After two years and more than 400 posts, Public Offering is taking the summer off. Since launching in 2008, faculty members, students and staff members have used this space to share thoughts about the School, analyze events affecting the business world, highlight student achievements and more. Though Public Offering is going on hiatus, the School’s goals for the blog — to share ideas, engage the community and provide a means for discussion across all areas of the School — live on. Please follow the School’s Facebook page or Twitter feed to stay in touch, and visit the homepage to see the latest faculty research highlighted in Columbia Ideas at Work.
Public Offering: The Columbia Business School Blog
RSS Feed URL: http://www4.gsb.columbia.edu/rss/publicoffering
Category: Articles & tutorials | Total Views: 2140
Latest entries from this feed
The Cost of Health Care Reform
In his address last night President Barack Obama tried to rally support for his health care reform agenda, and announced for the first time that he would consider raising taxes on families earning more than $1 million a year, which is a scaled-back version of an earlier proposal that would have imposed a surcharge on households earning $350,000 or more.
Rita McGrath, associate professor of management and author of Discovery-Driven Growth, worries that the cost of health care reform could still take an overwhelming toll on small businesses.
“I’m concerned with the plans for funding it,” says McGrath. “It seems disproportionately aimed at smaller businesses and small business owners.”
McGrath argues that the taxes hikes needed to underwrite the reform program will fundamentally alter the “structure of incentives” (a term borrowed from William J. Baumol’s “Entrepreneurship: Productive, Unproductive and Destructive”), for small business owners.
She points to several ways that could happen: high taxes will diminish the amount of working capital companies have available; the tax structure places artificial constraints for the number of employees (fewer than 25) for small businesses to remain in a lower tax bracket; and small business owners’ energy will be diverted from innovating products to innovating ways to not pay more taxes. Ultimately, she argues higher taxes will diminish a strong spirit of entrepreneurialism in the United States. She writes in her blog:
With the small business growth having led us out of most recessions in the past, get ready for this sector to add jobs far more slowly and with far greater caution than it had previously — a big blow to an economy that desperately needs a vibrant and growing small business sector.
At the macro level, the effects of higher individual taxes on rates of entrepreneurship are without an exception, negative. It is well accepted, and has been for decades, that the desire to have a vibrant entrepreneurial economy is at odds with the desire to operate a welfare state, due in large part to the way in which welfare states allocate resources. When the upside to undertaking the risks of entrepreneurship decrease, and the downside of not doing much at all are limited, it becomes hard to justify making the effort. If it is possible to live quite a comfortable life without too much bother, why take on the long hours, the worry and the headaches of small business ownership?
Columbia Business School lost an enduring member of its community on Sunday, when John C. “Sandy” Burton passed away at 77. Professor Burton was connected to the School in a number of roles: as a student, earning his MBA in 1956 and PhD in 1962; as a faculty member from 1962 to 2002; and as dean from 1982 to 1988.
In addition to his long and impressive tenure with Columbia Business School, Professor Burton left a lasting impression in public life as well. In Washington DC, he joined the Securities and Exchange Commission as its chief accountant in 1972, then returned to New York City to become Abraham Beame’s deputy mayor for finance in 1976, a time when the city faced severe financial challenges.
The New York Times, in an obituary showcasing Professor Burton’s life, writes about his approach to accounting and financial regulation:
At the S.E.C., Mr. Burton stiffened the requirements for financial reporting by companies and lobbied accounting firms to take greater responsibility for the accuracy and clarity of the financial records under their review.
He argued that the accountant’s task should not be confined to auditing corporate books, but should include forecasts, judgments on the corporation’s financial controls and evaluations of management. And he argued that accounting firms were too secretive about their own finances.“The mantra he was selling to Capitol Hill was, ‘An eighth grader has to understand this: Is the company healthy or isn’t it?’” said his daughter, now the general counsel for the Hearst Corporation, who was an eighth grader while her father was in Washington.
 |
|
|
View and post photos from commencement on the Columbia Business School Facebook page. |
This is an excerpt from the speech Vikas Raj ’10 gave at the School’s Recognition Ceremony on May 16, 2010. The class of 2010 took part in the Columbia University Commencement on May 18, 2010.
When most of us got into business school early in 2008, our friends told us, “What great timing.” But it wasn’t long after we started school that we began to question that. In fact, it was only weeks into our first semester — on September 15, 2008 — that Lehman Brothers filed for bankruptcy protection. The day before, Merrill Lynch was sold to Bank of America.
In the weeks that followed, we first-year students at Columbia Business School stood in the lobby of Uris Hall, watching two awkwardly placed TV screens for the latest news on what appeared to be the unfolding of the global economy.
We started business school when it was about as bad as it could get “out there.” But as Columbia’s most famous alumnus Warren Buffett, MS ’51, once said, “When life gives you limes, make margaritas.” Sorry, looks like that was Jimmy Buffett, but the point remains. Over the last two years, while the crisis continued “out there,” we were given the opportunity to learn from it in real time from our brilliant professors and from each other.
We learned to rely on each other and to make the best of this difficult environment. We leave Columbia today with the skills and the confidence to rebuild the business world.
At that first Sunday night dinner of Orientation, we tried to listen to then-GBA president Don Baxter ’09 tell us, “These are going to be the best two years of your lives.” What we were really doing was staring at each other. We knew already that these were the strange faces of the people who would define our Columbia experience. In the following week of Orientation, those strange faces became friends on whom we would learn to depend.
All of us now know that Orientation isn’t just block-standing games and case studies that bring together a cluster. It is the realization, gradually crystallizing over the course of two weeks, that somehow Admissions did it right, that they put together a group of people who were so different but still tied together by a fundamental desire to do something better and more impactful with our lives.
So, as things continued to get worse “out there,” inside the gates of Columbia Business School we began to depend on each other and learn from each other. We depended on each other to get through core classes and electives as our professors taught us the art and science of marketing, strategy and finance; they taught us to negotiate above our BATNAs and really value companies.
We depended on each other to get through the most difficult recruiting environment in decades, guiding each other through countless mock interviews, recruiting events and résumé reviews, and we checked in on each other during summer internships. We learned from each other by learning about the amazing things we had done before school. We came here to study in the same halls as business pioneers like Warren Buffett MS ’51, Henry R. Kravis ’69 and Jerry Speyer ’64, and to study with world-class professors in this amazing city, in the heart of the global business world. Columbia truly is a global business school.
Raj will begin a career in M&A investment banking at Evercore Partners in New York this summer.
Photo credit: Columbia Business School
The Risks of High-Frequency Trading
Between 2:30 and 3 p.m. on May 6, 2010, the Dow dropped 7 percent before partially restoring itself by the closing bell. In the days following that sudden market shock, regulators have investigated possible causes, looking at a single trade in the Standard & Poor’s e-mini futures contract and other causes for the brief panic. The plunge has telescoped focus on the role of “circuit breakers” and the way high-frequency traders function in response to irregular use of those safety mechanisms.
“I think that market-wide coordination of regulatory mechanisms such as circuit breakers is a very positive thing. The lack of such coordination seems to have had a significantly detrimental effect,” says Professor Ciamac Moallemi, who has studied behavior in financial markets. In his recent research, he created a quantitative model to value latency or the delay between decision and trade execution, finding that the higher frequency of trading, the more impact latency has on transaction costs. (Read more about this research in Ideas at Work.)
Moallemi said the events of May 6 raised a number of unanswered questions, including:
- Did buy-side firms employing algorithmic trading strategies contribute to the crash? Many mutual funds, pension funds, etc., try to efficiently buy or sell large positions via computerized strategies that buy or sell at a predetermined rate over the course of the day despite market conditions. Such strategies often trade at a faster rate in periods of high volume. Did these strategies accelerate selling just as the market was crashing?
- High-frequency liquidity providers implement computerized market-making strategies based on the statistical analysis of markets. In periods of market anomaly, where historical statistical relationships may not hold, these traders may withdraw from the market and hence remove liquidity at times when it is most needed. To what extent did high-frequency liquidity providers withdraw liquidity from the market immediately prior to the crash?
- Given that there does not seem to be any trading “error” involved in the crash, is it a wise policy for the exchanges to cancel trades that occurred at anomalously low prices? This would seem to destroy any incentive for investors to provide liquidity by buying during a crash. What incentives can be created for liquidity provision in turbulent times?
“Equity markets have changed dramatically in recent years, with the proliferation of electronic trading and the decentralization of trading across many new venues,” Moallemi adds. “While these changes have offered investors many benefits, there may be unintended consequences such as the momentary breakdown that occurred on May 6. This event highlights exactly how little we know about the complex and highly interdependent systems that constitute the market.”
Image credit: Google Finance
Inside Asia's Economic Recovery
“Asia is leading the way in the recovery of the world economy,” Professor Shang-Jin Wei said in his introduction of Jong-Wha Lee, chief economist of the Asian Development Bank. Lee spoke at the School on April 20, 2010, in an event sponsored by the Center on Japanese Economy and Business and the Jerome A. Chazen Institute of International Business. Wei, director of the Chazen Institute, is coeditor of the recently published book, China’s Growing Role in World Trade (University of Chicago Press, 2010).
Lee outlined several key messages in his presentation, saying that Asian recovery was taking “firm hold.” He predicted 1.7 percent growth in GDP for major industrial economies in 2010 and the number moving to 2.0 percent for 2011. In contrast, the figures for GDP growth in Asia are 7.5 percent in 2010 and 7.3 percent in 2011, he said. Drivers for Asia’s strong recovery included growth in private consumption and investment.
Lee also discussed inflation — on the rise but manageable — and the risks stemming from uncertain global recovery and volatile capital flows. He said Asian economies will gradually unwind stimulus support and shift to private demand in the future.
Who Will Be the Clean-Tech Leader?
The oil spill disaster in the Gulf of Mexico has placed renewed focus on clean energy, writes adjunct professor Bruce Usher, a carbon finance leader and executive in residence at the School.
In an op-ed in the New York Times (“Red China, Green China” May 6, 2010), Usher says that the United States lacks the political will to become a world leader in clean energy while China has been moving ahead with creating jobs and policies in the sector. Last year, China spent a total of $35 billion — double the amount of the United States — on projects related to renewable energy. In 2008, China held 84 percent of global market share for clean-development projects. Usher called for aggressive action by the United States to compete with China in the clean-tech race, outlining three actions to develop new technologies:
First, institute national feed-in tariffs or a renewable portfolio standard — two ways to require that utilities buy clean energy in a minimum amount or at a certain price. Such standards have been effectively put into practice in several states, most notably in Texas with wind power, but only a federal program will provide the scale necessary to compete with China, which has a national feed-in tariff program of its own.
Second, establish a price on carbon via either a tax or a cap-and-trade program to encourage low-carbon technologies. The Clean Development Mechanism placed a price on carbon in developing countries, initiating thousands of emissions-reduction projects in China. Putting a price on carbon in the United States would provide an incentive for domestic developers to build similar projects here.
Finally, get serious about supporting the research and development of carbon capture and storage, and maintain America’s lead in a field that offers enormous opportunity but is too large for any one company to finance. Coal is the No. 1 source of greenhouse gas emissions, and the first country to develop economically viable capture-and-storage technology will dictate the terms for reducing carbon dioxide emissions from coal-fired utilities globally.
Photo credit: Flickr/asmythie / CC BY-NC-ND 2.0
Choosing wisely for positive long-term outcomes — often at the expense of tempting short-term gains — is a hallmark of mature leadership. At the individual level, these types of decisions signal patience, vision and self control.
New research published in the journal Nature Neuroscience (March 28, 2010) provides significant evidence as to where in the brain these cognitive processes are taking place: the lateral prefrontal cortex. That region of the brain — tap your forehead, it’s right under there — is considered to be the executive lobe and is associated with planning, complex decision making and moderating socially acceptable behavioral responses.
Bernd Figner, a research scientist at the Business School and the University’s Department of Psychology, working with Professor Eric Johnson and Professor Elke Weber, used a brain stimulation technique called rTMS to temporarily disrupt the function of the lateral prefrontal cortex in a group of volunteers. After the brain stimulation, the volunteers were asked to make choices between smaller, more immediate rewards or larger, future rewards.
“When we disrupted the function of the volunteers’ left lateral prefrontal cortex, we found they strongly preferred the smaller, more immediate rewards,” says Figner. The effect of increased impatience was specific in three ways: it only occurred after stimulation of the left, but not the right prefrtontal cortex; when the smaller reward was a tempting immediate reward; and when a choice, not just an evaluative judgment, had to be made.
The results add to the growing body of scientific literature on decision making, which has examined the behavioral, cognitive and neural mechanisms. A recent Ideas at Work article profiled related research by Weber, Johnson and other researchers, on the role of cognitive mechanisms in decision making. Specifically, they examined how people use memory and attention in delaying gratification or taking an immediate reward; they found “people muster the most evidence to support the first choice they consider, drowning out other options.”
The implication of the research findings is important for “choice architecture” or the way in which environments are structured to lead people through a decision-making process.
In Ideas, Weber says out that we live in an era that makes choice architecture easy to implement: “More and more decision making and communication occurs on the Web, where it is easier to structure a choice environment in a way that focuses people on one type of option or query over another,” she says. “So you can provide people first with information about the future when they make health or financial decisions, building decision environments that promote less impulsive choices and encourage more long-term choice.”
Photo credit: Flickr/Dierk Schaefer / CC BY 2.0
To combat falling membership and scattered leadership, the Girl Scouts launched a new strategy in 2005. Five years later, the plan to increase participation appears to be working — at least in New York City where the New York Times recently reported a boom in troops.
The case of the Girl Scouts provides key lessons for strategy, says management professor Willie Pietersen. His new book, Strategic Learning (Wiley, March 2010), examines how organizations can turn market insights into strategic actions. In it, he uses the example of the Girl Scouts, with whom he has worked as a strategic adviser since 2004.
“The Girl Scouts are a movement rather than a legally aligned organization. It’s similar to a franchise operation,” Pietersen says.
The movement’s new strategy entailed redefining its customers and its winning proposition clearly, restating its mission and setting new priorities. Additionally, each of the organization’s 312 independent councils was required to set its own priorities, based on local markets, in alignment with the movement’s.
“After a total strategy was defined as a central idea, a local strategy was created for each independent council,” he continues. “They aligned their own propositions and priorities as a direct translation of what the total organization was trying to do. That gave coherence.”
In order to further streamline the Girl Scouts’ efforts, the number of councils was reduced from 312 to 109. “This was done to improve the implementation effectiveness of the strategy that had already been defined,” Pietersen says. The Girl Scouts made other tactical changes, including shifting the emphasis away from earning merit badges to learning about topics, like health and wellness or financial literacy, and using online tools to foster engagement. A key point in the strategic learning sequence is that structure should always follow strategy, Pietersen says.
Pietersen cautions that independent subsidiaries cannot automatically align with the central mission but should instead develop their own priorities. “They have to do their own situation analysis and learn about their own local markets,” he says. “They can translate that information into an aligned winning proposition.”
Willie Pietersen is teaching the Columbia Business School Executive Education program “Creating and Executing Breakthrough Strategy,” taking place May 16–21, 2010.
Save More, Spend Less, Peterson Says
Peter Peterson, cofounder and chairman emeritus of the Blackstone Group and former CEO of Lehman Brothers, spoke with students on January 21 as part of the Silfen Leadership Series. He served as the U.S. Secretary of Commerce under President Richard Nixon from 1972 to 1973. The event was co-sponsored by the Sanford C. Bernstein & Co. Center for Leadership and Ethics.
Peterson is a vocal advocate of deficit reduction and founded the Peter G. Peterson Foundation to promote non-partisan education and research for economic issues. In his presentation at Columbia Business School, he elaborated on his views of the long-term fiscal challenges ahead for the United States, which he said included entitlement spending, current accounts and savings deficits, and healthcare costs.
“We need to get rid of the notion that we will grow out of these problems,” he warned. “If we don’t demonstrate to foreign lenders that we’re going to take significant action [on our debt], they will be forced to raise interest rates.” Peterson also strongly advocated for education and the mobilization of younger generations to play a bigger role in economic decision making.
Peterson answered questions from the audience, including one on the future of private equity. “They desperately need for credit to open up,” Peterson said. “Otherwise it’s not much of a leverage business.”
Photo courtesy of the Peter G. Peterson Foundation
Value Investors Stayed the Course
Professor Bruce Greenwald and top value investors took part in a panel discussion at Columbia Business School on April 16, 2010. The program was hosted and televised by Bloomberg (watch video online).
In the discussion, Greenwald said the financial crisis validated the principles of sound value investing. “Thank God for the last year. … Value investors stayed the course,” he said. “We did not have a Great Depression, which I don’t think was ever the cards.” Greenwald went on to elaborate about the fundamentals of value investing, saying:
You are always buying future returns when you are buying a stock. The question is how you measure them. When you see a return today that you think you want to buy, the fundamental question is how long is going to last? You can see the birds in the bush, but the question is how many are going to die before you get to eat them? … Value investors have always focused on the permanence of the return. To Ben Graham that was asset production. For a business to be viable, if it needed assets, it had to earn a return on those assets or nobody was going to invest. … That’s why [Graham] focused on assets. But what Buffett taught people is that beyond assets, earnings are sustainable if you have barriers to competition.
Is Your Business Plan Outrageous?
 |
|
|
Judges and prize winners from the 2010 A. Lorne Weil Outrageous Business Plan Competition. |
Nick Friend ’11 and his mates, Chris Beardsley and Russell Greenberg, had a dilemma: How to create the perfect, portable cocktail for tailgating? After tinkering with a design (they share a background in architecture and design at Yale), they came up with the Sidecar. It is a liquid-filled disposable sleeve (with room for advertising) that fits over a soda can. Every sip from the enhanced can produces the perfect blend of can and sleeve contents. Think a portable Jack-and-Coke in less than three seconds. Their idea came in first place — with an award of $7,000 — at the Entrepreneurship Program’s A. Lorne Weil Outrageous Business Plan Competition, which took place on April 16, 2010.
More than a dozen teams of first- and second-year students and their business partners participated in the competition. The second-place cash prize of $4,500 went to Ben Appenzeller ’10 and his plan for a virtual gift card distributor called Gift Helix. Julia Levy ’11 received $1,500 for her third-place winning plan to create a private-public partnership with New York City to encourage people to drink more tap water and reduce the consumption of plastic water bottles.
Honorable mentions went to Jeremy Miller ’10 and his plan for FSA-Store.com, an online commerce site offering products eligible under Flexible Spending Account programs, and Srikanth Nimmagadda ’11 for a mobile app called Cougar Hunter, a GPS-based application to help interested men and women find each other on-the-go.
The competition included an elevator pitch segment, in which students were asked to give their best short-form pitch. Watch select segments from other participants in the competition:
Operations Research Solves River Problem
Like many great rivers, the Delaware has multiple identities: water supply for New York City, habitat for native fish populations and flooder of riverside hamlets. Historically, four states have vied for specific claims on the river’s water supply. New York City’s summertime dam releases have posed some of the most challenging problems for river management over the past 30 years, and caused political and environmental tension.
That changed in October 2007. The Delaware River Basin Commission (DRBC) implemented a plan called Flexible Flow Management Policy (FFMP) based on research from Peter Kolesar, a professor emeritus in the Decision, Risk and Operations Division. His work, done in collaboration with scientists and fish experts from the Nature Conservancy, Trout Unlimited and Delaware River Foundation, has been nominated for this year’s Franz Edelman Prize. The award ceremony takes place April 18–20, 2010.
The Commission’s FFMP policy is based on Kolesar’s adaptive inventory control research, which expresses the dam releases as a function of the storage in the reservoirs and the season of the year. In the two years since the plan has been in place, estimates place the economic benefit at $163 million annually in fishing and boating income and potential flood mitigation. (Read more about the research in Ideas at Work.)
The plan has potential for other water and river management systems, especially in the Southeast where officials from Georgia and Florida have been fighting for years over water allocation from Lake Lanier and the Tennessee River. The Delaware River case could help solve their conflict and key players from the DRBC have already made visits to Atlanta to share knowledge.
“The benefit of what we did — to bring disputing parties into agreement and our analysis — were breakthroughs,” Kolesar says, whose interest in the river originated with his fly-fishing experience in the Catskills. He says the combination of factors — from the scientific research and involvement of conservationists to local politics — made the success of the FFMP unique. “The whole package is now a possible model for other disputes.”
UPDATE (April 22, 2010): The 2010 Franz Edelman Prize was awarded to Indeval, the Mexican Central Securities Depository, for its application of operations research to complex financial transactions. “Participation in the competition really strengthened our dedication to the Delaware River and reinforced how important good operations analysis is for the river’s management and preservation,” Kolesar said.
Photo credit: Flickr/Chris Martino
Save or Spend? A Mixed Message
Last year, some economists expressed concern that the American consumer was in retreat. It would be a year of second-hand clothes and used cars, they predicted, and the lack of consumer spending would cause the economy to sputter and choke. At the same time, President Obama outlined ways that Americans should save more, advocating for retirement plans to be “opt out” instead of “opt in,” for example. Spend more or save more? That kind of mixed message, says Lauren Weber, has been par for the course. She completed the School’s Knight-Bagehot Fellowship in Economics and Business Journalism in 2007.
In her new book, In Cheap We Trust: The Story of a Misunderstood American Virtue (Little, Brown and Company, 2009), Weber examines the history of thrift in the United States. Drawing from her coursework and conversations with professors Ray Horton and Morris Holbrook, among others, Weber has compiled an elegant history of Americans’ confused relationship with saving and spending — and the moral paradoxes of financial policy.
“We’ve always gotten mixed messages about this issue, especially lately,” Weber says. “The idea of saving is pretty muddled because it is economic and impacted by policy issues, and yet it also has a moral cast to it, partly because of our Puritan history. Appeals for people to either save or spend have often been a confusing blend of pragmatism and moralism.”
Weber will be signing and discussing her book at the Columbia Journalism School Alumni Book Fair on Friday, April 23, from 7:30-9:00 p.m. at Low Library.
More Women Needed in Venture Capital
A guest lecturer in my Venture Capital class — a female partner at a large venture fund — told my students that she wouldn’t chase a contested deal if the management team and board lacked women. In her experience, she (a) wouldn’t win the deal so why waste cycles on it, (b) might have difficulty with “fit” even if she did get the deal, and (c) would rather use her time more efficiently on deals where she had an edge. A New York Times article on April 18, 2010, detailed this problem from the entrepreneurial side: Women are not starting as many companies as men, are having trouble getting them funded and are running into sexism in Silicon Valley’s well-known venture funds.
Perhaps even more distressing is the recent post by The Funded, a popular VC blog that provides Zagat-like reviews of venture investors. It came out with its list of the best VCs, ranked by the extent to which CEOs like working with them. Of the 84 VCs and super-angels who topped the list (from their database of more than 17,000 individual investors) only one woman made the grade: Maria Cirino at .406 Ventures in Boston. Clearly women constitute more than 1/84th of the current pool of venture investors.
How do we break this cycle if we are in fact experiencing a redlining of women in the venture capital ranks?
The success of the Gilt Groupe has made it clear that there is tremendous value in understanding how consumers approach purchasing and demonstrates a competitive advantage for women executives going after consumer Internet ventures. But right now it is an outlier. According to recent research by Professor Ann Bartel and the Women’s Executive Circle of New York, less than 11 percent of executive officers in New York are female. In the Fortune 500, that number is around 16 percent. In a study of Stanford’s MBA graduates, only 10 percent of the executives at start-up ventures are women. Yet nearly 40 percent of MBA graduates are women.
So how do we go from almost 40 percent of MBA graduates to only 10 percent of the execs at start-ups? How are start-ups, which are supposed to be at the cutting edge (and which are generally run by a younger set than the Fortune 500), worse on this issue than the Fortune 500? What can repeat players in the VC market do to equalize the representation of women in senior management at VC-backed startups?
Another guest lecturer (a male CEO of a VC-backed company in which I am an investor) showed a slide with his 12-person management team, all of whom were male. When a student (appropriately) queried why there were no females in management, he descended from the podium, handed her his business card and said “apply.” Two years later, that company has grown tremendously and has some extraordinarily talented women, but none are in the boardroom or have made it to the top echelon of management (yet).
What are entrepreneurs doing, and what role can VCs play, to bring more women into the world of start-ups and venture capital? Is there a tipping point or critical mass? In companies where there are two senior female executives or board members, is there a higher percentage of females company-wide? Some research indicates that having a higher percentage of women in senior management positions equates to better firm performance. If mixed-gender teams are likely more effective, should start-ups go out of their way to achieve critical mass?
Ed Zimmerman is an adjunct professor in the Finance and Economics Division and teaches the Venture Capital class. He is chair of the tech group at the law firm Lowenstein Sandler and angel invests through Grape Arbor VC.
Photo credit: Flickr/rogue3w
The Murky Boundaries of Illicit Trade
The biggest threat to international security is not terrorism but illicit trade, Moisés Naím, editor in chief of Foreign Policy, told students at the KPMG Peat Marwick/Stanley R. Klion Forum on Ethics on March 31, 2010. Technological innovation coupled with cultural and demographic shifts are changing the ways illicit trade is conducted and perceived, he said. Professor Bruce Kogut introduced the speaker and the event was hosted by the Sanford C. Bernstein & Co. Center for Leadership and Ethics.
Underground economies have become a central part of globalization and are increasingly pervasive as the lines between legal and illegal business activities blur. Naím cited several drivers that are blurring the lines, including the diversification of business and the need for factions to influence regulators. “Some places call this corruption,” he said. “Others call it lobbying.” Philanthropy is another possible grey area for corruption and Naím suggested that criminal elements give away money, much like businesses do, as a way to build feel-good awareness for their “brand.”
The recent Rio Tinto case, which Professor Ray Fisman examined in Foreign Policy, highlighted the challenges multinational companies face in diverse business environments where they are subject to different standards and laws.
Additional reporting provided by the Sanford C. Bernstein & Co. Center for Leadership and Ethics.
Frank Byrd ’00 discussed U.S. inflation from an historic perspective and the future prospect of inflation in light of current monetary policies with Professor Emi Nakamura on March 25, 2010. Their presentation was part of Columbia Business School’s ongoing series of community forums on business and the economy.
“Is inflation in our future? I believe being on the right side of the inflation/deflation question could be the single most important investment decision of the coming decade,” Byrd said. “Although many people fear inflation may arise in the future, no one seems to believe it is a problem today. I challenge this belief. It’s not in the future. It is in the present. It’s been with us since at least the late 90s, we just can’t see it — yet. So where is it hidden? How is it hidden?”
Watch the complete video to hear Byrd and Nakamura discuss this issue.
Lab Work for Your Business Model
Management professor Rita McGrath says experimentation must be an integral part of a company’s strategy in order to remain competitive in the future.
“The level of uncertainty and speed of change are touching sectors that used to be buffered from that,” McGrath says. “When you don’t know what’s going to happen, you don’t have much choice except to experiment.”
McGrath offers three rules for results-driven experimentation:
- Keep it cheap in the beginning: When some of your experiments fail — which they will — you don’t want to have all your eggs in the same basket. Limit the resources dedicated to any given experiment and focus on variety instead.
- Don’t sacrifice variety for efficiency: You want to have enough variety to cope with whatever comes your way. McGrath cautions that too many companies lose variety as they become overly focused on efficiency. “A typical company sets up a team with one person in charge, so in effect that’s one experiment,” she says. “If you have 10 little projects with each person looking at a slightly different angle, you’re much more likely to find success.”
- Design experiments as true experiments, not projects: Companies miss many of the insights that they can gain in experimentation because they are focused on completing a project, McGrath says. To learn, they must design each task as a true experiment.
Read more about Professor McGrath’s insights on the business model concept, published as “Business Models: A Discovery Driven Approach” in Long Range Planning: International Journal of Strategic Management (March 2010).
Photo credit: Flickr/Horia Varlan
 |
|
|
Professor Olivier Toubia, left, and Aliza Freud ’01 collaborated on research. |
Key takeaways from the BRITE conference, hosted by the School’s Center for Global Brand Leadership on March 31-April 1, focused on brand strategies for integrating on- and offline communication channels, leveraging communities for problem solving and finding new ways to think about excess capacity. A theme threaded throughout was the growing use of data sets and measurement in the marketing mix. (Read and watch complete audience-generated coverage at the conference’s media hub.)
That theme was explored in a breakout session on April 1, where professors Bernd Schmitt, Oded Netzer, Jonathan Levav and Olivier Toubia along with Aliza Freud ’01 (EMBA) discussed university research collaborations with businesses. The last decade’s boom in data sets — a result of technological innovations — Schmitt said, is one key driver of these collaborations. Toubia and Freud have worked together using data from Freud’s market research firm and online community, SheSpeaks. (Read more about their research in Ideas at Work.)
“Firms have all this data that they don’t necessarily know how to use, and small companies don’t have time to use it,” Levav said. “Our advantage is that we can leverage it into useful information.” He has worked with data from a large German auto manufacturer, for example, to look at decision making in build-to-order transactions.
Yoon Lee, vice president of product innovation at Samsung, presented at the conference and recently collaborated with Schmitt on a forthcoming case study for CaseWorks about the Samsung’s DualView camera and brand leadership. Lee suggested that corporations can have a difficult time getting beyond numbers-led innovation and “don’t know how to express qualitative data.” On the other side, he said, designers are “bad at putting linear arguments on emotional qualities.” Lee suggested that the balance between the technical and emotional qualities is where business school research offers an advantage.
Netzer, who has conducted research on topics as varied as pharmaceutical side effects and alumni giving, added that “cross silo” thinking occurs in the Marketing Division, where computer science, economics, psychology and other disciplines are all in the research mix. “We are bringing different types of perspectives,” he said, "which helps tremendously with the thinking."
Photo credit: Columbia Business School
Will Greece Leave the Eurozone?
Greece is likely to leave the Eurozone in the next few years unless it can achieve major fiscal reform, Professor Charles Calomiris says. In his article “The Painful Arithmetic of Greek Debt Default” (March 18, 2010) from e21, an online economics journal, Calomiris maps out the difficult road ahead for the country’s economy.
At the heart of Greece’s fiscal problems is a toxic combination of outstanding sovereign debt (which exceeds 123 percent of the GDP), poor confidence in the legal and political systems, institutionalized corruption and huge amounts of social-welfare spending. Calomiris says that spending cuts are likely to be the most successful tool the government can use, however, without reform that addresses the country’s chronic corruption, the prognosis for sustainable recovery remains dim. Calomiris writes:
The top priority for Greece right now is to make the immediate and massive cuts in public expenditure that are necessary to restore fiscal balance. Cutting expenditures by a total of, say, 14 percent and promising tax and corruption reforms that would increase taxes by 14 percent would buy Greece time to make the deep reforms necessary to restore its tax base. Failing those tax reforms, additional expenditure cuts would be needed quickly. Following that path not only would resolve the Greek debt problem, it would help restore Greece’s productive competitiveness, increase labor participation and increase savings, all of which would boost growth and reduce the Greek current account deficit. … In the medium term, even if Greece restores fiscal sustainability through expenditure cuts alone, it must address the deeper problems that plague its economy, its taxation system and its society more broadly, all of which revolve around the problem of endemic corruption.
Photo credit: Flickr/lpinseel
Japan: In Decline or at a Turning Point?
What can Japanese businesses learn from the unprecedented crisis engulfing Toyota, Japan’s flagship automaker?
It’s a question that was raised over spring break as the Japan Business Association and the Jerome A. Chazen Institute of International Business launched the 21st annual Japan Study Tour. Forty students, one faculty member and a Chazen representative spent nine days in Kyoto, Hakone and Tokyo. The tour, which was impeccably organized, included site visits to Nomura Holdings, Sony, the Mori Building, Gekkeikan’s sake-brewing facility and, of course, Toyota.
The revered automaker is probably the most powerful symbol of Japan’s rise to manufacturing excellence over the half-century since World War II, and a symbol of Japan’s self-confidence on the world stage in the 1980s. With the perceived safety and reliability of its vehicles providing a key competitive advantage, Toyota has grown in stature over the last two decades, recently eclipsing General Motors to claim the title of the world’s number one automaker.
Then came the recall. Over the past six months, Toyota’s reputation has been severely tarnished by a worldwide vehicle safety recall in which more than eight million vehicles, including the cutting-edge Prius sedan, have now been called back. The carmaker’s recent troubles are also damaging the excellent standing of other Japanese businesses according to some analysts, which comes at a time when the nation is set to be overtaken by China as the world’s second-largest economy. The crisis at Toyota is raising questions about the viability of Japan’s economy, beset by deflation, and its major corporations. With this in mind, our trip to Toyota City — a municipality that revolves around the automaker and houses its corporate headquarters, main research facilities and manufacturing plants — was perhaps the most anticipated company visit of the 2010 tour.
 |
|
|
Japan’s auto industry can still make a comeback, panelists said. |
We toured the corporate museum, a welding facility and an assembly plant, but, not surprisingly, had no meetings with top Toyota executives. However, Toyota’s troubles and their broader implications for Japanese companies was the topic of a lively debate when Columbia Business School’s Alumni Club of Japan hosted us at the Josui Kaikan building in the center of Tokyo.
In a discussion moderated by Japan expert and Michigan’s Ross School of Business Professor Schon Beechler (also a former Columbia Business School professor), alumni and current students talked about the competitive outlook for Japanese businesses and what the future may hold for Asia’s most developed economy. Beechler critiqued the recent Newsweek article “Toyota and the End of Japan” (March 5, 2010) as being too pessimistic. Rather than facing a precipitous decline, she said, Japan is instead at “an exciting inflection point.”
For other panelists — Japanese nationals educated at American business schools — Toyota’s problems are key to understanding Japan’s zeitgeist and are symptomatic of a nation withdrawing from the world. A case in point: While Sony and Nissan both have non-Japanese CEOs, signifying their global outlook, Toyota remains a “homespun” company with its Japanese president, Akio Toyoda, grandson of company founder Kiichiro Toyoda. A company like Toyota needs a leader with a more global mindset, the panelists said.
When it comes to the competiveness of another of Japan’s core industries — electronics — Japanese manufacturers are slipping behind major new rivals like Korea’s Samsung. Panelists agreed that Japanese companies now need to imbue their corporate cultures with a “sense of urgency.” Korea, India and China are nearby nations that are growing quickly and represent a significant threat, they said. The discussion ended on a hopeful note, however. Despite its current troubles, Japan has a lot to offer. The automotive and electronics sectors can come back, the panelists said, and Japan has expertise in healthcare, robotics and tourism that can make it very competitive in the modern global economy. The future of Japan lies in closer integration and cooperation with its neighbors, such as Korea and China.
“There’s a pressure on this country to open up, but there’s also a deep pride in the Japanese culture,” Beechler said. “This is the issue that will determine the future of business in Japan; it will determine whether the nation succeeds or fails.”
Photo credits: Junichiro Mimaki; Guzel Chechenova
A Long View on Health Insurance
Under the new healthcare reform bill, 32 million uninsured people, many in the lowest-income brackets, stand to gain access to coverage. Simultaneously, taxes may increase for higher-income citizens. The near-term ramifications of this reform are still being loudly deliberated on both sides of the aisle, but the long-term outcome of increased insurance coverage is a key consideration as well.
Medical insurance is a kind of investment, says Professor Frank Lichtenberg, who studies healthcare economics. While the 20- or 30-year returns on that investment — better health outcomes and lower costs — are challenging to assess, he says, many study results are consistent with the investment premise. For example, studies have shown that people who have healthcare coverage before age 65 have lower Medicare costs.
“There is a sense that wider health insurance coverage will ultimately benefit Americans as a whole by decreasing expenditure in the long run,” he says, “but it is challenging to quantify that.”
Lichtenberg’s research has shown that states with expanding health insurance coverage experienced slower growth in health expenditures in comparison to states with contracting health coverage.
“It sounds paradoxical,” says Lichtenberg. “Insurance increases the propensity of people to seek and receive medical care. The direct effect is that people will use more medical care, and that should raise costs in the short term. However, in the long run people start to receive preventative care in a timely way that will obviate more serious medical conditions down the road. Lower costs of medicine might also increase compliance and reduce hospital or emergency room visits.”
Photo credit: Flickr/O’Connor College of Law
Insurance is Healthy Economics
As the debate over the revamped health care system intensifies this week, one of the central arguments on both sides of the aisle is about cost. New research from Professor Frank Lichtenberg suggests that increasing health insurance coverage could be key in lowering rates of health spending. That underscores a central premise of Obama’s healthcare plan to expand coverage while reducing costs.
“It is almost a presumption in the debate that uninsured Americans are not getting medical care and therefore their health outcomes are compromised,” says Lichtenberg.
“But there is a lot of evidence that people who lack health insurance still get medical care, albeit in a costly and inefficient matter. They go to the emergency room instead of seeing a doctor on a regular basis,” he says. “Therefore, it is more costly for people to be uninsured.”
Data from Lichtenberg’s research, published by the National Bureau of Economic Research, focused on the reasons Americans are living longer. Using state-level data, he found that higher quality of medical care, newer drugs and better diagnostics are the principal factors for increased life expectancy. However, he also found a correlation between increased health insurance coverage and a slower growth in per capita health spending.
“States where health coverage is expanding faster actually have lower rates of growth for health expenditure,” he says.
“I think that is part of the reform pitch Obama is making, that we can’t afford not to have a much higher rate of coverage and my results are consistent with that,” says Lichtenberg. “It’s not that people are going to live longer, but they won’t live any less long, and it will actually save the system money.”
Photo credit: Tim Hoffman
Rational Decision Making: Myth or Reality?
How do we make decisions? If you believe classical economic models, decision making is a process of choosing the most rational and self-serving option. But, as Professor Stephan Meier’s research shows, many people’s decisions substantially deviate from this ideal. In fact, some individuals make consistently suboptimal choices, which can have an enormous effect on public policy and corporate strategy.
Meier’s research is focused on behavioral strategy, a subgroup of the growing field of behavioral economics. Behavioral economics marries standard economic theory with research in the field of psychology, often with surprising results.
Fruit or Chocolate?
In a famous experiment from 1998, Daniel Read and Barbara van Leeuwen of Leeds University Business School looked at how well individuals predict hunger and the effect of appetite on making choices. In the study, the researchers asked participants, “Deciding today, would you choose to eat fruit or chocolate next week?” Seventy-four percent of respondents chose fruit for next week. However, when the same respondents were asked about their choice a week later, 70 percent of them now picked chocolate, without regard to what was previously chosen. While this may not seem surprising to any chocolate lover, this effect is called present bias and it reveals an inconsistency in decision making not previously accounted for in economic theory and strategy.
Meier’s current research looks at the effect that present bias has on the financial services industry and the strategies firms can employ to provide benefits to both the nonrational consumer and the firm. In recent papers, he examined the links between present bias and credit card borrowing, showing that the association between higher credit card balances and present-biased individuals is robust — in other words, if you are the type of person who switched from fruit to chocolate, you will be more likely to have more credit card debt.
Capturing Value from Irrational Choices
Traditional for-profit financial services firms have used the irrational tendencies of consumers to their benefit — and even to the consumers’ detriment — which can result in long-term consumer attrition but high short-term profit margins. Meier suggests these firms might instead capitalize on the non-rationality of their consumers by offering products that benefit both parties, both to maintain long-term relationships and attempt to do well by doing good. For example, a firm could create a Christmas club account, which would allow consumers to save money in a non-interest bearing account for a specific purpose, such as the holiday.
Both the banks and the present-biased consumer benefit from this arrangement. Although it may seem like “doing well by doing good” is the social sector’s strength, there is also a lesson here for corporate firms: Think long term when building value for donors and design giving strategies that recognize and allow for nonrational decision making.
Meier encourages firms, both in the public and private sector, to “recognize people may make suboptimal decisions, but they are often systematic about these decisions. Since they are not random, firms can build on these behavioral patterns and predict how consumers may make decisions, designing products that maximize long-term value to the firm, not just squeezing short-term profits.”
This article also appeared in the Social Enterprise Club alumni newsletter. Learn more about the Social Enterprise Club and the Social Enterprise Program.
Photo credit: Flickr/The Consumerist
Competition, Profits in Latin America
Drawing on their industry background and experience, Columbia Business School’s Chazen Fellows are a group of students selected to report on events and activities relating to international business. In the most recent edition of the Chazen Web Journal, two fellows explore competitive advantage in old and new industries — energy and social networking — in Latin America.
James Walsh ’10 examines the emergence of socialism in Venezuela and its effect on the energy industry. He brings a unique perspective to this issue: before business school Walsh worked in economic and market analysis at Citigroup, researching domestic and international economic issues. After he graduates, he plans to return to his native Texas to work on energy-related matters. Exxon’s decision to pull out of Venezuela, Walsh argues, was one that put the energy company at a “disadvantage relative to its competitors, who clearly still find operating in the increasingly difficult Venezuelan market profitable.”
Walsh says the larger geopolitical risk for the United States is less volatile and concludes that a symbiosis exists that is mutually beneficial. “The U.S. needs foreign oil and will continue to purchase it from Venezuela and other not-so-friendly regimes,” he writes. “Conversely, Venezuela needs the U.S. as the closest large-scale consumer of its energy resources and as a source of institutional and operational expertise in the exploration and production industry.”
This issue also features a report on an emerging industry in Latin America: online social media. Lauren Frasca ’10 examines the battle between Orkut and Facebook for social networking dominance in Brazil. She draws on her prior experience developing television and digital content for major broadcast networks, along with her business school studies and a newfound interest in Brazil.
Frasca argues that although Orkut currently has dominance in Brazil, it would be mistaken to overlook Facebook as a major player in the near future. Indeed, Orkut once had dominance in India as well, but “recent numbers released show Orkut’s unique visitors in India falling by 800,000 within the month of August, while Facebook grew its unique visitors in India by 700,000 during the same time period. Indeed, Facebook has launched a few strategies to aggressively pursue Orkut’s user base in Brazil.” While both companies also need to focus on monetizing their businesses, Frasca concludes that the number of users is as important. “The key battle in winning the social networking war is that of developing a scalable, profitable business model.”
Read more in the March issue of the Chazen Web Journal.
Photo credit: Beatrice Murch/Flickr
Buzz Fail: Whose Default Is It?
Google’s rush to push its social media challenger Buzz out the door was an epic public relations fail for the company. With Buzz’s original default settings, e-mail contact lists, Picasa photo uploads and marked Google reader items suddenly became public domain overnight — and users were not happy. In the month since Buzz launched, Google has faced user outrage and has had to update its default settings on the online tool.
Could Google have avoided this? Easily, says Professor Eric Johnson. He says that too often defaults, in this case the privacy settings, are designed and implemented without being considered at the highest level of strategy. What works in engineering lab may not jibe with the marketing strategy.
How Do You Create An Appropriate Default?
Ask your customers.
“If Google had asked their users, they likely would have said ‘Only do that if you ask me first,’” Johnson says. “Google didn’t realize that the defaults they set would be objectionable.”
Johnson suggests that the beta-testing process for a new product should include a survey that asks customers what they prefer. Survey results can help a company design the appropriate default. In the case of Buzz, that might have been what he calls a “forced choice,” which requires customers to make active choices or be denied access to the product. Alternatively, if a firm knows relevant information about a customer’s behavior, interests or profiles, it can create a “smart default,” which generates individualized options that are optimal for both the firm and the customer, says Johnson. The key thing is to design a system that is a win for both parties, not just the firm.
“Create defaults that are appropriate for the customer,” he says.
Read more about Johnson’s research and how to design defaults in “Nudge Your Customers Toward Better Choices” (Harvard Business Review, December 2008).
Another Brick in the Pay Wall: Views on Publishing's Future
Build an iPhone app or create a pay wall? Three professors share their thoughts on how the print industry might shape its business model for a digital future.
What Can Online Newspapers Learn from the Airline Industry?
Brett Gordon, Assistant Professor, Marketing
When fuel costs spiked in 2008, none of the large air carriers wanted to be the first to charge for checked baggage. Few had noticed when low-cost carrier Spirit Airlines began charging for the first bag in June 2007. Nearly a year later in May 2008, American Airlines — one of the “majors” — announced that it would charge for the first bag. Before the end of summer, five of the seven largest North American carriers followed suit.
In some ways, the online news industry is facing a similar problem, albeit one without as simple a solution. After months of speculation, the New York Times recently announced that it would implement a new payment system starting in January 2011. Despite a few early chargers (e.g., Wall Street Journal) the vast majority of online news is provided freely to the public. Most newspapers would like to charge, at least partially, for content, but no one wants to be the odd paper out and make the first move. In the academic parlance of game theory this is called a coordination problem, and it occurs repeatedly in countless industries. So how do firms solve this issue?
Members of the airline industry are highly sophisticated at interpreting other airlines strategies. Smaller airlines tend to look to the majors before instituting pricing changes. The large airlines recognize their role and plan accordingly. Online newspapers need to develop a similar ability if the industry is to successfully move to a dual paid/ad-supported revenue model, however, their task is harder in part because the industry is more fragmented.
What Will the Publishing Industry Do Next?
Rita McGrath, Associate Professor, Management
A new development is that the Web itself is starting to splinter. In the early days, you had one way of accessing online content — that was through a computer — and developers could optimize for a certain kind of user experience. Today, people access content in myriad ways that are not always compatible with each other or optimized. A developer or a publisher has to decide whether to hit every platform or optimize for Blackberry, iPad or some other platform. They have to ask, “What is going to be our platform of choice?”
The content business model will be less driven by the need to aggregate the most eyeballs on a common platform, and move towards a model determined by the ecosystem that can draw the most participants. For example, Apple is trying to create a vertically integrated ecosystem with its products and partners. Rival ecosystems will start to compete for business with publishers, and media companies and content providers will watch to see where people are participating.
Publishers will have to come up with ways to monetize their participation in an ecosystem. There is hope that content providers can cut themselves more lucrative deals on these coming platforms.
What Is the Right Price?
Ava Seave, Adjunct Associate Professor, Finance and Economics
It is not unreasonable for companies to charge for information on the Internet. Many try-before-you-buy and sampling schemes are being tested across all types of media. Practically speaking, before companies make decisions about pricing, they should test the proposed pricing models as much as possible before rolling it out.
When the New York Times raised its newsstand and subscription prices in May 2009, they got a good idea of the inelasticity of their consumers’ demand. The move likely emboldened the paper to announce its current scheme. With time before the debut of its pay wall in 2011, the news organization can solicit customer feedback — and handle the blowback.
Every product is different in terms of where the company should put the price. The Times can measure the frequency with which people come back to the site, so it can set the pay wall at the optimal place for maximizing revenue. It is likely that the Times will adjust its online price as needed as its experience with it evolves.
Last Thursday, February 25, Howard Schweitzer and Jim Lambright entered Uris Hall serenely, shook off the snow and immediately began their discussion with a crowd of students and faculty members. While most people would have been dismayed by the travails of taking a train through a blizzard from Washington DC to New York — and just to visit Columbia Business School students! — Schweitzer and Lambright viewed the task as trifling.
Not surprising, given that until recently Schweitzer ran TARP (the Troubled Asset Relief Program) and Lambright, who had been the president of the Ex-Im Bank, served as TARP’s chief investment officer. When Schweitzer took the job in the fall of 2008, Lehman and WaMu had disintegrated, Wachovia had been acquired to stave off a panic and Goldman Sachs and Morgan Stanley, the last two major investment banks, had converted themselves into commercial banks. Running TARP, Lambright said, was like working in the emergency ward of a wartime hospital: lots of blunt instruments and patients enduring a great deal of pain. After that experience, a three-hour journey through a snowstorm was barely worth noticing.
Schweitzer and Lambright spoke to a lively and elite audience as part of the School’s Community Forum on Business and the Economy organized by Dean Glenn Hubbard. They gave an inside account of the beginning of TARP from the day Neel Kashkari first called Schweitzer to start up the program. With no clear mandate and makeshift offices hidden in crevices of the Treasury’s buildings, Schweitzer was given the task of managing the list of firms that the Treasury handed over.
Schweitzer recalled the first days of the program: Another $40 billion for AIG, ok, we’ll work that one out, we’ll do non-voting equity. CITI needs an injection of finance, ok, we’ll work out the warrants and take board seats. The public is in an uproar over compensation packages already in contract. Nothing much can be done; the rule of law prevails but let’s put in place a pay czar to make sure that the public money is spent wisely. Over here, the auto industry is bleeding cash, no credit is forthcoming and the repercussions on the financial system are massive. We’ll work something out, but there is an election happening too and a new guy is taking over January 20. Do I show up for work? Does TARP carry over and do we keep on working? What do I do January 21? Oh, it is business as usual. By the way, will TARP ever fully repay the taxpayer? The estimate is that it will be $120 billion short, but that’s the official estimate. It’s likely to pay back except for autos … and AIG?
Schweitzer and Lambright answered every question. While they were both very modest, there was still a sense that these two men knew how to get a job done. At one point during the heated events in 2009, the Wall Street Journal quoted former Treasury Secretary Henry Paulson, who hired Lambright. Paulson said about Lambright, “He’s unbelievably tough, and … the job is to save the financial system.”
Leaving aside whether one thinks TARP was a good idea (I do) or a bad one, the impression left by these two very amiable and frank government servants was that they took the entrepreneurial challenge and ran with it, steering carefully within the confines of the law that sets out hiring practices (they needed to hire fast) and transparency. Now after stepping down from TARP, Schweitzer has joined the big law firm Cozens O’Connor; Lambright is pursuing green energy at Sapphire Energy.
No revolving door into Wall Street for them. One had to leave the room very impressed.
Photo credit: Flickr/onecle
Why did subprime mortgage borrowers make the choices they did, even when in many cases their decisions made them worse off than they were to begin with? To answer this question we need to take a closer look at how people determine what is most in line with their self-interest — and how they fail.
Self-Interest Can Be Led Astray
We continually draw on the process of detecting patterns and making order from chaos when we are trying to figure out which choices are in line with our self-interest. In order to choose effectively, we ask ourselves — consciously or subconsciously — How does it look? We’re usually pretty accurate, but there are some systematic ways in which our ability to determine what’s true might fail us, which can have dire consequences. Our pattern-detection abilities are just as good at finding apparent patterns in purely random events as they are at finding actual patterns. These tendencies can also lead us astray when the true pattern is more complex than we realize.
We also consult our emotions from the very beginning, asking ourselves, How does it feel? We use the information we collected in the former process as a backdrop for assessing our feelings about options confronting us and their potential outcomes, and we make the choice that we feel will have the most positive consequences. But as with pattern detection, there are some systematic ways in which consulting our emotions can lead to error. It’s easier to feel the present consequences of a choice than its future ones, so we give greater weight to the former. However, decisions based on present desires may not be well suited to our modern world, where the ultimate goal is to be as satisfied with the long term as possible.
Buying Into the Illusion
So what kind of patterns and feelings were people detecting when they looked at the costs and benefits of owning a house?
Owning a home had traditionally been seen as a safe investment for the average person, almost guaranteed not to lose value over time. Indeed, the inflation-adjusted average home price had stayed almost constant at $110,000 (in today’s dollars) between the end of World War II and 1997. At that point a new pattern emerged, with prices nearly doubling to about $200,000 between 1997 and 2006 due to a perfect storm of demand-increasing factors: low interest rates, the creation of new financial products based on mortgage income and aggressive lending practices to name just a few. Many local markets grew even faster, especially those in California, New York and Florida.
Seeing this dramatic and consistent growth convinced people that this was a truth about the world — that prices would continue to rise in the future. A nationwide survey conducted by Fannie Mae in 2004 found that 70 percent of Americans considered buying a home to be a safe investment, nearly double the percentage that considered a 401(k) retirement plan to be a safe investment.
Combined with the more immediate and tangible benefits that purchasing a home offers, real estate began to look like an amazing investment. People buying a home to live in for years to come were afraid that if they didn’t act immediately their dream home would become dramatically more expensive, while speculators saw a golden opportunity to get rich quickly. They rushed to enter the market as quickly as possible, driving prices still higher.
But while the upward trend in housing prices could have been consistent with a pattern of constant increases in the future, or moving toward a new and permanently higher plateau, it could have been equally consistent with another pattern that is more variable and difficult to recognize: boom and bust, or a “bubble.” In a bubble situation people feed off one another’s enthusiasm, pushing prices far higher than the true value of the assets in question. Eventually it becomes clear that they’re overvalued, at which point the bubble pops as everyone rushes to sell their assets.
Our pattern-detection abilities and feelings can serve as a powerful source of information about the subtleties and complexities of the world around us, but once we’ve come to see a particular pattern we subconsciously want it to be right. It feels better to think that we’ve unlocked the mysteries of the universe and of the future, and when the pattern promises wealth or other forms of success, as in the case of the subprime market, it’s even more tempting to believe in.
Sheena Iyengar, the S. T. Lee Professor of Business, is the author of The Art of Choosing (Twelve, March 2010), which was published this month. Watch a video interview with Professor Iyengar about the book.
Photo credit: The Truth About Mortgage
Focus on Asset Quality, Not Activities
After last month’s proposal of the Volcker Rule from President Obama — an idea crafted by former Fed chairman Paul Volcker that would limit banks’ investing in speculations with subsidized capital — industry chatter likened the move to a return of the Glass-Steagall era. In the new issue of Ideas at Work, Professor David Beim examines the assumptions of the new rule and suggests a modern adaptation for the Depression-era regulation.
Volcker Rule Assumption 1: Only institutions that take insured deposits need to limit risk. Beim argues that all major financial institutions — not only the ones that take insured deposits — are liable for enormous risk. “We are now living in a world of massive moral hazard in which the government has shown it will bail out systemically important financial institutions whether they take deposits or not,” he writes. “Deposits are not the issue. We are far past that point.”
Volcker Rule Assumption 2: Banking activities must be segregated in order to prevent risk. Beim says, “It’s not the nature of the activity, but the extent of the risk.” He argues that while the rule’s goal of controlling for excessive risk is important, the focus of the rule — and of related regulatory efforts — should shift from activities to asset quality:
An effective modern adaptation of the spirit of Glass-Steagall would place substantive limits not on activities such as trading versus holding but on asset quality — what gets traded or held. Regulators are very cautious about this. It runs counter to modern regulatory thinking to impose such limits.
But some such limits may be appropriate. To adhere to Volcker’s proposal, all private equity investments and many hedge fund investments are both illiquid and themselves highly leveraged. Volcker suggests — and is correct — that such investments are not appropriate for the balance sheet of any financial institution that might have to be bailed out by the government. This idea can be pushed even further. …
Does government have the will to restrain this kind of risky lending, reversing its earlier posture? Time will tell. The current proposal, said to be reviving the spirit of Glass-Steagall, appears to have no political cost. There is no constituency for proprietary trading by banks except the discredited banks themselves. Unfortunately, as it stands, a ban on proprietary trading does little to make banks safer. Substantive restrictions on financial asset quality would go much further, giving the spirit of Glass-Steagall some modern substance.
Read the complete article in Ideas at Work.
Photo credit: Flickr/epicharmus
First CSR Case Competition Considers Norway's Pension Fund
Above, from left to right: Christopher Bishop, IBM; winning team, Elizabeth McCarthy ’11, Blaire Fernandez ’11, Justin Kidwell ’11, Kristin Stepaniak ’11; and Jennifer Crozier, Director, Corporate Citizenship and Corporate Affairs, IBM.
On November 18, three student teams gathered at Calder Lounge in Uris Hall to compete in the final round of the First Annual Columbia Business School Corporate Social Responsibility Case Competition sponsored by IBM. The winning team of Elizabeth McCarthy ’11, Blaire Fernandez ’11, Justin Kidwell ’11 and Kristin Stepaniak ’11 were awarded a prize of $1,500.
The case competition was organized in a joint effort by the CSR P2P Group, part of the Social Enterprise Club, and the General Management Association with the support of Columbia CaseWorks. It challenged teams of first- and second-year students to apply concepts and theories to a current challenging CSR issue.
This year’s case was “The Norwegian Government Pension Fund: The Divestiture of Wal-Mart Stores Inc.” written by Andrew Ang, the Ann F. Kaplan Professor of Business. The case considered the exclusion of Wal-Mart from the Norwegian Government Pension Fund’s investment universe and the subsequent divestiture of Wal-Mart by the fund; it looks at the issues socially responsible investing raises for portfolio managers.
The student teams presented their evaluations of the fund’s disinvestment and the judges critiqued them on their innovative approaches. Several proposed solutions emerged in each 10-minute presentation followed by a Q&A session. The panel of judges for the competition included Jennifer Crozier, Director, Corporate Citizenship and Corporate Affairs, IBM; Christopher Bishop, IBM; and Professor Ang.
After the students’ presentations, Ang, who has advised the government of Norway on strategic asset allocation for the past four years, expressed his point of view on the case. He has said the country has a history of ethical investing.
“Ethical considerations played an important part in running the fund,” he said. “Norway’s stance on ethical investing comes from the society and they view it as an important issue.” Ang also pointed out that it is not a “static process” but it has evolved and will continue to change in the future.
One of the main issues in the case of Wal-Mart was child labor, said Ang. In the past, the fund has excluded investments in firms that are connected to nuclear weapons and cluster bombs; it also has a history of exclusions based on humanitarian and environmental issues.
This case competition gives Columbia Business School students the unique opportunity to explore CSR topics while learning firsthand what goes into the effective implementations of corporate responsibility policies, and the challenges that companies and advocacies can face in the process. This inaugural competition was truly successful and we hope it has been just the first of many in the years to come!
Photo courtesy of Mara De Monte
A Confident Voice for Women in Finance
“I am the luckiest person I know,” Sallie Krawcheck ’92 said at an event in New York on February 4, 2010. Krawcheck, who is the president of Global Wealth & Investment Management at Bank of America, spoke at a presentation hosted by Columbia Business School and the Women’s Executive Circle of New York on findings from the 2009 New York Census. Professor Ann Bartel presented the data, which revealed that fewer than 11 percent of executive officers in New York are women (see related post).
“Don’t wait for a company to put an initiative in place,” Krawcheck told the women in the audience about moving forward in their organizations. “Take ownership of your career. Have conversations about money. Be self-aware and very honest with yourself about your strengths and weaknesses. When you ask for feedback, make sure you get it and then don’t push it away, even if it’s hard to take.”
Her advice for women early on in their careers is to take speech lessons, so that they exude confidence in their speaking. Another key to success, she said, is to know what to worry — and not to worry — about.
“My mantra is ‘Water off a duck’s back,’” she said. “Don’t focus on what you can’t control but on what you can, like your own behavior.”
Responding to a question from the audience about leadership in tough times, Krawcheck said it was important for leaders to skew toward optimism.
“People want to work with someone who is open; it’s about leading and interacting with the people who work for you,” she said. “Make them feel included and respected. It’s okay as a leader to show that you don’t always know all the answers.”
Photo courtesy of Columbia Business School
Neuroscience's Lessons for Leadership
Understanding some basic lessons from neuroscience can make you a more effective leader — and help you avoid mental practices that carry serious risks for your health, according to executive coach and author of Your Brain at Work David Rock.
On February 5, 2010, Rock joined Columbia University professor of psychology Kevin Ochsner, a leading researcher on the neuroscience of emotional regulation, for a workshop organized by the School’s Program on Social Intelligence as part of its “Science Meets Practice” series. Columbia Business School professor Hitendra Wadhwa moderated the discussion.
The workshop focused on emotional regulation — feeling the right emotions at the right time — a skill that is especially important in the workplace. Negative emotions are powerful: they can significantly reduce functioning in the prefrontal cortex, the region in the brain that supports higher intellectual processes, said Rock.
Ochsner gave two scenarios to explain how emotional regulation works in a stressful situation.
The typical response: You try to suppress your feelings. This turns out to be more physiologically arousing than expressing what you feel. Studies show that suppression not only reduces short-term memory and causes your blood pressure to go up — it also raises the blood pressure of your colleagues. Over time, this can lead to long-term health problems like diabetes and cardiovascular disease for both you and your peers.
A new response: Try a “reappraisal” strategy and decide to see the situation in a different way so as to prevent an emotional response. For example, if your boss criticizes your presentation, you might adopt the perspective that she is having a bad day, or focus on what you will do in your next presentation.
Ochsner explained that suppression and reappraisal cause very different responses in the brain: while suppression increases activity in areas involved in generating emotional responses — diminishing the brain’s capacity for higher intellectual functions — reappraisal reduces activity in them. So choosing to reappraise rather than suppress can literally prevent a negative emotion.
How to become more adept at reappraisal?
Practice mindfulness and pay attention to the present in an open, accepting way, Rock advised. Mindfulness enables you to turn off the brain’s “narrative circuit” — conscious, active thought — and activate “direct experience,” giving you a more accurate perception of reality and allowing you to be more flexible in how you respond to the world.
Rock believes that people will be more effective leaders if they can consciously move back and forth between these two modes. It’s a premise based on science: studies indicate that people high on a mindfulness scale have a greater ability to shape how they react and what they do than people with a lower capacity for mindfulness.
Photo credit: MR McGill
Stiglitz Says Change Is Still Needed
Speaking in a community forum with MBA students on February 19, 2009, Professor Joseph Stiglitz vigorously advocated for the government to nationalize banks — temporarily — in order to rein in the financial crisis. That didn’t happen, he laments in his new book, Freefall: America, Free Markets, and the Sinking of the World Economy (W. W. Norton & Company, Jan. 2010), and as a result the conditions that led to the crisis have continued.
“My main criticism of the Fed is not that it kept interest rates too low; it’s that it didn’t implement the regulation that it should have,” Stiglitz said in an interview with Bloomberg radio, broadcast live from Columbia University on February 16, 2010.
In other recent interviews, the Nobel Prize-winning economist has said the government should issue another round of U.S. stimulus spending focused on jobs and has supported proposals from the Obama Administration to restrict banks.
“Unless incentives and constraints are changed through regulation, it is unlikely that behavior on Wall Street will change. And once again, our financial system, our economy and the taxpayer will be in jeopardy,” Stiglitz wrote in the Los Angeles Times on January 29, 2010.
In the December 2009 issue of Finance & Development (a magazine produced by the International Monetary Fund) a thoughtful profile examined Stiglitz’s academic roots, from his early work at Amherst and MIT to his groundbreaking papers with Professor Bruce Greenwald in the 1980s about how changes in financial and credit conditions affect the business cycle.
The profile quoted Fed chairman Ben Bernanke, who has praised Stiglitz and others’ work: “‘[their research] gave economists the tools to think about the central role of financial markets in the real economy’ and led to a better understanding of how ‘extreme disruptions of the normal functioning of financial markets … seem often to have a significant impact on the real economy.’”
UPCOMING EVENT: The Heyman Center for the Humanities will hold the panel “The Continuing Financial Crisis: Perspectives from the North and the South” with Professor Joseph Stiglitz; Prabhat Patnaik, professor of economics at Jawaharlal Nehru University, New Delhi; and Jomo Kwame Sundaram, founder, International Development Economics Associates, at noon on March 25, 2010. Register for the event.
Photo credit: World Economic Forum
The new issue of the Chazen Web Journal — our second in 2010 — highlights several stories that echo a larger discourse currently affecting millions around the globe: the economy’s intersection with regulation. Two recent forums explored the issue with views on the banking industries in Japan and China.
In December, the Sanford C. Bernstein & Co. Center for Leadership and Ethics and the Center on Japanese Economy and Business hosted the panel “Why Was the Financial Crisis Less Enduring in Japan and Other Countries…This Time Around?” Adrian Almazan ’10 reports on the panel’s discussion of Japan’s banking history and exposure to risk, and how reform and regulation in Japan’s financial sector helped set the country apart during the recent economic crisis.
Almazan also reports on the China Business Initiative’s forum, which took place in October and featured Ma Weihua, president and CEO of China Merchants Bank. Weihua gave his insights on the globalization of the Chinese banking sector and how the government’s use of regulatory measures may have helped China avoid a more severe impact from the current crisis.
Mr. Ma compares the current industry dynamic to a marathon race: Those runners that once led the pack have fallen down, and the Chinese banking industry has an opportunity to sprint to the front. One of those potential sprinters is Mr. Ma’s own China Merchants Bank (CMB). CMB began 20 years ago with RMB 100 million in capital and a single office of 36 people. Today, CMB is a national commercial bank listed on both Shanghai and Hong Kong Stock Exchanges. CMB has net capital exceeding RMB 100 billion and total assets approaching RMB 2 trillion, with a network of 700 outlets and employee headcount of 37,000.
This issue also features an interview by James Walsh ’10 with Professor Ray Horton about the defining political events and trends that have shaped — and continue to shape — the world’s economy. In addition, Brian Hindo ’10 shares a discussion with Professor Gita Johar on the application the “4Ps” of marketing to the world’s the poor.
Read more in the February issue of the Chazen Web Journal
Photo courtesy of Chazen Institute
Taffy Holliday ’85 sits in the judges box at far right at the 2010 World Championships.
Olympic figure skating judge Taffy Holliday ’85 says music selection is as important as technical expertise for winning the gold medal at this year’s games, which began Friday. Holliday, a former U.S. champion, always had a passion for skating, even as she built a successful career at IBM and launched several software start-ups. Today, Holliday is the chief marketing officer and vice president of strategy for a new company called Value Spring. That's on pause, however, while she's in Vancouver judging the pairs figure skating competition.
How did you become an Olympic figure skating judge?
You become one in the same way you become an athlete — you train. You attend school and judge local events and gradually move to higher-level competitions. This is my first time as a judge at the Olympic Games.
Skating's new scoring system was implemented after a 2002 scandal where a judge allegedly participated in vote trading. However, does the new system favor technical skating over artistry now?
The intent was to remove any possible national bias. I think it has definitely removed the worst infractions of the past. Any new system takes a while for people — judges, coaches and skaters — to learn. While it may appear that the male skater who successfully executes a quadruple jump becomes the champion, it usually means he was equally strong in other areas and better overall than the other skaters. There have also been skaters who can do the tricks, but are just not good skaters. Hopefully, we as judges are doing a better job at scoring that appropriately. Skating is a combination of artistry and sport. One of the many good aspects of the new system is it gives us five ways to evaluate the artistic aspect of figure skating, including choreography, performance and music interpretation.
What are the similarities between being an Olympian and a successful business leader?
It’s about having a vision of what you want to be and what you want to accomplish, and then preparing and successfully executing a strategy. It’s important to form collaborative teams and bring together people who have the same vision who can help and support you.
Photo courtesy of Taffy Holliday ’85
What Corruption Fighters Can Learn from Figure Skating
In a recent Slate column — with a nod to the upcoming Vancouver Olympics — I describe a study by Dartmouth economist Eric Zitzewitz, who analyzed the sometimes shady world of Olympic figure skating. The figure skating community was shaken by a scandal in the 2002 Salt Lake City Games when a Russian judge, together with a bloc of other judges, allegedly colluded to hand victory to a Russian ice dancing pair over their Canadian competitors.
The International Skating Union responded by changing the way competitions are judged. Today, the scores are reported anonymously and only a subset of those are used in the final judging process. It may seem odd, at first, to expect that by removing direct public scrutiny of individual judges and concealing their identities, it would curtail vote trading. But the idea is that anonymity makes it hard to verify that corrupt judges have actually delivered the scores that they’ve promised — no one can tie any individual judge to a score. It’s hard to collude if you can’t tell whether your partner in crime is keeping up his end of the bargain.
Yet the study finds that these attempts at reducing collusion actually had the opposite effect. While it may have become a bit more difficult for corrupt judges to maintain a collusive arrangement, this effect was overwhelmed by the negative impact of reduced public scrutiny. Zitzewitz found that in the new system, having a home-country judge on the anonymous panel boosted a skater’s score by even more than it did under the earlier regime. (His data did not reveal, however, whether the home-country bias came just from the skater’s countryman, or a cabal of colluding judges — they were anonymous, remember.)
These findings are interesting even if you are not a fan of figure skating or sports in general, as they reveal some of the challenges in designing rules to fight corruption. With the right data we could run a similar type of study for, say, highway procurement contracts in California to analyze whether making bids public decreased corruption — because of greater public scrutiny — or increased it by making collusion among bidders that much easier.
The findings also highlight the unexpected effect of well-intentioned efforts to combat corruption. Anonymity could, in theory, have helped to make figure skating a cleaner sport. In reality, things played out very differently. The lesson, then, is that we should be open to experimenting with different means of keeping competition honest, whether there are highway contracts or gold medals at stake. And we need forensic statisticians with the data to see whether our experiments are successful.
Where Are the Women in the C-Suite?
In August 2009, Sallie Krawcheck ’92 was named president of Global Wealth and Investment Management for Bank of America making her one of the financial world’s top female executive officers. It was a bright spot for corporate women but also, perhaps, a too-rare one.
A new census study by Columbia Business School and the Women’s Executive Circle of New York shows there has been little change in the number of women executive officers in the top 100 companies in New York State between 2006 and 2008. Professor Ann Bartel presented the study’s findings on February 4, 2010, to an audience at the Bank of America building; after the presentation, Krawcheck spoke. Many Columbia Business School alumnae, including Jill Granoff ’85, CEO of Kenneth Cole, were in attendance.
Overall, less than 11 percent of executive officer positions were held by women in 2008, representing no statistically significant change from the previous 2006 census. In the banking and finance sectors, the number of female executive officers was higher than the average, with 17 percent of positions filled by women. Seventy-one of the 100 firms surveyed had no female executive officers.
In board rooms, women have had more progress since 2006, holding 17 percent of board positions, up from 15.6 percent. Bartel noted that several industries, notably retail and consumer products, have a much higher percentage of female board members likely due to the industry’s female consumer base.
“It is sobering that the numbers are as low as they are,” says Bartel, who oversaw the research as part of the School’s Workforce Transformation Initiative, which is made possible through Bank of America Merrill Lynch. “Women represent approximately 40 percent of the MBA population, but the numbers are very low in the executive officer pool.”
How Does the Copenhagen Accord Affect Business?
The ho-hum results from December’s international climate summit in Denmark drew out uncertainty about the future of global environmental laws — and that could cripple economic progress toward lower carbon emissions, says Professor Shang-Jin Wei. The 2009 Copenhagen Accord recognized the need for cooperative action on climate change but no legally binding targets were set. In a recent interview with Public Offering, Wei, newly appointed director of the Jerome A. Chazen Institute of International Business, shared his thoughts on how innovation and the environment are tied to the global economy.
“The uncertainty over whether Copenhagen and related negotiations will turn into binding policies deters businesses and governments from moving forward,” he said. “If environmental policy is not law, then firms and governments don’t want to produce something that is 20 percent more expensive than existing, less environmentally safe products. However, once it looks more certain that a law is going to exist, firms will respond or, more likely, take advantage of whatever new laws will be put in place.”
Wei suggested that innovation of environmentally friendly products can benefit firms in both rich and poor countries.
“Invention and production don’t necessarily have to go together and outsourcing is a demonstration of that,” he said. “It is quite possible that both high-income and low-income countries can benefit. Firms in high-income countries can get royalties and other profits from inventing products and innovating ideas; low-income countries benefit by producing or assembling some of those products or parts.”
However, key questions remain: who will finance long-term carbon-reduction measures and what will those measures look like? Sharing the environmental and fiscal burden is likely to come through financial or technology transfer, or some combination thereof, from industrialized nations to emerging markets. Potential for new markets to leapfrog into next generation low-emission technologies is also a promising alternative. As the issue of legally binding targets gets closer to reality, Wei shed light on the view from across the Pacific.
“The governments of developing economies worry that industrialized countries have already reaped the benefits of emitting pollution into the atmosphere,” he said. “High-income countries have already had the main course. Now as emerging markets come to the table, they feel they only get the dessert but are being asked to pay for the entire bill.”
“Of course, inaction by all sides is not really an option,” he adds. “Science suggests we’re not running out of time right now but we’re on course to, and something has to be done.”
Photo credit: COP 15
Will Dubai Hold Long-Term Allure for Western Business?
The 12-lane Sheikh Zayed Road is surrounded by new construction and a computer-operated train system.
On January 9, 2010, a group of 22 Columbia Business School students and Professor Todd Jick embarked on a trip to Dubai and Abu Dhabi organized by the Jerome A. Chazen Institute of International Business to learn about the United Arab Emirates through meetings with local and multinational companies and cultural excursions.
After ardently studying Dubai prior to the Chazen study tour — and then spending a week there — I had to ask myself, what’s not to love about Dubai? From a lifestyle perspective, the public amenities are endless: a remarkable public train system, well-maintained roads, modern construction, an educated population and great weather (almost) all year round. From a business perspective, there are tax privileges for many companies, particularly those that choose to reside in a tax-free zone such as the Dubai International Financial Center where businesses only need to pay rent and an incorporation fee. For many, that is a small price to pay for setting up a commercial hub in the Middle East. That incentive combined with the numerous amenities that Dubai has to offer make it a hot spot for attracting well-educated Western talent.
However, from another perspective, a question crossed the minds of many professionals: What are the drawbacks of being in Dubai? As one professional said, “There is not just a glass ceiling, there is a concrete ceiling here.”
 |
|
|
The allure of Dubai: the DIFC tax-free zone (arch) and in the distance, the tallest building in the world. |
He explained that the concrete ceiling exists because the native Emiratis receive a preference for top positions in government, private-public organizations, sovereign wealth funds and, in Dubai, these organizations have driven its massive growth. The Sheikh and his government have designed the country such that native Emiratis and offspring of male Emiratis will be the only people allowed to become UAE citizens and will be protected financially under UAE law. Such a system is unfamiliar to many of the Westerners that reside in or plan to move to Dubai and may hinder their plans to settle there for the long term. In addition to the drawbacks from a professional perspective, what implications does the UAE citizenship law hold in other areas, such as the justice system? Do Emiratis receive preference in procedures of law and order?
These questions and concerns were frequently discussed on our Chazen Study Tour. Our group was curious as to what lay below the glitz and glamour of Dubai. Regardless of the current drawbacks, I believe that Sheikh Mohammed and his government should be commended for having made incredible strides in Dubai’s development, such as transforming from a small desert city in the 1990s to a bustling commercial hub with remarkable worldly achievements, including the largest computer-operated train system and the tallest building in the world. As an emerging economy with much more to accomplish, I am sure that the UAE government will learn what is right and best for the country’s economy and its citizens.
Photo credits: Michelle Nathan ’10
Girls Wanted: China's Gender Imbalance Plays Havoc on Savings Rates
New research from Professor Shang-Jin Wei featured in the latest issue of Columbia Ideas at Work attributes the high savings rate in China to the severely skewed gender ratio — 100 girls born for approximately every 122 boys — that has emerged under the country’s one-child policy, which was instituted in 1980. The result is that today, 30 years later, there is a very competitive marriage market. Parents save at high levels in order to give their sons every possible advantage in attracting a wife, Wei says. It is clear that a rise in the sex ratio imbalance would lead to more unmarried men. In January, China’s state media reported that the government anticipates that at least 24 million men of reproductive age will remain single by 2020.
Wei’s research points to a new macroeconomic implication of China’s gender imbalance. The very high savings rate in China is unparalled in the world. On the economic front, the high savings rate has many implications for global business and there is discussion about whether China can adjust its growth models toward more dependence on domestic consumption, Wei says. While exchange rates are part of that policy toolbox, Wei says that it will be important for China to find a more equal balance between males and females if it expects to change savings behavior. He adds that there are several changes that can be influenced by social policy, including increasing the social preference for female babies; improving the status of women in China and reducing sex-selective abortions by controlling information about a fetus’s gender.
“The research suggests that a serious macroeconomic discussion cannot be divorced from an understanding of the social issues,” Wei says.
Photo credit: bebouchard
Is It Better to Go to a Start-Up or an Established Firm?
Our group at Facebook headquarters.
Two weeks ago, the Technology Business Group and the Green Business Club organized and led Columbia Business School's annual Silicon Valley Trip. This was the School’s 13th year heading west to explore career opportunities. We had more than 40 students on the trip and we visited 15 companies in three days. This year’s lineup was fantastic and included the following companies: Adobe, Apple, Autodesk, Bloom Energy, Blue Skye, eBay, Facebook, Google, IDEO, Khosla Ventures, Meebo, Tesla Motors, VMWare, Yahoo and Zynga.
The goal of our trip was to provide a chance for students to explore opportunities at technology and clean tech firms in the Bay Area. The company visits typically consisted of a campus tour, a talk with recruiters and either an executive speaker or a panel of employees. At many of the companies, we also had a chance to meet and speak with Columbia alumni who work there. For first-year students looking for summer internships and second-year students pursuing full-time jobs, the trip was refreshing, as it was clear that most of the companies we visited were in the process of ramping up recruitment efforts.
One interesting question that came up during our company visits, over meals, and in the car driving around the Bay Area is whether it’s better to head to a small start-up after graduation or join a larger and more established firm.
 |
||
|
What are your thoughts on this topic? Please leave a comment. |
In our first meeting at Zynga, a fast growing gaming company, their board member, Bing Gordon from Kleiner Perkins, suggested taking risks earlier in our careers to do something new and exciting. He felt that with an MBA from Columbia, you can always fall back to a job with a large established firm if the start-up doesn’t pan out. But in a meeting later that day at Adobe, CFO Mark Garrett provided an alternative perspective: He suggested going to a large company after graduation to gain industry expertise, since start-ups would always welcome someone with industry knowledge and an MBA from a great school.
After debating this question with classmates who spent time at both start-ups and large tech firms, one thing became clear: Either route can work. You should follow that path that you feel more passionate about.
We are grateful to these companies for hosting us and we thank all of our alumni who helped with planning. We also thank the Career Management Center for arranging an insightful VC panel and for partnering with our Bay Area Alumni Relations group to cohost a fun alumni reception at the Autodesk Gallery in San Francisco.
Read more about the trip on Christian’s blog, Philtered. Photo credit Bruno Orsini ’11.
On Tuesday, Google announced it would postpone the release of two Android phones in China following last week’s fracas between the search engine giant and Beijing. According to reports from Google, its security infrastructure underwent cyber attacks and theft, and the Gmail accounts of human rights activists had been hacked. In response, the company said it may withdraw its operations from the country. But how badly does it need China?
More than it might appear. The fact that the company is continuing to negotiate with Chinese authorities suggests that it places a high value on Chinese customers, Professor Brett Gordon says.
“I think Google does need China. One day China will be an enormously large portion of the Internet,” he says, “and it’s impossible for a company like Google to ignore more than one billion potential users.”
Gordon points to the history of Internet usage in the United States, which has grown quickly since it entered mainstream usage in the mid 1990s. The adoption of new technologies moves even more quickly in developing markets, he says. China’s stats appear to prove that point: the number of Internet users in China grew more than 28 percent from 2008 to 2009 for a total of 384 million last year, making it the largest group of Internet users in the world. And that figure is poised to grow higher given the country’s population of roughly 1.3 billion people.
Currently, Google’s market share in China is about 33 percent, with China’s Baidu.com dominating the market. “To support U.S. business in China,“ Gordon says, ”you would rather that Google be there than not. There is no reason that Baidu won’t become as large or larger than Google.”
The tension between Google and Beijing also points to fault lines around regulation of the Internet is as it grows internationally. “So far the Internet has been very strongly centered in the United States. As more emerging economies continue to grow, and given their large populations, the Internet will slowly keep shifting toward the largest user base and largest revenue base,” Gordon says. “But to try and police that through an international organization is very hard to do. Companies will simply have to decide between making a political point or a profit.”
Photo credit: Josh Chin
Disaster Strikes, Charity Spikes
If you have been on Facebook or Twitter in the last 24 hours, you may have seen mobile giving campaigns to aid Haiti. Red Cross and Yéle are among those organizations that have deployed viral giving models in the last 72 hours and have raised millions of dollars in individual donations.
When disaster strikes, charitable giving spikes dramatically. Professor Ray Fisman, director of the School’s Social Enterprise Program, cautions against less-than-honest schemes. Indeed, that has been a historic issue in Haiti. According to the January 13 New York Times op-ed by Tracy Kidder, there are more than 10,000 private organizations in Haiti with a “humanitarian mission” yet the country remains one of the poorest in the world. Fisman says that should not deter giving at the individual level, but rather heightens the importance of donating to well-run and professional aid organizations.
“It’s natural that at a time when an avalanche of cash is being thrown at a problem in a hurry — that’s the nature of disaster relief — opportunistic individuals will take advantage,” he says. “You can protect yourself to a large degree by donating through reputable channels.”
Fisman says a crisis like this also underscores the importance of all CSR policies, not just disaster-specific programs. In recent research on eBay’s GivingWorks program, he and his coreseachers found that following Hurricane Katrina the atmosphere of benevolence had a positive impact and nearly doubled all eBay charity-connected sales.
“At a time of great social need, consumers look very favorably on firms that show a charitable side,” he says. “We also saw this with all the good press that Walmart got for its quick and effective response to Katrina. Of course, companies should also consider helping out in relief efforts for the same reason individuals do — because it’s the right thing to do.”
Photo credit: Red Cross
For many companies, 2009 was not a growth year. For Walmart, however, its revenue grew more than 7 percent from 2008, topping $401 billion.
In the last decade the retailer expanded rapidly in the United States and around the globe. Today it has more than 7,800 locations worldwide. Yet between 1998 and 2005, 65 percent of proposed new stores in the United States that drew protests were never built. That’s a pretty good batting average — for anti-store crusaders. How could the world’s biggest retail chain get derailed by a handful of local activists? It’s part of Walmart’s management strategy, says Professor Paul Ingram.
Building a new retail outlet is not cheap. A store location encompassing tens of thousands of square feet can cost up to $10 million to build. Added to that, the hunt for viable real estate is fraught with uncertainties, particularly when it comes to community support. Ingram says that allowing for a certain number of concessions about location is part of the company’s negotiating process.
Ingram’s research (PDF), which he conducted with Lori Qingyuan Yue of Columbia University and Hayagreeva Rao of Stanford University, provides evidence that Walmart uses low-cost probes, such as filing a building proposal (typically under $15,000), to quietly suss out local support or opposition to a potential new store. Walmart can then withdraw its proposal or rethink its building plan if protests occur. The strategy both limits the company’s expenditure and investment in a new location and minimizes exposure to the news headlines.
“A lot of people make claims on how a corporation should behave,” Ingram says. “Negotiating is part of management. Here is a strategy that accepts concessions as way to manage costs.”
Photo credit: mjb84
What Can Multinationals Learn from Mom and Pop?
The future of poverty eradication lies in the private sector, says Nancy Barry, president and CEO of Enterprise Solutions to Poverty. Barry, former CEO of Women’s World Banking, created the venture to mobilize corporations and entrepreneurs to engage millions of low-income people to build competitive business models. In an exclusive interview with Columbia Business School at the 2009 Social Enterprise Conference, Barry highlighted the ways in which U.S. and European multinational companies can learn from emerging markets.
“In [companies’] engagement they are still skating on the surface,” she said in the video interview. “Their traditional business models and ways of working are getting in their way. They need to actually learn from emerging markets and entrepreneurs how to build decentralized distribution systems. The beauty of decentralized systems is that the mom-and-pops of this world actually are the poor people. If you figure out a way how to add value to that mom-and-pop, which is your distribution system, you are helping that family make more money and you are selling more products.”
View more videos from the 2009 Social Enterprise Conference.
The Year Ahead: Trends and Predictions
Faculty members shared their predictions about trends that will shape the year ahead. Please leave a comment with your prediction for 2010.
Mark Cohen on retail
The luxury bubble will continue to deflate, and only those truly special brands with real brand equity will recover; value players like Walmart, Target, Kohl’s, etc., will see renewed strength. The middle market of poorly differentiated specialty and department stores that lack a clear fashion and value strategy will continue to struggle, and it is unlikely that retail sales will retrace their pre-recession levels until 2011.
Cliff Cramer on the healthcare
industry
Consolidation will be a major theme in 2010 as insurers and hospitals seek additional leverage in contract negotiations and pharmaceutical companies explore transformational mergers to broaden product lines, strengthen geographic breadth (emerging markets) and manage earnings in response to major patent expirations in the near term.
Brett Gordon on marketing and technology
Intel will face continued legal pressure from the Federal Trade Commission and the New York attorney general’s office for its alleged anti-competitive practices despite the $1.25B settlement with AMD in November 2009. Online newspapers and other media outlets will test new revenue generation models in a last ditch attempt to stay afloat. Monetization strategies for online video (e.g., Hulu, YouTube) will get serious attention from firms seeking to lure back advertising dollars with more advanced technology.
Paul Ingram on management
Organizational culture will enjoy a renaissance. Firms will increasingly recognize that shared values can attract and retain employees to the company and that the common orientation of a strong culture allows coordinated responses to unforeseen and emerging challenges. In the next year and beyond, organizations with strong cultures will outperform others, and leaders will focus on building those cultures.
Wei Jiang on the economy
As much as we think that we learned from the crisis, new bubbles are already forming thanks to the easy monetary policies around the world. In particular, the weak dollar has fueled a massive rally in 2009 in a wide range of risky assets — equities, commodities and emerging markets — through carry trades. We are facing the danger of a recurring asset bust in the coming years if and when the dollar reverses.
Jonathan Knee on the media industry
The inexorable fragmentation of media will continue in 2010, Comcast’s acquisition of NBCU notwithstanding. This trend will have no impact, however, on the persistent and irrational fears of regulators, politicians and the public that the global markets for media may fall under the control of a handful of malevolent moguls at any moment.
Homepage photo credit: Bart Hiddink
Accounting for Intangible Value
As businesses shift away from manufacturing, the value of intangible assets such as brand recognition, distribution systems and market position is increasingly important to measure. A new white paper from Professor Stephen Penman and the Center for Excellence in Accounting and Security Analysis provides new insight for firms trying to do just this.
Penman’s work, recently featured in Columbia Ideas at Work, demonstrates that the value of intangible assets can be deciphered by looking at a firm’s income statement. The first clue lies in the firm’s market-to-book ratio; a ratio of more than six indicates that the market has assigned a lot of assets that are missing from the balance sheet.
In 2008, Microsoft’s book value was $36.3 billion, while its shares were trading at $25, for a total value of $228.8 billion. … Microsoft’s income statement reported a net income of $17.7 billion for 2008. Using information from the income statement, Penman employed a simple residual earnings valuation technique to calculate the equity value of expected earnings for 2009, arriving at a share price of $23.03 — much closer to Microsoft’s share price of $25 at the time than a look at the balance sheet (absent market share, intangible R&D assets or brand) would suggest.
Penman is careful to point out that intangible assets do not operate alone — but rather in symphony with other more established assets. Take the story of Coca-Cola, for example, he says.
“Coca-Cola’s value comes not just from the brand it created, but how the brand works in combination with its distribution system. The brand is an intangible working together with other intangible ideas about how to get value from customers. What if Coke sold off its brand? All the other intangible assets, like its distribution systems, and even tangible assets such as bottling facilities — would be worth far, far less than they are with the brand intact,” Penman says. “You cannot isolate the value of individual intangibles.”
Photo credit: Anssi Koskinen
Creative models for buying and selling goods allow consumers to act philanthropically through charity tie-ins with product purchases. But are they profitable?
New research from Professor Ray Fisman, Dan Elfenbein of Olin Business School, Washington University in St. Louis, and Brian McManus of University of North Carolina, Chapel Hill, shows that linking a product with a charity donation is an effective way to boost sales — but not quite enough to make up for the cost in the bottom line.
In the study, Fisman and his academic collaborators worked with Steve Hartman ’07 (EMBA) to assemble data from eBay’s GivingWorks program, where sellers can offer a portion of their auction proceeds to a charity. They found that on average, an item advertised with a 10 percent donation is 20 percent more likely to sell than its non-charity counterpart, and for a price that’s on average 2 percent higher. But these benefits aren’t enough to make up for the cost of the 10 percent donation itself.
The study also showed that inexperienced sellers who lacked a selling track record benefitted from a charity tie-in more than experienced sellers. Fisman suggests that buyers see the charity tie-in as a signal of trustworthiness, which is particularly valuable to a seller that has yet to establish a reputation for reliability. The study also found that following Hurricane Katrina, the impact of charitable giving on sales and price nearly doubled; at a time of national need, benevolence actually became profitable. Fisman also cautions that immediate financial profit is often only part of the overall goal of companies’ giving programs. Good corporate citizens also may bolster their brands over the long-term, and also may contribute to the social good because it’s the right thing to do, whether or not it adds to the bottom line.
This research certainly doesn’t prove that you can’t do well by doing good, or that charity is a “waste” of shareholder dollars. Rather, it highlights the complicated relationship between corporate social responsibility and profits. As business school students and future business practitioners, it’s worth asking how companies can effectively integrate philanthropy and other aspects of CSR into their business models.
Photo courtesy of the Social Enterprise Program
What Is the Best Book You Read in 2009?
Public Offering asked faculty members what books they enjoyed most this year and here’s what they said. (Take a look at last year’s list for more titles.)
Daniel Ames How to Break a Terrorist by Matthew Alexander is the story of the author’s experiences as a member of a U.S. intelligence and interrogation team working in Iraq in 2006. On one side, he struggles to coax information from hardened fighters as well as hapless suspects. On the other, he struggles with different attitudes in the military on the effectiveness of harsh interrogation techniques. It’s a fascinating glimpse into what is, for most of us, an unknown world. And the underlying story holds some lessons for how many of us might approach the “ordinary” conflicts in our everyday lives.
Ray Fisman Tokyo Vice: An American Reporter on the Police Beat in Japan by Jake Adelstein is an enormously entertaining and instructive look inside the world of the original economic gangsters.
Ray Horton I’ve read a number of good books on the now two-year-old economic crisis, including Robert Skidelsky’s Keynes: The Return of the Master, Justin Fox’s The Myth of the Rational Market and Animal Spirits by George A. Akerlof and Robert J. Shiller. But the best of the bunch in my opinion is John Cassidy’s new book How Markets Fail: The Logic of Economic Calamities. He does the best job of tying the theory problems to the rationally irrational behaviors that nearly sunk the ship of modern finance.
|
||
|
What is your book pick of the year? Please share your nomination. |
Malia Mason The Big Sort: Why the Clustering of Like-Minded America Is Tearing Us Apart by Bill Bishop with Robert G. Cushing.
Emi Nakamura This Time is Different: Eight Centuries of Financial Folly by Carmen Reinhardt and Kenneth Rogoff.
Many notable books and ideas were published by faculty authors this past year as well. Several of these have been recently featured in Columbia Ideas at Work including: The Curse of the Mogul by Bruce Greenwald, Jonathan Knee and Ava Seave; The Aid Trap by Glenn Hubbard and William Duggan; and Value Above Cost: Driving Superior Financial Performance with CVA: The Most Important Metric You’ve Never Used by Don Sexton.
Photo credit: Melanie
Buffett and Gates: Energy and Optimism
“When I left Columbia, they told me I’d probably have to come back and repeat a few classes,” Warren Buffett, MS ’51, deadpanned as he took the stage with Bill Gates on Thursday as part of a community forum at Columbia Business School. More than 700 students from the Business School were in attendance at the event, which was filmed for global broadcast by CNBC.
A major theme of the 90-minute Q&A session was optimism about U.S. economic prosperity in the long-term, with a nod to future energy issues. That theme underscored Buffett’s comments about Berkshire Hathaway’s recent acquisition of Burlington Northern Santa Fe for $34 billion last week.
“The railroads are tied to the future prosperity of this country. You can’t move a railroad to China or India or anywhere else,” he said. “As the country grows, the transport of goods will grow — [people] will be moving more and more goods back and forth to each other. And you have the most environmentally friendly and the most efficient way of doing that on the railroads.”
The theme returned later in Gates’ discussion about areas he sees with the most growth potential in the United States. He said those include information technology, energy and medicine. Gates discussed the growing field of alternative energy as a driver for a long-term economic development.
“Solar-thermal, solar-electric, nuclear [energy] is going to go through some of the revival and see if it can solve some of its cost challenges. As a country, we want to make sure all of those get lots of R&D and regulatory enablement because one of them is going to give us much cheaper power,” he said. “We don’t have quite as much R&D going into those things as I’d like to see. We have quite a bit, but I think the government policies could drive for more.” He added that he foresees an energy revolution and the United States is expected to lead the way.
Buffett also discussed his value-investing strategy, saying that it had not changed in light of the financial crisis and the fundamentals were the same. “We like companies with a durable, competitive advantage,” he said. On the economy, both Buffett and Gates lauded the actions of the government and the Federal Reserve.
Both men offered advice and inspiration to students. (Marry the right person, said Buffett. Act on your self-confidence, Gates added). Buffett signaled his optimism for future MBA graduates of Columbia Business School, making a promising offer to those in the audience.
“I would pay a $100,000 dollars for 10 percent of the future earnings of any of you,” Buffett said. “If that’s true, you’re a million-dollar asset right now.”
CNBC will broadcast “Warren Buffett and Bill Gates: Keeping America Great” moderated by Becky Quick on November 12 at 9 p.m. and 12 a.m. ET . Join the conversation with other students on Facebook and on Twitter.
Photo credit: Eileen Baroso
Notes from the Cornell-Fidelity Stock Pitch Competition
 |
|
|
From left: Clinton Chang ’11, Eric Hagemann ’11 and Dan Kaskawits ’11 at the 8th Annual Cornell-Fidelity Stock Pitch Competition. |
Last month, Clinton Chang ’11, Dan Kaskawits ’11 and I had the privilege of representing Columbia Business School’s Equity Research Club at the 8th Annual Cornell-Fidelity Stock Pitch Competition on November 5-6. We came in third place out of 12 participating MBA programs and the competition pitted us against worthy adversaries, including Booth, Fuqua, Ross, Stern, Tuck, Notre Dame’s Mendoza College of Business and Wharton, among others.
The competition’s design was unusual in that it required condensing what is weeks, if not months, of work into just 12 hours. At the opening of the event, we were assigned one company stock (Caterpillar) and two industries (railroads and casual dining) from which to select one stock each; we were then given from noon to midnight to conduct research and develop pitches (long or short) on the three stocks, to be presented at some cruel hour the following morning in front of a panel of professional investors, no doubt armed with incisive questions and piquant remarks. To do our research, we were given access to Capital IQ, FactSet and other research materials in the very impressive trading room at the Johnson School’s Parker Center for Investment Research.
Without hesitation, I can say that in the first six hours of our allotted research time, we accomplished nothing, at which point we were called to eat dinner — which was mandatory — comprising all manner of sleep aids such as ricotta-filled pasta shells and something like chicken français, followed by cheesecake. Following this nourishing repast, and notwithstanding our rapidly deteriorating physical states — caffeine had long since ceased to be effective due to overuse — we succeeded in assembling presentable pitches on all three stocks by 11:59 p.m., one minute short of the deadline. It was now unarguably time to hit the proverbial hay and regain some strength for the task awaiting us in the morning.
Rosy-fingered dawn swiftly arrived, and before we knew it, Clinton, Dan and I were standing before a panel of judges including a senior Fidelity portfolio manager, a Fidelity managing director of research, analysts from Putnam and Wellington and a private investor. We decided to pitch a long on Norfolk Southern Corporation; a long on Brinker International, owner of Chili’s and other franchises; and, contrary to the noted long-term value investor James Cramer, a short on Caterpillar.
Participating in this contest made me truly proud to attend Columbia. We brought to bear on our presentations certain ideas that are distinct to the heterodox approach to investing taught in some of School’s courses. Specifically, while pitching Caterpillar I believe that we were the only team to deliberately avoid using a discounted cash flow (DCF) or comparable multiples. In this, we followed Professor Bruce Greenwald’s argument that when using a DCF to value stocks, altering the input assumptions even within one’s margin of error produces wildly different output values. Instead, we tried to focus on strategic considerations and returns on incremental capital used to finance growth. Curiously, this decision invited the following written feedback post-competition: “Try to use more traditional approaches like DCF and multiples.”
Here, perhaps the apt quotation would be Bill Cosby’s: “I don’t know the key to success, but the key to failure is trying to please everybody.”
In the end, our team placed into the final four, losing in the last round to esteemed peers at Stern and Wharton. On behalf of all three of us, I would like to express our thanks to the Equity Research Club for trusting us to represent Columbia Business School; Fidelity Investments for their sponsorship of the event; and all the good folks at the Johnson School who were such hospitable and accommodating hosts.
Photo courtesy of Eric Hagemann ’11
Financial Models: Why All the Fuss?
 |
|
|
Professor Paul Glasserman moderated the panel “Does the Practice of Quantitative Finance Need to Be Changed?” at the research symposium on December 4 . |
The research symposium “The Quantitative Revolution and the Crisis: How Have Quantitative Financial Models Been Used and Misused” at Columbia Business School on December 4 explored the causes and effects of the proliferation of quantitative finance. Donald MacKenzie, a professor of sociology at the University of Edinburgh, gave the keynote speech (PDF).
Professor Bruce Kogut, in his opening remarks, acknowledged that financial engineering and innovation have received an onerous rap in the fallout from the financial crisis. However, he suggested that the field was ripe for public debate.
“It might be easy to leap to the conclusion that the subtext of today is that financial models created the crisis and hence innovation is bad. But such a deduction is in fact deeply complex and largely suspect,” he said. “Why is there such debate over financial innovations? After all, innovation is a driver of economic growth and wealth, so why all the fuss?” Kogut suggested three possibilites, including the disparity between private and social value, unanswered questions about systemic risk and the speed at which innovation takes place.
Professor Paul Glasserman pointed to popular media portrayals, like WIRED’s “The Secret Formula That Destroyed Wall Street and Nuked Your 401(k)” (Feb. 2009), which excoriated the financial industry’s use of models, as perpetuating misunderstanding about the uses and capabilities of quantitative finance.
“The article sets the record for the most incorrect statements packed into a title,” Glasserman said. “In a very short time there has been a dramatic shift in perception of quantitative finance.”
Glasserman moderated the panel “Does the Practice of Quantitative Finance Need to Be Changed?”, which comprised Professor Emanuel Derman, Department of Industrial Engineering and Operations Research at Columbia University; Professor Daniel Beunza, London School of Economics; Kent Daniel, Director of Research at Goldman Sachs; and Adam Parker, Director of Reserch and Chief Investment Strategist at Sanford C. Bernstein & Co. LLC.
Much of the panel’s discussion focused on when models are useful — and not useful — in financial markets. Derman, author of My Life as a Quant, led the discussion and offered a discourse on what models are and how they can be applied (download presentation PDF). He cautioned that there is never a “right” model but rather ”somewhere north of common sense and south of hubris lies the appropriate use of models.”
Beunza, formerly a visiting professor at the Business School, cautioned that the use of models is a “doubled-edged sword”; his research shows that they lead both to increased arbritrage and better reflexiveness.
Goldman Sachs’ research director Kent Daniel argued that models benefit many fields, such as airline safety, and not only financial markets. However, he cautioned that exacting data was fundamental to the use of models. “A successful quant model has to be subjected to every kind of scrutiny you have,” he said. “If your organization doesn’t do that, you’ll have a failure.”
The symposium "The Quantitative Revolution and the Crisis: How Have Quantitative Financial Models Been Used and Misused" took place on December 4 and was co-hosted by the Center on Japanese Economy and Business and the Sanford C. Bernstein & Co. Center for Leadership and Ethics.
Photo credit: Leslye Smith
Kravis Looks Ahead for Private Equity
What is the future of private equity? If the direction of Kohlberg Kravis Roberts (KKR) holds a clue, it may start looking a lot more like Berkshire Hathaway, founding partner Henry R. Kravis ’69 said in a recent interview with BusinessWeek.
The cover story in the December 10 issue of the magazine (“Can KKR Make Like Berkshire Hathaway?”) reported that KKR is reshaping its playbook as a result of lessons learned from the financial crisis. Taking a cue from Warren Buffett MS ’51, the firm is positioning itself to become more cash-ready and nimble to complement its past strategy of leveraged buyouts.
Kravis, who has been the cochair of the School’s Board of Overseers since 2005, says the ability to make acquisitions and minority investments in any economic environment is a key strategy. To raise the cash to do that, the firm is expected to go public in early 2010.
“We’re not just a private equity firm,” he said in the article. “We’re an asset management firm. … If all you’re going to do is say you’ll buy 100% of companies, you’re passing up a lot of opportunities where you can make a lot of money.”
The firm is also building an in-house investment bank, placing more emphasis on minority stakes and joint ventures and adopting new management strategies to align with its expanding size.
“Our job today is to create value,” Kravis said. “Private equity, to me, is acting and thinking like an industrialist.”
Economy is in 'Recovery Phase'
Dean Glenn Hubbard borrowed from Dirty Harry to deliver “the good, the bad and the ugly” about the economy in a community forum with students on December 8. He also detailed his economic forecast on CNBC on December 10 (video above).
Looking ahead to 2010, Dean Hubbard predicted GDP growth of around 3.5 percent in the coming year and said the U.S. economy is in the recovery phase. However, he noted that this is far less than previous post-recession bounces. He based this view on such positive signals in the economy as improvements in inventory, rising profits, improving market conditions and confidence. “We have a chance for a reasonable recovery,” he said, “although it is well below historical standards for a recession.”
Hubbard said that unemployment was unlikely to fall beneath 9.5 percent. “If you really want to have an impact on the job market, you have to get the economy going again,” he said on CNBC. “Get more credit to small businesses and stop talking of tax increases and healthcare insurance mandates on small business.” He said the job market could be helped by lowering economic uncertainty and continuing work with banks for credit.
Dean Hubbard said the “ugly” includes the potential wild cards of public policy and the Fed’s next steps. He added that he was concerned about the deficit at 10 percent of GDP because it could, if left unattended, significantly raise the real interest rate.
Better Incentives for Carbon Reduction
World leaders are meeting in Copenhagen to discuss climate change policy this week. Professor Geoff Heal suggests that the participants at Copenhagen are focusing on the wrong issues. “There should be more focus on micro-economic incentives to innovate,” he said in a recent community forum on climate change at the School, “and less rewriting of international economic order.” (Watch complete video coverage of the community forum below.)
One issue where progress could be made in Copenhagen is with the adoption of a deforestation policy or Reduced Emission from Deforestation and Degradation (REDD). Heal says that stopping deforestation by providing incentives for forest-rich countries can reduce 20 percent of greenhouse-gas emissions. He adds that it is relatively easy to accomplish because no new technology is needed.
The other step is to de-carbonize electricity supplies, which account for 30 percent of emissions says Heal. This can be accomplished through the use of renewable and nuclear energy, a better grid and carbon-storage technology. “Between deforestation and decarbonization of the electricity supply, you can basically remove enough CO2 emissions to stop the problem,” he says.
Chris Mayer, Senior Vice Dean, moderated a panel discussion on environmental policy and climate change on November 19. Speakers included Professors Geoff Heal, Elke Weber and Bruce Usher as well as Kevin Parker, Head of Asset Management, Deutsche Bank.
Summer Fellowships with Social Value
Last summer, more than 55 MBA students in the Social Enterprise Program participated in the Summer Fellowship Program. Their internships took place at a variety of organizations, from NGOs to venture capital firms. The fellows helped the organizations develop strategic planning, financial analysis and operational improvements. Students decamped to locations near and far — from Washington, D.C. to Cambodia — for 10 weeks and along the way kept journals about their experiences, which can be found online. Here are excerpts:
Jesus Rodriguez ’10
Entrepreneurship, Social Venture
Where Connect Us, a social start-up that is a pioneer in the use of cell-phone technology to improve healthcare for low-income people
What: To learn everything possible, from the inside, about a social venture start-up in order to start one myself in the future. As part of a team of three, with CEO Marc Lara ’04, I was able to do a little of everything: work on technical specifications, create selling presentations, review operations and conduct focus groups.
The takeaway: I was involved in the company’s negotiations for a $1.5 million contract with a pharmaceutical company. In the end, it did not come together, but I learned a lot of negotiation strategy. It also taught me that working in social venture is all about emotions and risks!
Jake Goldberg ’10
International Development, NGO
Where: PEPY, an NGO organization in the United States and Cambodia focused on improving standards of living in rural areas and education
What: To find distribution channels for the Hipster, a money belt constructed from khroma, traditional Cambodian scarves, and manufactured by women who are former sex workers; develop an e-commerce site and create a sales fulfillment plan for exports to the United States.
The takeaway: It was very powerful to be able to help these women market and sell their product on an international scale and help them start to find a way out of poverty. I also learned valuable lessons in pricing, exporting and distribution.
Melissa Cheong ’09
Investment, Business Development
Where: Enterprise Solutions to Poverty; Innosight Ventures
What: Research and deliver a list of industry contacts that have a high probability of evolving into valuable strategic or financial relationships for Innosight to make investments in the social venture space.
The takeaway: We had originally thought that targeting individual social angel investors would be most successful, but it became apparent we had more to gain targeting organizations and institutional investors. This meant we had to change our financing model. I learned that even though a lot of the early work we did on our plan wouldn’t be used, the experience was invaluable.
Learn more about the Summer Fellows Program and read more journal entries from the 2009 fellows.
Photos courtesy of the Social Enterprise Program
How to Navigate the Leadership Pipeline
Will there by a leadership shortage by 2015? Professor Rita McGrath blogged about a recent BusinessWeek article, which said that the number of qualified executives in the “right age bracket” will drop by 30 percent in the next six years as demands on talent grow and economic power redistributes to Asia. McGrath considers the issue from a strategic perspective, suggesting that the solution can be found in the way companies view their leadership pipeline, an idea made popular by writers Ram Charan and Peter Cairo. She writes:
The basic message is that you need to develop leaders in a bit of a sequence — it’s very hard for them to skip steps. And that means that your leaders in 5 to 10 years are highly likely to be somewhere in your pipeline today, unless you’re just going to admit defeat and hire from outside, which is both expensive and competitively often not successful (remember Bob Nardelli and Home Depot, anyone?).
What does this mean for MBA students and those starting out in their careers? McGrath says it's key to prepare for the two first passages in the pipeline. They are:
1. Engage in self-management
2. Become a manager of others
“The challenge of self-management is to go from doing what one is told and accomplishing others’ goals to doing work that addresses greater organizational priorities by being proactive and taking initiative in a positive way,” she says. “The chance to learn self-management can be undermined by an overly controlling supervisor or a situation in which very little leeway exists for independent initiative. In an ideal world, an MBA graduate or someone just starting out would avoid such situations. Topics we teach here at the business school, such as emotional intelligence and teamwork, are hugely helpful here. Self-awareness is vital to effectively moving to the next step.”
McGrath points out that the difficulty in making the transition from passage one to passage two is recognizing the difference between managing others and making individual contributions.
“Good managers of others are facilitators, rather than problem-solvers, supporters of others rather than heroic savers of the situation and coaches rather than worker bees,” she says. “It can be a hard transition because the shift is from doing work yourself to making sure work is getting done through others.”
“By the time graduates develop the skills for the next phase of the pipeline, which is being a ‘manager of managers,’ the work is almost purely focused on management and leadership. This is where the leadership pipeline for future development often breaks down — and where companies need to make substantial investments to make sure that their succession of talent is in place.”
Many of the courses offered through Columbia Business School’s Executive Education address blockages that often occur further along in the leadership pipeline; participants need to learn new skills that may not come easily to them on the job as they advance into senior and executive management. In particular, the Columbia Senior Executive Program (CSEP) helps with passage four to leadership autonomy; passage five to holistic leadership and eventually the final passage to visionary leadership
Photo credit: James Hill
Coke Brand Looks to Global Future
Anticipate the future structure of your industry, Muhtar Kent advised students in a recent lecture at the School. The chairman and CEO of the Coca-Cola Company gave a presentation as part of the Silfen Leadership Series on November 19. More than 400 students and prospective students attended the event.
“In the world you will inherit, turbulence will be the new norm,” he said. “That’s not a bad thing. For every front we face, there’s an equally powerful tailwind.”
Kent shared his views on the future of the global economy and the leadership characteristics that are necessary for success.
He voiced optimism that the United States would recover from the economic crisis “stronger and sooner than most anticipate” and said the United States has an advantage because of its heritage of innovation and entrepreneurial energy. In the future, he said, leaders need to manage the shifting balance of power and cultural influences from a uni-polar to multi-polar world. He emphasized that managers also need to have a worldview, remain flexible and be able to move easily across borders.
Kent discussed the Coke brand in the context of changing attitudes toward “Brand America” as well as the company’s corporate social responsibility policies as a multinational organization. He said that the brand has remained strong, even in parts of the world where the United States is unpopular, because of the company’s franchise system and partnership with local businesses. “It’s regarded as a local brand in many overseas locations,” he said.
Coca-Cola is invested in developing more franchise operations in BRIC countries, he said, and CSR has to be embedded into a firm’s policies. He highlighted the success of Coca-Cola’s innovation in HFC-free refrigeration and transition to water-neutral production.
“Our business is only as healthy as the community we are in,” Kent said.
Photo courtesy of The Coca-Cola Company
Ayn Rand: Prophet or Scapegoat?
Ayn Rand is experiencing a resurgence in popular culture — South Carolina’s Governor Mark Sanford published a glowing op-ed about Rand’s books in the October 23 issue of Newsweek and Jon Stewart dedicated a segment on The Daily Show to an interview with Jennifer Burns, author of the newly published Goddess of the Market: Ayn Rand and the American Right (Oxford University Press). Next week, Burns visits Columbia Business School to speak about her book.
According to Burns, this resurgence is entirely predictable. Rand’s popularity has waxed and waned with political cycles over the years. When a Democrat is in the White House, conservatives tend to more loudly champion her ideas.
|
||
|
What do you think of Ayn Rand’s philosophy? Please leave a comment. |
“Students who are interested in understanding the Great Crash of 2007 should know that Ayn Rand influenced a whole generation of influential opinion- and policy-makers with her idea that all things private are good and all things public bad,” says Professor Ray Horton. “One of her most important acolytes was Alan Greenspan, who as Federal Reserve Chairman stuck to the quaint view that the financial industry could regulate itself — until he recanted last year in Congressional testimony that qualifies as one of the classic mea culpas of all time.”
Rand’s legacy continues to provide grist for the debate mill: Did her celebration of free markets contribute to the current financial crisis or does her work provide a compelling case against bank bailouts and the dire consequences sure to follow?
Professor Horton will introduce Jennifer Burns for a book talk followed by a Q&A on November 11 from 6 to 8:30 p.m. at Columbia Business School. Please register here for the event by November 4.
UPDATE (11/25/09): Watch video from the event, including Burns’ discussion of her research about Alan Greenspan and Ayn Rand. -CN
Photo image from cover of Goddess of the Market.
It’s nurture, not nature. At least when it comes to competition and gender, new research suggests. In a recent column in Slate, professor Ray Fisman discussed a study (PDF) by economists that demonstrates that the competitive male warrior stereotype, prevalent in Western culture, may not be universal.
The study looked at the Khasi community of northeast India, where inheritance and social status are passed through daughters. Khasi women were more competitive than men in the same group when they competed in a ball-toss game, the research showed. Why is that? Fisman writes:
The authors suggest that it may stem from the relatively uncommon practice of female-directed household decision making and inheritance. In the Khasi society, women who learn to compete for resources get to keep the fruits of their efforts, and also pass on the wealth they generate to their daughters. Regardless of the underlying cause … [the study] proves that the Western stereotype of the male competitor isn’t universal: The male “warrior instinct” is a matter of socialization rather than instinct.
Adding another dimension to the competition debate is new research from Pranjal Mehta, a postdoctoral research scholar in the Management division at Columbia Business School, Elizabeth V. Wuehrmann and Robert A. Josephs.
Their study, published in the journal Hormones and Behavior, examined the effect of testosterone on competitive performance. In the study of 30 men and 30 women, participants completed analytical reasoning tests in both individual and intergroup competition. The researchers’ findings showed that the higher the participant’s level of testosterone, the better the performance in individual competition; however, high testosterone had the opposite effect for intergroup competition. In other words, social context appears to moderate the relationship between testosterone and performance.
Taken together, these studies might nudge us closer to the conclusion that the debate is neither nurture nor nature, but some intricate combination therein, where socialized expectations and incentives interplay with physiology. What is the takeaway for management training? Competitive success might be a matter of incentive alignment, not chromosomes.
Photo credit: Vitaliy Khustochka
New Healthcare Paradigm: Technology, Value and Emergence
Above: Healthcare conference team.
As the vitriolic debate on healthcare reform dominates the news, healthcare industry leaders continue to focus on several issues: innovation to drive growth and promote cost efficiencies; new offerings to generate higher value for each healthcare dollar invested; and the emergence of attractive new global markets and technologies. They recognize that continued economic weakness and new sets of competitive and regulatory pressures create a more challenging environment to drive business growth. At the same time, they see tremendous opportunities to develop cost-effective products and services that can dramatically improve patient care on a global basis.
At Columbia Business School’s 6th Annual Healthcare Conference held on November 6, nearly 500 students, alumni and other professionals heard more than 35 speakers and experts discuss these issues. The attendees benefited from panels on an array of healthcare topics including biopharmaceuticals, medical devices and diagnostics, healthcare services and information technology, venture capital/private equity, mergers and acquisitions and emerging markets. The day concluded with a networking reception and career fair where attendees met with the event’s 20 corporate sponsors.
Fred Hassan, chairman and CEO of Schering-Plough, gave the opening address. Despite economic, competitive and regulatory pressures facing the pharmaceutical industry, he was confident that new therapies and vaccines would be developed to address large areas of unmet needs, most notably Alzheimer’s disease, which represents a devastating social and economic threat to society.
Following his remarks, three concurrent panels took place in the morning. They focused on information technology solutions, growth strategies of Big Pharma and small-cap biotechnology companies, venture capital and private equity investment strategies in healthcare, and the impact of proposed healthcare reform initiatives on payors and providers.
Mike Barber, vice president and head of Healthymagination for GE, reviewed GE’s new $6 billion global commitment to develop new technologies and services to reduce costs, improve quality and expand access for millions of people around the world. Among other objectives, this initiative will accelerate healthcare information technology, support consumer-driven healthcare, create new wellness and healthy worksite programs and facilitate access to cost-effective healthcare in rural and underserved areas.
Three concurrent afternoon panels covered healthcare mergers and aquisitions, medical devices and diagnostics, and challenges and opportunities for healthcare companies in the emerging markets. Alex Gorsky, worldwide chairman for medical devices and diagnostics at Johnson & Johnson, discussed emerging opportunities to develop new therapies to extend and improve a patient’s quality of life, as well as new cost-effective and less invasive medical devices and procedures. He also commented on the changes underway in global healthcare companies and how employees need to expand their skills and experiences, such as seeking new functional roles and positions in new geographic regions to broaden their understanding of different healthcare systems and customers.
Photo courtesy of the Healthcare Conference
Opportunities in Alternative Energy
Last Thursday, Warren Buffett, MS ’51, and Bill Gates visited Columbia Business School. During the event, Gates identified energy — including renewable sources, like solar — healthcare and IT as the three sectors he sees as having the most opportunity for transformative growth in the foreseeable future. Buffett highlighted the high energy-efficiency and low environmental impact of rail transport as one of the key drivers of Berkshire Hathaway’s recently announced purchase of Burlington Northern Santa Fe Railroad. More MBAs than ever are looking for career opportunities in developing and investing in renewable energy. Where can they be found?
This past weekend, 50 Columbia Business School students were among the 2,400 attendees at the 2009 Net Impact conference at Cornell University. Net Impact is an organization for MBA students who share an interest in using business to make an environmental or social impact. Among the many panelists were leading investors in clean energy from Blackstone, Kleiner Perkins, JPMorgan Chase and Sequoia who spoke about what technologies and business models they believe have the greatest growth potential.
The investors focused on technologies that could, in the long run, be competitive without any subsidies or government support. To this end, they identified specific niches within energy-efficiency and waste-to-energy, as well as solar power.
Solar energy is viewed as an area with tremendous growth potential, with the U.S. market projected to grow 20-fold by 2020. Traditionally, solar energy has been extremely expensive and reliant on erratic government subsidies; however innovative leasing models, falling silicon prices and technological breakthroughs have reduced costs dramatically. Continued cost reductions along with carbon prices could make solar cost competitive with coal and natural gas.
Within solar energy, there are many technologies, and each has its own value proposition. Photovoltaic panels can be installed on rooftops for residential, commercial and industrial applications, or standalone, for us in utility-scale plants. Thin-film PV technology is very low cost but less efficient, making it the optimal solution for sites with plenty of space. Concentrating Solar Power (CSP) plants use mirrors to concentrate sunlight, which generates steam that spins a turbine to allow a much larger scale operation. All these technologies also have their downside — distributed PV generation does not permit economies of scale. Desert sites like those in the Southwest are most attractive for CSP, but CSP also requires a lot of water for cooling, as well as a challenging permitting and transmission environment.
In addition to solar, there is tremendous growth in wind, geothermal, combined heat and power, waste-to-energy and efficient energy. Nuclear energy is also slated for resurgent popularity. Repowering the world will provide tremendous opportunities for MBAs to generate value as investors, developers and operators of clean energy companies. Famed VC investor Vinod Khosla has invested in dozens of clean energy startups in the belief that the space will generate many $10 billion+ companies.
Photo credit: greenlagirl
Buffett's Most Important Investment?
There’s an old joke that goes like this: One day on the campaign trail, the President and the First Lady were driving down a highway when they came across a group of inmates in orange jumpsuits laboring in a field beside the road. “See honey,” the President said to the First Lady, “you’re lucky to be married to me. You could have been his wife. The First Lady turned, looked back at the President and, smiling, said: “Honey, if I was married to him, he would have been President.”
Behind every great man, some say, is a better woman.
Last Thursday, I had the rare and exclusive privilege to attend “Keeping America Great”, a CNBC-moderated town hall event at Columbia Business School with two incredible men: Warren Buffett, MS ’51, and Bill Gates. Buffett and Gates, the introduction announced, were returning to school, not to learn, but to teach.
Students asked questions about the influence of greed on the financial crisis, Buffett’s purchase of Burlington Northern, career advice, Steve Jobs and what keeps them up at night.
One student asked what advice they had for those who were unclear about what to do in life?
“First of all,” Buffett replied, “I’d say marry the right person. And I’m serious about that. It will make more difference in your life. It will change your aspiration, all kinds of things. It’s enormously important who you marry.”
“Oddly,” writes Roger Lowenstein in his Buffett biography, “when Buffett graduated in 1951, both (Benjamin) Graham and his father advised him not to go into stocks.” Buffett offered to work for Graham for free but Graham turned him down, saying he was still overpriced. Rather than take another job on Wall Street, Buffett returned to Omaha where he began to court Susan Thompson. The two married in 1952. Two years later, he was hired by Graham and the Dow had its best bull run since 1942. In 1954, the Dow (including dividends) rose 50 percent. Three years later Buffett opened his Partnership and the rest, as they say, is history.
Similarly, Bill Gates met his wife at a Microsoft press conference in 1987, “coincidentally” just before the company’s meteoric rise (see stock chart below).
Now, if I learned anything in statistics, there is clearly a positive correlation here. This poses an interesting question. Would Buffett and Gates had such tremendous runs as single men?
Which leads me to a question posed by Dean Glenn Hubbard. He asked the two men how they would develop business leaders who understand context and connect the dots.
“Some never learn, you know,” Buffett replied. “Having sound principles takes you through everything. And the bedrock principles that really I learned from Graham and Dodd, I haven’t had to do anything with them. They take me through good periods. They take me through bad periods. In the end, I don’t worry about them because I know they work.”
Teaching principles has become the new hot topic among business schools. “A year after the collapse of Lehman Brothers,…” a recent article in The Economist questioned, “will (MBAs) be taught to do things differently?”
Along these lines a student asked Buffett whether ethics could be taught in business school.
“Well, I think the best place to learn ethics,” Buffett replied, “is in the home.” (see video clip)
As the event progressed, I began to realize that the event was less about teaching future business leaders about business and more about teaching future business leaders folksy home-grown values.
So allow me to attempt to provide context and connect the dots: a strong partner leads to a successful marriage, which leads to good family values and ethics, good business, and keeping America great. Or in mathematical terms: 
Then again, I should have gathered this from the event’s own introduction. Buffett and Gates were returning to school, the introduction announced, “not to learn, but to teach, showing the next generation of business leaders that wealth is not about the money you amass, but the number of lives you enrich.”
So was Buffett’s marriage his most important investment?
If so, please take note: We don’t need a revised MBA curriculum, just more social mixers! Two Columbia Business School students, Mandy Tang ’10 and Lori Clement ’10, are already leading this charge with a new company called Pom Pom Love, a “NYC-based, fun-loving singles events company.”
Cover photo credit: Eileen Barroso
Success the Buffett-Gates Way: Combining Passion, Mentors and Luck
While there is no secret recipe for success, a few of the necessary ingredients became evident on November 12 during an hour of conversation with two of the most successful American businessmen of all time, Warren Buffett, MS ’51, and Microsoft founder Bill Gates.
During their town hall meeting with the Columbia Business School community, Buffett and Gates discussed the environment that facilitated their success, from America’s “equality of opportunity” and willingness to invest in long-term projects to their own driving passion, mentors and even good fortune.
Both Buffett and Gates gave enormous credit to what Buffett termed the “fertile soil” of the American economy: “What drives the American system is the equality of opportunity in a market system and the knowledge that when you get out of here, you're going to enjoy the fruits of the knowledge you have gained,” said Buffett. Gates added that he “was a huge beneficiary of this country's unique willingness to take risk on a young person.”
It became clear that the fruit Buffett referenced was neither money nor his investment in clothier Fruit of the Loom. It’s crucial, Buffett argued, to find a career or idea that “turns you on,” while Gates added that his “fanatical” passion for software drove him forward for the early part of his career. Buffett summarized this point in one of the most poignant moments of the conversation:
“We did both have a passion. We were doing what we did because we loved it. We weren't doing it to get rich,” he said. “We probably felt if we did it well, we would get rich. But we’d have done it if somebody was slipping bread in under the door, you know, to keep us going.”
The two titans of industry also touched on the importance of being taught by good mentors. Buffett cited Columbia professor and father of value investing Benjamin Graham, for whom he went to work shortly after graduating from Columbia Business School.
Another important element of success, they acknowledged, was luck: Gates credited his parents for creating an environment that enabled him to pursue his passion, and his good timing to be working with software while the applications for microprocessors were still developing. “It turned out only if you were kind of young and looking at [the invention of microprocessors] could you appreciate what it meant,” he said.
Passion and opportunity continue to propel Buffett and Gates’ upward trajectories — and they’d like to keep going: “I’d love to trade places with any of you,” Buffett said to the student audience with a knowing smile.
Cover photo credit: Eileen Barroso
Buffett, Gates Join Students in Conversation
They are two icons of American business — Warren Buffett, MS ’51, and Bill Gates. On November 12, Columbia Business School students will have the opportunity to connect with them in person. They will appear together in a special hour-long community forum at Columbia Business School, which will be filmed by CNBC for global broadcast. During the event, Buffett and Gates will field questions from students about the economy, the future of capitalism and corporate social responsibility.
It is the first time Buffett and Gates, who met each other in 1991, have appeared together at Columbia University. The last student forum they participated in was in 2005 at the University of Nebraska at Lincoln. Of the many bonds in their friendship, philanthropy and a shared philosophy of giving back to society is one of the strongest. In 2006, their relationship made the history books when Buffett announced that he would give the bulk of his estimated $40 billion fortune to the Bill & Melinda Gates Foundation.
Gates and Buffett’s latest ventures have been in recent headlines. Last week, Berkshire Hathaway announced a $26 billion deal for the railway company, Burlington Northern Santa Fe. Earlier in this year, Berkshire invested in BYD, a Chinese electric car company.
In a speech in October, Gates called for a new green revolution in agriculture and announced a $120 million package of agriculture-related grants to nine institutions around the world. Taking a page from Berkshire’s playbook, Gates wrote the foundation’s first annual letter this year and said the foundation will give away $3.8 billion in 2009.
CNBC will broadcast “Warren Buffett and Bill Gates: Keeping America Great” moderated by CNBC’s Becky Quick on November 12 at 9 p.m. and 12 a.m. ET . Join the conversation with other students on Facebook and on Twitter.
Photo courtesy of Columbia Business School
New research from Professor Olivier Toubia featured in the current issue of Columbia Ideas at Work demonstrates the power of viral marketing. Working with Aliza Freud ’01 (EMBA), who is the founder and CEO of the social media platform SheSpeaks, Toubia examined how influencer communities can promote and track viral product buzz.
The case study
The research centered on OPI nail products. “They were a very traditional brand and wanted to tap into consumer insights and advocacy,” says Freud. Using the SheSpeaks online community, samples of the new nail product were mailed to 10,000 self-declared beauty enthusiasts. The same women also received coupons for future purchases. Meanwhile, OPI also placed traditional coupons and ads in magazines and newspaper inserts. The result? The viral campaign outperformed the print campaign by 1200%. “It’s not surprising,” says Freud. “There is a much deeper engagement online than flipping through a magazine.”
What does this mean for marketing?
In the past five years, brand marketing has changed dramatically with the emergence of social networking. Current research, such as the data from Toubia and Freud, is backing that up. Freud, who spent 10 years at American Express in marketing and product management, says that marketers are in the rapid evolution phase of brand strategy.
“Brand managers need to change their way of thinking,” she says. “Historically, marketing has been a one-way communication and brands tried to stifle or control conversations about the product. Today, it is very different — it’s a two-way conversation between the brand and the audience.”
“In the future, managers will care much more deeply about these opportunities and make consumer conversations integral to their marketing program,” continues Freud. “They can engage with consumers online and capture a lot more information.”
Photo credit: Will Vanlue
Live on the Web: 'Ideas Worth Spreading'
For those of you familiar with TED, you might have your favorite clips (Jill Bolt Taylor’s “My Stroke of Insight” is popular). For the uninitiated, welcome to one of the treasure troves of the Internet. The lecture series, with more than 500 online video clips and counting, is devoted to “ideas worth spreading” and features presentations from luminaries across all disciplines.
Today, one of TED’s offspring — an independently organized local version called TEDxEast — is taking place in New York City. Professor William Duggan, author of Strategic Intuition and co-author of The Aid Trap, written with Dean Glenn Hubbard, and Naif Al-Mutawa ’03, founder of The 99, are among the speakers at the inaugural event. Other speakers include author Suzy Welch, 10-10-10: A Life-Transforming Idea; Scott Heiferman, CEO of Meetup; and Chris Elam, artistic director of Misnomer Dance Theater. Ed Rashba ’04 and Melek Pulatkonak ’02 helped organize the event.
TEDxEast is streaming live from the City Winery in New York City from 1 to 6:30 p.m. ET on November 6. Check back soon for video clips from the event.
What If They Held a Bailout and Nobody Came?
Monday, November 9, is the deadline for banks to apply for the Treasury’s Capital Assistance Program. Chances are, none will sign up.
The program — CAP for short — is the other shoe of last spring’s stress test. Announced on February 9 as a “core element of the Administration’s financial stability plan,” the program was designed to backstop banks that are unable to raise sufficient private capital. Secretary Geithner presented the plan to the Senate Banking Committee on February 10 and it was featured in Chairman Bernanke’s Senate testimony two weeks later.
Under the CAP, a bank receives government funds by issuing preferred securities to the Treasury. These CAP securities include complex embedded options for both the bank and the Treasury. In current work with Zhenyu Wang of the New York Fed, we have estimated prices at which these “structured products” would sell in a market transaction between private participants rather than as part of a government program. We have applied our method to the 18 publicly traded bank holding companies that participated in the stress test. (The 19th stress test bank, GMAC, is privately held and received funds through a special program for the auto industry.) Our estimates indicate that the CAP securities represent significant value — one might even say a huge potential subsidy — to eligible banks.
So why no takers? In many respects, the lack of participation is good news: the mere availability of CAP funds may have been enough to boost confidence in the financial system. The nine banks that were required to raise additional capital following the stress test all report being on track to meet their targets through the private sector, though some of the new capital, like the $2.1 billion in deferred tax assets claimed by Bank of America, falls short of a ringing endorsement from investors. But even if all the capital raised is solid, the question remains: Why pass up a good deal?
The circumstances suggest several possible explanations. A bank may avoid taking government funds if the strings attached require it to forgo other profitable opportunities. Citi’s sale of Phibro and troubles with Banamex illustrate this possibility, but such costs are unlikely to offset the value of the subsidy. In an odd twist, weak corporate governance may save taxpayers money. This explanation applies if bank executives pass up CAP funds to protect their own positions rather than the interests of shareholders. Senior management at any of the top banks would be unlikely to survive another injection of government capital.
These considerations apply to all the TARP programs, but one other explanation is specific to the CAP preferred securities. In our analysis, much of the value to a bank of the CAP securities lies in the option a bank gets to convert them to common equity. This feature comes at the cost of higher dividend payments than shares issued through earlier programs, which did not include a conversion option. But Citi negotiated conversion of some of its earlier shares, and remarks from Treasury officials and banks indicate that similar conversions have been discussed at other banks. Banks may be reluctant to pay for an option they think they can get for free.
Complex structured products designed in the private sector have drawn criticism for contributing to financial instability through a lack of transparency. The complexity of the Treasury’s design of the CAP shares — intended, no doubt, to avoid direct government purchase of bank stocks — may well have been a final factor in discouraging participation.
Photo credit: Adam FagenTeaching for a Small Business Sector
 |
|
|
Students at the University of Dar Es Salaam listen to a lecture. |
At last night’s Community Forum, Dean Glenn Hubbard, professors Bill Duggan and Gita Johar, and Eric Tienou ’03 of Burkina Faso discussed economic development in Africa. Hubbard and Duggan’s recently published book The Aid Trap (see blog post) advocates for aid investment directly into the small business sector rather than charitable aid through NGOs. Hubbard, who also spoke last week at the “Peace Through Reconstruction” conference, has said that a Marshall Plan-like program is not only a moral and economic imperative, but also good foreign policy for the United States. (Watch a video of his presentation.)
One example of how the development of the small business sector is taking place is emerging through the School’s partnership with the University of Dar Es Salaam (UDBS) in Tanzania, Africa. The partnership is made possible through Goldman Sachs’ 10,000 Women program.
Several faculty members, including Murray Low, Eric Abrahamson and Gita Johar, spent last summer working in Tanzania to teach students and UDBS faculty members. The goal of their work was twofold: to prepare local students to earn a cobranded advanced certificate in entrepreneurship and business management, and to facilitate UDBS faculty members in learning interactive case method teaching. The School is also helping to establish a PhD program at the African university.
“The group of students was incredibly diverse,” Johar said about her experience teaching. “We had chicken farmers and dried fruit distributors to engineers, consultants and a range of microfinance entrepreneurs.” This summer completed the first of a five-year teaching exchange.
While many of the challenges for small business owners in Tanzania are familiar — management, staff turnover and competition — the biggest challenge, said Johar, is access to capital. “Friends and family are the bank,” she says, noting that bank loans are virtually nonexistent. Nonetheless, students were very enthusiastic about the material.
“We were thrilled,” she says. “They were very hungry to learn and apply the teaching to their ventures.”
When Should a Founder Find a CEO?
Last week, Craig Newmark, the founder of Craigslist, spoke with Columbia Business School students about his experience as an entrepreneur and in social enterprise. He recalled the moment he realized that he wasn’t cut out for management early in the firm’s history (today he calls himself a customer service representative) and selected Jim Buckmaster to run the company as CEO in 2001. “The decision made me wince because I had to relegate control,” Newmark said. “But it worked. You need to know when to get out of the way and stop talking.”
So how does a start-up founder know when to get out of the way? We asked Brendan Burns, adjunct associate professor in the entrepreneurship program and who teaches the course Launching New Ventures, for his insight. This is what he told us:
In general, company founders fall into two simple categories: (a) first-time founders, and (b) repeat or “serial” entrepreneurs. In both cases founders tend to be special individuals whose idea(s) are spawned from a unique customer insight (often from a sales background), technical innovation (technology background) or a perception of a future opportunity (futurist/evangelist type). Company founders are not usually people who excel in process, building of an administrative infrastructure, compliance with various regulations, etc. That is not to say they are cavalier about it, it is just not at the top of their mind or specifically germane to building a company.
Since companies typically grow in phases, or between inflection points that call for different levels of infrastructure, a lack of process refinement usually helps, not hurts, in the earlier stages. Creativity, flexibility and openness are crucial to success in these stages. As you add more people (employees and partnerships), customers and the overall number of transactions, process and discipline become hugely important parts of “scalable growth.”
For every company, reaching that inflection point where things start to fall through the cracks is a true test of long-term viability. The exact metrics are different for every company, but the ability to anticipate these issues, add professional management to negotiate them and put ego aside in the pursuit of supporting the right outcome determines success or failure.
Not surprisingly, first-time founders fail more often than serial entrepreneurs at navigating these growth pains. Serial entrepreneurs more often have the self awareness to step aside or recruit executives with complementary strengths to support scale. Also, serial entrepreneurs more often go out and attract advisers who help hold them accountable to making these changes.
Photo credit: JD Lasica
High and Mighty: Behind the Vision of the City's Newest Park
High Line visionaries, architects, developers and city planners gathered for a panel discussion at Columbia Business School on October 13 to discuss New York’s newest public park: the 75-year-old elevated railroad that reinvigorated West Chelsea. The event was sponsored by the Paul Milstein Center and the MsRED Program and panelists included Robert Hammond, cofounder and president, Friends of the High Line; John H. Alschuler Jr., chairman, HR&A Advisors; and architects Jared Della Valle and Andrew Bernheimer. The discussion was moderated by Professor Lynne Sagalyn. Watch a video of the panel presentation.
 |
|
|
The shot that saved the High Line: a view of the elevated tracks before restoration. |
Robert Hammond, vagabond artist and High Line visionary, begins with a photo: a grass-covered railway, 30 feet above the fray, careens up the west side and disappears into the cityscape, like a strip of Central Park cutting through Gotham. The picture matters because this whole elevated-railway-turned-public-park idea was difficult to visualize back in 2001, but the photo offers a glimpse. Hammond calls it “the shot that saved the High Line.”
Next up is John Alschuler, adjunct professor at Columbia’s Graduate School of Architecture, Planning and Preservation and chairman of Friends of the High Line. The High Line, Alschuler explains, is one and a half miles of elevated railway that extends from the city’s Meatpacking District to Hell’s Kitchen, a corridor whose proximity to river and railyards made it America’s most important manufacturing hub in the mid-1900s. All goods coming to or leaving New York eventually found their way onto the line, so to say that the High Line facilitated New York’s rise to industrial superpower is not hyperbole.
So there’s that. And there’s the photo. The combination of the two made for a compelling case to save the High Line. “We saw the chance to create a world-class urban amenity,” Hammond explains. “one that would appeal to a New Yorker’s sense of history and design and reinvigorate this historically rich but blighted edge of the island.”
Eight years of fundraising, planning and politicking later, that vision has been realized. The High Line, now beautified by glass and grass and public art, has become the unique park promenade that Hammond envisioned back in 2001. Per the plan, a new West Chelsea has taken shape around it.
 |
|
|
Robert Hammond shows the route of the High Line in an aerial view. |
The transfer of air rights, a city planning mechanism that helped persuade naysayers and NIMBYs by increasing property values, allowed the neighborhood around the High Line to go vertical. This planning change coincided with the development boom of 2005, and the combined effect has been sudden and striking. The Standard Hotel, Frank Gehry’s IAC headquarters and countless other design-in-mind projects (one resembles plume of locomotive smoke) now stand as symbols of the new West Chelsea — no longer a dodgy enclave of abandoned warehouses, but the preferred address of athletes and actors, Nike and Google.
Of course there is criticism — too expensive, too narrow, too modern. And sure, in the wake the real estate collapse, appreciating these expensive (and mostly empty) towers requires a little suspension of disbelief. But walking the line for the first time on a late summer Saturday, it’s evident that something positive has happened here. While the critics are busy being critical, the rest of New York is enjoying their new park: a family walks their dog, a couple watches the sunset over the Hudson, a singer strums “Mr. Tambourine Man”. Let’s remember: five years ago this was an abandoned, blighted eyesore.
Hammond’s hope for the High Line is simple: he wants it to be a place New Yorkers — not tourists — go to and enjoy. He may get his wish: It certainly won’t photograph as well as Times Square, it won’t inspire people like Top of the Rock or offer the solace of Central Park. But it will be a great place to stroll on a Saturday, to appreciate New York’s past and present and enjoy sunsets and Bob Dylan covers — a great park, 30 feet above the fray.
Photo credits: Joel Sternfeld and Kirill Babikov
I recently had the honor of moderating a panel at the Outstanding Directors’ Exchange Program in New York City this early October. ODX is a leading forum for the sharing of insights and ideas among directors; it is also a partner with Columbia Business School’s Executive Education program. On my panel were David Nadler, a former Columbia Business School professor and who is now a vice chairman at Marsh & McLennan, a global professional services firm, and Ron Rittenmeyer, former chairman, president and CEO (retired) of EDS and a current director at R. H. Donnelley. They made some observations that I found very compelling:
David Nadler suggested that one key thing boards need is input into strategic decisions when there are still choices to be made, rather than simply being asked to vet decisions that management has already come to a conclusion about. We need, he suggests, to get away from a “review and concurrence” process and instead adopt one in which a board can make meaningful choices. The second key issue that boards need to be engaged on has to do with the question of risk — often the most significant risks don’t show up in the spreadsheets and presentations shown to the boards. What is needed, instead, are candid conversations about what happens if the unexpected happens or if the strategy goes wrong.
Ron Rittenmeyer noted that it is important to support innovation, but that the board needs to take into account what the company has to work with. “You have to innovate from where you are,” he said. That has powerful implications for understanding the three pillars of strategic execution: talent, technology and financial considerations. Rittenmeyer said he believes it is crucial that the board probe deeply into whether the company can actually execute against the strategy, no matter great the plan sounds.
For my part, I suggested that one of the big shifts in the world of strategy today is not necessarily reflected in board-level conversations. We still proceed as though there is a thing called a “sustainable-competitive advantage” in many industries. In reality, advantages in many segments are increasingly transient — what we have are cases of developing insight, launching initiatives, exploiting an advantage and then exiting. So boards need to be having candid conversations about this entire cycle, asking such questions as: What is our process for finding new advantages? How long will they last? What is our approach to exiting and freeing up resources when there are no longer benefits to be gained?
In such environments, I also proposed that boards can completely kill effective innovations by insisting on the wrong metrics — such as worrying about the rate of failure. I’ve long said that the rate doesn’t matter if the costs are low. Imposing those requirements will guarantee risk aversion among the staff.
Photo credit: Michael Sauers
Social Enterprise Conference Focused on Ethics, Technology
How is open source software a form of social enterprise? That was one of the many timely topics that surfaced at this year’s Social Enterprise Conference on October 9. A theme of technology — how it can be leveraged and developed for social endeavors — was prominent throughout the day. Dr. Craig Barrett, the retired CEO and chairman of Intel, was awarded the 2009 Botwinick Prize in Business Ethics, which was presented by the Sanford C. Bernstein & Co. Center for Leadership and Ethics, and gave the keynote address.
In a panel on “The Power of ICT in Social Enterprise,” several participants discussed the challenges of scaling microfinance and mobile banking. In another popular panel with Wikipedia’s Jimmy Wales, the encyclopedia founder addressed the question of open source software: “It solves a lot of incentive and trust problems,” he said. “It’s a powerful way of leveling the playing field and allowing for collaboration.” Wales went on to offer three tips for community design: 1) Open is not the enemy of quality, 2) You cannot have community without participation and 3) Participation can come in unexpected ways.
In his keynote address, Barrett discussed the ways in which Intel has used technology to do good, including its successful education program in 60 countries that is focused on math and science. He also named the challenges he sees for business leadership, drawing from his experience with the European Union’s anti-trust case against Intel that ended with a $1.45 billion fine against the company last May.
“The increasing role of government will put a burden on CEOs to respond to regulations in an appropriate fashion,” he said. Barrett lauded a recent Wall Street Journal op-ed by Coca-Cola CEO Muhtar Kent arguing against a proposed sugar tax as a way to tackle obesity.
Later he said, “The challenge for CEOs and business executives is to stand behind ethics in the face of governments that don’t have the same ethical background or breadth of view.”
Photo courtesy of Columbia Business School
Russia's Foreign Capital: Fight or Flight?
Russian gangsters, $230 million in allegedly stolen funds, a hedge fund investor and YouTube. The makings for a thriller are now a case study at business school. Professor Ray Fisman, director of the Social Enterprise Program, is teaching a case about Bill Browder’s tangle with the Russian government. Browder, the CEO/founder of Hermitage Capital, has accused the Russian government of organized corruption that took $230 million in a scam. The firm has approximately $3.5 billion invested in the country, making it one of largest foreign investors in the country. Countering his claims, the Russian Interior Ministry is seeking his arrest for illegally evading taxes. The story took turn on October 9 when Browder posted a documentary-style video on YouTube in English and in Russian to publicize his case. (Browder spoke at Columbia Business School in October 2006.)
In a recent commentary in Forbes.com, Fisman, writing with Eric Werker from Harvard Business School, wonders if this latest development in the story represents the “epigraph to a new chapter of capital flight from Russia.” However, underscoring the story about Browder’s standoff with the Russian government are larger questions about governance, economic development and foreign investment. Fisman writes:
Economic development requires investment. For their part, investors typically explore the upside and downside of any given opportunity: What is the likelihood that we will strike oil? At what price will we be able sell our product? What are the wages and taxes we will need to pay? Understanding the costs and risks, they then decide to invest if the profits are high enough.
Many of the risks come not from uncertainty over resource availability or technologies, but whether the “rules of the game” will be changed after the investment is made. That is, will an investment partner try to rewrite the contract to get a bigger piece of the pie? Or will a sovereign state--like Venezuela or Russia--try to up its share through higher taxes or even outright expropriation? If investors don’t trust the legal system to enforce the rules, the potential downside makes investment a whole lot riskier. So economists emphasize the role of contract enforcement and predictable government policies to foster investment and growth.
Photo credit: Josef F. Stuefer
CEO Leadership Advice: Know Thyself
“These are hard times and it’s nasty out there,” Shumeet Banerji, the CEO of Booz & Company, told students in early October. “But hold your nerve. It is getting better and recovery is long and slow.”
Banerji visted Columbia Business School as part of the Silfen Leadership Series and gave an hour-long presentation on career and leadership topics and answered questions. He encouraged students to focus on developing well-rounded characters rather than overly focusing on résumé success.
“It is important to know thyself. Acquiring self-consciousness is the most exquisite transformation that you make in your 30s and 40s,” he said. “Learn what you are good and bad at. Especially what you are bad at.” He also suggested that good leaders think in six to eight month campaigns. “Taken together, they are a course of action,” he said.
He offered 10 career development tips:
1. Pay attention to human capital and who you are as a human being; consider how you think about and construct problems.
2. Get and feed a network. If you only get in touch with people when you need something, it doesn’t work. Be helpful to others as well, even if it’s difficult to take the time and effort.
3. Find mentors. No one is good enough to sort out his problems on his own. Good mentors are the ones who have influenced you and paid attention to you. They not only advocate for you, but they are critical of you as well.
4. Seek diverse experiences and stretch yourself into areas where you are not naturally comfortable. Diverse experience builds character.
5. Be curious about the world and its issues; despite the pain of the financial crisis, it has been an accelerated learning curve.
6. Be interested or else you can’t be interesting. Nothing is worse than a dull dinner companion — you can be interested in anything.
7. Form an educated and distinctive point of view. It helps you make sense of abstraction. Have a worldview to see what forces are at play.
8. Read. At the minimum read a daily financial paper and a dozen good books a year.
9. Look after yourself. Careers are an endurance game and work happens to you more than any other activity.
10. Make time for people you love and who love you. It’s too early to let these people become a subsidiary early in your career. The thing about time is that it is very unforgiving.
Photo courtesy of Silfen Leadership Series
In September, Professor Bruce Kogut and Cheryl Rathbun, managing director and chief operating officer of Citi’s Institutional Client Group’s (ICG) Risk Management, participated in a question-and-answer fireside chat about the future of financial regulation.
While Rathbun made clear that “we’re not out of the woods yet”, she did say that some of “major contours” of the new financial landscape are appearing.
“I don’t think we’re going to see major money center banks growing and growing and we’ll just have three or four major institutions. I think we’ll see a paring down,” she said. “At the same time we’re going to have increased regulation and capital requirements, which will force the money center banks to have somewhat of a different model. It’s a little more retro and maybe going back to what we saw in the 1970s … we may see some reincarnation [of that era] and some bit separation between [securities and commercial banking].”
To learn more of Kogut and Rathbun’s exchange, watch the complete video coverage.
Where Are We Going With Business and Sustainability?
 |
|
|
Secretary-General Ban Ki-moon with a sample of polar ice during his visit to the Polar ice rim on September 1, 2009 to witness firsthand the impact of climate change on icebergs and glaciers. |
Today, the 2009 Social Enterprise Conference: From Vision to Practice is taking place at Columbia Business School. This year’s event features Craig Barrett, former chairman of Intel, as the keynote speaker, and the panel topics touch many areas of business and sustainability. One panel will touch on how the private sector can provide solutions for clean water scarcity; another will showcase successful social entrepreneurs. Many of the themes that are being discussed today came up as part of a debate we took part in last week at the Carnegie Council.
Last Wednesday, a team of second-year students made up of Irene Pipola ’10, Kayvan Parvin ’10, and myself participated in “The Future of Business and Sustainability” debate, hosted by the Carnegie New Leaders. The group debated with teams from the NYU Stern and Baruch business schools and explored various ways of using the private sector to achieve environmentally sustainable outcomes.
The debate took place on a cruise around Manhattan on a “green” boat powered by biodiesel fuel. The evening began with clips of the new film Shattered Sky, by Stephen Dorst, which explored the parallels between the current debate on climate change to the one that led up to the Montreal Protocol in 1987 that resulted in the regulation of industrial gases that were causing holes in the ozone layer. The Protocol has been very effective and levels of harmful gases in the atmosphere rapidly have stabilized in the years since it was passed with no economic impact on consumers.
Dorst was present, and we discussed the similarities between the two cases; in both, corporate lobbyists held up the legislation for years and winning public support was crucial to providing the political will for change. Most importantly, the leadership of the United States is key in both cases; it took 14 years after the discovery of the ozone-depleting properties of certain industrial gases to get global agreement — and U.S. leadership was crucial to bringing the world together to solve the problem. Similarly, the debate on how to regulate greenhouse gases to mitigate climate change has been going on for decades — and the lack of U.S. leadership has been fundamental to the inability of the world’s nations to reach an effective plan of action.
Once the debate started, our group put forth several innovative ideas on New York, business and sustainability. Kayvan identified innovative business models that could address the split incentives problem that causes many profitable opportunities in energy efficiency to go unrealized. Irene discussed how congestion charges and incentives for some businesses to operate at flexible hours could be cost effective tools to reduce the strain on New York’s public transit infrastructure. I insisted that solving the fundamental problem of the externalities associated with greenhouse gas emissions and climate change could not be addressed without putting a cap, and therefore a price, on those emissions.
Photo credit: UN Photo/Mark Garten
A Prescription for the Media Industry
The media industry is in dire straights — and it’s not because of the Internet. Rather the industry has made some fatal mistakes based on flawed strategies of growth and convergence. A new book, The Curse of the Mogul: What’s Wrong with the World’s Leading Media Companies written by Columbia Business School faculty members Jonathan Knee, Bruce Greenwald and Ava Seave, delves into the reasons why the industry is hitting bottom.
In the October issue of the The Atlantic Monthly, an excerpt from the book maps out the reasons behind the value destruction in media companies including “relentlessly overpriced acquisitions, ‘strategic’ investments, and contracts for content and talent.” The authors argue that drastic action is needed by the media giants to restore value. That requires “jettisoning all [the] entrenched media myths and going back to basics: understanding the key characteristics of various media segments and applying established business principles to determine the best way forward.”
So what exactly would this drastic action look like? Author Ava Seave, adjunct associate professor of finance and economics, elaborated.
“All of the advice we give in the book should be evaluated in light of the specific media segment the company operates under. If a company has the misfortune of being a conglomerate, each individual business should be evaluated in relationship to its industry, not its ownership,” says Seave.
“For example, Martha Stewart Living Omnimedia’s businesses (stock symbol MSLO) operate in multiple arenas — each with their own characteristics. The company’s products in magazines, books, TV syndication, online content aggregation and retail licensing are all very different businesses with very little in common in cost structure and competitive environment,” she continues. “It may be flip, but we are serious when we advise that the first drastic change is that immediately (if not sooner) media companies can stop making crazy acquisitions or have wild expectation about synergy among unrelated segments.”
The six principles the authors recommend media companies live (and die) by, according to Seave:
1. Dare to dream Imagine how the industries in which you operate could operate and most effectively organize -- and try to move the industry to the ideal.
2. Keep it local, keep it focused Ignore all the conventional wisdom about global footprint, and find businesses that have either a narrow geographic territory or more likely a product niche. This will have the double whammy of increasing likelihood that scale can be achieved quickly and there is a good basis for customer captivity.
3. Efficiency is cool It may be that asking you to pay attention to revenue and cost management is like preaching abstinence-only sex education in a high school, but it is important for you to try.
4. Don’t be such a big shot Overpaying and other means of destructive competition is a communicable disease, so try to find small areas of collaboration in your industry; cooperation can be similarly contagious.
5. Watch your back Even companies that seem to have an impregnable fortress will eventually be scaled, so a constant reassessment of the strength and reinforcement of the the source of competitive advantage is called for. Increased competition with other forms of media make it even more important to cooperate with your allies and collaborators.
6. Dying with dignity is an option It’s hard to admit you’ve lost it, but rather than reinvesting in projects that have little prospect of generating an adequate return, instead, milk a declining franchise and return the proceeds to the shareholders.
Photo credit: Kent Kanouse
Join professors Jonathan Knee, Bruce Greenwald and Ava Seave as they discuss the new book on November 16. Event is hosted by Columbia Business School Office of Alumni Relations. Click here for more information about the event.
Keeping It Green After Graduation
 |
|
|
Dr. Rohit Aggarwala ’00 spoke to the Sustainable Business Committee about his experience creating a “green” plan for New York City. |
Last month a new alumni group, the Sustainable Business Committee (SBC), held its first event to launch Making Green from Green, an eight-part series that will run through June 2010. The SBC, which is part of the Columbia Business School Alumni Club of New York, was formed to help alumni and the extended community stay current with emerging green trends and put their careers on a sustainable path.
The launch event featured keynote speakers Ray Anderson, founder and chairman of Interface and author of the new book Confessions of a Radical Industrialist and Dr. Rohit Aggarwala ’00, director for New York City Mayor’s Office of Long-term Planning and Sustainability.
Anderson, who has been called “America’s Greenest CEO” by Fortune magazine, described Interface’s journey to zero waste, which began in 1994. Since then, Interface reduced net greenhouse gas emissions by 82 percent and water usage by 75 percent, and increased their use of renewable energy to 27 percent of the total. Sales increased by two-thirds, profits doubled, and total costs declined, with $400 million in avoided costs. Anderson challenged what he called a “false choice between the economy and the environment” and concluded that “if we, a petro-intensive company can do it, anybody can. And if anybody can, it follows that everybody can.”
Aggarwala led the creation of “PlaNYC A Greener, Greater New York,” a comprehensive plan to green New York City. The City, according to Rohit, did not start out with a desire to be green, but came to environmentalism out of necessity, as a by-product of long-term planning. The City is expected grow from 8.4 million to 9.1 million people by 2030. In a city where every square foot is spoken for, he said, sustainability becomes a strategic need. Aggarwala described how the bottoms-up market demand for sustainability is changing the City. It lost two court cases where it sought to require taxis to convert to hybrid technologies. However, despite no regulation, 21 percent of all taxis in the City are hybrids, and 50 percent of those entering the fleet are hybrids, most of which are owner operated.
The next Making Green from Green event will be held on October 20. It will include a building tour by the architects and builders of the LEED Platinum Queens Botanical Garden Visitor & Administration Building. To register for the event, click here. Participants who attend six events will receive a certificate of attendance. For more information on SBC or the Certificate Program, email sustainablebusiness@cbsacny.org
“Your Business School years have coincided with an extraordinary time and now you have a huge opportunity,” Paul Calello ’87 told students in a recent lecture. “The themes of this time are change and responsibility.”
The CEO of the investment bank and a member of the executive boards for Credit Suisse Group and Credit Suisse, shared his views on the financial crisis and gave mentor advice on September 17 as part of the Silfen Leadership Series. Calello serves on the School’s Board of Overseers.
In discussing the impact of the crisis on the financial industry, Calello talked about the ways banks have had to innovate new solutions. He pointed to Credit Suisse’s executive compensation strategy as an example. The bank made headlines last December when it announced it would use its illiquid assets to fund some of its executive compensation packages.
“At first it was internally unpopular … but it was the right and responsible thing to do,” Calello said. “It was a way to align with the interests of shareholders, continue to rid the firm of these risky assets and, at the same time, address employees’ needs.”
Looking into the near future for the finance industry, Calello said he expected “many more significant developments to come in the next two years,” particularly from regulators. In response to a question about job opportunities, he said flow trading areas and products that are exchange-traded and centrally cleared would be strong.
As for practical advice for MBA students, he said there was no alternative to hard work and urged students to learn all they can about the crisis they’ve been living through.
“You will be part of an era of reform,” he said. “We’re relying on you to not repeat mistakes that have been made, but to help restore trust and confidence in our industry.”
Photo courtesy of Columbia Business School
Is it time for a new approach to solving world poverty? That question is at the heart of a new book, The Aid Trap, by Dean Glenn Hubbard and William Duggan, a senior business lecturer at Columbia Business School. In it, they argue that direct loans to businesses similar to the Marshall Plan is a more effective way to help sub-Saharan Africa pull out of poverty, rather than direct aid from charities and NGOs.
Hubbard and Duggan argue the current economic aid system — where non-governmental organizations run development projects — isn’t working effectively and there needs to be a “reorientation” of aid directly into the business sector. In many poor countries local business sectors are suppressed, they say, and that leaves economic development to either NGO-type entities or large multinationals. Their answer is to open up the middle of the economy for local business in order to have long-term sustainable growth.
“The question is mid-sized businesses. If you look at growth in the U.S. over the past two centuries or the industrial revolution in Western Europe, it was centered on growth of mid-sized enterprises,” Dean Hubbard said in a recent video interview at Forbes.com. “Mid-sized businesses need a very different credit structure than either microfinance or large multinationals, and that is missing in much of sub-Saharan Africa. A business focus on aid could get that going.”
Read more about The Aid Trap and in a Q&A with Dean Glenn Hubbard.
How to Harness Volunteer Power
 |
|
|
From left to right: Manisha Kathuria ’10, Marieke Van der Lans ’10, Marcela O. de Rovza, Tiago Sousa ’10 and Riccardo Boin ’10. |
Our Pangea Advisors project started with a “field trip”… yes, even in New York City we had this amazing opportunity! We left campus on a rainy day and we traveled for a couple of hours by train, ferry and taxi cab to reach a remote corner in Staten Island. There, for the next three hours, we immersed ourselves in the reality of 15 Hispanic immigrants, who were mostly day-workers, attending an evening class in financial literacy.
Qualitas of Life, our client, offers community-based financial education workshops for Hispanic immigrants in New York City. Its mission is to give these men and women tools to improve their personal finances and provide more opportunities for their families. It is a young organization and it faces the challenge of attracting, exciting and retaining volunteers who facilitate the workshops. As a Pangea Advisors team we were asked to develop a plan to strengthen their volunteer organization.
After thoroughly understanding our client’s mission and objectives, we were ready to do some investigation. We conducted interviews with staff members, board members and volunteers to better understand the challenges for the organization. We then decided to benchmark Qualitas of Life with other successful non-profit organizations and their volunteer programs. To do so, we not only did desk research, but also interviewed key people working in other non-profit organizations in New York City that had succeeded in creating an outstanding network of volunteers.
We traveled up and down Manhattan talking to executive directors and volunteer coordinators. It brought us to the most interesting places that we would have otherwise never seen — such as the 32nd floor in a typical New York City tower next to Penn Station, which, as we stepped out the elevator, turned out to be a huge warehouse with kids’ clothing and toys. We were in the right place to meet the executive director of a great non-profit organization called Baby Buggy.
We spent several weeks on data collection, interviews and follow-up meetings with the client, and then we were ready to develop our final recommendations. Our Pangea Advisors team met early in the morning and spent the entire day defining the framework and guidelines for our report. In a small room in Warren Hall everything came together: all our individual insights and opinions, different views on the structure of the recommendations (not surprising with three consultants and one banker among us!) and a lot of humor. In the end, it led to six types of recommendations: raising awareness; identifying and recruiting volunteers; welcoming new volunteers; organizing and allocating tasks to volunteers; measuring and rewarding volunteers, and communicating effectively with volunteers.
We worked hard to make the recommendations very specific and tangible. For example, we made a sample spreadsheet for the allocation of tasks to volunteers and we wrote sample introduction e-mails to new volunteers. Before finalizing the recommendations, we discussed them in detail with Qualitas’ two staff members, who helped us by pointing out where we could be even more specific.
In the first week of August, the entire team was invited by Qualitas’ president and founder, Marcela O. de Rovzar, to present and discuss the final recommendations. They were excited about our recommendations, and we had an in-depth and fruitful discussion with Marcela and the Qualitas staff during which we got a chance to share our views on the various challenges faced by the organization.
Now, a month later, it is great to see that they have already been implementing most of our recommendations. We are still following Qualitas with a lot of interest and self-satisfaction.
Photo courtesy of Marieke Van der Lans ’10
'A Terrific Pick' for Wall Street
Dean Glenn Hubbard called the selection of James P. Gorman ’87 as the new chief executive of Morgan Stanley a “recipe for success.”
Morgan Stanley announced the news on September 10 that Gorman, currently in charge of the firm’s global wealth management division, would replace John J. Mack as CEO starting Jan. 1, 2010.
Gorman has been with Morgan Stanley for four years. In that time he has had key success, including turning around the bank’s retail brokerage operation. Prior to joining Morgan Stanley, he ran the global private client business at Merrill Lynch. Gorman has been a member of the School’s Board of Overseers since 2006.
Dean Hubbard, who has known Gorman since his days at Merrill Lynch, said Gorman was a “terrific pick” and a “strategic thinker”, underscoring industry reports that Gorman was favored as CEO for his ability to switch quickly between jobs and his long-term thinking for the firm.
Photo courtesy of Columbia Business School
Driving Results With Social Media
You’ve heard about companies using TweetDeck to tweet on Twitter, updating their Facebook status while feeding into FriendFeed, and building buzz to bolster conversation on their blogs. But if you don’t understand what any of this means, and consider yourself a marketer, then 1) you are not alone and 2) you need to understand what all of this is about.
Social media as a communications channel is the New Big Thing for marketers. So what do you need to do to stay ahead of the curve and make sure your social media initiatives are successful at your company? Let this article be your starting point.
1) Launch, Track, Learn, Evolve, Rebuild
Don’t skimp on reporting. Everything in the online space is trackable — so track it. Launch initiatives quickly and then use the information and results that are gathered to learn and continue to evolve your platforms. Some of my greatest insights and strategic program adjustments have come by really diving into the numbers.
As a student in the Executive MBA program I recently completed a class called Decision Models, which is focused on how to structure information to support managerial decisions. I had little exposure to these areas before, but I was able to use the classroom knowledge immediately in my job. I used the models and applied them to my results to help inform funding allocations. You might consider doing the same thing.
Powerful in its simplicity, yet worth emphasizing — in social media it is critical to launch quickly, track results, continuously learn, iteratively evolve, and periodically rebuild your entire system.
2) Leadership Support and Empowerment
The success of social media programs can be influenced by the degree of leadership support and decentralized decision-making inherent in the process. To me, leadership support means two things: 1) empowering employees and 2) encouraging new ideas by involving social media gurus.
First, empower employees. Senior leaders in most traditional companies are digital immigrants and they are still getting up to speed on these new channels, they need to have trust in the digital natives — the thinkers who have come of age in the digital era. Smart leaders will empower the digital natives to make decisions as they themselves learn the ropes. In time, it is likely that companies which support employees to deliver on new social media initiatives will be the clear winners and innovators. Take, for example, the story of P&G, which is recognized for pioneering sponsored advertising in soap operas when TV was the next big thing.
Secondly, involve social media experts. It is challenging to launch company “firsts” in social media, even if you are working with people who have a can-do attitude and are empowered to drive these initiatives forward. Employee burnout and retention can happen with social media, just as it can with any other creative endeavor. Whether as a leader or peer, continually identifying and retaining people who are skilled in social media will help serve any establishment seeking to make inroads in this space.
3) Form Progressive Partnerships
At its heart, social media is about people and relationships. You can say this applies for anything in marketing, but I believe it is especially true for social media.
In the beginning, the process is about finding and retaining the right employees who are resilient, can work within internal processes, and who are also willing to challenge the ideas when appropriate. However, quickly, this evolves to fostering the right external partnerships. At OPEN Forum, we are fortunate to partner with big brands, small brands, and individuals’ brands. We partner with major online publications like Mashable, experts like Guy Kawasaki, and sponsors like FedEx, along with some of the best and brightest small business owners out there — our customers. (Also, on a personal note about relationships, it’s especially nice to work with another Columbia Business School grad, Julie Hansen ’03 (EMBA) of The Business Insider.)
Through listening and remaining open to opportunities with our partners, we’re able to exchange value organically, in a way that creates efficiencies and opportunities for all. As an example, we frequently meet with small business owners to find what is working for them and what they need (including my own personal experience consulting for SweetRiot, one of our small business retail customers). We help drive their business growth by offering advice, and they come to better understand the value of our products and services so they use them more — it’s a win-win situation. Do this authentically and consistently and you will win. I will leave you with a final thought — whether you are a digital immigrant or digital native, it’s imperative that marketers realize that social media is the business strategy — not just a part of the business strategy. So, keep this in mind as you start to get social and you will be truly successful. If you have any questions, feel free to tweet me at @brianlenhart.
Brian Lenhart ’10 is Manager, American Express OPEN, responsible for the content strategy and development for OPENForum.com and a current student in the Executive MBA program at Columbia Business School, where he avidly tweets about life as an EMBA student.Photo credit: Mike Paradise
A year ago this morning, we woke up to the news that Lehman Brothers had collapsed. The overnight demise of the investment bank is an important milestone, but it is only one failure in a series of calamitous events in the last year that shook the financial world and changed it forever.
Entire markets essential for world commerce effectively shut down and some markets continue to remain moribund today. Last year at this time, the whole banking system was on the verge of collapse and the world economy was tanking. Now that the economy is stabilizing — even perhaps tentatively recovering — and the financial sector is healthier, it is easy to forget just how bad things were.
It is true that investors today are now more cautious and banking will (hopefully) become more boring. But the financial and economic landscape has been permanently altered. The single biggest change pre- and post- Lehman Brothers’ failure is the role and the actions of the government and other financial authorities.
Before Lehman’s fall, the government played a relatively small direct role in financial markets. Now, the most important player, and still in some cases the only player, in financial markets is the government. The government essentially chose Lehman’s fate and allowed some of its peers to survive. Masses of money — tens of thousands of dollars per U.S. household — were injected by the United States Treasury to save the banking system from itself and bail out bankrupt industries. Unprecedented intervention by the Fed in markets, still continuing today, has slowly enticed investors back.
But now one year later, we can look back at how the government led us out, but the big question is: Where is it going to lead us next?
Photo credit: T. Shein
Can Business Learn to Embrace Politics?
If the financial crisis taught business schools anything, it's that the curriculum can no longer turn a blind eye to pressing policy issues that impact business, says Professor Bruce Kogut. (See yesterday’s post about some of the ways the School is incorporating the financial crisis into course work.)
In a recent article in BusinessWeek magazine, Kogut elaborated on his view of the financial crisis and said that it might be best seen through a political perspective, rather than a technical or managerial one. Abundant liquidity and “unprecedented income inequality”, he wrote, paved the way for a flawed incentive system. Kogut argues that there should be more focus on “regulation of the financial markets and less deference paid to financial innovation.”
What does this view mean for business education? Kogut says that politics must have place in the MBA education. He writes:
|
||
|
Do you share this view? Please leave a comment. |
Financial crises are the children of troubled politics, yet management education often eschews political questions. This is a fundamental flaw of most, if not all, business schools. If such questions are left unaddressed, we will produce business leaders with limited perspectives who may not be equipped to deal with the pressing issues of the day. In other words, we must make the case to our students that the political questions, while difficult, are critical to the practice of business — even if this kind of analysis may not appear to serve their immediate self-interest. …
The crisis has reshaped the financial landscape, shifting the value of management education toward pedagogies that strengthen students’ understanding of the fundamental relationships in society — how managerial, technical, ethical, and political elements work together.
Photo credit: Theo La Photo
Financial Crisis Module Offers Framework for the Core
“How do we make decisions under uncertainty?” Professor Wei Jiang posed the question to an audience of students last week during orientation. The question not only referred to the lecture’s topic — the financial crisis — but was offered as a framing device for students as they begin core classes in the MBA program this week.
“This will be the most important skill you can develop,” she said.
A new orientation module focused on the financial crisis was created this year to give new students an overview of the causes and issues of the crisis and provide key questions that connect it with upcoming courses in the core. In her lecture, Jiang considered different aspects of the crisis including international policy, behavioral bias, compensation structure, government regulation and risk models.
The module is part of a larger initiative by the School to use the financial crisis as a vehicle to foster integrative thinking in business training. Another element of that initiative is the creation of a new cross-discipline class, which will launch in Spring 2010, on the future of financial services. During the past summer term, former chief legal officer of Lehman Brothers, Thomas Russo, taught a half-term course looking at the crisis.
“Look ahead as well as look around you,” Jiang told students at the end of her lecture. “Think in terms of tradeoffs and equilibrium.”
Photo courtesy of Columbia Business School
This Is Your Brain on Stereotypes
Stereotypes and bias can affect judgment in the subtlest of ways. New brain imaging research shows just where these biases are experienced deep within grey matter.
“My colleagues and I were interested in determining how the brain responds when people are ‘put on the spot’ by decisions that could make them appear racially biased,” says Malia Mason, assistant professor of management who studies decision-making and the neuroscience of social perception. She will be co-hosting a symposium on diversity and leadership later this month at Columbia Business School.
Mason and her co-authors, Michael Norton, Joe Vandello, Andrew Biga and Rebecca Dyer, looked at how the brain helps people manage decisions that others might interpret as discriminatory. The researchers measured their white participants’ brain activity while they decided which of two individuals was more likely to have certain traits (e.g., gentle, intelligent, Canadian). On some trials participants were asked to decide between two white candidates, on other trials the particpants had to make a judgment involving a white and an African-American candidate.
“The results revealed that the brain’s alarm — the anterior cingulate cortex (ACC), a cortical region that detects conflicts or uncertainties — is triggered when people have to choose between a black and a white candidate,” Mason says. “Importantly, this occurs regardless of the relevancy of the trait or characteristic in question. The sound of the ACC alarm was just as loud when people decided who was Canadian as when they decided who was intelligent.”
Having to choose between a black and white candidate was also associated with activity in brain regions that support concentration (the dorso-lateral prefrontal cortex or DLPFC) and flexible responding (the lateral orbital frontal cortex or LOFC). Like the brain’s alarm (the ACC), these regions were recruited even when participants’ decisions could not be taken as evidence that they harbored stereotypical beliefs. These findings suggest that the judgmental context itself — having to choose between a white and a black participant — sets off a cascade of events and signals the need to proceed with caution and care, to inhibit stereotypical beliefs, and to consider how a decisions will be interpreted by others, says Mason.
“The good news is that people appear to be sensitive to social injustices and highly motivated to seem egalitarian,” says Mason. “Unfortunately, these findings also suggest that egalitarian aspirations alone do not lead to social colorblindness. The challenge is to help people unlearn beliefs with a dubious basis. Our results suggest that brute inhibition of stereotypes is a lot of work for the brain.”
The Program on Social Intelligence and the Sanford C. Bernstein & Co. Center for Leadership and Ethics are hosting the research symposium “Inclusive Leadership, Stereotyping and the Brain” on September 18, 2009. Learn more about the symposium and register for the event here.
Images courtesy of Malia Mason
About one-fifth of the adult population in the United States experiences some kind of mood disorder, with about 6 percent of the population suffering from severe mood-related disorders. The most prevalent instances fall into one of two classes: depressive disorders or anxiety disorders. But why do some people develop depression during very stressful times while others develop anxiety disorder? The answer may lie in regulatory fit and regulatory engagement.
My work on motivational systems recognizes a distinction between the two different types of basic preferences that people exhibit when pursuing their goals, each corresponding with a distinct regulatory state.
People who tend to make decisions and pursue their goals in an eager way, seeking opportunities for advancement, operate in a promotion state. Promotion people are more likely to consider a number of courses of action and exercise a greater willingness to take risks. People who are motivated primarily by cultivating safety and security as they pursue goals operate in a prevention state; they are intently concerned with avoiding errors and less likely to consider a wide variety of options.
When a promotion person operates in an environment in which there is a lot of innovation and risk taking, her environment fits her regulatory state. If you put that same promotion person in an environment where most of her colleagues are vigilant and slow to take risks, she’ll have a hard time operating in the prevailing prevention state — it’s a nonfit for her promotional motivation system. Conversely, when a prevention person finds himself in an eager, risk-taking work culture, she’s in a nonfit environment. (You can read more about the underlying research and its management and marketing applications in Columbia Ideas at Work.)
Depression versus anxiety
I’ve long been interested in why some people fall into depression and others develop anxiety disorder. And I believe that the logic of the two regulatory states, prevention and promotion, can account for these two very different reactions to stress.
Depression and anxiety both represent failures in goal pursuit — depression is a failure in promotion pursuit, while anxiety is a failure in prevention pursuit. When life isn’t going well, people with a promotion focus become sad and discouraged; people with a prevention focus become anxious, tense and worried.
To more fully understand how the promotion and prevention regulatory states inform depression and anxiety, I’ve investigated the role that engagement plays in intensifying how we value the activities we take part in and the goals we pursue.
Engagement is a way of understanding value — how much people value an activity or goal. And engagement is directly related to intensity. Typically when someone’s engagement in an activity or in pursuit of a goal increases — under fit conditions — intensity increases. Sometimes obstacles to goals can make us engage even more intently in what we are doing — and as a result, a goal can become more highly valued; sometimes obstacles cause us to disengage in what we’re doing, and goals and rewards become devalued.
Under fit conditions, both motivational types are engaged. But promotional people decrease their engagement after failure, while prevention people increase their engagement after failure.
When people with a promotion focus fail, they become less eager, and become sad and discouraged. They are no longer enthusiastic — and that’s a nonfit for promotion, there is less of the eagerness that fits their system. The nonfit causes a promotional person to disengage, and that deintensifies all the positive things in life. Loss of interest in even the good things in life is the major symptom of depression.
Prevention is the exact opposite — when prevention-focused personalities fail in prevention, they become more vigilant, anxious and on guard than ever. In prevention, the increased vigilance fits their system — so they actually become more engaged, intensifying all the negative things in life. All the negatives become more negative — which is precisely the main symptom of generalized anxiety disorder.
This work represents the first time in psychology that there has been a theory for why depressed people lose interest in everything and why anxious people generalize their anxiety to everything: they are reacting differently to failures in their distinct regulatory states with respect to both regulatory fit and engagement, which deintensifies positives in one case and intensifies negatives in the other.
If failures in promotion and prevention do account for the two major symptoms of depression and anxiety and explain why they are different, what does that imply for treatment? Tim Strauman of Duke University and I have received a grant from the National Institute of Mental Health to consider this question. Our hypothesis is that by increasing engagement for promotional personalities you can make life’s positives once more positive, and by decreasing engagement for prevention personalities you can deintensify the negatives. We intend to pursue new interventions in therapy that directly address the differences in engagement.
Photo credit: Yoel Ben-Avraham
The Best Time to Start a Business
Should we really be encouraging students to start businesses early in their careers?
I must admit that while my instinct has always told me yes, there have been moments when I wondered if I was right. While our success rate is similar to that of the venture capital industry as a whole, not all of the students we have encouraged to found businesses have been successful.
So in the spring of 2006, some colleagues of mine and I decided to collect some data. We wanted to learn about the entrepreneurial careers of Columbia Business School graduates so that we could know how to serve them better during their time as students.
After analyzing the survey results, we found that the answer to the question of when best to start your own business is not straightforward.
For our survey respondents, starting a first business two to five years after completion of business school led to the creation of the most successful businesses in terms of revenue. However, starting earlier than that was strongly correlated with starting multiple ventures — which was an even more important predictor of success.
The thousands of unique stories that lie beneath these results, all reveal that learning by experience is hard but unavoidable. We’ve found that students learn best when they are working on real projects, and that combining academic and practical experience while in business school can minimize the pain and maximize the gain of entrepreneurial endeavors. We seek to combine the best of academic and practical experience.
Becoming an entrepreneur is a very personal decision, and the right time to start a business is when it’s right for you. On average, 90 percent of the entrepreneurs we surveyed felt it was a good professional decision to start their business when they did; only 10 percent regretted their decision.
But regardless of what the timing may be, there is ultimately nothing more satisfying than running your own company and being master of your own destiny.
Next Week: What to Consider When Starting a Business
 |
|
|
Students use reusable water bottles to reduce plastic waste. |
The Columbia Business School community has always evolved with the times, and in recent years, through the tireless work of student leaders, school administrators and faculty members, the thread of sustainability has been woven into the fabric of the School.
Environmental sustainability is important not only in light of increased and increasing regulation, but also the opportunity that comes with it. The cover article in this month’s Harvard Business Review explains that sustainable practices allow business to capture two unique opportunities. First, as much of sustainability is related to reducing waste, companies with sustainable practices can reduce waste and subsequently costs in their value chains to grow their bottom lines. Second, the innovations that are developed to reduce waste can be used to create new products or services to grow a company’s top line. Sustainability could very well be the foundation of business growth for decades to come.
This year, it seemed only fitting to debut a green program as part of orientation to inform students from Day One that sustainability and environmental awareness are part of the MBA experience. Several changes, including waste reduction, recycling, and improved communication, have been made to orientation to reduce environmental impact while maintaining everything that students loved about orientation.
We reduced waste by distributing more materials electronically and we used recycled products where possible (for print outs, packaging for lunch). Peer advisors communicated the importance of green behaviors and extra signs were placed to inform students of recycling locations. In addition, peer advisors also advocated the use of reusable water bottles and coffee mugs that were distributed as part of orientation.
When orientation wraps up next week, we hope new students have had a small taste for one more aspect of what it means to be a Columbia MBA student. The lessons of environmental consciousness that were inculcated during orientation will last well beyond their two years and help to shape their business practices and leadership in an increasingly environmentally conscious world.
Photo courtesy of the Office of Student Affairs
Substantive CSR Yields Serious Results
Public outcry has a mixed history of leading to changes in foreign labor practices. For example, in the 90s anti-sweatshop activism led to some successful reforms in labor policy. Today the issue appears less visible. New research from a visiting scholar at the Bernstein Center for Ethics & Leadership examines how organizations respond to societal pressures for changes in their corporate social responsibility policies.
Noshua Watson, visiting Bernstein from INSEAD, studied the case of MAS, a Sri Lankan apparel manufacturer that supplies to companies like Victoria’s Secret, as part of her PhD dissertation. Professor Bruce Kogut advised her work. One of the questions she looked at was whether it is better to meet external demands and conform to industry norms for CSR, or for an organization to differentiate itself.
MAS is typical of many manufacturers in developing countries, where the low cost for implementing modern production methods and an available low-skilled labor pool are appealing. In 2003, the company created — and then heavily promoted — a robust CSR program called Go Beyond for the education and empowerment of its predominantly female workforce. The program has been a social and financial success and it has contributed to the company’s doubling of its revenue from $500 million to $1 billion between 2005 and 2008 by supporting strategic partnerships and bringing in customer donations, Watson found.
Watson concluded that the CSR program at MAS illustrates that there is a difference between “substantive compliance with human rights standards and superficial conformity with industry peers in the way the standards are implemented.” In other words, MAS outperformed the industry standard for CSR and in doing so, was able to leverage that success into growth.
However, Watson says it is not without risk to deviate from industry norms and that companies with a thicker financial buffer are better positioned to innovate new ways of implementing CSR.
“Companies that consistently go beyond industry standards and thrive tend to begin with additional resources that allow them to experiment with their CSR policy,” said Watson. “They also perceive that there will be gains from that experimentation even though simply conforming to industry standards would allow them to satisfy critics.”
Photo credit: hexodus
A Spanish Savings Bank Tries A New Way
Even as Spain’s savings banks struggle to survive in the fallout of the banking crisis, one bank, Caja Navarra is pioneering a new way with what it calls civic banking. Their goal is to provide a new level of transparency and agency for customers by engaging them in a dialogue about where their money should be placed.
Caja Navarra is one of 46 regional savings banks in Spain called cajas. The operations are owned by local interests and governments, and the cajas comprise almost half of the country’s banking system. Unique to these regional unlisted mutuals is that they give a hefty piece of their profits to local causes. One criticism of the caja system is that the banks “have become a financial tool of whichever party governs the region.” However, Casa Navarra is doing something new: the bank donates 30 percent of its profits to a social cause that its customers decide upon — and there is transparency about exactly how much the bank’s profits are.
In the latest issue of the Chazen Web Journal, Nicholas Doimi de Frankopan ’09 sat down for a video interview with Enrique Goni, the CEO of Caja Navarra. (view the complete interview). Goni said that he doesn’t think that civic banking is a niche trend, but rather represents the future of banking.
“I am convinced that civic banking and our way to understand it is the pioneer,” Goni says. “I am personally convinced that banking activity has to change radically and if banks are not civic-minded in the future, they will not [exist].”
Earlier this year, as Spain’s commercial banks, such as Santander, went relatively unscathed by the banking crisis, cajas took a hit — Caja de Ahorros Castilla-La Mancha received a €9 billion bailout at the end of March — and they have been far more affected by delinquency and high-risk loans. That has placed renewed debate over the future of Spain’s savings bank system.
Photo credit: failurez
Cold Calls Are Good for You and Other Lessons for the MBA Classroom
What is the key to case studies at business school?
“Always know someone who has read the case,” said Professor Todd Jick, bringing a light-hearted touch to a serious subject: learning in the MBA classroom.
Last week, international students arrived on campus. With more than 40 countries represented, the School designed an orientation to help them navigate the intricacies of American (and New York City) culture, including a lecture on learning.
Professor Jick discussed cold calls — the legendary practice of being called on at random — and speaking in class.
We offer you a few dos and don’ts from his presentation:
|
||
|
What is your best tip for succeeding in the classroom? Please leave a comment. |
Do
Add something you know about or share your unique knowledge, such as how it works in your country or experience.
Prepare special analysis (number crunch, Google some background information) and be prepared to share.
Volunteer to add more information to the debate and take a position.
Don’t
Sit in the back of the classroom and try to hide.
Make one big comment and then withdraw for the rest of the term.
Over-prepare a comment and then say it even if the conversation has moved on.
Wait until the end of the term to start speaking and participating.
Participating in class discussion is an essential part of the MBA experience, Jick said, but he also pointed to skills acquired in addition to the case material. The practice of cold calls helps students learn to think on their feet, speak in public, deal with pressure and assemble ideas under the spotlight.
“It’s not the end of the world when you don’t have the answer and you’re cold called,” said Jick, smiling. “But it is the second time.”
Photo courtesy of Columbia Business School
Sticking Your Head in the Sand
A typical Wednesday morning finds millions of online banking customers checking their balances. Unless, that is, the stock market has tanked.
When the stock market goes down, sticking your head in the sand regarding your own money and investments is not uncommon. Early research findings from Professor Nachum Sicherman, working with George Loewenstein and Duane Seppi at Carnegie Mellon University and Steve Utkus at Vanguard, show that consumers undergo an ostrich effect — giving selective attention to investment information — with their bank account balances when they see bad financial news.
In their study of 3,000 consumers at a regional U.S. bank, Sicherman and his colleagues found that when the market goes down, so does online balance checking. On average, a one percent rise or fall in the stock market increases or decreases, respectively, the likelihood of a customer logging into his or her bank account by one percent. Additional preliminary results taken from the data of one million customers at Vanguard are consistent with this outcome, says Sicherman.
Initial results show that individuals with larger balances, especially those with higher percentage of stocks, check their balances more frequently. Women, for example, go online less than men, and the ostrich effect is stronger for men than for women. Their data also showed that Wednesday has the peak number of account logins and people tend to check their balance between 9 a.m. and noon.
Sicherman and his co-researchers are looking at the results to see if there is a link with patterns of trading.
“To what extent does the ostrich effect affect trading if people are reluctant to look at their account for psychological reasons when the markets go down?” says Sicherman. “The next logical thing to hypothesize is that if they are not looking, then they are trading less. But we don’t have an answer yet.”
Photo credit: Njitram lexe Nav
What Are Your Economic Indicators?
Despite the jolt of market optimism after the Dow jumped above 9,000 for the first time since January last month, there are less hopeful economic indicators all around.
In New York City, one of the most apparent is empty storefronts. The New York Times reported that the city’s vacancy rate was 6.5% overall and more than 15% in parts of midtown Manhattan. In a citizen-journalism project, the city’s public radio station WNYC has asked its listeners to add their own indicators (more crowded campgrounds, overgrown highway signage, the height of cargo containers in Port Elizabeth).
Elsewhere, another canary: the Better Business Bureau of Chicago reported a steep increase in complaints about payday loan operators. From March 2007 through March 2008, five complaints were filed. From March 2008 to March 2009 this increased to 30 complaints filed.
In a recent column for Slate, Professor Ray Fisman questioned why people take out these kinds of loans that have an APR in the ballpark of 400 percent. Are they desperate or do they not understand the loan’s terms? He cited research that found that “borrowers who were given a chart explaining the three-month cost of carrying a payday loan were 10 percent less likely to take a loan during subsequent months. Among those who did take additional loans, the total amount borrowed averaged around $195, as compared with $235 for the control group.” In other words, financial literacy is a small factor — but for many borrowers, the need for fast cash is too great to be deterred.
|
||
|
What unusual economic indicators have you noticed? Please leave a comment. |
At the macro level, Professor Paul Glasserman pointed us to the VIX volatility index as an economic indicator. “It is a forward-looking measure of volatility in the stock market,” he said. “High volatility is often accompanied by negative returns. From 2004 through the middle of 2007, the VIX stayed below 20%. In the fall of 2008, it jumped to over 80%. It’s been generally declining since and is currently around 24%. A drop below 20% would be a symbolically important event.”
Some good news however: economic indicators are not necessarily mood indicators. Professor Jonathan Levav directed our attention to the research of Princeton economists Daniel Kahneman and Alan B. Krueger and their research on income and happiness. In a 2006 article in Science, they wrote, “People with above-average income are relatively satisfied with their lives but are barely happier than others in moment-to-moment experience, tend to be more tense, and do not spend more time in particularly enjoyable activities.”
Photo credit: Andrew Dallos
Summer Term: Hard Work, Community
Today is the last day of the term for MBA students. To recap the summer’s goings-on: in June, J-Term president Christopher Duve ’10 blogged about his hopes for creating an even-stronger community of students. By term's end, the class had hosted a number of happy hours and dinners with an international flavor. Students also completed a volunteer project at the Brooklyn Bridge Park in July. On campus, the summer’s Case Competition (“The Launch of the Indian Premier League”) was won by Philip Buergin ’10, Davide Grande ’10, Phillip Koehler ’10 and Koenraad Wiedhaup ’10. On July 23, the School held a Community Forum focused on behavioral economics with presentations by professors Gita Johar, Eric Johnson and Nachum Sicherman (view the complete video of the forum). And in case you missed it, Daniel Sorid ’10 published an article in the New York Times on August 8 about informal power and authority, inspired by Prof. Eric Abrahamson’s class Power & Influence.
Photo credits: Sridhar Anand ’10; Samberg Center for Teaching Excellence
CITI Assists with Broadband Review
The Federal Communications Commission, the agency charged with the task of creating a national broadband plan under the Obama Administration, asked the Columbia Institute for Tele-Information (CITI) to serve as an outside expert and provide analytic review for the program’s deployment last week.
The push to expand broadband coverage in the U.S. has raised a host of questions over ownership, content, speed and other economic issues. Backers of net-neutrality have expressed concern that telecom companies receiving broadband grants will have too much power over how and what information is transmitted. Part of CITI’s task is to provide a capital assessment of companies with future plans to deploy broadband networks, as well as their historical track record doing so. The FCC will make its official recommendations in February 2010.
“Too often, the debates over Internet policy have been driven by narrow agendas, with facts used selectively as ammunition rather than enlightenment,” says Professor Eli Noam, the director of CITI. “By focusing on data analysis of investment plans and deployment figures of upgraded broadband infrastructure, especially in this century — CITI looks forward to helping the FCC to change the past culture and develop a National Broadband Plan grounded in facts.”
Globally, broadband infrastructure reached a new frontier this week. On Monday, a new underseas fiber-optic cable providing faster connections to eastern and southern Africa opened.
Photo credit: Craig Rodway
Bringing Prudence to Wall Street
Her words are now prescient. Sallie L. Krawcheck ’92, speaking on a panel to incoming students in early 2005, discussed the conflict of interest between analysts and investment bankers on Wall Street.
“There is one client and one client only,” she told the audience about how analysts should conduct themselves, warning that research should not be dressed up to please companies. “If the company gets upset with you, then so be it — that’s not your client.”
Her vision for a cleaner Wall Street — which has earned Krawcheck a reputation for honest numbers and ethical leadership over the past decade — may be getting closer to reality. On August 3, she was named president of Global Wealth and Investment Management for Bank of America. This places her as a potential successor to Kenneth Lewis as CEO, according to industry reports. From March 2007 to December 2008 she was the CEO and chairman for Citi Global Wealth Management. She is a member of the School’s Board of Overseers.
Krawcheck’s participation in the School’s Individual, Business and Society Curriculum, which is on focused corporate governance and ethical leadership, underscores the ethics framework she will likely bring to her latest role in the banking industry.
Later this month, incoming students will begin the MBA core, which encompasses corporate governance and lessons learned from the financial crisis of 2008. Paul Glasserman, the Jack R. Anderson Professor of Business, who is overseeing the curriculum’s response to the crisis, says that students will need to take a broader view of management, which includes the role of government in business and behavioral aspects of markets.
“The crisis is a reminder of the importance of integrative thinking — connecting ideas that cut across disciplines,” said Glasserman. “In the coming year, we’ll be involving our students in new cases and classes that stress integration. We’ll also be engaging them in a discussion of the future of finance in the wake of the crisis.”
Photo courtesy of Columbia Business School
Some Management Theories Never Die
Many years ago, some terrific academic research found that when you plot the logarithm of unit sales produced against the logarithm of unit cost, the result in many manufacturing industries was a straight sloping downward line. This insight was taken to heart by the Boston Consulting Group who developed the famous growth/share matrix.
The reasoning went that if you could gain large market share in a growth market, you could capture a major cost advantage. That would give you a competitive advantage over smaller-share rivals.
You remember the matrix, of course: the 2x2 grid in which you plot the growth rate of your market against your position in that market. The high/high box (big shares in growing markets) were “stars”; the high/low box (big shares in slow-growth markets) were “cows”; the low/low box (small share in slow-growth markets) were “dogs” and the remaining quadrant (small share in low-growth markets) were question marks.
The strategy advice was to invest in stars, use the cows for cash, sell off the dogs, and … well, it was never quite clear what to do with the question marks. At one time, an academic study found that 75% of all CEOs of American companies were aware of and had used some aspect of the BCG matrix in making portfolio allocation decisions. It later transformed into the famous GE Matrix and also found its way into other tools offered by consulting firms such as McKinsey.
Well, it was too good to last, I suppose, because as the model gained in popularity, criticism of it grew. Observers argued that it was fundamentally flawed and led to starved cows, mis-fired stars, lost opportunities for profit and worst of all, the wholesale abandonment of markets whose domestic growth might have stalled, but which were growing globally (such as televisions).
The academics weighed in as well, with studies by Columbia’s own Don Hambrick and Ian MacMillan empirically testing the conclusions in the model (see references). But wait — it’s back!
In the May issue of the Harvard Business Review is an article (“Is Your Growth Strategy Flying Blind?”) on growth strategies that advocates a granular approach to analyzing possible markets, based on — you guessed it — market growth rate and market share (among other things). The approach differs from the old BCG approach in that the units of analysis the authors suggest are smaller — right down to individual product lines, customer segments and regions, but the strategic advice remains pretty much the same. Invest in those segments that show high growth rates, in which the position is strong and in which there is momentum. A great idea whose time came … and went … and has come again.
References: Hambrick, D. C., I. C. MacMillan & Day, D. L. 1982. Strategic attributes and performance in the BCG matrix: A PIMS based analysis of industrial product businesses. Academy of Management Journal, 25(3): 510-531.
Hambrick, D. C. 1982. The Product Portfolio and Man's Best Friend. California Management Review (pre-1986), 25(000001): 84.
What Drives Managers to Pad Sales?
 |
|
|
From left to right: Prof. Yusheng Zheng, Wharton School and Cheung Kong Graduate School of Business, paper award winner Guoming Lai and Prof. Fangruo Chen. |
Channel stuffing can lead to all kinds of distortions and ultimately hurts the long-term value of a company. So what are the incentives for a manager to engage in the practice? That was the winning topic for the Best Paper Award at this year’s Conference of the Overseas Chinese Scholars Association in Management Science and Engineering (OCSAMSE), which took place in Shanghai in July.
The conference was sponsored by Columbia Business School’s China Business Initiative, which is part of the Chazen Institute for International Business. OCSAMSE is the only organization representing overseas Chinese scholars in management science and engineering. The conference series was focused on integrating theory and practice and panelists discussed supplier relationship, supply chain and operations management.
Professor Fangruo Chen awarded the research prize to Guoming Lai and Lin Nan from David A. Tepper School of Business at Carnegie Mellon University and Laurens G. Debo from University of Chicago Booth School of Business for their paper “Manager Incentives for Channel Stuffing with Market-Based Compensation.”
The winning paper authors suggest that managers find real earnings management more attractive in the wake of the Sarbanes-Oxley Act. However, managers also now face more “real” constraints, such as bounds on physical inventory and often their interests are not aligned with long-term stakeholders. The results create three effects that drive the manager’s incentives for channel stuffing.
Other speakers at the conference included Dr. Weihua Ma of China Merchants Bank, Qinghou Zong of the Wahaha Group, Weimin Sun of Suning Appliance Co. Ltd., Steve Graves of M.I.T. and Mike Pinedo of New York University Stern School of Business.
Photo courtesy of Mei Xue
Putting Pressure on Loan Servicers
The Obama Administration released a public report (PDF) earlier this week that said only 9 percent of eligible home loans have been modified under the government’s Making Home Affordable program and named the loan-servicing companies they say have not modified any loans.
Is the public outing a fair or effective way to urge more companies to modify loans? Professor Chris Mayer spoke on Marketplace Radio (listen to the story) on August 4 and said a better way would be to work through the investors. He said:
Well I think the idea of sort of a public outing is not my favorite way to conduct government. You know, these are complicated programs and the government hasn’t made it easy to participate all the time. But no, I don’t think it’s fair to call people out. I prefer other methods. … My sort of preferred approach would be to work with investors to get rid of the servicers who are being ineffective at this.
Should the government publically out home lenders that it says isn’t doing enough to help homeowners?
Photo credit: Meghann Marco
Building Life Skills with Business
Above: Participants in our entrepreneurship camp program in Mexico plan to make calendars out of their photographs and use the money to help fund a new science lab at their school.
About half way through my MBA I began to realize that I was not only learning new skills, but also a new way of thinking. The change in perspective was a bit unexpected. I knew I would learn analytic skills, leadership and marketing techniques at Columbia Business School, but I did not anticipate evaluating opportunities differently or gaining insight into why some business prosper while others fail. That perspective would have served me well in a number of situations. It is something I should have and could have learned in high school or even earlier.
About a year ago I decided to use this summer to try and teach kids about how to be entrepreneurial in business, in life and in their academic careers. A friend of mine runs a NGO in Mexico called PEACE Mexico. The organization hosts summer camps for children and she agreed to let me offer a program focused on entrepreneurship to middle school and high school kids. We opened the camp to public school kids in some of the smaller towns surrounding Puerto Vallarta.
At first, it was a bit of a hard sell — when you are 14 spending your summer learning how to run a business is not the most exciting proposition. But we created a fun and interactive curriculum that teaches entrepreneurship through English language classes, art workshops, games and outdoor activities. We hired most of our camp counselors locally and we also have six volunteer English teachers from the U.S., including Lauren Wall ’09.
On the first day of camp the students heard from a roundtable of local business people who spoke about their experiences as entrepreneurs. The business people spoke about the hard work, challenges and failures they have experienced as entrepreneurs in addition to talking about all the great parts of owning a business. One of the guest entrepreneurs distributes ice cream to local restaurants. Each flavor of ice cream is packaged in the skin of the fruit that it comes from (coconut, orange, etc.). The campers loved hearing about that business because ice cream is always a popular topic, but also because the business idea was launched almost a decade ago in a similar student business plan competition. The ice cream is now sold throughout all of Mexico.
 |
|
|
In addition to learning about entrepreneurship we also did all the things you are supposed to do at summer camp — go to the beach, play soccer, have water balloon fights. Both campers and counselors have had a great time. |
We are now wrapping up the fourth and final week of camp. Our 60 campers have learned about famous entrepreneurs, considered their career plans and thought about how they can make a difference in their communities. They have also learned the four Ps of marketing (product, price, place and promotion) and discussed operating and financing businesses. Each group has created a plan for a business that they would like to launch and they will be pitching their ideas in a business fair to local entrepreneurs in hopes of finding funding.
Our students have come up with a range of business ideas. All are easy to start and appropriate for young entrepreneurs to run. One group of kids will take photos in their communities and use those photos to hold photo exhibits and to make calendars. With the money they collect from the calendars they will make improvements to their school (a new science lab is the first project they hope to fund). A second group is going to start a dance school and will teach dances to kids in their community for quincenas (a Mexican tradition much like a debutante ball or Sweet Sixteen celebration). A third group plans to open an after school program for primary school children where they will offer help with homework and extra curricular activities.
All of the business ideas are unique. And like all ideas, some will succeed and others will fail. However, our hope is that the lessons learned can be applied later in life when the students are faced with supporting themselves and their families. For many of the students who are attending the summer camp, life’s prospects are challenging. They come from low-income families and the chances are high that many will not complete high school. Even for those who do make it through high school and college, salaries can still be very low. In Mexico, business ownership is often the key to achieving a solid middle-class lifestyle.
Although I won’t have three months off next year to run the summer camp, the groundwork has been laid. The camp is self-sustainable and the curriculum can be reused. This year we charged kids 10 pesos a day to attend (about $0.80 USD). But not to worry, I haven’t given away all the secrets of business school — some of the kids can probably still benefit from getting an MBA later in life.
Melissa Floca ’09 received the 2009 Nathan Gantcher Prize for Social Enterprise.
Photos courtesy of Melissa Floca ’09
Imports are increasingly high-tech but the way they are measured is decidedly not.
In a case of economic myth busting, new research from professors Emi Nakamura and Jón Steinsson (Department of Economics) reveals that import prices may be substantially more responsive to exchange rate changes than they appear to be in the government’s data. And that has the potential to cause all sorts of problems for the GDP, according to BusinessWeek’s chief economist Michael Mandel. In a recent cover story, he cited their research and discussed how measurement problems in import price data can affect growth statistics.
Import goods like computers, machine parts, services and other items with prices that change quickly and where units are fundamentally hard-to-count can cause data issues. For example, model upgrades for high-tech goods and services happen remarkably often, potentially changing every few months, but the BLS is only able to log price changes for models that are identical from one month to the next. That means that price changes associated with these granular fluctuations (upgrades, discounts, manufacturing changes) are getting lost in the shuffle.
To make matters worse, Mandel notes that many services that are outsourced offshore, which should be measured as an imported good, are not measured at all.
“The kind of analysis the BLS needs is labor intensive,” says Nakamura. “If it’s true that we want to measure the impact of high-tech industries on the economy or the impact of services, we probably need to have these national statistic entities grow with the economy to be able to take on these additional tasks. This requires more funding.”
Nakamura and Steinsson uncovered the import price discrepancies by looking at the relationship between import prices and the exchange rate and started connecting the dots.
“When the U.S. exchange rate depreciates, imported products become more expensive and American consumers theoretically switch from buying imported to domestic products,” explains Nakamura. “But if you look at the data it looked like the import prices were responding very little to the exchange rate. That was a major puzzle: why did they look so smooth? It occurred to us that one of the reasons it might look so smooth was because a lot of the price adjustments during model changeovers were getting lost.”
For example, in the period between 2002 and 2008 there was a 20% movement in the exchange rate, but Nakamura shows that the foreign firms didn’t raise their U.S. dollar prices by nearly that much — raising prices by less than half of the amount they would have needed to protect their margins.
Mandel argues that the measurement problems uncovered by Nakamura and Steinsson have important implications for productivity growth. If import price inflation is overstated then productivity growth would also be overstated. That would mean we would be wrongly attributing the fact that we observe American companies producing more despite spending the same amount on foreign inputs. In fact, these gains might be arising from unmeasured growth in imported intermediate inputs.
And the issues here — both in measurement and types of imported goods — are only growing in magnitude.
“To the extent that the economy moves in the direction of importing more high-tech goods and services, where products are fundamentally hard to count, the problem will get worse,” Nakamura says.
Photo credit: Evan Leeson
Embracing Change in a Challenged Healthcare Industry
Above: Healthcare conference team.
The key challenge that healthcare enterprise leaders face is determining how to drive innovation while addressing problems of affordability, inefficiency and gaps in quality. This task is now complicated by strong economic headwinds that limit the resources available to attack these problems. Industry executives are also dealing with new sets of competitive and regulatory pressures on their efforts to drive business growth.
At Columbia Business School’s 5th Annual Healthcare Conference held in New York City on November 21, over 500 students, alumni and other professionals heard more than 40 speakers and panelists discuss these issues.
The featured healthcare leaders said they are embracing change to develop creative solutions to the industry’s growing problems and to provide attractive investment opportunities on a global basis. A career strategies panel of executive and corporate recruiters also presented their views on the skills and talents necessary for healthcare professionals to succeed in this dynamic environment. This was followed by a concluding career fair and networking reception with the conference’s 17 corporate sponsors.
Ed Ludwig ’75, chairman and CEO of BD (Becton, Dickinson), gave the opening keynote address. Ludwig said that a successful global healthcare company must use technology, scale, global reach and operational excellence to offer value-added products. These products should reduce costs, enhance the quality of patient care and generate sustainable earnings growth.
Following his remarks, four concurrent panels took place in the morning session on the topics of pharma and biotech, medical devices, diagnostics and payor/provider issues.
The pharma and biotech panel discussed the trend among companies to narrow their therapeutic priorities, focus on biologics, pursue licensing and target acquisitions and seek enhanced productivity and cost savings. Numerous early-stage biotechnology companies are turning to larger pharma and biotechnology firms to survive as they are unable to secure capital from the public market. Global medical device companies are seeking to introduce innovative and cost-effective products in a challenging regulatory and pricing/reimbursement environment and pursuing acquisitions and new markets to meet growth objectives. The consensus of the payor/ provider panel was that any healthcare reform in 2009 would likely be incremental due largely to economic and political headwinds, and that a key focus would be on information technology and expanding access to those without insurance coverage.
Robert Essner, former Chairman and CEO of Wyeth Pharmaceuticals and now executive-in-residence at Columbia Business School, provided the lunchtime keynote speech. He suggested that although the pharma industry faces significant challenges, the combination of new drugs, biologics and vaccines in key areas of unmet need (e.g. Alzheimer’s, cancer, congestive heart failure) and the massive influx of informed baby boomers, who are demanding health solutions, provides favorable long-term growth prospects for innovative global pharmaceutical companies.
Three afternoon panels covered M&A, life science investments and emerging markets. It is anticipated that healthcare M&A will remain active across all sectors and that consolidation among Big Pharma companies appears inevitable. Early-stage life science companies and investors face a capital squeeze, which is threatening the viability of existing companies with lower levels of funds available for new investment. Emerging markets are an increasing focus for global pharmaceutical and medical device companies that are seeking new markets for their products.
The final panel of the day focused on the changing talent acquisition and development strategies of major healthcare enterprises. Panelists commented that successful leaders will need to have global and cross-functional experiences; that employees should be open to lateral moves that broaden their skills and experiences; and that healthcare companies considering new hires are seeking a broader “toolkit” of skills that reach beyond the traditional focus on healthcare backgrounds.
For more information about the conference and sponsors visit www.cbshealthcareconference.com.
In the last post, we blogged on the growing study of social enterprise at Columbia Business School. One of the most enduring questions for the field is how to couple social objectives with the role of markets. Bruce Usher, adjunct professor in finance and economics and CEO of EcoSecurities, spoke about that question at an international social enterprise conference last March (complete video coverage of his lecture above).
|
||
|
In what ways can the markets play a bigger role for social change? Please leave a comment. |
“Market mechanisms can and will help social problems,” he said. In his presentation, he discussed several examples of successful ventures in the environmental sector, including Title 4 of the Clean Air Act, which reduced carbon emissions by 40% between 1990-2001. Usher also discussed the success of Renewable Portfolio Standards (RPS), Clean Development Mechanism (CDM), the role of microfinance and socially responsible investing.
“Markets force participants to internalize social costs and it becomes part of the daily way of doing things,” Usher said. “As a result participants change their behavior and they do things differently.”
Cover photo credit: Russell Smith
The Challenge of Scaling Growth
Columbia Business School’s Social Enterprise Program is poised to reach a milestone this fall when Professor Ray Fisman begins as faculty director, succeeding Ray Horton who stepped down as director of the program in the spring.
In the new issue of Hermes, the cover story tracks the development of the program under Horton’s guidance over the past 25 years. He attributes the proliferation of student interest in social enterprise to corporate scandals and a changing attitude toward the value of contributing to society. Last March, speaking at a social enterprise conference hosted by the Korea Development Institute and Columbia Business School, he elaborated on the meaning, scope and potential of social enterprise. (Complete video of his presentation above.)
Broadly defined, the field of social enterprise is the application of business skills and methods to social problems, Horton said. That can take place in many forms, from socially responsible investing and corporate responsibility to nonprofit management and social entrepreneurship. Horton says that one of the biggest challenges entrepreneurs in the social sector face is how to sustain growth.
|
||
|
How does an entrepreneurial organization approach the challenge of scalability? Please leave a comment. |
“The factor more than any other that clouds the potential of social entrepreneurs is the difficulty of bringing the organizations they found to scale, to sustainable scale,” he said. “The inability to attract sufficient resources converts many would-be social entrepreneurs into salaried employees of larger organizations...Fortunately, there are new developments and new institutions and new ways of using the market that will bring financial and human resources.”
NOTE: In a school-wide effort to conserve materials and reduce costs, Hermes magazine will no longer be mailed to alumni unless they confirm they would like to continue receiving it. If you are an alumni of the School, please log in and confirm your preference.
Cover photo credit: Simon Harvey
Tour Report: The View from China
 |
|
|
Hiking along the Great Wall of China was a cultural highlight of the East Asia tour. |
This post is part of a series following the “Pre-MBA World Tour,” a program of international trips organized by incoming students in the class of 2011.
During the month of July, approximately 30 incoming Columbia students traveled through East Asia with the goals to experience life in East Asian countries by immersing ourselves in the different cultures and to learn about local economies and how business is conducted in the area. The month-long journey included visits to six countries, nine cities and 12 companies.
East Asia is rich in history and we were able to see it firsthand with a guided tour through the National Palace Museum in Taipei, a hike to the Great Wall in Beijing and a visit to the demilitarized zone in South Korea. The area is also rich in culture, customs and cuisine and we were fortunate enough to learn about them through the eyes of fellow admitted students living in these cities, who acted as our student ambassadors. We will all walk away with fond memories of Jessica Lam ’11 and her parents showing us how to eat local Chinese cuisine in Hong Kong, Kevin Coll ’11 teaching us how to pray to Buddhist deities in the Longshan Temple in Taipei and Jessie Yang ’11 and Janie Kim ’11 demonstrating the proper way to hold chop sticks in Seoul.
One thing that amazed us was the constant juxtaposition of historic relics from the different East Asian dynasties and Buddhist temples with Western-style restaurants, retail stores and corporations. We took many pictures of traditional Chinese temples and markets where the background contained record-setting Shanghai skyscrapers that were home to some of the largest U.S. and European financial institutions in the world.
As Columbia students, we were granted an insider’s view to several of these financial institutions and other companies with significant presence in Asia, including the Hong Kong Trade Commission in Hong Kong, Bertlesmann Media and Goldman Sachs in Beijing, SK Telecom in South Korea and Toyota in Osaka.
The most interesting company visits occurred in China where we learned about the challenges of doing business in a heavily regulated environment. First, we heard from representatives from the Hong Kong Trade Commission who are of the opinion that the People’s Republic of China will shift to a more capitalist, less-regulated society in preparation for Hong Kong’s economic and political integration with the mainland in approximately 40 years.
 |
|
|
The students visited Goldman Sachs in Beijing. |
We also heard from an investment banker at Goldman Sachs in Beijing who was not as optimistic about the deregulation, given the recent rejection of Coca Cola’s proposed $2.4 billion acquisition of Huiyuan Juice Group by the China Ministry of Commerce. However, she remained hopeful that M&A regulation would decrease and both international and domestic M&A would increase as the Chinese government and Chinese businesses recognize the importance of M&A to the growth and success of the Chinese economy.
Last, we heard from an equity research analyst at Goldman Sachs who felt that China’s recent announcement, which stated that the government will allow domestic companies to make foreign investments using the renminbi, China’s local currency, is a step in the right direction for deregulation and a more free trade economy.
All the company visits left us intrigued and spurred many debates, especially about where the different East Asian economies are heading and how these nations’ political and economic decisions will affect the U.S. and the rest of the world.
This World Tour experience proved to be a success with all of us for gaining more knowledge of East Asian culture, increasing our interest in East Asian economics and politics and building life long friendships with our fellow classmates.
Photos courtesy of Maria Testani ’11
Read the prior Tour Report blog post from Iran.
Blending Cultural Identity with Social Entrepreneurship
 |
|
|
What can London’s Brick Lane Mosque teach us about social enterprise? |
How do you create a sustainable business while incorporating contrasting cultural identities as part of the organization?
For the past two weeks, a group of fellows visiting Columbia Business School grappled with these questions through the lens of Jewish and Muslim cultural history as part of the Ariane de Rothschild Fellows Program: Dialogue & Social Entrepreneurship. The program concludes today.
The fellowship, which is in its first year, is a blend of humanities and management training between the University of Cambridge, King’s College Cambridge and Columbia Business School’s Executive Education. The group of 28 Fellows is comprised of mainly Jewish and Muslim social entrepreneurs from the U.S., France and the U.K.
“The goal was to create a training program that addressed social challenges while building bridges,” says Firoz Ladak, executive director of The Edmond & Benjamin de Rothschild Foundation, the program’s sponsor. “We wanted to develop and provide practical tools for business development and work across ethnicities, nationalities and religion.”
Last Friday’s presentation by Ed Kessler, director of the Centre for Muslim-Jewish Relations at Cambridge, put the concept into action.
“What impact does it have on your work as a social entrepreneur when cultural, ethnic and religious identities begin to blur?” Kessler asked the group of fellows.
Changing the language and terminology used in an organization’s communications one fellow suggested. Another fellow said that an organization must accept, as part of its mission, that members will be part of multiple institutions.
|
||
|
What challenges do you see for cultural or religious organizations? Please leave a comment. |
Kessler, in his lively lecture, suggested that identity conflict can be resolved when a group can successfully “renovate memory for positive reasons rather than negative reasons.” He used London’s Brick Lane Mosque, which has been at times a church, synagogue and is now a mosque, as an example of an organization that had used its past history in a progressive way.
Ladak, whose own background is in investment banking, emphasized that the program is about blending both cultural and bottom line objectives.
"We’re engaging beyond tolerance,” Ladak said. “It is about creating a new paradigm and harnessing what is best from the worlds of social entrepreneurship, cross-cultural engagement and academia.”
Professor Bruce Kogut, faculty leader for Columbia Business School’s participation in the program, added “The program is teaching the skills they need to use the power of their social values and the power of the market to further their goals.”
 |
|
|
McHugh was recently featured on MSNBC’s “Your Business” (watch the video). |
Emily McHugh ’99 is the CEO and co-founder of Casauri, a manufacturer of designer laptop cases and accessories. This post is re-published from McHugh’s Casauri blog.
When I applied to Columbia Business School I was not exactly sure what I was going to do once I received my MBA. My hope was that I would “figure” it all out in business school and ultimately end up with a job that was better than the one I had before business school. Business school gives one the opportunity to be exposed to various opportunities from a unique vantage point. It is like being offered a smörgasbord of career paths from which to choose. However, in order to choose, it is important to ask yourself whether you are able to muster the passion necessary to be truly happy and fulfilled in a particular career. Being passionate means that you love something so much that you are willing to suffer and endure whatever it takes to be successful.
I came to the realization of my passion during the last semester of business school when I took an entrepreneurship course. It was in that class that I finally “figured” out what I was going to do with my MBA — go into business for myself. After all, I would be able to put everything I ever learned into practice and become a true-blue businessperson.
Having an MBA is not a prerequisite to becoming an entrepreneur, neither does having an MBA guarantee or improve your chances for success. However, the MBA teaches key business principles. The MBA helps to remove some of the uncertainty in the business landscape by teaching the vocabulary and components of business.
The entrepreneur can expect that having an MBA will: 1) add credibility to a potentially incredible endeavor, 2) develop confidence to overcome the impossible, and 3) build stamina and endurance to persist in the face of uncertainty. Having an MBA will not: 1) make starting a business easy, 2) save the entrepreneur from struggles and hardships, and 3) teach you everything you need to know about starting and running a business.
It is probably safe to say that with or without an MBA, most entrepreneurs have to start their businesses from scratch without the benefit of a defined and predictable path. Most entrepreneurial skills have to be learned on the job or during the course of the entrepreneurial journey. Moreover, despite the commonalities that entrepreneurs share, each entrepreneur’s experience is unique and highly dependent on the type of business venture being pursued.
The two most valuable lessons I learned in business school that helped to prepare me for entrepreneurship were valuation and negotiation. One does not become an expert in these areas just by taking a class, however, one becomes aware of the tools needed to be effective in assessing value (valuation) and persuading someone to give you what you want (negotiation). Ultimately, communication unifies the above two skills. Being able to express or “sell” yourself expedites entrepreneurial success, since most of your time is spent trying to convince people to believe in you.
|
||
|
What has been the most valuable lesson from business school in your experience? Please leave a comment. |
In business school, valuation is mainly taught from a financial perspective in terms of valuing companies or pricing securities. However, valuation principles are applicable to any situation where determining worth is in question. Since most of the decisions entrepreneurs make involve applying limited resources to limitless needs, being able to intelligently allocate resources is essential. As entrepreneurs, we have to constantly determine value — of products, employees, customers, and services. This skill requires extensive practice, since it is not an exact science.
Negotiation is another nebulous area, as it involves many independent factors to be effective. Negotiation is the ultimate team sport. It is like a dance where you try to avoid stepping on the other person’s toes. To negotiate requires research and as thorough an understanding of the given situation as possible. We negotiate at every level of our lives, starting from infancy to adulthood. Entrepreneurship requires endless negotiation, the ability to overcome obstacles, inspire others to action, and risk losing what you actually may want to obtain.
The MBA provides the tools that improve one’s ability to valuate and negotiate. Beyond these skills, the MBA provides access to an incredible network of contacts that can help propel your business forward. It is a personal choice whether the business school experience will be appropriate for each entrepreneur. I would not recommend to someone contemplating entrepreneurship to wait, go to business school, and then start a business as a fixed formula. However, I would recommend seizing opportunities as they present themselves. In my case, I am very glad the opportunities included an MBA.
How Closing Car Dealerships Will Help the Auto Industry
With at least 2,000 car dealerships from Chrysler and GM slated to close this year (and more than 1,000 dealerships overall that closed last year), the existing American dealership model is in crisis. The closings appear to underscore just how over-extended — and over-stocked — the U.S. dealership system has become. One of the fatal flaws for dealerships has been an inefficient distribution network.
My research, conducted with my colleague Gérard Cachon at The Wharton School at the University of Pennsylvania, shows that the current structure of the U.S. brands’ dealership network led to inefficiencies in the distribution system. These inefficiencies add to the total distribution cost, which accounts for 30% of the price of a new car.
A major inefficiency is the pattern of holding inventory — an important part of the distribution cost. Most of the vehicles in the U.S. are purchased directly from dealer stock and holding inventory is expensive, especially when credit is scarce as it is now. The graph below illustrates important differences in the monthly days-of-supply for Chevrolet, Ford and Toyota.
The popular press suggests that 60-day supply is the ideal level of inventory for the auto industry. This is, in fact, the industry average, but the figures show that Toyota is consistently below that benchmark while Chevrolet and Ford are usually above it (other brands of Ford and GM also show a similar pattern). Overall from 2000 to 2004, Chevrolet held about 130,000 more vehicles in inventory relative to Toyota (300,000 compared to 170,000 units), even though the two brands sold about the same number of vehicles in the U.S.
The huge number of GM dealerships explains most of this difference in inventory performance. As of 2007, Chevrolet had around 4,000 dealerships compared to 1,200 Toyota dealerships. That means that an average Toyota dealership sells three times as many vehicles.
| Auto brand | No. of dealerships | Sales per dealership |
| Chevrolet | 4,063 | 586 |
| Ford | 3,711 | 645 |
| Honda | 1,019 | 1,286 |
| Toyota | 1,224 | 1,821 |
Source: Automotive News 2007 Yearbook
Due to economies of scale, managing inventory for a Chevrolet dealership is much more costly than for Toyota. In general, dealerships from domestic manufacturers carry substantially more days of supply. Consequently, they require more cash to operate, their inventory is less fresh and they tend to have more overstock at the end of the model year, which in turn leads to more rebates. All of this translates into higher distribution costs and lower profits for the dealer.
How could U.S. auto dealerships be improved? Reducing the number of dealerships can do several things.
First, it will reduce cannibalization between dealerships, increasing average sales per dealership. Dealers can take advantage of economies of scale in the distribution process and have more frequent deliveries and lower safety stocks, thereby reducing the amount of inventory held without hurting (and possibly improving) customer service. It also helps to keep a fresher stock to better match customer preferences and to lower markdowns at the end of the season.
All of this leads to a more profitable dealership and a more efficient distribution network. Higher dealership earnings can be used to invest in better showrooms and better training of the sales force, which can improve customer service and further boost revenues.
Photo credit: never a safe second
This post is part of a series following the “Pre-MBA World Tour,” a program of international trips organized by incoming students in the class of 2011.
Last week the World Tour visited Iran in order to witness, first hand, a country that has been at the center of controversy over the last 50 years. Just two weeks after the election that sparked riots around the nation (and 18 months after President Mahmoud Ahmadinejad visited Columbia University), we embarked on an adventure would change our lives forever.
When we told our friends and co-workers that we were going to Iran, almost everyone was worried that we would end up dead or locked in prison. When I asked what we had to be afraid of the common response elicited images of anti-American terrorists, shooting guns and taking hostages. However, what we found instead was a progressive culture with a long-standing history of peace and tolerance, and a young generation that simply disagrees with their current regime.
The reality is that Iranians are some of the most friendly people I have encountered anywhere in the world. One of our future classmates, Ali Reza Sadeghian ’11, is joining us directly from Tehran and offered to be our host for a week. We visited Tehran, Isfahan, Yazd and Shiraz and were consistently asked by Iranian students to deliver a message to our friends back home: 1) Don’t believe everything you see on television, 2) Don’t judge all Iranians based on the political rhetoric of our leaders, and 3) “There is nothing to fear here in Iran, you are always welcome to visit.”
The political landscape is yet to be determined, but with a young population of 70 million people, Iran will begin to play an even larger role in global economics.
Photo courtesy of John Shoaf ’10
Are We Hardwired to Love Our iPhones?
Why do we love our iPhones so? Of course the reasons for the gadget’s immense popularity are many, but consider this: the device’s interface — complete with colorful pictures and icons — may activate the part of our brain associated with emotional processing, and that, in turn, may lead to greater consumer preference for the best-selling phone.
In a new study published in the Journal of Consumer Research, Professor Leonard Lee, with his colleagues Dan Ariely at Duke University and On Amir at the University of California San Diego, found that decisions made with emotional processing, such as a gut decision, rather than cognitive processing (analyzing the pros and cons) tend to be more consistent. And consistency is, after all, what we humans really crave. Indeed, there is long-standing evidence in social psychology that we aim for consistency across all our beliefs and attitudes.
“How happy or satisfied we are by our preferences is driven by consistency to some extent,” says Lee. “When we use emotional processing to make decisions, we can actually be more satisfied with our choices.”
Lee found that certain attributes elicit more emotion-based decisions. For example, a color photo of an object rather than black and white text describing its features provokes more emotional, and thus more consistent, decisions in people. He also found, in another study, that some products might naturally elicit more emotional processing than others.
“Even if the product is essentially utilitarian and elicits more cognitive processing, we can put a more emotional layer on it so we can better elicit emotional processing,” says Lee.
For marketers and product designers, the implications are manifest — the big, shiny red button will outperform that wonky features list when it comes to giving consumers a choice that they will feel satisfied with.
“For many consumer products, it makes sense for marketers to use as many affective cues or emotional cues to elicit consumers’ emotional processing rather than just listing all the features of a product, which might induce greater cognitive processing,” says Lee.
Photo credit: David Pham
Left to right: John Piermont ’10, Tim Rupert ’09, Grant Bowman ’10 and Bill Ackman
The authors won the 2009 Pershing Square Value Investing and Philanthropy Challenge, which was made possible through a gift from Bill Ackman and Pershing Square Capital Management LP and awarded through the Heilbrunn Center for Graham and Dodd Investing.
Participating in the Pershing Square Challenge is the type of experience you go to business school for. Where else in the world do you have the opportunity to pitch a stock to a panel of value investing legends including Bill Ackman, John Griffin, Dan Loeb and Bruce Greenwald?
Our team came together quickly — Tim and Grant worked together over the summer at Blue Ridge Capital and John and Tim knew each other through the CIMA mentor program. Despite other recruiting, academic, and personal (like Grant’s son Griffin) commitments, we all agreed that our goal was to win the competition and that would be a priority for each of us.
We were keen to find a short to differentiate our work from the other 45 teams that were going to have very strong long ideas. After reviewing different sectors, for-profit education appeared to still be attracting rich valuations despite the severe downturn in the market and a questionable customer-value proposition.
We split the sector into three areas and each of us conducted initial diligence on a subset of companies. After reviewing all the major for-profit education stocks, we settled on the Apollo Group (parent company for the University of Phoenix) for three reasons. First, it had a rich valuation. Second, it has questionable business practices, and, lastly, the company cost U.S. taxpayers $250 million dollars through defaulted loans that the government guarantees. We believed highlighting the government subsidy of corporate profits dovetailed with the philanthropic goals of the competition.
We worked on the idea all semester, coming together weekly to discuss the team’s progress and ideas for different analyses. As we neared the submission deadline the measured pace became frantic and our weekly meetings turned into daily ones. In spite of our differing styles and opinions — Grant wanted to explain every detail, John wanted to explain nothing, and Tim wanted a balance — we shared a common goal and our discussions, though at times heated and lengthy, always ended with agreement.
After all the groups presented in the finals and we were waiting for the results, the three of us were remarkably calm. We all had a feeling of accomplishment, not from winning (we hadn’t heard the results yet!), but from putting together what we thought was a thorough and convincing stock pitch. Our feeling turned out to be spot on — we had won the competition and a prize of $25,000 to be used as a gift back to the School.
We took the responsibility of directing Mr. Ackman’s $25,000 gift very seriously. We agreed the money should be used to support both students interested in investing and students who will make a broader impact on society. We hope Mr. Ackman is pleased that the money will be going to scholarships for veterans returning from military service (as part of the Yellow Ribbon Program), a student with a focus on investing and community service, and to the Heilbrunn Center to support the value investing curriculum at Columbia Business School.
We would like to thank Bill Ackman for sponsoring the competition, the judges for taking the time to give us feedback, Erin Bellissimo and the Heilbrunn Center for supporting the competition and the class, professors Paul Sonkin ’95 and Caryn Zweig ’98 for their support in and outside the classroom, and all the mentors who took their personal time to help students and provide feedback throughout the semester.
Photo courtesy of the Heilbrunn Center
Class of 2011 Begins World Tour
This post is part of a series following the “CBS World Tour” organized by Shoaf and incoming MBA students.
This week marks the beginning of the second annual CBS World Tour where nearly 150 admitted students from the class of 2011 will be meeting up in 40 countries around the world. Along their journey, students will be adventuring through jungles, hiking volcanoes, and visiting with senior executives and officials who can share a unique perspective of their countries and industries. Alumni chapters around the world are hosting informal gatherings and helping to arrange company visits. Most impressively, the tour is being organized by admitted students (who haven’t even begun the program yet). In each of the 40 locations on the itinerary, a local admit is hosting a group of five to 20 students in their home countries.
Initially, the World Tour was designed exclusively for admitted students, but this year we extended the invitation to the graduating class of 2009 as a way to build a bridge between incoming and outgoing students. The idea is to foster relationship between the newest alumni and the new students that will be courting each other during on campus recruiting this fall. (Read blog posts from last year’s tour.)
The itinerary is broken into six four-week itineraries and includes a number of exciting locations such as Galapagos, Iran and Cambodia. The most popular trips this year (based on demand) seem to be Eastern Europe, South America and China.
Over the next 10 weeks, the 2011 Travel Team Captains will be posting blogs to share some of their experiences and lessons learned from the road. Stay tuned and visit the World Tour’s web site to learn more about the tour. For questions, please contact jshoaf10 *at* gsb.columbia.edu.
Alumni Clubs from across the globe will host events on or around Thursday, June 11, 2009 to recognize and celebrate Columbia Business School’s global alumni network during the third annual Worldwide Alumni Club Event. Click here to learn more about the events.
Behind the Mark-to-Market Change
The debate over fair-value and mark-to-market accounting rules has quieted down in recent weeks but it is far from over. At the heart of the issue is this question: Are hard-to-value securities worth only what the market is willing to pay, or is the market too dysfunctional to set values in a meaningful way?
A new paper, “The Subject Matter of Financial Reporting: The Conflict between Cash Conversion Cycles and Fair Value in the Measurement of Income” published by the Center for Excellence in Accounting and Security Analysis, challenges some basic assumptions in the existing model for financial reporting. (The paper was reportedly circulated among the financial regulators responsible for the recent rule change.) Authored by Andreas Bezold, a former chief risk officer and deputy CFO/board member of a large German Bank, and reviewed by Professor Trevor Harris, the paper concluded that a clearer distinction between fair-value changes as information and fair-value changes as income is essential. The paper makes these key points:
•Business activity is the primary object of financial reporting, which is characterized as investing cash in non-cash resources to be combined according to a specific economic logic to generate future net cash flows. The production of net cash flows is the business activity in its entirety, not single non-cash resources or constructs like “net assets”.
•Different business activities have different business models based on a different economic logic and that the value of a non-cash resource to an activity depends on the way it contributes to the net cash inflows under the economic logic of the activity in progress, i.e. depending on its function and use.
•Accounting concepts and measurement attributes have to be aligned with the inherent economic logic of an activity if faithful representation is to be achieved.
Click here to download the complete paper (PDF).
Photo courtesy of CEASA
Summer Books: What Are You Reading?
We asked some of our faculty members what books they are reading or what they recommend this summer. Here are some of their selections. Please feel free to leave your own recommendations in the comments section.
Maria Guadalupe
Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof and Robert J. Shiller
The Savage Detectives by Roberto Bolaño
Jonah Rockoff
Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life by Avinash K. Dixit and Barry J. Nalebuff. (“It’s a classic on game theory and fun to read,” says Rockoff.)
Laurie Simon Hodrick
The Omnivore’s Dilemma by Michael Pollan. (“It’s an incredibly eye-opening book and it raises even more important questions than it answers,” says Hodrick.)
Ray Fisman
Myth of the Rational Market by Justin Fox (“It connects the academic world of finance to the market ethos that took hold on Wall Street over the past few decades,” says Fisman.)
American Pastoral by Philip Roth
Michael Keehner
The Art and Politics of Science by Harold Varmus. (“He’s an interesting guy — winner of the Nobel prize in medicine, NIH boss and now co-chair of the Council of Science and Technology Advisers,” says Keehner. “No doubt he is a player in any healthcare reform package and so I’m curious to see how he choose his particular career journey and how he thinks.”)
Gita Johar
Mindless Eating: Why We Eat More Than We Think by Brian Wansink
Outliers: The Story of Success by Malcolm Gladwell
Made to Stick: Why Some Ideas Survive and Others Die by Chip Heath and Dan Heath
The Histories by Herodotus
Shantaram by Gregory David Roberts
The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It by Paul Collier
Ray Horton
Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof and Robert J. Shiller
The Ascent of Money: A Financial History of the World by Niall Ferguson
A Splendid Exchange: How Trade Shaped the World by William Bernstein
A Short Walk in the Hindu Kush by Eric Newby
Daniel Beunza
Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe by Gillian Tett
Joel Brockner
Outliers: The Story of Success by Malcolm Gladwell
Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler and Cass R. Sunstein
Seth Freeman
Negotiating Hostage Crises with the New Terrorists by Adam Dolnik and Keith M. Fitzgerald (read Freeman’s review)
Shakespeare by Another Name: The Life of Edward De Vere, Earl of Oxford, the Man Who Was Shakespeare by Mark Anderson (read Freeman’s review)
You can also view this complete list and a list of other faculty-authored books on Public Offering’s Good Reads profile.
Tour Report: Hope and Challenge in Africa
This post is part of a series following the “Pre-MBA World Tour,” a program of international trips organized by incoming students in the class of 2011.
Shortly after we began our journey on the World Tour, our South African host took us on a road trip close to the southern most tip of the African continent. The breathtaking setting of the Cape of Good Hope seemed an appropriate point to stop and reflect on the vast inequalities we had witnessed over the first few days of the tour. From the hope and despair of Johannesburg’s Soweto township to the luxury villas and trendy bars of Cape Town’s Clifton Beach, South Africa seemed to represent the full range of potential and challenges that coexist in Africa.
The following travel-filled days — by plane, bus and car ride — were full of discussions about global social welfare and the role of business in achieving it. There was plenty of personal experience to draw on — we have students from Greece, Germany, Egypt and the U.S in our group. Jon Kornik ’11 is working on renewable energy in Africa and Sekher Suryanarayanan ’11 is wrapping up a project aimed at bringing solar-powered lights to Tanzania and beyond. Another group member was reading Jeffrey Sachs’ The End of Poverty, which was an apt book to be passed around the bus on our journey to Kenya. The country is a relative economic success story for Africa, but it is also home to perhaps the world’s biggest slum in Kibera. On the same bus journey, a heated discussion broke out about a Bruce Greenwald lecture attended by Georgios Dimopoulos ’11 and Sekher, who came away with almost completely opposing opinions. We concluded that one of the things we were most looking forward to over the next two years was plenty more intelligent and passionate disagreements!
Traveling in Africa, which is in many ways the world’s final socio-economic frontier, reconfirmed to me that the roles of business and commerce are, in fact, humanity’s true universal languages (step aside pretenders art, music and even love!). Entrepreneurship may take less formal roles but human ingenuity is on offer everywhere you look (street hawkers, foreign exchange touts, Masai tour guides and souvenir sellers) often in spite of, or in outright defiance of, local governments and local laws. I was often reminded of Dean Glenn Hubbard’s “business is social development” phrase.
The following days included a brief stopover in a surprisingly hip Nairobi and a visit with Babafemi Agboola ’11 to the Badagry slave museum a few hours outside of Lagos, Nigeria. A few days later (and just after President Obama’s visit) I found myself retracing the president’s steps alongside Alexander Gordon ’11 and Takayuki Matsunaga ’11 in Cairo, Egypt.
Now, from the historical Middle East to the future Middle East, we’re on to Dubai and Abu Dhabi next and have company visits planned with Google, GE and Mubadala amongst others. The historic events unfolding in Iran mean that portion of the trip will need to be postponed to next year’s World Tour. There’s a sense of uncertainty and wonder about how these economic times will pan out amongst the incoming Class of 2011 but it is more than offset by an infectious mix of ambition and optimism.
Photo credit: Shehab Hamad
Tour Report: East Meets West in Singapore
Above: Class of 2011 Columbia Business School students visit local business offices in Singapore.
This post is part of a series following the “Pre-MBA World Tour,” a program of international trips organized by incoming students in the class of 2011.
Our intention, as part of the World Tour, was to adopt a total-immersion approach, which would not only provide us a closer look at the countries’ economies by meeting the local executives, but also introduce us to the local culture and cuisine. Our first stop was Singapore, where we landed on June 7. To help us “immerse” in this country’s culture and introduce us to the city, we connected with a local business school admit, Xin Yu '11, who was a very helpful resource. After uniting with a few more local admits we thus began our Singapore odyssey.
In between visiting local attractions, we had the opportunity to meet with key executives from Credit Suisse, Standard Chartered and Thomson Reuters to learn about their operations in Singapore and other Southeast Asian countries. My most memorable experience was our interaction with former Iraq Bureau Chief from Thomson Reuters. His experience convinced me how safe our working and living environment is compared to a war journalist, who face such tremendous difficulties in getting a real story and earning a livelihood. After our three-day stay in Singapore was over I concluded that it is the most Westernized country in Asia. Indeed, Singapore is now an economic powerhouse precisely because its political, legal and social institutions have been shaped in ways to ensure its assimilation into a global economic system that emanates from the West.
On June 10, we arrived in Malaysia. The drive from the airport revealed to us the country’s strong Middle Eastern and South Indian influences in the region. The architecture of the buildings, a trip to the Batu caves and the local cuisine further confirmed my belief. The highlights of our visit were to the Petronas Towers, which symbolize the strength and grace of the Malaysian economy in the center of Kuala Lumpur, and to Putrajaya, the seat of the federal government. I have never seen such an amazing organization of a government’s office in any other place.
Fresh from our Malaysian quest, we touched down in Bangkok on June 13. Our city ambassador Preaw Achiraya Chalermsuk ’11 did a fantastic job in preparing our itinerary, and our stay in Bangkok encompassed everything that one could ask for. We saw breathtaking natural and cultural sites in and around the city and we ate at exquisite restaurants where we relished the authentic hot-and-spicy Thai food. We also experienced the world-renowned Thai hospitality extended to us by the local Columbia Business School alumni during our company visit to SCG Chemicals. One could easily feel the warmth of the people as one toured around and I would definitely like to visit here again.
Photo courtesy of Kuber Sharma ’11
Can We Regulate Out of This Mess?
In a recent Forbes.com op-ed, professors Bruce Kogut, Patrick Bolton and Tano Santos argue that in order to be effective, a good regulatory system must distinguish between prevention and resolution. The current system, they say, has failed to do so, instead relying on “stop gap” prevention measures.
Kogut, Bolton and Santos say that the current system failed to follow the principles of crisis prevention by allowing incentives to become misaligned, creating risk-blind structural silos and failing to require the disclosure of risk exposure, particularly in the case of credit default swaps. The solution, they propose, is the creation of a new entity — the Crisis Resolution Board. They write:
A new regulatory system must also be capable of crisis resolution, because the hallmark of modern financial crises is that the limits of institutions and markets quickly bleed into one another, and the problem rapidly takes on a global scale. The data show that as the most recent crisis hit, all the crickets began to sing in harmony — all markets behaved erratically simultaneously. A “regulator of regulators” — which we will call the Crisis Resolution Board — should be charged with monitoring and responding to systemic risks.
The Crisis Resolution Board cannot be merely an honorary posting. Effective intervention by the Crisis Resolution Board will require social capital — crises always rely upon the personal knowledge among the players. Thus, this oversight board should include the chiefs of the Treasury, Fed and an FSA regulatory agency, as well as industry and investor representatives. In addition, the board must have more than global access to data — it must have knowledge of the global exposure and the systemic risk provided by a research staff that continually tests its instruments against the dynamic evolution of markets.
Concretely, what would the Board do? First, it will have power to monitor the exposure of all financial institutions and markets, and to issue early warning signals. This is hardly a radical idea. The IMF plays a similar role at the global level in monitoring national reserves. The role is clearly feasible for a national regulator and will lead to a strengthening of global financial market coordination.
Second, like any good fire brigade, which has a deep respect for plumbing, when things get hot the board will ensure that the financial markets’ plumbing is functioning. Markets depend on brokerage, exchanges and settlement. That’s their plumbing, and it’s also the key to systemic risk. It must be charted and tracked globally if we are to know what to do when the next crisis comes.
Regulatory reform should seek to distinguish between crisis prevention and crisis resolution. Prevention relies upon a tripartite structure and clear rules of accountability. Crisis resolution demands an integrated approach to systemic risk. Both structures are required and yet, no country has yet to design such a system. This is the time to do so.
Photo credit: SKPY/Scott
Tour Report: Rubbing Elbows in Brazil
Above: Class of 2011 Columbia Business School students with Fernando Cardoso and Bill Clinton in Sao Paulo, Brazil.
This post is part of a series following the “Pre-MBA World Tour,” a program of international trips organized by incoming students in the class of 2011.
We started out in Sao Paulo, Brazil to begin the first leg of the World Tour on June 1. Little did we realize our first day would end with bang — Bill Clinton, who was in town to speak at the Ethanol Summit, appeared at the restaurant where we were dining. After some negotiation with the secret service, we managed to steal him and former Brazilian president Fernando Cardoso for some handshakes and pictures. Sao Paulo was an incredible first stop, given the fantastic food, music, diversity, and inviting culture. A fellow 2011 Columbia Business School classmate and Paulista even guided us to his favorite samba locale.
Next, after a few days on the beaches of Rio de Janeiro, we took our time crossing the Brazil-Argentina border at Iguazu Falls. We spent one week in Buenos Aires, splurging on great steak and Malbec wine.
Santiago was our next destination. This Chilean city awed us upon arrival with its beautiful backdrop of the snow-covered Andes. Local Columbia Business School alumni took us out for a fantastic dinner and through them we were able to meet the chairman of Banco de Chile, the largest national bank of the country, and a Department of Commerce representative at the U.S. Embassy.
We’re now in La Paz, Bolivia and already the city has been an eye-opener, both in terms of both the breathtaking landscape and the abundance of poverty. We’re headed to Peru next for the final stop of our journey.
Photo courtesy of Genisha Saverimuthu ’11
Executive Education in Saudi Arabia
From left to right: Executive education account manager Alan Chen, Columbia Business School Professor Ray Horton, University of Massachusetts professor Brian Lickel, Professor Eric Abrahamson and Professor Daniel Ames. They recently returned from teaching a one-week program for nonprofit leaders in Riyadh, Saudi Arabia. Horton, the faculty director of Social Enterprise Programs in Executive Education, shared his thoughts about the experience.
Let me say up front that the assignment with the King Khalid Foundation was one of the most interesting and rewarding experiences I’ve had as a professor. It was also one of the most challenging.
A little background for our assignment: There’s a strong tradition in the world of Islam for giving, which Saudi Arabians certainly live up to. Yet nonprofit organizations have not played a very important role in the country historically because many of the wealthy simply hand out money directly to those in need or to charities that distribute the funds without maximizing the impact of each riyal. However, a growing number of Saudi leaders now recognize that “street-level philanthropy” of this kind tends to sustain poverty rather than reduce it. One of them is Princess Banderi AR Al Faisal, the director general of the King Khalid Foundation.
A growing movement for development
Princess Banderi is leading a movement among Saudi foundations to channel more charitable giving to nonprofit organizations whose programs are designed to address the poverty issue through human development rather than handouts. The success of that strategy depends on the ability of nonprofit leaders to manage their organizations effectively. In recognition of this, the Princess and her colleagues designated management training for leaders of the nascent nonprofit movement as one of the Foundation’s key initiatives.
To this end the Foundation decided it would sponsor the first-ever Executive Education program for nonprofit leaders in Saudi Arabia. With the help and coordination of Dr. Natasha Matic, a strategic consultant to the Foundation, the Columbia Business School program was selected to bring that management training to Riyadh.
It wasn’t an easy program to develop or deliver. We academics can say all we want about the “fundamentals” of nonprofit management, but many fundamentals in the U.S. are not the same fundamentals in Saudi Arabia. We spent a great deal of development time in the months leading up to the program working on our presentations until they received Dr. Matic’s stamp of approval. We thought we were well prepared when we arrived in Riyadh, but we still had some lessons to learn ourselves.
Teaching past cultural differences
I could go on for a long time about the cultural differences that become readily apparent when New Yorkers arrive in Riyadh, but the most obvious difference, on the street and in the classroom, is the relationship between men and women.
I think all of the participants were a little discombobulated at first to discover that the training would be provided in one room rather than two, and that women out-numbered men two-to-one. It took a day for everybody to start feeling comfortable, including us, but by day two things were starting to go smoothly. By day three, the men and women were engaged in lively debate with each other over the strategy projects Eric Abrahamson had designed for them; by day four, Daniel Ames had women and men choosing to negotiate with each other rather than with a member of the same sex. And by day five, I had everyone in the room laughing at me after I illustrated the importance of not wasting scarce resources in reference to some nonprofit leaders in New York City who use chauffeured cars rather than subways to get around — forgetting for the moment that there is no public transportation in Riyadh and, to make matters worse, that Saudi women are not allowed to drive cars. So much for cultural sensitivity.
While it was interesting to see the male-female dynamic change in the course of the week, what impressed me most was the passion these people brought to their professional lives, women and men alike. Many of them run nonprofits with small or non-existent staffs, small or non-existent budgets, and small or non-existent boards, conditions of nonprofit life that would seem to be discouraging. But when you hear them talk about the importance of their missions and the scale of the problems they’re fighting you begin to understand how motivated they are to make their world a better place.
In the end, I know the participants were grateful to the King Khalid Foundation and to us for the learning experience they received. I’m grateful to have had the experience too.
Photo courtesy of Alan Chen
For the MBA grad who is launching his or her own venture this year, the current economy is a mixed blessing.
“Suddenly every investment banker wants to be an entrepreneur,” says Tom Bowen Wright ’09, founder of Neighborhood Hero. “Finding great talent is much easier right now.” The downside? “Raising capital in this market is really tough,” he adds.
Regardless of the economy, there are evergreen challenges for young companies. “All your policies and procedures have to be developed from scratch, and that can be an extremely time-consuming part of the start-up process,” says Jennifer Wright ’09. Costs can add up if you’re not careful. “Running up legal bills is actually very easy,” says Robert Liebesman ’09.
This weekend a group of start-up companies started by Columbia University graduates, including this year’s four Lang Fund Board investment picks and ventures from the School of Engineering, will take part in a Columbia Ventures Showcase. We spoke with this year’s Lang Fund recipients about the most important lesson he or she learned at Columbia.
Tom Bowen Wright ’09, Neighborhood Hero, a digital communication tool to help merchants and local consumers connect
“It is critical to encapsulate a powerful vision behind your idea and you need to package it and sell it. I have also learned that you need to do as much research as possible before jumping into the deep end. There is no reason why, before you invest thousands of dollars in R&D, you can’t have already established who the customers are, their specific needs, what they would pay for your product if you were to make it and what it would take to actually close a sale with them. If you haven’t proven to yourself and to others that there is a genuine need, you should not roll the dice.”
Arlyn Davich ’09, PayPerks, a corporate incentive program to convert employees to electronic pay checks
“The power of a win, win, win proposition. The time I have spent honing the value proposition of each layer in the value chain has paid off in dividends.”
Robert Liebesman ’09, Palogix USA, provides reusable and rental storage and shipping solutions
“Listen to people’s criticism and don’t get disheartened. You take five steps forward and then three backwards. Make sure to process information and to not have a selection bias — there are threats to your business; make sure you are aware of them. I have found that stepping back and looking at the big picture can help me get out of treading water. Make sure to have a balance in your life; this stuff can consume your life pretty quickly, so force yourself to have an hour or two a day for other people and hobbies. I get my best thinking done during long runs. Give your head a chance to sort out the clutter.”
Jennifer Wright ’09 (EMBA), Environmentally Conscious Organization Inc. (e.c.o.), a design, licensing, manufacturing and subcontract management firm dedicated to the use of recycled materials
“Professor Cliff Schorer told us ‘Never turn down an opportunity to talk about your product.’ I believe this to be true and I made sure we were present at every entrepreneurial event at Columbia to talk about our product. You never know who could be instrumental in helping your business.”
Smartphones and Emerging Markets: A New Technology Revolution?
It is no secret that the mobile phone industry is thriving in emerging markets, and that this growth has helped make cell phones the fastest spreading technology in human history. Less known, but equally as important, is that this growth has extended well beyond the ability to make phone calls. Today mobile operators in Africa, Asia and Latin America also offer their customers the ability to send cash to relatives, pay bills, and even check whether a taxi is legal or illegal, all via their cell phone. Many of these services have even begun transforming entire societies — in Kenya alone a mobile phone-based cash transfer service called M-Pesa has over six million customers.
However, despite these innovations, we believe mobile-phone based services remain limited relative to their potential in emerging markets because they rely on a fairly basic form of technology: SMS text messaging. These messages are limited to 160 text characters and due to their simplicity are simply not designed to deliver the advanced services we are accustomed to in more developed markets.
For us, these facts beg the question: when will mobile services in emerging markets evolve beyond text message technology? Relatedly, when will consumers in emerging markets embrace the enhanced functionality that comes with purchasing a more advanced handset? We believe that time is now, at least for certain customer groups. So-called “smartphones” — phones such as the Blackberry, iPhone and G1 that have the ability to download new software applications — have already transformed the way consumers in developed markets use and access data (iPhone customers alone have downloaded more than one billion applications). And certainly smartphones, which are in effect mini-computers, have even greater potential in emerging markets where relatively few computers exist. There is little doubt that smartphones will soon be more widespread in emerging markets yet a central question remains: who will build applications for these underserved customers?
Enter Frogtek, a for-profit social venture that began as an idea in the classroom at Columbia Business School and will soon begin formal operations in Colombia. Frogtek is premised in part on the theory that smartphones can solve several major problems endemic to emerging markets that text-messaging based technology solutions cannot. Of course, we recognize that getting customers to use smartphones in emerging markets today comes with a unique set of challenges. Perhaps most prominently, smartphones are still fairly expensive. Moreover, most software applications for smartphones were developed with a rich consumer in mind. These challenges are not insignificant.
For these reasons, Frogtek today is focused on what we believe can be a vanguard customer group in emerging markets, one that already has access to capital and a demonstrated need for simple and customized technology solutions: micro-retailers. The need we’re addressing is that most of these “mom-and-pop” shops do not keep sales records, which can result in inefficient business operations and even bankruptcy. Hence, our first product is an accounting and inventory management tool that allows a shopkeeper to use a smartphone as a point-of-sale device; the camera even doubles as a bar code reader. The phone generates basic reports about sales, inventory and profitability, and information is also uploaded to Frogtek servers wirelessly for secure storage and further analysis.
At this stage we have completed a prototype and will be working with SABMiller and a prominent Colombian NGO this summer to test our product with 50 shopkeepers. By the end of the summer we plan to have a complete version that we can distribute more widely in Colombia and eventually Latin America.
Accounting solutions are only the first step for Frogtek. If we are successful this summer and shopkeepers become comfortable using smartphones, we believe it will be relatively easy to develop and introduce additional products via smartphones such as micro-insurance and branchless banking. Time will tell whether our idea is premature but there is little doubt that smartphones are coming soon to an emerging market near you.
David Del Ser '08 is a 2009 Echoing Green Fellow. He is also the 2008 winner of the Nathan Gantcher Award in Social Enterprise at Columbia Business School.
Images courtesy of Frogtek
The Credit Cardholder’s Bill of Rights, which was signed into law on May 22, is the first major overhaul of credit card regulation in 30 years. Is the bill a game-changer for the way consumers use credit or the way lenders dole it out? We spoke with assistant finance professor Enrichetta Ravina, who has done research on the credit card industry and consumer behavior, about the relationship between the lenders and borrowers, how it might change, and whether credit cards make us happier.
Now that credit card holders have a bill of rights, how might that affect consumer behavior?
1. Better debt management More transparency in the credit card terms could mean that consumers are more informed and better understand the terms of their credit card contract. They might avoid paying fees due to their inattention/misinformation and to switch to cheaper forms of credit if they need to borrow. The caveat is that more information doesn’t always lead to restraint. In the same way that knowing that fats are unhealthy doesn’t make everybody restrain from fast food, it is unlikely that being better informed on the terms of the credit card contract will make everybody manage their debt more carefully.
2. Prevent early onset debt New restrictions for issuing cards to people below 21 will make it harder for students and very young consumers to have easy access to credit. The legislation is aimed at protecting a category that might be less financially educated, has fewer incentives to be financially responsible and preventing that they become overwhelmed by debt even before starting their working life.
3. Harder to get easy credit The new legislation requires credit card companies to wait until the account is 60 days late before applying a penalty interest rate and to give 45-day advance notice before changing the interest rates or any other terms. Thus, the credit card companies’ pricing strategy will change. A better ex-ante assessment of the creditworthiness of the consumers will be necessary and credit card contracts will have lower credit limits, higher interest rates for certain categories of consumers and more upfront fees. Lower credit limits and higher interest rates will make it harder for overly optimistic, financially uneducated consumers to get into unmanageably high levels of debt.
What does a consumer’s spending say about his or her behavior?
Most consumers are very predictable in their credit card use. In my research I find that consumers exhibit a high degree of habit in their consumption choice and that they prefer a smooth, increasing consumption path. Demographics like gender, age and income bracket are important, but mostly people’s spending on catalog and online shopping and on other credit cards are the best predictors of their behavior and of whether he or she will carry a balance, pay late or always be on time.
Who are credit card companies making money from?
The most profitable consumers for a credit card company, and therefore the most sought after, are those that spend a lot, pay late and carry a balance (which 45% of Americans do). People’s attitudes to money and their finances tends to be remarkably consistent across financial instruments and therefore people that miss payments on other credit cards and auto loans, stretch themselves with high loan-to-value mortgages are more likely to do the same on this card. Among these very profitable consumers, however, are those that “hide” and who will generate charges only for a short period and will soon default.
Can credit card companies tell who might default from their spending behavior?
It is very difficult to predict this behavior early in advance. These consumers that are very risky are those with limited financial education. Such consumers do not understand the terms of the credit card contracts, are not good at budgeting, saving and spending within their means. At the beginning, they are very profitable for the credit card companies because they generate fees and interest charges. However, once an income shock hits them, or their spending habits get out of control, they rapidly become the worst type of accounts.
What is the upside to easy credit?
Credit cards constitute a tremendous opportunity for some consumers and are very important for economic growth. They allow entrepreneurs to finance the very first stages of their companies when it is hard or impossible to get a loan from a bank. They also allow households to finance durables, consumption goods and other projects. For these reasons, they promote economic activity and a more efficient allocation of economic resources. Compared to other countries where credit cards (and debt) are less diffused, U.S. consumers face more dangers, but also more opportunities and more means to fulfill their projects.
Does this greater opportunity and means to fulfill projects translate into more happiness?
In my research I find that happiness is a relative concept. Above a certain level of consumption that satisfies the necessities of a comfortable life, happiness doesn’t depend on the amount we consume, but rather on the amount we consume compared to the people around us. The reference group we belong to are work colleagues, neighbors, people with a similar socioeconomic status to which we tend to compare ourselves. Credit cards can be used to consume more than the reference group (even though the income is not enough to cover spending), in the hope that income will continue to grow or that no emergency comes to disrupt this fragile equilibrium. Such a use of the credit card is usually associated with short-term happiness and economic problems and anxiety down the road.
Photo credit: Andres Rueda Lopez
On Thursday the Treasury announced their choice of executive pay overseer, Kenneth R. Feinberg, who will have the task of setting compensation of the top 25 executives at seven financial firms. The new appointment challenges the view that it is not what you pay, but how you pay, that matters, says accounting professor Sudhakar V. Balachandran.
“What we have seen to date tells us that reforms in how boards set compensation are warranted, and that there needs to be a better relationship between pay and performance, particularly performance that is not immediately observable, ” he says.
“That said, it is a completely different matter to say that a centralized body in Washington D.C. can do this better, ” Balachandran continues. “Boards have substantially more information about the company and its circumstances and by centralizing the process we might be throwing away a lot of valuable information. There is a difference between providing reform to the compensation process and providing a centralized compensation policies that are determined by a political process. I believe only the former has a chance of success but I’m afraid we may be heading towards the latter. ”
Photo credit: Michael Aston
The upcoming transition at Xerox from Ann Mulcahy to Ursula Burns as CEO is an important benchmark for female corporate leadership. However, the news at Xerox doesn’t compensate for the fact that there continues to be a paucity of women in senior management positions, says Professor Ray Fisman. Why is that?
In a recent article for Slate, Fisman looks at one of the reasons the gender gap persists in some fields, like science and technology. He suggests that mentoring — beginning in the classroom — may be one area to consider. Fisman considered a study by University of California-Davis economists Scott Carrell and Marianne Page and James West at the Air Force Academy, about academic performance in math and science and professor gender at the Air Force Academy. The study demonstrated that female cadets who had female instructors had better performance than those with male professors (download PDF).
“Having a male instructor didn't just affect female cadets’ performance in their first-year classes — ramifications could be seen throughout their undergraduate careers. Not surprisingly, students who did well in their introductory science classes were more likely to go on to obtain science degrees (and presumably go on to science-related professions),” he writes.
Fisman brought the issue to a scientist and colleague at Barnard, Stephanie Pfirman, for her insight. She made the point that academic performance in young women is not only an environmental issue — but it is also a psychological one and that there needs to be more encouragement for women to “realize that getting an A- or even a B+ in an introductory course doesn’t spell the end of your career as a scientist, as many high-achieving young women believe.”
Without diminishing the very real issues that exist at the institutional level, we wanted to know more about how perfectionism may bottleneck female achievement, in the sciences and beyond, and how might mentorship meet that challenge?
We asked Cali Yost ’95, author of Work+Life Fit, who has written widely about gender and the workplace and mentorship issues, about that topic. She agreed that perfect is too often the enemy of good and that better mentoring could start to resolve this.
“There is a lot of pressure on women to be perfect at both work and at home,” says Yost. “Female mentors may say ‘You can’t do this job and have a life’ rather than giving a broad and innovative way to do both. They may not have had a lot of choices and flexibility when they were doing it 20 or 30 years ago, and so they are not able to mentor in that dimension. There needs to be more conversation around that.”
Yost points out that employers today are more willing to consider alternative and flexible options for women with families, for example. And that needs to be acknowledged in the mentoring process itself.
“One skill set for mentoring is that when mentees ask ‘How did you do it?’ the mentors talk about in such a way that shows that their experience isn’t the only way or answer,” Yost says. “They may say things that may not apply today and we need to facilitate the conversation and help mentors be creative in the context of today.”
Photo credit: Alvaro Canivell
Small Investments, Large Growth
On Sunday, May 17, 2009, Matt Berry ’10 and I landed at the Mbarara airstrip in southern Uganda (see map) to begin our weeklong due diligence of Ruhiira Millennium Savings and Credit Co-Operative (RMSACCO), a tiny savings and loan cooperative to which Microlumbia is considering making a $10,000 loan.
RMSACCO is in the village of Ruhiira, roughly one hour on pot-holed roads from our home base in Mbarara. The entire region is covered by banana plantations, the favored crop which takes up over 60% of the arable land. The SACCO has 864 members, all with savings deposits. There is a minimum requirement to join, helping to inculcate a culture of saving in the village. The organization’s loan portfolio totals roughly $35,000, constraining its capacity to disburse loans. It works closely with the Millennium Villages Project (MVP), a multi-country, multi-sector economic development project led by Jeffrey Sachs, Director of the Earth Institute at Columbia University. Ruhiira is in the MVP’s Uganda project zone, and RMSACCO benefits from the increased economic activity related to the MVP’s initiatives. However, RMSACCO is not officially part of the MVP and has members outside of the project zone.
During our week with the SACCO, we became intimately familiar with its processes for appraising loans, recording transactions, and recovering bad debts. We conducted extensive interviews with the three employees — Cleophus, the manager; Jude, the loan officer; and Agatha, the cashier. We were greatly impressed with the SACCO’s knowledge of local economics and its abilities to track every transaction on paper. They have a computer, but no electricity; they hope the MVP will provide them with solar power soon. Without a computer, it is difficult for the SACCO to organize its data so that it can analyze its portfolio quality or devise a strategy built on key value drivers.
One of our key takeaways from the week is how compelling the local economics are. For example, a small investment in time and money can enable a banana farmer to increase his yields five-fold. In order to do that, though, he not only needs the money to invest in some basic modern tools and inputs — roughly $1,000 investment per acre, but most families own only a fraction of an acre — but also enough to live on so he can get by without selling bananas for the year the field is under rehabilitation. However, whereas most plantations currently earn roughly $375 per acre per year, a rehabilitated field earns roughly $1,850 per acre per year. Without institutions like RMSACCO, such investments are simply not possible.
We will present our findings later this year on RMSACCO’s social impact, operations, and likely ability to repay our loan to the Microlumbia Investment Committee. If the loan is approved, we will likely expand the relationship by asking the SACCO to work with Microlumbia’s consulting arm to implement some improved accounting procedures and to drive the loan portfolio in a more strategic direction. I am confident this would be an educational experience for the students and bear some operational benefit for the SACCO.
Photos courtesy of Pangea Advisors
Media publishers are marching ever closer toward pay walls and price hikes for their content. Last month, GigaOM Network, a group well known for its tech blogs, announced it will charge a $79 annual fee for its research service. Hulu may soon jump to a subscription service as well. Offline, the New York Times recently increased the price of both its weekday and Sunday newspapers.
A variety of pricing schemes and solutions for content — pay walls, increased fees, bundling and micropayments — has been the topic of media discussion in the last year. But will people start paying for something that has been free? Not if there’s cheaper competition, says Ava Seave, adjunct associate professor in finance and economics. She is the co-author, with Bruce Greenwald and Jonathan Knee, of The Curse of the Mogul: What’s Wrong with the World’s Leading Media Companies, which will be published later this year.
“It’s pretty hard to start charging if there is a substitute product that is free,” she says. “Free competition forces companies to try and make due with advertising or other revenue, which they hope they are making up for in eyeballs. What we may see is that many companies will go under or become only marginally profitable. At this point new companies won’t want to enter in the ‘free’ business and they will try to enter by charging for some sort of differentiated product. But it’s tough.”
Print publishers for magazines and newspapers are struggling to find the right price for their products. But as ad revenue dries up, where does the pricing power remain if it’s not with advertisers? Seave says there is no one right answer to that question.
“You can’t make any generalizations across the board — each industry vertical is different,” she says. “One thing that you need to know is who the players are and look at the product in a local way or in a space.”
For example, the New York Times, in their decision to raise the print price, likely made a calculation that existing paper-readers were committed and a bump in the price would not lead to a subscriber drop-off.
“It seems as if the remaining readers of the newspaper are inelastic when it comes to price. Even with a higher price-per-copy, these readers will, by and large, stay with the paper,” she says. “It is possible that the Times will lose so few copies due to the price increase that they can still make more money from circulation and they can still be able to guarantee the same amount of money by guaranteeing the reader level to keep up their ad rates. They probably figured that paper buyers are committed and so net, they could be ahead for the moment.”
But for online-only media, finding the right price is especially difficult because free competition is stiff. “Electronic media has very little pricing power,” says Seave. “It is too easy for consumers to click around to find something that is a reasonable substitute and is free.”
So how do companies get online users and readers to start paying for their products? Create necessary value.
“You have hook someone into some sort of product and then make it so that it is essential to their work,” says Seave.
Photo credit: Rick Valentin
Narayana Murthy: Leaders Must Be the Change They Want
Narayana Murthy is arguably the most respected voice in India’s business community. Under his leadership, the computer services firm Infosys, which he founded in 1981 with six others, paved the way for the booming outsourcing industry that now thrives in the country. In 2005, the Economist ranked him 8th among the 15 most admired global leaders.
His words and his presence exuded a blend of conviction, practical wisdom and humility as he delivered the inaugural Khemka Distinguished Speaker Forum talk to the Columbia Business School community at University Club in Manhattan on May 26.
Mr. Murthy offered a provocative thesis on what has gone wrong with capitalism in recent times and how to fix it. Instead of focusing on regulatory policy and institutional reform, he took aim at the enemy within — the need for a change in leaders’ attitudes and mindsets, the need for each of us to, in Gandhi’s words, “be the change we want to see in the world.”
What do you think of Mr. Murthy’s definition of “success” as being “not about money or power… [but] the acceptance by the circle of your family, friends and your community that you are indeed valuable”? What is your definition of success in life?
Mr. Murthy’s prescriptions for strengthening our leadership qualities — such as “creating an environment of happiness around you”, “shunning jealousy” and seeing all parts of your life in totality — resonate well with the scientific findings and great-achiever stories that we discuss in the CBS course on Personal Leadership & Success. Which prescriptions do you find provocative, or difficult to accept? Why? And which of them strike a strong chord with you?
Beyond the Cluster: MBA Community
Columbia Business School students will have the opportunity to strengthen the spirit of a lifetime community in the coming months. As part of the 180 January-start students who converge on Warren each day over the summer, we can draw on our smaller class size to strengthen our bonds.
Summer on campus is more relaxed and less hectic than the fall schedule when days are filled with running from meetings to guest speakers to club events. Daily life is more personal and we have the chance to break out of the three J-Term clusters and intermingle with the entire program.
However, too many of us fall into the trap of thinking that building a network of our peers is synonymous with creating a community of our peers. Instead of being an aspiration, creating community has quickly become a buzzword or an empty cliché. But every one of us at CBS has the chance to build more than just a world-class network; we have the opportunity to become a member of a family. This summer we can jump-start that process.
We are making a concerted effort to break down the cluster barriers and fully integrate everyone in the J-Term into one big community. Events in the spring semester, such as Cluster Cup and core classes, revolved around our small cluster groups. However, this summer those lines are dissolving and we are planning all activities — Friday soccer anyone? — for the entire community of J-Term students.
Community is about more than the person standing to your right and the person to your left when you graduate, it is about creating a sense of belonging where you can feel a part of something greater than yourself. Camaraderie and loyalty that extends to anyone who shares the CBS experience is the foundation for developing the lifetime community as well as growing a strong brand.
Though we come from diverse backgrounds and all have different goals and dreams, no matter where we go in life we all forever be linked to each other through our time here at the School.
As a member of the Class of 2010, and a January-start student, I look forward to welcoming the returning class, alumni, newly admitted students, faculty and staff. Our experiences together this summer, and until we graduate next May, create a community that brings the words on paper for the Community Contract to life.
Photo courtesy Office of Student Affairs
Has Competition Held Intel Back?
In mid-May the European Commission fined Intel $1.45 billion as part of an anti-trust lawsuit, ruling that the microchip company had skewed the competition — namely with rival Advanced Micro Devices (AMD) — by offering rebates to computer manufacturers in exchange for exclusive distribution contracts.
Supporters of the Commission’s decision hope that the ruling will make the microchip market more competitive — and thus more innovative. However, research from Professor Brett Gordon and Ronald Goettler from the University of Chicago based on data collected from the two chipmakers suggests that in the case of Intel, less competition, not more, would lead to more innovation.
In their research, which was recently featured in Ideas at Work, Gordon and Goettler found that the company would have innovated more quickly if it had not been in competition with AMD. How might this be possible?
First, as the world’s only microprocessor developer, Intel would have pricing power in the market, allowing it to charge more for its products. The increased profit margin would allow Intel to invest more money in research and development, which would result in a higher rate of innovation.
Second, as the sole microprocessor developer, Intel could potentially put itself out of business if it didn’t innovate often enough. If, for example, Intel sold a microprocessor today, it is unlikely the same customer would purchase another microprocessor unless the new processor was more technologically advanced. This provides another incentive for Intel to innovate rapidly.
Read the complete article about this research in Ideas at Work.
Photo credit: Uwe Hermann
Accountability for Satyam's Auditors
This morning the New York Times profiled the case of two imprisoned accountants from the Indian office of Pricewaterhouse-Coopers who have been linked to the Satyam scandal. Though they operated as independent auditors for the computer services firm, they have been charged with multiple offenses, including falsification of accounts.
Their imprisonment is nearly unprecedented in the purview of corporate accounting scandals. Hence, some view it as unfair that they must await trial in prison. However, their imprisonment must be seen as part of a system of action that is seeking to preserve investor confidence and limit the collateral damage of Satyam’s ruin. It also underscores the importance of accountability by independent auditors. The auditors were responsible for pro-active audit work which they, by their own admission, did not conduct. Indeed, the defense of, “No concerns were ever brought to us by anyone…,” which the Satyam Auditors gave in the Times article, rings a bit hollow for me.
In 2007, the audit committee of Satyam, and ultimately the shareholders, paid the auditors $873.9 thousand in audit fees and $1.802 million in total fees including fees for tax and other non-audit services. In 2008, they paid $1.172 million in audit fees and $1.918 in total fees. These fees are paid for the auditor to “audit” actively, not passively. Auditors typically do not wait for concerns to be brought. They investigate independently and to a set of professional standards, and so the imprisoned auditors’ claim of innocence by inaction is implausible given the makeup of the assets on Satyam’s balance sheet. Consider the assets reported on Satyam’s 20-F filed on March 31, 2008:
| As of March 2008 | As of March 2007 | |
| Cash and cash equivalents | 290.5 | 152.2 |
| Investments in bank deposits | 826.7 | -- |
| Accounts receivable, net allowance for doubtful debts | 508.4 | 364.2 |
| Unbilled revenue | 81.5 | 38.6 |
| Deferred income tax assets | 23.7 | 17.1 |
| Prepaid expenses and other receivables | 131.7 | 37.1 |
| Total current assets | 1,862.5 | 609.2 |
| Investments in bank deposits | -- | 767.6 |
| Investments in associated companies | 4.7 | 4.6 |
| Premises and equipment, net | 236.6 | 163.1 |
| Goodwill, net | 80.0 | 32.7 |
| Intangible assets, net | 15.6 | 7.4 |
| Other assets | 43.9 | 39.5 |
| Total assets | 2,243.3 | 1,624.1 |
Two numbers are important. First, cash (and cash equivalents) and second, investment in bank deposits (short term in 2008, and long term in 2007). These accounts are approximately 52% of the balance sheet in 2007, and approximately 49% of the balance sheet in 2008.
Roughly half of Satyam’s balance sheet was either cash (which is typically held by its bank) or a bank deposit (similar to a certificate of deposit that any of us may hold at our local bank). Given the large holding of these assets I find it hard to believe that the auditor could be paid in the ballpark of one million dollars in audit fees and then not proactively investigate the details of half of the balance sheet. It’s also hard to believe that they did not look at these accounts given how easy cash and bank deposits are to audit.
Typically one audits cash and deposits by contacting the bank to get a statement with the company’s account balance and then compares the statement to the balance sheet. If the two amounts match then the auditor offers an opinion that account has been stated accurately, confirming that the company indeed has the money it claims to have on its balance sheet.
Satyam’s auditors claim that they relied on bank statement documents provided by the company, which ultimately turned out to be false statements. This is not a typical practice among auditors in India who instead independently ask the bank to provide statements directly. It is further shocking that Satyam’s auditors did not pursue independent verification given the unusually large holdings of cash and deposits on the balance sheet.
The auditors also argued that there were many bank accounts and that made independent verification more difficult. But the number of accounts should have been a tip-off. If you are company like Walmart, with stores covering many locations that do a lot of daily cash business, you need to be banking with many banks and accounts so that each store can get cash to the bank quickly.
In contrast, at a professional business service firm like Satyam, clients pay by check or electronically, and payments are processed in a centralized system and so there is less need for numerous bank accounts. A seasoned accountant with 31 years of experience (which Satyam auditor Mr. S. Gopalakrishnan had) would know this, and should have raised a red flag. They should have taken more initiative.
An audit is part of what an accounting firm calls an “assurance” service, and it is hard to provide assurance if auditors don’t occasionally challenge company management and seek independent verification.
Professor Balachandran would like to thank professors Ray Fisman, Andrew Schmidt and Catherine Thomas of the Columbia Business School and Prof. K Ramesh of the Broad School of Business at Michigan State University for their input to this post.
Photo credit: nav in atl
The lowest rungs of the microfinance ladder are occupied by the poorest of borrowers in the world’s underdeveloped economies — and in many places the great majority of borrowers are women.
There is some difference of opinion on the benefit of this gender bias. One view holds that when men see women successfully turn microloans into income that supports the household (such as spending on education and health), men find their position as primary breadwinner threatened. Consequently, men frequently reduce their contribution to the household because they believe the size of the loans women wield is larger than it in fact is, and more friction ensues. The thinking here is that opening up borrowing opportunities to men would counteract these negative outcomes.
Other observers point to evidence that lending to women is more likely to result in better health and education levels for the household overall than lending to men, as men tend to spend surplus disproportionately on alcohol, tobacco and gambling at the expense of supporting the household. Proponents say that the gender bias produces an empowerment effect: not only is lending to women more likely to result in better health and education levels for the household, but it can be a transformative experience for other members of the household to see a women leading the household, managing a loan, working and bringing home money. There is still little empirical evidence about the consequences of the gender bias or what happens when efforts are made to counteract the bias by extending loans to men.
My colleagues Beatriz Armendariz of Harvard and University College London and Nigel Roome of the Free University of Brussels and Tilberg University have done some excellent preliminary work in Mexico investigating the bias question. Anecdotal evidence suggests that female borrowers do find it more difficult to manage their relationships with their male counterparts over tensions about money and power in the household. One proposed remedy is to involve men in borrowing groups (most microlending depends on a group dynamic to succeed and many groups are open only to women) to foster a sense of participation in lending and some parity in the household. In Mexico, when men were brought into the borrowing group, loan officers reported more investment overall, higher repayment rates, more sharing of both business and household chores and management, and decreases in household tensions.
Studies by others found that, in Africa, the empowerment factor is inconsistent and largely dependent on differences in regions and households; research in Bangladesh suggests that women borrowers frequently cede control to their husbands when choosing how to invest.
This evidence is noteworthy, but I caution against embracing this approach too soon. Until we know more about which practices produce the best outcomes and how they vary by geography and culture, we should view gender bias as a good thing that we should work to keep intact.
My own view is that it is preferable to forgo a certain parity in order that the next generation sees women as the primary breadwinners in households, even if that might extract a psychological cost on the household in the form of marital tensions. Because women are discriminated against in so many cultures it is a transformative experience to grow up with a female head of household. That alone argues for allowing the bias to persist.
Professor Suresh Sundaresan is the editor of Microfinance: Emerging Trends and Challenges. You can read more in a Q&A with Professor Sundaresan in this month’s issue of Ideas at Work.
Photo credit: McKay Savage
Is It Time For a Super-Regulator?
In an interview with Nightly Business Report on Monday, Dean Glenn Hubbard said that President Obama’s stimulus package gets positive marks for “stopping the free fall in the U.S. economy.” However, the dean also said that improving financial markets and institutions and changing the regulatory structure are key to economic recovery.
Indeed, the Committee on Capital Markets Regulation, which is co-chaired by Dean Hubbard, released its report on Tuesday. The executive summary outlines 57 specific recommendations for overhauling financial market regulations. The recommendations cover an extensive swath that includes credit default swaps, ratings agencies, accounting standards, hedge funds and international regulation (view the complete executive summary).
A few of the Committee’s recommendations:
13. Hold Large Institutions to Higher Solvency Standards
15. Maintain and Strengthen the Leverage Ratio
31. Prohibit or Restrict High-Risk Mortgage Products and Lending Practices from Entering the Securitization Market
38. Develop Globally Consistent Standards [for credit rating agencies]
42. Increase Disclosure as to How Ratings Are Determined
47. Refrain from Reimposing Glass-Steagall
50. Increase the Role of the Fed
51. Establish the USFSA [U.S. Financial Services Authority, an organization to “regulate all aspects of the financial system, including market structure and activities and safety and soundness for all financial institutions”]
56. Enable the IMF to Play an Early Warning Role
The question of systemic risk and how to prevent it has been at the fore since the crisis hit the markets in full force last year. Leading faculty and industry experts explored the issues at the Bernstein Center’s “Preventing the Next Financial Crisis” symposium held last December (download conference proceedings, PDF).
In February, professors Bruce Kogut, Patrick Bolton and Tano Santos also proposed the creation of a Crisis Resolution Board (see blog post). In a Forbes.com op-ed, the professors emphasized that “regulatory reform should seek to distinguish between crisis prevention and crisis resolution. Prevention relies upon a tripartite structure and clear rules of accountability. Crisis resolution demands an integrated approach to systemic risk.”
Photo credit: Joe Hatfield
The Obama administration revealed the results of its “stress tests” on Thursday, causing banks to start a new scramble for capital — $75 billion in total. The banks in need of additional capital, which include Bank of America, Wells Fargo and Citigroup, must present regulators with their plan for raising the funds by June 8.
In an op-ed in the Wall Street Journal on May 6, Dean Glenn Hubbard, writing with Hal Scott and Luigi Zingales, suggests an approach to recapitalizing the banking sector far different from the one adopted by the Treasury. Rather than being offered “carrot” incentive plans, such as TARP, insolvent institutions should be managed by the FDIC, the authors suggest. They write:
It’s time for government to use the stick, beginning with creditors. The first step should be an announcement that the FDIC guarantees of short-term debt, set to expire at the end of October, will not be renewed. Insolvent banks — defined not by stress tests, but as those that cannot fund themselves in the private market — will be taken over by the FDIC. Of course, this takeover plan must be clear and credible. Otherwise creditors will play “chicken” with the government, knowing that at the last minute the government will flinch and fail to remove the guarantees.
… Rather than taking over and running banks, the FDIC should split each bank into two parts. One part (“the bad bank”) will assume all the residential and commercial real-estate loans and securitized mortgages as assets, and all the long-term debt as liabilities. In addition, “the bad bank” will obtain a loan from the “good bank.” This loan is necessary because the long-term debt of the old bank is not likely to be sufficient to fund the assets of the bad bank. The good bank will have all the remaining assets, including derivative contracts and its loan to the bad bank. It will have all the insured deposits and the FDIC-guaranteed short-term debt as liabilities. Once the split is accomplished, the good bank can be cut loose from FDIC receivership.
Photo credit: Joshua Brauer
Female Leadership Brings Strong Performance
Last week, Xerox made history when it announced that CEO Anne Mulcahy will be succeeded by Ursula M. Burns when Mulcahy steps down in July.
The occasion marked the first time that a female CEO of a Fortune 500 company has passed the position to another female. Currently, there are 12 female CEOs in the Fortune 500.
The transition, which has been carefully orchestrated, represents a textbook leadership succession plan as well as an important benchmark for women in corporate leadership. However, as important — if not more so from a performance standpoint — will be the number of women holding senior management positions. (Indeed, Mulcahy will remain as chairman on the board.)
Research from Professor David Gaddis Ross indicates that having a higher percentage of women in senior management positions equates to better firm performance. From a recent article in Ideas at Work about Ross’s research:
To investigate the connection between women senior managers and firm performance, Ross and Dezsö examined such performance metrics as the market-to-book ratio, return on assets, return on equity and annual sales growth from 1992 to 2006 for the largest 1,500 U.S. firms. The researchers analyzed the relationship between these measures and the percentage of women in senior management positions up to, but not including, the CEO level. Separately, they studied these performance measures in firms that had female CEOs.
Their findings showed that having a higher percentage of women in senior management positions up to the CEO level — in most cases, just having a single female — is positively associated with better firm performance. For companies with a female CEO, however, the association with firm performance is neutral or negative. This suggests that female senior managers do add value to their firms but that whatever special qualities female managers may have are neutralized by the unique attributes of the CEO position.
In news closer to home, another technology company led by a female CEO was recently profiled in Alumni News. Read a Q&A with Rebecca Masisak ’90, co-CEO of TechSoup Global.
Photo courtesy of Xerox
Annual Dinner Highlights Leadership
If there was a theme to the evening it was the call for bold, new action in business leadership. Columbia Business School’s 33rd Annual Dinner, held at the Waldorf-Astoria on May 4, honored Meg Whitman, former CEO of eBay, and Cory Booker, mayor of Newark, N.J., for their leadership in private and public sectors.
“We are on the cusp of a new era of business,” Dean Glenn Hubbard said in his introduction. “We must reaffirm the positive role that business plays in society and to reinforce the responsibility of schools like ours to create whole business leaders — problem solvers who understand the puzzle, not just one piece of it.”
The dinner, which was attended by more than 800 alumni, students and friends of the School, included remarks by Board of Overseers member Paul Calello ’87, Columbia University President Lee Bollinger and Professor Bruce Greenwald.
Whitman, who is seeking the Republican nomination for California governor in 2010, discussed her experience at eBay and offered a few ideas that she said were key to the company’s success under her leadership. Those ideas included focusing on what you do best, surrounding yourself with talented people, and being courageous enough to take calculated risks.
“The price of inaction is greater than making a mistake,” she said.
Booker, honored for his leadership in public service, received a standing ovation for his remarks, which were a call to action for value-based leadership.
“We must answer to the call of courage in our own way,” said Booker. “It falls on us to do something in this century that we will be remembered for.”
UPDATE (5/21/09): View more photos from the Annual Dinner, now posted on Columbia Business School’s Flickr group. -CN
Photo credit: Jon Roemer
The MBA Class of 2009 Graduates
More than 700 freshly minted MBAs lined up on the west side of Uris Hall on the morning of May 20, 2009 to start the procession for the 255th Commencement of Columbia University.
In his final e-mail address to the class of 2009, Dean Glenn Hubbard offered guidance for the uncertain economy that the new graduates face. He wrote:
The current economic situation offers another lesson as well. Recessions are times of change and turmoil. In this environment, economies built on entrepreneurial capitalism offer managers and entrepreneurs chances to “connect the dots” in a bottom-up way that drives innovation. Seen this way, entrepreneurship and innovation are less the harsh discipline of creative destruction, to use Joseph Schumpeter’s famous term, than the nondestructive creation embedded in the company examples I gave earlier [Revlon, Hewlett-Packard and Apple].
And you will feel this opportunity. Your MBA and the network that comes with it are like a key to unlock a future opportunity whenever it comes your way. The most frequent comment I get from alumni is that their Columbia MBA gave them a Eureka! moment just when they needed it.
Congratulations, class! To see more pictures from the past year, view the Columbia Business School’s Flickr page. Complete webcasts of the Commencement ceremonies are also available.
Photo credit: Catherine New
99 Ways to Be a Social Entrepreneur
 |
|
|
Naif al Mutawa ’03 of the Teshkeel Media Group, left, receives the Social Entrepreneur Award in the Middle East from Hilda Schwab, chairperson and co-founder, Schwab Foundation for Social Entrepreneurs at the World Economic Forum on the Middle East at the Dead Sea, Jordan on May 16. |
It has been a big year for Naif al Mutawa ’03. The founder and creator of comic book company Teshkeel and The 99, an Islamic comic book series based on the 99 attributes of Allah, opened the company’s first theme park in Kuwait in March, and last weekend al Mutawa was honored with the Social Entrepreneur Award in the Middle East by the Schwab Foundation. Public Offering recently spoke with him about his adventures with superheroes and his advice for entrepreneurs.
How is a comic book a social enterprise?
I wanted to create alternative heroes that wouldn’t disappoint and would be positive. In so doing, I knew I needed to create something that would have legs in U.S. and Europe and Asia. One of the ideas that I send out through the series is that the values implicit in the 99 attributes of Allah tie us all together as people. Our focus is on the values that humanity shares while building a business around it and to create an alternative to those who would have others believe that there is a clash of values between Islam and the rest of the world.
How does the company fit into the larger trend of social enterprise?
We are a social enterprise through our values and the medium is comic books. It’s our philosophy that we are doing well by doing good. You hear about the philosophy of business at the School; this is the business of philosophy.
In the nearly five years since you launched the company, what has surprised you?
I have had to switch our focus. At first, we focused on protecting the property and creating the concept with [the artists] … We were covered extensively in the press and had a lot of positive publicity before we even had a product. I mistook that to think I could expand outside of the region, but that time might have been better spent focusing on the region. So we let go of that a little and we raised a second round of financing. We converted the company to an Islamic company and that allowed us to be accepted in new places, which led to the opening of the theme park and that allowed for more opportunity for us in the Middle East.
What advice do you have for entrepreneurs starting out?
Networks are very important. Never burn a bridge and don’t let your ego get in the way, because an opportunity may come down the road. It is also important to know the difference between luck and skill and don’t confuse the two — we got extremely lucky.
Photo credit: World Economic Forum/Nader Daoud
The Value of Trust: My Weekend with Warren Buffett (and 35,000 Other Adoring Fans)
 |
|
|
Brad Doppelt ’10, Brandt Blimkie ’10 and Darren Bounds ’10 proudly bearing their “partner” passes while waiting for the doors to open at the annual meeting. |
I could have sworn I was at a rock show, not an annual meeting. Yet there I stood outside the Qwest Center in Omaha, Nebraska at 6 a.m. on a Saturday morning alongside 35,000 other excited fans waiting for the doors to open for the 2009 Berkshire Hathaway Annual Meeting.
The annual meeting’s “cowboy” theme this year couldn’t have been more appropriate. Our tickets branded us as “partners,” not shareholders. And when the doors finally opened, I found myself caught in a stampede for the best seats in the stadium. Never in my life did I anticipate that I’d be competing in an early morning foot race against agile seniors at 7 a.m. for a chance to listen to a pair of octogenarians speak for six hours.
Fortunately, I was traveling with another student who had attended before, and he was able to guide us through the crowd into seats ten rows off stage left, giving us a perfect sight-line for the Oracle. It was 7:15 a.m.
Opening Night
The night before, we attended a shareholders’ reception at Borsheim’s, one of North America’s largest jewelers, which Berkshire purchased in 1989. The store overflowed with partners proudly bearing their shareholder passes around their necks. At the reception, I met a family represented by three generations. The grandmother’s father had been approached by Warren Buffett in the 1950s to contribute $10,000 to his original partnership but he declined the offer. Another family had a similar story. Her father had also been approached by Buffett, but had told the young Oracle to come back when he was driving a nicer car than his own. The irony is that Buffet is probably still driving a worse car than the grandfather (Buffett drove a Lincoln Town Car until 2001, when he replaced it with a Cadillac DTS). I wondered how many others had similar stories. A simple lack of trust had cost these families literally millions of dollars.
After we left Borsheim’s, we ventured over to the local Dairy Queen (also owned by Berkshire). It was hosting a book-signing with authors who had written books on Warren Buffett, while a BBC film crew was there filming a documentary. After indulging my childhood sweet tooth with my favorite DQ Blizzard, I sat down and spoke with Bill Child about his book, How to Build a Business Warren Buffett Would Buy. Child, who inherited the company RC Willey from his father-in-law, built the operation into Utah’s largest furniture store. In 1995, he sold the company to Berkshire for $175 million after being introduced to Buffett by the owners of the Nebraska Furniture Mart (which, as you might guess, is also owned by Berkshire).
I asked Child how Buffett had assessed his company. He told me that Buffett had asked him why he was selling the company and what he intended to do after the sale, and then instructed him to send over three years of financial reports along with a brief history of the company. Within three days, Child had received an offer. It was significantly lower than the $200 million he had been offered by investment bankers and other furniture retailers, but Bill decided to accept the lower offer from Buffett. I was amazed that it took Buffett only three days to feel comfortable purchasing this company and to trust his investment with Bill Child. It takes me three days just to read an annual report!
“Disneyland for Investors”
Waking up on Saturday morning, even at 5 a.m., was remarkably easy. I jumped out of bed like a kid on Christmas