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

Read the previous post

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

Read the previous post

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 th