevin Dehoff, s+b, Winter 2009.) Successful companies,says Colvin, “play offense, not defense, during a reces-sion…. [They] see opportunities to build advantageswhen their competitors have in effect taken themselvesout of the game.”

Colvin’s overarching prescription is to make changesnow, while employees are looking for something that willmove them beyond anxiety or despair. Citing research onmilitary leadership during crises, he notes that peoplerespond better when their leaders help them see stressfulevents as challenges from which they can learn and ben-efit. “A crisis is the optimal moment for personalgrowth,” writes Colvin. “It is also the best time for acompany’s own personal growth, theimprovement of its culture.”

Managers Can Be LeadersAlthough managers can help leadchange, they cannot bring it aboutalone, according to Henry Mintzbergin his new book, simply calledManaging. The Cleghorn Professorof Management Studies at McGillUniversity and author of more than15 books, Mintzberg continues topromote his belief that managementis not merely a science encompassedin a set of analytical skills taught ina classroom, but also an art thatdepends on imagination and creative insight, and a craftthat is learned on the job through apprenticeship, men-torship, and direct experience.

Mintzberg researched this book by spending a dayeach with 29 managers and watching them work.The managers were employed in a variety of industries,government, and nonprofit organizations, in settings asdisparate as offices, refugee camps, and symphonyorchestras. Watching these managers balance thinkingand acting, as well as dealing with multiple activities,frequent interruptions, and a pace that never let up,inspired Mintzberg to propose both a model and a set ofconcrete skills for managerial effectiveness.

The model seeks to erase the arbitrary line betweenmanagers and leaders — “we should be seeing managers

as leaders and leadership as man-agement practiced well,” he

writes. He thinks of both functions in terms of the“communityship” inherent in them. The effective man-ager, he says, is one who “leverages the natural propen-sity of people to cooperate in communities.”

Management books often make me feel like Ishould head back to boot camp. But reading Managing,which is written in a breezy and accessible style, Ifound my own managerial insecurities melting away.Mintzberg reminds us that most managers are prey toevents and demands they do not control, and that awide range of styles can work well for a boss. Balance isthe key: keeping up with the hectic pace of businessyet making time for reflection; driving change yet main-taining stability; leading and collaborating; leaveninganalysis with judgment.

Further, all these skills must function within thelarger context of a worldly mind-set— an attitude that Mintzberg dis-tinguishes from the common man-date for companies to be global. “Allmanagers function on a set of edgesbetween their own world and thoseof other people,” he writes. “To beworldly means to get over theseedges from time to time, into thoseworlds — other cultures, otherorganizations, other functions intheir own organization, above allthe thinking of other people — soas to understand their own worldmore deeply.”

For Mintzberg, management isnot confined to the inner workings of an organization,but takes into account the larger landscape in which abusiness functions. “Is there an economist prepared toargue that social decisions have no economic conse-quences?” he asks. “Not likely: everything costs some-thing. Well, then, can any economist argue that there areeconomic decisions that have no social consequences?And what happens when managers ignore them, beyondremaining within the limits of the law?”

Mintzberg finds the answer in a quote from Russianauthor Aleksandr Solzhenitsyn, who, describing his lifeunder a Communist regime, said: “A society that isbased on the letter of the law and never reaches anyhigher is taking very scarce advantage of the high level ofhuman possibilities. The letter of the law is too cold andformal to have a beneficial effect on society. Wheneverthe tissue of life is woven of legalistic relations, there isBEST09BOOKS

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an atmosphere of moral mediocrity, paralyzing man’snoblest impulses.”

How do we develop managers who can lead busi-nesses in a more sustainable direction? Mintzberg, a reli-able critic of business schools, challenges them to gobeyond the usual fare of courses organized by businessfunctions — marketing, finance, and accounting. Thatapproach “amounts to a focus on analysis,” he says.Instead of “calculating managers,” he wants managers“who can deal with the calculated chaos of managing —its art and craft — which highlights the importance ofreflection, worldliness, collaboration and action.”

The bottom line for Mintzberg is instilling a senseof commitment in managers — commitment “to thejob, the people, and the purpose, to be sure, but alsoto the organization, and beyond that, in a responsibleway, to related communities in soci-ety.” Amen.

That same sense of commit-ment lies at the heart of John C.Bogle’s Enough: True Measures ofMoney, Business, and Life. The germfor this book and its title come froma story about writers Kurt Vonnegutand Joseph Heller. At a party givenby a billionaire hedge fund manager,Vonnegut informs Heller that theirhost makes more money in a singleday than Heller has earned in totalfrom his wildly popular novel Catch-22. Heller responds, “Yes, but Ihave something he will neverhave. . . enough.”

The founder of the Vanguard Group and the cre-ator of the first index fund, Bogle examines how leadersand managers in the financial-services industry — andbusiness generally — have failed both investors and soci-ety and discusses what can be done to set things right.Bogle could be the poster boy for Mintzberg’s effectivemanager and leader. The tenacity of his message and hisbusiness model of long-term investing, especially in anera when the so-called smart money ran in the oppositedirection, makes him a real hero of mine.

In a world where measurement has replaced judg-ment, where investing subtracts value from societyrather than adds it, and where our financial systemchallenges corporations to “produce earnings growththat is, in truth, unsustainable,” Bogle would have usadopt some new rules for leaders. Some of these rules

echo what Mintzberg says aboutthe managerial traits he has iden-tified as vital, such as commitment, caring, and theability to leverage people’s desire to work together incommunity.

Unsurprisingly, trust is also high on Bogle’s list ofleadership and organizational attributes. He quoteseconomist and investor Henry Kaufman, who assertedin On Money and Markets: A Wall Street Memoir, “Trustis the cornerstone of most relationships in life. Financialinstitutions and markets must rest on a foundation oftrust as well.” Bogle points to a survey of fund investorsthat found that almost three-quarters of the respondentsdid not trust the fund industry. “And how can fundinvestors muster any faith whatsoever in the funds thatnow exist,” he asks, “when more than half of their man-

agers won’t put their own money onthe line?”

Bogle points to the emphasis onmeasurement at the expense of judg-ment as another factor that is erod-ing trust. “Business organizationsmust learn that ‘not everything thatcan be counted counts,’” he pointsout, quoting Albert Einstein. “Yettoday we rely too heavily on count-ing and not enough on trusting. Itis time — well past time in fact —to strike a healthier balance betweenthe two.” For Bogle, it all comesdown to a lack of leadership, as heillustrates through discussions of

excessive CEO compensation, the lack of accountabilityand principles for ethical conduct, short-term specula-tion at the expense of long-term investment and growth,and more.

The final section of the book, labeled “Life,” callsfor a return to 18th-century values. Before rolling ourcollective eyes, let’s remember that the 18th century wasthe age of reason, and of Thomas Paine, Adam Smith,and Benjamin Franklin, whom Bogle calls the “para-digm of the eighteenth-century man.” It is Franklin theentrepreneur whom Bogle holds up as a contrast tothose in our own century — a man motivated not by adesire for personal profit but by the joy of creating andof exercising his ingenuity and energy. Indeed, accordingto Bogle, the leaders of the 18th century were ableto “implant in society a reliance on reason, a passionfor social reform, and the belief that moral authority is

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integral to the successful functioning of education andreligion as well as to commerce and finance.” He wouldlike to see more such leaders today.

The End Isn’t NearGiven the current conditions, and the rise of new eco-nomic powers such as China and India, I can’t help wor-rying that there might not be time to build the kind ofmanagers and organizations that Mintzberg and Bogleenvision, especially here in the United States. So I wassurprised in an airport bookstore when I found TheNext 100 Years: A Forecast for the 21st Century and read:“The history of the U.S. will be the history of the 21stcentury.” Its author, George Friedman, is founder andCEO of Stratfor (Strategic Forecasting Inc.), a globalintelligence-gathering company. A former academicwhose geopolitical and economic analysis has been usedby the Pentagon and Wall Street, Friedman makes a con-trarian yet convincing case for seeing the future for theU.S. as a glass half full.

Friedman bases his case on what he cites as “the sin-gle most important fact of the twenty-first century: theend of the population explosion.” He argues that “theentire global system has been built since 1750 on theexpectation of continually expanding populations. Moreworkers, more consumers, more soldiers — this wasalways the expectation. In the twenty-first century, how-ever, that will cease to be true.” Because advanced indus-trial countries will be losing population at a dramaticrate by 2050, and birthrates are slowing in most under-developed countries, Friedman believes that populationgrowth will stabilize, and by the end of the century,technology and immigration will be the key ingredientsof economic competitiveness and power. And in both ofthese areas, the U.S. has the advantage.

Assessing China’s current “economic dynamism” asunsustainable, Friedman sees other economic powersemerging at mid-century: Japan, Turkey, and Poland —for a number of fascinating and convincing reasons thatI cannot do justice to in this review. But looming over

them all, in Friedman’s assess-ment, is the U.S. powerhouse,

despite the self-doubts and doom-filled predictionsengendered by our current financial crisis.

The sense that this country is “approaching the eveof destruction,” says Friedman, is the same forebodingthat was present during the Nixon presidency. In fact,the U.S. has historically been plagued by the naggingfeeling that “the country isn’t what it used to be.” Itturns out that American culture mirrors the dichotomiesof the Dickens quote I used earlier. According toFriedman, it is “the manic combination of exultanthubris and profound gloom.”

But then, what else would you expect from a coun-try still in its adolescence? Calling on history, demo-graphics, and geopolitical patterns over the centuries,Friedman argues that the U.S. is experiencing an adoles-cent identity crisis, “complete with incredible newstrength and irrational mood swings.” This will eventu-ally lead to an adult nation that, he explains, will bemore stable and powerful.

Thanks to factors like immigration (which will be

welcomed as falling birthrates fuel an international laborshortage by 2020), the power of the computer (whoseprogramming language is English), and U.S. militarymight (especially its sea power), Friedman foresees aUnited States that will continue to hold center stage asthe century progresses.

To help make the case, the author offers a long sum-mary of all the times over the past several centuries thatthe popular geopolitical forecast turned out to be deadwrong. The message: The future is never set in stone. Sostay on your toes, fellow travelers. There is time to influ-ence events in business and in life. All the more reasonto use this opportunity to build the institutions — anddevelop the managers — that will help us create amature society that we all want to live in. +

By the end of the century, says George Friedman,technology and immigration will be the key

ingredients of economic competitiveness and power.

Judith F. Samuelson (judy.samuelson@aspeninst.org) is thefounder and executive director of the Aspen Institute Business andSociety Program, which employs research and dialogue amongbusiness leaders to build a sustainable global society. Shewas previously with the Ford Foundation and helped launch itsCorporate Involvement Initiative.BEST09BOOKS

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Shel Israel, Twitterville: HowBusinesses Can Thrive in theNew Global Neighborhoods(Portfolio, 2009)

Chris Anderson, Free: TheFuture of a Radical Price(Hyperion, 2009)

John Gerzema and Ed Lebar,The Brand Bubble: TheLooming Crisis in BrandValue and How to Avoid It(Jossey-Bass, 2008)

It’s been true for a few years that consumers have amore commanding voice in the marketing arena; thedifference now, as Twitter’s popularity reveals, is thatmore and more individual consumers are using theirvoices — what was once a trickle produced by the mosttech-savvy consumers is now a rushing stream. Theinjection of the consumer’s voice into brand messagingmay be the most explosive change for digital-age mar-keters, but it’s the ongoing contribution of all thosevoices that is actually making the impact.

Now that major marketers and individual con-sumers use the same tools to produce and distributemessages, it’s as though the open source movement hasspread into the business of brand communications. TakeDunkin’ Donuts: It spends millions of dollars on mar-keting, but there are also dozens of fan-producedDunkin’ Donuts pages on Facebook, and the vast major-ity of the 5,000 YouTube videos tagged “Dunkin’Donuts” were uploaded by consumers. The cross-pollination of corporate marketing and consumer mes-saging has reached a point of irreversibility. The threebest marketing books of the year address this reorderedworld of messaging and marketing.

All Aflutter about TwitterIt is virtually, pardon the pun, impossible to ignore themental space that Twitter has taken up in the last yearwithin the marketing and communications industries.The service is still relatively small — InformationWeekreported that Twitter attracted about 23 million hits ver-sus Facebook’s 122 million hits in June 2009 — but itshold on the marketing imagination is profound. Twitteris word-of-mouth moving at hyper-speed. Each person(or corporation) using the free service can post text-sizedmessages (tweets) and “follow” the messages of otherusers. Users resend the most interesting of the messagesto their followers, creating a constant spreading of tweetsin a very public forum in real time. This makes Twitter

BrandingGOES Viralby Catharine P. Taylor

ERHAPS NOTHING THIS YEAR CAPTURED THE

fancy of the marketing and media intelligentsia,and the interest of pop culture as a whole, more

than Twitter. This micro-blogging service promised toinfuse excitement into moribund customer service, re-vitalize marketing, reengineer the connections betweencelebrities and fans, and perhaps even overthrow govern-ments, all in 140 characters or less — the maximumallowed length of a message.

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flights, and then, completing the virtuous circle, postedmessages on Twitter to market the added seats. Mean-while, the other airline with many flights to Austin —American Airlines (@aaairwaves) — missed the money-making opportunity, simply because Twitter wasn’t yeton its corporate radar.

Israel’s understanding of Twitter culture is best dis-played in an anecdote about how Procter & GambleCompany, usually among the most savvy advertisers, gotTwitter wrong. P&G partnered with Feeding Americato sell Tide T-shirts to fight hunger, but it failed tounderstand how the Twitter community worked whenit attempted to piggyback on the reputation of 150of the most followed users of the service. P&G askedthese influencers to send tweets to their followers, whowould presumably re-tweet the message to their follow-

ers, and so on. However, the good-will of the Twitterati didn’t extendto hawking T-shirts promotingTide, especially since Procter &Gamble didn’t disclose how muchof the purchase price was actuallygoing toward feeding people. In theend, P&G sold only 2,000 T-shirtsand the initiative was considered, bythe Twitter community at least, tohave bombed.

No one knows if Twitter willbecome a permanent fixture in thesocial networking scene or turn outto be a fad, but in terms of thisbook’s relevance, it’s a moot point.

Reading Twitterville should be a priority for anyone whois serious about marketing today, because the onlineconversation is just beginning to evolve, and dismissingthe phenomenon exemplified by Twitter would be amajor mistake.

Giving the Store Away, but Making a ProfitIt might be tempting to dismiss Free: The Future of aRadical Price, except that its author is Chris Anderson,editor-in-chief of Wired and author of The Long Tail:Why the Future of Business Is Selling Less of More(Hyperion, 2006), whose title became one of the bigcatchphrases of Web 2.0. Anderson’s controversial newtheory is that sooner or later, every business will have todeal with Free (a term that he uses as a capitalized noun,somewhat preciously, throughout the book) and startgiving away goods and services that in a pre-digital era

an incredibly dynamic platform for communicatingwith and distributing messages to people with high lev-els of interest in a brand, as well as a potent platform forgathering consumer intelligence.

Not surprisingly, about two dozen books solelydevoted to the two-year-old service are already for saleon Amazon. Thus, in picking books to review, the taskbecame not whether a Twitter book should make the list,but which book to include. Some of the authors are mar-keting wonders, but many are charlatans who simplyconsider their role as Twitter pundits to be a get-rich-quick opportunity.

Shel Israel (Twitter user name: @shelisrael) doesn’tfit into that latter category. Israel is the coauthor, withtech evangelist Robert Scoble (@scobleizer), of NakedConversations: How Blogs Are Changing the WayBusinesses Talk with Consumers(Wiley, 2006), and he admits his ownearly skepticism about the service. InTwitterville: How Businesses CanThrive in the New Global Neigh-borhoods, he writes: “When a friendtalked me into trying Twitter inAugust 2007, I found myself reluc-tant.… I already had all the contactsI thought I needed and was havingplenty of interaction with peoplethrough traditional and social mediatools.” Israel’s experience, repletewith early fits and starts, makes hisinsights into Twitter all the morecredible, as does his research method— about three-quarters of the book comes from peoplewho are active users. He also knows how to tell a goodstory, in this case of how a teenager named Jack Dorseycreated an online municipal dispatch service in 2000,which provided the seed that became Twitter.

For the marketer, Twitterville really shines in its casestudies, which show how the service can provide a dis-tinct, and easily achievable, competitive advantage. Onecase study concerns the JetBlue Airways Corporation(@jetblue), which in 2008 discovered the service’s utilityas both a mechanism to determine consumer needs anda promotional tool. When airline employees who usedTwitter noticed messages complaining about the diffi-culty in booking flights between San Francisco andAustin, Tex., for the SXSW Interactive conference, a key

gathering of technology execu-tives, the airline quickly addedBEST09BOOKS

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was uncovered by the VirginiaQuarterly Review in the weeksleading up to the book’s publication. (Anderson calledhis lapse “sloppy” and “inexcusable.”)

For marketers, the most salient points of Free aren’treally pricing related, even if that’s what the book’s titleimplies. The concept of “free” is important for two rea-sons. First, it has already been embraced by youngerdemographics. We’re now dealing with an entire genera-tion that, through file sharing, free Facebook accounts,and free Google Docs software, views “free” not just asthe way things are, but as the way they should be. Givenmarketers’ endless pursuit of youth culture, they’d betterget their arms around this. Second, although Andersondoesn’t quite come out and say it this way, “free” can beseen as the new mass media. As it becomes harder and

harder to engage consumers, perhapsthe easiest way to create interest is togive away a stripped-down version ofa product. The trick then becomeshow to get those people who uploadpictures to the basic Flickr service orplay a free version of an online gameto buy the premium version of thesame product. It’s a strategy thatAnderson references throughout thebook as a “freemium.”

Anderson also tracks the “free”phenomenon into the analog world,where it has existed at least as long asthere have been “buy one, get onefree” deals. His most detailed exam-

ple is Ryanair, which sells airline tickets for unbelievablylow prices (a recent visit to its website showed flightsfrom Liverpool to Stockholm for only £4). But the Irishairline charges for nearly everything else, from flyingwith an infant to renting a car through its website. It iseven considering charging passengers to use the rest-room and pondering whether letting people gamble onboard would allow it to give away tickets on someflights. One thing Anderson doesn’t point out is that“free,” like any other marketing program, can have asubstantial cost in a company’s reputation with cus-tomers if it’s done poorly. In a series of interviews on theU.K.-based website BrandRepublic.com, for instance,Ryanair customers called its plan to charge for toilets“absolutely horrific.” Still, as the tens of millions of peo-ple who have flown Ryanair can attest, “free” has anobvious allure — and so does Anderson’s book.

BEST09BOOKSwould have been sold. Up to a point, anyway.

Not that “free” is easy. After quoting Sheryl Crowabout how “sad” she feels that some people think musicshould be free, Anderson says the most heretical thingthat it’s possible to say to a capitalist. “Spot the fallacy?”he asks. “It’s that the only way to measure value is withmoney.” Anderson argues that Crow doesn’t recognizethat when her songs are stolen, she is really participat-ing in two of the Internet’s “nonmonetary economies”— economies measured in attention and reputation,which can be used to make money. Thus, he espousesthe idea that “free” is the essential first step toward rev-enue, particularly in digital businesses, where the mar-ginal costs of reproducing and distributing products areessentially zero.

If that doesn’t sound heretical exactly, it does soundwrong-headed — maybe even crazy.And yet, there is no denying that“free” can work marvelously. Look atGoogle, which gives away e-mail,blogging software, maps, and even asoftware suite that rivals MicrosoftOffice, and thrives from this expo-sure. (As for Crow, Anderson pointsout that the exposure stemming fromfree music leads to revenue from mer-chandising, concerts, and licensing;just ask the surviving members of theGrateful Dead.)

Of course, the trouble with“free,” especially in these data-driventimes, when return on investmentshould be an exact science, is that the profit it generatesis indirect. The ties between Google’s sponsored linksprogram and revenue could not be more direct, but howdoes a traditional businessperson rationalize the com-pany’s decision to simply give away software? Anderson’scaustic answer to those still attached to 20th-centuryideas of pricing: “You have to think creatively about howto convert the reputation and attention you can getfrom Free into cash…. This is just like everything else inlife — the only mystery is why people blame Free fortheir own poverty of imagination and intolerance forpossible failure.”

Yes, there is certainly stridency here, so much sothat you have to wonder if there’s a subconscious con-nection between Anderson’s passion for his theory andhis lifting of some of the book’s passages fromWikipedia, the free online encyclopedia; the plagiarism

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When the Brand Bubble PopsIf this year’s best marketing book, The Brand Bubble:The Looming Crisis in Brand Value and How to Avoid It,weren’t so well-documented, it would be easy to accusethe book’s authors of trading in scary headlines — burstbubbles are all the rage these days. But John Gerzemaand Ed Lebar, executives at the global ad agency Young& Rubicam, have plenty of data; they oversee theagency’s BrandAsset Valuator, an analytic database thatcurrently encompasses 600,000 customers, 30,000brands, 48 countries, and 240 studies.

Here’s what they found: Wall Street has been bid-ding up the value of brands to such an extent that“brands account for approximately 30% of the marketcapitalization of the S&P 500” and “have doubled intheir contribution to shareholder value over the last 30years.” The problem, as the authors explain, is that whileWall Street has been bidding brands up, consumers havebeen bidding them down. The public’s faith in mostbrands has been eroded by decades of over-the-top ad

claims and the fact that the shelves are overcrowded withundifferentiated products. Kudos to Gerzema and Lebarfor also making the link between the accelerating declinein brand credibility and the mass adoption of theInternet, which, in effect, open sourced people’s abilityto research brands and communicate about them.

Among the loads of evidence The Brand Bubblepresents to substantiate consumers’ lack of interest isdata from Forrester Research Inc. revealing that the per-centage of people who say they “buy products because oftheir ads” fell from 29 percent to 13 percent in the four-year period between 2002 and 2006, and the percentageof those who agreed with the phrase “companies gener-ally tell the truth in ads” declined from 13 percent to 6percent at the same time — and those figures came afterdecades of slower erosion in the power of brands.

It wasn’t only the authors’ command of the factsthat struck me when reading The Brand Bubble. It was agut reaction that Gerzema and Lebar, having examinedall the many facts at their disposal, have articulated

something profound about thesorry state of brand equity.

Decades ago, as they put it, “simple awareness wasenough to create product differentiation, especiallywhen brands were small and regional.” Now, “barringmeaningful distinction, brands enter into a transaction-al relationship with consumers, letting price dictate thepurchase decision.” As brand equity erodes, the specterof commoditization rises.

Just as insightful is their discussion of why certainbrands continue to resonate with consumers. What is itabout Apple, Nike, Virgin, Whole Foods, and Google?They’ve all achieved “energized differentiation,” accord-ing to the authors. These brands don’t rest on theirlaurels, they are continually looking forward and stayingin motion:

We used to think of positioning as a hole in theground in which to plant a brand. Water itwith repetitive messages and GRPs [gross rat-ing points] until it bears the fruit of brandequity. But the marketplace is in constant

motion. Competitors, consumers and cultureare constantly reordering brand meaning….It’s no longer effective to stake a claim to a per-petual territory and defend it through repeti-tion. Instead, the best way for a brand to own aposition is to be constantly dynamic with it.

Eureka! The power of Apple’s iPod isn’t in the coreinvention, but in how the brand is constantly evolving.And the decades-old skin-care brand Dove is still rele-vant because it “elevated itself from a memorable prod-uct attribute focus (‘one-quarter cleansing cream’) toengaging in a cultural conversation with consumers(reframing social perceptions of beauty).”

Fortunately, the book spends much more time onhow to capture energized differentiation — startingwith an energy audit to assess a brand’s current position— than it does on explaining why the brand bubbleexists in the first place. Although much of it is toodetailed to describe here, the book’s advice for reenergiz-ing moribund brands is as well reasoned as its big ideas.(Also see Gerzema and Lebar’s “The Trouble withBEST09BOOKS

The public’s faith in most brands has been eroded bydecades of over-the-top ad claims and shelves that are

overcrowded with undifferentiated products.

Julia Angwin, StealingMySpace: The Battle toControl the Most PopularWebsite in America (RandomHouse, 2009)

Lawrence Lessig, Remix:Making Art and CommerceThrive in the Hybrid Economy(Penguin, 2008)

Scott Rosenberg, SayEverything: How BloggingBegan, What It’s Becoming,and Why It Matters (Crown,2009)

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Disruption 2.0by Steven Levy

N MARCH 2007, AT A LUNCH WITH MYSPACE.COM

founders Tom Anderson and Chris DeWolfe, I per-sonally delivered what I thought would be some

troubling news to them. MySpace had just lost theUnited Nations School in New York City. My son, whowas then a junior at that high school, had been part of acohort that spent a huge amount of time on the socialnetwork. But recently, the entire junior and senior classhad engaged in a mass defection to Facebook. What’smore, I had collected anecdotal information that thiswas happening all over the country.

I thought I knew what the MySpacers would reply.They first would acknowledge the trend and assure methey were on top of the situation. Then they would out-line the myriad ways they were improving their site tomake it more compelling for people like my son and hisfriends. But to my surprise, they shrugged off the migra-

Brands,” s+b, Summer 2009.)Finally, in a move that Chris Anderson would

applaud, the authors invite marketers to go to www.thebrandbubble.com as a starting point for conductingtheir own energy audits. Even though the process doesrequire registrants to give up “basic information” toreceive a password, the authors promise they won’t fol-low up. (But if you want to get in touch “for a personaldiscussion of your brand,” they won’t object.)

In some sense, what makes these the three best mar-keting books of the year is that they couldn’t have beenwritten at any other time, maybe not even as recently asa year ago. The cross-pollination of brand messaging hasbeen slowly emerging, but as it comes into full flower,

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the only books worth reading are those that help uscome to terms with the dangers and opportunities in acompletely reordered communications and competitivelandscape. Many older books that once contained greatmarketing insights have become obsolete, because in themarketing and communications industries these days,it’s less and less true that past is prologue. +

Catharine P. Taylor (cathyptaylor@gmail.com) has covered adver-tising and marketing for almost 20 years, focusing on the impactof digital media since 1994 and writing for publications includingAdweek, Advertising Age, and Wired. Founder of Adweek’s AdFreakblog, she currently posts about advertising at her own blog,Adverganza.com, posts daily to the BNET Media blog, and writes aweekly column, the Social Media Insider, for Mediapost. Her Twitteruser name is @cpealet.

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tion, sniffing that it was an isolated phenomenonamong privileged East Coast schools, and changed thesubject to movie tie-ins with the MySpace parent com-pany, Rupert Murdoch’s News Corporation. They werealso eager to discuss their plans to start a record label. Nomatter how hard I tried, they would not engage in a dis-cussion of the competition between MySpace and othersocial networking sites.

I was baffled. Two years later, Facebook — growingat a breakneck pace — passed the flatlining MySpace innumber of users. And I was still baffled by Andersonand DeWolfe’s continued insouciance. But JuliaAngwin’s relentlessly researched and compellingly ren-dered Stealing MySpace: The Battle to Control the MostPopular Website in America explains everything. Thefounders of MySpace had unwittingly put their compa-ny in jeopardy because they, like asurprising number of other technol-ogy pioneers, did not understand thenature of what they had created.

Stealing MySpace, along with theother two books that stand out in thebusiness and technology field thisyear, would seem at first glance tograpple with a particular aspect ofthe digital revolution: the empower-ing effect of technologies that allowpeople to communicate, connect,and express themselves on a globalscale via the Internet. This effectalters the relationship between com-panies and customers, which, inturn, lays waste to traditional business models, whilegiving rise to new ones.

The direction of technology itself is rather pre-dictable. We know that it insistently drives forward, pow-ered by the rocket fuel of Moore’s Law and a seeminglybottomless reservoir of innovation and brainpower, mostoften generated by fuzzy-cheeked geeks wearing sneakers.But those people actually running businesses — not justthe enterprises that introduce disruptive elements, but allof the enterprises subsequently affected, too — must nav-igate new minefields. How well they do this depends notjust on wizardry and gadgetry, but also on more elusive fac-tors like personality, culture, and a knack for knowingwhat to do when the lawyers come calling.

One might assume that a book about MySpace,which seems to deserve the “mostpopular Website” description in

the subtitle (more than 70 million users by April 2008),would be a chronicle of far-seeing visionaries who firstidentified, then successfully harnessed, the need thatyoung people had to organize their social networksonline. That’s not the case. Nor is Stealing MySpace adeep analysis of what the company means to the mil-lions of people who create messy pages, swap songs, andintemperately post party pictures on its site. Angwin isless concerned with cultural effects than she is with spin-ning an old-fashioned investigative boardroom drama.

MySpace’s DNA did not spring from the gene poolthat yielded great Internet companies like Amazon,eBay, and Google, but from a fetid digital backwatercalled eUniverse, based in an industrial park near theLos Angeles airport. The idea sprang from two “cubicle-dwelling marketing executives with no technical prowess

or revolutionary ideas,” Angwinwrites. As a teenager, Andersonhad flirted with the dark-hat hackerunderground; he was mentoredby Bill Landreth, a well-knownmalefactor who parlayed a criminalrecord into a book contract withMicrosoft Press. Later, he gotinvolved in a website focusing onAsian pornography. DeWolfe was afrat-boy finance major who took amarketing job during the first dot-com boom. His activities ateUniverse involved creating e-mailspam and spyware; his big successwas getting people to download a

patriotic cursor (to show support for Operation DesertStorm) that secretly loaded software to snoop on theironline activities. EUniverse, writes Angwin, was “thetrailer park of the Internet.”

When DeWolfe launched MySpace as an eUniverseproperty in 2003, it seemed like yet another exercise inbottom-feeding: It was a bald attempt to clone what wasthen the Net’s hottest newcomer, a social networkingsite called Friendster. Despite massive buzz and invest-ments from top venture-capital firms, Friendster flamedout while MySpace thrived.

How did two SoCal hustlers beat out a SiliconValley first mover? One factor was MySpace’s malleabil-ity — of all the social networks, MySpace has been theone to allow users the most latitude. This tapped intothe teenage urge to personalize a corner of the Internet,even though it wound up making a user’s space the dig-BEST09BOOKS

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MySpace tried to buy Facebook.Twice. Both times, the askingprice was way too high for MySpace’s taste.)

The speed of MySpace’s relative decline has appar-ently blindsided even the gimlet-eyed Angwin. In herepilogue, she writes, “MySpace remains the dominantsocial networking website.… Facebook is just half thesize.” But those were last year’s numbers. In May 2009,MySpace’s problems became sufficiently dire forMurdoch to fire DeWolfe and shuffle Anderson off toa quiet office. The new CEO is Owen Van Natta, for-merly an executive at Facebook.

There is a bigger picture behind the phenomenonthat drew millions to MySpace: the shift that suddenlyopened a new channel of communication, part personaland part broadcasting. Because it is as easy for friends toshare copyrighted digital files as it is to tweet their activ-ities, the Net is also a disruptive (to say the least) distri-bution system. Cheap, or free, software tools allow peo-ple to add their own creative spin to existing books,

movies, and songs — though the activity is currentlyillegal. But when a technological reset dramatically altersthe landscape, shouldn’t legal boundaries be altered aswell? And if so, which ones? And how?

These are complicated questions, and no one hasdeconstructed them more vividly than law professorLawrence Lessig. (See “Lawrence Lessig: The ThoughtLeader Interview,” by Lawrence M. Fisher, s+b, SecondQuarter 2002.) Over the past decade, Lessig has beenwriting what may now be seen as a multivolume work onhow the Web interacts — and often clashes — with thelaw. (His pioneering role in the field has earned him thesobriquet “the Elvis of cyberlaw.”) Taken as a whole,Lessig’s body of work is sort of a digital War and Peace, amix of gleeful optimism at the new creative opportunitiesthe technology provides and grim hand-wringing at howentrenched forces can stifle those prospects with restrictiveregulations and software. The latest tome is Remix:Making Art and Commerce Thrive in the Hybrid Economy.

Make no mistake, Lessig is an advocate. He tilts hislance at the entrenched forces that have fortified andextended the laws of copyright. The Recording Industry

BEST09BOOKSital equivalent of a disheveled dorm room. Angwinreveals that this was not a conscious management deci-sion, but sloppy programming that enabled users tohack their own pages. And whereas Friendster was builtto reflect users’ real identities and help people connectwith others in the spirit of an actual social circle,MySpace wasn’t nearly as picky. People could use fakeidentities or try out alternative personalities. Emergingrock bands or wannabe celebrities were welcome tosolicit and link to massive numbers of “friends.” A soft-porn model named Tila Tequila garnered 1.7 millionMySpace friends.

Angwin deftly describes how as MySpace grew,DeWolfe and Anderson became more committed to itsmission. But they found themselves fighting the fast-buck mentality of its parent company. MySpace hadbecome eUniverse’s most valuable property. The taletakes on Shakespearean tones when eUniverse’s CEO,a golden-tongued businessman named RichardRosenblatt, enters negotiations to sell the company to

Rupert Murdoch’s News Corporation without theknowledge of DeWolfe and Anderson. Another suitorwas Viacom, and followers of the long-running warof media behemoths will savor the competition betweenMurdoch and archrival Sumner Redstone, CEO ofViacom. (Bottom line: Murdoch’s trust in his executivesallowed News Corporation to move nimbly, whilethe paranoid Redstone fumbled the deal by second-guessing his underlings — and then blamed them forlosing the prize.)

True to Rosenblatt’s promise, MySpace got RupertMurdoch on the cover of Wired. And a US$900 millionad deal with Google seemed to make Murdoch’s $580million purchase price a bargain. But DeWolfe andAnderson — who were shut out of the Google negotia-tions — still found themselves struggling to controltheir creation, this time squabbling with Murdoch’sminions. All this was a distraction from the surprisinglystrong challenge from Facebook — the threat thatMySpace’s founders tried to shrug off during our lunch.(Angwin recounts something else DeWolfe andAnderson didn’t mention during our meal — that

The idea for MySpace, Julia Angwin writes, sprangfrom two “cubicle-dwelling marketing executives with

no technical prowess or revolutionary ideas.”

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Association of America probably considers him a biggerthreat than peer-to-peer file-sharing programs likeLimeWire. Lessig has even abandoned his armchair tofound an organization, Creative Commons, that allowsartists to register their work in a way that circumventsthe restrictive default copyright status, allowing morefreedom to those who would share the works or includeportions of them in their own creations. But he also bris-tles at attempts to make him into a radical who wants toeliminate copyright entirely.

In Remix, Lessig draws a sweeping picture of therise, fall, and budding revival of participatory culture.He starts with the 19th century; before radio andphonographs, people actually made their own music!(John Philip Sousa, Lessig tells us, argued for copyrightprotection, but also worried that the advent of “infernalmachines” would mean the end ofthe amateur music maker.) Lessigdescribes that participatory process as“read write” (RW) culture. Duringthe 20th century, however, popularmedia such as radio, vinyl recordingdisks, and movies generated an over-whelming bias toward “read only”(RO) culture, where highly commer-cialized information, art, and enter-tainment was delivered to passivelisteners and viewers who had littleability — and less inclination — tocreate their own work.

In the 21st century, the era ofdigital files and the Internet, it’smuch easier for amateurs to tweak existing works, mixthem into new creations, or hatch new work. And forthe first time, instant global distribution is accessible toall. (With a $200 Flip video camera and YouTube, mil-lions have the power that only a few decades ago wasreserved for a very few broadcasters.) As you wouldexpect, we’re seeing a triumphant return to RW culture,and Lessig trots out a number of examples, including aPittsburgh medical technician who mines hundreds ofsongs to create avant-garde remixes (called mash-ups)and communities making Star Wars sequels with Legoblocks.

Unfortunately, says Lessig, our current laws regardthe creation of such works as a criminal act. The situa-tion is not only repressive, it’s ludicrous, according to

Lessig, who argues, “We can’tmake our kids passive in the way

we were toward the culture around us. We can onlymake them ‘pirates.’” Even when the law doesn’t prohib-it remixing (such as under fair use provisions), somecopyright holders have installed digital locks on theirworks to deny even legal reuse of the material.

Having established these points in the first half ofRemix, Lessig tries something more ambitious in the sec-ond part of the book: laying the groundwork for anentirely new copyright system through which artists andbusinesses might make money in an era of thriving, andlegal, RW culture. Although not necessarily convincing,his arguments are fascinating.

Lessig delineates two current economies on theInternet: a traditional commercial one in which thedominant form of exchange is money, and a “sharingeconomy,” in which labor and goods are traded for love,

altruism, patriotism, the fun of par-ticipation. . .anything, it seems, butmoney. Amazon belongs to the firsteconomy, and Wikipedia is a primeexample of the second. Lessig envi-sions the emergence of “an increas-ingly important third economy: onethat builds upon both the sharingand commercial economies, onethat adds value to each. This thirdtype — the hybrid — will dominatethe architecture for commerce onthe Web…. The hybrid is either acommercial entity that aims toleverage value from a sharing econo-my, or it is a sharing economy that

builds a commercial entity to better support its sharingaims. Either way, the hybrid links two simpler, or purer,economies, and produces something from the link.”

In other words, theThird Way is definitely for-prof-it but not rapaciously so, and such businesses are syncedto the sharing spirit of the Web. It sounds terrific, butthe examples Lessig gives aren’t exactly overwhelming.There’s Red Hat, the company promoting the opensource Linux (struggling in recent years). He also citesFlickr, a photo-sharing site (now owned by Yahoo) thattakes in revenues from premium memberships. He talksabout Craigslist, a service that was firmly planted in thesharing economy but is still struggling to figure out howfar it wants to venture into the commercial realm.(Oddly, Lessig doesn’t dwell on the examples of socialnetworking sites like Facebook or MySpace, whichappear to fit his hybrid prototype, with their for-profitBEST09BOOKS

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exploitation of user content.)Lessig returns to firmer ground in his conclusions,

where once again he urges a rethinking of copyrightlaws. His closing argument, while spirited, has an elegiactone. After four books attacking copyright laws, Lessig ison to his next crusade — fighting the influence of cam-paign money on legislators. Throughout the copyrightcontroversy, Lessig’s arguments have ultimately rested oncommon sense and logic. As far as legislators are con-cerned, both of these are almost always trumped by spe-cial interest money. Case in point: a copyright regimenthat has criminalized an entire generation.

One of the most prominent examples of 21st-century RW culture owes less to remixing than to sim-ple expression. That would be blogging. This doesn’tsurprise Scott Rosenberg, a former newspaper writerturned online journalist and blogger. “Commu-nication,” he writes in Say Everything: How BloggingBegan, What It’s Becoming, and Why It Matters, “was notsome bell or whistle. It was the whole point of theWeb, thedefining trait of the new medium — like motion inmovies, or sound in radio, or narrow columns of text innewspapers.” (Emphasis author’s.) But although blog-ging in one sense seems a fairly predictable outgrowth ofa medium that allows instant publication to a globalaudience, the path toward ubiquity is more colorfulthan one might expect. And despite all the attentionpaid to blogging, in Rosenberg’s hands, the implicationsturn out to be more profound than most people, evenbloggers, have recognized to date.

Say Everything is not only a delightful history of theform but a surprisingly broad account that touches on anumber of major issues of the past decade, quietly mak-ing a case that blogs now play an indispensable role. Thisfor a format that was once (and in many quarters, stillis) dismissed as the time-wasting, unreliable, and oftenantisocial rantings of “guys in pajamas.” The bookbegins with descriptions of how blogging provided someof the best, and certainly the timeliest, accounts of theSeptember 11, 2001, attacks. We revisit the role bloggingplayed in unseating a senator, dislodging an anchorman,and giving a face to the Iraqi population in the daysbefore the U.S. invasion began. In every case, the digitalsoapbox provided by a blog empowered an unheraldedcitizen (or group of citizens) to affect the world. Bloggersmay not have elected the current U.S. president, butevery candidate in the 2008 election certainly regardedbloggers as a constituency to be taken seriously.

Rosenberg’s approach is to tell the stories of the sto-

rytellers, constructing his briefhistory of blogging by way of thebloggers themselves. He does this so well that it appearsalmost serendipitous that each aspect of his subject isalmost perfectly embodied by the story of one or twoindividuals. To illustrate how blogging provides a mega-phone to one’s personal life, we meet Justin Hall, a nudi-ty-loving college student whose compulsive candormade him a harbinger of the reckless sharing that wouldfollow on blogs and social networks. And to show howa blog can make an impact on a professional commu-nity, there is Dave Winer. A well-known software devel-oper who helped create some of the technology behindblogging, Winer became captivated by the ultimatesoapbox, leading him to a series of endless feuds and abasic truth: “As long as the voice of a person comesthrough, it’s a weblog.”

Blogging also turns out to be an excellent lens forviewing some of the commercial dilemmas of theInternet age. (Maybe blog networks will provide someexamples of that elusive hybrid economy that Lessigenvisions.) Rosenberg is particularly vivid in talkingabout the commercialization of blogs by entrepreneurslike Nick Denton, who pays journalists by the post towrite the snarky contents of Gawker, Wonkette, andValleywag, and Jason Calacanis, who lured awayDenton’s talent and made a bundle selling his blog net-work to AOL. Clearly, the essence of blogging — theauthenticity that arises from directly addressing theaudience in one’s own, unedited voice — can be a pow-erful marketing force (even if you’re creating a hothouseform of authenticity by dressing up traditional modelsin edgier blog attire).

Rosenberg is a mensch, resisting cheap shots evenwhen his subjects behave badly. But he is quick to punc-ture pretense, whether it comes from the self-importance of bloggers suddenly thrust into the publiceye, or the snobbery of mainstream media dismissingcitizen postings because their authors lack the trainingor credentials to participate in a national discussion. Asone would expect, he is at his best in the inevitable chap-ter “Journalists vs. Bloggers,” in which he sympatheti-cally regards the defensiveness of mainstream mediawhile building a strong case that blogging is an essentialpart of the journalistic ecosystem. As proof, he notesthat many of the harshest criticisms of blogs from mem-bers of the mainstream media come in the form of blogpostings hosted by the authors’ publications.

Rosenberg does engage in some last-minute scram-

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bling to accommodate the more recent rumblings thatthe era of the blog is passing, rendered moot by theshorter, more insistent postings on Twitter. But he’s gotthe numbers to prove that although some of the buzz isgone from blogging, more people than ever are actuallydoing it. And, he writes, this is a very good thing:

Hostile observers have always painted bloggersas barbarians thronging before the gates of abesieged culture…. But it has always been afantasy. Bloggers are writers who sit down totype character after character, word upon word,day by day, steadily constructing, out of theirfragments, little edifices of memory and publicrecord. In this activity they resemble not thehordes outside the gates of a city, but rather thestudious scribes within.

Ironically, Rosenberg’s extended encomium of blog-ging also turns out to be an implicit defense of another

UnconventionalLivesby James O’Toole

HIS YEAR’S BEST BUSINESS BIOGRAPHIES —volumes on the lives of John Stuart Mill,Cornelius Vanderbilt, and Warren Buffett —

weigh in at a hefty eight and a half pounds, in toto.Fortunately, the varied and numerous rewards that read-ers will find in these three engaging books more thancompensate for the risk of hernia and the obvious tollon the eyes of poring over 2,295 densely printed pages.Each of these biographies is meticulously researched,

allegedly endangered form: the book. Only by suchan extended and well-organized presentation canRosenberg both give us a comprehensive account ofblogging and successfully argue for its importance. Thepages of Say Everything provide not only an expertlycurated burst of information, but also entertainment forseveral evenings. The book provides thought and provo-cation. It illuminates the deep economic challenges ofthe Internet. And, as is the case with blog postings,Rosenberg speaks with the clarity and wit of an authen-tic voice — even after the highly filtered, far-from-real-time processing of a major publisher. That’s why I thinkSay Everything is the best technology-related businessbook of the year. +

Steven Levy (stevenl@gmail.com) is senior writer at Wiredmagazine and previously was senior editor and chief technologycorrespondent at Newsweek. His most recent book is The PerfectThing: How the iPod Shuffles Commerce, Culture, and Coolness(Simon & Schuster, 2006).

Richard Reeves, John StuartMill: Victorian Firebrand(Overlook, 2008)

T.J. Stiles, The First Tycoon:The Epic Life of CorneliusVanderbilt (Knopf, 2009)

Alice Schroeder, TheSnowball: Warren Buffett andthe Business of Life (Bantam,2008)

T

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masterfully written, and replete with insights relevantto the lives of contemporary businesspeople. Becauseeach book delights in a different way, the judgment ofwhich of the three is best depends more on the readerthan this reviewer.

Champion of LibertyMy personal preference among the three is British jour-nalist Richard Reeves’s critical biography, John StuartMill: Victorian Firebrand. Mill (1806–1873) was a truepolymath — political economist, philosopher, polemi-cist, parliamentarian, and a prime mover in the 19th-century reform movement that transformed Britainfrom an aristocracy into a modern liberal democracy.

Homeschooled by his father, noted scholar JamesMill (with an occasional assist from Mill family benefac-tor Jeremy Bentham), the youngMill mastered Latin at age 6 andGreek two years later, and was writ-ing a treatise on political economyby his 12th year. Philosopher IsaiahBerlin deemed Mill’s education “anappalling success.” Indeed, years ofnothing but study, coupled with im-mersion in Bentham’s coldly rationalutilitarian philosophy (in which hap-piness is reckoned by a “felicitycalculus”), turned Mill into theheartless thinking machine dubbed“Arithmetic Mill” by ThomasCarlyle. Eventually, a childhood andadolescence of all work and no playexacted a heavy toll on Mill: In his 20s, he suffered whathe termed a severe “crisis,” or psychological breakdown.

What finally snapped him out of it was love, sweetlove. Mill fell madly, adoringly, and enduringly in lovewith Harriet Taylor, who would become his lifelong soulmate and collaborator. Unfortunately, there was also aMr. Taylor, whose existence would ordinarily have con-stituted a formidable obstacle in Victorian England,where divorces were rare and extramarital affairs wereviewed as several degrees worse than scandalous. Un-daunted, Mill and the Taylors entered into a kind ofménage à trois in which she had, in effect, two husbands.Taylor would retreat to his gentleman’s club when Millvisited. Things went on that way for two decades untilJohn Taylor died, thus clearing the way for a happily-ever-after marriage between the persistent lovebirds.

Mill controversially claimed that Harriet Taylor was

not only his inspiration for, butbasically the coauthor of, someof his most important works. Reeves documents howshe greatly influenced the conclusions in Mill’s multivol-ume Political Economy, often cited as the 19th century’sleading work on the subject, and in the classic OnLiberty, the book on which his lasting reputation isbased. Without a doubt, Harriet disabused Mill of hisbeliefs in doctrinaire utilitarianism: He would hence-forth add a touch of poetry to Bentham’s mathematics.

Mill was, and still is, known as the “champion ofliberty.” His “harm principle” is commonly used todefine the proper limit of governmental authority overthe individual: “The only purpose for which power canbe rightfully exercised over any member of a civilisedcommunity, against his will, is to prevent harm to oth-

ers. His own good, either physical ormoral, is not a sufficient warrant.”He applied this principle to count-less controversial domestic issues,including state control of prostitu-tion, gambling, and the sale of alco-hol. His conclusion will resonatewith contemporary libertarians: Anyactivity should be legal to the extent itdoesn’t harm others. (He also appliedhis principles to foreign policy, rea-soning that a country has a duty totry to prevent a powerful nationfrom attacking a weak neighbor but,conversely, no nation has the right tointervene in the domestic affairs of

another, even if the intent is to rid that country of atyrannical leader.)

Unlike modern libertarians, Mill believed the primethreat to freedom in a democratic country is not thenanny state but what he called the “despotism of soci-ety.” He argued that in countries like Britain and theU.S. the tyranny of the majority and the intolerance ofpowerful religious and ideological minorities constitutethe real threats to individual liberty. For example, byquestioning the patriotism of dissenters, vocal minori-ties can effectively kill off healthy discussion of policyalternatives. Because Mill believed that no one is evereither all right or all wrong, he saw the function of lib-erty as guaranteeing that all perspectives could be airedso that the inevitable shortcomings of any policy weremore likely to be identified.

What most distinguishes Mill from other great

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minds of his time is that, in hindsight, he turns out tohave been on the right side of history with respect toalmost every significant issue he addressed. He was aforceful advocate of free markets and private businessownership (at the same time that Karl Marx was reach-ing quite the opposite conclusions). Mill’s favorite causewas universal, compulsory education, and he was thefirst to advocate a school financing system that wewould call vouchers. He was a leader of the anti-slaverymovement and one of the most vocal British advocatesof the Union cause during the American Civil War. Hefought for free speech and the right of assembly(Speakers’ Corner in London’s Hyde Park is his lastinglegacy). He was an early environmentalist, calling for atax on coal to reduce its consumption and for accessiblegreen spaces. He advocated birth control, fought forIrish home rule, sought a ban on smoking in publicplaces, and legislated to prevent fraud in voting. Mostsignificantly, he worked ceaselessly to expand the rightto vote to the British middle and working classes — andnot just to those of the male persuasion.

Not surprisingly, almost all of Mill’s views wereunpopular among the landed aristocrats who dominat-ed British politics at the time, but none of his causesirked them more than his ceaseless advocacy of the rightsof women. If British feminism can be said to have hadmany mothers (foremost of whom was Harriet Taylor),it had only one father: J.S. Mill. His uncompromisingstand that women were entitled to full equality in polit-ical affairs, in workplaces, and in the home was viewedas dangerously extremist in an era when women weredenied the right to vote and hold office, could work onlyas domestic servants, and were viewed as mere legalwards of their husbands (in most cases, wives couldn’town property in their own names). Mill’s views aboutwomen were the logical extension of his fundamentalphilosophical belief that the good life consists of contin-ual learning and growth. He argued that people developcharacter through their habits — for example, throughparticipating in political, community, and workplaceactivities. Because women were manifestly denied theopportunity for such development, he felt they weredenied their basic humanity.

Moreover, he believed that everyone should be ableto develop that character in whatever manner each sawfit. He didn’t believe the state could, or should, makepeople happy; instead, he argued that the proper role of

government was to free peoplefrom the involuntary constraints

that prevented those who wished to do so from develop-ing their character to the fullest. At the same time, Millbalanced his libertarianism with an equal measure ofcommunitarian responsibility. He believed that we arenot isolated islands unto ourselves but, instead, mem-bers of moral communities. For example, to build char-acter among the working classes, he believed that estab-lished companies ultimately should be owned by theiremployees (he advocated that a financing system similarto today’s employee stock ownership plans be put inplace after the deaths of founding entrepreneurs). Hereasoned that workers who were also owners wouldbehave more responsibly and productively than if theywere mere hired hands, to the benefit of society and theeconomy. They would have the opportunity to grow asresponsible individuals and, as a fillip, the inequities ofcapitalism (which led Marx to call for revolution) wouldbe addressed through peaceful reform as every man andwoman became a capitalist.

Mill loved entrepreneurs, those independent andunconventional sorts who defied the tyranny of customthrough experimentation and innovation. Because hesaw them as the drivers of social and economic progress,he did not want to hamper their motivation by taxingtheir income. By the same token, he disapproved ofthose who lived on “unearned” income, namely the idleinheritors of great wealth. In his view, trust fund babieswere unproductive members of society who had noincentive to improve their character. He thus advocatedhigh inheritance taxes as the fairest, and least economi-cally inefficient, means of generating state revenue.

Reeves concludes that Mill was the “voice and con-science” of the greatest era of progress and wealth cre-ation in history. Yet it is nearly impossible to pigeonholehim in ideological terms. Was he liberal or conservative,Democratic Socialist or free marketer? Mill’s admirablemany-sidedness, his belief that no one is ever whollyright or wrong, and his tolerance of those who advocat-ed the most unpopular of causes made him simply andadmirably “the champion of liberty.”

The Original Robber BaronAs portrayed in T.J. Stiles’s The First Tycoon: The EpicLife of Cornelius Vanderbilt (1794–1877), Vanderbiltmight, at first blush, appear to be the type of custom-breaking entrepreneur Mill admired. A self-made manwithout formal education, Vanderbilt was universallyafforded the high naval title “commodore” because ofthe great steamship line he created from scratch (startingBEST09BOOKS

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with the single sailboat that he skippered himself to ferrypassengers between Staten Island and Manhattan). Inthe process, he transformed shipping through consolida-tion and price cutting, creating a modern industry inwhich his giant ships dominated the lucrative NorthAtlantic route and transported men from New York towork in the goldfields of California in the 1850s.

As the Civil War drew to a close and Vanderbiltentered the eighth decade of his life, he daringly sold allhis ships to concentrate his efforts on the emerging rail-road industry. In a spectacular second act, Vanderbilttransformed the railway business as thoroughly as hehad transformed shipping. In a short span of time, heconsolidated numerous small trunk lines competing forbusiness between Chicago and New York into onemammoth, integrated network that would become theNew York Central Railroad.

When he died, Stiles says,Vanderbilt was probably the richestman in the U.S., with a fortune thatrepresented US$1 out of every $20in circulation in the country, includ-ing cash and demand deposits (toput that in perspective, Bill Gates’swealth in 2008 represented $1 out ofevery $138). But Stiles has muchmore in mind in this weighty tomethan simply documenting the rise ofone fabulously wealthy man. Thereal subject of his book is the trans-formation of the U.S. economy fromthe solo-owner, small-scale capital-ism of the 18th century to the modern age of giant, pub-licly held corporations. To make that potentially aridtopic appealing, Stiles casts Vanderbilt as the personifi-cation of that historical shift, beginning his career as thesole owner of a business in a simple industry character-ized by many small competitors and ending it as themajor investor in a huge company that, for all intentsand purposes, is a monopoly.

The book succeeds brilliantly as a history of the riseof American corporate capitalism. Stiles has great com-mand of the ins and outs of national economics and cor-porate finance. He explains in clear language andauthoritative detail just how the U.S. came to havea national currency of “greenbacks,” and what causedthe panic of 1873 and the decade-long depression thatensued (conditions in that sorry era sound enoughlike our current economic crisis to give a reader the

willies). Similarly, he draws oninternal corporate records todocument exactly when, why, and how this or that cor-porate takeover (or bankruptcy) occurred. As history,this is great stuff.

Where the book doesn’t quite work is in regard toVanderbilt the man. In my reading, he is an imperfectinstrument for the complex tune Stiles wishes him toplay. The Commodore, for all his wealth and power, wasa rather one-dimensional character. Doubtless, he was afinancial genius, and one of the first to understand howthe game of publicly trading corporate shares could bemade to work in favor of investors (he was the first to“corner the market” for a major stock). That said, hadthe book focused solely on the life of Vanderbilt, itwould have been repetitious at 200 pages. Thus, what

we get is a paragraph or two aboutthe man, followed by long, fascinat-ing asides on the culture, politics, oreconomy of his time. Occasionallywe lose sight of Vanderbilt altogeth-er, which isn’t necessarily a bad thingbecause the historical context Stilesdescribes is usually more interestingthan the life of the man.

Vanderbilt was a ruthless com-petitor: opportunistic, aggressive,greedy, egotistic, monomaniacal, andvindictive. He believed in winning atall costs, and some of the methods heemployed — for example, stock-price manipulation — were unethi-

cal even by the lax standards of his era and would beoutright illegal today. He was a hypocrite to boot, a pro-fessed anti-monopolist who sought to create legalmonopolies. Notwithstanding those manifest faults,Stiles bends over backward to offer a balanced portrait,trying to get us to at least respect his protagonist, even ifwe can’t like him. The main line of defense is that, for allhis faults, Vanderbilt lived by “a strict code of honor inbusiness.” In fact, he does seem to have been as “good ashis word” — invariably a point of pride with even themost patently unethical entrepreneurs. Perhaps there ishonor among thieves, but that doesn’t make thieveshonorable.

Although Vanderbilt was the first to earn the sobri-quet “robber baron,” he was not the least admirable ofthe group. That distinction goes to his archenemies,James Fisk and Jay Gould, owners of the Erie Railway,

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who had the pleasure of being among the few ofVanderbilt’s competitors ever to best him in a deal. Inone tricky maneuver described by Stiles,

[Fisk and Gould] secretly purchased some sixthousand head of livestock in the West.Then. . . they announced they were cutting theErie’s livestock rates to $1 per car. The moveforced the [New York] Central to follow suit, asthey knew it would. Shortly afterward, Gouldand Fisk boasted to the press that they hadshipped their livestock over the Central at theseabsurd rates, reaping a huge profit at theCommodore’s expense. The Central instantlyraised rates to $40 per car.

Vanderbilt predictably went bal-listic, but he didn’t pull back fromcompetition. Many of his invest-ments turned out to be significantlosses, and he took them like “theman” he prided himself in being. Buthe won many more than he lost and,in the end, “proved himself an expertat using the stock market to concen-trate capital or avenge himself on hisenemies.” Alas, there was little elseabout his life that merits reporting.Aside from betting on cards andhorses (he helped establish harnessracing as a sport), he had no dis-cernible interests. He was an absent,perhaps even abusive, husband and father (he had hisfirst wife briefly committed to an asylum so he would befree to dally with their servant girl); uninvolved in poli-tics (except to lobby both parties in the service of hisinvestments); unmoved by culture (his “only notablework of art was a bust of himself”); and lacking inalmost any philanthropic inclinations (the exceptionbeing his funding of Vanderbilt University, which wasfar less expensive than one might expect).

In Vanderbilt’s own eyes, he was the avatar of theJacksonian promise: the hardworking, nearly illiterateson of a poor boatman who, by dint of his own efforts,created wealth far in excess of anything produced bythe privileged sons of America’s decadent landed gentry.Paradoxically, he then spent the last years of his life try-

ing to create his own dynasty,leaving the bulk of his invest-

ments in the hands of his eldest son in hopes that theVanderbilts would carry on for generations like the aris-tocratic Astors and Schuylers. He should have read Mill.Within two generations, his ne’er-do-well descendantshad pretty well dissipated the fortune and lost theirsocial standing. His remaining monument is Man-hattan’s Grand Central Station, the terminus of his NewYork Central Railroad. If you crane your neck, you canmake out his statue way up there over the entrance, star-ing out over Park Avenue South.

The Oracle of OmahaThere is no greater contemporary “conjurer in the finan-cial ether” than Warren Buffett, the subject of AliceSchroeder’s surprisingly objective biography, TheSnowball: Warren Buffett and the Business of Life. The

book is not what I (or, apparently,Buffett) expected from an “ap-proved” bio written with the fullcooperation of the subject. Far frombeing an adoring hagiography, thisis as thorough and honest anaccount of Buffett’s life and career asone could ask for. Significantly,showing Buffett’s warts ultimatelyserves more to humanize the manthan diminish the mogul.

It is hard to imagine there isanything new to write about theeccentric and humble multibillion-aire who, as we know, drives his ownSUV, carries his own luggage, lives

in the same modest house in Omaha where he hasresided for decades, works out of an unadorned officewith minuscule staffing, dresses like an engineeringundergrad, and subsists on a diet of burgers and cherryCoke. And we all know about his oracular annual letterto Berkshire Hathaway shareholders, in which he offerssage investment advice and commonsense insight intothe arcana of corporate finance, and the related stadium-filling shareholder meetings at which he and longtimesidekick and business partner Charlie Munger proclaimon all manner of subjects economical and commercial(some 30,000 Berkshire Hathaway stock owners showedup in 2007).

But it turns out we really didn’t know him all thatwell. Schroeder offers us a nuanced portrait of a surpris-ingly complex and insecure man whose life is full ofparadoxes and contradictions, one who somehow com-BEST09BOOKS

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bines a career quite similar to Vanderbilt’s with a philos-ophy much like Mill’s. The son of an abusive motherand an ideologically wacko father who represented Iowain the U.S. Congress, Buffett grew up socially awkward,needy, and nerdy. Immature and maladjusted through-out his prolonged adolescence, he was a chronic pilfererof golf balls from the local Sears store.

His saving grace was that he was a born entrepre-neur. In high school he started a pinball machine busi-ness and had accumulated on the order of 50 grand(in today’s dollars) by age 16. He drifted until graduateschool, when he came under the influence of twoColumbia University B-school profs, David Dodd andBenjamin Graham, who taught him the virtue of low-risk investing, primarily by scrounging for “cigar butts”(obscure stocks trading below the liquidated value of acompany’s assets). He quickly learned how to do theresearch and analysis required to find these gems in therough, developing the mind of an actuary in his abilityto calculate risks and future returns. It was all about the

math of compounding (that’s the “snowball” effect of thetitle). Buffett was quick to appreciate that it is far betterin the long term to reinvest than to spend. Where oth-ers saw a dollar today, he saw a hundred in 20 years.Hence his legendary tightfistedness (when a millionairefriend once asked to borrow a dime for a phone call andBuffett found only a quarter in his pocket, he went look-ing for change).

Buffett developed his own simple formula for whatto do with a cigar butt once he owned it: Take out all thecash and raise prices. That worked well for a while, untilit became harder to find undervalued companies. It wasthen that Munger — a charmingly crotchety lawyer —stepped in to wean Buffett off bargain hunting andteach him to appreciate the value of “great businesses.”Once Buffett added the art of qualitative assessment tohis prodigious quantitative skills, the rest was history.Buffett and Munger’s holding company, BerkshireHathaway, would become a major shareholder or out-right owner of companies with such perennially strongbrands as Coca-Cola, Fruit of the Loom, Geico, Gillette,and See’s. By 1974, Buffett was on his way to fortune

and fame, thanks to being fea-tured in “Adam Smith’s” best-seller, Supermoney, as not only a genius investor, but anhonest one too — almost a saint among the demons ofWall Street.

Buffett’s reputation would grow with his wealth. In1987, the value of a Berkshire share had increased 23percent per annum for 23 years (an initial investment of$1,000 was worth $1.1 million — there’s that snow-ball!). In the process, his name became synonymouswith careful, prudent, and patient investing and withtraits such as openness, integrity, and extreme honesty. Itwas all about the basics, starting with living by DaleCarnegie’s sensible rules for success (“Ask questionsinstead of giving direct orders”) and Buffett’s own home-spun common sense (“Be long-term greedy, not short-term greedy”). Although his personal expertise was lim-ited to finance, Buffett appreciated the value of strongenterprise management and knew great leaders when hesaw them (then he invested in their companies and left

them in place to run their businesses without interfer-ence). He was ahead of his time in calling for independ-ent boards, the expensing of stock options, and an endto excessive executive compensation and, especially,unconscionable perks. Most famously, he was a constantcritic of Wall Street and often cautioned managers not totake expedient actions to satisfy the short-term thinkingof stock analysts.

That’s the story we all know — the official line that“media-shy” Buffett turns out to have promulgated andcarefully managed for decades. But Schroeder shows usanother, more complicated and factual, version of thelegend that is Buffett, one in sharp contrast to his “aw-shucks” image.

How to explain the dichotomy between Buffett fig-uratively sitting on the front porch with a glass oflemonade, telling folksy stories and teaching throughhomilies, and his long history of sophisticated businessfeats? What was he doing as interim chairman of aninvestment bank while talking and writing about WallStreet as a gang of con men, sharpies, and cheats?

As a major investor in and a board member at

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Where others saw a dollar today,Warren Buffett saw a hundred in 20 years.

Hence his legendary tightfistedness.

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Salomon Brothers, Buffett was the logical choice to stepin to chair that firm in the early 1990s when the head ofits government bond business was caught making illegaltrades that netted about $4 million in profits. That actwould cost Salomon some $800 million in “lost busi-ness, fines, penalties and legal fees.” The episode nearlyled to Salomon’s demise as its reputation was blown tosmithereens. In great detail, Schroeder documents howBuffett’s actions — most notably his willingness to cap-italize on his own reputation for integrity — saved thefirm. In the process, she also shows that he was no naiveoutsider in the investment industry but, instead, one ofits shrewdest players. And the contradictions continue:More recently, he was a vocal critic of the derivativesgame, in 2003 calling them “financial weapons of massdestruction.” Later, it turned out that companies in hisown portfolio were major players in derivatives markets.(And, in 2008, he spectacularly became one of thelargest investors in Goldman Sachs, arguably the masterof the derivatives game. In hindsight this investmentappears to be so potentially lucrative that it may offsethis recent heavy losses in the Great Recession.)

It is when explaining derivatives and other technicalissues, such as the shortcomings of the “efficient-markethypothesis,” that Schroeder shines as a writer. A formerstaffer at the Financial Accounting Standards Board, shedisplays profound financial expertise and the ability toemploy that knowledge to clarify and simplify complexconcepts for the benefit of readers. She is also good atexplicating the many contradictions in Buffett’s person-al life. For example, while he keeps his modest house inOmaha and hangs out at the local diner, he has hob-nobbed throughout most of his adult life with the rich-est and most powerful people in America. He has beena jet-setter par excellence (with his own jet), most oftenin the company of his closest friend (and, possibly,more), Katharine Graham, the now-deceased publisherof the Washington Post and one of the nation’s leadingsocialites and power brokers. And it wasn’t his wife whowas in that ol’ house. For decades, he had a most uncon-ventional marital relationship with, in effect, two wives:Susie, the one he was legally married to, living in SanFrancisco and seeing him regularly, and the other,Astrid, Susie’s good friend, living at the Omaha house.After Susie’s death, he married Astrid. Shades of Harrietand John (and John)!

Buffett’s life and career actually resembleVanderbilt’s: Each man was aneccentric stock speculator, com-

petitive in the extreme, sure of himself in business mat-ters to the point of arrogance, and fixated on money-making. Both were mavericks in their business dealings,often willing to swim against the tide of conventionalinvestment wisdom. (Buffett has said, “You can’t do wellin investing unless you think independently.”) Othersimilarities are striking: Both men were incapable ofexpressing emotion to their wives and children, andboth habitually retreated behind a hand of cards to com-pensate for being socially maladroit.

But there is also a crucial difference: Unlike theCommodore, the Oracle has a sense of humor abouthimself and understands his own limitations. Buffetttruly seems to appreciate that good luck was a major fac-tor in his success. Although he is proud of the fact thathe has worked hard for what he has rightly earned —Munger calls him a “learning machine” — Buffett isquick to point out that he also was a winner in “the ovar-ian lottery.” He notes that had he been born the son ofan Alabama sharecropper or in an underdevelopednation, he doubtless would not have become one of therichest people on the planet. Hence, he has adopted aMillian philosophy of political economy, believing thatthe “ideal was a world in which winners were free tostrive, but narrowed the gap by helping the losers.” Hisbelief in meritocracy, coupled with his sense that win-ner-take-all capitalism is unjust, has led him to take aprincipled, vocal stand against the repeal of the estate tax(“I am not an enthusiast for dynastic wealth”). In thisregard, at least, his words have matched his deeds: Hehas insisted that his own children largely make their ownway in the world. And the philanthropic act that hascapped his unconventional career is indicative of virtu-ous character: Instead of funding monuments to him-self, he has chosen to give the bulk of his vast fortune tothe Bill & Melinda Gates Foundation, with the provisothat the entire sum be spent quickly on the major socialproblems that his friends and protégés the Gateses havetargeted for aid. Buffett came to the honest and humbleconclusion that the couple were far more skilled philan-thropists than he would ever be. Doubtless, Mill wouldhave approved. +

Reprint No. 09407

BEST09BOOKS

James O’Toole (jim@jamesotoole.com) is the Daniels DistinguishedProfessor of Business Ethics at the University of Denver’s DanielsCollege of Business and coauthor, with Warren Bennis and DanielGoleman, of Transparency: How Leaders Create a Culture ofCandor (Jossey-Bass, 2008).

THE MELTDOWNDavid Wessel, In FedWe Trust: Ben Bernanke’sWar on the Great Panic(Crown Business, 2009)

LEADERSHI PKenneth Hopper andWilliam Hopper,The Puritan Gift:Reclaiming the AmericanDream amidst GlobalFinancial Chaos(revised ed., I.B.Tauris,2009)

STRATEGYMark Blaxill and RalphEckardt, The InvisibleEdge: Taking YourStrategy to the NextLevel Using IntellectualProperty(Portfolio, 2009)

GLOBALI ZATI ONBen Simpfendorfer,The New Silk Road:How a Rising Arab WorldIs Turning Away fromthe West andRediscovering China(Palgrave Macmillan, 2009)

MANAGEMENTGeoff Colvin, The Upsideof the Downturn: TenManagement Strategiesto Prevail in theRecession and Thrivein the Aftermath(Portfolio, 2009)

MARKETI NGJohn Gerzema and EdLebar, The Brand Bubble:The Looming Crisisin Brand Value and Howto Avoid It(Jossey-Bass, 2008)

TECHNOLOGYScott Rosenberg,Say Everything: HowBlogging Began, WhatIt’s Becoming, andWhy It Matters(Crown, 2009)

BI OGRAPHYRichard Reeves, JohnStuart Mill: VictorianFirebrand(Overlook, 2008)

bestbooks2009

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