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

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

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

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

“I was told when I graduated that I had to come back and take 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

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

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.

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.

Photo image from cover of Goddess of the Market.

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.

	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.”

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

	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

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

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

“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.

	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

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.

	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.

	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

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

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.

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

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

“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

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

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

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

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

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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

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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

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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

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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

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

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

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.

	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

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

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

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

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

	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.

	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.”

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?

Photo credit: apox apox

	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.

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.

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

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

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

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.

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

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.

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

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

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

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

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

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

“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.”

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

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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 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?

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

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

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.

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

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

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

This post contains an update.

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

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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

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

	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 morning. We arrived outside the Qwest Center an hour later and, after claiming our seats, decided to go explore the exhibition hall. Two friends stayed behind to guard our prized spots.

	Darren Bounds ’10 and the author pose with the Fruit of the Loom bunch.

The hall was filled with booths from Berkshire-owned companies, including Borsheim’s, Fruit of the Loom, Dairy Queen, NetJets, Justin Boots, See’s Candy and more. We had our pictures taken with the Fruit of the Loom “fruit” and the Dairy Queen mascot. Add in a Wall Street-themed roller coaster to parody the ups and downs of “Mr. Market” and the annual meeting would have resembled a Disneyland for investors, or maybe a Star Trek convention. But instead of speaking in Klingon, people used words like “margin of safety,” “intrinsic value” and “moats.”

“Those Dilly Bars look good,” said Warren Buffett, as he walked through the crowd. “I should get one.”

As we wandered the hall, I noticed a press circle moving toward us. Before I knew it, Warren Buffett was walking directly toward me. In fact, I was in his way. I came face-to-face with my idol and froze completely, like a deer in headlights. Would security jump on me if I said hello and reached out to shake his hand? I decided to smile and politely step aside. “Those Dilly Bars look good,” he said pointing to a member of the crowd as he walked by. “I should get one.”

We returned to our seats, eager to finally hear him speak. The morning began with a one-hour video montage of commercials for the companies Berkshire owns and a few short satiric skits. In one clip, Buffett pretends to be Tiger Woods’s caddy. In another, he sells a mattress called the Nervous Nellie to a customer in the Nebraska Furniture Mart. The mattress had a compartment to store money, Berkshire shares and old magazines.

The rest of the meeting followed a question and answer format. Questions alternated between those from audience members and those submitted in advance by journalists from Fortune, CNBC and the New York Times. The questions covered a range of topics, including the improvement of financial literacy, Berkshire’s exposure to derivatives, Buffett’s view on the government bailout, the threat of inflation and Berkshire’s investment in Chinese battery maker BYD. The entire time Buffett and his partner, Charlie Munger, drank Cherry Coke, ate See’s fudge and looked happier than two kids in a sandbox. The Q&A period broke for a half-hour lunch and then resumed.

Tough questions for Berkshire

	Kiewit Plaza is home to the world headquarters for Berkshire Hathaway.

The most intriguing questions were the ones that Buffett didn’t really answer. Who was in line to replace him as CEO and head investor? There were three candidates for CEO and four for CIO, he said, but he didn’t give any names. Why does he hold Wells Fargo stock? If he could only invest in one company, he replied, it would be Wells Fargo, but he never said why. How does he evaluate and incentivize managers? That was a great question. “We don’t want relationships that are based on contracts,” he responded.

Charlie Munger added, “Our model is a seamless web of trust that’s deserved on both sides. That’s what we’re aiming for. The Hollywood model where everyone has a contract and no trust is deserved on either side is not what we want at all.” Buffett cited Peter Kiewit’s contracts (Kiewit founded Omaha’s largest construction company) as an example, without specifying what those contracts entailed.

By 2 p.m. we were all getting fidgety. I didn’t want to miss a word, but my legs were beginning to cramp. I had to get up and walk around. I couldn’t believe these two men could sit there for so long in such comfort with no break. At 3:30 p.m. the Q&A period ended and the formal annual meeting began, whereupon the board of directors were reelected by majority vote.

During the meeting, a shareholder put forth a motion requesting Berkshire to produce a sustainability report. This was my first exposure to the criticisms levied against one of Berkshire’s subsidiaries. According to the shareholder’s representative, there were allegations of labor violations at a Russell Athletics factory in Honduras. These allegations have caused several Ivy League schools, including Columbia University, to discontinue their use of Russell Athletics. The representative then passed the microphone to a worker from the factory in Honduras. She spoke for ten minutes in Spanish about the cramped workspace, long hours with few breaks and anti-union activity. Following her testimony, Buffett asked the CEO of Russell Athletics to respond. The CEO outlined the actions they had taken to improve conditions, and how a non-partisan labor rights group had been invited to monitor and evaluate the conditions. The motion was put to a vote and defeated.

Graham and Doddsville

After the meeting concluded, we walked over to a Columbia Business School reception hosted by the Heilbrunn Center for Graham & Dodd Investing. Professor Bruce Greenwald, Tom Russo of Gardner Russo Gardner, and Adam Weiss of Scout Capital shared their thoughts on the meeting and the enduring relevance of Benjamin Graham and David Dodd’s seminal 1934 text, Security Analysis.

To illustrate this point, Weiss cited passages warning of the dangers presented by over-levered institutions. Russo explained how his best investments had come from companies that had grown in value and benefited not only when the market recognized their intrinsic value but also when the company grew and its multiple increased. Professor Greenwald shared his perspective on the questions that Buffett opted not to answer completely. Why was Wells Fargo different from most other banks? Because it focused on local economies of scale, Greenwald said. Unlike other banks, Wells Fargo had concentrated its growth in the west (similar to See’s Candy) rather than spread itself across the country like other banks. What made Buffett’s contracts unique? They incentivized managers to not only pursue growth but to achieve profitability.

Following the reception, we made our last stop of the day. We drove to Berkshire’s legendary Nebraska Furniture Mart for a western BBQ cookout. I was expecting a large warehouse like Costco and was shocked when we arrived. At 77 acres, the Mart was not only larger than eight Costco warehouses laid side-by-side, it probably had its own zip code. Talk about local economies of scale!

A View on Trust

	Blimkie, standing outside Buffett’s house in Omaha, says the lack of a fancy security gate is one way Buffett demonstrates his trust.

On the way to the airport the next day, we drove by Buffett’s house and Kiewit Plaza, Berkshire’s headquarters. They are only a ten-minute drive apart, and you can easily picture Buffett skipping into work. Buffett owns a gorgeous brown house with a barn-style roof. It certainly was not the palace you would expect one of the world’s richest men to own. But what surprised me the most was the lack of a visible security presence. No fence. No moat. Just trust. I realized that if there was one underlying theme to the weekend, it was the value of trust.

After all, how valuable is a partner if you can’t trust him? Unlike some of the family members I met, Buffett’s original partners trusted him with their hard-earned money. Buffett, in turn, has held that level of trust in the managers of every company he has ever owned. He trusted Russell Athletic’s management to make the right decisions in Honduras. He trusted Bill Child to continue to run RC Willey exactly the same way after he bought the company. He trusted all of his managers and that partnership manifested itself as stable, predictable cash flows.

But trust is not something that appears explicitly in a P/E ratio or a discount rate. It’s not something you can model in an excel spreadsheet. And it’s certainly not something that can be quantified in a contract. This presents amateur investors like me with a challenge. If trust is so important, how do we decide whom to trust — and how to value it? I suppose that is the art of investing. After all, Benjamin Graham did not title his second book The “Value” Investor, but The Intelligent Investor. Those who recognize the additional margin of safety that trust bestows would be intelligent to follow Buffett’s lead. Trust is certainly a concept that holds enduring relevance, as Buffett’s 35,000 adoring “partners” can attest.

Brandt Blimkie ’10 is the incoming co-president of the Investment Management Club.

Photos courtesy of Brandt Blimkie ’10.

The ailing newspaper industry has seen its troubles go from bad to worse in recent months, with several high-profile closures and bankruptcy filings. Professor Jonathan Knee, director of Columbia Business School’s media program and co-author of the forthcoming “Curse of the Mogul: What’s Wrong with the World’s Leading Media Companies?”, was recently interviewed by the Wall Street Journal on the subject. Knee’s recommendation? Newspapers should focus more on their local coverage.

WSJ: What would be your advice to newspaper owners?

Knee: You have seen people outsource everything from printing to editorial and indeed, any kind of journalism where your scale in the local community does not provide you with an advantage should be gotten elsewhere. If you find out how many people the large papers sent to the national conventions, you would wonder whether that’s economically justified. You have to focus on your competitive advantage, which is local. When the smoke clears, the local newspaper, which may not be the sexiest part of the newspaper industry but is overwhelmingly the largest and most profitable part of the industry, will be a smaller and more-focused enterprise whose activities will be directed to those areas where their local presence gives them competitive advantage and they will continue to generate as a result better profits than the supersexy businesses in the media industry asking for government or nonprofit help like movies and music.

The newspaper industry has not been blessed with the best managers, and generations of monopoly profits do dull the senses. On the journalism side, I think many managers would rather have avoided a fight with journalists than actually force them to think harder about what their readers want, rather than what they want their readers to want. In the economic environment we’re in, newspapers can’t afford to do every six-part investigative series they could have done before.

Photo credit: Matt Callow

Daniel Petroff ’09 was the student speaker at Columbia Business School’s Recognition Ceremony on May 17, 2009. This is an excerpt from his speech.

I remember the first week of school being full of surprises. I didn’t expect that I’d be nervous that first morning as I walked up the steps of Uris past our cheering Peer Advisors. Or that my clustermates would actually think I was the single oldest person in our entire class. I was amazed that it was possible to produce such a wide variety of completely inedible box lunches. And I hadn’t expected that taking every class with the same people would be such a comfort and such a pleasure.

I remember hearing how a classmate’s parents started dating at the School and graduated 36 years ago, a story that a number of you are well on your way to making your own.

I remember the phenomenal trips I’ve shared with so many of you. Skiing the bumps in Colorado; smoking a hookah in Dubai; offroading in Iceland; diving on the Great Barrier Reef; tasting wines in Napa; sailing in the Caribbean. All made possible by countless hours of hard work by people here today.

I remember standing in a packed Uris lobby as we stared up at the televisions and watched the markets dive. I remember finally having my “wow” moment as a Peer Advisor. And I’ll remember being here today with all of you.

When I was struggling to write this speech, I was heartened by how many classmates provided encouragement and advice. One suggested a theme centered on the economist Joseph Schumpeter and creative destruction. Another offered me the speech he had drafted for his own audition. And there were many more creative ideas and magnanimous gestures.

Then one wise classmate brought it all together for me when he said, “I came to Columbia expecting great things for my career, and instead the greatest things came from the people I met.”

At the start of school, we heard again and again about the value of the Columbia network, about how important your classmates are to you, about how you can’t do it alone.

And I remember that many of us, me included, didn’t really get it. I remember the former investment banker who patiently taught a clustermate how to build a discounted cash flow model to value Clarkson Lumber.

I remember the alumna who, though exhausted from constant travel, took three precious hours out of a rare day in New York to help me figure out what to do with my life.

I remember the entire student body, despite the economic downturn and uncertain employment outlook, raising almost exactly as much money this year as we did last year for the Social Enterprise Summer Fellowship Program.

I remember the consultants who returned from their summer internships with full-time offers and then devoted part of their winter break to preparing classmates for case interviews.

And I remember the classmate who stayed in Africa to look after a friend struck ill and hospitalized while on spring break, and another who stayed overnight in the emergency room watching over a friend with a broken jaw.

I am honored to be a member of the Class of 2009. Individually, you are as talented and driven as anyone I have ever met. Together, we are even better.

If I can ask only one thing of each of you, then I ask you this: just as you have spent the last two years being excellent to each other, spend the next 50 years being even more so.

Photo courtesy of the Office of Student Affairs

In a recent column for Slate, Professor Ray Fisman argues that the process of how executive compensation is determined — namely the practice of peer-pay comparison — has allowed the pay of top-level employees to snowball. Fisman suggests that the priority for pay must be realigned with performance. He writes:

… the lesson isn’t that we should dump the baby of peer comparison out with the bathwater. If CEOs and others should earn “what the market will bear,” how better to figure this out than to look at how the market is treating other CEOs? But this CEO labor market will work only if all companies also keep an eye on the more basic market principle that higher CEO pay must first and foremost be tied to the success of the companies they lead.

Accounting professor Sudhakar Balachandran argues that another potential effect of the peer-pay model is decreased sensitivity of pay-to-poor performance (see blog post “Paying for a Pulse”).

“Peer-pay comparison is typically motivated by the goal of trying attract and retain the best talent, which is often at odds with the other major goal in compensation, that of motivating performance,” says Balanchandran. “Businesses are trying to achieve multiple objectives that are conflicting with each other, and that tension has to be managed and resolved by the board.”

Balanchandran suggests that the balance for determining how to structure executive pay — where a firm must find and retain talent on one hand and motivate leaders on the other — creates a tension that is never likely to disappear. Recognizing and accepting that push-and-pull may be the first step for creating a new model for pay, he says.

“Some of the populism found in the business press these days is a little dangerous because it tries to pretend that tension doesn’t exist. And that can create a bigger problem because you are ignoring real economic tensions.”

Photo credit: Thomas Claveirole

From left to right: John O’Shaughnessy, Mac Hulbert, Morris Holbrook, Don Lehmann, Noel Capon

Last weekend, faculty and current and former students gathered for Morrisfest, a “not-so-stuffy” academic conference to honor marketing professor Morris Holbrook, who is retiring after 35 years of teaching. Public Offering spoke with Holbrook about the evolution of research on consumer behavior.

Marketing professor and consumer behavior scholar Morris Holbrook dispels the notion that “evil German scientists” were responsible for early forays into consumer behavior research.

“As part of the fallout from World War II, a number of psychoanalytically trained researchers came here from Germany. They weren’t licensed to practice, so they got jobs in advertising agencies doing motivation research, figuring out the deep underlying repressed needs of consumers and how they could be manipulated to sell more Cornflakes,” says Holbrook. “But that approach was attacked on the basis of a kind of ethics. It was disgraced and abandoned and went into hibernation.”

In the early 1980s — after marketing research began to adopt a decision-oriented perspective — the qualitative science of consumer behavior was back, this time with Holbrook leading the scholarly pack. He says it was a natural response to the field’s direction, which had become overly focused on the “rational economic behavior model.”

“We said, ‘Wait a minute! What about all the irrational stuff, the daydreams, the fantasies, the feelings, emotions, misperceptions and biases?’” Holbrook says, recalling the shift to the more experiential approach.

“We started focusing on various aspects of consumer emotion and the hedonic aspects of consumer pleasure and the aesthetics of consumer behavior,” he says. “[The rational model] was omitting so much of people’s real emotional connection to the consumption experience and the other kinds of value associated with the experience.”

He adds, “Today, people have assimilated that into their thinking. It’s not news anymore … and it’s kind of caught on and the management guru types have embraced it. It’s very much related to various notions that branch off from it like branding.”

Read more about Holbrook’s research in Ideas at Work.

Photo courtesy of Eric Johnson

Above: Members of the Social Enterprise Club with Joel Klein.

What are the most important characteristics for MBAs in the education sector?

Transparency, consistency and being genuine, Jemina Bernard, executive director of Teach For America, told students at a recent lunch with the Social Enterprise Club.

This year the club has organized events with education leaders from Uncommon Schools, The New Teacher Project, a meeting with New York City Schools Chancellor Joel Klein, Washinton D.C.’s chancellor Michelle Rhee, as well as the recent lunch with Bernard as part of its education initiative. The education events are part of the club’s peer-to-peer structure, which gives students within the club a group based around their particular career interest.

At the brown-bag event, Bernard added that TFA and the education reform movement are receptive to MBAs because graduates have “strong people and project management skills.”

As the business and education sectors continue to cross-pollinate, there are even broader lessons from the field of social enterprise that are shaping education reform say members of the club.

Lisa King ’09 says the education sector can learn to “replicate successful models and scale to meaningful impact” from the development of other social ventures.

Another lesson is to apply more quantitative methods for measuring what works, adds Jessica Hendrix ’09. “Social Enterprise has started to emphasize the ability to quantify results in order to measure success,” she says. “After quantifiable data exists, it is far easier to determine the success drivers which need to be replicated to spread successful results.”

Organization, rather than management alone, is another key distinction for successful education reform. “One can be a gifted manager or a talented planner, and that’s needed to keep an organization running,” says Joe Chmielewski ’09, the club’s co-president. “But to affect organizational change, you need to work with constituencies.”

“Organizing generates that buy-in and an enthusiasm and passion for vision that will carry it through the bumps in the road of implementation,” adds King.

Photo courtesy of Joe Chmielewski ’09

In a New York Times Magazine article from April 16, Professor Elke Weber, co-director of the Center for the Decision Sciences, suggests that solving climate change requires more than developing the right technology. It requires changing the way we make decisions. “… Climate change is anthropogenic,” Weber says. “That means it’s caused by human behavior. That’s not to say that engineering solutions aren’t important. But if it’s caused by human behavior, then the solution probably also lies in changing human behavior."

But why aren’t we naturally inclined to curb behavior that promotes global warming? Why, as the title of the article wonders, isn’t the brain green? Jon Gertner, author of the article, explains Weber’s findings:

… Weber’s research seems to help establish that we have a “finite pool of worry,” which means we’re unable to maintain our fear of climate change when a different problem — a plunging stock market, a personal emergency — comes along. We simply move one fear into the worry bin and one fear out. And even if we could remain persistently concerned about a warmer world? Weber described what she calls a “single-action bias.” Prompted by a distressing emotional signal, we buy a more efficient furnace or insulate our attic or vote for a green candidate — a single action that effectively diminishes global warming as a motivating factor. And that leaves us where we started.

Weber’s research illustrates how decision science can be used to influence human behavior — in this case, to make our brains green. Gertner writes:

“… Cooperation is a goal that can be activated,” Weber told me one morning. Her point was that climate change can be easily viewed as a very large “commons dilemma” — a version, that is, of the textbook situation in which sheepherders have little incentive to act alone to preserve the grassy commons and as a result suffer collectively from overgrazing. The best way to avoid such failure is by collaborating more, not less. “We enjoy congregating; we need to know we are part of groups,” Weber said. “It gives us inherent pleasure to do this. And when we are reminded of the fact that we’re part of communities, then the community becomes sort of the decision-making unit. That’s how we make huge sacrifices, like in World War II.”

But does employing decision science in such a manner carry ethical consequences?

“We tend to always wonder,” Weber says: “What’s that person’s true preference? What do they really want? I think that’s the wrong question, because we want it all.”

Photo credit: Xurde

This post contains an update.

Sugar Plum didn’t make it and neither did Fred and Ginger. But Chocolate Fudge Brownie is a bestseller.

Not every flavor makes it to your freezer; but if you’re Ben & Jerry’s Ice Cream, you keep trying. Indeed, making ice cream has been a metaphor for the way the company has become a leader in sustainable business.

“Figuring out how to have a socially conscious business was like creating a new flavor,” Jerry Greenfield told students in a presentation at the Feed Your Conscience event on April 22. “We had no idea to do it, but it didn’t prevent us from trying and failing, making improvements and trying again.”

Greenfield spoke with Julius Walls, Jr., President and CEO of Greyston Bakery, at the event, which was sponsored by the Eugene Lang Entrepreneurship Center, the Social Enterprise Program, the Social Enterprise Club, the Green Business Club and the Columbia Entrepreneurs Organization. The presentations were followed with brownies a la mode.

Walls shared his experience connecting Greyston’s business model to a community mission and urged students to look beyond financial returns.

“It’s not about the dollar and making money,” he said. “It’s about people, planet and profits. You don’t have to give up one to serve another — business should serve humanity.”

Both leaders agreed that community outreach and ingredient sourcing have been key parts of their sustainability mission. In an audience Q&A, Greenfield responded to questions about the challenges of both becoming a public-owned company as well as a subsidiary of Unilever, which it has been since 2000.

“How do you maintain the mission in founder-driven entrepreneurial companies?” he asked. “The jury is still out. It’s very difficult.”

However, Greenfield said the strongest endorsement of the mission is in the bottom line.

“Our experience is that the more giving and caring we are, the more successful [the business] is,” he said.

UPDATE (5/6/09): Watch video from Feed Your Conscience ’09, now posted on Columbia Business School’s YouTube channel. -CN

Photo credit: Anna Berger

This past Monday, President Obama announced a series of proposed changes to the tax code. The changes include a reform of a long-standing tax deferral for multinational companies on revenue drawn from their foreign operations, a permanent extension of an R&D tax credit and a curb on offshore tax havens.

Professor Andrew Schmidt says the Obama administration hopes that the overall effect of the proposed corporate tax code changes results in a shift of more investments to the United States by effectively minimizing the incentive for foreign growth and improving resources for R&D in the U.S.

“The idea is that eliminating the tax deferral will drive up [companies with foreign operations’] tax rates and potentially curb the incentives to invest overseas. The result could be reduced investment in foreign operations as firms may have less cash to expand plants or factories,” says Schmidt.  “The revenue raised by eliminating the tax deferral would then be used to permanently extend the R&D tax credit, which would encourage firms to make some of these investments in the U.S. instead.”

He adds, “The R&D credit was a temporary provision and was re-upped every few years when it was about to expire. By making it permanent, firms can rely on that subsidy and not wonder if it will expire. This will be a big deal to certain industries, like Big Pharma, which has heavy R&D.”

On the issue of curbing tax offshore tax shelters — a political hot potato — Schmidt says that one effect would be a reduction in the tax gap, which according to the most recent figures from the IRS (fiscal year 2001) is between $312 and $353 billion.

Listen to an interview with Professor Schmidt on WNYC.

Photo credit: kalavinka

Nearly 35,000 people — including a group of students from Columbia Business School — descended on Omaha this weekend for the Berkshire Hathaway Annual Meeting. This year’s gathering — commonly known as the “Woodstock of Capitalism” — was under especially close scrutiny after the company’s net worth shrank by 9.8% in 2008. However, according to Professor Bruce Greenwald, those losses are somewhat “fictitious” over the next five to seven years. Greenwald, gave his view on Buffett’s annual letter on CNBC on March 2 (see video), says that Berkshire Hathaway did “surprisingly well” in a tough environment on the investment side.

But what lies at the core of Buffett’s investment strategy?

In an article written in 1983 for Hermes, and republished this year in celebration of the 75th anniversary of Security Analysis, Warren Buffett ’51 profiled nine “superinvestors.” In his own words, Buffett describes the investment principles that so heavily influenced him:

The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in the market. Essentially, they exploit those discrepancies without the efficient market theorist’s concern as to whether the stocks are bought on Monday or Thursday, or whether it is January or July, etc. Incidentally, when businessmen buy businesses, which is just what our Graham & Dodd investors are doing through the medium of marketable stocks — I doubt that many are cranking into their purchase decision the day of the week or the month in which the transaction is going to occur. If it doesn’t make any difference whether all of a business is being bought on a Monday or a Friday, I am baffled why academicians invest extensive time and effort to see whether it makes a difference when buying small pieces of those same businesses. Our Graham & Dodd investors, needless to say, do not discuss beta, the capital asset pricing model, or covariance in returns among securities. These are not subjects of any interest to them. In fact, most of them would have difficulty defining those terms. The investors simply focus on two variables: price and value.

Keep reading the complete article in the Spring 2009 issue of Hermes, or download a PDF of the original here.

For the National Football League, the off-season is anything but uneventful. From the frenzy surrounding the league’s annual draft to decisions about the league’s Collective Bargaining Agreement to the question of whether to expand the regular season to 18 games, these warmer months are crunch time for the world’s most successful and popular sports league.

In an April 23 talk with students sponsored by the Sports Business Association and led by Matthew Hill ’09, NFL Commissioner Roger Goodell discussed many of the major issues currently facing the league.

On increasing the marketing push behind the NFL Draft.
“People have a great interest in our game. And we’ve tried to show that the game isn’t just on Sundays and Mondays in the fall, that there’s a game in the offseason, as well. It’s in how teams prepare for the coming season, how they select players, evaluate players, how they manage the salary cap, how they train. All of that goes into how successful a team will be. What we’ve tried to do is expose the fans to that.”

On renegotiating the NFL’s collective bargaining agreement.
“The CBA is at the core of our economics. Sixty percent of our gross revenue goes to players. That’s a pretty good business for the players. For the owners, particularly in this climate, it’s a risky proposition. And I think that’s what they want to evaluate — how do we get better recognition of the costs associated with creating that revenue? Obviously we have significant TV and media contracts, but more and more the revenue is being created on the local level with stadiums. In New York, the stadium across the river is going to probably cost $1.8 billion. That’s all privately financed. That risk in the marketplace is one that the owners have to bear; the players don’t bear that. But they’re the biggest beneficiaries.”

On playing regular season games outside the United States.
“International growth is important to us. Up until three years ago we had a different strategy — we invested in NFL Europe. What the fans eventually realized is that it wasn’t the best quality product. And when we played preseason games there, they understood it then, too. So we said, listen, we can’t sell to our international fan base what we couldn’t sell here in the United States. So we started taking regular season games there. And this year we sold out 90,000 tickets in the UK, in a terrible market, nine months in advance — in four hours.”

On expanding the NFL’s regular season schedule to 18 games.
“What we’re trying to do is what most organizations are trying to do: create greater value for our customers. It’s no secret that the quality of our preseason suffers because many of the more prominent players don’t play and because the games don’t count toward the regular season standings. We’re charging our customers for that, and I think it’s wrong for us to do that to our fans. We can create the same high quality programming and content in the regular season with only two preseason games. So the question is, can we convert two of the preseason games to regular season games so you will get a higher quality product for the same value? But we have to determine the unintended consequences of that, and that’s why I haven’t taken a position on it yet.

Photo credit: Ryan Lejbak

In developing countries, it makes up 41% of gross national income, 30% of the GDP, accounts for 70% of employment and in many countries is growing faster than the overall economy. This thriving area of growth is also known as the informal sector.

For those who haven’t spent much time in a developing country, you may be wondering this means exactly. The businesses that make up this sector are not gangster-run outfits operating in clandestine markets. Instead, they are unofficial businesses that operate openly. They are “tolerated” by local governments, which cannot or will not make the benefits of formality accessible to local business owners. The vast majority of people operating in this sector are simply trying to scratch out a living — and are sometimes thriving — by buying or selling goods.

However, the invisibility of these businesses, as well as their transactions with consumers, leaves the door open for opportunistic behaviors. Both my personal experience and the limited data I’ve been able to find lead me to think this is a much bigger barrier to business growth than is commonly understood.

I spent two years living and working in Kenya with informal businesses and small-holder farmers who operate as informal entrepreneurs selling produce. Time and again I heard stories of business deals gone wrong — of a middleman who bought produce on credit only to disappear without a trace and carry away hundreds of dollars worth of goods without paying for it. While the vast majority of businesses are honest dealers, and most transactions are smoothly conducted, it only takes a few such incidences to discourage otherwise worthwhile business investments. Would providing businesses with a virtual community to allow them to tap into their social networks to gain trust and credibility unleash an explosion of economic growth at the base of the pyramid?

My business partner Felix Macharia ’09 and I have set out to try this concept in Kenya, a country we both know well. Our business, Dango, seeks to create a referential mobile phone-based business directory and social messaging platform for the Kenyan marketplace. The system will work entirely on the simplest and most widely available ICT form available: text messaging. Imagine each of those thousands of informal businesses listed in a business directory accessible to anyone with a mobile phone? What if they were also linked to their regular customers, and through them, thousands of potential new customers? What if they could use their good reputation to find new customers and make bigger and better business deals? Dango will provide them a way to list their businesses, link with customers and reach out to new customers using their existing social networks. Non-business owners may use Dango as a social network and share news and information with groups of friends or formal groups like churches and student groups, and finding trusted businesses through the social networks inherent in these groups. If a Dango member searches for a car seller in a particular area, for example, he will be able to find one who is known to him through a friend or colleague.

Currently, Felix and I are conducting concept tests in Kenya and developing a prototype of the system. We will be in Nairobi this summer piloting the system with some select church and business groups. To get to this point, we’ve leveraged CBS’s resources tremendously.

Through the Entrepreneurial Greenhouse Program, CBS’s intensive incubator program for aspiring second-year entrepreneurs, we’ve gained exposure to entrepreneurs and investors and have been pushed to hone our business plan and pitches. Through the International Development Club’s Pangea Advisors, I was able to meet with leaders of top Kenyan businesses and social enterprises while conducting a field study of Kenyan businesses for Nancy Barry’s Enterprise Solutions to Poverty, a new organization that works with large companies and social enterprises in the developing world to create inclusive business models.

As a student in Professor Gita Johar’s “Global Marketing Consulting for Social Enterprise” class this semester, I led a team on a consulting project for Yasmina McCarty’s EMBA ’08 GreenMango, a fully localized online service marketplace that provides an easy way to find local small businesses for Indian professionals. The experience I’ve gained in working with GreenMango has provided me with an entirely new lens through which to see my own venture. Last but not least, the leadership experience I’ve gained as co-president of the International Development Club has given me confidence that I can lead a team in executing my vision to make Dango a reality. When I reflect on how I’ve been able to bring all of these experiences together in such a short two years, I am in awe of how much I’ve been able to accomplish.

As I prepare to walk out the doors of Uris Hall for the last time (as a student, at least!) I’m grateful for incredible opportunity I’ve had to bring my dreams closer to reality.

Photo credit: Ken Banks, kiwanja.net

The outbreak of swine flu, which is responsible for at least 159 deaths in Mexico, has put the U.S. vaccine industry into overdrive. However, the New York Times reports that federal officials are warning consumers that a swine flu vaccine will not be available until late November at the earliest. What does this long lead time teach us about supply chain risks?

In the case of vaccines, it underscores how dependent the U.S. supply is on a traditional — and slow — manufacturing process that involves growing the vaccine viruses in hen eggs. The process takes approximately six months for a finished product to be ready for market.

Professor Awi Federgruen, who has written in Ideas at Work about his research on supply chain risk in general and the flu vaccine in particular, says that the vaccine industry is lacking adequate incentives for investments in better and faster technology and larger capacities.

“When the need arises for a new type of vaccine — like we have now — and to act on it with traditional technology, it takes an enormous amount of time to produce something that can be used,” says Federgruen. “That’s a real problem because by the time it gets to market the epidemic may have done all the damage. If we had an industry that was more agile, we would be in much better shape. How do you provide an incentive structure to invest in such technologies?”

While faster technology does exist, it has not been implemented on a scale that would be needed to supply an entire domestic market. Part of problem, says Federgruen, lies in the roulette-nature of flu vaccine manufacturing in general, where assessments are made far in advance of flu season or potential pandemics and easily result in mismatches of supply to the demand.

“This is another way in which we collectively pay a big price in that we have suppliers operating with inferior technology,” Federgruen says. “And they are operating with inferior technology and low capacities because to change these amounts to large investments, the long term benefits of which are too risky. The federal government has started to address the problem by providing roughly $1 billion in grants for construction costs and guaranteed vaccine purchases. However, considerably more needs to be done to provide adequate incentives to the industry.”

Photo credit: hmerinomx

One of the companies I studied for my dissertation research, which dealt with how established companies build competences to tackle new areas, was Citibank (as it was then known). Citi was kind enough to sponsor my three-year research program on their corporate ventures that yielded many insights into the corporate venturing process (and which helped me get through graduate school). I studied their successes and the failures and tried to figure out what made the difference.

Ironically, one of Citibank’s major successes was its credit card division. In a plot with many twists and turns, I learned how Citibank had leveraged Bank of America’s marketing campaign to switch from BankAmericard to “Visa” by capitalizing on a mistake. Bank of America, which had convinced many customers that a Visa card was the next must-have financial product, proceeded to promise customers that they would indeed get their new Visa cards — but only when their current cards expired. By definition, half their target audience would have to wait six months or more! Citi put huge ads in the newspaper, promising that if customers applied for its Visa, they would get one immediately. The response was overwhelming — so much so that the resulting cash outflow nearly sunk the bank. The operational stress was legendary. Warehouses full of Christmas receipts were said to be still sitting around in February. Cleaning up the operations was what eventually set John Reed up to become the CEO of the bank.

An even bigger problem, however, was that bank regulation at the time (the 1970s) strictly limited how much interest could be charged on consumer credit. These regulations, called usury laws, were intended to help protect consumers from the rapacious behavior of people who would take advantage of them. But by 1980, the interest limits imposed by usury laws were lower than the rate of inflation. Citibank was being squeezed between New York state usury laws and double-digit inflation rates.

“You are lending money at 12 percent and paying 20 percent,” said Walter Wriston, then the CEO of Citi. “You don’t have to be Einstein to realize you’re out of business.”

Citi successfully lobbied the government of South Dakota for a deal. The company would bring thousands of well-paid white collar jobs to a state that was going through massive economic suffering in exchange for the ability to charge higher rates of interest on revolving credit card debt. Deal done, Citi moved, and the forces that shaped the way we use credit cards today were set in motion.

Amazingly, even when interest rates came down, consumers continued to pay high rates of interest on their cards. As I’ve argued elsewhere, the people that run credit card companies must be the smartest behavioral economists in the world — they figured out how to get people to take the cards, run up balances and ignore the long-term implications.

At the time, changes in the rules around credit cards were viewed as having many positive consequences. Entire populations, like students and housewives, got access to spending power and the chance to build an independent credit record. Credit cards changed the allocation of credit from whatever the local bank manager thought about you to a more objective formula, which was based on things like your ability to pay and not the color of your skin or social status. And if you were truly facing an emergency, credit card debt could get you through a rough patch. But whoa, hasn’t bankings’ dependence on cards now gone way too far?

Retroactive changes to interest rates on existing balances, increasing interest rates for payment issues with other lenders (such as the phone company), selling an account from one provider to another and charging customers for the transaction. And fees, fees, fees galore — for everything from late payments to charging above your maximum. It is just amazing. And at some level, I think this behavior violates most people’s basic understanding of what is a fair and appropriate way to treat consumers.

My prediction is that for the first time in several decades, there may be a populist, political and economic perfect storm that will result in a reining in of the card companies. Now let’s hope that the useful and advantageous aspects of the card industry don’t get thrown out along with the more egregious practices.

Photo credit: Giuseppe Leto Barone

“You have to find a way to unite people behind a central theme,” National Basketball Association Commissioner David Stern told students in a speech delivered on April 14 as part of the School’s Silfen Leadership Series.

Stern, who joined the NBA in 1978 as general counsel and became commissioner in 1984, discussed how this leadership principle helped the league overcome some of its early struggles.

“What people wrote about us is that we were too black. We were too drug-infested. Our players were too highly paid. And so we fell into every stereotype that you could possibly imagine,” Stern said. He referenced a Boston Globe journalist who “had the audacity to believe that our league was doomed because America would never accept a black league.”

To combat this, Stern focused the organization on a single idea: basketball is a great game. “In the face of the press, in the face of the media showing our empty seats, we focused on our product. We focused on the talents of our players. And we focused on America. It sounds corny now, but we said, ‘It can’t hold. America’s too good for this.’”

Leadership, Stern said, is ultimately defined by how you manage change and respond to crises. He described several significant changes to occur during his time as commissioner:

• The rise of sports marketing. “Michael [Jordan] did wonderful things on that front, and suddenly everyone was involved in sports marketing. To get a sponsor to spend behind your product and promote your player with his uniform on and your brand equity is an acquisition that you couldn’t possibly afford to make yourself.”
• New arenas. If the Nets move to Brooklyn as intended, all of the league’s buildings will have been built or dramatically renovated since 1987. “We had bigger buildings and higher prices, and our revenues were going straight up,” Stern said.
• Television and media. When Stern negotiated the league’s first cable deal in 1979, there were only four million cable subscribers in the U.S. “Now we have NBA TV, our own digital network, we have NBA.com. We weren’t the first to do each of those; we were the second. We don’t mind being second. We want to see what’s going on and then move into it.”
• Globalization. “We’ve just enjoyed enormous growth” since NBA players became eligible for the Olympics, Stern said. He cited the NBA’s opening of offices in Milan, Istanbul, Madrid, Paris, London and China as evidence of basketball’s global reach. He also discussed a new joint venture with the Anschutz Entertainment Group to build and manage arenas in China.

Stern also discussed three crises the league has had to overcome during his tenure: Magic Johnson’s HIV positive diagnosis (“It became an opportunity for us; we changed the debate on HIV and AIDS in this country”), the 2004 brawl at the Palace at Auburn Hills and the indictment of referee Tim Donaghy on gambling charges in 2007.

“My conclusion is, as it always is: enjoy it if you get lucky,” Stern told the students. “And we’re pretty lucky. We work in a great industry, we have an impact on people’s lives, and every year there are new players. We’re constantly refreshed. The changes in the world are our friend.”

Photo courtesy of Columbia Business School

How can managers prepare for the less beneficial outcomes of practicing fairness?

According to the research of Professor Joel Brockner, both staff and management alike benefit when a firm makes a strong commitment to practice fairness. While there are some barriers to implementing fair process, Brockner says, it’s undeniable that firms that do so consistently see higher levels of employee commitment and productivity and that their employees report more job satisfaction and less stress — which makes overcoming those barriers a worthwhile investment. His research is featured in the most recent Ideas at Work.

But fairness can come at a cost.

“If people feel that the process was handled fairly regarding a decision that they will not be happy with, such as the loss of a job, or the failure to get a promotion, there is less resentment directed toward to the organization,” he says. “But the potential risk is there is more self-blaming and more low self-esteem.”

The tenure system illustrates the dilemma of process fairness. “When someone is turned down for tenure, the last thing they want to hear is what a fair process it was because then they feel like ‘OK, I got what I deserved.’ If they got what they deserved and the outcome is bad then they may feel badly about themselves.”

Brockner’s advice to managers? “The negative consequences of fair process don’t mean you should forego fairness. Practice fairness but also be aware that people may end up feeling badly about themselves and take additional action to counteract it.”

For example, Brockner and his co-authors recently found that people who engage in corporate-sponsored volunteer activity often feel more committed to the organization, precisely because the act of volunteering reaffirms their sense of self.

“There is a conundrum when you dole out unfavorable outcomes. If you are fair, people blame themselves, if you are unfair, then they blame you. So beware — you’ve got work to do as a manager either way.”

Learn more about Professor Brockner’s research in Columbia Ideas at Work, where he outlines the keys to process fairness and offers guidelines to help firms make hard decisions in a fair way. Read more about (download file) his research on the downside of process fairness.

Photo credit: Eric Lemoine

As with nearly every facet of the economy in the past year, family wealth has had its share of financial setbacks.

An April 2 report in the Economist estimated that the financial crisis has created a loss of more than $10 trillion worldwide for high-net-worth individuals. And the collective shudder that results from the mere mention of the name Madoff suggests that this is more than a financial crisis — it’s a trust crisis.

Family Wealth Management, a new Executive Education program launched in partnership with the Heilbrunn Center for Graham & Dodd Investing, is designed to specifically address some of the unique challenges facing families with large and complex investment portfolios.

“If people had asked more specific process and operational questions of Madoff, they wouldn’t have invested with him,” says Professor Bruce Greenwald, the program’s faculty director. “We see an opportunity to bring the principles of value investing to families. People will better understand what their money managers are doing, and because it’s their own money they have the most incentive to listen.”

For families who take an active role in investing, the first step is learning the basic framework of sound capital management.

“The Graham and Dodd approach is, we believe, the most sustainable and long-term strategy for investing,” Greenwald says. “If you’re thinking about a family that wants to preserve wealth over many generations, you want to look where there is limited impairment of capital and some upside that isn’t just market swing.”

The four-day course, which begins in May, will cover the framework of value investing, how and what questions to ask, and even behavioral economics.

“The Family Wealth Management program helps families understand what the process is about before they put their family assets at stake,” Greenwald says.

Photo courtesy of Columbia Business School

Earth Day 2009 is here, and if you’re a business student or a practitioner, you might want to pay attention.

Long considered the province of treehuggers and other warm-hearted-but-corporately-challenged individuals, Earth Day in the 21st century has taken on a new importance. And unlike previous corporate excursions in the environmental realm during the ’70s and early ’80s, this time around the movement is unlikely to be subject to the whim of oil prices. Environmental progress touches a wide array of policy issues dear to the hearts of both liberal and conservative politicians: energy security, job creation, climate change and human health. In other words, sustainability and environmental issues are here to stay.

Last week the Environmental Protection Agency (EPA) issued a finding that carbon dioxide and other greenhouse gas emissions endanger “the health and welfare of current and future generations.” EPA Administrator Lisa Jackson cited the report as “the first formal recognition by the U.S. government of the threats posed by climate change.” The finding has far-reaching significance for U.S. business — whether through EPA regulation or congressional legislation, change is coming soon.

While some of the world’s leading organizations have made meaningful progress on their environmental impact, there remains a general lack of expertise on the way that business intersects with the environment. A focus on environmental issues appears likely to follow the same adoption path that the Internet experienced in the mid-to-late ’90s: from novelty, to practice by a few early adopters, to acknowledged competitive advantage, to business-as-usual.

Today, some of the world’s largest and best-run companies, including DuPont, GE, Sony, 3M and Coca-Cola, have already recognized the reality that their industry landscapes will be profoundly impacted by a greater focus on the environment. They have responded to these pending changes by devoting substantial resources to develop expertise on sustainable issues and how they can benefit from improving their environmental standing.

Given the direction in which these industry bellwethers are moving, business schools must start paying attention. The limited supply of managers educated in both business and the environment creates enormous opportunities for those students coming out of school with knowledge of both these areas.

Columbia Business School has been quick to recognize this, responding with a number of theoretical and practical learning opportunities for its students. Course offerings such as Finance & Sustainability, Green Marketing and New Developments in Energy Markets focus specifically on how students can maximize organizational performance in light of environmental opportunities. Practical experience in the form of cutting-edge programming and activities has been supplied by the recently formed Green Business Club, which had a membership of almost 200 students in its first year on campus.

Some examples of the Club’s recent events and advocacy include:

• “The Future of Business is Green” event with executives from Goldman Sachs, the Clinton Climate Initiative, the NRDC and McKinsey
• Unveiling of the UN’s Green Jobs Report
• PepsiCo Sustainability Tour
• Clean Tech Month
• LEED platinum campaign
• CFL lightbulb exchange
• Reusable happy hour steins
• Green Columbia initiatives, including increased recycling capacity and decreased paper waste

Through events and activities such as these, Columbia Business School is creating leaders who truly understand the importance of environmental impacts on business performance. While more apprehensive managers may think it unwise to divert their attention to environmental issues until absolutely necessary, savvy executives will see the advantages of being first-movers. For institutions with the mandate of preparing forward-thinking, strategic leaders, now is the time to start focusing on environmentally sustainable business. And that starts here, at business school.

Photo courtesy of the Green Business Club

The SEC announced on April 8 that it is considering reimposing the uptick rule to limit short selling. The old uptick rule prohibited short sellers from trading in a stock at a price lower than the most recent reported transaction. The concern was that without an uptick rule, short sellers might manipulate a stock by selling aggressively and repeatedly, driving stock prices below fundamental value. The SEC has now proposed five different types of possible rules for comment.

Professor Charles Jones says that while a resurrection of the rule will likely reverse the increase in shorting activity that occurred after the rule was repealed in 2007, its impact will be limited.

“No matter what new rule the SEC chooses, it will be a reversal of what we saw in 2007 when they took it off, and we will see modest effects,” says Jones. “It won’t magically raise stock prices. We will see a modest decline in the amount of shorting, but I don’t think it will be more than a minor nuisance for long-term, fundamental shorts.”

Jones’ research (PDF) on the July 2007 repeal of the uptick rule showed that there was a slight increase in shorting after the repeal. However, Jones says that the bout of market volatility that occurred in August 2007 was not related to the repeal.

“A lot of people think that because the volatility episode was so close on the heels of the repeal the two were related in some way,” says Jones. “But there are two problems with that. First, it didn’t happen right away. The volatility was in August, a full month after the uptick rule was removed.

“Second, when we dig in and look at what happened in that volatile period, it doesn’t look like the short sellers are to blame,” he says. “We have detailed, proprietary data from the exchanges on all shorting activity. They are not piling on stocks that went down. It doesn’t look like they are conducting bear raids or being abusive or pushing prices around in any way. When all is said and done, it doesn’t look like shorts were contributing to this volatility in any way.”

Photo credit: kevingessner

How much is your virtual yuan worth?

Green Panda Games is hoping quite a bit. The gaming company, a new venture by Megan Bordi ’09 and business partner Nate Altschul, recently won the Eugene Lang Entrepreneurship Center’s annual A. Lorne Weil Outrageous Business Plan Competition. (check out their winning elevator pitch)

Green Panda is a free-to-play virtual world and educational online game for Chinese kids and tweens. The company’s goal is to create an alternative product to the popular but violent role-playing games and culture that has become prevalent in China.

One of the key elements of the platform — and Green Panda’s primary revenue stream — is the use of microtransactions, a model that has been very profitable in the Chinese gaming market. That format both localizes the platform and provides an educational component with virtual allowances and bank accounts.

“If the kids are buying things, the parents ultimately pay so we recognize that we need to target both groups,” says Bordi, who is a participant in the Entrepreneurial Greenhouse Program Master Class.

However, Green Panda is careful to learn the lessons of other American Internet companies, such as Google, that have gone into the Chinese market.

“We are focused on developing the product from a Chinese perspective and we have a Chinese development team,” Bordi says. “We’re not adapting an American product.”

Altschul adds, “We’ve done a lot of research and work with gaming experts to understand what parents, educators and kids want.”

With the product in private beta testing now, Bordi and Altschul plan to launch the game platform later this year.

Watch video for Green Panda’s winning elevator pitch (opens Flash player).

Thomas Russo, the former vice chairman and chief legal officer of Lehman Brothers, met last night with students in a Community Forum discussion about the financial crisis. Russo will be teaching the half-term summer course “Credit Crisis: As Seen Through Different Lenses.”

In a 45-minute presentation, followed by a Q&A, Russo gave his perspective on the origins and fallout of the crisis. One topic he focused on was the changing role of leverage for banks.

“Leverage now has a lot of bad things attached to it, but that’s the way we make money,” he said. “If you change leverage, you are limiting profitability.”

He predicted that it will be easier for smaller firms to make money in the future because they will not be encumbered by the enormous cost structures and lack of flexibility that larger institutions have.

“Since banks won’t have leverage down the road, it will be harder in the institutional sense to make money,” he said. “There will be more opportunity to make money outside the institution. Things in the future will be developed by smaller entities.”

Segueing into advice for future CEOs in the audience, Russo said the most important thing to remember was to have multiple points of view.

“You have to put yourself in other people’s shoes,” he advised. “Understand that every problem has many sides and if you’re in the decision-making role, you have to look at all of them.”

Photo credit: Antonio Morales Garcia

Maurice Lam ’78 is not alone when he says that the future of Africa lies in private sector business. Dean Glenn Hubbard and Professor William Duggan’s upcoming book The Aid Trap (Columbia University Press), due to be published later this year, explores the topic.

However, Lam’s position as chairman of the Board of Investment for Mauritius offers a unique case-study perspective on how this future can be realized. After a series of reforms in 2006 to modernize industries and boost investments, the Indian Ocean island country increased its economic growth from 2.3 percent to more than 5 percent.

The first step, Lam told Public Offering in a recent interview, is to simplify the way business is done.

“Make it easy to do business in Africa by simplifying the rules and regulations,” Lam says. “We are doing this in Mauritius, and we have moved up in rankings on the World Bank’s Doing Business survey from 32 to 24. As a result, we have seen more locals investing in the private sector and more investors from overseas.”

Lam, who has also advised Uganda on investment opportunities, argues that African nations allow the opportunity for corruption by creating too many hurdles for success through complicated permit and fee systems.

“You leave yourself open to corruption opportunities when you have administration procedures where there is discretionary power,” he says. “So you must remove them.”

Lam, who was born in Mauritius, now resides in Singapore, where he runs a strategy-consulting firm for family-run businesses. He says a key to success in the private sector in Africa is political will.

“Political leadership has to be willing and particularly the finance ministers,” he says. “These countries lack revenue so you have to convince the finance ministers that the big picture will make more money for the government.”

Another key is business-sector support, in which Columbia Business School has been playing a vital role. In addition to Hubbard and Duggan’s book, students have been engaged in numerous entrepreneurial projects in Africa, including last year’s Master Class (see blog). The School is also working with universities in Kenya and Tanzania to develop better business-education methods.

Photo credit: Lionoche

This is part of a series of posts from the International Development Club.

On a recent Friday morning, we made our way with 25 fellow MBA students to the United Nations World Headquarters for a special visit. We all had one question on our minds: how does one actually get a job at the UN?

We learned that while it’s a difficult place to get one’s foot in the door, networking, perseverance and a willingness to live in relatively less-desirable locations can help you find a job with the prestigious organization.

After a lunch in the Delegates Dining Room, we met with Brett House, from the Office of the UN Deputy Secretary-General. He demystified the organizational structure and gave our group some insight as to where the skills of an MBA might be most valuable. He pointed to the International Finance Corporation (IFC), International Monetary Fund (IMF-Capital Markets), World Bank, Multilateral Investment Guarantee Agency (MIGA), Food and Agriculture Organization of the UN (FAO), United Nations Capital Development Fund (UNCDF) and United Nations Development Program (UNDP) as organizations within the UN that hire MBAs.

Next we met with representatives from the human resources department. They gave us an understanding of the hiring process (long and complicated) and its Galaxy Web site (jobs.un.org). Perseverance, it seems, is critical when applying for these jobs — as is recognizomg that resumés are not just going into a black box.

The human resource representatives stressed the importance of meeting all (or almost all) of the minimum requirements, particularly in regard to work experience. The typical applicants for positions requiring “minimum five years experience” have seven or eight years of experience. Furthermore, they said approximately 300 people apply to each position — with 5,000 applying for 200 internship positions — so make sure the CV you submit is your best effort!

The day’s highlight was a panel featuring four speakers from various organizations within the UN. Lucas Black ’00 SIPA, who works in the MDG Carbon Facility, opened the panel and discussed his work trading carbon credits and supporting emission reduction projects with significant benefits to the Millennium Development Goals.

Dr. Manuel Escudero, from United Nations Global Compact, spoke about his experience and how much one has to believe in the mission of the organization to succeed. He noted that smarts and hard work are great, but that it is the ability to deliver results and creativity that separates the best employees from the mediocre ones at the UN.

Elizabeth Leff ’99 SIPA, who works in Human Resources (Planning), discussed her transition from consulting to development work in Thailand to finding a job at the UN. She stressed that it is critical to have experience in a developing country under one’s belt.

Matthew Hochbrueckner ’06, who works at the Office for the Coordination of Humanitarian Affairs (OCHA) underscored that point, saying that he would not have gotten the job at the UN had he not taken the time to work in Eastern Europe and the Balkans after business school.

The bottom line for MBAs who want to work at the UN?

1. Manage your expectations. It is very difficult to get a job and the recruitment process is very long and extremely competitive.
2. Leverage any contacts inside the organization and try to obtain a short-term contract. This way you can get your foot in the door and have the opportunity to demonstrate your value to the organization. Once you prove you are “UN material,” it will be easier to find other UN jobs and ask for a position in a country in which you are interested.
3. Take big risks. Apply for positions in danger zones like Sudan, Iraq or Afghanistan, for which there is a very short supply of candidates. A couple of years stationed in one of these countries could lead to a lifelong career at the UN.

Photo credit: Ashitaka San

The role of India’s central bank has been a mitigating factor for how the country has fared during the financial market meltdown, Professor Joseph Stiglitz told the audience at last week’s South Asian Business Association (SABA) conference, “India: Rising to the Challenge.”

In his afternoon keynote address, Stiglitz also refuted the theory of “decoupling” that suggested the economic crisis would not spread from the most developed economies to other parts of the world.

“The world has become so integrated that to have a downturn of the largest economy in the world, and one of this magnitude, has to have global repercussions,” he said.

However, Stiglitz pointed to the Indian central bank’s policies as lessening the financial blow to the country of more than 1 billion people.

“India was one of the countries that resisted the wholesale deregulation movement that the United States had been exporting,” Stiglitz said. “They did it against political pressure … and now I think the financial markets are thankful that they did resist those pressures. The result is that India’s financial markets are in better shape than they would have been if they had engaged in the kind of wholesale deregulation that the United States engaged in.”

While Stiglitz still expects India’s growth to be between 5.5 and 6 percent, he believes the country will feel a contraction in the amount of capital investments from developed countries and possibly from remittances, as well.

However, the news for India remains mostly positive.

“The two largest developing countries, India and China, are the least dark spots in this gloomy economic picture,” Stiglitz said. “The prospects for India are that it will continue to grow — strongly by historical standards — but that growth will be much slower than it was before the crisis, and much slower than many people would have hoped.”

Photo credit: Roy Sinai

Is the tale of Exubera — an inhalable form of insulin that Pfizer launched in 2006 and withdrew in 2007 after poor sales — a bellwhether for Big Pharma?

“It taught me that the organization lacked accountability and the willingness to make hard decisions,” Jeff Kindler, chairman and CEO of Pfizer, said in a recent address to students as part of the Silfen Leadership Series. “But we have made a lot of changes over the last two years and we’re dramatically different now. That’s why we are able to do the Wyeth deal.” (See post, “A Perspective on the Pfizer-Wyeth Merger.”)

In an hour-long lecture, Kindler, who came to Pfizer in 2002 from the McDonald’s Corporation and who has been in the company’s top post since 2006, discussed how Pfizer is changing its strategy to confront impending patent expirations and other value chain challenges, such as the company’s declining stock price and public opinion of leadership. He also discussed the company’s integration with Wyeth.

“Every element of the value chain had been severely challenged, and many people think the Big Pharma model is irreparably damaged,” he said. However, Kindler said that January’s merger with Wyeth represents a “terrific diversification” and a “big change in the blockbuster business model.”

Kindler said Pfizer is focused on six strategies: investing and focusing in areas of unmet need such as Alzheimer’s, oncology and inflammation; becoming a leader in biotherapeutics; having a larger presence in the area of vaccines; taking advantage of its position in developing markets where there is large unmet need; establishing more generic products; and strengthening other areas, such as animal health products.

“[The Wyeth acquisition] puts us in a position to advance every one of these strategies. When we’re complete, we will be extraordinarily diversified and able to operate across the whole health spectrum,” Kindler said.

Photo courtesy of Columbia Business School

On April 3, the Columbia Business School Energy Club in conjunction with the SIPA Energy Association held the 2009 Energy Symposium, “Imagining Tomorrow: Meeting Energy Demands in a Carbon-Constrained World.”

Dr. Ivan Marten, a senior partner and managing director at the Boston Consulting Group, gave the morning’s keynote address and asked three questions that directed the conversation throughout the day:

1. Are there enough resources to sustain current growth rates?
2. Do we have access to and security of these supplies?
3. What role can alternative energy and carbon sequestration play in the future global energy market?

The answers, Marten said, all depend on the price of oil. Currently, large international oil companies (IOCs) are still making significant capital expenditures in exploration and production, Marten said. However, national oil companies (NOCs) that dominate world reserves, are now short on income and are generally reducing investments in exploration and production.

According to Marten, this investment imbalance will lead to an imbalance in future supplies and thus result in a shift of power between IOCs and NOCs.

Marten also noted the reduction in investment extended to renewable forms of energy despite the current political commitment to sustainability. Although this commitment in the West will likely drive up production of renewable energy sources, Marten argued the overall impact on global emissions would be counterbalanced by the growing energy production and associated emissions from countries like China.

Other panels during the day-long symposium focused on the impact of a future carbon regulatory structure on the current energy market.

Speaking as part of the panel, “Coal: Then and Now,” Courtney Lowrance, vice president for Environmental and Social Risk Management at Citi Markets and Banking, said a major shift occurred in coal investment starting in 2006 when coal companies began facing problems with public perception and investment.

However, the panel’s consensus was that coal, despite the current concern over its emissions, is essential to meeting energy demands and will be included in the U.S.’s future energy portfolio. The panelists emphasized that in the future, the coal market will incorporate new technologies like carbon capture and sequestration (CCS) and integrated gasification plants with carbon capture (IGCC plants).

Joseph Strakey, chief technology officer of the National Energy and Technology Lab, and Klaus Lackner, a chaired professor of the Earth and Environmental Engineering Department at Columbia University, agreed that reducing coal-based emissions is possible with these technologies.

To provide evidence that CCS could be incorporated and its current price-for-capture could be reduced, Strakey pointed to the changes in the coal market during the 1970s that resulted from regulations on sulfur emissions.

Lackner stressed that the most difficult obstacle facing carbon sequestration is the regulatory issues associated with controlling an amount of carbon dioxide “roughly the size of Lake Michigan.”

Brian Ward, managing director and chief risk officer of GE Energy Financial Services, stressed the need for the energy industry to be involved in developing the new regulatory framework for carbon emissions in his afternoon keynote address.

Photo credit: nelgallan

Last November, I posted a rather negative view of the proposal to bail out General Motors (“Bail Out GM? No Way”). It wasn’t a good idea for a number of reasons, I said. Keeping the company going with government money is essentially a vote of confidence that the current management team — the one getting the bailout — can return the company to viability. Moreover, GM is a classic case of ‘permanent failure’ in which its importance to key stakeholders (employees, dealers, communities) keeps it going rather than its ability to create a customer.

Well, here we are, five months later, and what have we learned? For one, the shocking collapse in demand for cars has continued, affecting all car companies but particularly GM. Second, the restructuring plan submitted by GM — as we might have predicted — wasn’t far-reaching enough to have a sufficient impact. Finally, we learned that the folks in charge of bringing the company to its current state of non-viability were probably not going to be the ones to turn things around. These are just some of the surprises facing the taxpayers whose money is going toward the bailout.

So the CEO of GM has been asked to leave, and now reliable experts are saying that bankruptcy may be the only option for GM. The sad part is that dragging out the march toward what is looking like almost certain bankruptcy is chewing up even more resources, further weakening the company and undermining confidence in our system’s tools for addressing truly significant problems. Some of these wasted resources could have been used to buffer some of the painful social adjustment costs for those who will really suffer from a bankruptcy — GM’s employees.

Photo credit: vetcw3

Only days before the Indian Premier League is set to begin its month-long second season in South Africa, a different sort of cricket tournament concluded at Columbia Business School. Last night, Cluster C's Team 11 nabbed the winning spot in Case Competition 2009.

Sponsored by the Dean’s Office, the Chazen Institute, the Samberg Institute and Columbia Case Works, the event was Columbia Business School’s first ever case competition. The winning team was awarded a check for $2,400.

This term’s case, The Launch of the Indian Premier League, followed Lalit Modi as he endeavored to build a domestic cricket league in India. The league plays a new form of the game that lasts about three hours and which is more compatible with television. The league’s eight teams are based in Indian cities in a model similar to American professional sport leagues.

“Almost no one gave the new cricket league a chance when it was first conceived,” says case author Professor Rajeev Kohli about how he became interested in the story. “But not only was it successful, it became a phenomenon around the world. The case centers around why that is so.”

Kohli says there are three keys to IPL’s success:

1. The players: “There was great clarity in Modi’s mind that the first issue was the players. He created the right incentives for them so [joining the IPL] would be financially lucrative for every top player in the world.”
2. Securing broadcast rates: “The payment structure was based on a long-term (10 year) contracts with clauses for ratings. The broadcasters had the right incentives to take risks and to make the product right for a prime-time audience in a country where most households have a single televisions set.”
3. Glitter factor: “Once the [Bollywood] stars showed interest, the league became a very glamorous mix of cinema and sport. Suddenly all the industrialists said, ‘We want in, too.’”

“By providing the right incentives, structuring the broadcast rates and bringing in glamour, and attracting women and children into the audience, Modi was able to create demand,” explains Kohli.

How will this season’s South Africa location affect the league’s success? The IPL had to move the 2009 tournament out of India due to ongoing security concerns surrounding national elections.

“It is a disappointment, but in balance it is the best thing that could be done at this time and keeps the players safe,” says Kohli. “My hunch is that they won’t be much affected because it is a media event, and South Africa also has many cricket fans.”

Photo credit: SJ Jagadeesh

Want to have a hand in the success of Manchester United, the world’s preeminent soccer franchise? Forget traveling across the pond or even tuning your television to the next big match — all you have to do is pay your taxes.

The economic downturn has done what even David Beckham could not: transform professional soccer into an American institution.

Just take a look at the jersey of star center forward Wayne Rooney (pictured). In addition to the Manchester United logo and the Nike Swoosh, the famed red uniform prominently carries the logo of AIG, the insurance giant famous for paying out bonuses to its top executives after receiving a multi-billion dollar bailout from the U.S. government.

Now, Manchester United doesn’t put logos on its jerseys for free. AIG has to pay the team more than 56 million quid for the exposure, and it’s a good bet that those payments are continuing.

This means that U.S. taxpayers, like it or not, are financially supporting Manchester United — and thus have a stake in how well it performs this year.

So how is our team faring this year?

Just a few weeks ago, Man U sat proudly atop the English Premier League. But its once-significant lead in the standings has shrunk dramatically. On March 14, the team lost 4-1 at home to rival Liverpool. The following Saturday, Man U saw two of its players ejected in a 2-0 loss to Fulham, and later lost its number one ranking. On Sunday, playing without a suspended Rooney, Man U reclaimed a marginal lead in the standings by eking out a 3-2 thriller against Aston Villa.

Though the team’s recent struggles can hardly be blamed on its partnership with AIG, the situation does teach us a valuable lesson about the dangers of co-branding. Joining with a seemingly strong brand may improve a firm’s short-term fortunes. However, in this increasingly volatile world management should think very carefully before staking its company’s reputation on a relationship with a third party over which it has very little control.

But while things may look very challenging for Man U, the team still has a chance to win the English Premier League, the FA Cup and the European Champions League — in addition to the Club World Cup and the English League Carling Cup, which it has already pocketed.

A victory for Man U is a victory for the U.S. taxpayer — in spirit, at the very least — so let’s all give cheer for Manchester United, America’s Team. If we’re going to be backing them financially, let’s make sure we get our money’s worth.

Noel Capon is the R.C. Kopf Professor of International Marketing at Columbia Business School. He is author of Managing Global Accounts and The Marketing Mavens; his high-value, low-price marketing textbook, Managing Marketing in the 21st Century, is available at www.axcesscapon.com on a pay-what-you-think-it’s-worth basis.

Photo credit: toksuede

The fate of General Motors could mean tricky political business for Toyota, says Professor Hugh Patrick, faculty director of the Center on Japanese Economy and Business. Patrick is moderating a panel event tonight about the two automakers.

“The downsizing of GM opens economic opportunities for Toyota in the U.S. market, but it may also create serious political risks for Toyota’s market share, now a little under 20%, goes to 25% or 30%,” Patrick says. “Job creation is a major political as well as economic issue in the U.S., and there almost certainly will be various pressures on Toyota to assemble more vehicles in the U.S. and to purchase more parts and components in the U.S. — and to import fewer from Japan.”

William Holstein, author of Why GM Matters: Inside the Race to Transform an American Icon and panelist at tonight’s CJEB event, says the government’s recent actions have ignored the progress the company has made, such as absorbing lean manufacturing lessons from Toyota through the companies’ joint venture, NUMMI.

“Rick Wagoner was leading an ambitious restructuring plan at GM and there was very real chance that he was going to be successful in doing this by 2010,” Holstein says. “The Obama administration completely ignored the very substantial progress Wagoner had made with changing the cost structures of the company, changing its manufacturing process, revitalizing its car design and investing in the future of the lithium-ion battery.” (See Holstein’s related op-ed in the New York Times.)

As the government reportedly considers a Good GM/Bad GM plan, could Toyota itself be a contender to purchase a piece of the auto manufacturer?

“My guess is that Toyota will not be interested in purchasing GM or any significant part of it,” says Patrick. “Toyota’s cars already compete very well with GM’s in the U.S. market, and there might well be considerable political exposure for Toyota emanating from such purchases.”

The Center on Japanese Economy and Business presents “Two Behemoths in a Troubled Industry: Toyota and GM” tonight from 6:00 to 7:30 p.m.

Photo credit: Ahren D.

Throughout my time at the School, I really wanted to come up with The Next Great Idea. It didn’t come then, and I waited for the right opportunity to arrive. In 2007, I had the idea for ZocDoc, an online service to connect patients with doctors, and I quit my job to give all of my time and attention to the company. The challenges came right away. But so did the lessons.

The common attitude towards business school is that grades don’t matter. True as this may be, your reputation does. People need to know they can count on you. This served me well when we were looking for angels — half of ZocDoc’s angel investors were classmates of mine.

Though many people supported me in this venture, I definitely heard “This will never work” more than I cared to. But I pressed on. Healthcare is the largest sector of the U.S. economy, and it also happens to be plagued with problems. It was always my intention to fix one simple problem instead of trying to fix them all, and I think this is an effective way to succeed in the healthcare sector. Focus on one problem and do it better than anyone else.

With the nation’s current climate, I’m glad to be working in healthcare. It has always been a strong industry, and with the economy we have now, ZocDoc isn’t affected as much as other startups might be. People will always need to find a dentist or a doctor. Also, healthcare seems to be high on the Obama administration’s agenda, and we look forward to positioning ourselves as a leader in the changing landscape that surely lies ahead.

The future of healthcare in America is bright, and if you are interested in starting your business in this space, be patient with yourself. Wait for the right idea, and then go for it. All in.

This post is part of a special series celebrating the School’s Alumni Forever Week (March 30 through April 2).

Profile
Karen Kalina ’94
Director, Strategy and Portfolio Analysis, Siemens Real Estate

Tell us about your career path since getting your MBA.
Before Columbia Business School, I worked at the United Nations. I worked on various budgets, and that inspired me to go to business school. I knew there was some method I needed to find out. I also speak five languages, including Czech and German, so my dream was always to get over to Eastern Europe. After I graduated, I worked at State Street Bank and Trust in the global custody division and later their credit and risk management group, focusing on Europe and Eastern Europe. After leaving State Street, I moved to Prague to work in financial services with KPMG Consulting on bank privatizations and then to Credit Suisse Financial Services in mergers and acquisitions in Weisbaden, Germany. After the Internet bubble popped, I had been in Europe for six years and I made a decision to come back to the U.S. I looked for jobs through the School’s job BANC network. Through a fellow alum I found a position with Siemens.

What has the transition from financial services to corporate business been like?
I am now celebrating five years at Siemens. In financial services I was a three-year person, so that tells you something! You can shift internally in corporate business and it is more flexible than financial services, which calls for a very defined set of skills. Working in finance as a woman with two kids, I had to make trade-offs. I am believer of staying in the work force as a working mother, but I knew being in mergers and acquisitions, where I was on the road all the time, would be too much. When I missed my second child’s first steps, that was an eye opener.

What has been your experience as a woman in finance?
I’ve always thought that being a woman in finance was fantastic. There are less of us so we tend to stand out more. I think that was an advantage because you automatically got more visibility; I stood out because I wasn’t wearing a necktie. Once you’re in, how do you handle it? There are not a lot of people to meet in the bathroom. You find other women in external organizations and keep in touch with them.

Looking back at your Columbia Business School experience, what was your aha! moment?
I was having tough time with Introduction to Finance, but I also didn’t have trouble visiting my professors’ office hours. The obvious one was in Bruce Greenwald’s class. I went to his office hours and he looked me in the eye and he said, “Not only can you do this, you can be great at it!” That was a turning point for me. His confidence that, yeah, I could do it, really empowered me, as did the knowledge that he and many others would support me. I knew at that moment that this was really possible if wanted to do it. Up until then, I would have done marketing or international business. Finance changed my life. The other person who was an “aha!” is Laura Resnikoff. I took Turnaround Management with Laura when she was still a new professor. That class was very small; it took place over the summer and I was the only female student. She’s an amazing teacher and a tough cookie. She really challenged us and especially challenged me. But again, she gave me a real “You can do it” impression. Her class taught me that I liked not only finance but also the whole business and strategy. Every job I’ve had since State Street has contained strategy elements, and Laura’s course opened my eyes to that possibility.

What advice do you have for MBA or prospective MBA students?
Let go of incredibly high expectations. When I graduated in 1994 it wasn’t that great of a job market. If you don’t start at most spectacular place on planet, you’re still going to be okay. I never thought of working at a major corporation, but each one has a finance group and excellent training programs. It is also important to pursue the things you are inherently interested in. Look inside yourself for career advice, because that is important, wherever it might lead you. In finance, people can get trapped into a certain narrow way of thinking. The world is a lot bigger than New York City.

This post is part of a special series celebrating the School’s Alumni Forever Week (March 30 through April 2).

Profile
Stephano Kim ’03
President and Chief Operating Officer, [x+1]

Tell us about your career path since getting your MBA.
When I came to business school I really wanted to know what I didn’t know. A lot of my colleagues came for the networking or certification or career change, but I went to figure out what I wanted to round out in my skill set. I have a background in venture capital and entrepreneurship, but I knew my professional experience was lacking something. After graduation, I joined AOL’s business strategy and development team and helped turn them into a portal- and ad-driven business. In July 2006 I joined [x+1], where I am the president and COO. Our mission is to use data to make online advertising more effective. We have Fortune 500 brands that power their advertising through us to make it more targeted and efficient. In a time with increased focus on ROI, our story has become powerful.

Looking back at your CBS experience, what was your aha! moment?
My core classes validated and formalized what I already knew, but Professor David Juran’s modeling and stats classes were key for me. I realized I should have been an engineer! The data and the numbers speak for themselves, and they are the foundation of what we do. Juran is now on our advisory board and he is helping us with new product development.

In your field, what business trend or idea are you watching this year?
In media and marketing, there are a couple of key trends. First, the agencies are embracing digital. It has been a buzzword for the past 10 years, but as CEOs demand more ROI, agencies and their respective clients are forced to take a harder look at which channels are performing. When you dissect a $1 billion ad spend and look at where the chunks go — online, print, broadcast — you see that it is hard to measure the effectiveness of a television ad campaign and that the reach of newspaper and other print is falling off. So now it is about finding pockets of performance that can deliver the reach of TV with new platforms like mobile, where you can measure the ROI. While overall ad spend will decline this year, performance based online advertising will grow as the marketing mix shifts away from less effective and less measurable marketing channels.

What advice do you have for MBA or prospective MBA students?
Take a hard look at your skill set and see where you can leverage those while figuring out what other skills you need to develop. The roles within media and marketing have traditionally required very specific personality traits but with recent trends, those roles now require more business savvy people with well rounded skill sets. People who haven’t considered careers in media and marketing should take another look because their skills will be more and more relevant.

Photo courtesy of Stephano Kim

This post is part of a special series celebrating the School’s Alumni Forever Week (March 30 through April 2).

Profile
Robert Klein ’04
Vice President, MJC Associates LLC

Tell us about your career path
Prior to business school, I was at Goldman Sachs in Fixed Income Derivatives and Private Wealth Management. Upon graduation I worked at Reckson Associates Realty Corp. When Reckson was acquired by SL Green, I left and helped start a boutique investment bank focused on the real estate sector, MJC Associates LLC, and I have been there ever since. Last year we completed our largest deal, which was $1.7 billion.

Looking back at your CBS experience, what was your aha! moment?
Taking Real Estate Finance with Larry Raiman ’89 in 2003 was where I got my first exposure to real estate finance. He was a phenomenal teacher and I spent a lot of time with him, outside of class, discussing my thoughts on real estate. Leanne Lachman, who is an executive in residence, really helped me shape and define my career goals. Her guidance in conjunction with the rest of my experiences at the School gave me the framework and connections to execute my plan. It’s important to learn about real estate and to know about real estate companies, but it is crucial to have professors and faculty, such as Larry and Leanne, available to help you network.

As a business practitioner, where do you see opportunity this year?
There are a few places for opportunity. In the distressed side of the world, there are an abundance of companies with liquidity issues ranging from the capital structure of the companies all the way down to the performance of individual assets. The opportunity is to creatively match capital and distressed product. There is a lot of phantom capital right now and they key is knowing how to align yourself with real capital.

What advice do you have for MBA or prospective MBA students?
My advice, especially for folks in real estate or looking to get into it: be creative and really put yourself out there and meet as many people as possible. Jobs are few and far between, and because many firms are not using traditional sources of hiring, you have to be creative and figure out a way you can add value to a person or organization. You can’t rely on having an MBA to secure a position in this market. Your networking skills are crucial, and if you opitmize your student experience, it will define and separate you.

Photo courtesy of Robert Klein

This post is part of a special series celebrating the School’s Alumni Forever Week (March 30 through April 3).

Profile
Rob Torti ’07
Turnaround Consultant, AlixPartners LLC

Tell us about your career path.
Like every other former investment banker, I wanted to be in private equity. I pursued that but I learned it was a solitary job and that my real passion was for management, and that was something I was good at. After school, I took the summer off and traveled and then came back and looked for jobs at turnaround firms. I wish I could say that it was the result of having foresight, but realistically I liked the job description. The job entails a lot of finance, business analysis and strategy as well as some law; there is a huge management aspect where you get parachuted into a company and take a senior management role.

Looking back at your Columbia Business School experience, what was your aha! moment?
While I was in school my ideas changed dramatically. I took Turnaround Management with Gregory Rourke during the first semester of second year and that opened that whole world to me that I didn’t know that existed. I also took Professor Ralph Biggadike’s Top Management Process class. I really enjoyed the complexity of management, and I realized I had a passion for working with a lot of different people and solving complex problems.

In your industry, what trends are you watching and where is there opportunity?
I probably have a more doom-and-gloom view of the economy in the next two years than most. Having been an investment banker myself, I know that some of these companies just cannot survive. Given the distresses out there, I am looking at the end of 2010 for the economic recovery — and it won’t be a quick bounce back. If you see your company headed for a bad spell and think that bankruptcy will be a real possibility, rather than put everyone in bind at the eleventh hour, you need to get professional help. The bankruptcy process is not something to be feared; you have to embrace it. Don’t wait for a white dove to save you. There won’t be a huge turnaround.

What advice do you have for current or prospective MBA students?
Think of your career as a tree: move along the trunk and don’t jump to a branch too early. When you work for a distressed company, you are given more work and you learn so much more. If the company has a good management team and you are there to help them through the process and see the nuts and bolts at a unique time in their business, you will be successful. This climate allows you to learn at a magnified rate.

If you visit a McDonald’s in India, you might notice the Chicken Maharaja Mac on the menu. In Norway you might dine on a McLak, a grilled salmon burger with dill sauce. By decentralizing their decision making, multinational firms such as McDonald’s are able to create specialized products and better cater to local tastes.

But just how many specialized products should firms offer? Not that many, says Professor Catherine Thomas.

In a Columbia Ideas at Work article, Thomas explains why less might be more when it comes to offering localized varieties. “The benefit of being a multinational and having a brand is that a company can take advantage of economies of scale by producing the same product in bulk selling it everywhere, minimizing unit cost and increasing profits,” Thomas says. “But acting against that are differing market demands. So, if a company were to sell the same product range in each country, it may well lose brand-level market share.”

By employing some form of decentralized decision making, companies are better able to target the tastes of their customers. “An executive in the company headquarters in Brussels,” Thomas explains, “can’t make the best decisions on what to offer in various European markets because that person doesn’t know the local markets well enough to understand preferences.”

Using research on the sales of different varieties of laundry detergent across Europe, Thomas created a model to determine how sales were affected by replacing localized varieties with more standardized ones. She found that detergent manufacturers could produce far fewer varieties without diminishing profits.

Still, Thomas warns that firms should think twice before centralizing their decision making — it may result in having too few localized products on the shelves.

“Multinational consumer product firms operating in complex product markets should stick with some form of decentralized decision making as the best way to ensure their products are aligned with the local preferences of customers,” Thomas says. “But understand that a decentralized organizational design includes an inbuilt bias towards the manufacture of too many products.”

For more information on the dilemmas faced by multinational brands, as well as Thomas’s research, see “Too many products?” in Columbia Ideas at Work.

Photo credit: blmurch

The ongoing recent global economic collapse is so monstrous, so broad and so deep that it requires a big-picture explanation. This isn’t just about some stupid moves by mortgage brokers in California — how could that have such a vast impact on the global economy? It isn’t just about Wall Street greed — hasn’t Wall Street been greedy forever?

The underlying problem is deeper: For the past 25 years we have been over-consuming and over-borrowing to do it. The problem is debt itself.

Consider the ratio of household debt (all mortgage debt, credit cards, bank loans of all kinds) to the U.S. gross domestic product. This ratio rose steadily in the period after World War II until it stabilized at around 40% to 50% in the 1960s and 1970s. In the mid-1980s, it turned a corner and broke through 50%, hitting 60% in 1988 and 70% in 2000. It then accelerated all the way to 100% in the seven-year stretch from 2001 to 2007.

All that borrowing by individuals had a powerful stimulatory effect on the economy. Business sales grew, and production increased to meet improved demand. The result was an astonishing period of almost unbroken economic growth during the past 25 years.

But debt was growing faster than income, so the aggregate “credit ratio” of household debt to median household income steadily deteriorated. The problem, of course, was worst at the lowest end of the income spectrum. But the pattern of growing debt pervaded society. People maxed out credit cards and pulled the equity out of their houses. And most people stopped worrying about ever paying the debt back, since the abundant liquidity in our system made it seem that debt could always be rolled over and refinanced.

In short, more of our prosperity than we have been willing to admit has been driven by debt. At the global level we were in a huge financial imbalance, borrowing hundreds of billions per year from China and other countries so we could go on over-consuming. But debt-driven prosperity is an illusion, since debt must someday be repaid. That ugly fact remains hidden until the debt ratio gets very high.

Why don’t both borrowers and lenders see this in time to stop? Perhaps borrowers are shortsighted, and lenders are corrupted by large cash bonuses. These are both very likely true. But even if they were not, no one can say when the end will come, and it is in everyone’s interest to keep the party rolling. Consumers want to go on consuming, and banks want to go on making profits.

What finally brings the party to an end is when the banks begin to have funding problems. If a Bear Stearns or a Lehman Brothers starts to look dangerously over-extended, first a few funders will pull back, and then more will follow. The bank’s stock price begins to fall, and the price of insuring its borrowing begins to rise. Then its funding begins to dry up, and a financial crisis is at hand.

We have seen similar events happen in developing countries, most recently in the East Asian crisis of 1997 to 1998, but we never thought it could happen to us. Well, it just has. The current events are not at all like an ordinary business cycle; they are not a mere recession brought on by tight monetary policy or too many inventories. Rather, we are witnessing a systemic crisis, a joint collapse of financial prices, financial institutions and the real economy.

Have we ever seen a systemic crisis in the U.S.? Yes we have — in the 1930s. The data for household debt do not extend back that far, but there is a related series kept by the U.S. Commerce Department called “individual and noncorporate debt.” The ratio of that number to GDP rose rapidly from 55% in 1920 to a peak of 97% in 1932. The 1920s were also a boom time, but in retrospect, that too was debt-driven growth, and it ended in the systemic crisis known to us as the Great Depression.

There are of course many differences between our era and the 1930s. Among other things, government has become much more activist and is far more willing than it was in the 1930s to intervene to stop the slide. But does the government literally have the power to stop the slide? It can no doubt help at the margin, and it is certainly obliged politically to try everything it can. But merely spending money may have no more than a temporary effect. The essential problem is that people have too much debt, and that problem can only be solved by debt reduction.

How do you reduce debt? There are really only two ways: repay it or default on it. A renegotiation of terms is also possible — this is a blend of repaying and defaulting. Repayment of even some debt means that Americans must regain the habit of saving.

Our ratio of household saving to disposable personal income, which had been in the 8% to 10% range as recently as the 1990s, fell to nearly 0% by 2007 but has returned to about 5% in the fourth quarter of 2008. Saving means consuming less, and of course this hurts the economy. Default is happening too, and this clobbers the banks. But there is no way to reduce debt without harm. De-leveraging is as painful as borrowing is pleasant.

Government policies that are directed toward debt reduction, such as the administration’s latest program to promote mortgage debt renegotiation, are well focused. But the government is deeply misguided when it beats on the banks to “lend more”: The banks have lent too much already, and consumers have borrowed too much. If the name of the problem is too much debt, “lend more” hurts rather than helps.

We have met the enemy, as Pogo said, and he is us.

This article originally appeared on Forbes.com.

Photo credit: lemonjenny

Have you ever ripped off the lid of a pizza box to make an impromptu plate? With the Green Box, Jennifer Wright ’09 (EMBA) and her business partners at environmentally conscious organization, inc. (e.c.o.) have made the task a lot easier — changing the way we consume pizza, one box at a time.

Along with her two business partners, Wright — who is part of the Entrepreneurial Greenhouse Program Master Class led by Cliff Schorer, adjunct professor and entrepreneur in residence — created the box from 100% recycled material. The top of the Green Box breaks down into four serving plates, while the bottom converts to a small storage box — perfect for that slice you’re saving for tomorrow’s breakfast.

Wright’s e.c.o. partner William Walsh is the engineering whiz behind the new box. Walsh’s aha! moment, Wright says, came in college, when as a football player he consumed his fare share of slices — only to be left with a pile of leftover boxes. Walsh, who found the boxes too unwieldy for the recycling bin, realized that they could be broken down and put to use. They just needed to be perforated in the proper places.

Eight years later, the new box is patented and ready for buyers. “It’s our entrée product,” says Wright, who along with her partners at e.c.o. is busy developing other like-minded products.

Wright attributes a large part of the product’s early success to the Greenhouse Program.

“The program has been a fantastic experience for me,” she says. “It has provided the platform to go beyond the plan and actually further develop the business, as well as the access to potential clients that would be otherwise difficult to achieve. In addition, the guidance and support offered by Professors Schorer and [Brendan] Burns has been invaluable.”

Consumer spending typically falls during a recession, but does that mean that entrepreneurs have to wait until the economic clouds have passed to introduce new products?

Just the opposite, says Professor Amar Bhidé in a recent New York Times Room for Debate blog post. In a recession, Bhidé says, consumers are forced to reexamine their behavior — and it is in this “reshuffling of the deck” that entrepreneurial opportunities are born. Bhidé, author of The Venturesome Economy, points to the early 1980s as an example of how a changing economic landscape paved the way for many successful businesses:

About 20 years ago, I studied 100 founders of Inc. magazine’s 1989 list of the 500 fastest growing private companies in the U.S. Virtually all of them had started between 1981-83 in the midst of an awful recession.

But that didn’t prevent those founders from starting a new venture — in fact, in many ways it may have helped. Several had lost their jobs, so they weren’t risking steady employment — and they were able to hire employees who didn’t have great job prospects on the cheap. Landlords offered leases without asking too many questions about credit histories. Suppliers were willing to wait to be paid.

And even though the old economy and the rust belt was in a deep slump, the personal computer was taking off, and with it opportunities not only for new hardware and software makers but also for retailers, resellers and even magazine publishers.

Bhidé expands on the importance of consumers’ continual thirst for innovation in a recent op-ed published in the Wall Street Journal. He writes, “The venturesomeness of consumers has nourished unimaginable advances in our standard of living and created invaluable human capital that is often ignored.”

He cites the personal computer as a product whose success was driven by forward-looking consumers who, despite a challenging economic environment, were willing to change their purchasing behavior and adopt an innovative new product.

History suggests that Americans don’t shirk from venturesome consumption in hard times. The personal computer took off in the dark days of the early 1980s. I paid more than a fourth of my annual income to buy an IBM XT then — as did millions of others. Similarly, in spite of the Great Depression, the rapid increase in the use of new technologies made the 1930s a period of exceptional productivity growth. Today, sales of Apple’s iPhone continue to expand at double-digit rates. Low-income groups (in the $25,000 to $49,999 income segment) are showing the most rapid growth, with resourceful buyers using the latest models as their primary device for accessing the Internet.

The takeaway? Purchases of cars and other big-ticket items may be down, but consumers are still willing to pay for innovation — and that may be the ladder we need to climb out of this dark economic hole.

Photo credit: Fr3d

Economics may not always be the dismal science, after all.

In a recent article in Columbia Ideas at Work, Professor Paul Ingram writes that despite being “pummeled by measures of our decline” — such as stock indices, home values and unemployment rates — our overall level of happiness has remained high.

Ingram, along with doctoral student Xi Zou, surveyed more than 500 businesspeople — mostly employed young executives in New York and London “on the front lines of the financial crisis” — to gauge their level of happiness.

What Ingram and Zou found is somewhat surprising: since the crisis began, the happiness level of their respondents has remained relatively stable.

Can this really be possible?

“This may come as a shock to anyone who works in finance or knows people who do,” Ingram writes. “There is certainly more moping and doomsaying in this group than there was a year ago,” he acknowledges, “but negative moods are not the same thing as low life satisfaction.”

Ingram suggests that people “consistently underestimate their capacity to adjust to negative life and career events, and overestimate the impact those events will have on their happiness.”

In his research, Ingram noted the following trends:

• People disposed to comparing their position with others’ tend to be less satisfied with their lives.
• People who are vigilant about protecting what they have and value — whatever it is — tend to be happier than those not as concerned with losing what’s important to them.
• People in eager pursuit of some potential gain tend to be happier than those not focused on achieving a specific goal.

To read more about Professor Ingram’s research, see “How to be happy during the crisis” in Columbia Ideas at Work.

Photo credit: Pfala

At Friday’s community forum, Professors Paul Glasserman, Trevor Harris and Hitendra Wadhwa (pictured at right) held an open discussion with students about how best to move forward from the financial crisis. The forum covered economic issues ranging from risk management to accounting to the importance of not allowing the near-constant stream of negative news to affect your decision making.

Professor Glasserman began the event by speaking about capital requirements for banks as they relate to the banks’ risk management practices. He offered three main points:

1. Tightly linking capital requirements to risk can lead to dangerous procyclical behavior

   “When a bank’s assets start to look more risky [as a result of a downturn], it must hold more capital. How does it hold more capital? It cuts back on lending. So at the worst possible time, there’s an incentive — in fact, a requirement — for banks to cut back on lending.”

   To help prevent this, Glasserman suggested that banks take countercyclical measures, such as averaging out their risk over the business cycle. He also recommended that banks be required to hold additional capital in good times so that in down times there’s a buffer for them to draw on.

2. Banks should continue to bear the responsibility of regulating their own risk
   

   While it’s understandable that the recent trend of forcing banks to regulate their own risk has received a lot of criticism, Glasserman said, putting the burden back onto regulators might make matters worse.

   “If you go to an environment where the regulators are specifying a very precise set of rules, you’ve created an enormous incentive for banks to manufacture products that look low-risk by regulators’ standards but are in fact high-risk in all the ways the regulators haven’t anticipated. And that’s a large part of what’s led to the current crisis.”

3. Systemic risk must be factored into capital requirements
   

   “A traditional view of risk management says, ‘What harm can the market do to me?’” Glasserman said. “When you ask about systemic risk, you’re asking, ‘What harm can I do to the market?’ It’s a fundamentally different approach, and it’s not been part of the way capital standards have been set to date.”

Professor Harris referred to the situation described by Glasserman as a “classic accounting problem.”

Harris spoke about a critical flaw in the subprime mortgage-backed securities that are a big part of the crisis, is that all parties (originators, intermediaries, investors, rating agencies and auditors) lost sight of the underlying fundamentals of people who had borrowed more than they could afford.

“My whole view is that people have forgotten fundamentals, and they’ve created lots of quant-based analytics that actually have nothing to do with reality,” Harris said. “What that leads to in many cases is the illusion of precision. We have so many techniques, including valuation techniques, to come up with point estimates, and the reality is that there’s huge amounts of uncertainty going forward, and we have to deal with that.”

He concluded, “I view [the crisis] as a great opportunity to fix a lot of systemic problems. My biggest fear is that if we come back too quickly, we won’t actually address a lot of these issues. If we don’t deal with complexity and address these fundamentals, we will actually end up in a much worse situation.”

Professor Wadhwa said that while it’s easy to allow the near-constant stream of negative economic news to affect your mood, doing so can impair your ability to make critical decisions.

“[Maintaining a positive outlook] broadens your mind, making you more aware of the periphery of whatever it is you’re looking at. It makes you more mindful of a whole range of ideas.”

To support his position, Wadhwa cited research that demonstrated a link between the mood of physicians and their ability to properly diagnose patients.

To keep yourself in a positive state of mind, Wadhwa suggested taking the following steps:

1. Break the causal link between external events and your internal mood. Do this by injecting behaviors, such as displaying gratitude.
2. Use humor and body language to project a positive mood not only outward but also inward.
3. Turn adversity into transformational opportunities.

“Even with the constraints many of us face,” Wadhwa said, “there’s a potential for us to ask ourselves, ‘What is there within this that might be redemptive?’ By the fact that certain doors might have closed on us, we are forced out of our comfort zone to think anew about our skill set and interests and who we are.”

Photo courtesy of Columbia Business School

Note: The remarks of Professors Calomiris and Balachandran were made prior to AIG CEO Edward Liddy’s call yesterday for employees earning more than $100,000 a year to return at least half of their bonuses.

As anger on the Hill mounts over AIG’s use of bailout funds to pay executive bonuses, a debate has grown about how the bonuses fit into the firm’s contractual obligations. Professor Charles Calomiris discussed the matter in an interview with NPR’s Talk of the Nation on March 17 (listen to audio).

“A lot of these bonuses are being used to pay middle-level managers who have this coming as part of their contractual agreements with AIG. From what I understand … much of this money, if not all of it, is something AIG would like to get out of paying, but doesn’t see any way to do so. The remainder [is] the normal bonuses it feels it wants to pay to retain good people,” said Calomiris. “What we are seeing is a backlash of anger and that’s understandable — but anger is not what gets us out of this mess.”

He continued, “There is a strong economic argument for some bonuses, and I can’t judge without knowing more details what is warranted and what is not, but why are we so sure that the AIG CEO is wrong?”

Professor Sudhakar V. Balachandran said in a recent interview that it is not a matter of the company abrogating contracts but rather a situation in which executives could voluntarily defer bonus payment in order to restore public confidence.

“We’re missing a great opportunity here. If you think about the Great Depression, one thing we saw was that a set of business executives really stepped up to the plate to use their skills and their management capabilities to lead their country and their companies back out. They were voluntarily setting aside compensation that they contractually been awarded and entitled to said they would come to work for $1,” said Balachandran.

He continued, “Maybe the folks at AIG didn’t have to do anything that drastic, but wouldn’t it have been a great idea if they had said, ‘We know we are contractually allowed to take this, but why don’t we change this? We are willing to defer what we are entitled to.’ They could do this as an act of faith and take the bonus after the company has turned the corner and is able to pay back the government and taxpayers. Think about the amount of confidence it would restore to voters and taxpayers who feel helpless right now.”

Balachandran added, “This is the time for business to lead, not for business to sit there and say, ‘We’re contractually entitled, so this is what we do.’ We have to restore people’s confidence. The same thinking that got us into this mess isn’t going to get us out.”

Photo credit: Clarke Thomas

If you’re in the market to beef up your investment portfolio — and have the stomach to ride the Dow roller coaster — Andrew Ang, professor of finance, says to follow this checklist before you decide to buy or sell.

1) Know your risk tolerance
This seems obvious. If you’re very risk averse, don’t hold a lot of risky assets. Unfortunately, a lot of people have learned the hard way that they overestimated their risk tolerance. Equities fell in 2008 by a lot — around 50% worldwide. You need to be very comfortable with the proportion of risky asset holdings and then stick to this. Making adjustments to your portfolio right now by selling equities could be one of the biggest mistakes you can make. You don’t sell stocks when stock prices are really low and future-expected returns are very high.

2) Diversify widely
The large negative returns that have occurred in many asset classes doesn’t mean that diversification has failed. In fact, it’s quite the contrary. If, like James Barrow, you bought 10% of Bear Stearns in 2007, you would have lost close to everything. He would have been much better off buying the S&P 500. Similarly, if your employer allows you to buy company stock, don't build up a large position. Your salary comes from that firm, and you add to that risk by having savings in that same firm. Buy the S&P 500 or something else instead. Diversification means not bearing the specific risk of an individual firm. Diversification also means recognizing your investment property in the Hamptons looks a lot like your equity portfolio.

You want to diversify widely. Hold many different asset classes. In 2008, Treasuries were one of the few asset classes to increase in value. If you didn’t hold them, you missed out. Note that diversification doesn’t mean that owning many different asset classes will shield you from many of those asset classes having simultaneous downturns, which we’ve seen over the last few months. Diversification doesn’t guarantee this. If you’re uncomfortable bearing risk, see (1).

3) Rebalance regularly
Every year, or at some regular interval, rebalance your portfolio. Suppose you hold 60/40 equities and bonds. At the end of the year, if equities increase relative to bonds, you sell equity to buy bonds. After 2008, you bravely buy equities and sell bonds. Rebalancing is inherently contrarian. You buy assets with declines in prices and pare back your exposure to assets with increases in prices. An investor doing this from 2001 to 2007 would have sold equities and bought bonds almost every year. If you didn’t do this, your portfolio by the end of 2007 would be heavily weighted into equity and you would be bearing enormous equity risk. Rebalancing tempers that risk and makes sure you are bearing only as much exposure to risky assets as you can tolerate.

4) Save, save and save
There is no such thing as a free lunch. High returns only come with high risk. For saving towards retirement, you must save, save and then save some more.

5) Keep your costs to a minimum
Avoid active mutual funds and other active management like the plague. The average active mutual fund loses money. Hold index funds instead. Keep things simple. Structured assets simply chop up positions of underlying assets with leverage and charge you a lot of money. Minimizing costs means you get to reinvest more and that means more money for you at the end.

Photo credit: Bill S.

When Jackie Endriss Oberoi ’04 arrived at Columbia Business School in the fall of 2002, she knew she wanted to move from human resource consulting into finance. She accomplished the career transition and is now an associate director and credit analyst with Standard & Poor’s. Public Offering spoke with her about the unexpected perks of working in industry finance.

What has been your path since graduation?
I took advantage of the School’s internship program and came to Standard & Poor’s in the summer of 2003. I came back to S&P after graduation. I have changed roles within the company — I am now in corporate ratings and rating retail companies. Even though I have stayed with the same company, changing positions has allowed my career to stay fresh.

How has your MBA experience shaped where you are today?
I came to CBS as a career-changer. I was in human resources consulting and had no financial background when I came to the School, but I knew I wanted to do something more quantitative. The finance classes were quite strong; I was impressed with the finance and capital markets courses in my second year, when I focused my studies. The excellent faculty and high quality of the students made the courses more discussion-oriented than lecture-oriented and contributed to the overall experience.

What helped you make the career change?
The key is parlaying your skills from your former industry into a new one. For me, I focused on how my presentation and communication skills were relevant to a career in finance. In this economy, people really have to push their strengths from their former career and explain how they can be applied.

Now that you are working in finance, have your expectations been met? What has been totally unexpected?
My expectations coming into S&P were met fully — this company is very transparent. I have found a challenging work environment with interesting people and a daily schedule that lacks monotony. There is a lot of flexibility in my career. With telecommuting and flexible hours, I was able to take a six-month maternity leave. Most nights, I can leave at 5:30 p.m. I can spend time with my family and excel at my job at the same time. That was unexpected. S&P is very family-friendly.

Where are the opportunities for people just starting their careers in finance?
My advice is to broaden your expectations — think about doing finance in industry or in-house and then you can move to an investment bank when the economy improves. This doesn’t just apply to students, but also to people who have lost their jobs.

What’s your advice to current MBA students?
Lean heavily on your network of other students. Build your network while you are at the School. You can learn so much from other students, so learn everything you can from the people you’re in contact with. The people you work with after you leave the School might not be as interesting and as diverse.

This column is part of our Next Steps series, which profiles alumni in their first five years after Columbia Business School. Do you know someone we should write about? Let us know about other candidates.

Photo courtesy of Jackie Endriss Oberoi

With the economy sputtering, many are looking to a government-funded expansion of our broadband networks to spur a recovery. The recently-passed economic stimulus package allocated $7.2 billion for projects to expand broadband, including bringing service into rural areas. But will increasing our nation’s Internet connectivity create jobs and promote economic growth?

Yes and no, says Raul Katz, adjunct senior research scholar in finance and economics and the director of business strategy research for the Columbia Institute for Tele-Information (CITI). Katz recently spoke about the impact of the expansion at a conference cosponsored by CITI and Georgetown’s McDonough School of Business.

He says that while physically expanding the networks will undoubtedly create jobs, “the most difficult part is determining the jobs that will be generated as a result of network externalities (e.g. the innovation effect, the productivity impact). The research in this area is very embryonic.”

Katz also cautions those looking for a quick pop in economic growth.

“Economists have determined that in order to profit from information and communication technologies, firms have to modify their production processes and organization to adapt them to the new technology,” he says. Katz estimates the timetable for changes in business processes, training and exploration of new applications to be two to three years.

Additionally, Katz says that people receiving broadband access by way of the expansion might be less likely to take advantage of the technology’s benefits than earlier adopters.

And just as the expansion may create new jobs, it will destroy others. New technologies focused on efficiency often leave some professions obsolete. A New York Times article on the subject refers to this as the “John Henry Effect.”

“Productivity enhancement that is not compensated by business expansion necessarily has to lead to job destruction,” says Katz. “If new services/businesses are not developed by firms having a productivity dividend out of broadband, jobs will be eliminated.” The sector most likely to be affected by this trend, Katz says, are professional services, which are information intensive.

There’s also the risk of increased outsourcing, which Katz’s research (PDF) suggests is a likely result of the expansion.

Katz recommends that the following steps be taken to ensure that the U.S. gets the most bang for its broadband buck:

• Provide incentives to companies likely to outsource services to help keep jobs in the region
• Enact job creation programs that include relocation of businesses in the areas where broadband is deployed
• Promote business innovation that can lead to the creation of new services by the firms benefiting from broadband-induced productivity effects
• Train the workforce and entrepreneurs take advantage of the newly deployed broadband infrastructure

Mark-to-market currently requires banks to reprice their balance sheet assets each day based on the assets’ open-market value. Banks claim that the rule is forcing them to unfairly mark down the value of their assets, such as their mortgage-backed securities. Supporters of mark-to-market say that it creates more transparency.

While some investors are putting a bullish spin on the news of the possible rule adjustments, Floyd Norris ’83 has a much more skeptical view. In his Friday column in the New York Times, Norris writes, “Sadly, a victory for the bankers would not help them much. Even if it were true that banks would be held in higher regard now if they had not been forced to write down the value of their bad assets — and that is, at best, debatable — changing the rules now would be counterproductive. Would you trust banks more? Would other banks be more inclined to trust banks?”

In an interview earlier this week, Warren Buffett ’51 came out in favor of suspending the mark-to-market accounting for regulatory capital purposes.

Appearing on CNBC’s The Kudlow Report on Wednesday, Senior Vice Dean Chris Mayer offered his thoughts on the issue. “The problem is, ‘What are the write-downs that are still sitting in the system?’ The continued critique of mark-to-market is that the current values are just based on illiquidity and they’re low. But we have not seen the bottom of the economy, so I don’t know how anyone can say the values are too low.”

Did you “Elf Yourself” last holiday season? OfficeMax’s seasonal marketing campaign featured a viral Web component which allowed customers to superimpose an image of their own face on an animated dancing elf. According to Internet tracking service comScore, more than 17 million people visited the Elf Yourself Web site during the 2007 holiday season. But did all of those unique visitors translate into increased sales? The answer is not really: the company’s reported total sales in Q4 2007 were down 2.6%. The economy’s slide hasn’t helped either; in 2008, OfficeMax reported that its 2008 Q4 earnings were down more than 14%.

Ava Seave, an adjunct associate professor in Finance and Economics, recently blogged about the correlation between viral marketing success and sales totals. Seave suggests that marketers examine traditional metrics to gauge the success of their campaigns. She writes:

Viral marketing can decrease acquisition costs for new customers because your current customers essentially endorse your product when they send along a game or video they think is funny or interesting, and, of course, is associated with your product.

However, the acquisition cost calculation needs to be done over time, since a viral marketing campaign almost never leads to direct sales from that game or video viewing. The right goals for a viral campaign should be a lot more old school: Does this campaign generate leads and does it help with brand recognition?

Judging a viral campaign’s success for lead generation is straight forward — count the number of the leads that close and judge the quality — i.e. total revenue — of the new customers. To count, how many leads land on the registration form and actually fill in the information, and how many abandon? What percentage of leads make a transaction? What is the cost of the lead and the cost of the order?

Compare these statistics to all your other sources, naturally. Does this campaign help with brand recognition is a harder question to pull out a quantitative answer. You can point to the number of downloads or pass-alongs as new exposures to your brand, and we assume exposure will lead to recognition. You also could look at what terms are put into search engines that lead to your site and determine if this indicates the effectiveness of the campaign.

Photo credit: Judy Baxter

How can marketers adapt to this challenging economic climate? Professor Don Sexton offers three keys to success.

Do not use an axe to make cuts
In a down economy, the worst thing you can do is make across-the-board cuts. If you go in with in axe, you will most likely make some real mistakes. Think more carefully where your outlays are. How do you determine what you get back from marketing expenditures? You must first understand the long-term value of your customers to you and the costs involved with finding and keeping them. If you go by your gut you will have a problem. This applies to which type of media to use, such as deciding between social media and more traditional types of media, and to whom you direct your marketing efforts.

Help your customers find value
Don’t just say “we feel your pain.” Think about what you can do to help and find ways to partner with your customers. For example, I recently heard about an auto dealership that will give you a loaner if you need to get to a job interview. It’s not a major outlay for the dealership but it shows they care about their customers. The point is not just the thought but the action behind it. What you do with your customers now will affect your performance in the future.

Marketers must also rethink how to delight customers. You want to satisfy customers but make sure the balance between costs and value is correct. Don’t cut costs so much that you are pulling down value to the customer more than any costs you save and don’t add value so much that your costs increase more than the additional value you are providing. We call this “value engineering.”

Perceiving is believing
Marketers need to be more transparent to consumers. For example, even if the $400 million that Citigroup reportedly spent on the naming rights for the new Mets ballpark is a good idea — and that is debatable — Citi still must consider how people will perceive that expenditure. Someone unfamiliar with how branding works and why such a move might make sense may wonder why their taxes (via bailout money) and fees/interest they pay the bank are being used to put a name on a stadium instead of helping them. That kind of perception can have a negative impact. No company is immune to such scrutiny. These days marketing actions are public and will be discussed. Companies should be sure that people are going to understand the motivation behind its actions. They really have to think about what signals they are sending with every marketing action they take.

Don Sexton is the author of Marketing 101, Branding 101 and Value Above Cost: Driving Superior Financial Performance with CVA®, the Most Important Metric You’ve Never Used.

Photo credit: Harlem Lands

Merck announced yesterday that it is acquiring Schering-Plough in a stock and cash deal valued at approximately $41 billion. The move follows Pfizer’s announcement in January that it will acquire Wyeth in a $68 billion deal (see blog post “Perspective on the Pfizer-Wyeth Merger”).

The rationales behind these acquisitions are similar. Both Pfizer and Merck are reacting to the industry’s perceived overcapacity on a global basis and are seeking to broaden their technology platforms. The companies each face slowing revenue growth as a result of the unique life cycle of prescription drugs (where sales of a major product can vanish in a matter of months upon patent expiration) and a downturn in the number of new drug approvals. Lastly, Pfizer and Merck see their respective horizontal mergers as significant opportunities for cost savings.

For Merck, the acquisition of Schering-Plough broadens its product line, research pipeline and technology platform (e.g., biologics) and creates a larger base so that no single product has a material impact on the company’s earnings or infrastructure. The acquisition will also allow Merck to “smooth” earnings post 2010 when the patents on two of its main drugs, Cozaar and Singular, expire. In addition, Merck can consolidate the joint venture it has with Schering around blockbuster cholesterol-lowering drugs Vytorin and Zetia for more effective decision making.

The transaction raises a number of questions, however. First, there is an inherent integration risk complicated by Merck’s relative lack of experience in orchestrating these large transactions and the ongoing integration of Schering’s earlier acquisition of Organon. Merck is also betting on the strength of Schering’s research and technology platform and promise of its pipeline. There also may be questions involving Schering’s arrangement with Johnson & Johnson around Remicade and its follow-on a rheumatoid arthritis drug (hence the rationale for the reverse merger) — plus there is growing competition in that category. The ability for Merck to reignite growth of the Vytorin/Zetia franchise also will be a challenge. Lastly, the new combined entity remains reliant on the global prescription drug sector that faces increased challenges and threats.

Bottom line: the deal can be viewed as a logical response to an industry that has overcapacity, unique (and now shorter) product life cycles, and slowing top-line growth. Merck and Schering-Plough have largely complementary therapeutic and product portfolios and technology platforms, and have been working together for years through the Vytorin/Zetia joint venture. The key questions relate to execution risk, i.e., Merck’s ability to integrate without major disruptions to its business, and whether this transaction will materially improve Merck’s longer-term growth prospects.

However, the transaction shows Merck management is willing to take bold action in seeking to strengthen the company in the face of an increasingly challenging and competitive environment.

Photo courtesy of Schering-Plough

Last August I talked about the actions Big Pharma may take to address its slowing top-line growth and the upcoming slew of major drugs facing patent expiration in the next several years. A “horizontal merger” was one option discussed, and yesterday Pfizer proceeded with that strategy with its $68 billion acquisition of Wyeth. So why did Pfizer pursue this strategy, and will it encourage other Big Pharma players to pursue a similar approach?

One contributing factor to Pfizer’s deal with Wyeth is the company’s impending loss of patent exclusivity for its blockbuster drug Lipitor in 2011. Lipitor had $12 billion in sales last year, amounting to 25% of Pfizer’s total sales. However, Pfizer is also keenly interested in gaining access to Wyeth’s long-established biologics expertise and portfolio (Pfizer did not have critical mass in this area), its promising (albeit risky) experimental Alzheimer’s drug, as well as its vaccines franchise, consumer healthcare business and animal health franchise. The deal broadens Pfizer’s portfolio and provides added flexibility in managing earnings over the next five years.

However, the deal is unlikely to contribute to top-line growth in the near term for several reasons. Wyeth has its own patent expiration issues over the next three years, and large pharma mergers are inherently disruptive, particularly to R&D divisions, which are the lifeblood of these companies. The acquisition premium Pfizer paid (approximately 30% over last week’s price) will require Pfizer to be very aggressive in cost-cutting to make the deal accretive to earnings by year two, and that may exacerbate the organizational disruption. Pfizer announced it was cutting its dividend in half to help finance the acquisition (one of the reasons investors previously held Pfizer shares was its high dividend yield).

Will we see other Big Pharma mergers in the near term? Well, virtually every company is considering the possibility, however, challenges remain for other deals, including pricing, financing, social issues (such as who will run the combined entity), antitrust and expected market reaction. Two of the major players are already tied up in other large transactions: Roche’s bid for the remaining shares of Genentech that it does not already own, and Novartis’s two-step acquisition of a controlling interest in Alcon. It is doubtful that the Pfizer deal materially changes the competitive dynamics in the industry. Other Big Pharma players must consider their own internal capabilities and growth prospects and determine whether it is worth taking on the inherent risks of a large pharma merger in today’s competitive economic environment.

Photo credit: Dan Buczynski

Weaving personal growth into professional success was one of the main themes at this year’s annual Columbia Women in Business (CWIB) conference held on February 20. The conference brought hundreds of alumnae and professional women together for more than a dozen panels.

“We are entering a phase where we are delving into much deeper civic engagement,” said Paula Kerger, CEO of PBS, in her keynote address. “It’s important to get outside your work experience to get perspective. Engage with your relationships, family, life and community.”

The day’s panels addressed the work-life matrix through different lenses, including Wall Street, corporate social responsibility and all-female industries.

Across the panels several common threads emerged. Good relationships — both in and out of the office — are key to success; the definition of success is constantly evolving; and the importance for women to develop specific skill sets.

“I realized how important it’s been to have partners in other parts of the bank,” said panelist Chandra Metzler, a director at Deutsche Bank, when speaking about how the banking crisis has impacted her job. “It’s been important to have people to talk to because you have already-established relationships.”

That theme was also discussed in the “Creating Champions and Allies” panel, in which participants advocated a 360-degree approach to developing allies, encouraging the attendees to “champion above, down and around.”

On the subject of networking and career development, Merle Duskin Kailas, executive director of the Samuel Waxman Cancer Research Foundation, advised the audience, “Develop a skill set early in your career. Always remain on the credit-side of every equation.”

Where can career seekers find opportunity? Lisa Carnoy CC ’89, managing director and head of global equity capital markets at Bank of America, told audience members at the “Banking in High Heels” panel that it is still an opportune time to begin a career in finance.

“It is a fantastic time to join banking,” Carnoy said. “You will be pulled up faster on the upside — which will inevitably be more extreme the next time — than if you joined in a more robust period. It takes guts and long-term perspective.”

Photo courtesy of PBS/Columbia Women in Business

Believe it or not, engineers have emotions just like everyone else. I know this because I used to be one — in the car industry, at that. Before going to Columbia Business School, I spent seven years working at Ricardo, one of the world’s leading automotive engineering and management consultancies. After graduation, I founded rightpedal, an automotive social media site for Generation Y. While it is difficult to say what makes an engineer tick, one thing is true of the people who make the world’s machinery: they love a challenge.

This is why the news that troubled giant General Motors was shutting down its High Performance Vehicles division — responsible for cars like the Chevrolet Cobalt and V-Series Cadillacs — came as a blow not only to engineers in the car industry but many car enthusiasts, as well. While the shuttering of a small division responsible for a negligible number of cars seems like minor news against the backdrop of a much deeper crisis, it this kind of act that will have a major psychological and symbolic impact on the car industry.

Nothing gets automotive engineers quite as excited as a project with a purpose. One such project is what I like to call a “halo car,” an automobile designed to rejuvenate a company’s morale and, in turn, its overall product line. With halo cars, engineers are asked to outdo themselves creatively and intellectually. While halo cars aren’t always supercars, it’s often the case.

Creating high-performance cars allows engineers to have fun and think back to when they used to peer up at that poster of a red Lamborghini and dream of one day being close to one. Almost invariably, these halo cars end up being special and historic machines; the original Dodge Viper was concurrent with a brief but confident era for Chrysler, when even its minivans and LH-platform cars were lauded by the automotive press for their innovative design and engineering.

The loss is more than just esoteric or emotional. High-performance cars are crucial to the advancement of technology. Given that these automobiles are usually low-volume and premium-priced, their manufacturers briefly become less risk-averse, and willing to experiment with new and expensive technologies that may some day find their way into regular passenger cars.

Take, for instance, the VTEC system that is today found in many Hondas. The variable valve-timing system, which allows Honda engines to perform more efficiently across their operation range, was first tested in Honda’s brutally successful Formula 1 racing engines and then put into production in the cult classic Acura NSX supercar. The Acura NSX was the first production car in history to feature a full aluminum chassis. While it never sold considerably well due to its exorbitant price, the NSX did change Honda forever.

In a day and age when cars are under attack for ruining the environment and “green” is the socially hip moniker du jour, let us take a moment to remember supercars and their importance in the annals of automotive engineering. If inspirational projects are quashed within R&D centers around the world, innovation itself might be in peril.

Photo courtesy of Hootan Mahallati

The New York Times (and others) reported on Tuesday that Morgan Stanley’s real estate man in Shanghai has come under investigation for giving gifts and cash to government officials in order to get in on choice deals in China, likely in violation of the U.S. Foreign Corrupt Practices Act (FCPA).

The Morgan Stanley head office has taken the view that this was the rogue act of a rogue individual, and an internal investigation revealed that “questionable activity was isolated to a discrete set of real estate transactions in China.” This is an unfortunate — yet all too common — reaction to revelations of corporate misdeeds.

Bribery and corruption are global problems that, at least from the perspective of countries like the U.S., remain safely hidden from view. Garth Peterson was a blue chip banker from a blue chip firm, yet anyone involved in land deals in China surely won't be surprised that he was involved in illicit payments to politicians and bureaucrats.

When evidence of pay-offs or favor-seeking surface in such organizations, many of which have explicit public anti-corruption stances, it is seen as a pathological deviation from the legal conduct of business.

Yet Peterson was most likely a typical banker put in a situation where bribe-paying was very literally the norm. Before its company-wide corruption scandal made global headlines, Siemens was an average company bidding on contracts in corrupt countries — rather than a corporation with a rotten culture.

Labeling individuals like Peterson or companies like Siemens as unprincipled exceptions shoves under the rug the deeper problem: informal rules that dictate global commerce. As long as the conversation focuses on catching deviants, we’ll never have an open dialog on changing the norms that bear much of the responsibility.

There is also the need for those higher up in the chain of command to accept responsibility. Local managers are often given conflicting messages. They’re rewarded first and foremost for making big bucks for the company. (It’s interesting to note that Peterson's monkey business only came to light after China’s real estate market went sour.) Of course, this directive may be accompanied by warnings to stay on the right side of laws like the FCPA and to adhere to a corporate code of conduct, but it’s often with a wink and a nudge. The message: do what you can within the confines of the law to maximize profits.

Yet given legal ambiguity combined with innate human ability to rationalize anything from stealing office pens to Enron-style fraud, it’s not surprising that expediency and the lure of promotion or profits rule the day.

What’s to be done? There are certainly efforts underway to change global business culture. One particularly noteworthy example is the Partnering Against Corruption Initiative (PACI) spearheaded by Mark Pieth and the World Economic Forum. PACI focuses specifically on changing the “cultural equilibrium” of business practice by attracting a large number of CEOs to sign on to a public declaration of personal anti-corruption pledge. Shifting the equilibrium will be a difficult process; there will always be “rogue” corporations that are willing to undercut the honest conduct of business. Yet it’s hard to imagine we'll get very far in affecting change unless we can start with an honest conversation.

This article originally appeared on Forbes.com.

Photo credit: theCarol

New debate over protectionism has emerged in the past week about a clause in the stimulus bill that stipulates that firms building public works must “buy American.” The language has now been softened to comply more consistently with U.S. trade obligations. The irony in the situation is that proponents of the bill, such as many U.S. steel companies, don’t want to be forced to buy their own inputs from only U.S. companies. They know this could raise their cost substantially and that American consumers and firms may not want to pay for that. However, even with new qualifiers, there is still potential for the clause to endanger global recovery in several ways.

1. It violates international trade obligations
This is a violation of the United States’ international treaty obligations as both a member of the World Trade Organization and as a member of bilateral/regional trade agreements such as NAFTA. A fundamental principle of the WTO obligations is “national treatment,” meaning that foreign- and domestic-made products receive the same treatment. When all countries participate, consumers and firms enjoy the benefit of lowest possible costs. This is the principle that the United States — a long-time champion of taking down trade barriers — has been pushing for the last six decades. The United States often accuses other countries, such as China, for not living up to their WTO obligations and for having protectionist policies. But the “buy American” clause does exactly what U.S. has asked other countries not to do.

2. As others may follow suit, this could be self-defeating
Other countries may feel justified to enact their own protectionist measures, following the U.S. example. As a result, American firms such as GE and Caterpillar will be able to sell fewer American-made products in other markets, and that will cost the U.S. more jobs than the stimulus package can save.

3. It opens the door for WTO cases against the U.S.
Not only could the clause itself could be the basis for a WTO case against the United States, it may also lead other countries to challenge the financial sector bailout package that the Obama administration is still designing and expanding. Why? At the moment, no country has challenged the United States for its bailout packages, such as TARP, which are separate from the stimulus package and designed to help its troubled financial institutions. However, other countries might argue that these bailout packages effectively offer government subsidies to the cost of capital for U.S. manufacturing firms, giving U.S. exporting firms an unfair advantage in the world market. This is the sort of thing — launching a WTO case — that the U.S. trade representative often threatens to China, charging that Beijing’s majority state-owned banks are subsidizing the cost of capital for its exporting firms.

The European Union and Japan may not launch such a WTO case as they are also buying non-performing bank assets at an above-the-market price. Others may be willing to give the United States some breathing room to sort out the financial mess. But there are some major trading partners who do not have the same kind of banking-sector problems, such as China, India and Brazil, and their inhibition to launch a case against the United States may be removed if they see that Washington is making some protectionist maneuvers.

4. It undermines broad foreign policy objectives in the long term
The United States prides itself as a nation of principles; it is also looked up to for its ideals as least as much as for its military supremacy (or so we would like to think). This clause will undermine the six decades of U.S. leadership in the global economy, especially in the area of multilateral trade liberalization. If the clause becomes law, it will encourage a cynical perception by other countries that there is a gap between the Americans’ lofty words and selfish deeds. This cynicism could spill over to non-economic spheres, undermining U.S. foreign policy objectives more broadly.

Photo credit: Vards Uzvards

Could the power of the crowd soon rival corporations’ ability to organize labor? Jeff Howe, author of Crowdsourcing and writer for WIRED magazine, says it is possible. Howe is speaking at today’s BRITE conference. (Read Howe’s blog; see Public Offering’s live Twitter feed of the BRITE conference.)

The practice of crowdsourcing is simple: an organically-formed community of people use their spare cycles to produce content or solve tasks. “Whether or not [crowdsourcing] will be a model of economic production that occupies space like outsourcing or a long-term permanent alternative to traditional methods of labor acquisition remains to be seen,” Howe said in a recent interview. “I hypothesize we will see the community begin to rival the corporation as a way of organizing labor.”

If the phenomenon is poised to become a serious segment of economic production in the near future, how broadly can the trend be applied?

Already, crowdsourcing has migrated from areas such as open source software to graphic design and stock photography to spot news. One collaborative project referred to as the Eco Team translates the Economist into Chinese each week. Crowdsourcing’s tentacles have also reached into the world of finance through peer-to-peer lenders such as Prosper.com.

The trickiest application, however, is in its use of monitoring — new projects are harnessing the crowd by acting as a kind of universal Big Brother. On the bright side, new efforts such as the Herdict Web project usher in a new type of group-generated transparency to the flow of information. However, the application of crowdsourcing gets decidedly more complicated when it ventures into such areas as patrolling borders (see the Texas Border Sheriff’s Coalition).

As the applications continue to play out in multiple arenas, there remains a constant: the potential labor pool is ever increasing.

“One thing that is safe to say is that the economic downturn is adding fuel to the fire because crowdsourcing tends to be cheaper and more affordable than [traditional] hiring,” Howe said. “Crowdsourcing is based on people’s spare cycles, and as spare cycles increase, the size of labor force as measured in labor hours will increase.”

Photo credit: James Cridland

Over the last two weeks, international students and foreign nationals working in the United States under H-1B visas have been forced to grapple with a new reality: under a provision in President Obama’s recently passed stimulus package, they may not be able to continue working in the U.S. (View a list of H-1B employers in 2008.)

The provision, which calls for limits on hiring H-1B visa holders, affects firms that have accepted TARP funds. Major TARP recipients include Citigroup, Bank of America, AIG, JPMorgan Chase, American Express and Goldman Sachs among others. (View the compete list of TARP recipients.)

In response, Dean Glenn Hubbard has written letters to Treasury Secretary Timothy Geithner and National Economic Council head Larry Summers to express deep concern over the provision and how it will be implemented.

“This is absolutely terrible,” the dean told students in a town hall meeting last Thursday. “It gives an advantage to international institutions over American institutions,” he said. The dean did sound a note of optimism, saying, “I believe [the problem] will get fixed.”

It is still unclear how the provision will affect students looking to enter the workforce. Thomas Monaco, director of international advising and outreach, says that recruiters have not yet indicated any changes in their strategies. The School’s Career Management Center is in contact with all of its recruiters and peer schools to continue to monitor developments.

“Many of our recruiters are still translating the legislation,” Monaco says. “Right now it is very much a wait and see situation.”

International students comprise approximately one-third of the class of 2009. Some of those with student visas can stay in the United States for one year after graduation for optional practical training. However, workers who need or have H-1B visas still face some uncertainties.

“The School is doing everything possible to act as advocates where we can and stay abreast of developments as they occur,” says Monaco.

The provision has generated concern throughout financial and academic communities alike. Last month at a conference organized by the Council on Foreign Relations, Columbia professor and economist Jagdish Bhagwati commented on the loss in talent that will occur if the provision is upheld. “In terms of broader considerations like the people who are coming in on H-1B visas,” Bhagwati said, “they’re frequently highly trained and talented people … a lot of our progress and prosperity depend on having such people.”

Photo credit: Columbia Business School

It’s a common situation: a Hollywood blockbuster, panned by critics, racks up huge box office sales while a critical darling struggles to find an audience. But is this disparity the result of the considerable marketing and promotional backing these blockbusters, or do average moviegoers simply have bad taste?

According to research by Professor Morris Holbrook, the answer is the former. In a study featured in Ideas at Work, Holbrook compared the opinions of professional critics with those of regular moviegoers but controlled for market-related phenomena such as advertising, trailers, number of opening screens and promotional appearances by the stars of the film.

Holbrook found that, absent of the influence of marketing and promotional campaigns, moviegoers expressed views similar to those of professional critics. In fact, they were five times more likely to exercise “good taste” than Holbrook suspected.

People will always flock to theaters to see the latest Hollywood blockbuster regardless of what critics have to say, but according to Holbrook, “If you take away the contaminating influence of the marketplace — advertising dollars, promotional budgets and putting a movie on every screen in every shopping mall — you find that people actually do like what’s good.”

For more information on Holbrook’s research, see “A Question of Taste” in Ideas at Work.

“We are great risk of becoming over-dependent on a miracle solution,” Sam Zell cautioned students during his recent presentation at Columbia Business School. Referring to the current economic crisis as the first “Blackberry recession,” Zell warned against instant gratification and said the economic recovery could be slow and gradual.

Professor Lynne Sagalyn introduced Zell, who spoke about the economy and the real estate market on February 17 as part of the Silfen Leadership Series.

Though cautious, Zell did sound a note of optimism when he said that the real estate industry will recover more quickly than pundits suggest, and that equilibrium for the single-family home market could appear as soon as the summer.

“But before you ask where the opportunities are, you have to identify what your capital is worth. The biggest mistake anybody could make is to assume that his capital is worth the same today as it was a year ago or two years ago,” he said. “The reality is that it is worth two, three or four times more than it was as recently as 24 months ago.”

Zell said opportunity could be found in the debt-side of real estate and in geographic areas where demand is growing, citing locations as diverse as China, Brazil, Mexico and Egypt.

“Ultimately, profitability will come from the acquisition of assets at measurable discounts to replacement costs, whether it is in equities, real estate or any other area,” he said.

Photo credit: Leslye Smith

This post contains an update.

Retailers have been stunned by how abrupt the change in the economy has been and that it has happened across all strata of consumers. It is most pronounced in the luxury sector. As recently as seven or eight months ago, luxury thought that it was invulnerable, but that is not true.

Many luxury customers are aspirational and are vulnerable to downturns in the economy. The core customer with essentially unlimited disposable funds may no longer find it fashionable to behave as they had in the past. Irrational exuberance may not return and people may not seek to live beyond their means, choosing a more conservative lifestyle. Now, the customer is saving for the first time in many years, and this recession will leave a lasting mark on consumer behavior.

Jobs, confidence are lacking
Retailers are one of the largest sectors of the economy. They are very large employers. When business declines, retailers stop hiring. Layoffs soon follow. We’re seeing this across the country. Laying off large numbers of people creates a cascade of breakage. This impacts consumer confidence; everyone knows someone who was laid off. Stores begin to close. That is very visible. At the end of the day, if people don’t have jobs, there is no recovery and that’s the end of it. The consumer has to be viable, which means jobs and a rise in confidence. Many people with viable jobs become increasingly fearful of losing their employment. We’ve gone from irrational exuberance to irrational fear.

It’s good to be different
This downturn creates powerful opportunities for organizations to emerge if they can successfully differentiate themselves. Retailers with notable products and services can create enormous energy and value. Two examples are Apple and Amazon. Apple has a highly differentiated product and a selling environment at retail that is incomparable. Their market share will continue to climb as long as they continue to satisfy their customers’ needs and wants. Amazon aggregates assortments of merchandise in an on line setting that is the best in the world and continues to acquire more and more market share. They invested in an esoteric device, the Kindle, and surprise! It looks like a $1.4 billion business next year.

On the other hand, retailers with little or no forward strategy like the department stores, who have been playing out a “Last Man Standing” end game have little likelihood of future success and vitality. Layoffs in this sector are a tragic and ineffective expression of survival. You can’t use reductions in force as a strategic blueprint. It creates enormous disruption and leads to more crises downstream.

Good news for the shopper
Currently there is an enormous excess of inventory in many retailers supply chains because of recent extreme and unanticipated shortfalls in sales. These excesses will have to be liquidated. Retailers are dumping inventory, canceling what they can and avoiding buying forward product. In the next year we’re going to see fewer stores, less inventory overall in stores and less discounting because of less inventory. Prices will come down because consumers will expect more value and will be less willing to play the high-low game as they have in the past.

This economic downturn, recession if you will, is likely to continue for at least 12 to 18 months and maybe longer. I believe that when it is over the retail landscape will be very different than it is today.

UPDATE (2/25/09): Follow up from the Retail & Luxury Goods Conference. Keynote speaker Robert Burke said, “I don't think the department stores are completely dead and I don’t believe luxury is over. … It became overused and ambiguous terminology.” View the complete video (part 1, part 2) of his speech. -CN

Photo credit: Christopher Chan

President Obama’s housing plan, which will take effect on March 4, is aimed at two groups of homeowners. The first group simply cannot afford to make their mortgage payments and are in acute danger of foreclosure. The second includes homeowners who are current on their payments but who are unable to refinance in the face of high interest rates due to their homes’ decreased value.

“The nightmare scenario is that this second group of homeowners will all start abandoning their houses,” says Professor Eric Johnson. “But behavioral economics suggests that won’t happen so easily.”

“We need to know one fact: how many people will abandon their houses when that property is underwater. Standard economics makes a clear prediction that when your house is underwater, and you owe more than it’s worth on the market and that amount is more than it costs to move, you will abandon the house and accept a foreclosure.”

“But there are two effects in behavioral economics that suggest that won’t happen so easily,” Johnson continues. “The first is the endowment effect. People tend to value their own house above its market price.” Johnson cites a 1997 study by Senior Vice Dean Chris Mayer and David Genesove of MIT that analyzed the Boston condo market in the early 1990s. The study showed that a homeowner’s equity position determined his or her experience as a seller. Those with a high loan-to-value ratio set a higher reservation price, causing the home to take longer to sell. “Owners don’t want to sell at a loss. They have what we call a loss aversion,” Johnson says.

“Secondly, people weight present outcomes more than long-term benefits. Imagine making a choice between staying where you are and moving somewhere else. That somewhere else might be nice, but what do you have to do to get there? You have to pack up, pay movers and learn a new neighborhood. All those are upfront costs, while the benefits are long-term. People are impatient and weight present costs and benefits more, so they will walk away less often than we might think.”

Photo credit: Eric Hackathorn

This post contains an update.

The notion of getting a “bailout” has, by now, become embedded in American culture, emboldened no doubt by unprecedented federal support for troubled companies like AIG. So far the rationale has been to protect companies that are “too big to let fail.” There are some things that are “too small to let fail,” too — the young enterprises which are the entrepreneurial backbone of our economy.

As Americans, we hold our tradition of entrepreneurship dear. Decades of growth have been fueled by innovators and have spawned entirely new industries, high-value jobs and stock market gains. Yet one result of the financial crisis is that the current wave of these innovations will inevitably be slowed — or withheld from us as consumers, investors and perhaps even employees entirely — by the lack of adequate investment sources.

Many of these companies are now facing serious cash shortages and some outright failure, not for lack of entrepreneurial promise but for lack of dependable funding from venture funds. These budding enterprises are typically underwritten by venture funds that invest in young, high-potential companies and hope to see a return as the companies mature. But these funds are experiencing a capital drought of their own. Their principal investors, high-profile pension funds and endowments, are reeling from losses, markdowns and greatly diminished equity portfolios. As a result, some institutions are beginning to retrench on honoring capital calls and rethink their commitment to the investment category including venture capital.

Additionally, the lack of a viable IPO market is a difficulty. Public markets are a crucial capital source for these enterprises and an exit for the venture funds. Today, there is no viable public market access and none is likely soon.

Some inappropriate ventures will fail, but many could succeed. Those that do offer the promise of many desirable attributes — new technologies, new products and new efficiencies — all nice things to have on an accelerated timeframe in an economic downturn. There is also job creation, economic activity and perhaps an exciting story or two to breathe some life back into the IPO markets in the not-too-distant future.

I suggest that we place a few stimulus chips on the best of these young and soon-to-be cash-starved enterprises, rather than bet everything on outdated industries or new infrastructure. An agency could consider taking over venture fund commitments from legitimately cash-constrained institutions or making “side-car” investments alongside venture funds with promising investments. Meaningful taxpayer protections are not that difficult to devise, and the benefit is injecting some fiscal acceleration into this important entrepreneurial sector. Further, with the right kind of protections, a taxpayer might get a decent return on their invested tax dollar.

No jets full of entrepreneurs or venture capitalists are flying (or driving) to Washington to make the case for this particular form of stimulus. But think about it for a moment: in a few years, would we be better off with some of our tax dollars invested in a few years’ vintages of U.S. entrepreneurs, or in Detroit or a bridge?

UPDATE: PricewaterhouseCoopers reports “first-time financings dollars dropped in the fourth quarter to $1.1 billion, down 28 percent from the prior quarter, the lowest level invested since the first quarter of 2004. The number of companies receiving venture capital for the first time in the fourth quarter also dropped by 17 percent from the prior quarter to 236, the lowest number in three years.” (View Q4 / Full Year 2008 MoneyTree Report, PDF)

Photo credit: D.B. Blas

This is part of a series of posts to celebrate the 25th anniversary of the Social Enterprise Program and newly expanded nonprofit and social enterprise course offerings in Executive Education.

Today, the nonprofit sector is one of the fastest-growing areas of the economy. It is doing more and more of what the government used to do in social services, healthcare, education and culture. Along with the growth in this sector, there comes a greater need for leadership over bigger and more complicated enterprises. If nonprofit organizations are not performing efficiently, it affects our whole economy.

Nonprofit leaders have the same accountability to “stretch a dollar” as their corporate counterparts. We’re seeing a great deal more sophistication in how nonprofits operate and how they relate to the board and their constituents. Accountability is strong and forceful, and the media is playing a vital role in making sure nonprofits are accountable and transparent to stakeholders.

Another change we’re seeing in nonprofits is that wealth is no longer available to the same degree as in the past. Increasingly, there is more dependence on operating income rather than philanthropy. The skills required for growing capital on the inside are different from those you need for raising capital on the outside. This shift will transform nonprofits, because they now must be self-sustaining and enterprising.

I recently had the opportunity to work with Betsy Poirier ’08 at the Norman Rockwell Museum as part of the School’s Nonprofit Board Leadership Program. She brought a whole new level of expertise in how to commercially position the museum store on the Internet. Betsy’s experience exposed a real gap between the skill sets Columbia Business School students have and what most museums can attract and compensate.

How do nonprofits close that gap and attract that kind of talent? For starters, nonprofits need to offer compensation and benefits that can compete with for-profit organizations. They must also consider where they need talent. Do they need it at the operating level if it exists at the board level? The need for talent is acute at both levels, especially as demands on board members increase.

One solution to think about is to consolidate nonprofits under “umbrella” organizations. Perhaps several affinity organizations could operate within a “holding company” with administrative, IT and marketing services to better share limited talent and expertise. Nonprofits need to start thinking about what we can do collaboratively, given shrinking community resources. Nonprofits can use economies of scale to access leadership capital. They can also be more businesslike by creating growth paths and sharing corporate overhead and expertise. Community stakeholders will benefit as more output is gained from limited resources. In 10 years, we will not recognize the not-for-profit landscape as it enters the post-2008 world of economics.

Photo credit: Columbia Business School

The success of Slumdog Millionaire, which won Best Picture at the Academy Awards on Sunday night, is the a perfect storm of marketing memes in India. The movie’s fairy tale plot, its focus on youth, celebrity and television, and, ultimately, the transcultural nature of its fame are the very things also driving success stories in advertising and branding in India today.

Marketing professor Gita Johar, who recently moderated a panel at the “Branding in China and India: The Reality and the Future” symposium, said that the panelists concluded that the biggest trends in advertising are the size of the youth market — 40 percent of the population is less than 20 years old — and the role of television and celebrity advertising, particularly as aspirational messaging.

“[Younger consumers] are confident, articulate and looking for brands that have some meaning for them,” Johar said about the panel discussion on the success of celebrity endorsements. “Storytelling is appealing to them.”

The panel also discussed the relationship between the growing acceptance of Indian products and items outside the country and their increase in brand value inside India.

“Now we are taking things from East to West,” Johar said. “Indian-based content is doing well abroad and that success abroad validates it back home.”

However, as transcultural products and stories become more popular, there are still distinctly local aspects to branding and advertising in India. The panel discussed the need for firms to quickly innovate products targeted to base of the consumer pyramid, as knock-off competition is strong, and to utilize off-beat media, such as megaphones and wall painting. Johar said the panel also discussed the shift to using local talent for creative and agency work.

“It was very good that Greenspan used the N-word,” Professor Joseph Stiglitz said in reference to bank nationalization at last night’s community forum on the economy. Stiglitz said that temporary nationalization is “not that big of a deal” and that it is essential to changing incentive structures.

“When the economy recovers, you privatize again,” he added.

Bank nationalization was just one of many topics the Nobel Prize–winning economist covered in his 70-minute talk, which was streamed live on the Columbia Business School Web site as well as on the Huffington Post. Stiglitz opened by discussing the macroeconomic view of the financial crisis, citing two factors that are now playing out: the growing economic inequality in most countries and the aftereffects of the 1997–98 East Asian crisis. He called the management of that crisis “miserable.”

“The consequences of the IMF and U.S. Treasury were such that affected countries said ‘Never again,’ and they felt it was just too risky not to have huge reserves,” he said. “Now [those countries] are living within their means, and there is one country that was the consumer of last resort. That was the U.S. That game has now changed — and that’s the important part. It will be difficult for the U.S. to continue to live beyond its means.”

Stiglitz went on to discuss the three aspects of the government’s response to the financial crisis.

On the stimulus: “The consensus was that it was not enough. It is trying to offset deficiency in aggregate demand, but it’s just too small … The guiding principles for a good stimulus are that it should be designed with high multipliers, it should be fast-acting and should address long-term problems … but this is not designed as it should be.”

On the housing initiatives: “Try to get people to refinance mortgages and get interest rates lower. Part of the problem is that homeowners still can’t afford these mortgages, so the government is trying to provide incentives to lenders to refinance and provide lower mortgage rates, but it is difficult because people have no equity left and have no money to take out a new mortgage. The general feeling is that this will only help a fraction.”

On fixing financial institutions: “It is pretty clear that TARP 1 — the first $350 billion — did not work. It gets an F or F–, depending on your grading structure. What we squandered on our banks would have fixed Social Security for several generations … This is close to a zero-sum transaction. The losses are there and people are talking about moving those losses from one part of the balance sheet to another, but those losses don’t disappear from society. They are still there. Most of what’s happening is just moving things around with financial alchemy. It’s not quite zero-sum because it can be a negative sum if you don’t get it right … People talk about the greed of bankers in taking the money the government gave them and using it for bonuses, not recapitalization … Well, they were doing what their incentives told them to do … A big mistake the government has made is that it has confused its ability to make loans with its incentive to make loans.”

Read the live Twitter feed from this event.

Photo credit: Apesphere

This is part of a series of posts to celebrate the 25th anniversary of the Social Enterprise Program and newly expanded nonprofit and social enterprise course offerings in Executive Education.

MBA graduates often have the opportunity to work in the nonprofit world in two ways: organizationally, as a business manager in the daily operations, and strategically, as a board member. Lulu Wang ’83, who is a member of Columbia Business School’s Board of Overseers, is an expert in the latter. With her experience serving on numerous boards including those at Rockefeller University, WNYC Public Radio, the Asia Society and the Metropolitan Museum of Art, she has also been an active participant in the Nonprofit Board Leadership Program. The program, which is now in its third year, is part of the Social Enterprise Program and matches students with nonprofit board member mentors.

For you, why is being active in nonprofits important in your life? Was there an “ah ha” moment or event that was defining for you as a board leader?
My work with nonprofits has enriched my life, giving me a great return on my investment of time and financial resources. I’ve tried to be thoughtful and selective with which nonprofits I join, as I know I am most engaged when I can make a real difference. Whether enabling a major capital project or enabling a group of students, my defining moment as a board member has to come from seeing a positive impact that would not have happened if I had not been there.

With your experience serving on a wide variety of boards, are there any common themes or challenges in leadership that you see across all of them?
The one common attribute I’ve observed in the most effective board members is a genuine passion for the mission of the organization, paired with an expertise or talent that is much needed by the nonprofit.

As a supporter of the Columbia Business School Nonprofit Board Leadership Program, how do you see this program contributing to the future of nonprofit leadership?
I strongly believe that nonprofits benefit from the rigor and the accountability found in the best for-profits. The Columbia Business School Nonprofit Board Leadership Program provides the business skills that enable our students to go into the nonprofit sector and, while preserving the values of volunteerism and social commitment, help bring both focus and discipline to their organizations.

Photo credit: Courtesy of Lulu Wang

Shanta Devarajan started as a mathematician and ended up in banking somewhat unexpectedly. Today, he heads up the World Bank operations in Africa. In our recent interview at Columbia Business School, he discussed his practical and pragmatic approach to solving some of Africa’s most profound problems. His thoughts were both refreshing and reassuring.

Devarajan believes that the World Bank has an important role to play in disseminating knowledge and best practices for the provision of capital for infrastructure and human capital-based projects. The present economic crisis, he said, can show how the World Bank’s development agency can be beneficial in helping responsible countries in the region. He also stressed that the recent past has shown that there is no single solution to poverty; rather, different aspects of society need to be encouraged. These aspects include macro-economic stability, priming the private sector to be an engine of growth and a sober, responsible government.

For the complete interview, please visit the Chazen Web Journal.

This post is part of a series celebrating Professor Ray Horton’s final academic year as director of the Social Enterprise Program and the newly expanded nonprofit and social enterprise course offerings in Executive Education.

The ashes of crisis create fertile ground for change. Indeed, the very origins of Columbia Business School’s Social Enterprise Program can be traced to New York City’s fiscal crisis of the late 1970s. Today, a new financial crisis serves as a pivotal backdrop for founder Professor Ray Horton’s final year as the program’s director.

Horton recently reflected on the elements that have shaped the thinking of students in the program over the last 25 years, and he pointed to the considerable influence of both corporate scandals and the environment.

“The corporate scandals of the 1980s and early 2000s have had an impact on MBA students. And there was also the realization that we’ll be choking on our own air pollution 50 years from now if we don’t do something about it,” he said.

“But the great crash of 2008 has turned a huge number of students off about greed. I think people now understand the antisocial consequences of the finance game that major institutions were playing.”

That shift in student thinking underscores Horton’s own view that the traditional economic division between profit incentive and social good is fading away.

“The private sector and the nonprofit world are more alike than they are different,” Horton said.

However, as the students’ thinking — and the discipline itself — continue to evolve, there is one element that is a constant for the program: Horton’s own sense of service.

“I’ve always felt you have an obligation to pay back to society,” Horton said. “Part of my role at the School is convincing people that there is something beyond trying to make as much money as possible.”

Photo courtesy of the Social Enterprise Program

Throughout the financial crisis, one question has bubbled to the surface again and again: “Who’s to blame?” While many are pointing the finger at former executives like Stan O’Neal and Dick Fuld, others are targeting something a little more abstract: the models financial institutions use to calculate the risk in their portfolios.

A recent New York Times article chronicled the role that VaR (Value at Risk), the most widely used of these models, played in contributing to the crisis. Joe Nocera, the author of the article, summarizes how the model works: “If you have $50 million of weekly VaR, that means that over the course of the next week, there is a 99% chance that your portfolio won’t lose more than $50 million.”

The potential damage represented by the remaining 1%, however, is incalculable. And while events that trigger losses in this range don’t come along often, they do come along. The subprime crisis and subsequent credit crunch were extremely unlikely events; as such, they were just the type that models like VaR were ill equipped to anticipate.

Taking issue with the model is Professor Eric Schoenberg, who first expressed his frustration in a letter to the editor. “Relying on a faulty measure is fine,” Schoenberg says in an interview, “if the only person who suffers when that measure fails is you. But that’s not the way the system is set up. And unless people acknowledge that they basically are relying on a public utility to allow them to run their business — which very few investment banks are willing to acknowledge — it’s not an exercise in intellectual argument. It’s an exercise in power politics. It’s about what you can get away with.”

While Schoenberg admits that the issue of how much risk financial institutions should be allowed to take on is a difficult one, he believes that leverage lies at the heart of the matter. “In order to address the moral hazard problem, people have to have a lot more at risk themselves relative to what generalized risks they’re creating. There has to be a significant reduction in the amount of leverage we allow these institutions to have.”

Where do we go from here? “We must acknowledge that there is a fundamental disconnect between what makes sense for individuals and what makes sense for the group, and the only entity that can address what’s right for the group is the government,” Schoenberg says.

“Basically, this is the issue of free market fundamentalism, which is the idea that markets are best and any time the government intervenes it’s going to screw things up. Well, if you have that belief, you know, you’re going to have these things happen over and over and over again.”

Photo credit: Travel Aficionado

Treasury Secretary Timothy Geithner unveiled the government’s revised economic plan yesterday. From pundits to economists, response to the plan was lukewarm at best. Professor Charles Calomiris reacted to the Treasury’s announcement by saying:

I have serious problems with the plan. It will move much too slowly and not have a dramatic enough effect. The architects of the plan have added some good ideas, but their concerns to make sure that the taxpayers get a good deal have gone too far, to the point where the package may do little for the banks or the economy, which makes the bill penny wise and pound foolish.

In an interview with BusinessWeek, Calomiris said the plan emphasizes “very careful investments over a period of time with a lot of upside potential for taxpayers, and with all sorts of limits on what bankers can do.” One way he suggested that the plan could be improved was to guarantee banks a floor prices on their real estate assets.

Professor Chris Mayer offered his thoughts on CNBC’s The Kudlow Report (watch video):

“This is perpetuating a broken system… It’s not a good model and we shouldn’t be trying to fund a trillion dollars of it.”

Professor David Beim also commented on aspects of the plan on Forbes.com:

[Beim] estimates the potential losses to banks from the credit crisis at between $1 trillion and $2 trillion, an enormous capital hole that the government needs to find a way to fill, since private investors don’t appear willing to do so anymore.

“They're going to have to find a way to do that. Banks themselves don’t know if they are insolvent because they don’t know the value of their assets. It's a very odd situation,” Beim said.

Photo credit: Treasury Department

How are entrepreneurs weathering the financial storm? Panelists in a recent Master Class on Innovation and the Economy discussed some of the ways entrepreneurs can stay competitive in a down market. (view video of the Master Class)

1. Look for money in the right places
While money is scarce (and being used to fund existing portfolios), it’s not impossible to find, the panelists agreed. “You can raise money if you have the right idea, but it has to be very real and very targeted,” said Professor Cliff Schorer. Alumni panelist Leonard Sylk ’65 said cutting costs was essential to raising funds and that firms should look to their suppliers for money. “Ninety days from your supplier is a gift because that can be interest-free money,” he said.

2. Secure your balance sheet
Preserve cash flow, ensure that there is capital on your balance sheet, take the long perspective and be wary of a high burn-rate, said Professor Morten Sorensen.

3. Find the opportunity
“Look at your resources and assets and find the opportunity,” said Schorer. “Ask, ‘Where can I take advantage of pockets of gold?’” Panelists discussed healthcare and energy as two areas with the potential for growth. “Provide services that can help companies run more efficiently and find places where there is revolutionary change,” continued Schorer.

4. Tap hidden resources
Schorer recommended that entrepreneurs wanting to build intellectual or leadership capital enlist the help of retirees. “Look to older people who are not returning to the work force and who are willing to help,” he said.

5. Be prudent to survive the game
“Resist the urge to expand beyond what you can handle, especially with fixed costs, and know how much debt you can take on,” said Sylk. “Have the discipline to say, ‘It’s not the right thing to do.’ Learn how to not be greedy and secure your position. If you can survive, that’s the most important thing, because you won’t have much competition left if you do.”

Photo credit: Jim Wallace

In a recent USA Today op-ed, Professor Seth Freeman discusses why admitting what you don’t know — and asking questions about it — can be a very smart proposition.

“Ask me to explain things like derivatives and I'll look blankly at you,” Freeman says of his ability to understand the financial crisis. “My credentials in economics, negotiation and law should qualify me to speak, but often the news leaves me slack-jawed with confusion. Bring me to a panel discussion, and I'll ask dumb questions,” he writes.

But instead of wanting his students to avoid ever asking a “stupid” question, Freeman encourages them to ask more. “In short,” Freeman says, “I am a role model. I want them to join me in the fight against the fear of looking dumb. Overcoming that fear can save them from serious traps.” Failing to ask the right questions — no matter how embarrassing — allows us to be overwhelmed by jargon and complex terms, making us more susceptible to questionable practices, Freeman says.

The value of unabashed critical thinking seems especially important in the midst of the financial crisis. In a recent piece for Portfolio, Michael Lewis chronicled the success of hedge fund manager Steve Eisman, who scored big in the years leading up to the financial crisis by betting against the banks. Eisman, famous among colleagues for his skeptical nature, became suspicious of the financial underpinnings of mortgage-backed securities when he realized that not even the banks themselves could grasp the investments’ complex nature.

Freeman communicates this point to his students through a classroom exercise that penalizes them for failing to ask “dumb” questions. Freeman describes the exercise:

Students pretend to be teams of entrepreneurs, preparing extensively. I walk into class in the role of a corporate executive and give each team a complex investment offer. Secret: My character wants to take over their businesses, using charm, jargon and complicated terms. If they understand my offer, or admit to themselves they don't understand it, they’ll walk away. Yet, it’s easy to con a third to a half of them into fatal deals.

Professor Seth Freeman is currently working on a book, Promises: Making Commitments More Reliable in Business and Beyond.

Photo credit: e-magic

President Barack Obama announced a plan this week that would limit executive compensation at companies seeking large amounts of government aid. The plan includes placing a $500,000 cap on the annual salary of senior executives and restricting the cashing in of stock incentives until government assistance is repaid.

But will the limits create a leadership void at these firms? Professor Nahum Melumad said that some of the proposal’s terms could hinder recruitment and retention.

“You need the best talent money can buy and that may be difficult without the right award,” said Melumad. “Currently the administration is saying that a company may pay a large amount in the form of stock options, but that executives will be allowed to exercise those only after the government has sold its equity positions. That may be too long a period to retain any incentive impact and to attract top managers."

“A better way might be to have executive compensation consist of two key components: a ‘reasonable’ base pay and an additional component that is a function of improved company performance,” Melumad said. “The latter should have significant upside potential to attract top managerial talent.”

Professor Sudhakar Balachandran points out that even if firms aren’t too concerned about losing talent, they’re still faced with the challenge of motivation.

“There have been some arguments that there will be an exodus, but I am not too worried because the job market and prospects are tougher now,” he said. “In the past we’ve seen turnover when a firm’s retention mechanisms fail. But today, if someone wants to leave, where would they go?”

“If there’s no upside potential, you now have to worry that people will not work hard or smart, but instead that they will just show up and check off the boxes,” said Balachandran.

Photo credit: White House/Pete Souza

Google recently announced a plan to allow employees to exchange their stock options for new ones at a lower strike price. The program aims to create better incentives for employees, who have seen the company’s stock price fall more than 50% since 2007. Professor Wei Jiang offered her thoughts on the program in the Financial Times. She said:

How might Google justify its plan to exchange employee options? First, it might say that, without this initiative, staff will stop putting in long hours or coming up with ideas, since rewards would not kick in until Google’s stock price regained the $400-plus mark — a dim prospect in the foreseeable future. There is some truth to this. But how can exchanging options provide much incentive if employees expect them to be exchanged again if things do not work out further down the road? Second, it might say that without this measure staff will move. Yet there are few greener pastures out there. And why not give key staff restricted shares? Options are “cheaper” only when they are not properly expensed. Another argument is that Google staff should not be punished by stock price falls that were mostly due to the global financial crisis. I agree. But then, should the same rule not apply when the company’s stock price goes up in a bull market?

Photo credit: Keso S.

Last Friday, I participated in a dinner conversation at the World Economic Forum in Davos on whether economics itself is in need of a bailout. The consensus view, which included perspectives from several far more distinguished economists than myself, was that as a predictive social science, economics has not failed. That is, people do generally make decisions based on cost-benefit trade-offs and incentives, and thinking about human decision making in this way is a very effective means of understanding what people do in companies, markets and the economy as a whole.

The natural question, then, is why the world out there has such a dismal view of the so-called dismal science? My answer was that we, as economists, have been terrible ambassadors of the profession in two critical ways. First, we have not properly conveyed the limits to economic predictions. An economy is a very complex system with highly imperfect information and many moving parts. Perhaps more importantly, we also haven’t properly communicated — to students and to the public at large — that economics is about more than the straw man of perfectly efficient markets. Any sensible economist — from Berkeley to Chicago — understands this perfectly well.

What are the implications for policy, and for economics as a profession? First, we have to be a lot better at “selling” our ideas to the public. Rather than leaving it to journalists to parody economic theory, we need to get our voices heard in the public debate. Second, we could do with a dose of humility. If the popular perception is that economics should be an all-knowing, precise tool for fine-tuning the economy, it may be because a lot of economists have drunk a little too much of the economics-as-crystal-ball Kool-Aid themselves.

Photo credit: World Economic Forum

Models pose a paradox. They hold the key to extraordinary profits but can inflict destructive losses on a bank. Because a model entails a complex perspective on issues that are typically fuzzy and ambiguous, they can lock traders into a mistaken view of the world, leading to billionaire losses. Can banks reap the benefits of models while avoiding their accompanying dangers?

Our research suggests they do, and shows how. We conducted a sociological study of a derivatives trading room at a large bank on Wall Street. The bank, which remained anonymous in our study, reaped extraordinary profits from its models — but emerged from the credit crisis unscathed. For three years, we were the proverbial fly on the wall, observing the traders with the same ethnographic techniques that anthropologists used to understand tribesmen in the South Pacific. We identified a set of managerial procedures, which we call “reflexive modeling,” that lead to superior model development. (View the complete study)

The key to outstanding trades, we found, lies outside the models. It is a matter of culture, organizational design and leadership. The bank that we observed introduced reflexivity in every aspect of its organization. From the junior traders to the supervisors, everyone at the bank was ready to question their own assumptions, listen for dissonant cues and respect diverse opinions.

How? As many have already suggested, individuals certainly matter. The bank hired people with a healthy dose of humility and an appreciation for the limits of their smarts. This often meant opting for older traders rather than younger hotshots.

But the key to the bank’s reflexiveness did not just lie in individuals. By reflexiveness we don’t mean super-intelligent traders engaged in some heroic mental feat, splitting and twisting their minds back on themselves like some intellectual variant of a contortionist. Reflexivity is a property of organizations.

The architecture of the bank, for instance, was crucial. The open-plan trading room grouped different trading strategies in the same shared space. Each desk focused on a single model, developing a specialized expertise in certain aspect of the stocks.

To see why this was useful, think of a stock as a round pie. Investors on Main Street often eat the pie whole, with predictably dire consequences. The professionals that we saw, by contrast, sliced stocks into different properties. Each desk was in charge of a different property, and the different desks then shared their insights with each other. This could happen in a one-minute chat between senior traders across desks or in an overheard conversation from the desk nearby. This communication allowed traders to understand those aspects of the stock that lay outside their own models — the unexpected “black swans” that can derail a trade.

Sharing, of course, is easier said than done. The bank made it possible with a culture that prized collaboration. For instance, it used objective bonuses rather than subjective ones to ensure that envy did not poison teamwork. It moved teams around the room to build the automatic trust that physical proximity engenders. It promoted from within, avoiding sharp layoffs during downturns.

Most importantly, the leadership of the trading room had the courage to punish uncooperative behavior. Bill, the manger of the room, made it abundantly clear that he would not tolerate the view, prominent among some, that if you’re great at Excel, “it’s OK to be an asshole.” And he conveyed the message with decisive clarity by firing anti-social traders on the spot — including some top producers.

In other words, the culture at the bank was nothing like the consecration of greed that outsiders attribute to Wall Street. We refer to it as “organized dissonance.”

Our study suggests that a lack of reflexivity — that is, the lack of doubt on the part of banks — may be behind the current credit crisis. We are reminded of infantry officers who instructed their drummers to disrupt cadence while crossing bridges. The disruption prevents the uniformity of marching feet from producing resonance that might bring down the bridge. As we see it, the troubles of contemporary banks may well be a consequence of resonant structures that banished doubt, thereby engendering disaster.

This blog post was coauthored with Professor David Stark, chair of the Department of Sociology at Columbia University and author of The Sense of Dissonance (Princeton University Press, 2009). Please visit Professor Daniel Beunza’s blog Socializing Finance to learn more about his research on the social studies of finance.

Photo credit: Daniel Beunza

What would you do if a client gave you a very expensive gold watch? The question was just one of many discussed at an ethics panel and debate that took place last week at Columbia Business School. Organized by the Student Leadership and Ethics Board, working with the Sanford C. Bernstein Center for Leadership and Ethics, an international panel of students discussed their perspectives and experiences confronting ethical dilemmas or corruption.

“Most of the time the ethical dilemmas are not created at the junior levels, but we are most often responsible for their execution,” said student board member Vicente Brocchetto ’10. “The way we handle these situations can make all the difference.”

Several key points/questions were raised:

• Knowledge of local customs and how respect is conveyed in different cultures is important. In one example, the matter of taking shoes and hats off when dealing with a local chief was key to winning a negotiation.
• At what level of materiality does corruption matter? There was an interesting debate about what a manager can overlook, and what a manager cannot, particularly in areas of the world where poverty is prevalent.
• How the use of the English language for business establishes formality and implicitly suggests that business is operating under a different set of standards.
• Leverage what you do have, rather than trying to meet or beat local corruption. In an example case of an international firm that confronted bid rigging by regional groups, the firm’s solution was to capitalize and leverage proprietary products available through its global network, rather than engage with local competition.
• How does perspective change for foreign national managers after training/managing in the United States? How do managers handle different standards for business in the U.S. versus abroad?
• Prof. David Beim, who moderated the panel, said, “Talk about [differences]. People are reluctant to talk about it because it is personal and can appear embarrassing. When you do talk, you find more options and that there’s more nuance than you might have imagined.”
• Don’t be afraid to turn down business. “Any quality firm turns down more business than it accepts,” said Prof. Beim.

Photo credit: Public Offering/Catherine New

Transforming market uncertainty into opportunity is the theme of the 15th Annual Private Equity and Venture Capital Conference, which is taking place at Columbia Business School today. More than 700 people are expected to attend the conference’s six panels.

Dan Primack, editor of PEHub and moderator of the conference’s panel on venture capital, said that one of the questions the panel will address is how the weak IPO market affects the basic model of VC. Primack said that VC must consider these questions:

How they will honestly make money without an IPO market?
Can VC make money without an IPO market?
Do you make different types of investments without an IPO market?

“The average investor’s chances of making of money would have been better if he’d put his money under the mattress. That may be true of public markets, too, but you can’t liquidate in VC. All those median funds are a loser,” Primack said. “That shows you that the industry has some fundamental problems and there must be some considerations to radical proposals.” (He recently blogged about one such proposal.)

David Snow, the executive editor and director of PEI Media, who is moderating a panel on how LPs can think long-term in the volatile market, discussed some of the trends he sees.

“Negotiating power has moved squarely to the LPs. During the boom years, right up through 2007, there was a sense that GPs were holding a velvet rope in front of funds and raising billions in commitments while giving the impression that they were turning down extra demand. That demand from LPs allowed GPs to receive favorable terms,” Snow said.

“Now there’s far less capital available and many signs that partners are willing to concede on some terms in exchange for capital from LPs. But many LPs are heartbroken because first, they wish they had more money to commit, and what’s more, many experienced investors are aware that the best time to invest is during a recession. The inability of LPs to do more buying is causing grief and heartache. So you see huge activity in the secondaries market, as many LPs are trying to free up cash to double down in this environment.”

Snow said he would ask panelists about the role of the accounting rule FAS 157 in private equity, which requires the use of fair-value accounting.

“I’ll ask if, because of FAS 157, LPs would be perturbed if GPs assigned huge write-downs to existing portfolios,” he said. “Of course, the silver lining may be that write downs in private equity might allow LPs to invest more capital, because lower private equity valuations will equate to freed-up private equity allocations relative to the rest of the institutional portfolio. Are LPs with a long-term view on performance begging GPs to write down portfolio values?”

Your life may get a little healthier thanks to Cyrus Massoumi ’03, founder and CEO of ZocDoc. The company aims to change the way you find and book a doctor’s appointment. While the company is not even two years old, the accolades have come quickly. In 2007, it was named one of TechCrunch’s top 40 hottest startups, and last month it won Forbes.com’s “Boost Your Business” contest (check out their video pitch). Public Offering caught up with Massoumi to talk about life as an entrepreneur.

How did you get started?
Before I came to Columbia Business School, I ran a software company called OneSizeTooSmall in Austin. It was really helpful to bring that experience with me to Columbia. After School, I joined McKinsey & Company, and the idea for ZocDoc came about from a business trip. I was on an airplane and ruptured my eardrum, and I needed to find a doctor on short notice. After that experience, I talked to my coworker, Oliver Kharraz, who was the expert on electronic health records, and we both liked the idea of an online service to connect patients with doctors. Our third co-founder, Nick Ganju EMBA ’08, joined us next as the chief technology officer.

How did you know that it was the right idea at the right time?
You kind of know in your gut. At first this was just a pebble in my shoe and I kept thinking, Do I want to do another start-up? Is this the right one? But I couldn’t get away from it, and it came to a point where I knew it wouldn’t be successful unless we immersed ourselves completely. So that’s what we did.

So how do entrepreneurs know if now is the right time to start a venture?
Now is the best time to take that leap. Everything is cheaper to do, and resources are more readily available — real estate and hiring, in particular. Fewer hedge funds are competing for talent, so more really good people are available right now. The best businesses were built in recessions, so if you have capital or time to invest, that is a great thing. With so many companies contracting and worrying about survival, you can be more aggressive and actively pursue opportunities. It might sound risky, but great ideas transcend bad economies.

What advice do you have for Columbia MBAs?
In New York City there is so much access to people with practical knowledge and I tried to find classes that had a lot of guest speakers, like Leadership in Retail. I knew I didn’t want to go into retail, but the class had 20 CEOs coming in to speak. Hearing first-hand from someone who runs a company is good for an entrepreneur. There is really no other way to prepare to be one. Also, it’s not a joke that investors like to invest with other investors. Some people invested only because they knew me, even without a business plan. Many of my CBS classmates invested in ZocDoc, and that confidence has paid off, ultimately leading to us getting investments from people like Jeff Bezos. Having people regard you well in your class is important; they need to know they can count on you.

What is the toughest thing about being an entrepreneur?
It can be lonely. There are ups and downs and the buck always stops with you. It can be hard sometimes to lead the charge uphill while getting fired at non-stop, but that comes with the territory. The great thing about co-founders is you have that feeling a lot less.

…and the best thing?
It doesn’t seem like work anymore. I love my company and I enjoy coming in to work every day. I wouldn’t go home if I didn’t have to get some sleep.

This is the inaugural column in our Next Steps series, which will profile alumni in their first five years after Columbia Business School. Do you know someone we should write about? Tell us about other candidates.

Photo credit: Julie Galluzzo

Walking home late at night, a man finds his neighbor searching for something under a street lamp and stops to help. “What have you lost?” the man asks. “My wedding ring,” the neighbor replies. “Are you sure you dropped it here?”

“No,” the neighbor answers. “I dropped it over there, but it’s dark over there and light over here. I am searching where I can see.”

This ancient and well-worn fable is, unfortunately, an apt description of a great deal of research on the characteristics of highly effective teachers. Previous work on this topic, including some of my own, focuses on information already being collected by school districts and state boards of education, such as whether teachers possess graduate degrees, obtain special certification, or have a degree from a selective college. But to the frustration of many, these “highly qualified” teachers are typically no better than their less-decorated colleagues, or not nearly as effective as one might hope, given that we hire and pay teachers based on these attributes.

In a recent study, my colleagues Thomas Kane from Harvard University, Brian Jacob from the University of Michigan, Douglas Staiger from Dartmouth College and I try to shine a new light on this topic. To do that, we surveyed hundreds of new math teachers in New York City and collected information on a number of non-traditional predictors of effectiveness, including specific content knowledge, cognitive ability, personality traits, feelings of self-efficacy and scores on a commercially available teacher-selection test. We then looked to see whether teachers who scored higher on these measures also led their students to higher gains in math achievement on standardized exams.

Our first finding was that none of the single measures we studied is a very strong predictor of student outcomes. In other words, there is no silver bullet, no pencil-and-paper test that will tell you exactly how good a prospective teacher will be in the classroom. However, we also found that the measures we collected can be used to build broader indices of cognitive and non-cognitive skills. Moreover, by pooling individual measures into indices, one gains modest, but statistically significant, predictive power to predict which teachers will be more effective than others.

Through low-cost mechanisms, such as our online survey, school officials can gather an expanded set of information on candidates to help them use their resources more effectively. Districts can do their own analyses to see which teachers tend to perform well, and can focus their efforts on increasing the pool of candidates with similar traits. Individual schools could use this information to decide the order in which to interview candidates or the particular issues they focus on during the interview process.

Researchers and policymakers agree that hiring good teachers is one of the most promising paths to improving school quality. But, if we want to find a new supply of great teachers, we need to change methods by which we search for them. Like the lost wedding ring, we might just be surprised with what we find.

Photo credit: Liz Marie

This is part of a series of posts from the International Development Club.

Handmade lingerie wasn’t at the top of my mind when I came to b-school.

Nevertheless, that’s one of the myriad surprises I encountered on my Pangea Advisors trip (formerly International Development Club Projects). Our client, Give to Colombia, an umbrella organization that liaises between U.S. donors and Colombian NGOs, wanted a monitoring and evaluation system to track the efficacy of the NGOs. We worked with the NGOs to expand their budgetary reports (e.g. how the donors’ money was spent) to include impact (e.g. how many lives were affected and by how much). Based on these case studies, we extrapolated a model of how to change the reporting criteria for all of their NGOs.

When my team (Chad Di Stefano ’10, Hernando Forero ’09, Omari Jinaki ’10 and Sachit Shah ’10) and I traveled to Colombia to meet the NGOs, we met Jorge Porras Suarez, an entrepreneur who hires women from sweatshops to make high-quality intimate apparel in better working conditions for better wages. Meeting Jorge recalibrated my notion of what industries an emerging market entrepreneur can target — and on what scale. If he can enter the luxury lingerie market and make deals with buyers in New York — keep your eyes peeled for the Black and White collection by Vanity Colors — why can’t someone else start farming sugarcane to supply an ethanol plant? Jorge reminded me that there aren’t any limits to entrepreneurship. If an idea is good enough, and the work ethic tough enough, the entrepreneur will succeed, regardless of frigid credit markets, living in a slum, or being told he can’t do it.

We also met a foundation that gives pregnant teens pre- and post-natal support, thereby cutting infant mortality in the catchment area from 5% to 1%. And another that builds bathrooms and sinks for the poorest schools in the area. It was humbling to work with people who will succeed no matter what; if we weren’t helping them them, they were focused enough to seek assistance elsewhere.

Being deeply involved in IDC brought my first semester to life. It’s been more than just the project: it’s been getting to know my peers outside of cluster F ’10 (no disrespect intended), meeting students from other schools at Net Impact and forgetting about my next Corp Fin valuation when I listen to a speaker at a conference. The most rewarding part has been speaking with prospective students who are where I was a year ago.

All of this reminds me why I came to Columbia Business School: for the entire experience, the practicum, the people and to gain the technical skills that will help developing world entrepreneurs seize their own opportunities.

I’m grateful that I had the chance to seize mine.

I’m not the only one jazzed about Pangea Advisors. Just last Thursday, more than 50 students and alumni gathered at a cocktail reception to formally kick off this outstanding student-run initiative. Feel free to contact any of us at IDC to learn more.

Photo credit: Chad Di Stefano ’10

Professor Frederic Mishkin, a former member of the Board of Governors of the Federal Reserve System, met with students yesterday in a community forum to present his view of the current financial crisis. Framing his analysis in the historical context of the Great Depression, he said that many elements of the current crisis were “classic” and that they inspired a sense of “déjà vu.”

“The basic issue is that financial markets are the brain of the economy,” Mishkin told the students. “They are key to an economy functioning well because they help allocate capital to productive investments. But when financial systems stop working and they can no longer allocate capital, we see what is happening now.”

“A basic problem in allocating capital is asymmetric information … It’s an agency problem. What happened in this financial crisis, and in financial development, is new financial innovation, which in the long run is a very good thing,” he said. “The innovation was driven by a couple of features, technology and high-speed computers. This allowed you to do two things: cheaply bundle small loans into a security, so there were low transaction costs, and get information on people and their credit worthiness in a quantitative manner.”

“This allowed you to democratize credit and give credit to people who otherwise wouldn’t have gotten it, and then put those loans into a security and sell it off. A lot of people would like to see subprime lending never happen again but that would be a disaster. It is a real danger that regulation could kill off this market because it is something that, if it’s done right — which it easily can be — is a tremendous benefit to the average person who couldn’t access credit before.”

“But the problem is that sometimes you don’t solve all the information problems,” Mishkin continued. “Although there were all these benefits, maybe people didn’t have the right incentives to pay back [the loans] … Incentives were not aligned with those of the holder of the security.”

“We also had a huge flow of liquidity come in; poor countries were providing capital to rich countries, [like China to the United States],” he said. “As a result we had this global savings glut and huge inflows of liquidity. This, combined with the financial innovation, made the system go wild. Also what you see — and this is classic — is that when you have innovation and a burst of liquidity [together], you frequently have an asset bubble. And in this case it was in the real estate market.”

Photo credit: Randen Pederson

While firms with charismatic CEOs often enjoy an advantage in communicating their message to their target audience, they are also subject to a unique set of challenges, as chronicled by Professor Bruce Kogut in a recent post about leadership in social enterprise.

When Apple CEO Steve Jobs recently announced that he’d be taking a leave of absence until the end of June to address his health concerns, investors panicked and initiated a wave of selling that sent the stock down 10% within minutes of the news.

Now, despite the company posting better than expected first quarter results, some are expressing doubt about Apple’s long-term outlook. As Slate’s Farhad Manjoo asked in a recent article, “What happens to a cult without a leader?”

Apple’s milieu raises several important questions about leadership and corporate governance issues that all successful firms must address. Here are just a few:

How integral is a CEO to a company’s success? Should firms work to dispel the idea that one individual can play such a large role in the company’s business?

By allowing senior leadership to personify the company’s message, is it in effect diluting its brand in the long term?

How necessary is it for companies to develop transparent leadership succession plans?

Should firms be wary of creating celebrity CEOs that become too closely associated with their brand?

What obligation do publicly traded companies have to disclose the health of its senior leadership to its shareholders?

Have an opinion on any of these issues? Let us hear it.

Photo credit: acaben

Linda V. Green: He should give top priority to changing the diagnosis-related group (DRG) system, which is the hospital payment system for Medicare (and which is used by private insurers, as well). This system is highly skewed toward compensating for procedures rather than medical care. As a result, hospitals tend to invest in profitable areas, such as cardiac and orthopedic surgery, but neglect to add capacity to often over-crowded clinical units that care for patients suffering from strokes, heart attacks, pneumonia and kidney failure. This has caused the nation to experience increasing emergency department congestion and ambulance diversions, which lead to sometimes-fatal consequences. Also as a result, many unnecessary, expensive procedures and surgeries are being performed. Current estimates are that up to 45% of cardiac bypass surgeries and perhaps the majority of angioplasties are unnecessary. So changing the DRG system would result in both lower costs and better quality.

Murray Low: The top priority has to be to restore confidence in our institutions, both government and business. In recent years there has been a huge erosion of trust because of self-dealing by those in leadership positions. We need to have leaders that inspire.

Garrett van Ryzin: Restore the world’s faith and trust in the American ideal.

Michael Feiner: The most important issues are trust and transparency. If those are addressed, Obama will get it right as it relates to healthcare, the economy and education and so on. People need a dose of the optimism that has characterized the American mindset. And the optics of trust and transparency are as important as substantive fixes and solutions in each area. The first thing to do is hire great people, which he has done for the most part — he has gone for quality, not cronies. The second thing is to become vocal, frank and communicative frequently — both with press and American people. This is not the time to hide and manage and spin the data. He needs to communicate his plans and where he is against those plans. He needs to demonstrate that he will reach out to foreign powers and that he is more collaborative and less isolationist. There are lots of public things he can do using pulpit of presidency to show that the administration will do things very differently.

Photo credit: Jay Tamboli

This is the last in a series of posts on the challenges surrounding social entrepreneurship.

I have learned in my life as a business professor that just as being a good manager is not the same thing as being a good leader, being a media star is far different from being a good leader or manager. We live in an era where the media-friendly entrepreneur/founder must act on stage, under the spotlight. Many of the foundations supporting social entrepreneurs encourage what the French call mediatisation, supposedly under the theory that media attention draws resources to the enterprise. It also draws attention to the foundation or private investor who funds the star leader.

All of this comes at a cost. I wonder how many tragic failures we have created as a result of our preference for sparkling leaders, rather than ones who know their business and who know how to work on a team. I am absolutely for charismatic leadership, but I am wary of the prima donnas that we tend to create.

I would like to see fewer media leaders and more good team leaders in control of social enterprises. And I would encourage investors to put aside their egos in promoting excessive media attention. It is quite possible that when we have managed to develop better social capital markets, there will be less dependence on the egos of private investors who tend to bet on media figures.

It is a tragedy when an organization’s leader must leave his business and retire, or seek another role in the project. I can think of a social enterprise in Portugal that has done great things in its work with troubled youth. After 30 years of success, the company has slowed and the founder is in danger of seeing a total reversal of the gains it has made. The problem is that too much weight was attributed to the founder and not enough effort was spent creating a team around her that had real capacity or power. Not surprisingly, the leader has become too accustomed to the media spotlight to depart.

An equally painful case is the argument between two founders of an exciting enterprise engaged in funding new ventures in deprived urban communities in a European country.

One leader managed to attract far more media attention, and the chairman of the board threw his support to him for this reason. But was he the better leader or manager? This question appears to have been almost beside the point. As a consequence and despite ample talents, the other founder was forced to leave the enterprise he helped build.

A good entrepreneurial leader is not a substitute for good management, and an organization is more than just the leader. Success also requires team leadership and capable management. To build a successful social enterprise, we must make sure that teams lead the enterprise. And watch out for media-struck leaders.

The above is drawn from remarks made at “Leadership for the 21st Century,” an interactive training session held at the U.S. Ambassador’s Residence in Paris on October 23, 2008 to launch the Ariane de Rothschild Fellows Program: Dialogue & Social Entrepreneurship. The program aims to develop a network of social entrepreneurs with an interest in fostering a culture of mutual respect and dialogue among Jewish and Muslim communities. ]]> Fri, 16 Jan 2009 13:11:56 EST ]]> Entrepreneurship Leadership Organizations Social Enterprise Strategy

Columbia Business School’s digital footprint is growing. This month marks the one-year anniversary of Public Offering. Since our first post last January, we’ve not only been blogging on a daily basis but have become part of lively communities on Facebook and Flickr, and we’ve even established audio and video channels on YouTube and iTunes. Also, if you’re just looking for quick hits and other links of interest, you can follow Public Offering on Twitter.

Looking back at a year’s worth of posts, it’s interesting to watch the current economic crisis unfold through the real-time analysis and insight of our faculty bloggers. Here are some of the highlights, beginning in 2008:

January 22: Frank Lichtenberg: When to Use the Word Recession
March 03: Should the Federal Government Provide a Housing Bailout?
May 06: Mortgage Delinquencies and Foreclosures
June 06: Turmoil in Global Money Markets
July 15: The Panic Over Fannie and Freddie
July 21: We’re Asking Too Much of the Fed
August 27: Crisis Alters Banking Structures
September 08: New Chapter For Financial Giants
September 15: Learning from Lehman
September 29: Where Is Oil Headed?
October 13: Financial Crisis' Flawed Metrics
November 21: Grappling with Risk, the New Value-Investing Way
December 16: Too Small to Fail?
January 07: Stemming the Foreclosure Tide

For complete coverage of the financial crisis, visit our special section on the economy.

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Photo credit: Enrique Dans

We’ve been down this road before, and seldom has the ending been pretty. General Motors and the other American carmakers are textbook cases of what one of my colleagues famously called “permanently failing” organizations. The syndrome of permanent failure afflicts supposedly for-profit organizations that create no economic value or that even destroy economic value. This syndrome often persists because a coalition of stakeholders comes to value the organization as an organization — as an institution — and its survival becomes an end in itself. The webs connecting the entities that benefit from the company’s ongoing existence are so strong that they dominate all decision making. GM, depending on whose analysis you read, is widely recognized as having destroyed billions of dollars in economic value, and it has been unsuccessful in its half-hearted efforts at transformation since at least the 1970s.

What seems to be killing the company is a giant-sized version of the same self-inflicted wounds that get in the way of innovation and change at many large organizations: coalitions of value-chain partners; legacy agreements that lock in decisions that made sense in another era but no longer do; and leaders who are so embedded in a given thought world that they find it hard to move to a new model. These issues are frequent topics in our executive course Leading Strategic Growth and Change, in which a key theme is determining how to get your organization to not end up like GM by making necessary innovations and continuously changing as your world evolves.

This is not to say that GM hasn’t had its better moments. Its OnStar system is a textbook example of how to get innovation right, and the popularity of GM’s products internationally speaks well to its ability to produce cars and trucks that significant numbers of people want to buy. The problem is that the bulk of the organization remains unchanged, largely because those who would suffer from any such change conspire to keep things as they are.

So what is to be done? Clearly, a bailout is only going to prolong the death agonies. A bailout will do nothing to unwind the web of dependency relationships that are a huge part of GM’s trouble. Indeed, read any proponent of the bailout’s justification and you’ll hear all about the harm a GM bankruptcy would do to workers, suppliers, counterparties and other interested parties. I’ve yet to read one, however, that refers to the irredeemable loss to GM’s loyal customers, save those that argue that customers will have difficulty finding replacement parts in the future.

Somehow, the road to redemption is for the company to start unwinding the coalitions that trap it in its current situation. A bankruptcy could be a start. So could a slash-and-burn acquisition, though that hasn’t seemed to help Chrysler much. I’m not wild about the idea — who could be, considering the economic carnage it would likely create? The problem is that unless GM feels a compelling need to change, things are highly likely to stay pretty much the same, as they have done for decades, in spite of clear evidence that things are not working well from an economic perspective. As Peter Drucker once said, “The purpose of a business is to create a customer.” GM has not fulfilled that purpose very well.

Where public money could usefully go is toward lessening the pain for stakeholders, ameliorating the damage to innocent bystanders and helping with social adjustment costs. Without a fundamental transformation, the endgame can only be delayed, not avoided entirely.

Federal Reserve Chairman Ben Bernanke announced yesterday that the Federal Reserve will do more to focus on economic recovery, possibly buying up bad assets and providing more capital injections to banks. Bernanke also said that Fed could influence longer-term interest rates by informing the public’s expectations about the future course of monetary policy.

The Fed’s policy response to the crisis was a frequent topic of discussion at last month’s research symposium, “Preventing the Next Financial Crisis.” Floyd Norris ’83, chief financial correspondent for the New York Times, suggested that the crisis could have been tempered had the Fed used monetary policy to keep asset prices from spiraling out of control.

“I still don’t understand why no monetary response is appropriate when asset prices rise beyond reason, but immediate and sharp response is needed as soon as they fall. Basically, I think that economists have learned the lessons of the 1930s, but they have yet to learn the lessons of the 1920s,” said Norris, responding to the keynote address given by Professor Frederic Mishkin on the role of monetary policy in the current financial crisis.

Mr. Norris spoke as part of a panel with Matthew Bishop (The Economist), and Chrystia Freeland (The Financial Times) for the conference, which was held by the Sanford C. Bernstein & Co. Center for Leadership and Ethics.

To view full-length videos of conference presentations, please visit the conference Web site.

As part of his economic stimulus package, President-elect Barack Obama will reportedly propose a significant expansion of the country’s broadband Internet networks. For the program to launch successfully, however, it must address the issue of network neutrality, Professor Eli Noam said in a recent interview with Fortune Magazine.

Proponents of net neutrality argue that broadband Internet consumers should be free of any content monitoring or restrictions. Network providers, such as Verizon, Comcast and Time Warner, however, say that without the ability to control the data traveling over their networks, they are reluctant to expand their services.

Noam, professor of finance and economics and director of the Columbia Institute of Tele-Information, said that the stimulus package should be designed with the issue of net neutrality in mind:

[Noam] thinks the telecom companies, content providers and lawmakers need to acknowledge the net-neutrality issue in formulating any broadband stimulus package — thus far, few have mentioned it — and essentially forge a pact: “The telecom companies want their incentives, the Internet companies want openness, and citizens need stimulus,” he says.

“If the government makes the stimulus strong enough for the infrastructure providers but makes it conditional on policies of openness, you can, in a way, have the government underwrite the openness.”

Photo credit: von Kinder

Rembrandt, it turns out, is a great teaching tool for business leaders. Not as cautionary tale — the painter had notoriously bad money management skills — but rather as an expert on symbolic communication.

Executives from the Columbia Senior Executive Program (CSEP), gathered at the Frick Collection on a recent Monday morning to learn how to better use symbols as leaders by looking at how master artists, such as Rembrandt, used symbolism in their paintings.

The class was a unique collaboration between CSEP’s director, Professor Paul Ingram, and the museum’s chief curator, Colin Bailey, that was part of the month-long executive education module on organizational alignment.

“When you draw your own conclusions from a story or symbol,” Ingram said in his lecture, “you are engaged in the creation of the message, you are active in creating meaning. That affects commitment.”

Consider direct versus symbolic communication: direct missives — such as a mass email — are fast and clear, they create authority and allow little room for misunderstanding. However, they are not very powerful messages; the more people who receive the message, the less power the message contains.

“Direct communication can be cheap talk,” said Prof. Ingram. “It doesn’t have much credibility.”

Symbols, however, require an investment from both the sender and the receiver of the message. That, said Ingram, makes the message all the more meaningful. The reader — and in the case at the museum, the viewer — is an active receiver. Take Rembrandt’s 1658 Self Portrait (pictured above), which was part of the day’s lesson: what is the meaning of the staff in the artist’s hand, the vestment-style clothing, the colors used? (Listen to Frick audio guide)

“There is no one right answer,” said Mr. Bailey. “There are only ways to appreciate the sophistication of what’s being communicated.”

Image courtesy of the Frick Collection.

A friend of mine recently donated storm windows to his daughter’s school. Not exactly a splashy gift, but that was entirely by design: he wanted to make a statement about giving according to the school’s needs instead of tying his donation to getting his name on a building.

This perspective on philanthropy is particularly welcomed by non-profits that are struggling to make ends meet during the current financial downturn. However, it is but one piece of a larger need to apply sensible economics in informing giving decisions.

I am a strong proponent of outcomes-based philanthropy — donors can and should demand to see that organizations use their dollars wisely. Yet if everyone demands that every dollar translate into incremental programs or services, grantees are left trying to figure out how to cover the overhead costs that are part of running any organization (or fudging the numbers they present to donors). Organizations may need to pare back services in response to hard times, and if they’re to avoid going into a downward spiral, donors will need to show a willingness to provide bridge funding to weather the financial storm.

As always, groups will be tempted to compromise mission in exchange for donor dollars. This is part of life in a non-profit, and as the going gets tougher, these temptations will multiply. This only reinforces the importance of having a clear sense of purpose and mission, so as to not lose sight of why you’re in this business in the first place.

Alumni are invited to attend “Squeeze Play: Philanthropy in a Recession”, an event with Professor Fisman and other guests on Tuesday, January 13th 2009 at 6:30pm. Register here.

Photo credit: Anna Vignet

The massive accounting scandal involving Satyam, one of India’s largest outsourcing companies, seriously hurts investor confidence, not only in India but worldwide, says Professor Sudhakar V. Balachandran.

“They should have been under good accounting scrutiny, and so this is shaking confidence,” Balachandran said in a phone interview Thursday morning. “There will be spillover effects, people will think twice about investing in Indian tech companies, investing in India and, following that, investing in the market. It’s the old story of a few lemons corrupting the entire market.  If you can’t tell the good from the bad, it just becomes too risky to invest. Eventually that poses risk to the entire economic system.”

In an op-ed published on Forbes.com on January 8, Balachandran says that the three mechanisms to prevent fraud — corporate governance, audits and legal consequences — are not doing enough.

The company’s good social standing added another layer of complexity. “[Satyam] was well run and well governed.  They also did a lot of charitable work in rural development in India, so they appeared to be taking social responsibility seriously. They did a couple little things with their accounting early and then it snowballed,” said Balachandran. “These may not have been evilly intentioned guys; they had a history of doing good.”

Especially worrisome to Balachrandan is the failure of the requirements for auditing control systems.

“Satyam has an ADR [American Depository Receipt] and they are listed on the NYSE, so they have to follow American rules similar to those of American publicly traded companies. That includes having audited financial statements, using US GAAP, having signatures from the CEO and CFO stating that their accounting is sound as required by Sarbanes-Oxley Section 302, and so on. With all this, the company reported a lot of cash — a little more than $1 billion — that wasn’t there,” he said.

“Section 404 of Sarbanes-Oxley has very strict and very costly rules on what should be audited in the firm’s internal control systems. Auditors certify the controls so we can believe that the company is not recording fictitious transactions, so that when they say they have made a sale, we can believe they actually made a sale. In addition, auditing standards in India are not trivial and definitely require the auditing of cash. The fact that they didn’t catch the missing cash [at Satyam] raises a lot of questions.”

Prof. Balachandran acknowledges Columbia Business School professors Ray Fisman, Bruce Kogut, Partha Mohanram and Amir Ziv for their contributions in the analysis of the Satyam situation.

The housing market and growing number of foreclosures are placing an enormous strain on American households and the economy. There were more than 2.2 foreclosures started last year and house prices are in the worst decline since the Great Depression. Fixing these problems must be a priority for the next administration.

The government needs to take a two-pronged approach. The first part — stabilizing the housing market — is something I have discussed widely. In a plan developed with Dean Glenn Hubbard, I propose that the government allow new mortgages to be issued at a rate that is 1.6 percent above the rate of a 10-year Treasury bond. That new rate, which may be as low as 4 percent for conforming mortgages, will stabilize the housing market, provide a fiscal stimulus and raise housing demand.

The second part is preventing foreclosures, which I spoke about today in an interview with CNBC (watch video). My Columbia University colleagues Edward Morrison and Tomasz Piskorski and I have outlined a new proposal for reducing foreclosures. We propose a combination of an incentive fee program for service providers and a legislative initiative to modify servicing agreements.

Ours is a new approach that focuses on what has been the most intractable part of the foreclosure problem: the behavior of third-party servicers who manage portfolios of securitized portfolios. Recent research from Thomas Piskorski, Amit Seru and Vikrant Vig shows that third-party servicers opt for foreclosure much more often than banks that service their own loans.

The proposal eliminates the barriers that prevent these third-party servicers from better managing their portfolios. The first step is to create an incentive fee structure to make loan modification rewarding for both servicer and investor. Secondly, temporary legislation must remove explicit barriers for modifying PSAs and should create “litigation safe harbor” that insulates servicers, provided they modify loans in good faith for investors. We calculate that by taking these steps, up to one million foreclosures can be prevented at a modest cost of $10.7 billion to taxpayers.

The way to fund solutions on both these fronts is with TARP expenditures. If the new administration makes this a priority, they can facilitate economic recovery, reduce foreclosures and help struggling homeowners while protecting taxpayers.

The application of business research provides a critical link between theory and practice. As Dean Glenn Hubbard recently told faculty members at Columbia Business School, over the coming year the world’s financial turmoil will present an opportunity for research and innovation. He challenged the faculty members to frame their research in these terms:

1. How can we address problems and opportunities posed by globalization?

2. How can we design the most efficient provision of financial services (in matching savers and borrowers, and providing risk-sharing, liquidity, and information services)?

3. How should we conceptualize strategy and high-level business decision-making?

What areas of research would you like to see developed this year? How will you frame your organization’s thinking and goals in 2009?

We would love to hear your thoughts. Please leave your comments.

In 2009, change is not just a buzzword — it’s a top priority for many organizations and individuals. And according to Professor Eric Johnson, major change need not be difficult or expensive. Often, Johnson says, change can start by simply looking at how an organization — or a consumer — utilizes default settings.

“There are many defaults that affect you, and you don’t even realize it,” says Johnson. “An unchecked box is a default.”

Research by Johnson and Daniel Goldstein of the London School of Economics has shown that default settings have the power to affect change on a wide range of issues, from consumer purchases to organ donations. Take the example of buying a new car. A customer completes an online car configurator and is shown features that match her preferences, such as the option for a sporty three-spoke steering wheel with a high-horsepower engine. These adaptive defaults serve to align product and consumer as closely as possible. In a different study, a default for organ donation can account for a 16-50% increase in transplantations performed in a country, they found.

However, in addition to changing a desired outcome by checking or un-checking a box, a default also promotes change in user behavior.

“Defaults change the way you look at choices. It is as if you owned the default, and you have to decide what are the advantages and alternatives,” says Johnson.

In a recent article in Harvard Business Review, Johnson, with co-authors Goldstein, Andreas Herrmann and Mark Heitmann, discuss how to best design defaults. The first thing to consider is who is designing them.

“[Default settings] are a decision that is strategic and goes to the bottom line,” says Johnson. “But the decision is too often made by the IT person or the person doing the page design. It is an essential characteristic of a Web site. It’s part of a larger view that site architecture has a large influence over consumer behavior and that’s not something most firms and consumers anticipate.”

And that decision making need not require any overhead, says Johnson. “The beauty of defaults is that they can be changed by simply editing a couple of lines of HTML.”

To learn more about Professor Johnson’s research on defaults, see “Defaults make a difference” in Ideas at Work.

As 2009 begins, the economic lessons learned during the financial crisis will quickly be put to the test. Participants in the recent research symposium, “Preventing the Next Financial Crisis: Lessons for a New Framework of Financial Market Stabilization,” which was hosted by the Sanford C. Bernstein & Co. Center for Leadership and Ethics, provided a look at some of the issues and trends that will shape the year ahead:

Monetary policy is still effective, said keynote speaker Professsor Frederic Mishkin. “I think it’s an absolute fallacy that monetary policy isn’t effective during a financial crisis. It’s just plain wrong.”

Bankruptcy should be an option, because it allows for speedy work outs, argued Professor David Skeel of the University of Pennsylvania Law School. “The problem is that if you address one form of moral hazard [with a bailout], you create another. With Bear Sterns the Fed addressed shareholders’ moral hazard, but [in doing so, it] created creditor moral hazard. That is why, I argue, firms like Lehman didn’t do a lot to try and change their balance sheets after the Bear Sterns collapse,” he said.

Regulatory process will undergo a major overhaul in 2009, said Dean Glenn Hubbard. Many panelists agreed that the systemic risk of trillion dollar markets, such as those for credit default swaps, is too great and that such instruments should be traded in regulated clearinghouse exchanges.

The price of homes must be bolstered, said Senior Vice Dean Chris Mayer, who, with Dean Hubbard, has designed a proposal to stabilize the housing market by guaranteeing a 4.5% interest rate for American homeowners. According to Mayer and Hubbard’s calculations, this would allow Americans to refinance their homes, yielding an average monthly savings of $350.

Financial literacy is poor amongst the poor. Data presented by Professor Stephan Meier about financial literacy showed that 30% of people with adjustable rate mortgages do not know that they have them. This percentage is fairly descriptive of all income groups, however Meier said that it is highest among the poorest.

We asked faculty members to look back at the year and give us their pick for the best idea or book of 2008. Here’s what they said.

Professor Joel Brocker
Best idea: Behavioral economics and decision making
Why? “This year it’s been quite exciting to see the related fields of behavioral economics, behavioral finance and behavioral decision making coming into the popular domain,” said Brockner. “The fields refer to the psychological influences on decision making, and how people don’t always adhere to ‘economically rational’ views of decision making. There have been a number of books on this topic in recent years, such as Blink by Malcolm Gladwell, and in 2008, Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler and Cass R. Sunstein.”

Professor Eric Johnson
Best idea/book: Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler and Cass R. Sunstein
Why? The book’s notion of choice architecture is very powerful for firms and policymakers because they can make changes within their organizations for almost no money, said Johnson, who reviewed the book for Science magazine earlier this year.

Professor Rita McGrath
Best books: The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation by A.G. Lafley and Enough: True Measures of Money, Business, and Life by John Bogel
Why? Both of these topics, growth and a reordering of business values, will be key in the coming year, according to McGrath. “There will be a structural shift and we’re seeing the early warnings that will happen,” said McGrath. “Financial innovation is not the only kind of innovation. It is a great time for innovators to be looking forward for two reasons. First, tough times mean we have no choice but to be creative; a lot of great companies started this way. Secondly, when resources are hard to come by, people have to behave with more discipline. They test assumptions and impose a more disciplined approach.”

Professor Ray Horton
Best book: John Maynard Keynes: Economist, Philosopher, Statesman by Robert Skidelsky
Why? “I read this book last August while capitalism as we’d come to know and love was melting down into what now looks like the most severe downturn since the Great Depression,” said Horton. “Keynes had been out of vogue among most economists and policymakers for more than a quarter-century, dating back to the ‘purification’ of capitalism by Milton Friedman and other monetarists. If anyone wants to understand why we’re all Keynesians now, to borrow a phrase from Richard Nixon, Skidelsky’s biography provides the answer: Capitalism is very unstable from time to time, and from time to time the state needs to bail it out in order to get it up and running again.”

Professor Paul Glasserman
Best idea: The Federal Reserve’s managed sale of Bear Stearns
Why? “It was executed quickly (over a weekend) and creatively (given that Bear was not subject to regulation by the Fed). The Fed’s only exposure is a collateralized loan, backed by the type of mortgage-backed securities the TARP was later created to prop up,” said Glasserman. “Employees and shareholders suffered from Bear’s collapse, but the managed sale may have been the most effective step taken this year to try to limit the spread of the financial crisis.”

Professor Ray Fisman
Best book: Gomorrah: A Personal Journey into the Violent International Empire of Naples’ Organized Crime System by Roberto Saviano
Why? “The Camorra, Naples’ version of the Cosa Nostra, out-Godfathers The Godfather and out-Sopranos The Sopranos. Sometimes, as the saying goes, truth is stranger than fiction (and in this case it’s certainly a lot more violent). As a scholar of economic gangsterism, it is really striking how often Saviano emphasizes that Naples’ mob bosses are rational businessmen of crime,” said Fisman. “You’ll never look at a ball of mozzarella the same way again.”

Globalization is:

A) The future; it is an irresistible and growing part of economic reality.

B) The dominant force shaping the world’s economies.

C) The fate of the world’s workers and businesses, who must adapt or suffer the consequences.

D) The irrational fear that someone in China will steal your job.

If you picked D, congratulations. You’re ready for the central teachings of Professor Bruce C. Greenwald and Judd Kahn’s new book, glob•ali•za’•tion (n): The Irrational Fear That Someone in China Will Take Your Job (Wiley, 2008).

The slender volume sets out to redefine the term which has become a household catchphrase. The authors make the argument that many of the fundamental assumptions about globalization (see answers A, B and C) are “either highly questionable or largely false.” Instead they argue that globalization is not a new trend, that crucial local forces such as improvements in productivity and changes in demand are ignored, and that hard data has been selectively used or underused in favor of anecdotal evidence.

As the book’s title suggests, the authors argue that job security or the lack thereof, is one of the bigger misconceptions in the commonly held idea of globalization. They write:

Do you agree with the authors’ opinions on globalization? Disagree? Please leave your comments.

This is part of a series of posts on the challenges surrounding social entrepreneurship.

The case of Ethos Water offers us an example of the challenges in financing a social enterprise and why we need to improve the instruments available to do so.

A little background: the founder of Ethos, Peter Thum, wanted to create a bottled water company that donated part of its revenues to a fund to improve water supply conditions in poor countries. Founded by Thum in 2001, Ethos was acquired by Starbucks in 2005 for a total of $8 million.

A one-liter bottle of Ethos Water sells for around $1.80. A fraction of this price is given to NGOs that work to improve access to clean drinking water in underdeveloped countries. Starbucks aims to raise $10 million in donations by 2010. Of the $1.80 sale price, however, only $0.05 is donated.

The concept and purchase of Ethos have been the topic of much criticism in the blogosphere. One blogger, writing from France, summed it up:

We agree — it's a little weird. I am not challenging these criticisms except to add that $0.05 is not negligible and that $10 million is still $10 million. Every penny counts.

I use this example to discuss the company’s initial funding. Ethos was founded in 2001 by partners Thum and Jerry Greenfield and two angel investors. Three years later, eBay founder Pierre Omidyar invested in Ethos after it had experienced difficulties. Less than 10 months later, Ethos was sold to Starbucks, where the CEO is a friend of Omidyar. After the 2005 sale to Starbucks, all of Ethos’s original investors left with capital gains. During its four years of independence Ethos never experienced a profit, though it did contribute more than $100,000 dollars to several NGOs.

In the sale, the founders stipulated that Starbucks must continue to contribute revenues to a fund under their control. Instead, I would like to advance the idea today that it would have been better to create financial instruments in social funds independently. We would prefer to see the creation of financial instruments and markets that are designed specifically for social enterprise.

To do this, it may be necessary to create alternatives to the legal status of non-for-profit organizations that still provides the fiscal benefits of charitable giving. In return, shareholders agree to allow a portion of the capital gains be automatically reinvested in a social investment fund. More interestingly, it could be encouraged that these shares be traded in markets, which would improve liquidity and also attract a new segment of investors.

The story of Ethos is an example of the immaturity of existing financial markets today for the financing of social enterprises. It is scandalous that we have not managed to create financial instruments better adapted to the needs of social enterprise. We must create new, innovative markets for financial help in social enterprise.

The above is drawn from remarks made at “Leadership for the 21st Century”, an interactive training session held at the U.S. Ambassador’s Residence in Paris on October 23, 2008 to launch the Ariane de Rothschild Fellows Program: Dialogue & Social Entrepreneurship. The program aims to develop a network of social entrepreneurs with an interest in fostering a culture of mutual respect and dialogue among Jewish and Muslim communities. ]]> Wed, 24 Dec 2008 11:30:40 EST ]]> Entrepreneurship Social Enterprise Strategy Video clip from “Business Ethics in the 21st Century.” Courtesy of WLIW21.

Business leadership has fallen under the microscope in 2008. Part of this scrutiny has been a renewed look at how business schools fit into the leadership landscape. Recent op-ed articles by Dean Glenn Hubbard (“Back to Basics”) and by Professor Ray Fisman (“The Marie Antoinettes of Corporate America”) examine the role of business education and ethical leadership.

Dean Hubbard discusses challenges and solutions for business programs and students. He writes:

Especially since students graduating today find themselves in management positions sooner than was the case in business even just 10 years ago, management education needs to focus on social intelligence and leadership development training. Also, schools must bridge academic theory and current, real-world experience so students can hit the ground running, making immediate contributions to the organizations they join or ventures they launch.

Professor Fisman, co-writing with Rakesh Khurana of Harvard University, supports a broadening of the business education to instill a sense of social purpose in MBAs. They write in their op-ed:

Adding another perspective to the conversation is a new documentary, “Business Ethics in the 21st Century,” which premieres tonight on WLIW21 at 7:30 p.m.

Hosted by executive-in-residence Bill Baker (author of Leading with Kindness), the show examines the topic of leadership through the lens of social enterprise. Interviews with industry leaders from Unilever and GE and professors Ray Horton, Bruce Kogut, Geoff Heal, Ray Fisman and Dean Glenn Hubbard examine how CSR, corporate governance and executive compensation play a role in leadership ethics.

“At the end of the day, it’s not enough to turn a profit,” says Baker. “There’s a clear indication that to be successful, we must bring good business and character traits to the marketplace.”

“Business Ethics in the 21st Century” airs on WLIW21 on Monday, December 22 at 7:30 p.m. and on THIRTEEN on Saturday, December 27 at 9:30 a.m.

The Tribune Company’s filing of Chapter 11 this week could wind up being the journalism industry’s equivalent of the subprime crisis. Print is the backbone of American journalism and if it collapses, then all serious, professional journalism is the United States is in peril. To avoid this, we must present new economic models to support good, robust print reportage.

One alternative is not-for-profit journalism. In my role as a senior research fellow at Harvard’s Hauser Center at the Kennedy School, I am creating a dynamic NPO database to follow these various emerging organizations. Though valuable, the not-for-profit model cannot replace a whole industry that represents billions of dollars. There is not enough philanthropy out there to do that. There must be earned income for print journalism.

Right now, almost all newspaper content that appears on the Web is free. The newspaper industry has been trading advertising dollars for Internet cents. How does it turn those Internet cents into Internet dollars? Or, simply, how does it get direct money from its users?

One discussion I’ve had with students here at Columbia Business School is about creating an earned-income model for the newspaper industry along the lines of Skype, where users make micropayments.

I check the New York Times five to 10 times a day on my Blackberry, for example, and I don’t pay a cent for that content. Is there a way for the Times and other newspapers — especially local newspapers, where there is high value for the reader — to create a micropayment each time a reader checks the site?

Multiply those small amounts by millions of users and it adds up to a serious amount of money. Direct micropayments are part of the solution, but experts must first create a model for them.

The challenge is to better understand the technology so it can be implemented seamlessly, like with Skype, or people just won’t participate. Another challenge lays in adoption: if only one or two newspapers do this, will readers simply choose to get their information elsewhere? Migrating from a free to a for-pay service in critical areas, like journalism, will take some work, but I feel confident it can be done.

Journalism is arguably one of the most important industries in the U.S. because it involves fundamental and basic freedoms: the right to free speech and information.

That Tribune Company filed Chapter 11 doesn’t mean that it — and others — are going out of business, but it does create a snowball effect and says to investors that print journalism is not a good place for their money. We need intelligent models to excite investors and present operators before things get worse.

The model that ultimately may make the most sense is some combination of micropayments and advertising. Academics and students must now present plausible models and see if the free market jumps on board. Otherwise, we are in danger of losing the great professional infrastructure that exists in American journalism.

Dr. Baker is the co-author of Leading with Kindness.

Photo credit: Daniel R. Blume

The incoming Obama administration is reportedly considering a spending package for as much as $850 billion. If you’re wondering where the money will come from, the Fed announced on December 16 that it would print as much money as it needed to in order to battle the deepening financial downturn. The New York Times’s Economix blog asked a number of economists how they would spend the money, using $500 billion as a ballpark figure. Professor Jospeh Stiglitz said:

Right now there’s going to be a major shortfall in revenues for states on the order of a magnitude of $100 or $150 billion per year. This means they may cut back on expenditures, which would be like a negative multiplier and lead to a contraction in the economy. The first priority is making sure to fill in the hole, that shortfall in state and local money …

The second thing I would do is that we need stronger unemployment insurance. Unemployment is growing more long-term again, and we don’t know the magnitude of that. I’d put that at the top of the priorities, including help for those who would otherwise lose their home because they’re unemployed, and health insurance for the unemployed. That’s my second priority.

The third, I think, obviously is spending money to try to prevent foreclosures, whether that’s part of TARP, or a successor to TARP. That would be foreclosures among lower-middle-income people … which would help stem the financial crisis.

Then fourth is the remaining part needs to be divided among several categories. One of the critical issues here is how quickly you can gear up various kinds of spending categories. There are two important criteria: The first is the bang for the buck, how much stimulus we get for every dollar we spend. The second is consistency with our long-run vision. That means supporting R.&D., including green R.&D. as well as basic research. That also means infrastructure, and restructuring the economy for higher energy prices. That also means schools. There are a lot of decrepit schools. That means a broad infrastructure deficit.

I would actually scale back military expenditures which do not stimulate the economy as much as some of these other kinds of expenditures. Given the high deficit, we have to be careful how we spend money, given our various financial problems. We should restructure our health care system, our energy system, and our military system.

Photo credit: Andy Melton

On September 19, the SEC issued an emergency order to suspend short selling. The ban lasted until October 8, a few days after the U.S. Treasury’s $700 billion bailout plan was signed into law. Professor Charles Jones, chair of the Finance and Economics Division, used the rare suspension to measure the ban’s effect on stock prices. According to preliminary research Jones conducted with colleagues, which he recently outlined in an Ideas at Work article, stocks protected by the ban experienced only a temporary price bump and had their market liquidity degraded. That result, says Jones, should not have been surprising given the historical precedent.

“We want all kinds of information to be part of a stock price, including positive information, negative information, optimistic views and pessimistic views. That’s the way we get the best prices, if they reflect all the information that’s out there. Short selling gives a way for people to trade based on that negative information or opinion,” Jones says.

“But when prices fall dramatically, this kind of ban gets trotted out. There are a lot parallels with 1931 in terms of what we’re doing to harass short sellers. The last time there was a ban was in September 1931 during the Great Depression. The ban was put in place after stock prices had fallen by two-thirds. It was a two-day experiment and it went badly. We don’t repeat history, but it certainly does rhyme, like Mark Twain says.”

“During the three weeks of the ban [in 2008], stock prices cratered, falling by about one-third. Financials fell even more, completely reversing their initial gains,” says Jones. “Even more troubling was the ban’s effect on market liquidity. Stocks subject to the ban suffered a severe degradation in liquidity, as measured by bid-ask spreads.”

For the complete article about Jones’s preliminary research and data on the short selling ban, see “Assessing the Shorting Ban” in Ideas at Work.

In a December 17 op-ed in the Wall Street Journal, Senior Vice Dean Christopher Mayer and Dean Glenn Hubbard expressed their support of a U.S. Treasury plan to lower mortgage rates for new homebuyers to as low as 4.5%. The Treasury’s plan closely parallels Mayer and Hubbard’s own plan, which they unveiled in October. The op-ed follows Mayer’s presentation about mortgage rates and homeownership at the Bernstein Center research symposium, “Preventing the Next Financial Crisis,” on December 11.

In the op-ed, Mayer and Hubbard demonstrate the strong relationship between housing prices and mortgage rates and how lowering mortgage rates now will likely increase homeownership rates in 2009. They also argue that house prices are already at or below where they should be based on fundamentals (download research paper PDF).

They also address one of the main concerns swirling around the Treasury’s possible plan: its risk to lenders:

Some have argued that lenders should earn more than the average 1.6% spread, to compensate for the fact that housing is a much riskier investment today. We don't think so. Recall that a mortgage can be thought of as a risk-free bond plus two possibilities that increase risk to lenders: default and/or prepayment. Historically, the risk of default adds about 0.25% to the interest rate. The remaining spread of the mortgage rate over the Treasury yield represents the risk of prepayment and underwriting costs. With falling house prices, the risk of default could indeed add 0.75% or more for a newly underwritten and fully documented loan. But 4.5% would be the lowest mortgage rate in more than 30 years — so the additional risk to lenders of prepayment would be almost nil. And low mortgage rates would substantially reduce the risk of further house price declines.

Professor Charles Calomiris, speaking at the Bernstein Center symposium, supported Mayer’s plan, saying, “The incremental costs to the taxpayers are negative. The GSEs that we now own have $5 trillion of mortgage debt, $1.6 trillion is subprime with 10 times the current default rates of the normal remainder in that portfolio. We also have trillions of dollars of FSA mortgages and, of course, [the ones] in the private sector. If you look at expected losses on those subprime pieces, which are somewhere between 20 and 25% right now, that the effects of [Mayer’s] proposal would be to reduce taxpayer’s fiscal costs going forward.”

Last week’s Senate decision to abandon an auto industry bailout bid has raised the possibility — again — that General Motors and Chrysler will not survive. It also rekindled the debate about protectionism. In a recent interview with Worldfocus, Professor Bruce Kogut discussed whether or not the American automotive industry is suffering from the protectionist policies adopted by several U.S. trading partners.

“By and large it’s not true [in Asia],” said Kogut. “China is a quickly growing market and GM is making a lot of money there; [GM] is also located inside Korea. American manufacturers have already placed investments and have plants operating there, so the case is more on the U.S. export side. There have been some constraints in exports to these markets, but most of them have been tapering down over time. The impact on the U.S. is not going to be very large.”

Do you think foreign protectionism has contributed to the decline of the Big Three automakers?

It’s Monday again, and in what has become a too-familiar weekend drill, major financial institutions — Lehman Brothers and Merrill Lynch — failed to emerge in their last-Friday form. And Lehman’s bankruptcy and Merrill’s takeover have important lessons for policymakers.

Lehman’s demise as one of Wall Street’s oldest and most well known independent firms comes on the heels of the forced sale of Bear Stearns to JPMorgan Chase, the government’s “conservatorship” of Fannie Mae and Freddie Mac, and now Bank of America’s acquisition of Merrill Lynch. Just two Wall Street titans remain.

The Treasury and the Fed have been aggressive. The “blank check” power given to the Treasury by Congress has provided taxpayer support of unknown size to mortgage giants Fannie Mae and Freddie Mac. The Fed’s rush of liquidity injections reflect Walter Bagehot’s classic Lombard Street advice “to lend freely.” And lend freely it has, with extraordinary liquidity provisions — through a more attractive regular primary credit program, the Term Auction Facility, the Term Securities Lending Facility, and the Primary Dealer Credit Facility. Borrowers include banks, investment houses, Fannie and Freddie and, now, AIG. The credit risk on the Fed’s balance sheet will be borne by — you guessed it — the taxpayer.

Now the Treasury and Fed should not ignore systemic risk just to limit moral hazard. But all of this firefighting has left us with problems remaining. Additional write-downs are coming. We cannot and should not try to protect every institution.

But, stepping back, there are steps we should take. To limit the further spread of real estate woes to the broader economy, expanded FHA authority for mortgage refinancing can make sense. In addition, putting in place a clean-up agency like the 1930s’ Homeowner’s Loan Corporation or the 1980s’ Resolution Trust Corporation would help. Taxpayer funds used to support such vehicles offer more stimulus and stabilization than temporary tax cuts or public spending.

The financial meltdown that engulfed Lehman and the uncomfortable responses of policymakers the past several months also highlight the need for regulatory reform. The problem is actually not too little regulation — both lightly and heavily regulated institutions are in trouble. And some regulations encouraged the growth of high-risk mortgage lending.

We do need smarter regulation: a key step is to broaden capital and liquidity requirements and increase them during financial booms to lean against excessive risk-taking.

The events of the past three years highlight that risk misperceptions in a boom can lead to a scramble for liquidity if collateral values decline. Ascertaining this problem in real time will always be tough for regulators (even for the increased number of regulators the Treasury recently proposed).

Bagehot picked up on this, too. His admonition goes on to say: “The time for economy and for accumulation is before. A good banker will have accumulated in ordinary times the reserve he is to make use of in extraordinary times.” That is, regulation of capital adequacy could require more capital to support incremental risk-taking in a boom and lower such capital in a bust. With such requirements, financial institutions would find risk-taking marginally more costly in a credit boom, in which credit risk and liquidity risk are very low. In a downturn, a scramble for liquidity to meet capital requirements would be attenuated.

While strong supervision obviously remains important, this other advice from Bagehot would be an important addition to the policy tool kit. This could be implemented by raising banks’ capital requirements proportionately as risk-weighted bank assets grow. By varying capital cushions over credit cycles, consequences of risk distortions for actual lending and borrowing decisions will be reduced, along with the likelihood of asset fire sales and extraordinary central bank liquidity provisions.

I hope Secretary Paulson will be able to take Chairman Bernanke on one of his famous bird-watching expeditions next weekend.

This column also appeared on Forbes.com.

Photo credit: T. Shein

This is part of a series of posts exploring issues of careers and women that were discussed at the “Universities, Careers and Women” symposium on September 19.

There are blogs and books and there is plenty of anecdotal evidence, but finding the right calculus for work and life is no easy task. For many, this is where the role of a mentor comes in handy. Especially for women who seek to have a family and a career, finding a mentor can be critical to establishing a realistic template for what’s to come.

This topic was part of the discussion of September’s “Universities, Careers and Women” research symposium. Panelist Subha Barry, managing director and head of multicultural careers at Merrill Lynch, talked about some of the reasons behind the dearth of female mentorship.

“There is an ignorance, and [senior women] don’t know how they could help to guide them differently,” said Barry. “There is a pathway they created for themselves as the way to success, and they are unsure whether they can affirm that there is an alternative path, so they feel you need to march in lockstep with what they did to be successful.”

Mentoring is critical for many reasons: it provides a transfer of human and intellectual capital, it creates a web of accountability and loyalty, and it provides comfort and guidance in the face of challenges. Mentoring is also about the bottom line. Without it, there are some very real retention issues.

Economist Anne Preston of Haverford College, who spoke at the symposium, discussed her study that showed that the number one reason women leave the science field is a lack of mentorship.

Earlier this year, Professor Jonah Rockoff blogged about his research showing that teachers were more likely to return the following year if they were assigned a mentor that used to work in their school.

So if mentoring works, but there’s a lack of it for professional women, what can be done?

Cali Williams Yost ’95, author of Work+Life, has spent more than a decade researching and writing about the intersection of career and personal life issues.

In a recent interview, Yost discussed how both roles — mentor and mentee — can be improved. The increasing emphasis on global business and the 24/7 culture of the workplace has changed what it means to have separate professional and private lives, Yost said. Like Barry, she pointed to some generational issues that hinder the mentoring process. In a prior generation, “when [professional women] were raising children, you worked or you didn’t,” said Yost. “Now you have a younger generation who says, ‘I am not going to do that. I want to find a new way and its not going to look the way you did it.’ And leaders struggle to have that conversation. They did it the way they did it for some reason, but now it’s different and you have to engage in a dialogue and move out of the ‘all or nothing’ mindset.”

Yost says the emphasis in mentorship should be less about handing down practices and more about sparking a discussion of how to support realistic life demands.

“[Mentorship] is not giving younger women ideas but rather supporting the conversation and working with them to find a creative way to do it and knowing you yourself may also experience elder care or work in retirement,” said Yost.

“For younger women, when you experience a work-life transition, you need to say something. You need to initiate and come to the table having thought of a plan that considers what you need to do as well as the needs of your business.”

Photo credit: Leslye Smith

Much like the brick-and-mortar American mall, where dozens, if not hundreds of shops are clustered together, social commerce sites such as eBay, Amazon and ZLiO.com bring together online shops via links.

Research from Professor Olivier Toubia, conducted with doctoral student Andrew Stephen, shows that having a relatively large number of links directed to a shop benefits that shop. They also found, more surprisingly, that when shops link to each other, there is a net positive effect — even though this may seemingly increase competition. “It makes sense to link to other shops, even though you’re sending customers away,” Toubia says. “It helps more than hurts, because in most social networks people link back.”

Read more about Toubia’s research in Ideas at Work.

Understanding the financial underpinnings of mortgage-backed securities, the investments at the center of the financial crisis, is a difficult task. The complex structure of these investments may have even obscured their inherent risk to those parties directly involved with their purchase and sale.

A December 7 New York Times article by Gretchen Morgenson chronicles the predicament of Moody’s, the credit rating agency that has fallen under scrutiny for inaccurately giving high ratings to many mortgage-backed securities, including those with questionable financial fundamentals.

The rating agencies, however, were not alone in their misjudgment. According to a recent article by Professor Trevor Harris in Ideas at Work, all parties to the transactions — including the lenders, mortgage brokers and banks, securities firms and borrowers — failed to understand the fundamentals of these investments.

According to Harris, “[They] were making a bet on constantly rising home prices, while disregarding the real people and real homes on top of which these products were precariously built. Much like a Ponzi scheme, everyone lent to everyone else, creating a bubble and then compounding it. Returns could only continue while new money kept flowing into the system. When the money stopped, the whole system started unraveling.”

Harris suggests that by bringing transparency into the underlying fundamentals and risk characteristics of a business, regulators will be able to provide a more accurate and complete assessment of the related fundamentals and risks.

For a more detailed look at how the fundamentals of mortgage-related investments were neglected and what can be done to prevent this from happening again, see Harris’s article, “Back to Basics,” in Ideas at Work.

Two books by Columbia Business School faculty were named to the Economist’s list of the best books of 2008.

Congratulations to Professor Amar Bhidé and his book The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World. Here’s the magazine’s snapshot review:

A counterintuitive view of technology and globalization that will delight those who believe that American innovation is insulated from economic ups and downs.

The Three Trillion Dollar War: The True Cost of the Iraq Conflict by Professor Joseph Stiglitz and Linda Bilmes was also on the list (and was the source for a popular online video circulating earlier this year). Here’s what the magazine said about the book:

With the patience of auditors and the passion of polemicists, two academics, one a Nobel prize-winning economist and the other a public-finance expert at Harvard’s Kennedy School of Government, take an unflinching look at the hidden cost of invading Iraq.

What else was on book critics’ shelves this year? Fast Company magazine has a nifty interactive feature on their best business reads of the year, and for a comprehensive guide to all of the year-end compilations, check out this blog.

This is the first in a series of posts on the challenges facing social entrepreneurship. The following is drawn from remarks made on October. 23, 2008 at “Leadership for the 21st Century,” an interactive training session held at the U.S. Ambassador’s Residence in Paris.

I want to consider the question of strategy and competition among social enterprises. Is it true that there is no competition between organizations? Or do social enterprises need to be better equipped to function in the context of competition?

Among the conditions often attached to a foundation’s money is that the social enterprise receiving it must disseminate its business model to other organizations. This is not easy because there is little incentive to do so or time to allocate to this project.

I propose an alternative for exchanging knowledge that does not put a considerable burden on the people who must share it: co-location. Consider the model of La Ruche, a social enterprise that provides collective space to other social enterprises. A beehive offers a collective space where bees — the social entrepreneurs — meet and the exchange of knowledge can go through informal channels. Social enterprises that co-locate in this kind of setting are not in competition, for by design, they serve different needs by different means. Instead, the shared collective space creates a community of practice with positive incentives to share knowledge — without creating competition.

Whereas voluntary sharing knowledge is a good thing, we should not ignore that competition still exists everywhere and is itself an important driver of the dissemination of good ideas. Though often painful, it can serve us collectively if we give it the respect it deserves. Take this example: a very talented entrepreneur had the idea to create a company that would employ people with disabilities and allow the customers to share the experience of being disabled. The idea sold very well, and it came time to design a strategy to implement the concept in the real world.

But when the entrepreneur arrived in a major European city to study the possibility of implementing his business model, he was surprised to learn that he had arrived too late. Someone else had seen the idea and already launched the project. The entrepreneur was very disappointed and felt betrayed by a stranger.

When an idea is copied, who is in the wrong? In the business world, the fault lies with the creator: it is his responsibility to protect his idea and devise a strategy to exploit it.

But let’s not overlook the big picture: even though the case was disappointing for the entrepreneur, the social enterprise concept was still allowed to spread.

Like the previous example has shown, competition does not prohibit the dissemination of good ideas. However, instead of foundations demanding that the social enterprises they fund involuntarily disseminate their ideas, we should provide the tools and knowledge to entrepreneurs and equip them to effectively grow their business and innovations in the context of competition.

Photo credit: Peter Shanks

The Treasury is considering a plan that may lower mortgage rates to as low as 4.5 percent for people buying homes. Chairman of the Federal Reserve Ben Bernanke discussed the proposal on December 4 (read complete transcript). The plan, still in development, resembles a plan developed earlier this year by Senior Vice Dean Chris Mayer and Dean Glenn Hubbard (read more).

Prof. Mayer, interviewed in the New York Times on December 5, urged the government to consider extending the low rates to existing home owners in addition to new buyers.

"This really is the opportunity of a lifetime," [Mr. Mayer] said. "If you ask someone if this is the time to come into the market, I think anyone who would have bought a house in 2007 and was sitting on the sidelines, or who wants to buy this year or would buy in 2010, would want to take advantage of this."

Mr. Mayer said long-term Treasury rates are so low right now that the government could actually make a profit on the cheap loans. The Treasury can sell 10-year bonds right now and pay only 2.7 percent a year, far below the 4.5 percent that it would be charging home buyers.

But he said his own preference was to make the mortgages available to existing homeowners as well as home buyers.

"I think there are additional benefits one could have by extending the program for people who refinance," Mr. Mayer said. "At 4.5 percent, you might be looking at 25 million people who could refinance and the average savings could be $400 to $500 a month."

He also analyzed the plan on NPR’s All Things Considered on December 4 (listen to audio) and discussed how the move could bolster house prices. He said:

"My own research shows that as many as 1.5 million to 2.5 million people could come into the housing market if such a program were in place. That kind of influx of new home buyers pulls a lot of inventory off the market. That then stops the decline in house prices and eventually leads house prices to turn the other direction. That's an enormous first step in preventing foreclosures because the lower house prices go, the more people face pressure to walk away from their house."

 

Where there is change, there is opportunity. This idea was at the heart of a recent presentation to students and faculty at Columbia Business School by Michihisa Shinagawa, president and CEO of Sumitomo Corporation of America. He spoke as part of the Center on Japanese Economy and Business’s ongoing Zandankai Series. The corporation is one of Japan’s largest trading companies.

Currently, there are three structural shifts that are transforming the Americas, which could provide opportunities for Sumitomo, said Mr. Shinagawa.

Firstly, there is a need to use natural resources more efficiently, such as by developing fuel-efficient transportation and energy-efficient buildings, and to develop alternative energy sources.

Secondly, the United States is becoming more of a consumer nation. Despite the current downturn, as income levels of immigrants rise and the region grows, the U.S. consumer market is expected to create greater business opportunities.

Lastly, Canada and Central and South America will continue to grow in importance as producer regions and supply sources, given that labor costs in China and freight charges will increase.

To take advantage of these structural changes, Sumitomo is developing strategic goals.

“The first strategy is to achieve ‘critical mass’ in markets,” Mr. Shinagawa said. “As commodity prices fluctuate and consumers become more cost-conscious, many industries, such as mineral resources, steel and aerospace, are up against stiff competition. As a result, companies are merging to become giant global players.”

He also discussed how the company would make the most of these current economic cycles.

“We try to anticipate economic cycles and recognize shifts in growth areas,” he said, citing Sumitomo’s real estate portfolio as an example.

“Until 2004, our U.S. office building portfolio had only one property, which was in New York,” he said. “Then we began recycling our assets and realized a large profit. We re-invested that profit, and today our portfolio is much more diversified and valuable.”

The final piece of Sumitomo’s strategy is an ongoing effort to be a ‘lean and mean’ organization by monitoring inventory levels, recycling investment assets and enhancing their human resources.

Photo credit: Michael Pereckas

Dean Glenn Hubbard met with students in a town hall meeting on December 2 for a discussion on the state of the U.S. economy and career prospects for MBA students. The forum coincided with news from the National Bureau of Economic Research that the U.S. has been in a recession since last December.

A relatively deep recession will last through the middle of next year, predicted Dean Hubbard. He also discussed actions to bolster the economy, including fixing short-term lending, recapitalizing banks and stabilizing housing prices (see his plan developed with Professor Chris Mayer).

Dean Hubbard also voiced some optimism and pointed to market opportunities, including fixed-income securities. “The most senior secured loans,” he said, “are yielding 17-18%. The refinancing in commercial real estate that is likely to happen will yield huge returns.”

The Dean emphasized that MBAs entering the job market focus on where they want to be in five to seven years. He urged graduates to pursue activities and skills that will gradually advance them up their career ladder.

Looking forward to next year, Dean Hubbard said, “2009 is going to look a lot like 1933.” In that year, a newly elected president Franklin Roosevelt took office in March and enacted a series of government measures which restored, at least temporarily, confidence in the shaken banking system. The year marked the end of a recession that lasted from 1929 to 1933, according to the NBER.

Prof. Amar Bhidé’s compelling thesis from his new book The Venturesome Economy, was recently featured in the New York Times and The Economist.

At the heart of his argument is the idea that technological innovation is important for economic development. As important, though, if not more so, is the ability to apply that innovation creatively.

“The largest benefits,” Prof. Bhidé says, “will accrue to those economies that are most capable of taking advantage of these [technological] advances.”

His argument comes at a particularly critical point for American business, which faces ever-increasing technological competition from China and India and the potential for new government policy on research from the incoming Obama administration.

Prof. Bhidé argues that “midlevel innovation” is of greater competitive value than high-level research to companies.

“It is breadth of knowledge,” says Prof. Bhidé, “that underpins this ability to take advantage of innovation.”

His theory bodes well for MBA students, whose breadth of general management knowledge will be of increasing value in the corporate business world.

“The MBA education,” he says, “teaches you to think broadly and quickly about a variety of things.”

A crisis of trust is plaguing investors, says adjunct professor Seth Freeman in a recent column in the Christian Science Monitor. His column discusses the “promise problem” that we’re facing at the economic level — that is, how do investors know that borrowers will keep their word?

Freeman suggests that the solution is a building a “trust support,” and that doing so requires both parties to answer the following questions:

1. Who can serve as a credible bridge of trust? The government, for instance, can back borrowers’ promises.
2. How can we most effectively watch or test the promisemaker’s ability to perform? Helping lenders know what toxic assets borrowers hold might help them test for ability to perform.
3. What incentives and penalties can best encourage performance? My nephew is a case in point.
4. Are there ways to build in mild, moderate, and strong trust supports? A range can help lenders and backers intervene early and late with the least coercion necessary.
5. Does the solution satisfy all parties’ key interests?
6. What if the worst case scenario happens?

“The promise problem is as central to the current crisis as it has been to many others. It’s the issue lurking behind many of the world's biggest problems. Want to stop global warming? The spread of nuclear weapons? Human rights abuses?” Freeman writes. “Tackling the promise problem is the great and often solvable challenge behind the others.”

In the first half of 2008, the high price of oil caused food prices to rise dramatically. And while oil prices have come down for now, food prices are still up: it is estimated your turkey dinner will cost 5.6% more than it did last year. In addition, consumers are spending less as a result of current economic conditions. All of this means that restaurateurs — already accustomed to razor-thin margins even in a good year — must be more creative than ever to keep their businesses running successfully.

Public Offering spoke with two alumni in the restaurant business in New York City, Peter Schatzberg ’07, co-owner of FreeFoods Organic Cafe in Midtown, and Cecilia Pineda Feret ’92, co-owner of Brasserie Julien on the Upper East Side, about how they’ve changed their business models to adjust to these challenges.

Measure twice, pay once

“We work by the motto ‘What gets measured, gets done,’” says Schatzberg, who worked at GE before he ventured into the restaurant business with raw food celeb-chef Matthew Kenney. “If you are watching and measuring people, it changes people’s behavior. You can value engineer; I measure the chef every week and keep moving the target, and that changes behavior.”

Stay seasonal

“If you can change a whole item on the menu with a new name, new ingredients and a new price for the season, [a change in price] is less visible,” says Schatzberg. “We have also scaled back on meat and chicken and are offering more vegetarian choices.”

Curate the menu

“Items with higher profit margins should come first,” says Feret, who has been in business with her husband, who is the chef, for nearly 10 years. “Work with your costs and see what dishes you need to encourage people to try. We put all the entrees under $19.50 in one column because we saw people at the door were concerned with price, and this encourages them to come in.”

New food presentation

“We created a new menu item last year as a tactical way to keep our costs down but provide the same quality of meat,” says Feret. “The hanging brochette is a kebab presentation [of steak], that allows us to have the quality of filet mignon without having to worry about buying larger pieces that are more expensive.”

Photo credit: Peter Schatzberg

With Security Analysis, Graham and Dodd laid out a superb analysis that has stood the test of time. But their prescription for risk management was to say, “Buy bonds.” In their time, when they looked at the overall economic environment and at risk properly defined, bonds were where they saw methods and opportunities to control risk. Today, value investors think about managing risks in more sophisticated ways.

One of the real lessons of Graham and Dodd is that you had better understand the determinants of cash flows, you had better understand companies and industries, rather than just taking a historical average and slapping a multiple on it. And you had better understand when a company’s superior returns are going to be sustainable in the face of the relentless force of competition.

Graham and Dodd were aware of that, but in their world they didn’t see any chance of resisting that relentless force of competition — that if a company produced 20–30 percent returns on capital, five or 10 years later those returns were going to be gone. We have a more sophisticated view of which business models are likely to survive, of why it is that Coke produced superior returns for more than 100 years whereas other firms have produced those returns for short periods of time (notably the Internet-based industries).

So the first lesson we can take from today’s value investors: understanding sources of competitive advantage in a sophisticated way is a discipline that has advanced far beyond what Graham and Dodd envisioned. That means you can look at cash flows in ways that you never could before and think about risks you are exposing yourself to when you pay eight or nine times those cash flows, which could evaporate. Understanding the business models that fell apart and those that didn’t is very much a lesson in risk management.

The second lesson is something I’ve learned more recently by listening to other value investors: be good at buying insurance and formal risk management. As we’ve experienced in the past year, there are always events that can come out of left field. Begin to do active risk management so that you have a portfolio of good companies at good prices and are protected from the fallout.

This doesn’t mean trying to outguess people in forecasting the economy. What risk management means is having a sense of when there are macro vulnerabilities and when there are vulnerabilities in the market because of people’s bizarre attitudes toward risk. About a year before the LTCM bailout in 1998, I was offered a job by one of LTCM’s senior people. He proclaimed that risk was just going away, that it ultimately was going to disappear. This was during an enormous bubble, and it was a crazy thing to believe. I declined the offer. When the market starts to sound crazy like that, that’s when you want to buy insurance, and you want to learn to buy it in a way that’s most cost-efficient. Ironically, insurance is cheapest when you need it the most, because it’s precisely at that point when things are most overvalued.

More recently, it’s not just mortgages where people went crazy: you could get credit default swaps in summer 2007 on almost any debt at ridiculous prices. At its most ridiculous, you could get a contract that would pay full face value of Dubai’s sovereign debt if Dubai defaulted at four basis points. The market was saying that this country — with a short history, living in the most dangerous part of the world, subject to the greatest possible variation in economic and social conditions — had one chance in 2,500 years of defaulting on its debt. If you had bought those credit default swaps at those four basis points, then you would have made 21 times your money and protected yourself against potential losses. Earlier this year, the same credit default swaps were at 86 basis points simply because of the change in the psychological atmosphere.

You ought to have the sense that this is an opportunity to buy cheap general insurance because what is driving that situation is a perception about risk broadly in the economy that is pervasive.

Finally, such an approach rigorously exercised would have gone a long way toward avoiding losses in the recent mortgage meltdown. Meanwhile, the bailouts today have not even begun to address risk attitudes. We should remember that however new the risk management methods of today’s value investors are, they are based on the extraordinarily durable principles of Security Analysis.

This piece is drawn from remarks made by Professor Greenwald at October’s “Celebrating 75 Years of Security Analysis” symposium in honor of the new sixth edition, which was published on the 75th anniversary of the first edition. These remarks were also published in Ideas at Work.]]> Mon, 24 Nov 2008 10:09:59 EST ]]> Capital Markets and Investments Strategy

The term “endgame” refers to the second half of a product’s life cycle, during which firms producing products face slow growth, no growth or negative growth in consumer demand. Are U.S.-based automakers prepared for theirs?

General Motors, Ford and DaimlerChrysler Daimler AG are facing declining demand primarily because their products are less popular than those manufactured by competitors on U.S. soil such as Acura, Isuzu, Mercedes-Benz, Mitsubishi, Nissan, Toyota and Volkswagen. But this decline in demand is not the result of U.S. consumers buying significantly fewer cars; American autos are less popular because these automakers have failed to innovate to match consumer demand.

Yet even before this reality was recognized, General Motors had 22 idle factories that no incoming competitor wanted to acquire. Those plants weren’t attractive to new buyers because they were antiquated and because GM’s laid-off laborers had high wage expectations. In the 1960s, the era of domestic market share dominance and the time when “a good time was had by all,” the employees (including the managers) of U.S. automotive firms enjoyed lavish compensation packages, especially with respect to retiree benefits. But those good times had a steep price for American industry, opening the door to offshore competition in Detroit’s own backyard.

Look at the steel industry, for example, where similar “legacy” costs have in the past bankrupted more than 35 U.S. steelmaking firms. When the government-backed Pension Benefit Guaranty Corporation (PBGC) created a way for investors to revive mothballed steel mills, U.S. steelmaking assets became hot properties. They were acquired by offshore competitors, such as Arcelor-Mittal NV from India and WCI Steel, which is owned by the Russian Federation, who bought their way into the U.S. market for steel with vastly reduced operating costs.

This phenomenon — offshore competitors becoming “domestic” — has already occurred in the automotive industry, where offshore competitors jumped the tariff wall long ago to become “local” and built their greenfield plants in regions where there were no legacy costs (or manufacturing practices) to hobble their cost structures.

Today, the automobile industry’s endgame problem is determining how to scale back the manufacturing capacity of those firms whose products are no longer economical to produce. However, in spite of this endgame for some firms, many others that are producing cars in the U.S. are doing just fine.

Photo credit: Pennilicious

“My dad gave me a lot of good advice when I was growing up, including the following pearl: ‘Net worth is usually more a function of how much one spends than of how much one makes,’” said Professor Ray Horton, director of the Social Enterprise Program, when considering the question of whether you need to be “rich” to launch a successful social enterprise. “You don’t need to be rich to be happy or, for that matter, to be a social entrepreneur. If there is one thing that social scientists have nailed down, it is that money (beyond some minimal standard) and happiness are not strongly correlated.“

The question also came up at the Social Enterprise Conference on October 24. While many business people who have experienced financial success often have a second act in socially oriented causes, social enterprise stands alone as a business model. The four panelists speaking at “The Frontlines of Social Entrepreneurship” event considered the question. Here are a few of their remarks:

“If you turn in your salary to work 18 hours to do good for no money, you better have made a ton of money [before]. But can you do good every day until then? Yeah, absolutely. Get rid of the fine print. Stop making stuff out of garbage. Everybody in this room can do good starting one minute from now. Make a good decision so that the social change starts as you think about the rest of your life. Then, if you make a lot of money, maybe you want to donate some number of years to some crazy thing, but until then just be a nice guy.” Rob Wunder, Co-Founder, Yummy Earth

“I think you can start a company that makes money and does good. I am not sure if a model of social enterprise that is solely about doing good and that is not designed to make any money is scalable. It’s hard. Random, bad things happen and all of sudden you don’t have the capacity to respond. The design of the company, from the ground up, should be [geared to] doing something that makes the world better while still making money.” John Katzman, Founder and CEO, The Princeton Review and 2tor.

“A lot of people in business school ask if they should go and get skills at some consulting firm or investment bank first. I feel that at the end of the day, what’s important is that we all take step closer to what we want to be doing. The secret is that it is much harder to find interesting work and a way to make a difference, and it takes time to get there. It’s not just in one day that you're going to find the answer of what your social enterprise is going to be. What’s important is to take a step towards that path. And in the years when you're just trying to make money or get skills, while those skills may help you, you should also be searching for ways to get you closer to what you want to be doing.” Jeremy Hockenstein, Founder and CEO, Digital Data Divide

“I think you need to pay yourself first and that's enough. You don’t need to make lots of money, and there’s no need for greed … You go do what feels good and take care of you and your family.” Danny Kennedy, Founder and President, Sungevity

Do you think you need to be “rich” to be a social entrepreneur? Please leave your comments.

Photo credit: Linus Bohman

Nearly 500 alumni and guests gathered in Hong Kong for the Pan-Asian Reunion on October 24-25. “The atmosphere was very warm and friendly,” said Woo Taik Kim ’72, president of the South Korea Alumni Club and a panel sponsor, who attended the weekend event. Faculty panels on topics ranging from healthcare to private equity were held in addition to the reunion dinner. The faculty and panelists received substantial coverage in the local news. A few highlights of the event:

Global Economy

Speaking at a press conference, Dean Glenn Hubbard said that the candidate who wins next week’s presidential election must be prepared to immediately begin work with Treasury Secretary Henry Paulson and not wait for the start of term in January 2009. He also discussed how the strength or weakness of a recession in the U.S. would affect China. From China Daily, on October 22:

Prof. Shang-Jin Wei, who moderated the panel “Asia: From a Major Investment Destination to a Rising Source of Capital,” also offered his view on the on the financial crisis. In an interview with 21st Century Business Herald on October 25, he discussed the safety of the U.S. dollar and said:

Private Equity

The “Private Equity and the Capital Markets” panel on October 24 with Paul Calello ’87, Russell L. Carson ’67 and Henry R. Kravis ’69, and moderated by Prof. Bruce Greenwald was very well attended. Prof. Greenwald discussed his thoughts on private equity before the conference with Asian Venture Capital Journal:

Tokyo’s Lesson

Heizo Takenaka, Japan’s former economy minister, was part of the “Asian Financial Centers: Activities and Aspirations” panel moderated by Prof. Hugh Patrick on October 25. He spoke with the Financial Times afterward and discussed lessons learned from Japanese crisis (watch video). He said:

We must admit that we knew very little about Grameen Shakti when we filled in the application for the International Development Club project at the beginning of the summer of 2008. The information package outlined a rural energy company related to the Grameen Bank, the Bangladeshi microfinance organization created by 2006 Peace Nobel Prize winner Muhammad Yunus. However, the intersection of microfinance and rural energy piqued our interest.

On the one hand, energy needs in developing countries’ rural areas are overwhelming: more than two billion people do not have access to modern forms of energy like electricity or oil while a third of the energy consumed in these countries comes from burning wood, crop residues and animal dung (PDF). On the other hand, microfinance, pioneered by Professor Yunus in the 1970s and probably the most successful business innovation to serve low-income consumers, has opened new possibilities to fight poverty beyond traditional government programs and international aid.

How can innovations in microfinance be applied to rural energy?

Yunus and Dipal Barua, one of his students when he started Grameen Bank, founded Grameen Shakti (the name literally translates to “Rural Energy”) in the mid-1990s with the mission of empowering rural people by giving them access to green energy and income. Grameen Shakti’s clients purchase green energy equipment such as solar panels with an in-house microloan that they can pay back over three years. After that, they own a source of electricity that usually lasts up to 20 years. In addition to solar energy, Grameen Shakti provides energy products like Improved Cooking Stoves and Biogas Plants.

The organization also makes smart use of available technology; for example, Barua receives daily text messages with solar panel sales per office. And they are a truly grassroots organization: all employees are Bangladeshis and most of the funding comes from their own operations.

Like the bank, Grameen Shakti achieved almost immediate success and has grown very quickly. Barua now heads the organization, which employs more than 2,000 people and has offices all over rural Bangladesh. It has installed close to 200,000 solar panels in households across the country and plans to reach one million in the next three years.

During the three months we worked in New York and the two weeks we spent in Dhaka, we helped them refine a plan to train young women to install and repair the solar home systems. We had the opportunity to see first hand how poor rural women provided with appropriate training and tools are able to earn a living by producing and repairing electronic accessories for the solar panels.

Nilufa, pictured at the top of this post, left a profound impact on us: she is 21 years old and has one son. Abandoned by her husband, she is now supporting her son and her family by producing at home hundreds of electronic accessories every month.

We returned to New York with the feeling that we had learned much more from them than they had learned from us and convinced that local social businesses have a great potential to change the lives of the poor.

Where are value investors looking for in today’s market? In an interview with US News & World Report on November 7, Professor Bruce Greenwald discussed the effects of the current market on the mindset of value investors, Warren Buffett’s investments in General Electric and Goldman Sachs and where the best opportunities lie. (Read the complete interview.)

Excerpted from the interview:

Photo credit: iStockPhoto

Above: Part one of Jeffrey Immelt’s Botwinick Prize acceptance speech on October 24. Watch the speech in its entirety.

Jeffrey Immelt, chairman and CEO of General Electric, visited Columbia Business School on October 24 to receive the Botwinick Prize in Business Ethics, which is organized under the auspices of the Sanford C. Bernstein & Co. Center for Leadership and Ethics and its director, Professor Bruce Kogut, the Sanford C. Bernstein & Co. Professor of Leadership and Ethics.

The three keys to ethical leadership, Immelt told a capacity crowd at Riverside Cathedral, are keeping the company financially safe, operational excellence and protecting the future. He shared his thoughts on the industry’s future, citing its need for “a regulatory structure that is industry focused, led by domain experts” as well as more investment into technological research and development. He also encouraged the education of more engineers.

GE spends $6 billion annually in R&D, Immelt said. While this investment may not show returns on GE’s near-term balance sheets, it signals Immelt’s intent to lead the company into a clean energy future. He said:

We can make a clean energy future. This is an extremely solvable problem. Most of the technology is on the shelf today. There’s been a pitiful amount that’s spent in energy technology over the past 25 or 30 years. Even if the price of oil is considered low today at around $70 or $75 a barrel, maybe half what it was two months ago, it’s still four times higher than it was the previous 25 years. So the need to create this clean energy future, I think, is both a social imperative as well as an economic windfall for the people that figure out how to do it, and in my mind should be job one of the next administration because it’s so highly solvable. It requires investment in renewable technology; it requires rejuvenation of core technologies like clean coal, nuclear power.

It requires a build-out of the national grid. It requires the evolution of new technologies like battery and solar and technologies like that. But I would say in the next 10 or 20 years, countries like the United States and much of the developed world can really develop an energy infrastructure that is diverse, that is protected, that is economical and that can create lots of jobs while we’re at it. So the first thing I would say in our new society, in our innovative society has got to be an incredible focus on energy because it’s so solvable.

Above: Xerox’s Anne Mulcahy spoke to Columbia MBA students as part of the Silfen Leadership Series on Oct. 6 (part 1). View entire speech: part 1, part 2, part 3, part 4.

It is one thing to turn around a troubled company — it is another to transform it. Anne Mulcahy has done both. As the CEO and Chairman of Xerox, she led the company from near bankruptcy in 2000 to $17 billion in revenues today. She recently spoke to Columbia Business School students about her experience guiding a corporation out of a time of crisis — more relevant than ever, she noted — and creating one of the most respected and enduring businesses in the world.

A few of Mulcahy’s lessons on leadership:

Take time

“Understand the issues in the company and know what the problems are that you are facing. When I started … I traveled the world for 90 days listening to the problems through the eyes of our employees, investors and customers. A lot of our problems were masking fundamental issues in the business; we were trying to put out fires when we didn’t even know were the fuel leak was. Taking the time to understand the issues in a company is important.”

Communicate openly

“With our people and in public I was very candid about the issues. The level of transparency with regard to the problems you have is becoming more important by the day; an ability to talk about what will be done to overcome them is the other part of the communications strategy.”

Believe in it

“You have to have people aligned with your goals and objectives. It’s the scale of belief that is the single most important thing to making progress and without that, it is a disadvantage being big. It was the single most important thing for [Xerox] to make as much progress as we did.”

Make decisions

“Be bold and decisive in a time of crisis. Moving quickly and decisively and making a few mistakes is much more important than being as thoughtful and as perfect you can be when you don’t have time to put that perfect solution in place.”

Simplify your business plan

“We undid all the complexities and engineering so that there was this incredible logic about revenue, costs, expenses and profits that we hadn’t seen in a while. … It’s about strengthening the business fundamentals, discipline and control; it’s about having the discipline be focused on productivity and improvement.”

Don’t wait to change

“Use good times to change; don’t wait until the crisis. ... You have the luxury of time and [change] can thoughtful and it’s easier on the people.”

Follow your instincts

“Use your experience to make decisions. We had a five-dimensional management matrix [when I took over as CEO] and each step of it was logical, but when I looked at it, I couldn’t really find anyone who was accountable. It’s far less important the choice you make, than making a choice for clear accountability. So we made a choice: geography is our P&L center. At the end of the day, when I want to know what’s happening in Europe, I call the guy who is managing in Europe. It’s not perfect, but it’s clear and it enabled us to move quickly and efficiently.”

That diet, at least elements of it, was at the core of a panel discussion with Dean Glenn Hubbard and professors Bruce Greenwald, Pierre Collin-Dufresne and Christopher Mayer.

“We still are in a period of substantial credit stringency,” said Hubbard in his opening remarks. “Financial institutions remain undercapitalized for normal activity.” [In a separate column published on Oct. 3 with Princeton's Alan Blinder, Hubbard suggests expanding the FDIC cap.]

Prof. Greenwald followed with a discussion of monetary policy’s role in the financial crisis with a ‘tale of two decades’. In the 1960s the changes in U.S. money supply were linked to subsequent growth in the nominal GDP. In the 1990s, reforms in monetary policy led to very little movement in the nominal GDP, while the money supply was extremely unstable.

“The real heart of this crisis is that the traditional means for recapitalizing these institutions have gone away,” Greenwald said. “The movement of interest rates down to 2% has had no effect, just as monetary policy has had very little effect for a long time. If you’re going to restabilize the economy, you have to have a direct means to recapitalize the banks.”

Greenwald came out in favor of the Treasury’s bailout plan, saying, “If you don’t want to be Japan in the 1990s, just give [the banks] the money. The return in terms of economic stimulus will far outweigh the cost of any financing they get.”

Prof. Dufresne, speaking next, pointed to the location and foundation — low interest rates, high demand, insufficient models, complex vehicles — of the risks in the 1990s as key factors in the current financial crisis. “This made exposure hard to measure,” he said.

Concurring with Greenwald, Dufresne said the solution to the crisis was in bank recapitalization. (watch video)

Prof. Mayer focused on the housing market’s role in the credit crisis. “As we look at the problem in the U.S.,” he said, “we need to think about how to stop the housing crisis.” Mayer and Dean Hubbard have proposed a much-discussed plan that would allow anyone with a primary residence mortgage to refinance at 5.25% on a 30-year-fixed rate loan. (listen to NPR audio about proposal)

Mayer closed his comments considering the coming year: “We’re going to have to re-create a new lending system in the future.”

This is part of a series of posts on healthcare industry topics that will be discussed at the Columbia Business School Healthcare Conference on November 21. The “Payor/Provider Panel” will discuss new paradigms in medical cost and outcomes management and how these paradigms will be impacted by the election of Barack Obama.

Attempting to restrain healthcare spending in the U.S. is a bit like trying to extinguish a forest fire: while one of the smaller fires on the periphery may be easy to put out, the ones deep in the core of the forest are much more difficult to stop. Many of the propellants that have fueled national healthcare expenditures are deeply entrenched (“core”) aspects of either the healthcare system or our society’s values. As such, they have largely resisted many of the efforts made to control them.

According to the the Centers for Medicare and Medicaid Services, the share of U.S. GDP devoted to healthcare grew from 9.1% in 1980 to 16.0% in 2006. By 2016, healthcare expenditures are predicted to grow to $4.2 trillion dollars, or 20% of GDP. It is clear that it is necessary to control costs; however, the current recession will make doing so even more challenging.

Here is a cross-section of the social and logistical issues that cloud cost-cutting:

National Wealth

In spite of a potential global recession, the U.S. is likely to remain one of the wealthiest nations on earth. U.S. per capita spending on healthcare is 48% higher than that of the next highest-spending country (Norway) and 83% greater than Canada’s, according to the Organization for Economic Cooperation and Development. Princeton’s Uwe Reinhardt points out that the “ability to pay, as measured by GDP per capita, has repeatedly been shown to be one of the most important factors” driving a nation’s healthcare spending.

Administrative Costs

The U.S. healthcare financing system is very complex and entails significantly higher administrative costs than those of other countries. A study by Harvard Medical School and the Canadian Institute for Health Information estimated that approximately 31% of U.S. healthcare expenditures ($1,000 per person per year) are directed to administrative costs, about double what is spent in Canada.

System Inefficiencies

Poorly coordinated care, variations in provider practice patterns and misaligned financial incentives are just three of the inefficiencies of the U.S. healthcare system that drive up costs.

Cost of the Uninsured

A recession could force a greater number of people to live without insurance. The cost of paying for these patients when they show up at our nation’s emergency rooms is exorbitant and borne by the general public.

Cost of Technology/Resistance to Rationing

Most of the major medical technology/life science innovations over the past two decades have been priced at substantial premiums to previous technologies. In the absence of national pricing/reimbursement reform, this pricing structure will probably remain intact. The desire of Americans to always have the best doctors and the newest technologies drives up costs. Modestly intrusive practices that control the use of the most expensive treatment options, such as therapeutic substitution and step therapy, have gained some traction in the pharmaceuticals marketplace. More intrusive restrictions, such as rationing care or establishing annual cap amounts over which all care becomes out-of-pocket (a practice employed in some European countries), are much less likely to take hold. Outside of Oregon, America is probably not ready for measures as radical as rationing care.

Graying of America/Expense of End-of-Life Care

Healthcare expenses for persons over 65 are about three times those of the under-65 population, according to government data. When it comes to end-of-life care for relatives, most Americans want to keep family members alive as long as they have a “fighting chance.” Approximately 10-12% of the total national healthcare budget and 27% of the Medicare budget is spent on end-of-life care, according to the Center to Advance Palliative Care (CAPC). Like rationing, euthanasia is not likely to gain a foothold in the U.S. anytime soon, if ever. With the aging of our nation, this “core” issue will only grow in prominence. According to the U.S. Census Bureau, the percentage of the U.S. population over 65 will increase from 12% in 2006 to 20% by 2030.

What thoughts or questions do you have about healthcare spending? Please share your comments.

In an interview with Bloomberg TV on November 4, Professor Charles Calomiris discussed the economic challenges facing the incoming president, Barack Obama (watch video/WMV). Professor Calomiris said:

The most obvious set of issues is dealing with the financial crisis … We need to increase capital injections to the banks, improve the way they have been managed, and then we need to do a whole set of things to help the consumer: foreclosure mitigation, refinancing at lower interest rates and putting a bottom on how far the value of mortgages can go. The other major immediate issue — which has been neglected — is preventing the implosion of global trade … We are already in a situation where there is a lot of anti-trade sentiment the U.S., and [that] sentiment, especially [in] organized labor, is now ascendant under [an Obama presidency]. We are sitting on three bilateral trade agreements that Obama has been opposing and he’s already threatened to abrogate NAFTA …

The right formula [for banks], which is different than the one Secretary Paulson has been pursuing, is to maintain a more senior position in the bank with straight preferred [stock], no warrants, and to have less of a micromanaging role. But, more importantly, you have to help not just by injecting capital but by helping the consumer and the mortgage markets. That means direct loss sharing to mitigate foreclosures and it means helping healthy mortgage holders refinance at lower rates. And it means putting a floor in the market by guaranteeing a very low price for mortgages. If you did that, it would it preclude all those disastrous death spirals scenarios and have an immediate positive effect in elevating mortgage-backed security prices and CDO prices.

What you do in the voting booth on Election Day could be the product of your system’s hardwiring. According to recent research by Prof. Dana Carney, political left-right differences are rooted in basic heritable personality traits such as openness and conscientiousness.

The study, conducted with professors John Jost (NYU), Sam Gosling (UT-Austin) and Jeff Potter at Atof Inc., demonstrates that liberals are generally messier, more open to new experiences and more expressive than their conservative pals, who tend to be more organized, conventional and reserved. Sound familiar? Recall that Family Ties’ Alex P. Keaton, a suit amongst the hippies, was a die-hard Reagan supporter. However, in this campaign season a substantial number of Republicans have defied the liberal stereotype and crossed the aisle to become “Obamicans.” We spoke with Prof. Carney about this trend. She said:

There is a cognitive style association with being more liberal or more conservative. Liberals are able to tolerate more ambiguity and more ideas all at one time, as well as ideas that don’t have a right answer. That cognitive style lends itself to work in experimental science, literature and other things that are ambiguous. A conservative mind searches for answers and looks for them in black and white; it wants resolution and order in work and life.

We as people are cognitive misers and so we want leaders who will worry about “it” for us. That’s why in last few elections we have seen the electorate gravitate towards leaders who appear to have answers and are not wish-washy, like we saw with [the failure of] John Kerry’s campaign. We want things to be simple so we don’t have to think as much. Historically, we have seen this issue. Democrats tolerate ambiguity and open mindedness. Americans have gravitated away from that because we’re cognitive misers and it is costly to think — we want to reserve these precious cognitive resources for other, more immediate, activities like how to do one’s job, how to raise one’s kids and what to have for dinner.

But Obama has done a lot of conservative things in the way he speaks and in the simplicity of his message. He’s being clear about what he is planning to do and where the country will be during his presidency; he is much more decisive and people have responded to that. McCain has also been decisive and clear. So this decisiveness is certainly not the only thing carrying Obama’s lead in the polls.

Our data suggest that liberals are much warmer and approachable than conservatives. We are certainly seeing this play out among Obama and McCain. Obama is much warmer and charismatic. He smiles more and has more expansive gestures which signal dominance. McCain has a shorter stature and limbs which, even when he does make expansive gestures, appear less dominant than when Obama makes them. McCain has very serious facial expressions and smiles less. McCain is less warm to his family members, as well. All of these nonverbal behaviors add up to Obama appearing more warm and approachable and charismatic which, as we well know, accounts for some of the variance in for whom Americans vote. It seems the recipe for whom Americans elect may well be rooted in some combination of simplicity of message, interpersonal warmth and a charisma quotient.

Barack Obama did not go to business school, but he will win the U.S. presidency because he understands the core principle of developing a market strategy — the positioning statement. Similar to how L’Oreal became an industry leader by telling a consistent story to its customers (“Because You’re Worth It”), Barack Obama has offered voters a consistent message: “The Change We Need.” It’s everywhere: in his speeches, in the advertising, and in the placards held his by supporters at campaign events. By contrast, John McCain’s message has been inconsistent and confused.

As any marketing student knows, the positioning statement has four elements: customer target, competitor target, value proposition, and reason to believe. Obama’s customer targets are the specific voters he is trying to attract: young and first-time voters, African-Americans, Hispanics, Democrats, Independents. Obama is not concerned with mainstream Republicans or the religious right, reflected in his decision to make little effort in heavily red states such as Texas, Oklahoma and Kansas. His competitor target is also pretty clear — it’s not McCain, but rather George W. Bush. How many times has Obama reminded us that “John McCain voted with President Bush over 90% of the time”? Obama’s advertisements even depict McCain confirming that assertion (video).

Obama’s value proposition, “The Change We Need,” is clear and resolute, but from the start his main problem has been establishing the reason to believe. Why should anyone think that a first-term senator from Illinois with minimal executive experience can handle the most powerful office in the world? Sure, he’s an excellent speaker and has a credible record in Illinois, but president of the United States?

The answer is threefold: first, he has run a highly disciplined campaign that has been consistently on message; to put it another way, he has stuck to his value proposition. Second, his selection of Joe Biden as his running mate has shored up his foreign policy credentials. Third, in all three presidential debates, Obama showed himself to be intelligent, capable, and thoughtful about just exactly what needs change, and how he would go about implementing it.

John McCain, on the other hand, has got his marketing all wrong. Independents hold the key to the election, but McCain chose the right wing of the Republican Party as his customer target, evidenced by the selection of Sarah Palin as his running mate. McCain’s competitor target is clearly Senator Obama, but he might have done better running against Congressional Democrats, thinking, “Things don’t look good for Republicans in the House and Senate, but a McCain presidency will keep a lid on the Democrats’ excesses.”

McCain’s real problem, though, has been his value proposition. What is it, you ask? Well, there are a few to choose from: war hero, bipartisan, courageous patriot, conservative, straight-talker, and experienced leader. While each of these is credible on its own, there is no cohesive narrative or consistent value proposition. One moment, McCain’s a war hero, the next he’s an experienced political leader, and then later he’s a bipartisan trying to build consensus on immigration. The shoot-from-the-hip, overnight decision to select Sarah Palin, the suspension of his campaign and his personal attacks on Obama have destroyed whatever coherence a voter might try to construct. Just compare all of this to the resolute consistency of “The Change We Need.”

So what should we take away from this presidential race? First, I would like to award Barack Obama an Honorary Honors grade for the marketing core course at Columbia Business School. John McCain is receiving an Honorary Fail, but he can turn this into a Low Pass by submitting an analytic paper on the role of positioning in the market strategy. Second, and more generally, the market strategy is at the core of any successful business strategy. Check with your own marketing department. If they cannot articulate a coherent positioning statement, then you have a problem!

Noel Capon is the R.C. Kopf Professor of International Marketing at Columbia Business School. He is author of The Marketing Mavens; his marketing textbook, Managing Marketing in the 21st Century, is available FREE online at www.mm21c.com.

This is the second in a series of posts from the International Development Club.

Each semester, the International Development Club (IDC) matches student teams with organizations around the world to work on over a dozen consulting projects. The aim is to put together teams that can apply the business thinking that we study at CBS to help organizations that work to improve lives across the developing world. At the same time we want to provide students with the opportunity to gain exposure to working in the field of international development. We have served a wide range of clients (PDF) that includes foundations, non-profit organizations, multilaterals, non-profit consulting firms, social entrepreneurs and for-profit businesses that have a positive social or environmental impact.

Teams work from New York with their clients throughout the semester and travel to visit them during breaks with support from the International Development Consulting Project Travel Fund from the Social Enterprise Program. Donors include the program’s advisory board members and Deutsche Bank. Each team is matched with a project advisor that provides mentorship throughout the project. Project advisors are typically international development practitioners, consultants at firms here in New York, or CBS faculty members.

But where do IDC projects come from? In the past, the IDC has sourced projects from organizations that have experience working with students or from organizations that we have partnered with in the past. A number of projects each semester also come together as organizations are networked with the IDC.

This semester the IDC is working to restructure its projects program to relaunch as a branded pro bono consulting group in the spring semester. The new structure will raise the profile of the important work that our members are doing and help us to source more and higher quality international development projects each semester. Additionally, the relaunch aims to:

1. Source a balanced portfolio of projects each semester that matches student interest in geographies, industries and organizations
2. Increase impact for client organizations by consistently providing high quality deliverables
3. Identify an advisory board to advise and oversee the student-run group
4. Create ongoing relationships with the most exciting clients in order to have a pipeline of high-quality projects
5. Create ongoing relationships with project advisors who can provide appropriate mentorship to teams semester after semester

The IDC Projects team is hard at work preparing to relaunch for the spring semester. However, we urgently need a name for this exciting new IDC initiative. The name should capture the uniqueness of the IDC brand and be fitting of an MBA student-run pro bono consulting group that works with some of the most innovative organizations in the field of international development. With a community full of consultants — not to mention aspiring marketing gurus and budding entrepreneurs — there must be one of you out there who can come up with the perfect name for the new group! Submit your ideas online here by Friday, November 7th. If you have more than one, please feel free to share them all.

The International Development Club aims to cultivate passionate leaders who aspire to make a global impact by applying cutting-edge business thinking to development issues. The IDC offers consulting opportunities with enterprises throughout the developing world, a speaker series and an annual Washington DC careers trip. Last year, the IDC spun off Microlumbia, the first student-run microfinance fund of its type.

Recent weeks have left no doubt that the business world has made a fundamental shift: the marketplace — including every up and down — is now global.

In an address to students earlier this year, Dean Glenn Hubbard emphasized that opportunities for students are now increasingly global in nature. “The overwhelming forces of globalization and the demands for international finance,” said Hubbard, “should be a source of optimism for MBA job seekers.”

And if the practice of business is now global, so too must be the theory. EMBA-Global has met that need for international education with its partnership between Columbia Business School and London Business School, which started in 2000.

The success of the New York and London-based program, rated No. 1 overall by the Financial Times in rankings published October 27, has brought expansion to yet another world financial center: Hong Kong. Next May, EMBA-Global Asia will welcome its first executive MBA students at HKU Business School.

“Students have an unmatched opportunity,” said Ethan Hanabury, associate dean of Executive MBA Programs at Columbia Business School, “to study global business in every respect — through professors from each of the three institutions and their fellow students, who are accomplished executives from around the world.”

“Business and the management of people and organizations is becoming increasingly complex in today’s fast-moving and inter-dependent world,” said Lyn Hoffman, associate dean at London Business School. “The events of recent weeks are a sobering reminder of how important it is to equip our students with global business capabilities. EMBA-Global has sought to do that, and we are delighted that our alumni are having such success in their own global careers.”

The internationalism of the program, with classes in the world’s three major financial hubs, provides a key advantage for firms that are trying to meet new challenges.

“We are finding that for current [EMBA] students it is a great time to be in business school,” Hanabury said. “They can bring insights right back into the workplace. Companies want perspective about the changing economic landscape and to learn about current research.”

Dateline: London

I think to really understand the ramifications of what happened, you just had to be there. At London’s Heathrow Airport that is.

On Thursday March 27, I took British Airways’ (BA) day flight from JFK to Heathrow. On Saturday I was due to talk about customer value to a group of high-level strategic account directors at a global software company. I planned to tell them that success in value delivery would guarantee customer satisfaction and enable them to retain and grow their customers, increase profits, and lead to greater shareholder value. I relaxed in my Club World backward-facing seat and concentrated on the task ahead.

On Thursday evening I landed at Terminal 4; little did I know what was unfolding at Terminal 5.

Terminal 5 was BA’s long-planned new $8.6 billion state-of-the-art facility at Heathrow. CEO Willie Walsh was on hand at 4 a.m. when the first flight arrived early from Hong Kong.

After that, everything went downhill. In a word, BA’s baggage-handling operation failed. Apparently, the system had functioned well in a 2,000-passenger test, but could not handle the 40,000 who that day crowded into the terminal.

By the following mid-week, BA had cancelled over 300 flights, 40,000 pieces of baggage had been separated from their owners (many sent overland to Italy for resorting), and thousands of passengers did not reach their destinations. To make matters worse, Britain’s aviation regulator reacted swiftly to stranded passengers’ complaints that BA failed to provide hotel rooms, in possible breach of European Union requirements.

In a stroke of genius, the Terminal 5 debacle occurred just three days before an open-skies agreement between the U.S. and Britain came into force. In addition to increased competition from European airlines flying from the U.S. to continental destinations, BA would now have new U.S.-based competitors at Heathrow. Continental, Delta and Northwest Airlines each offered flights on day one. Some analysts’ estimates of BA’s losses from canceled flights, additional costs, and reduced future bookings approached $100 million; Goldman Sachs downgraded BA shares to sell.

So what lessons can we learn from BA’s experience?

First, service businesses are tough to manage. Operations occur with the customer in close proximity and problems are quickly highly visible — very different from a factory making products.

Second, sophisticated systems are great when they work, but when they fail, disaster is close behind.

Third, when you put in sophisticated systems, test, test and then test again; it may take time and it may cost money, but consider the alternative!

Fourth, customer satisfaction depends on the difference between expectations and performance. BA had so hyped its new terminal that any failure hurt even more.

As for me, when I arrived back at terminal 4 on Saturday afternoon, British Airways could not get me on their JFK flight. The agent sent me to Virgin Atlantic where I gratefully accepted one of the few remaining Premium Economy seats to Newark. The counter clerk cheerfully phoned New York so I could change my car service pick up and I headed for the gate. As I was boarding, the gate clerk told me there was a change — an upgrade to Upper Class. Thank you Sir Richard!

Footnote: The following Wednesday, British supermodel Naomi Campbell was reportedly taken off a Los Angeles-bound BA flight and arrested. Apparently Campbell became agitated when told one of her two bags had been misplaced.

You can find Noel Capon’s new marketing planning workbook, The Virgin Marketer, and his textbook, Managing Marketing in the 21st Century, at www.mm21c.com.

Prof. Bernd Schmitt moderated the panel “How to Build an Asian Brand into a Global Brand” at the Pan-Asian Reunion in Hong Kong on Oct. 24. The panel included Yuzaburo Mogi ’61, Chairman and CEO, Kikkoman Corporation; Dong Bin Shin ’81, Executive Vice Chairman, Lotte Group; and Daniel Mingdong Wu ’96, CFO, Focus Media.

Public Offering: What differentiates a global brand from a local one?

SCHMITT: A global brand is planned and marketed on a global scale. A global brand is also available in all key markets around the world. Moreover, there is a high level of consistency to a global brand. The product will be largely the same (except for minor local variations), the visual identity (logo, signage and name) will be identical and communications will be designed for a global market. The classic global brands — which mostly come from the U.S., like Coca Cola, McDonald’s or Starbucks — exemplify such global branding. Local brands, in contrast, are only known in certain markets. They may have close connections to consumers in those markets but frequently they are seen as being of lower quality and not as contemporary as global brands.

PO: What is the best way a brand can build from local to global?

S: Professional management and a clear vision are needed. Brand builders must have a global vision and global aspirations for the brand and then set up the right organizational structures for managing a global brand. In addition, the company must understand consumer preferences. People in different markets differ in values, attitudes and behaviors. For understanding consumers in different markets, consumer research is key. Commissioning a global segmentation study is a good starting point.

PO: What is an example of an Asian brand that has transformed successfully into a global one?

S: One of the participants in my panel at Columbia Business School’s Pan-Asian Reunion in Hong Kong, Mr. Mogi, has such a brand: Kikkoman. Originally, Kikkoman was a local Japanese brand. Now, the brand stands for soy sauce worldwide. When you produce a soy sauce, it helps, of course, to be from Asia. A Western soy sauce brand would not have the same credibility.

PO: What are some other successful Asian brands?

S: There are numerous other Japanese brands in consumer electronics and in the car business, for example, and other businesses. In cosmetics, beauty and fashion, the global consumer knows Shiseido, or Issey Miyake and Yohji Yamamoto. In Korea, there is Samsung, which, by the way, has outperformed Sony in brand value according to the latest brand valuation studies. Then, there is Singapore Airlines, one of the greatest airlines in the world. So, by now, there is no shortage of Asian brands that are known globally — and more will be coming soon.

PO: Which brands should we look out for in the future?

S: Mr. Shin, the executive vice chairman of Lotte, another executive on my panel in Hong Kong, is currently building Lotte, which recently entered China and Russia, into a global brand. I also expect more global brands coming out of China soon, and not just brands like Lenovo that that were bought but brands that were home-grown, so to speak. In China, executives from established companies, entrepreneurs and the government are all strongly focused on building global brands.

Photo credit: Peyri Leigh

Lindsay Kruse ’06 is speaking on a panel as part of the Social Enterprise Conference on Oct. 24, 2008. The panel will discuss ways to lead and implement change in K-12 education, with a focus on improving teacher quality.

There is no more urgent or important work than providing children from low-income communities the same high quality education that their affluent peers receive. There is no more effective means to accomplish this end than by creating schools of the highest quality. Uncommon Schools (Uncommon) was founded to create more “uncommon” schools — uncommonly good, extraordinary, autonomous and distinctive.

We aim to serve 11,500 students. Recognizing that leveraging human capital in this work is critical, we must do the following in order to achieve our goal:

• Ensure that teaching is seen as a challenging profession that provides ongoing growth and development
• Recruit the highest quality teachers
• Develop purposeful and strategic efforts to retain teachers and leaders
• Recruit and develop tenacious school leaders who drive student achievement
• Foster strong management support and processes
• Define clear performance feedback to align the goals of student achievement with teacher performance
• Ensure that our workforce is diverse and represents the needs of the students we serve

We are working to recruit diverse, high-quality teachers and to ensure that our teachers receive regular feedback as well as opportunities to stretch and develop professionally. We have created a dual-leader model to allow instructional leaders to focus on the core of student achievement while operations leaders manage all non-instructional functions. We have created a yearlong fellowship program that includes a residency within one of our schools and a personalized development plan.

Uncommon has built — and continues to build — a diverse home office staff of educators, MBAs (including six CBS alums!) and other driven professionals to ensure that our organization is poised to address these challenges in a systematic, sustainable way. Uncommon provides a great opportunity for MBAs than to have a deep and lasting impact on this, the greatest civil rights issue of our time. MBAs are bringing their skills to bear across all aspects of the education world. At our organization, we have MBAs working as managing directors, as school-based operations leaders, and from the home office in finance, leadership development, operations, and real estate.

Should you be interested in exploring opportunities at Uncommon, feel free to contact us.

Photo credit: Uncommon Schools

Professor Noel Capon has something in common with his students: he thinks the price of textbooks has gotten out of hand. “It’s a serious social issue,” he says.

Capon likens the landscape of the textbook industry to that of the airline industry in the 1950s and ’60s, describing it as a “cozy oligopoly” in which the different players “compete for authors and over the quality of the books but not on price.”

To help ease the financial burden, Capon is allowing students to pay what they wish to use the online version of his text Managing Marketing in the 21st Century. The pay-what-you-wish model was made famous by the band Radiohead, who allowed customers to download their most recent album, In Rainbows, for what they thought it was worth. The print version of the text, which sells for $45, is priced about $100 less than its competitors.

Capon hopes that the unconventional pricing strategy will cause the major textbook publishers — such as Pearson Education, McGraw-Hill and Cengage — to lower their prices. In this respect, he likens Wessex Press, which publishes Managing Marketing and which is owned and operated by Capon, to Southwest Airlines.

“Thirty years ago, in came Southwest with a very efficient, low price model, offering a safe ride in a new aircraft but without all the frills,” Capon says. “Well, I’ve come in with a book that doesn’t have a lot of frills but which is very much to the point and which is a very serious marketing book.”

Though Capon is unsure of how much revenue he’ll secure from the online version — he’s also donating 50 percent to college scholarship funds — he hopes that the new pricing model will give instructors cause to consider using his text.

“It’s a way of getting my book into the hands of as many people as possible,” Capon says of the model. “The major barrier I’ve had to overcome is the reluctance of instructors to switch books. By taking the price of the online version to zero, instructors who weren’t interested at the old price are going to have to give my book a serious thought.”

Capon hopes improving the book’s readership will benefit Columbia Business School, as well. “Columbia has arguably the world’s leading marketing division, but we’ve never been strong in the textbook area. I’m hoping that this move, if it’s successful, will strengthen the School’s position as having the world’s leading marketing division.”

Capon’s colleagues are taking notice. Michael R. Czinkota, Ilkka A. Ronkainen and Michael H. Moffett, authors of Fundamentals of International Business, have published the new edition of their text with Wessex. While Capon “wouldn’t rule out” taking on similar projects in the future, he plans to remain focused on his day job, teaching at Columbia Business School and writing his own books.

When asked about being referred to as the “Radiohead of textbook authors,” he only laughs. Capon, who hails from Southampton in southern England, says, “I’m fine with that. They’re British, after all.”

Nothing gets past a Manhattan doorman. Not even 25 CEOs from Korea, collectively representing one-fifth of the nation’s GDP. As part of their weeklong visit to Columbia Business School, the group visited the famously white-glove Metropolitan Club for an event hosted by GC Andersen. The establishment has but one rule: everyone must wear a tie. Unfortunately, no one in the group was wearing one.

However, the tie-less executives cheerfully divvied up the backroom emergency stash — paisley and all — and proceeded to the special event in high spirits. The moment, noted faculty director of the Korea CEO program Prof. Cliff Schorer, exemplified the warmth and flexibility that they displayed during their stay.

In mid-September, two groups of high-level executives from China and Korea completed Executive Education courses in general management, conducted site visits and networked with US executives and each other. Asia’s growing role in international finance has brought an increasing number of executives to American universities to learn how to sustain and scale their own economic growth, and how the US economy impacts their own. Columbia Business School has partnered with the Cheung Kong Graduate School of Business and Global Education Network to offer different types of programs for those executives.

For both groups of CEOs, the coursework — which bridged practice and theory — had historical implications as their final week of classes, held in New York City, coincided with one of the most tumultuous weeks in Wall Street history.

Economic Insights

Prof. Wei Jiang, responding to the week's news, gave a presentation to the Chinese CEOs and discussed the impact of the current financial crisis on Asian markets. She placed the crisis in a historical long-cycle context and offered insight on what is new to this crisis. Using the example of Morgan Stanley’s reported real estate offering in Shanghai in early September, Prof. Jiang considered how the current financial crisis is different than the crisis in 2001.

“Now they are looking at their balance sheet, and suddenly those assets they hold in China become their most sellable assets,” said Prof. Jiang. “Because the foreign investment in China are real [estate] assets and are a relatively new phenomena, China doesn’t have any experience with the contagions of financial crisis through the asset sales channel.”

Understanding the economic implications of the trade imbalance was also of interest to the group and part of the group discussion, she said.

“The real reason for a trade imbalance is a fundamental imbalance in savings behavior. In the end, a country that consumes more than it produces will import from a country that produces more than it consumes,” she said. “In the US, they worry that people don’t save. In China, they have the opposite headache, and people don’t spend.”

Management Style

Another area that was covered as part of the Chinese CEOs’ course work was cross-cultural differences in management style. Prof. Joel Brockner, faculty director of the China CEO program said differences in management style were less important than how they are managed and discussed. For example, the issue of “power distance” differs between American and Chinese management styles.

“You read a lot about employee involvement and how you need to involve them in decision making. That’s a Western principle,” said Prof. Brockner. “In China there is not the same feeling. People at the bottom aren’t expecting or wanting to be involved in decision-making. We are preaching involvement as our management style and we assume low-deference to authority. But in China there’s more high deference.”

“Asian businessmen tend to be more introspective,” said Prof. Schorer. “They absorb, consider and ponder versus shooting from the hip.”

Global Vision

On the morning of Sept. 29, the Korean executives had an unexpected surprise: a site visit to the New York Stock Exchange with NYSE president Gerald Putnam became front-row seats to the biggest single-day drop in Dow Jones history.

The timing of the visit, coming at the height of chaos in the financial markets, generated much stimulating discussion according to Prof. Schorer. The US market collapse in 1987 (25% drop in one day) and the subsequent Asian financial crisis were both really confined to an identifiable geographic region. It was an eye-opener to see how immediately this crisis spread, and how the domino effect, caused by the subprime debacle, spread fear and reaction around the world so quickly, Prof. Schorer said.

Wall Street’s role as the center of global finance was also the focus of discussion in a special class session with Prof. Ray Horton, who gave a presentation to both groups of CEOs on the changing distribution of global power.

He asked the groups to consider what the world’s distribution of power will look like in 20 years and whether the world would have one, two or more poles of control. Breakout groups debated and then assigned probabilities to all the type of international power structures. Both the Chinese CEOs and the Korean CEOs were split between a unipolar world, with either the US or China leading (usually the US), or a bipolar world, with both China and the US, said Prof. Horton.

Their conclusions mirrored the overall tenor to the visit.

“The Korean CEOs had a global vision and a heightened recognition that we’re seeing how integrated we’ve become,” said Prof. Schorer. “We’re all now related in this web of commerce and investment.”

Photo credit:Courtesy of Executive Education

How does the financial crisis affect business in China?

There are two ways: through the trading route and through the asset route. If the US economy goes into a recession and reduces demand from abroad, China will have to cut its exports, causing it to be affected as well.

I think that effect will be estimate-able because we have had, as recently as 9/11 when the stock market and NASDAQ dropped by more than 50% and the overall market dropped by a third, a real recession. China’s growth rate had a very limited drop from 2000 to 2001 because its components are income-driven and driven by internal demand. Thus, when the US economy took a huge hit, China wasn’t greatly impacted. Their domestic growth is increasing faster than the overall economy and that is increasingly more important as a growth-driver.

Secondly, the types of commodities and products that China exports to the U.S. is not super-sensitive to the economic downturn. For example, Wal-Mart accounts for 12% of total imports from China — if Wal-Mart was a country it would be China’s eighth largest trading partner — to just give you a sense of what these exports are. They are not super-sensitive to economic downturns.

What is new this time is the asset market. In the center of Shanghai there is a block of very expensive real estate. Morgan Stanley invested early on and made a handsome profit on paper. But only recently have they decided to sell. So you can tell it’s part of the deleveraging process where they are selling assets in order to raise cash to reduce the debt burden on their balance sheet. They have to sell in overseas markets because they couldn’t sell their subprime assets after market liquidity completely dried up.

Now they are looking at their balance sheet, and suddenly those assets they hold in China become their most sellable assets. Because foreign investments in China are real [estate] assets and are relatively new phenomena, China doesn’t have any experience with the contagions of financial crisis through the asset sales channel. That is what is new and we will have to see what effect that will have.

Photo credit: Aapo Haapanen

In recent years, compensation packages for CEOs and other senior corporate executives have been criticized for both their high level and their growth, often despite poor company performance. Are patterns such as this likely to continue in the aftermath of the recent financial meltdown?

You might think the answer would be obvious. For one thing, the precipitous drop in the stock market reduces the value of stock options, typically the largest component of executive compensation. Even companies that have a history of granting a fixed value of stock options may be unable to continue the practice.

“It may simply be too dilutive to grant the number of options required to maintain fixed value,” says Irv Becker, managing director of the compensation consulting firm The Hay Group, in New York. Second, current economic conditions are likely to depress corporate earnings, which are commonly used to determine incentive-based bonuses. Third, executive compensation packages are designed to attract and retain the best managerial talent, so an executive being recruited by company A is likely to be “made whole” for any compensation that he or she might lose if they leave company B, including unvested stock options. Since the current market is likely to leave many previously granted options “under water,” the cost of attracting and retaining employees is likely to decline.

In other words, when we “pay for performance,” if performance is down, shouldn’t pay go down with it? In theory yes. But many of my academic colleagues and I have observed a very robust pattern in executive compensation over the years that we like to call “pay for pulse.” The pattern is as follows: Suppose we split all companies into two groups: Group one, in which shareholders saw some positive returns to their investment for the year, and group two, in which returns were negative. As you might expect, the executives in group one receive compensation that is greater, with better returns corresponding to larger increases in compensation. So in group one we observe “pay for performance.”

In contrast, executives in group two typically also receive more in compensation, despite their poor performance. Historically this increase has been more than double the rate of inflation in most years. What’s even more troubling is that there is typically no difference between pay for executives in firms with marginally poor performance compared to those in firms with worse performance. Hence the term “pay for pulse.”

What’s driving this?

When performance is poor, the company’s board of directors and its compensation committee face the difficult task of separating the role of the economy from the contribution of management. So when the economy is bad, boards may be tempted to conclude that their management team did a great job given the circumstances. Typically boards rely on two mechanisms to reach such a conclusion.

First, compensation committees typically benchmark their company’s compensation and performance with that of a peer group. Correspondingly we see better compensation in firms where the board concludes that the company has outperformed its competition. Second, executive compensation typically allows the inclusion of subjective assessments of factors such as leadership, which are difficult to measure objectively.

Are there reasons to believe that “pay for pulse” will go away?

I think so. The revised compensation disclosure requirements enacted by the Securities and Exchange Commission (SEC) in 2006, combined with the observed growth in shareholder activism in recent years, is likely to reign in the board’s use of peer groups and subjectivity in awarding compensation. With broader disclosure, shareholders have substantially more information from which to form opinions of the fairness of their company’s executive compensation. For example, companies must disclose the peer group that they used in the compensation process, so shareholders can form their own opinion on whether a reasonable peer group was used or whether the board “cherry-picked” the peer group to justify higher compensation.

Even before the economic meltdown reached its peak, we began seeing examples of the effectiveness of the SEC’s regulations and the actions of shareholders. Specifically, a survey of executive compensation in 2007 by The Hay Group showed — for the first time in recent history — decreases in compensation when firms had decreases in stock price. In prior years, we typically observed small increases in compensation for firms when stock price decreased, and larger increases in compensation as stock price increased.

In addition, we recently began to see firms take steps to curtail “golden parachute” severance packages. Finally, in 2007 we saw the growing use of “claw backs,” which permit firms to take back the portion of compensation that was awarded to executives using misstated accounting numbers.

Overall, the executive compensation process is shaped by many forces, but in our current environment scrutiny from both regulators and investors is particularly high. The rescue of Fannie Mae and Freddie Mac, and the $700 billion federal financial rescue package, impose executive compensation restrictions including the elimination of golden parachutes and provisions for claw backs.

But as you might expect, there are efforts underway to negotiate exceptions to these compensation restrictions. Will our current economic meltdown, combined with regulatory scrutiny, shareholder activism and increased disclosures, eliminate “pay for pulse” going forward? Let’s hope so.

This column also appeared on Forbes.com.

Federal Reserve Chairman Ben Bernanke spoke at the Economic Club of New York on Oct. 15, 2008 and praised the Treasury and Congress for moving to restore confidence in US financial markets. (full speech) However, he warned the process would take time, since the housing crisis continued to be worrisome. He said:

Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away. Economic activity had been decelerating even before the recent intensification of the crisis. The housing market continues to be a primary source of weakness in the real economy as well as in the financial markets, and we have seen marked slowdowns in consumer spending, business investment, and the labor market. Credit markets will take some time to unfreeze.

Dean Glenn Hubbard, who is also chairman of the Economic Club, responded along with Harvard economist Martin Feldstein, to Bernanke’s speech in an interview with Bloomberg TV. Hubbard said: (watch video)

What is important is ... to stop falling house prices. There are ways to do that and variety of proposals, but they all center on getting the mortgage rate back to where it would be in a well-functioning credit market. The second would be to clarify the capital injections, and how the Fed and the Treasury will resolve troubled institutions so the market knows and private capital knows. And the third would be for the Fed to be very aggressive in guaranteeing interbank lending and providing for commercial paper. … We will have 10 to 15 % further house price decline likely, absent policy action, and that will hurt consumer spending and hurt the job market and, of course, the balance sheets of commercial institutions.

Both Dean Hubbard and Senior Vice Dean Chris Mayer (and Feldstein as well) have been vociferous in asking for policy action on housing. In the Wall Street Journal ("No Quick Fix for Housing Prices", Oct. 14), Mayer called for government to "push mortgage rates down to 5.25% in order to spur demand."

Prof. Charles Calomiris offered another view on solving the housing crisis ("How To Prevent Foreclosures", Oct. 14) and said:

As I understand the new McCain plan, it would buy mortgages from the lenders (or servicers) and then refinance them into the FHA plan. ... A more modest proposal than that of Sen. McCain, which may balance costs and benefits more effectively, would follow the example of the successful Mexican "Punto Final" plan of 1999, which resulted in substantial debt write-downs very quickly and the resolution of much financial gridlock in that country.

The government would share losses borne by lenders from mortgage principal write-downs on a proportional basis. For example, taxpayers could absorb 20% of the write-down cost borne by lenders on any mortgage so long as it is agreed through a voluntary renegotiation between lenders and borrowers, and so long as doing so creates a sufficient write-down for borrowers to be able qualify for refinancing under the FHA facility.

What are your thoughts about solving the housing crisis? Please leave your comments.

Photo credit: Economic Club of New York

The Treasury announced a plan this week to recapitalize banks with $250 billion. Responding in the Wall Street Journal (“A Thumbs Up From the Ivory Tower” on Oct. 13) Prof. Charles Calomiris said:

Prof. Frank Lichtenberg spoke with the Financial Post about the thawing of the credit markets:

Dean Glenn Hubbard, writing with Princeton’s Alan S. Blinder, addressed the Treasury’s plan to broaden of deposit insurance coverage in the Wall Street Journal (“Blanket Deposit Insurance Is A Bad Idea” on Oct. 15). They wrote:

Speaking on National Public Radio’s On Point program on Oct. 14, Prof. Frederic Mishkin discussed the global perspective and the cost in reputation to the U.S. economic model. He said:

Photo credit: Phil Dokas

It’s been just two months since Google rolled out its new Web property “Knol” to much confusion, ill will among advertisers and derision for the worst brand name of all time. Many have asked whether we really need another Wikipedia.

Last month, Google announced another seemingly-redundant product: it’s new Web browser, Chrome. And at the end of this month, Google will launch the much-anticipated Android-based G1 smart phone.

Why develop a new Web browser? (Especially when Google has been spending heavily to invest in the open-source Firefox browser.) Is this a sign that Google’s culture of a million innovations has gone off the deep end? Are there too many engineers with too much “20% time” on their hands? Or is there a far-reaching strategy behind this?

I’m leaning towards the latter.

The Future is Cloudy

We are in the midst of a huge shift towards “cloud computing” — where we store our files and software on the web rather than on our personal desktop machines. This shift began for consumers with services like Flickr, Facebook, and YouTube; it’s now moving to online applications like Google Docs and Zoho, which may make Microsoft Office a thing of the past. Utility-like Web services have also been designed for corporate consumers, first by pioneers like Salesforce.com (which offers a database you can access through the Web), and now by Amazon and IBM. As I’ve written previously, this shift raises the stakes in the browser wars.

But what’s the advantage of Google entering the browser market itself instead of just continuing to support the successful and well-designed Firefox?

An Operating System Built for Web Apps

Google argues that Chrome is not just another browser but rather an attempt to build the next-generation environment for the future of cloud computing. In other words, Chrome aims to be a operating system for the next wave of Web apps that Google is developing.

It will need to be if Google really wants to challenge licensed-software companies like Microsoft. Many of Google’s current Web apps offer the promise of thrilling functionality (incredibly easy collaborating on Google Docs, the ability to work offline with Google Gears). But most are still trapped in a “Beta” version with limited applicability.

With the Chrome browser, Google may be able to make its Web apps more robust, so that they can really compete with Microsoft for the future of the personal computer space.

Chrome Smells a Lot Like Android

We’ve seen this play before from Google, except now it’s in the mobile phone space. With much advance buzz over the last year, Google has been developing its next generation operating system for smart phones – called Android. Google’s competitor in the mobile phone space is not Microsoft but Apple, maker of the iPhone. And industry observers have been waiting to see if the Android operating system will allow phone makers like Samsung and Nokia to roll out an “iPhone killer.” The first phone running on Android is expected this fall from HTC.

Open vs. Closed

With both Chrome and Android, Google is betting on the open-source model for innovation, which built the Linux operating system and the Firefox browser. By contrast, Microsoft Office and Apple’s iPhone are both built on closed, proprietary systems.

Open vs. closed is a big debate these days. Techies love to extol the virtues of the open source movement. But Apple’s success shows the potential strength of closed innovation, which allows for a seamless user experience. Closed innovation is why iPod+iTunes were able to break the deadlock on digital music (winning the trust of record labels and creating an intuitive buying experience online). Closed innovation allowed Apple to create the first Web-enabled phone that actually works in the U.S. (too bad Apple couldn’t build its own phone network, too, rather than use AT&T’s).

But Apple has not always been able to hold on to the success of its innovations. Windows stole Apple’s thunder (and huge market share) by copying the best design elements from the Mac. What’s to keep Google from swooping in like Microsoft did and copying the iPhone design (which has solved the key problems for a smartphone in the U.S. market)? Can Google grab the best ideas for their Android phone platform, allowing Samsung, HTC and others to dominate the smartphone market? Will the diversity of an open ecosystem triumph over Apple in the end?

Betting on Google’s Strategy

What’s clear now is that Google is pursuing a two-pronged strategy aimed at a future of cloud computing. They will use Chrome as an operating system to challenge Microsoft in the world of PCs, laptops and netbooks. And they will use Android to establish an alternative Apple in the realm of mobile devices. With both prongs, they are using an open innovation approach with many partners to challenge established market leaders.

It’s an audacious strategy. And it’s probably too early to tell if will succeed.

Right now, I’m hedging my bets. When people ask what me, “Which operating system do you use?”, I answer, “All three.” My mobile platform is iPhone, my laptop platform is Windows and my cloud platform is Google. But I’m open to see who comes up with the next great idea.

Columbia Business School and the Center on Global Brand Leadership are hosting the BRITE Workshop on Online Communities on Oct. 16.

Photo credit: Google]]> Thu, 16 Oct 2008 13:42:40 EDT ]]> Marketing Media and Technology Left to right: Prof. Bruce Greenwald, Bruce Berkowitz, Glenn Greenberg ’73 and Thomas Russo speak at the anniversary luncheon.

Bruce Berkowitz held up a pilot’s pre-flight checklist at the end of his presentation on developments in value investing. The analogy was clear: flying at altitude can be a risky business if you don’t know about the equipment you’re using.

The Fairholme Fund president was among the distinguished guests who spoke as part of the 75th anniversary celebration of the publication of Security Analysis hosted by Columbia Business School and the Heilbrunn Center for Graham & Dodd Investing on Oct. 2.

Three panels made up of contributors to the sixth edition of the book, including Prof. Bruce Greenwald, discussed value investing in today’s market as well developments since the book was published in 1934. The dismal news from Wall Street — and managing risk in the current environment — permeated the discussion.

“In some fundamental way, the current market is what Security Analysis is about. We do the same thing regardless of the market: we look for value,” said David Abrams, managing member of Abrams Capital Management, who spoke as part of the first panel with Seth Klarman and Howard Marks.

“Quantifying risk is an oxymoron,” said Marks, chairman of Oaktree Capital. “It cannot be measured in numbers. Volatility can be measured but the job of measuring risk requires the same thing as measuring prospective return and requires superior skill.”

Prof. Bruce Greenwald moderated the day’s second panel with Berkowitz, Glenn Greenberg ’73 and Thomas Russo to discuss what has changed in the 75 years since Security Analysis was first published. Greenwald discussed how controlling that risk has changed.

“Today, value investors are managing risks in more sophisticated ways, starting with cash flows,” said Greenwald. “One of the real lessons is that you better understand the determinants of those cash flows, rather than just taking the historical average and slapping it on. You have to understand whether a company’s superior returns are going to be able to be sustained in the face of relentless competition.”

Greenwald asked the panelists where they see the opportunity in today’s market climate. Russo pointed to international markets and consumer products, and Berkowitz said he was looking for companies with “double-digit free cash flow yields,” citing Pfizer as as an example.

What not to buy?

“Things where you can lose all your money,” cautioned Greenberg. “I am not joking. If you can lose all your money, don’t buy it. If it has great potential but is dependent on the next round of financing, we wouldn’t buy it.”

Berkowitz agreed. “You’re right. When you die, you die. There’s no more spinning the roulette wheel.”

Photo credit: Leslye Smith

While everyone is looking for reasons why this nation is in a financial mess, let me toss another one into the ring. We’re in this situation because we’ve focused almost exclusively on the income statement and ignored the balance sheet.

An income statement indicates how revenues are transformed into net income, or profits after taking expenses into account. The balance sheet lays out the assets deployed in the operations to generate the revenues that drive profits. The critical factor for any firm’s success is its profitability, i.e., how much profit is the firm making relative to the amount of assets that have been deployed. Almost no one looks at profitability — we focus on raw profits instead, to our detriment.

Who’s “we”?

It’s the manager chasing growth in sales and earnings, without worrying about the resources used to obtain the growth.

It’s the financial analyst who incessantly focuses on Earnings Per Share (EPS) targets without any concern for whether the targets were met by organic growth or by value-diminishing acquisitions.

It’s the investment banker who spends most of his attention on whether a transaction is going to be "accretive" or "dilutive" to EPS, not on whether the transaction is going to improve asset productivity.

It’s the business media, which focus on these flawed metrics and increase the pressure on managers to meet rising earnings expectations, even at the cost of declining profitability.

It’s investors who focus all their attention on whether the firms meet analysts' estimates, harshly penalizing firms that miss by a few cents.

It’s the board of directors who compensate managers based on earnings targets instead of profitability targets.

It’s the regulators who have permitted firms to park many of their toxic assets off the balance sheet.

And it’s all of us in business academia for not properly explaining to our students that profit growth and profitability growth are not the same; in fact they are often opposites.

What happens when one ignores the balance sheet? First, one ignores the quantum of assets deployed for the generation of income. Consider Lehman Brothers and other firms that increased their profits quite dramatically until last year through investments in mortgage-backed and similar assets. Their profit growth was dramatic, as was their stock price performance, almost doubling from $44 at the start of 2005 to around $80 in June of 2007. However, if one considers the growth in the amount of assets on their balance sheet, the trend in profitability is much more modest.

Second, one ignores the quality of assets on the balance sheet. If one had paid attention to the rising profits from these risky investments with one eye on the balance sheet, one might have had a better appreciation for the nature of the risk involved. Of course, regulators made this worse by allowing firms to place many of their assets (such as Variable Interest Entities (VIEs), which are at the heart of the subprime mess) off the balance sheets. When people ignore what’s on the balance sheet, what are the odds that they’re reading the footnotes to see what’s left off it?

What does paying more attention to the balance sheet imply? Managers should care as much about what any new transaction brings to their balance sheet as what it brings to their income statements. Analysts should stop focusing exclusively on EPS targets and also forecast profitability targets. Investment bankers should abandon the charade of “accretion-dilution” analysis and focus on whether an M&A transaction really adds economic value (historically, most do not, and my guess is this is partially driven by ignoring the balance sheet).

The business press should stop facilitating the negative cycle caused by an emphasis on profits and growth without regard to the assets used to derive them. Boards of directors should reward managers for growth in profitability, not profit, by incorporating measures such as residual income (earnings less a charge for capital employed) in deciding executive compensation. Regulators should clamp down on off-balance sheet items, a lesson that apparently wasn't learned from the Enron debacle. Finally, business academics must train the next generation of managers, financial analysts and investment bankers to understand the critical difference between profit and profitability.

With any crisis, there is always a period of increased scrutiny, followed by business as usual. In this case, I hope all the “we’s” listed above continue to pay greater attention to the balance sheet once this crisis has been resolved.

This column originally appeared on Forbes.com on Oct. 5, 2008.

Photo credit: Dan Foy

Nonprofits around the country are wondering how they will weather the economically turbulent days ahead. If a recession — or worse — hits, charities can expect to see their contributions decline along with the incomes of the individuals and companies that fund them (conventional wisdom among economics researchers is that a 10% decline in income generates around a 4-8% drop in giving). Government funds won’t take care of the shortfall, as budget-balancing states cut back, as well.

Some charities have a “rainy day fund” that they will use to cover their deficits; some will even choose to eat into their endowments. But few organizations have the billion-dollar cushions of the Harvards and Yales of the world, and endowments’ returns are being hit by the market decline, too. This leaves no option but to cut back on programs — a cruel irony since for many nonprofits hard times are precisely when their services are needed most.

In the current environment of greater needs and lesser means, what's a philanthropist to do? First and foremost, the current environment underscores the importance of giving thoughtfully and strategically. The best predictor of someone’s choice of charity today is whichever one he wrote a check to last year. But this isn’t a time for philanthropic inertia — a dollar given to one organization means one dollar less that’s available to give to some other, potentially more worthy cause, what economists refer to as the opportunity cost of funds.

Think hard about the biggest problems out there to be solved and survey the charity landscape for organizations that most effectively address your chosen set of needs. The focus should be on outcomes: How many indigents were fed by a soup kitchen? How many unemployed — who would otherwise have remained jobless — were taken off the welfare rolls by a job training program? And what did it cost to generate these outcomes? Identifying and funding the “highest productivity” charities is more important than ever. With increasing number of watchdog organizations as well as large foundations carefully assessing charities’ activities and publicizing the results, it’s possible for even smaller donors to evaluate and compare potential beneficiaries and to give strategically.

Economic hard times may also be cause to reprioritize what you see as the greatest needs. The arts are an eminently worthy cause, for example, but art museums’ needs do not wax and wane with economic cycles in the same way that those of social service organizations like soup kitchens and homeless shelters do. So, at least while times are bad, you may wish to reshuffle your giving portfolio to focus on causes designed to buffer the impact of economic downturn on those most affected.

Organizations with sizeable reserve funds may not face the same financial crunch right now as those living hand-to-mouth. For years now, Harvard alums have been questioning the merits of writing checks that effectively get direct-deposited into the school’s 30-something billion dollar endowment. With rising needs elsewhere, the case to be made for giving to the fat cats of the nonprofit world becomes ever-harder. It’s hard to imagine that Harvard’s students or faculty, cushioned as they are by an outsized endowment, will face see too much of a cutback in services in the days ahead, even in a worst-case economic scenario.

Finally, think about how much you can really afford to give. I’ve already argued that whatever you choose to give, you should do it strategically. But if you truly want to practice strategic philanthropy in tough economic times and have the means to do so, practice “countercyclical philanthropy,” giving more when the needs are greatest.

A version of this article also appeared on Forbes.com.

Photo credit: Oblivion Ratula]]> Thu, 9 Oct 2008 13:22:46 EDT ]]> Organizations Social Enterprise

This is the first in a series of blog posts from the International Development Club.

Much of the political discussion surrounding the $700 billion bailout passed by Congress last Friday has revolved around how the plan will affect ordinary “Main Street” Americans. Yet the financial crisis has had an impact world wide. Will the economic “base of the pyramid” — the three to four billion people in the developing world who earn under $3,000 per year — feel the pain?

It is estimated that large portions of many developing countries’ GDPs are held in the informal sector. In Nigeria, for example, it is estimated that two-thirds of the country’s economic output takes place outside of any economic and legal regulation. Unfortunately, this means that many people developing countries (90% in Nigeria, for example) have the dubious “advantage” of being unbanked. They draw income, pay expenses, and hold savings in cash and rarely engage with the formal capital markets in any direct way. While they may not be adversely affected by the financial crisis, people in developing countries are affected by other issues, such as the increase in food prices. That cost was up 40% in 2007 alone according to the UN Food and Agricultural Organization and it has effectively lowered the income of millions of people already living without a financial cushion.

The fact remains that an enormous swath of the world’s population has never had access to the wealth-generating power of capital markets that we, until recently, have taken for granted. This should prompt us to consider how we can best help the world’s poor access the wealth-magnifying capacity of well regulated formal financial markets without exposing them to the type of reckless behavior demonstrated by of some of the major American financial institutions in recent years.

Our upcoming Social Enterprise Conference will feature practitioners who have some interesting thoughts to contribute on this topic, especially in the areas of private equity and microfinance. What are your thoughts on how financial institutions can move into emerging markets safely? Please leave your comments.

The International Development Club is involved with projects as diverse as SME (Small and Medium Enterprise) development initiatives in emerging markets, the ongoing evolution of microcredit, and base-of-pyramid inclusive business strategies employed by multinationals. Last year the IDC spun off Microlumbia, the first student-run microfinance fund of its type. The IDC also offers consulting opportunities with enterprises throughout the developing world, a speaker series and an annual Washington DC careers trip.

Photo credit: Shubert Ciencia

This is the first in a series of posts exploring issues of careers and women that were discussed at the “Universities, Careers and Women” symposium on Sept. 19, 2008.

Historically, the women’s movement has focused on providing equal opportunity and access to education for women. By any measure, it’s been a roaring success: since 1980, women have comprised the majority of BA holders and more recently, the majority of newly minted MDs and JDs.

However, as more women than ever enter the professional labor force — equal with men in both numbers and stature — there remains a persistent fault line: the earnings gap. Complicating the equality landscape is how education, especially at the top tier, and so-called “opting out” are playing into — or out of — this gap.

The topic was the subject of last month’s research symposium, “Universities, Careers and Women”, hosted by Columbia Business School and the Sanford C. Bernstein Center for Leadership. Keynote speaker Harvard economist Claudia Goldin and her colleague Lawrence Katz presented their findings from their recent “Harvard and Beyond” (download PDF) study, the first to examine how the earnings gap plays out at the top-tier education level. (They co-authored The Race Between Education and Technology, published in June 2008.)

Goldin and Katz found that the earnings gap widens the further up the educational and professional food chain the female college grad goes. There is a 67% difference in earnings between Harvard men and women compared to 40% for college grads nationwide.

For MBA women, bottom line parity is especially elusive. Economist Marianne Bertrand from the University of Chicago’s Graduate School of Business also presented her research at the symposium. She found 60% earnings difference between female and male Chicago GSB alums 10 years out of school.

“There is a big earnings difference,” Bertrand said, “and it is affected by whether or not you have children. There are no signs that there is discrimination affecting gender gap in earnings, although there is a penalty for stopping out to raise kids.”

Katz found in his data that for MBA holders, any work interruption led to a 30% drop in earnings, and the longer the stop-out, the bigger the loss. A timeout of 15 to 18 months sunk earnings by 35% immediately; once lost wages were factored in, this decline reached 50%. (download presentation PDF)

An interesting twist, however, was the key role of spouse choice. According to Bertrand’s research, MBA women with high-earning mates were more likely to move off the fast track; whereas women with husbands not on the fast track were more likely to return to full-term office work sooner and purchase childcare. (download presentation PDF)

The symposium discussion went on to consider the issues that might close the gap and allow women to pursue career and family in a mutually beneficial fit. Mentoring and coaching, male behavior modeling (e.g. paternity leave), job sharing and career development programs are some of the issues that were discussed.

The takeaway: Women face steep economic penalties for stepping out of the labor force (for children, eldercare, etc.). This, of course, drills down right to the core of womenomics and has serious implications for firms competing for human capital and knowledge. A perplexing question remains at large: how to shift the corporate paradigm so that women not only make equal pay for equal work but have equal work and family opportunities at equal pay? The next blog post will consider some of the ways this is happening.

Photo caption: Left to right, panelists Marianne Bertrand, Lawrence Katz and Anne Preston

Photo credit: Leslye Smith

Tonight, John McCain and Barack Obama will meet in Nashville for the second of three presidential debates. In an op-ed published in the New York Times on Oct. 7, 2008 (“The Dismal Questions”), Dean Glenn Hubbard and Prof. Joseph Stiglitz posed several questions relating to the economy they would like the candidates to answer. Select questions:

From Prof. Stiglitz:

More than a million people have lost their homes in the past two years. A million more are expected to lose their homes in the next 12 months or so. Do you support a more direct program of relief for homeowners? The government pays more of the mortgage costs of rich homeowners, through larger tax deductions, than of poorer homeowners. What would you do to correct this injustice?

From Dean Hubbard:

Does the financial crisis indicate that we need more regulation? Or is the problem less one of too little regulation than of poorly focused regulation? The crisis had its origins in part in international capital flows that led to extraordinarily low interest rates. But high-risk mortgage lending drew some of its breath from regulatory interventions. Some heavily regulated financial institutions managed to get themselves in trouble. And it was government-sponsored enterprises, no strangers to regulation, that stimulated the demand for questionable mortgage products. Shouldn’t the next president be standing up to protect markets instead of sowing doubts about them?

What questions about the economy would you like the presidential candidates to answer?

In an Oct. 2 column published in the Wall Street Journal (“First, Let's Stabilize Home Prices”), Dean Glenn Hubbard and Prof. Chris Mayer propose that bolstering housing prices will improve the intent of the Treasury’s bailout plan. They write:

We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25% (matching the lowest mortgage rate in the past 30 years), and place those mortgages with Fannie Mae and Freddie Mac. Investors and speculators should not be allowed to qualify.

The historical spread of the 30-year, fixed-rate conforming mortgage over 10-year Treasury bonds is about 160 basis points. So a rate of 5.25% would be close to where mortgage rates would be today with normally functioning mortgage markets. One of us (Chris Mayer) recently published a study showing that — assuming normally functioning mortgage markets — the cost of buying a house is now 10% to 15% below the cost of renting across most of the country. Rising mortgage spreads and down-payment requirements are what’s still driving down housing prices. We need to stop this decline.

The direct cost of this plan would be modest for the 85% of mortgages where the homeowner owes less on the house than it is worth. Lower interest rates will mean higher overall house prices. The government now controls nearly 90% of the mortgage market and can (and should) act on this realization. Remove the refinancing option and you can have lower rates without substantial cost to the taxpayer. Homeowners would have to give up the right to refinance their mortgage if rates fall, although homeowners could pay off their mortgage by selling their home. For borrowers with lower credit scores, the mortgage rate would be greater than 5.25%, but it would be less than their current rate.

Now, what about mortgages on homes that are worth less than the total amount of the loan? These mortgages could be refinanced into a 30-year fixed-rate loan to be held by a new agency modeled on the 1930s-era Homeowners Loan Corporation. New mortgages would be made of up 95% of the current value of a home.

The government might use two approaches to mitigate its losses. It could offer owners and servicers the opportunity to split the losses on refinancing a mortgage with the new agency. Servicers would have to agree to accept these refinancings on all or none of their mortgages, to avoid cherry-picking. Or the government should take an equity position in return for the mortgage write-down so that the taxpayers profit when the housing market turns around.

This week, Columbia Business School faculty members responded to the failure of the Treasury’s bank rescue plan to pass the House. The overall sentiment: something needs to be done, but what form it should take, and what kind of support it will have, is still unclear. On Sept. 29, Prof. Suresh Sundaresan offered his insights on National Public Radio’s Planet Money (listen to audio):

It’s a bit of a shock that the rescue plan was rejected; over the last several days some tight provisions were added on… and safeguards were added and we had two extremely informed and knowledgeable folks — the Secretary of the Treasury and the Chairman of the Federal Reserve — pleading for this assistance. … I could be wrong completely in the sense that the stock market picks up and libor goes back, but I find a low possibility of that happening unless something is done by Congress.

On Sept. 30, Prof. David Beim spoke with Tom Ashbrook on NPR’s show On Point (listen to audio), saying:

Writing in the New York Times, “Lessons From A Credit Crisis: When Trust Vanishes, Worry,” David Leonhardt cited an anecdote from Prof. Frederic Mishkin on the public’s growing skepticism and lack of support for the bailout.

Is the public’s skepticism of the bailout deserved or misplaced? The Senate is expected to vote Wednesday night on the Treasury plan. Please share your comments.

Prior to the recent financial crisis, the biggest economic story of 2008 had arguably been the rising cost of oil. After hitting a low of $50.48 a barrel in January 2007, oil prices have spent much of 2008 above $120. When the price of oil reached a historic high of $147.27 on July 11, Goldman Sachs’ prediction that oil would soon rise to $200 a barrel seemed well on its way to coming to fruition.

However, since the peak in mid-July, prices have fallen sharply, reaching $96.36 on Sept. 29. What caused this decline? Will it continue, or will oil prices quickly rebound?

Contrary to what we commonly hear from business commentators, speculators have little impact on the oil market, and storms, like Hurricanes Gustav and Ike, only cause a blip in the data. The fluctuations caused by the current financial crisis are also blips, short-run effects; however, if the crisis causes or reinforces a recession, its impact on oil prices will be more durable.

There are two main causes of the recent drop in oil prices: the global economic slowdown and the rise in value of the U.S. dollar. While the idea of a U.S. recession is something we’re all familiar with, Europe, too, has been dragged down by the recent credit crises, and even China has seen a slowdown in growth. Together, these slowdowns have caused global demand for oil to fall, resulting in lower prices.

Oil’s connection to the dollar stems from the fact that while oil is priced in dollars, most oil-producing countries — Saudi Arabia, Russia, etc. — don’t want dollars but rather other currencies. As the dollar fluctuates, these countries mark the price of oil up or down to preserve the value of their exports in the currencies that matter to them. If the current crisis leads to a drop in the international value of the dollar — which it will do if it leads to less use of the dollar as a reserve currency — we can expect some subsequent increase in the dollar price of oil.

Over the next six to 12 months, I expect the price of oil to fall further than it has. Aside from another war in the Middle East or the Caucasus — both of which are possible — I don’t see any forces on the horizon that will be strong enough to counteract slumping global demand and cause prices to increase. While OPEC will undoubtedly try to stabilize or raise prices by keeping a lid on supply, they are often not very effective in doing so. Only once have they clearly managed to raise the price of oil and hold it there for a while, and that was back in the 1970s in the context of an Arab-Israeli war.

In the long term, however, global demand will rebound, causing oil prices to rise again and eventually surpass their July 2008 highs. The growth of the economies of developing countries will play an important role in this, as early stages of growth are particularly energy-intensive.

Supply, on the other hand, is not likely to increase much. Quite simply, we are not finding much oil. For example, the Tupi field off the coast of Brazil, which was hailed as a giant find when it was discovered, has about 10–20 billion barrels of oil in it. That may sound like a lot, but when you consider that the world consumes about 31 billion barrels every year, it only adds up to six to nine months of global consumption. That certainly doesn’t represent a fundamental increase in supply. Neither would more drilling in the U.S., which would generate finds that are peanuts relative to global or even U.S. demand (which represents one quarter of global demand).

While lower oil prices may seem like a silver lining of the world’s current economic turmoil, we must realize that when we recover, the laws of supply and demand will once again force us to confront the issue of rising oil costs.

An article in the New York Times on Sept. 28 (“Wall Street R.I.P.: The End of an Era, Even at Goldman”) which proclaimed the death of Wall Street, refers to the growth of “pointy-headed” quantitative analysts in the industry. It is an epithet that fits well with the roll-your-eyes-and-don’t-even-try-to-understand-it angle of much coverage of the financial crisis. Derivatives are invariably “arcane” or “dizzyingly complex” and, worst of all, unwelcome in Omaha. The geeky dad went to work at a bank, and now we’re all living “Honey, I Shrunk the Credit Market.”

Rewind to just a few months ago. Alarms were being raised about New York losing its prominence in the global financial services industry. Mayor Michael Bloomberg and Senator Charles Schumer commissioned a study on how best to buttress New York’s leadership position. A key finding of the 2007 Bloomberg-Schumer report (PDF) is that New York needs to expand its supply of quantitative talent to keep up with global competition. London may already have edged out New York in some markets, and increased competition from Asia is inevitable.

The current crisis does not change the logic of the Bloomberg-Schumer report. A complex industry requires a highly skilled workforce. Whereas a high school diploma may once have been sufficient for work as a trader, you’re now more likely to find someone with a graduate degree making markets. Risk management needs to be at least as sophisticated as the trading it monitors. Financial intermediaries are modern factories, producing products to manage and transfer risk. Yes, we need new measures to guard against toxic waste, but we especially need people who understand the machinery.

If Wall Street is drained of its quantitative talent, the effects will be felt within months, not years. And as the industry recovers, the consolidation wrought by the current crisis will open the way for new and smaller firms. Technology will be critical to financial innovation, while more routine work may move off shore. Will the sequel be “Revenge of the Nerds?” No, New York’s competitive advantage will rely on a base of highly educated professionals with a combination of quantitative and managerial skills, heads that operate in both pointy and broad modes. The opportunity and challenge for business schools is to develop this talent.

The New York Fed has gotten its long-standing wish: Goldman Sachs and Morgan Stanley have become, like Citigroup, bank holding companies subject to its supervision. The increased power may please some Fed officials — and provide a great security blanket for “value” investors like Warren Buffett ’51. But as far as public policy is concerned, this is a step in precisely the wrong direction: We need more focused, transparent financial players, not more “Too Big to Fail” and “Too Complex to Manage” behemoths like Citigroup.

“How could our CEO possibly certify Citigroup’s accounts?” complained one of his lieutenants, shortly after Sarbanes-Oxley had been passed. “They are just too complicated.” Perhaps, I suggested, Citicorp should be split up into simpler units. Of course not! A flat world needed global financial institutions. If U.S. regulators didn’t back off, they’d all flee to London. Outsiders like me just didn’t get it.

In fact, the insiders didn’t. Stanley O’Neal and James Cayne famously frolicked on golf courses and at bridge tables while Merrill Lynch and Bear Stearns imploded. They weren’t callous, just profoundly — and given the complexity of their firms, inevitably — ignorant of the risks. Nor were they the exceptions. The financial system is paralyzed by fear not just of financial institutions hiding bad loans, but also that the insiders who are supposedly in charge don’t know the magnitudes of their liabilities.

American industry — businesses in the real economy — long ago learned hard lessons in the virtues of focus. In the 1960s, the prevailing wisdom favored growth through diversification. Many benefits were cited. Besides synergistic cost reductions offered by sharing resources in functions such as manufacturing and marketing, executives of large diversified corporations allegedly could allocate capital more wisely than could external markets. In fact, the synergies often turned out to be illusory, and corporate executives out of touch. Super-allocators like Jack Welch and Warren Buffett were exceptions.

The weaknesses of diversification were sharply exposed by the recession of the early 1980s and by Japanese competition. Later in the decade, raiders used junk bonds to acquire conglomerates at deservedly depressed prices and sold off their components at a handsome profit.

Banks missed the 1960s party. Prohibitions on interstate banking and the separation between investment and commercial banking mandated by the Glass-Steagall Act severely limited diversification in the financial industry. But as the rules were dismantled in later decades, financial institutions plunged right ahead.

The early results weren’t promising. Efforts to sell stocks and socks at Sears went nowhere, as did the Prudential Insurance Company’s foray into brokerage and Morgan Stanley’s venture into credit cards. But the forces that had curbed diversification in the industrial sector did not restrain financial institutions. Low-cost Japanese competitors did not show up inefficiencies--in many financial businesses, the driver of long-run profits lies in the prudent management of risks and returns, not costs.

Raiders couldn’t use junk bonds to dismantle conglomerates; financial institutions are too highly levered to be taken over with borrowed money; compensation arrangements made diversification irresistible. Many financial firms pay out nearly half their gross profits as bonuses – even if these profits are secured by loading up on risk. And bonuses paid are paid forever, even if the bets ultimately go bad.

Diversification offered CEOs the opportunity to take ever larger bets – and earn staggering personal returns without much personal risk. CEO Richard Fuld’s Lehman stock may now be worthless – but he gets to keep the $500 million he took out in previous years. James Cayne may have fallen off the Forbes 400 list, but he isn’t in the poor house. Sandy Weil has laughed all the way away from Citigroup, which he turned into a hodgepodge of investment banking, trading, retail brokerage, commercial banking and insurance.

Even now, battered CEOs seem bent on doubling up to recoup their bad diversification bets instead of cleaning house. Last year, Bank of America CEO Ken Lewis declared that he had had “all the fun I can stand in investment banking.” Yet last week, Lewis engineered the acquisition of Merrill Lynch. Now Goldman and Morgan Stanley, in their new holding company incarnation, are looking to acquire deposit-rich regional banks.

Predictably, taxpayers are footing much of the bill for the misadventures in diversification. Regulators, who looked the other way while bankers put the public’s deposits at risk and brought the nation’s economy to its knees, now have an opportunity to redeem themselves. They ought to demand an unraveling of the tangle that would help separate the good from the bad, and create institutions whose books CEOs could honestly certify.

Instead, they are encouraging more diversification, hoping to bury, for instance, Merrill Lynch’s unknown liabilities into Bank of America’s impenetrable balance sheets, and — in spite of their past failures with the likes of Citicorp — welcoming the creation of more megabanks. This is rather like giving the addict in the ER more drugs. It may soothe the tremors, but it isn’t a long-term solution to the diversification debacle.

The column also appeared on Forbes.com.

All eyes are on emerging markets in Africa. Growth is booming, particularly in Nigeria, where the market cap of the stock exchange has grown an astounding 962 percent since 2003. Starcomms, a Nigerian mobile telecom operator, is part of this growth trend; last summer, we became the first publicly traded telecom company in Nigeria, listing at $750 million.

However, growth comes with inevitable challenges, particularly in the dimension of capital markets and governance. In this capacity, Columbia Business School is playing a strong leadership role. Professors Enrique Arzac and Partha Mohanram recently joined the board of Starcomms and have brought their knowledge and expertise to this African growth story.

In 2001, less than one percent of Nigerians had a phone line — fixed or mobile. Today, about 30 percent of the population has a mobile phone, and that number has the potential to grow to 65 or 70 percent. The emergence of a strong and competitive telecom industry has had a dramatic effect on everyone in this country of 154 million. From the cattle driver who can now call in to hear prices in different markets before deciding where to move his herd to the businessman who can now access the Internet from the field, mobile telecom is quickly transforming the way business operates in Africa.

Starcomms is Nigeria’s market leader in CDMA service and its fourth overall telecom provider. We have grown from 2,000 subscribers in 2002 to nearly two million today. As the industry itself moves to a newer, more internationally competitive phase, our advantage is our human capital, which has only grown stronger with our newly expanded board. Professors Arzac and Mohanram bring us critical and unique expertise in managing a publicly listed organization and ensuring that international best practices are brought to Nigeria. Prof. Arzac brings the experienced eye of a global financier, while Prof. Mohanram brings acute accounting knowledge to bear. The complexity of being the first listed telecom and the associated governance issues make their insight crucial. Their experience with the telecom industry in countries like Argentina and India allow them to help us blend the ideal with the practical.

In the big picture, telecom is a macroeconomic driver; it’s a multiplier and, along with the financial industry, it is helping the Nigerian economy diversify and move away from traditional dependence on oil and gas. Telecom operators have invested billions over the last six years and are reaping rewards throughout the system.

The industry’s development mirrors the wider African surge. As a continent, sub-Saharan Africa is growing at around nine percent according to the International Monetary Fund. The traditional, western view of African business was only that of the “microfinance” paradigm. However, western businesses have finally come to realize that Africa has many well-run, sophisticated small to mid-cap businesses (by U.S. standards) that need direction in the crucial area of governance, over and above their need for structured capital.

By 2010, the Nigerian government expects the country to rank among the top 20 industrialized economies and double its GDP to $300 billion. With increased human capital and continued growth of telecom companies such as Starcomms, business in Nigeria will continue to transform both the country and the continent.

As the government’s proposed $700 billion bailout plan winds its way through Congress this week, the issue of how to price banks’ mortgage-related assets — and potential taxpayer exposure — has caused concern among economists. Dean Hubbard, writing with Hal Scott of Harvard Law School and Luigi Zingales at the University of Chicago Graduate School of Business, raises the issue of price-setting in a Wall Street Journal column, “Let’s Get The Bank Rescue Right” published Sept. 24.

The [Treasury’s] proposal needs to articulate the price-setting process. Although a reverse auction has been suggested, with asset holders “bidding” to sell their mortgage-related securities to the Treasury, such an approach raises significant problems. Most significant is the risk posed by asymmetric information regarding the value of these securities. Because the holders of complex and incomparable mortgage-related securities have more information regarding their worth than does Treasury, Treasury is at a huge disadvantage and will likely overpay. … How can we design a transparent asset purchase process that avoids arbitrariness and potential favoritism? Any such process will have to be designed from scratch, because there is no U.S. precedent for such a targeted purchase of bad assets.

Professor Charles Calomiris also addressed the complications of setting a fair price for bad loans, suggesting that purchasing banks’ equity, rather than their mortgage-related assets, would limit taxpayer exposure. Writing in the Financial Times on Sept. 19, Calomiris said:

Government injections of preferred stock into banks, advocated by New York’s Sen. Charles Schumer and inspired by the Reconstruction Finance Corporation’s policies in the 1930s, are a better choice. Pricing sub-prime instruments for purchase would be very challenging, and fraught with potentially unfair and hard-to-defend judgments. If the price were too low, that could hurt selling institutions; if it were too high, that could harm taxpayers. Who would determine how much should be purchased from whom in order to achieve the desired systemic risk reduction consequences at least cost to taxpayers? How would the purchasing entity dispose of its assets?

Preferred stock assistance would leave asset valuation and liquidation decisions to the private sector, but would provide needed recapitalization assistance to banks in an incentive-compatible manner to facilitate banks’ abilities to maintain and grow assets. If executed properly, it would limit taxpayers’ loss exposure, and leave the tough decisions of managing assets, and deciding on how to allocate capital assistance from the taxpayers, to the market.

Preferred stock assistance would work best if it were required to be matched by common stock issues underwritten by the private sector, which would ensure the proper targeting of assistance, and force private parties rather than taxpayers to bear first-tier losses. Banks in need of capital would apply for Matched Preferred Stock (MPS) assistance. Initially, say for three years, there would be no dividend paid to the government on MPS. That subsidy would increase the net worth of the recipient and facilitate raising additional capital via common stock.

Last night, John McCain and Barack Obama came together to praise the value of national service. Volunteerism is an important aspect of what makes a society civilized. Contributing to the community at large is not only good business or good government; it’s also the right thing to do.

But to what extent can bureaucratic forces foster national service without stifling it? McCain reminded the crowd that the federal government has its limits, and Obama shied away from the idea of compulsory “national civic service.”

Perhaps the best way to promote a culture of service is through business education. At Columbia Business School, we learn to appreciate not only the facts of the case in question but also the issues surrounding and clouding the situation. In Leadership, we are always taught that raw intelligence only gets you so far and that emotional intelligence is the true determinant of success. Learning how to insert the relevant resources to the relevant people at the relevant time is essential to a Columbia MBA. It is this knowledge that is required to organize or help movements that people care passionately about. This is the kind of service that all Americans would like to see at the heart of this country.

MBA students must also learn another element of service — that to whom much is given, much is expected. An MBA equips people with the skills and knowledge to be more socially conscious precisely because the degree is part of such an august tradition. It should escape no one’s attention that service is an essential component of leadership. In today’s society, there is no shortage of good causes for which our skills can be put to use. For every person there is a cause that rings strong and true. As McCain stated last night, “It’s not about the individual — it’s about the cause that they serve.” This discussion, which occurred on the seventh anniversary of the tragic events of September 11, reminded Americans of a greater common cause.

Goldman Sachs and Morgan Stanley have taken the plunge. They have decided to become “bank holding companies.”

In essence, this means they will enter the brave old world of depository banking, with the regulatory apparatus that this entails, and leave behind the “proprietary trading” business models that have made these institutions the envy of the financial world for the past decade.

The nature of their debts will change (from securities and money market instruments such as repos to deposits), and the level of their portfolio risks will fall as they come under the pressure of a far more intrusive regulatory regime. However, their leverage will remain high and may even increase — access to cheap and reliable sources of debt funding, after all, is the main attraction of becoming a depository bank.

The investment banks’ previous resistance largely reflected the regulatory costs and risk “culture” changes that come with regulated depository banking. Virtually all of the franchise value of Goldman and Morgan is human capital. The folks at these firms are the most innovative product developers and skilled risk managers that the world has ever seen.

Depository bank regulation, supervision and examination prizes stability and predictability over innovation, and banks bear a great compliance burden associated not only with their financial condition but also their “processes” related to both prudential regulatory compliance and consumer protection. None of that is conducive to innovation and nimble risk-taking.

Goldman and Morgan’s moves, therefore, could greatly trim their upside potential and reduce the value of their human capital for developing new products and proprietary trading strategies. What about the benefits? First and foremost, they will be able to use reliable, low-cost deposit financing as a substitute for the shrinking collateralized repo market and other high-priced, market-based debt instruments.

Second, they will be able to preserve their client advisory business and perhaps even compete better in underwriting activities. Stand-alone investment banks have lost market share in underwriting to universal banks over the past two decades because underwriting and lending businesses are linked, and non-depository institutions suffer a comparative disadvantage in funding their lending (as shown in a recent academic paper).

In this sense, the capitulation of the stand-alones marks the final stage of the victory of the relationship banking/universal banking model. Those of us who argued in the 1980s that nationwide branching would allow commercial banks to serve as platforms for universal banks with large relationship economies of scope can now say, “We told you so.”

Bank of America, JPMorgan Chase and Citigroup have all weathered the financial storm and are not under threat of failure because their geographic and product diversification has kept them resilient. It has even permitted them to engage in acquisitions and new stock offerings during the worst shock in postwar financial history.

Somehow, Sunday’s announcements did not make me feel like celebrating. It is not progress, in my mind, to move toward a one-size-fits-all financial system comprised solely of behemoth universal depository banks. Just as community banks still play an important role in small business finance (owing to their local knowledge and flat organizational structures), we need nimble, innovative risk-takers like Goldman and Morgan in the system. What will we do without them?

While I may not be celebrating, I’m also not too worried about the lost long-run innovative capacity of American and global finance, for a simple reason: ultimately, people, not institutions, are responsible for innovation. Smart, innovative people can — and will — find homes elsewhere. The financial landscape will shift, giving rise to new franchises and new structures (perhaps even spin-offs from the current investment banks) that combine features of the old franchises that don’t fit comfortably under the Fed’s umbrella. Global competition, as always, will be a reliable driver of financial efficiency.

A version of this column was also published at Forbes.com.

By happenstance I’m lecturing on John Maynard Keynes in my Modern Political Economy course today. I don’t ask my students to read the whole of The General Theory of Employment, Interest and Money, which would indeed be cruel and unusual punishment, but I do require them to read chapters 10, 12 and 24. Those, to me at least, are most essential to understanding the General Theory. Chapter 12 certainly makes the carnage on Wall Street a bit easier to understand; it also is a reminder that recovery isn’t going to be easy. Quoting Keynes:

A conventional valuation which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion due to factors which do not really make much difference to the prospective yield; since there will be no strong roots of conviction to hold it steady. In abnormal times in particular, when the hypothesis of an indefinite continuance of the existing state of affairs is less plausible than usual even though there are no express grounds to anticipate a definite change, the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning and yet in a sense legitimate where no solid basis exists for a reasonable calculation.

So far we have had chiefly in mind the state of confidence of the speculator or speculative investor himself and may have seemed to be tacitly assuming that, if he himself is satisfied with the prospects, he has unlimited command over money at the market rate of interest. This is, of course, not the case. Thus we must also take account of the other facet of the state of confidence, namely, the confidence of the lending institutions towards those who seek to borrow from them, sometimes described as the state of credit. A collapse in the price of equities, which has had disastrous reactions on the marginal efficiency of capital, may have been due to the weakening either of speculative confidence or of the state of credit. But whereas the weakening of either is enough to cause a collapse, recovery requires the revival of both. For whilst the weakening of credit is sufficient to bring about a collapse, its strengthening, though a necessary condition of recovery, is not a sufficient condition. (emphasis added)

These days, Keynes is not very popular in some circles; in truth, he is a bit hard on the neo-classicists in chapter two. But behavioral economics, which is now mounting a serious attack on the neo-classicists (at Columbia Business School as well as in the discipline), owes a lot to Keynes, as the above quote makes clear. As he wrote more than seven decades ago, strengthening credit is a necessary but not sufficient condition for recovery. We need to restore some confidence too, which is probably where political leadership comes in.

The U.S. government, faced with the country’s worst financial crisis since the 1930s, has announced a $700 billion plan to purchase bad mortgage assets from banks. Is this a good bailout or a bad one? The difference is important, because history shows us that bad bailouts can actually make financial crises worse.

The Japanese government’s handling of its massive bank crisis in the 1990s is an example of bad bailout policy. At first, the Japanese government ignored the problem it was facing, then it decided not to enforce its own rules requiring sufficient bank capital (“forbearance”), then it began investing government funds into insolvent banks through preferred stock and subordinated debt. This caused the crisis to only grow larger, which contributed greatly to Japan’s poor economic performance during the 1990s and for several years thereafter.

A good bailout focuses on liquidity. The government acts appropriately when it helps institutions with liquidity at a time of crisis by lending against collateral or by purchasing bank assets at fair market prices. A bad bailout is one that tries to help with solvency. The government acts badly when it invests money directly into failing banks without closing them. If a bank — even if there is more than one — is actually insolvent (i.e. its liabilities exceed the value of their assets), then best practice dictates that it should be closed.

Closing a bank is less draconian than it sounds. A closed bank is not simply blown up or thrown away; on the contrary, every effort is made to preserve the bank’s franchise value and maintain continuity with customers and employees. Normally, the government cleanses the bank of its bad assets after closure and transfers the cleaned-up business to new owners as rapidly as possible.

Good bailouts wipe out the shareholders of insolvent banks and dismiss their senior management. Why? Because these are the people who created the problem, and they must be seen to pay a high price. Remember that most banks are conservative, well-run and solvent; only a minority get over-extended.

The problem with the Japanese banks in the 1990s was not just the bubble economy of the 1980s but a continuing unwillingness by banks and the government to acknowledge bad lending practices and change them. A few banks were eventually closed; however, one of these names, Long-Term Credit Bank, eventually became Japan’s greatest banking success after it was closed and sold to an American buyout fund, which resurrected it under the name Shinsei Bank.

From 1986-1992, the FDIC closed over 2,300 banks and thrifts. The Resolution Trust Corporation (RTC) was established to move the bad real estate assets back into the economy as promptly as possible. The RTC, much admired for its speed and efficiency, did not try to buoy up failing banks; it handled their assets after the failing banks were closed.

So is the current administration plan a good bailout or a bad one? At this point the proposal is written in a very general way, and the devil is always in the details. The test will be whether the government plans to buy assets at something resembling their fair market value.

Suppose a bank has made a $10 million loan that is actually worth about $6 million. If the government buys the loan at $6 million, then it is providing liquidity assistance, which is fine. But if the government buys the bad loan for $10 million, it is in essence giving the bank a $4 million gift. Handing out gifts to misbehaving banks is characteristic of a very expensive, bad bailout.

Secretary Paulson has spoken of buying the bad assets at a deep discount, but this is not written into his proposal. It should be a requirement. That would minimize the ultimate cost to the U.S. taxpayers and increase the chances that this bailout is a good one.

I am an economist, so naturally I believe that a lot of behaviors can be explained by the incentives people face and the cost-benefit calculations that ensue.

But I like to think I’m not a narrow-minded economist. I can acknowledge that the foibles of human psychology also account for a lot of what we do. And sometimes the two interact in surprising and interesting ways.

In understanding who does — or does not — get ahead in the workplace, some (economic) discrimination surely plays a role – a subject not unfamiliar to many working women. But it also appears that some women may be leaving the work force as a pre-emptive strike; why stick around when all that hard work isn’t going to pay off?

Some years ago, I had a conversation on this topic with Maura O’Neill, who at the time was an MBA student in the Berkeley-Columbia program. Maura suggested that active discrimination accounts for only half of a vicious cycle. The other half, she said, is women simply choosing not to compete for leadership positions in order to avoid facing such dispiriting discrimination. This, of course, only reinforces the idea that women are unwilling to or incapable of fulfilling such roles, perpetuating the cycle.

And so began our very happy academic collaboration to study the difference in attitudes between men and women and return on effort in the workplace.

In the resulting study, which will be published next year in the Journal of Human Resources, we discovered that women are more likely to view success as a matter of luck or connections rather than hard work, a result consistent with Maura’s description of the discouraging prospects for promotion for many women. We used data from the World Values Survey, which allowed us to look globally at the relationship and find that this gender difference in viewpoint is remarkably persistent over time and across countries. Perhaps more concerning for those with leadership ambitions is that this “gender perceptions gap” is far wider for those in managerial positions.

But these findings represent something that concerns us all. As Maura wrote in a column on the study last year, “I worry that if women don't think that the workplace is a level playing field where effort generates promotions, they will not feel compelled to invest their best efforts. As a result, corporate America will lose out on a vast reservoir of talent.”

Well put, Maura. Now that we have a better sense of the problem, how about some suggested solutions?

Columbia Business School and the Bernstein Center for Leadership and Ethics are hosting a research symposium on “Universities, Careers and Women” on September 19.

Photo credit: Ricardo Motti]]> Fri, 19 Sep 2008 15:56:44 EDT ]]> Leadership Organizations

On Tuesday at lunchtime, students navigated pizza boxes and a packed auditorium for the semester’s first Town Hall meeting. Dean Glenn Hubbard addressed the school-wide audience about the near and long-term economic impact of the current Wall Street crisis. He also addressed the job market, a source of great concern for many students, saying:

A question that may be on your mind is “Does financial services need to shrink?” There will be job losses and exits, not only with the firms that have exited but probably more. But I have considerably more optimism for the medium term in financial services, and there are three simple reasons for that:

1. The global phenomenon of an aging society puts pressure on the demand for a whole variety of financial products and services. This isn’t as well developed as it should be in the U.S. or the U.K., let alone in many emerging economies, and the number of return income vehicles, insurance products and so on will increase.
2. Many of the big emerging economies are improving their domestic demand, which will generate a huge demand for financial services as they exit from the state provision of services to the market.
3. The overwhelming forces of globalization and the demands for international finance. Anyone who says that the financial sector is going to shrink out of business has not been through these cycles before.

Dean Hubbard urged students to remain flexible and keep perspective.

“We are behind you,” he said. “Ask yourself, ‘What are the right jobs for me on my career ladder?’”

Photo credit: Catherine New]]> Thu, 18 Sep 2008 09:56:53 EDT ]]> Corporate Finance Leadership Organizations

Tonight, Senators McCain and Obama will speak about public service here at Columbia University. They are likely to talk about creating a program for a year of national service. That is a fine idea, but what strikes me today is that there is a management gap in service: Social organizations need people with managerial skills to better achieve their goals and support their mission.

The greatest constraint in solving the world’s most pressing problems, from health care to environmental policy to poverty, is not a lack of ideas. Many great minds, including those of large numbers of Columbia faculty members, are focused on research relating to society’s most fundamental challenges.

What the social sector still needs, however, is management. Management, along with the ability to get things done, is the scarcest skill among those who devote themselves to service. A desire to do good is an absolute requirement, but in order to navigate complex social and governmental channels and effectively create change, one must be equipped with the knowledge and skills necessary to analyze, decide, and lead.

That’s what business schools do. Top business schools are producing MBAs whose management skills will be invaluable in the social sector—even if they are not necessarily the people who are running nonprofit organizations. I argue that what a lot of development and health care reform efforts are missing is the involvement of people who know how to manage and run large, complicated organizations. If management is the scarce skill, then that means business schools need a seat at the public service table.

Columbia Business School’s involvement in Africa and other emerging markets and its health care management, entrepreneurship, and social enterprise programs are just some of ways we are committed to service. We also have programs to train principals for New York City schools and work with community businesses here in Upper Manhattan. We are taking management skills and actively applying them to public service.

Senators Obama and McCain have already demonstrated their understanding of the critical importance of business in creating and sustaining economic growth. It is my hope that when they take the stage this evening at ServiceNation’s Presidential Candidates Forum, they will also convey the need to engage business and businesspeople in the social sector.

P