Harry Markopolos and the vulnerability of senior management to ignoring warnings
It’s been six years since the discovery of Bernie Madoff’s Ponzi scheme but more than 15 years since Harry Markopolos began warning the Securities and Exchange Commission about it.
Why didn’t the SEC listen or investigate Markopolos’ warnings thoroughly until it was too late? Is it possible that the perception of Markopolos and his analytical personality played an important role? And if so, what are the lessons for you as business leaders of your company?
Harry Markopolos has an impressive background, one that should have given him credibility in analyzing and reporting on Bernie Madoff’s scheme. With a master's of science in finance from Boston College and certification as a chartered financial analyst, Markopolos had the education and expertise to perform his analyses. The chronology of Markopolos’ repeated attempts to report the Madoff scheme are well documented by now.
He submitted multiple reports to the SEC over a nine-year period, from 1999 to 2008, and his 2005 19-page memo to the SEC, “The World’s Largest Hedge Fund is a Fraud,” laid out in painstaking financial and statistical detail why Madoff’s reported returns were impossible. The SEC’s response was a brief investigation -- which consisted primarily of asking Madoff if he was running a Ponzi scheme -- that concluded, incorrectly, that there was no evidence of fraud. In December 2008, the scheme was finally uncovered, but not before more than $65 billion of investor money was lost.
But why was the evidence presented by Markopolos ignored for so long? Did the SEC’s perception of Markopolos hinder their ability to listen to him? Does our perception of another individual in the workplace effect our ability to listen?
Harry Markopolos is a self-described “quant,” or quantitative analyst. Like everyone in this world, the traits that led to Markopolos’ career are different than other personality types. In Emanuel Derman’s book, “My Life as a Quant: Reflections on Physics and Finance,” Derman describes the personality traits of a quant:
“I didn’t fully realize that the word quant had negative overtones until I leafed through a dictionary of finance terms ... and saw the entry “quant -- often pejorative.”
Derman continues by describing quants as “circumspect and reticent,” with introspective personalities and scholarly backgrounds. She describes the quant professional ladder as short and often ending in midair. Markopolos’ accounting of the Madoff scheme and his reporting of it have been described by many as “a rant,” including by comedian and "Daily Show" host Jon Stewart, who referred to Markopolos as “an angry guy” during an interview with him.
Watching that interview, and another one with Markopolos on "60 Minutes," the words nerd, irritating, arrogant, and super-smart come to mind. Depending on which newspaper or magazine you read, Markopolos has been described as nuts, a boor, unnerving, or an idiot savant, among other put-downs.
You might describe Markopolos similarly if you watched those interviews, and I believe the SEC said the same when Markopolos brought his findings to them.
The reality, however, is that Markopolos was correct in his analysis of Madoff’s scheme, and it begs the question of how we can look beyond the particular personality traits of a credible reporter to both listen and thoroughly investigate their warnings.
The first step in overcoming the power of perception that blocks our ability to listen is to recognize that different employees in our workforce have different personalities, often related to the type of role each employee has. Many organizations throughout the world use the Myers Briggs Type Indicator assessment to gain knowledge of personality type.
"Since type provides a framework for understanding individual differences, and provides a dynamic model of individual development, it has found wide application in the many functions that compose an organization." However, understanding that different personality types exist within our organization helps to soften the power of perception when communicating with other employees.
Interestingly, senior managers including CEOs are often most vulnerable to the power of perception when interacting with others. Everyone takes in information some of the time. Everyone makes decisions some of the time. However, when it comes to dealing with the outer world, people who tend to focus on making decisions, such as CEOs and other senior managers, have a preference for judging because they tend to like things decided.
But a word of caution to CEOs and managers; your tendency to judge may cause you to dismiss information provided by individuals whose personality is different than yours. Rather, the advice of Isabel Briggs Myers may help to value the differences in our employees and lead us to listen to credible reports and warnings:
"When people differ, a knowledge of type lessons friction and eases strain. In addition it reveals the value of differences. No one has to be good at everything."
For example, giving individuals power can make them less accurate in perceiving others and more likely to rely on stereotypes when judging others. Powerful individuals do this because they pay less attention to others and are less likely to take others’ perspectives.
Overcoming the power of perception
With so many data points and information sources, how do we effectively listen to employees whose personality type and communication style is different? The next time someone wants to tell you that the “emperor has no clothes,” focus on the following questions in assessing the information being presented, rather than the perception you have of the employee:
- Does the individual have knowledge of the systems, processes or people that he/she is warning about?
- Does the individual have requisite expertise or education to support that give him/her the ability to assess the situation and ring the warning bell?
- Is the individual including data as part of his or her warning?
When you find yourself listening to a quant, or someone with a different accent, clothing style or personality, try to look beyond. Focus on the expertise and credibility of the individual, and the data they present, to best listen to and act upon their warnings.
Dave Yarin is a compliance and risk management consultant to senior management and directors of large and mid-size companies, and author of the soon-to-be-published book “Fair Warning — The Information Within.” Yarin follows and researches news stories regarding ignored warnings that lead to bad business outcomes, along with the social psychology theories that explain why these warnings were ignored. He lives near Boston with his fiancée and two children. For more information, visit his website, follow him on Twitter, or subscribe to his FlipBoard magazine, Fair Warning.
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