Open Secrets - A Company Computer and Questions About Email Privacy

A very interesting fact pattern - it would make a great exam question.

Today's New York Times has an interesting article about the strength (or not) of a company's computer usage policies.

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When he was fired, Scott Sidell was angry enough. Then he found out that his former employer was reading his personal Yahoo e-mail messages, after he had left the company.

In a lawsuit that he filed in May against Structured Settlement Investments, the finance company he used to run, Mr. Sidell claims that executives at the company went so far as to read e-mail messages that he had sent to his lawyers discussing his strategy for winning an arbitration claim over his lost job.

“It’s kind of like the other side gets your playbook or they’re spying on your locker room,” said Russell Green, a lawyer representing Mr. Sidell. He said that his client was now using a new e-mail address.

The lawsuit filed by Mr. Sidell in federal court in Connecticut involves an unsettled area of the law, where changes in technology create tension between expectations of personal privacy and companies’ rights to monitor the equipment they provide to employees. The case’s unusual combination of facts, which are in dispute, paves the way for a decision that could help set a precedent for dealing with personal e-mail at work.

The law governing e-mail communications is still evolving.

Generally, courts have found that employers can monitor employees’ e-mail communications on company computers. But courts have also recognized greater privacy protection for e-mail messages sent using personal, Web-based e-mail accounts. For example, this month a panel of the United States Court of Appeals for the Ninth Circuit in California ruled that personal text messages sent on two-way pagers provided to police officers in Ontario, Calif., were protected from the department.

Mr. Sidell’s case gives the courts an opportunity to address other questions, said Marc Rotenberg, executive director of the Electronic Privacy Information Center in Washington. “This case raises a lot of new issues that reflect the changing place of e-mail in the work place,” Mr. Rotenberg said. “We have Web-based e-mail, which is not directly under the control of the employer.”

In addition to concerns about privacy in the workplace, Mr. Sidell’s claim involves communications between a lawyer and a client. “It’s a nice set of factors that are all compacted into this,” said Matt Zimmerman, senior staff attorney in the San Francisco office of the Electronic Frontier Foundation, a nonprofit civil liberties organization that seeks to protect privacy rights online.

In addition to concerns about privacy in the workplace, Mr. Sidell’s claim involves communications between a lawyer and a client.

An employer’s ability to read messages worries office workers everywhere, not least because e-mail messages have figured in criminal cases like the one brought last week against two former Bear Stearns hedge fund managers. People disclose all manner of personal information in e-mail messages, in the expectation — perhaps unfounded — that what they type will remain confidential.

Companies often adopt policies explicitly stating that everything an employee does on a computer provided by the employer is subject to monitoring. But even so, and especially in the absence of such a policy, employees may have a reasonable expectation of privacy.

Moreover, he said the expectation of privacy would be even higher if employees used remotely hosted personal e-mail accounts like those provided by Yahoo. John Crossman, a lawyer at Zukerman Gore & Brandeis representing the company, said Structured Settlements had a policy that gave it the right to access its own computers.

But Mr. Sidell was no longer an employee when his mail was supposedly read. And he said in his complaint that it went well beyond the company’s rights to read e-mail messages from the personal account of a terminated employee to his lawyer.

“The plaintiff is alleging, and I think he may have a very strong argument, that his former employer exceeded their authority,” Mr. Zimmerman said. “That is, he is accusing them of accessing his Yahoo account without authorization, in violation of federal law.”

Another question is how it was possible to read Mr. Sidell’s Yahoo e-mail messages. In his complaint, he said that when he returned to his office after he was fired, he may not have signed out of his Yahoo account. A feature of the account could have allowed anyone using his computer to access his e-mail messages for up to two weeks.

Rich Palma, the chief operating officer for Structured Settlement, outlined the company’s position in a statement filed with the court. Mr. Palma said that Mr. Sidell had returned to the office after he was fired and had begun using another employee’s computer.

He said that Mr. Sidell had used that computer without authorization and had sent trade secrets and confidential company information to his Yahoo e-mail account. Mr. Palma said the information included lists of customers, their home addresses and phone numbers, terms of deals and brokers who had sent business to the company and personal information about the company’s employees.

Mr. Crossman said the company could see what Mr. Sidell had done because Mr. Sidell’s Yahoo e-mail account remained visible on the computer screen. “He did it in plain sight so that people in the office saw what he had done on the open, operating computer,” he said.

That twist in the case, if true, may support the company’s claim against Mr. Sidell for violating terms of his employment contract, which among other things prohibited him from competing against his employer for three years after leaving the company.

Of course, if the company learned of the contractual breach by improperly reading Mr. Sidell’s personal e-mail, that could support his claim.

Mr. Crossman was careful in responding to that claim, saying “It appears that the effort to assess the damage may have continued for several days, but the details of that are still being investigated.”

The claims and counterclaims present “a very interesting fact pattern,” said Mr. Rotenberg of the Electronic Privacy Information Center. “It would make a great exam question.”

Sway: The Irresistible Pull of Irrational Behavior

We are neither as rational nor as wise as we think we are.

Brothers Ori and Rom Brafman are the authors of a New York Times best seller - Sway: The Irresistible Pull of Irrational Behavior.

In the book the Brafmans discuss - as a means of explaining the risk assessment decision making process - the concept of loss aversion - our tendancy to go to great lengths to avoid perceived losses; value attribution - we attribute value to people and things based on quick impressions; and commitment - our reluctance to change the course of a plan or decision even when it's not working.

The book provides the example of Veldhuyzen van Zanten.

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Van Zanten entered service at KLM Royal Dutch Airlines in 1950.

He was KLM's most senior pilot with 11,700 hours of flight, even though he was mostly a flight instructor; nearly all KLM pilots who flew a Boeing 747 airplane in 1977 had been tutored by him.

The passengers aboard KLM Flight 4805 didn’t know it, but they were in the hands of one of the most experienced and accomplished pilots in the world.

Captain Jacob Van Zanten didn’t just have a knack for flying. His attention to detail, methodical approach, and spotless record made him a natural choice to head KLM’s safety program.

On the flight deck of the 747, en route from Amsterdam to Las Palmas Airport in the Canary Islands, Van Zanten must have felt a sense of pride. Today’s trip was along with the smooth precision that had become his hallmark. The schedule was straightforward: land in Las Palmas, refuel, and transport a new set of passengers back home to Holland.

But then Van Zanten got an urgent message from airtraffic control. A terrorist bomb had exploded at the airport flower shop, causing massive chaos on the ground; Las Palmas would be closed until further notice.

The captain knew that at times like this the most important thing was to remain calm and proceed with caution. He had performed drills preparing for this kind of situation countless times. In fact, Van Zanten had just returned from leading a six-month safety course on how to react in exactly this kind of situation.

Following standard procedure, the captain obeyed orders to land fifty nautical miles from his original destination, on the island of Tenerife. There, at 1:10 p.m., his plane joined several others that had been similarly diverted.

Now, you don’t need to be a seasoned airline pilot to appreciate that Tenerife was no JFK. It was a tiny airport, with a single runway not meant to support jumbo jets.

With his plane safely parked at the edge of the runway, the captain checked his watch. Seeing the time, he was struck with a worrisome thought: the mandated rest period.

The Dutch government had recently instituted strict, complicated rules to which every pilot had to adhere. After getting in touch with HQ and performing some quick calculations, Van Zanten figured the latest he could take off was 6:30 p.m. Flying after the start of his mandated rest period was out of the question—it wasn’t just against policy; it was a crime punishable by imprisonment. But taking the rest period would open its own can of worms. Here in Tenerife there would be no replacement crew to take over. Hundreds of passengers would be stranded overnight. That would mean the airline would have to find them a place to stay, and there weren’t enough hotel rooms on the island. In addition, a delay here would initiate a cascade of flight cancellations throughout KLM. A seemingly minor diversion could easily become a logistical nightmare.

It’s easy to imagine the stress that Van Zanten was experiencing and why he became so determined to save time. It was like being stuck at a red light when you’re late for a big meeting. Try as you might to stay calm, you know that your reputation is on the line; your frustration grows, and there’s really not much you can do. But there was one thing Van Zanten could do: the captain decided to keep the passengers on board, so that when Las Palmas reopened, he could get back in the air immediately.

But the air-traffic control personnel who worked at Tenerife tower were of a different mind-set. Here was a small airport on a tropical island, now inundated with planes from all over the world that had been diverted because of the Las Palmas explosion. Not only was the tower understaffed, but the air-traffic controllers were in no hurry to get planes out of the gate; they were, in fact, getting ready to listen to a live soccer match on their transistor radios. Twenty minutes after landing, Van Zanten received word from the tower that he should let his passengers off: it looked like they would be here for a while.

From there, events at Tenerife continued to move forward like molasses. Twenty minutes turned into an hour. The captain spent every moment thinking of ways to minimize the delay. He held a strategy session with his crew. He called KLM headquarters to find out exactly how much time he had left before the mandated rest period kicked in. An hour on the ground had turned into two; then the captain came up with another idea. He decided to refuel at Tenerife and thus shave half an hour off the turnaround in Las Palmas.

But this time-saving idea backfired. As soon as Van Zanten started refueling, word came from Las Palmas that the airport had finally reopened. But it was too late to stop the thirty-five-minute refueling process.

Finally, just when it looked like the plane was set to go, nature threw its own wrench into the plan: a thick layer of fog descended upon the runway.

Kicking himself over his decision to refuel, Van Zanten became even more intent on getting under way. With the fog growing thicker, visibility dropped to just 300 meters—so poor that gazing out the cockpit window the captain couldn’t see the end of the runway.

Van Zanten knew that every moment the fog got worse made it that much likelier that the Tenerife tower would shut down the airport. He saw that his window of opportunity to get out of Tenerife before an overnight stay was closing. It was now or never—time to go.

But what the captain did next was completely out of character. Van Zanten revved up the engines, and the plane lurched down the runway.

“Wait a minute,” Van Zanten’s copilot said in confusion.

“We don’t have ATC clearance.”

“I know that,” replied the captain as he hit the brakes.

“Go ahead and ask.”

The copilot got on the radio and received airway clearance—approval of the flight plan. But the tower said nothing about the vital takeoff clearance. And yet, determined to take off, Van Zanten turned the throttles to full power and roared down the foggy runway.

The jumbo jet was gaining momentum when, seemingly out of nowhere, the scariest sight Van Zanten could have imagined appeared before him. A Pan Am 747 was parked across the runway, and Van Zanten was approaching it at take-off speed.

There was no way to stop or swerve. Instinctively, Van Zanten knew that his only chance was to take off early. “Come on! Please!” the captain urged his plane. He pulled the aircraft’s nose up desperately, dragging its tail on the ground and throwing up a blinding spray of sparks.

The nose of Van Zanten’s plane managed to narrowly clear the parked 747. But just when it looked like he was in the clear, the underside of Van Zanten’s fuselage ripped through the top of the Pan Am plane.

The KLM plane burst into a fiery explosion as it hurtled another five hundred yards down the runway.

Van Zanten, his entire crew, and all of his passengers were killed. In all, 584 people lost their lives that day.

The aeronautical community was stunned. It was by far the deadliest airplane collision in history. An international team of experts descended on Tenerife airport. They examined every bit of evidence, interviewed the eyewitnesses, and scrutinized every moment of the cockpit recorders in an attempt to pinpoint the cause of the accident.

The experts quickly ruled out a mechanical failure or terrorist attack. Piecing together the events of that day, it was clear that the other plane on the runway, Pan Am Flight 1736, had missed a taxiway turnoff and ended up in the wrong place. The thick fog contributed to the disaster. Van Zanten couldn’t see the Pan Am plane, the Pan Am pilot couldn’t see him, and the tower controllers couldn’t see either one of them. On top of that, the tower was undermanned and the controllers were distracted by the day’s events.

Despite all these factors, though, the tragedy would never have occurred if Van Zanten hadn’t taken off without clearance. Why would this seasoned pilot, the head of safety at the airline, make such a rash and irresponsible decision?

The best explanation the investigators could come up with was that Van Zanten was feeling frustrated. But that didn’t quite add up. Feeling frustrated is one thing; completely disregarding protocol and forgetting about safety is another.

Clearly, Van Zanten was experienced. Clearly, he was well trained. And clearly, he was good at what he did. How could he cast aside every bit of training and protocol when the stakes were so high?

The aeronautical experts turned over every stone in their search for an explanation. But there was something in Tenerife that remained completely hidden. Alongside the rolling fog and crowded airfield, an unseen psychological force was at work, steering Van Zanten off the path of reason.

A growing body of research reveals that our behavior and decision making are influenced by an array of such psychological undercurrents and that they are much more powerful and pervasive than most of us realize. The interesting thing about these forces is that, like streams, they converge to become even more powerful. As we follow these streams, we notice unlikely connections among events that lie along their banks: the actions of an investor help us to better understand presidential decision making; students buying theater tickets illuminate a bitter controversy in the archeological community over human evolution; NBA draft picks point to a fatal flaw in common job-interview procedures; women talking on the phone show why a shaky bridge can be a powerful aphrodisiac.

Charting these psychological undercurrents and their unexpected effects, we can see where the currents are strongest and how their dynamics help us understand some of the most perplexing human mysteries. These hidden currents and forces include loss aversion (our tendency to go to great lengths to avoid possible losses), value attribution (our inclination to imbue a person or thing with certain qualities based on initial perceived value), and the diagnosis bias (our blindness to all evidence that contradicts our initial assessment of a person or situation). When we understand how these and a host of other mysterious forces operate, one thing becomes certain: whether we’re a head of state or a college football coach, a love-struck student or a venture capitalist, we’re all susceptible to the irresistible pull of irrational behavior. And as we gain insight about irrational motives that affect our work and personal lives, fascinating patterns emerge, connecting seemingly unrelated events.

Let’s examine the first of these streams, to help us solve the mystery of what happened with Captain Van Zanten. We find our first clue in an unlikely place—the egg and orange juice aisles of our neighborhood supermarket.

Professor Daniel Putler, a former researcher at the U.S. Department of Agriculture, has spent more time thinking about eggs in a year than the rest of us spend in a lifetime. He carefully tracked and studied every aspect of egg sales in southern California. Looking at the data, he found some interesting patterns. Egg sales, for instance, were typically higher during the first week of each month. Not surprisingly, they were abnormally high in the weeks leading up to Easter, only to experience a sharp decline the week after. That was all well and good, but Putler’s next discovery wasn’t just of use to the USDA and Al the grocer. Poring over cash-register data that reflected egg-price fluctuations, Putler identified what is referred to in economics as an “asymmetry.”

Now, traditional economic theory holds that people should react to price fluctuations with equal intensity whether the price moves up or down. If the price goes down a bit, we buy a little more. If the price goes up a bit, we buy a little less.

In other words, economists wouldn’t expect people to be more sensitive to price increases than to price decreases. But what Putler found was that shoppers completely overreacted when prices rose.

It turns out that, when it comes to price increases, egg buyers are a sensitive bunch. If you reduce the price of eggs, consumers buy a little more. But when the price of eggs rises, they cut back their consumption by two and a half times.

Anyone who’s made a shopping list with a budget in mind can tell you how this plays out. If the price drops, we’re mildly pleased. But if we see that the price has gone up since last week, we get an oh no feeling in the pit of our stomachs and decide it’s cereal for breakfast that week instead of scrambled eggs. This feeling of dread over a price increase is disproportionate—or asymmetric—to the satisfaction we feel when we get a good deal.

We experience the pain associated with a loss much more vividly than we do the joy of experiencing a gain. Sensing a loss as a result of the high price, the shoppers can’t help but put the carton back on the shelf.

And it’s not only egg buyers who are affected by the pain of a loss. A group of researchers replicated Putler’s study among orange juice shoppers in Indiana and arrived at the exact same results: Midwest OJ drinkers are just as finicky about price increases as are Los Angeles omelet makers. Regardless of geography and breakfast preferences, losses loom larger than gains.

Putler’s research illuminates a mystery that economists have been grappling with for years. For no apparent logical reason, we overreact to perceived losses.

This principle is key to understanding Van Zanten’s actions.

When the first reports about the accident came through to KLM headquarters they even tried to locate Mr. Van Zanten to send him to Tenerife to lead or help the investigations.

****

Ori Brafman spoke at the Mountain View Google offices on June 18, 2008 about the book and its concepts:

The Problem of the Oblong Dice

We need to remember that uncertainties will always exist in complex financial markets, but also that we'll learn from what we didn't know. It took many generations, but at least we now insist on dice that are perfect cubes.

An excellent article by Gordon Crovitz on the US subprime credit crisis was published in Monday's Wall Street Journal.

***

As the first anniversary of the credit crisis approaches, it's clear that a major part of the problem was a spectacular failure of information, with complex asset-backed securities turning out to be far riskier than anyone thought. But as sophisticated as we consider ourselves, this is just a contemporary example of what might be called the Problem of the Oblong Dice.

The first game of dice, played by ancient Greeks, Romans and Egyptians, used astragali, animal ankle bones that are more oblong than square. Yet rolls of the dice got the same score whether the dice ended up on a narrow face or on a wide face. Anyone who understood that the odds of landing on a narrow face were much lower would have been a big winner, but instead for centuries our ancestors treated all sides of an oblong as equal. There was no concept of probability, perhaps because "zero" was not understood by most educated Westerners until about the year 1000.

These odds-less gamblers didn't know what they didn't know, which brings us to the central fact of our credit crisis: We didn't know what we still don't fully know, including the depth and breadth of mispriced mortgage loans. In this Information Age, when we take pride in knowing, parsing and spreading risk, how can we not have the information?

The explanation is the much-overlooked difference between risk and uncertainty. Unlike risk, financial uncertainty is not about probabilities so much as the animal spirits that move markets in ways even Federal Reserve governors cannot explain, much less control.

The best explanation for today's credit crisis came in a 1921 book by University of Chicago economist Frank Knight, "Risk, Uncertainty and Profit." Risks can be known for individual corporate bonds with long histories, for example. But uncertainty is about unknowable probabilities, as happens when there are multiple variables with unknown relationships, such as a falling dollar, a housing recession and complex asset-backed securities.

Financial historian Peter Bernstein, who described the odd-shaped astragali in his classic on risk, "Against the Gods," wrote that "Knight's ideas are particularly relevant to financial markets, where all decisions reflect a forecast of the future and where surprise occurs regularly."

Hindsight is 20/20, but those who kept the difference between risk and uncertainty in mind were a step ahead. Back in 2006, the British trade publication Banking Technology asked, "Can risk management tools cope with the slippery topic of uncertainties? Clearly they are deeply inappropriate in some circumstances – if there is not sufficient past data they are useless; in fact worse than this, they can be positively dangerous."

Senior managers "tend not to question risk profiles produced by their boffins and quants, particularly if the math makes their head hurt." A tip for nonquantitative senior bankers reviewing new financial instruments: Ask about the unknown unknowns – or in the shorthand of Knight-trained economists, the "unk unks."

Once unk unks are recognized, there's a big incentive to understand them and work them into future analysis, which is why this crisis will eventually end.

It's not easy to accept the notion of uncertainty in markets; we all understand the basic point that prices reflect all known information.

What we're relearning is that crises can result from information that is not known and thus not reflected in prices – until it is, sometimes with a thump. This implies inevitable uncertainty, a concept that is anathema to most politicians and regulators.

As we're now seeing, they tilt at the windmill of outlawing the kind of uncertainty that surprised even sophisticated bankers whose money was at stake and has now been lost.

The better solution now is that the faster that unknowns are marked to market and prices reflect newly known information, the faster that markets will return to normal.

Retired Federal Reserve Chairman Alan Greenspan told The Wall Street Journal in April that he had been "chagrined at how badly some of the judgments of very sophisticated investors have been with respect to risks."

But the solution is not to pretend that uncertainty can be legislated into avoidable risk.

"Omniscience is not given to us. There is no way to predict how innovative markets will develop," Mr. Greenspan said.

Rather than regulations that might or might not avoid crises but would certainly discourage growth, he urged acknowledging what we don't know how to fix. A lightly regulated economy will be "highly competitive, innovative and dynamic – but periodically visited by wrenching crises."

Even in the Information Age, uncertainties make the best information incomplete.

We need to remember that uncertainties will always exist in complex financial markets, but also that we'll learn from what we didn't know.

It took many generations, but at least we now insist on dice that are perfect cubes.

The Honda Point Disaster

The man at the top took responsibility.


Lying latitude: 34.60278; longitude: -120.64472 off the coast of Santa Barbara County, California is a Point Honda - also known as Destroyer Rocks.

On the evening of September 8, 1923 it was the location of the largest peacetime loss of US Navy ships and one of the most storied examples in modern American military history of leadership taking responsibility for errors.

Seven destroyers, while traveling at 20 knots (37 km/h), ran aground at Honda Point, a few miles from the northern side of the Santa Barbara Channel.

Two other ships grounded, but were able to maneuver free of the rocks. Twenty-three sailors died in the mishap.

***

The ships were navigating by dead reckoning, estimating their position by their heading and speed, as measured by propeller turns.

At the time radio navigational aids were new and not completely trusted.

One of the destroyers - the Delphy was equipped with a radio navigational receiver, but ignored the bearings, believing them to be erroneous.

No effort was made to take soundings or depth measurements.

These operations were not performed due to the need to slow the ships to take readings. The ships were performing an exercise that simulated wartime conditions, hence the decision not to slow down.

In this case, the dead reckoning was wrong and the mistake fatal.

***

Edward Howe Watson (February 28, 1874 - January 7, 1942) was a career United States Navy officer who held the command of the Destroyer squadron.

Watson is remembered not for his court martial for his role in the event but for the way he took responsibility for all the failures under his command.

An editorial in the Army & Navy Journal at the time read in part

"... Captain Watson has given a splendid example of the finest attributes of character overcoming the elemental instinct of self-preservation.

Voluntarily waiving the fundamental right of a defendant to place the burden of proof upon the prosecution, and to refrain from testifying under oath to any facts that might tend to incriminate himself, he took the witness stand and not only freely testified to facts relating to his own culpability but also volunteered his opinion under oath that he was wholly responsible for the disaster, and that none of his subordinates should be blamed.

The book itself shows this was an act of outstanding honor and leadership; that in fact the causes of the tragedy lay in new technology, fog and a series of small errors resulting in the fleet not being where its navigators believed it should be; but given the tradition of chain of command, the man at the top took responsibility."

2007 Australian Equine Influenza Outbreak

The suggestion that a formal import risk analysis should have been carried out does not seem to me to be radical or anything other than obvious. It was an exercise that could easily, and should, have been done.

An outbreak of equine influenze in Australia was confirmed by the New South Wales Department of Primary Industries on August 24, 2007.

It was the first known time that there had been such a breach of Australia's tight quarantine measures.

Because of strict quarantine procedures to reduce the risk of exotic pests and diseases entering Australia horses in Australia had not been exposed to the virus and, not being vaccinated, were fully susceptible.

James Gilkerson, President of the Australian Equine Veterinarians Association, said the horse racing and breeding industries could come to a standstill if horse flu took hold.

John Messara, President of Australian Thoroughbred Breeders, said the industry would lose hundreds of millions of dollars in lost gambling revenue and stallion servicing fees.

Then Federal Treasurer Peter Costello said "when you take into account breeders, trainers, jockeys and race meetings the outbreak will affect the economy."

***

Soon after the outbreak, the Australian Government appointed the former High Court Judge Ian Callinan to investigate the situation.

Today, his 383 page report was released by the Australian Government.

http://125.7.49.90/Report.pdf

The report criticised failures including a lack of communication between managers and field offices in the Australian Quarantine Inspection Service.

The report noted that the relevant agencies were understaffed, under-resourced, are characterised by "an impenetrable maze of bureaucracy" and display a "lack of diligence".

"What I describe bespeaks an organisation that lacked clear lines of communication between those responsible for formulating procedures and work instructions and those responsible for implementing them," Commissioner Callinan said.

Deficiencies in Risk Assessment

The report provides a very good example of the importance of risk assessment in a strong control environment.

Callinan noted:

The quarantine policies emerged over time, and the conditions or requirements had been varied to take account of outbreaks of particular diseases or revised assessments of risks attaching to those diseases. Most importantly, no formal risk analysis was carried out in relation to the importation of horses, and there was no single document identifying the diseases and risks associated with such importation and describing how they are to be dealt with by the imposition of import conditions with a view to achieving the outcome that the ‘level of quarantine risk’ is sufficiently low to enable the importation to proceed consistently with Australia’s conservative but not zero-risk approach to animal and plant biosecurity risks.

One consequence of the absence of any formal import risk analysis in relation to horses is that for the Australian Quarantine Inspection Service officers exercising delegated authority to grant import permits there is no document that explains why particular conditions are considered necessary for dealing with the risks presented by a particular disease or diseases.

Another consequence of the absence of any such formal import risk analysis is that there has never been any rigorous review of the policy that has evolved since the early 1990s, so as to identify those conditions that are no longer applicable, those that should be amended, and any additional conditions that should be included.

***

The Federal Agriculture Minister has announced the Deputy Secretary of his department, and Director of Quarantine, Stephen Hunter, will step down to take responsibility for "systemic failures" revealed by the Callinan inquiry report into horse flu.

Internal Controls Placebos

Does a placebo effect apply to internal controls?

A placebo is a substance or procedure which a patient accepts as a medicine or therapy but which has no specific therapeutic activity for the condition. Any effect is thought to be based on the power of suggestion.

A placebo effect occurs when a patient's symptoms are altered in some way (i.e., alleviated or exacerbated) by a treatment, due to the individual expecting or believing that it will work.

The placebo effect occurs when a patient is treated in conjunction with the suggestion from an authority figure or from acquired information that the treatment will aid in healing and the patient’s condition improves.

***

Translate this now to internal controls.

Can an internal control be effective if the company's behaviour is altered in some way by an expectation by the company's employee that the internal control will work.

Take for example using passwords to access your computer network.

Does the password serve the purpose of eliminating the risk of unauthorised entry.

No - a library of hacking case studies is evidence of that.

Does the password serve the purpose of developing an expectation in the user that the system is more secure than would be the case had the password not existed.

Yes.

Is the password therefore a placebo internal control?

***

Translate this now into corporate governance.

In 2006, the American Bar Association held a forum on the very topic.

It noted that statistical measures of corporate governance are in vogue in studying how and whether good governance affects a company's performance.

Through the prism of litigation, it asked to what degree does good corporate goverance interact with litigation.

Does good governance promote practices that reduce litigation exposure it asked?

Does good governance itself minimize such exposure?

Or, is good governance merely a placebo?

***

Perhaps there is a link therefore between the discipline of behavioural economics and the effective execution of a strong internal control environment.

An interesting presentation was given by Dan Ariely in March 2008.

Dan Ariely is the Alfred P. Sloan Professor of Behavioral Economics at MIT, where he holds a joint appointment between MIT's Media Laboratory and the Sloan School of Management. His work has been featured in The New York Times, the Wall Street Journal, the Washington Post, the Boston Globe, Scientific American, and Science.

In the presentation he discusses the effectiveness of placebos, and outlines how expectations of a given situation will affect our experiences of that situation.

The Renaissance of the World's 2nd Largest Employer

The railways' renaissance has been engineered by simple practices


Indian Railways operates the rail network in India and has a total state monopoly on India’s rail transport.

It is the world’s largest commercial or utility employer with more than 1.6 million employees and only second to the Chinese Army in terms of being the world’s largest employer.

The rail network traverses the length and breadth of the country covering a total length of 63,140 kms.

It is said to be the 2nd largest railway network in the world, transporting over 5 billion passengers and over 350 million tonnes of freight annually (seventeen million passengers and more than one million tonnes of freight daily) in 13,000 trains from 6,947 stations.

In 2001 an Indian Government report noted:

“Today Indian Railways is on the verge of a financial crisis... To put it bluntly, the ‘business as usual low growth’ will rapidly drive Indian Railways to fatal bankruptcy … On a pure operating level, IR is in a terminal debt trap.”

The report noted several causes for Indian Railways performance decline.

These, among others, included the loss of market share in the profitable freight business, lack of flexibility in pricing, and the high cost of internally sourced products and services together with investments in un-remunerative projects.

It was noted that lack of accountability was the prime source of the Indian Railways problems which were compounded by the rising employee cost and poor staff productivity (staff costs accounted for nearly half of the total operating costs).

***

Today, Indian Railways is written up as a case study by some of the great business schools of the world – Harvard, INSEAD, Wharton, Indian Institute of Management – as one of the most impressive organisational turnaround stories of recent times.

It's a turnaround story that has amazed management experts - the dramatic return to profitability for the 154-year-old Indian Railways.

In February, when Railway Minister Lalu Prasad presented India's railway budget for the 2007-08 fiscal, its most striking aspect was the Rs.215 billion ($4.5 billion) surplus.

"The railways' renaissance has been engineered by simple practices, which have evoked the admiration of internationally renowned institutions and companies alike," said a report by KPMG, which also conducted an international conference on railways in New Delhi last month.

Modernization, safety and security of passengers, replacement and renewal of assets, track renewal, improvement in passenger amenities, reduced expenditure, increase in productivity and reduction in operating ratio, computerization of railway systems, induction of new technologies for signaling and telecom and prevention of leakages of revenue have been the salient features of the overall development of Indian Railways.

The Indian Railways has a massive infrastructure in place and the costs incurred are predominantly fixed and independent of the operations.

The challenge was therefore to achieve enhanced capacity while not incurring additional capital expenditure.

This was achieved by the following process and system improvements:

• Most wagon sidings (equivalent of passenger platforms) were 1/4th the length of the train, making it impossible to load/unload all wagons (58 per train) simultaneously, thereby requiring 4 times as much time to load/unload. The Indian Railways started extending all such sidings to 650m (length of the train with 58 wagons) to ensure that loading/unloading happens simultaneously.
  
  
• In the past, loading/unloading was done only during day time (10 hours a day on an average) and trains used to lie idle at customer sites overnight. The Indian Railways provided incentives to customers to undertake loading/unloading 24 hours a day. Consequently, the average time taken for loading came down from 30 hours to 16 hours and for unloading from 34 hours to 18 hours, reducing the turnaround time by over a day.
  
  
• Indian Railways did away with the system of train examination, which consumes about 16 hrs on an average. Earlier, train examination was done every time a train came back to its base station, irrespective of the distance traveled in the interim. In recent times, examination is being conducted only after 4,500 kms or 15 days (whichever is later). This strategy was very successful and has been later extended to 7,500 kms.
  
  
• Changes in planning systems - Indian Railways introduced improved accounting and management information systems to provide financial, operating and management information needed to increase efficiency, meet emerging business needs and improve commercial orientation. It introduced Long-Range Decision-Support System and related systems for investment selection on the basis of expected returns. To cater to the rising passenger numbers, the Indian Railways introduced state-of-art passenger reservation system. Similarly, the freight business was streamlined through the Freight Operating Information System and Enterprise Resource Planning packages were implemented in workshops, production units and selected zonal railways.
  
  
• In order to encourage public-private partnership, in procurement of wagons, the Indian Railways introduced a wagon investment scheme. Customers investing in railway wagons were assured of a guaranteed number of rakes based on the number of rakes procured and turn around of the type of wagons, over and above the existing supply. In addition, IR also extended discounts on freight rate for a period of 10-15 years. After initial skepticism, many customers started investing in rakes thereby contributing to the supply of rolling stock for the Railways.
  
  
• The cornerstone of the unit cost focused strategy was to ensure optimal capacity utilization. Dramatic improvements in this area were achieved by a market friendly dynamic pricing policy. Tariff based on demand-supply situation and hefty discounts in lean periods and in reverse flow directions resulted in a large increase in volumes to offset the lower tariffs. · To simplify and rationalize goods tariff, the classification of items was reduced from over 4000 to a mere 28 groups of commodities. As a result, goods tariff, which was running into more than 500 pages earlier (the tariff tables), was condensed to a few pages.
  
  
• The demand for freight transportation typically dips from 1 July to 31 October on account of the monsoon season. It was estimated that over 400 trains remain idle in this period due to lack of demand. Hence, during this period, freight rebate of 15% was offered.
  
  
• To encourage the transportation of cement, iron and steel by rail, a Loyalty Discount Scheme was announced. Under this scheme, during the non-peak season, if over 90% of the production of any steel or cement factory was transported by rail, a discount of 1% in freight was offered.
  
  
• With a view to bring down the wagon turnaround time, the Terminal Incentive cum Engine-on-load Scheme was formulated. Customers who fulfilled the conditions laid down in the scheme and invested in their terminals to bring down the loading and unloading time, qualified for 5% rebate in the first year.
  
  
• Previously, the Railways did not allow unloading multiple times along the way. But this policy was changed and cement companies were allowed to unload multiple times on the way (2-3 times instead of once) and also offered mini-rakes (half carrying capacity of normal wagon). This has made a big difference to the logistics cost and enhanced the Railways' value proposition.
  

The following is a presentation given by the Indian Railways Minister Lalu Prasad at the Singapore campus of INSEAD in June 2008

The Fringe Benefits of Failure and the Importance of Imagination

Imagination is not only the uniquely human capacity to envision that which is not, and therefore the fount of all invention and innovation.

In its arguably most transformative and revelatory capacity, it is the power that enables us to empathise with humans whose experiences we have never shared.


Each year there is a great commencement speech given at a leading American university.

On Thursday, JK Rowling gave the 2008 commencement address at Harvard University.


JK Rowling is the British writer and author of the Harry Potter fantasy series - the idea of which was conceived whilst on a train trip from Manchester to London in 1990.


The Harry Potter books have sold nearly 400 million copies.


The five films currently released became the highest grossing film series of all time with US$4.48 billion in worldwide receipts.