This post is part of a series following the “Pre-MBA World Tour” organized by Shoaf and members of the class of 2010.

In London, we visited with a banker at Blackstone who works in the corporate restructuring group. Following are a few highlights from our conversation:

Restructuring is a recent concept in the EU; not many banks or corporations are familiar with the practice, so it’s a fairly nascent market. The UK has much stricter bankruptcy laws, which means that the concept of restructuring is a bit trickier to deal with.

Blackstone is one of the few firms advising on restructuring deals in the EU; Houlihan Lokey and Lazard are among their main competitors.

At most firms, restructuring generally falls under the “advisory” business, but it is very different from M&A or capital markets. While M&A transactions typically involve a fairly straightforward auction process (build a book, build a list, call the list), restructuring deals are much more complex and unique — they involve several more parties per transaction and are often less predictable. Most companies undergoing restructuring transactions are overleveraged and have serious operational issues in addition to problems with their capital structure (e.g., a liquidity crisis).

Also, there is much more tension and drama involved in a restructuring because there is generally a losing party involved. So unlike an M&A deal where each party is excited about newfound synergies, restructuring generally involves a bit of pain for the equity holders during the deleveraging process. Another difference is that with restructuring, banks are typically brought in and retained (hired) by the creditors, rather than the corporation or the equity holders as is the case with M&As.

As many know, restructuring is a counter-cyclical business, which means that when the market is hot, the restructuring guys get to play golf on the weekdays, but when the market crashes (and all the other bankers get laid off), these guys roll up their sleeves and get to work.

At the first CBS open house, a few of us were talking about going into restructuring in order to capitalize on the anticipated recession.

However, according to my new friend at Blackstone, restructuring isn’t something you get into for the short run; it’s a very specialized practice that takes a few market cycles to really understand the business and get to know the players. It also has a short window of opportunity because, unlike the weather here in London, there are typically more sunny days than rainy days in any given market cycle.

That said, Blackstone hasn’t seen any significant increase in restructuring deals . . . yet. It seems that most of the deleveraging has been taking place in the capital markets and hasn’t yet hit the corporations, which seem to still have a lot of cash on their balance sheets. A few bad quarters and this could change very quickly.

Okay, there’s my report from London. I’ll end with saying that I don’t have a restructuring background, and most of this information was derived from one conversation, so I’d love to hear anyone else’s thoughts about the matter. Is now the right time to get into restructuring?

Next stops: Paris and Frankfurt.

It seems like any entrepreneur would kill for the chance to become an early leader in one of the many fast-growing global industries. Yet fast growth can lead to a wide range of problems, from human resources and managerial control to finance and information technology.

And when a company’s development is driven primarily by industry-wide expansion rather than the company’s innovation and operational excellence, you can be certain that the organization will experience its share of growing pains.

These challenges were the focus of Professor Michael Preston’s class, Managing the Growing Company. In this class we examined the common patterns that emerge when high-performing small and mid-sized companies outgrow their infrastructures. We studied many companies that successfully made this transition, including TheKnot.com and Mitchells & Richards, and some that did not.

Turns out that companies that grew successfully exhibited some of the same patterns:

1. The founders acknowledged their weaknesses and sought outside help. They were willing to consider that the people and processes that contributed the most to their growth in the start-up phase could be part of what was holding them back in the next phase.

2. When the organization grew, formal systems were put in place to manage functions like accounting and human resources that were once handled on an ad-hoc basis.

3. Founders avoided becoming a bottleneck by delegating important decisions. Trusted operational managers focused on day-to-day firefighting, while top executives focused on more strategic issues.

For the final class project, our team studied Did-It.com, a leader in search engine marketing (SEM). Over the past ten years, SEM has undergone wave after wave of upheaval and growth. Industry changes, which now occur almost daily, have left a long trail of shattered business models.

It was technological change that led Did-It.com to change its business model at least a half dozen times since it was founded in 1996. Each time the industry shifted, the company managed to move to an even stronger position. Over the past five years, the company recorded growth of 1,369 percent, landing it at number 137 on Inc. magazine’s list of the fastest-growing private companies in the United States.

How has Did-It.com remained so nimble? To find out, Jindra Zitek ’08 and I caught up with founder Kevin Lee at the company’s New York headquarters.

It became clear almost immediately that the leadership of Lee and his partner Dave Pasternack has been a huge factor in the company’s success. By constantly adapting their vision to both market realities and employee sentiments, they’ve kept their organization one step ahead of the curve.

For example, Lee told us that a few years ago he was walking around the office when he noticed that half of his employees were stressed-out and unhappy — employees focused on “organic” SEM. When this trend continued, he and Pasternak promptly closed this part of the business to focus on paid listings-management.

When asked about the defining factor that allowed Did-It.com to succeed where many rivals foundered, Lee cited his willingness to delegate responsibility. Employees are empowered to make important decisions without oversight, allowing them to deliver exceptional customer service while adapting quickly to whatever changes new technologies may bring.

“My employees don’t work for me,” Lee said. “They work for my customers.”

This post is part of a series in honor of the School’s Leadership and Ethics Week.

There’s something almost irresistible about the story of bad apples — unscrupulous individuals whose lack of integrity can humiliate an unwitting organization or even bring it to its knees. Witness Société Générale’s recent rogue trader Jérôme Kerviel or knife-and-mallet wielding Lisa Nowak, the love-triangle astronaut at NASA.

Hand-in-hand with the notion that bad apples are at the root of much trouble is the idea that we can — and should — spot them in advance. According to the popular story, the fix for ethical problems is to identify and weed out the troublemakers before they make trouble. The problem with this bad-apple story is that it’s almost entirely wrong — if not in theory then at least in practice.

Let’s start with the first part of the story: bad apples are at the root of most trouble. A century of social science highlights how behavior is a joint function of people (their character, their vulnerabilities and so forth) and the situations in which they act (incentives, pressures, temptations, role models, etc.). To be sure, some characters need only a weak situation to evoke their unethical behavior, and indeed some characters simply create those situations for themselves.

On the other hand, some situations are powerful enough to get almost anyone to go along, even though most people outside the situation would see it as unacceptable or unwanted behavior. Psychologist Phil Zimbardo argues that the terrifying, sleep-deprived, pressure-cooker, no-rules environment at the Abu Ghraib prison in Iraq in 2003 was sufficiently intense and relentless to evoke sadistic behavior from otherwise normal, well-adjusted soldiers.

Management scholars Ann Tenbrunsel and David Messick suggest that much unethical behavior in organizations stems from people being in situations where they can readily deceive themselves into believing they are doing the right thing. Thanks to an organization’s habitual language or labels for describing things — the ways in which decisions are framed, for instance — decent people can do awful things while seeing themselves as just and reasonable.

None of this is to dismiss the idea of personal responsibility for one’s own behavior. But if our goal is to predict untoward behavior, grading the badness of apples may not be sufficient to forecast who will do what.

Do bad apples exist? Yes. Is bad-appleness the best explanation for bad behavior? Sometimes it is; but in many cases the story is considerably more complicated.

Now, the second part of the story: can bad apples be spotted? Let’s consider one approach that seems tempting: catch bad apples on their way in the door by gauging their integrity during a job application or interview. Pose an ethical dilemma to a candidate, the idea might go, and use their response to predict whether their morals pass muster.

I sympathize that this method would appear to be utterly rational, but my reluctant conclusion is that it’s likely to be almost meaningless, or worse. Recent work on ethical thinking suggests there are multiple mental systems in play. For instance, research by neuroscientists such as Joshua Greene suggests that moral choices and behavior often flow from intuitive, unconscious, sometimes emotional processes that are distinct from rational or conscious processes. Asking someone to respond to a hypothetical ethical situation could tap into this later system of conscious thought, extemporaneous account-giving, and verbal proficiency. When put on the spot, a charming sociopath could confabulate an enchanting account about impeccably ethical behavior, even though their actual behavior in a real situation might be something quite different. A tongue-tied do-gooder might botch his or her answer but do the right thing if the situation actually happened.

In a way, doing something like posing ethical challenges to screen applicants could be worse than useless if an organization believed that such screening meant they were bad-apple free. Misplaced confidence in gatekeeping could lead an organization to ease up elsewhere in reinforcing the importance of integrity.

Does this mean scrapping ethics and integrity from interviews or hiring conversations? Not at all. I think discussing integrity during an interview can provide an important signaling function, saying, in effect: “We care about integrity here.” The focus would not be so much on whether someone passes an ethics test, but on showing candidates from day one that the organization takes integrity seriously.

Bad apples exist and can cause dramatic harm to an organization. But this isn’t the only, or perhaps even dominant, explanation for bad behavior. And while it may be tempting to try to catch these characters on their way in the door, practical and reliable methods for doing so are not readily at hand. It may be better to start sending a message from those early moments that integrity is taken seriously inside the organization.

And beyond this, organizations can work to build what Tenbrunsel calls an “ethical infrastructure” — formal and informal systems of communication, sanctioning, decision framing, and so forth — that creates situations pulling for everyone to do the right thing.

In part, it’s bad luck and bad timing. Airlines operated with an overburdened infrastructure to begin with, and then FAA inspections surfaced precisely as oil prices soared to record highs and the economy teetered into a housing-led recession. A perfect storm.

In 2001 there were similar shakeouts as the industry came down from a boom cycle fueled by the dot-com era, when airlines had to fire people, go into bankruptcy and jettison aircraft. Airlines are very sensitive to economic downturns. Many consumers and businesses eliminate air travel when times are hard, yet airlines cannot shed costs as quickly to keep pace because they have large commitments of capital and fixed costs such as airplanes, labor contracts, gate space and landing slots.

In hard times, airlines do what they can to survive. Some file for bankruptcy protection; others restructure and merge. Mergers, like Delta and Northwest’s, can help airlines offer more routes to customers, feed traffic into their hubs and spread overhead costs. But it’s a gamble. Continental’s recent rejection of a merger deal with United shows that industry consensus on whether or not consolidation will ultimately help reduce costs and increase profits is far from clear. Continental, for one, is betting that its international diversification will allow it to endure a weakening U.S. economy and dollar-denominated oil.

Perversely perhaps, these woes can also be viewed as a good thing. Low prices, crowded planes and gates, airlines scrambling over each other to offer new routes and services — all of these are signs of a starkly competitive industry.

In a certain way travelers have gotten what they’ve asked for too. Bob Crandall, former CEO at American Airlines, once said that every time American experimented with giving people more room on the plane and charging $5 more, they would lose out to competitors over price. Cheap, basic service is what most air travelers seem to want, judging by how they vote with their wallets.

Another byproduct of a competitive industry is that there is a lot of innovation and change. Bad business models fail and are replaced by new ones. There is no shortage of entrepreneurs trying to reinvent the industry. Eos Airlines thought there was a market for an all-business class service to Europe with fully flat bed seats, champagne and gourmet meals. An interesting idea, seemingly, but their recent bankruptcy proved it wasn’t viable.

One interesting trend happening on the high end right now is on-demand air taxi service provided by small regional jets that are relatively cheap to operate, fly out of less-congested regional airports and have sufficient range to compete with mainline carriers. They are targeted at business people who want to avoid the hassles of commercial airline travel. Good idea? Bob Crandall thinks so; he is leading a new venture called POGO to provide exactly this kind of service. Time will tell if he’s right.

As the industry continues to absorb shocks and innovate, it’s obviously disrupting the lives of employees and travelers alike. Sure, air travel was more glamorous in years past, but it was also extremely expensive and only available to a limited number of cities. Now people can fly anywhere for relatively little. Yet air travel can be miserable and crowded; airlines have cut back on services. Cost cutting produces hardships, and rapid change can feel a lot like chaos.

The question is: how much will you tolerate before you stop flying? If it reaches the point where we all opt to stay home or drive rather than fly, then the airline industry will really have something to worry about.

During spring break we traveled to Ghana with the mission of developing a marketing strategy that would increase tourism and investment in Kumasi, Ghana’s second largest city. Our goal was to collect information and make the necessary contacts to help us implement our recommendations.

Kumasi, as part of Columbia’s Millennium Cities Initiative (MCI) is working on a number of projects in infrastructure, health and education that will hopefully bring the city closer to the Millennium Development Goals (MDGs). Our project is a key component of that effort due to the obvious benefits that the increased economic activity can bring to the city.

The first lesson we learned might seem obvious, but is very important: You can’t market a product you don’t know. The many hours we spent reading reports on Kumasi and browsing what was available online didn’t give us much of an idea of what we discovered in the end.

What we discovered was a city with a rich history as the capital of the Ashanti Kingdom and the home of many local crafts such as Kente cloths and Adinkra prints. We also learned about areas with untapped tourism potential such as Lake Bosomtwe and the Bomfobiri Wildlife Sanctuary. On the business side, despite all the challenges, we found a local administration working to improve the infrastructure and we discovered some intrinsic advantages of Kumasi over other cities in Ghana.

Even though it is the second largest city in Ghana and has more than a million inhabitants, Kumasi has serious infrastructure challenges surrounding its road network, electricity, water and Internet (getting our emails in Kumasi took a painfully long time). Many businesses complain that the centralization of government services in the capital, Accra, is a heavy burden to their productivity.

The team has been working hard on the project and we are in the process of developing an actionable set of recommendations for the city that we think can make a difference. The rest of the team — Kenny Hsu, Dario Cacciatore and Andre Le — will travel to Kumasi again in May to formally present our proposal and to start working with the project stakeholders to help Kumasi achieve the MDGs.

This consulting project was supported by the Social Enterprise Program’s International Development Consulting Project Fund, for the Earth Institute at Columbia University.

The following excerpt is drawn from Ben Bernanke’s remarks at last night’s Annual Dinner, at which he was honored with the Distinguished Leadership in Government Award. download the full text

Many foreclosures are not preventable. Investors, for example, are unlikely to want to hold onto a property whose value has depreciated significantly, and some borrowers — perhaps because they were put into an inappropriate loan or because personal circumstances have changed — cannot realistically sustain homeownership. However, if a foreclosure is preventable, and the borrower wants to stay in the home, the economic case for trying to avoid foreclosure is strong.

Clusters of foreclosures can destabilize communities, reduce the property values of nearby homes, and lower municipal tax revenues. At both the local and national levels, foreclosures add to the stock of homes for sale, increasing downward pressure on home prices in general. In the current environment, more-rapid declines in house prices may have an adverse impact on the broader economy and, through their effects on the valuation of mortgage-related assets, on the stability of the financial system. Thus, finding ways to avoid preventable foreclosures is a legitimate and important concern of public policy.

To determine the appropriate public- and private-sector responses to the rise in mortgage delinquencies and foreclosures, we need to better understand the sources of this phenomenon. In good times and bad, a mortgage default can be triggered by a life event, such as the loss of a job, serious illness or injury, or divorce. However, another factor is now playing an increasing role in many markets: declines in home values, which reduce homeowners’ equity and may consequently affect their ability or incentive to make the financial sacrifices necessary to stay in their homes.

On the principle that a picture is worth a thousand words, Federal Reserve staff, using detailed, county-by-county information on mortgage performance, have developed a series of heat maps, which summarize the incidence of serious mortgage delinquencies across the nation as well as some of the key drivers of loan performance. As the examples will make clear, the figures use warmer colors — orange and red — to show counties for which the factor being considered has a higher value or change. Lower values or changes are indicated by cooler colors — shades of green and yellows — indicate areas where the factor under consideration has a moderate value or change.

download all seven heat maps

What are the implications of these relationships, particularly the linkage of mortgage payment problems and falling house prices? Loan servicers are used to dealing with mortgage delinquencies related to life events such as unemployment or illness, with the most common approaches being a temporary repayment plan or the folding of missed payments into the principal balance. A widespread decline in home prices, by contrast, is a relatively novel phenomenon, and lenders and servicers will have to develop new and flexible strategies to deal with this issue. In some cases, when the source of the problem is a decline of the value of the home well below the mortgage’s principal balance, the best solution may be a write-down of principal or other permanent modification of the loan by the servicer, perhaps combined with a refinancing by the Federal Housing Administration or another lender.

To be effective, such programs must be tightly targeted to borrowers at the highest risk of foreclosure, as measured, for example, by debt-to-income ratio or by the extent to which the mortgage is underwater. Finding the right balance — particularly the need to avoid programs that give borrowers who can make their payments an incentive to default — is difficult. But realistic public- and private-sector policies must take into account the fact that traditional foreclosure avoidance strategies may not always work well in the current environment.

Most Americans are paying their mortgages on time and are not at risk of foreclosure. But high rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy. Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It’s in everybody’s interest.

How do you get nearly seven hundred graduate students to donate to an unrestricted gift? In past years, class gift committees thought it wouldn’t be possible to rally students around something that wasn’t tangible like a scholarship fund or a classroom. Others tried, but then had to change course when they faced too much pushback from the student body.

But the fact is that unrestricted gifts make the biggest difference to nonprofit organizations — including business schools. And this year, the Class of 2008 not only became the first class in the history of CBS to pledge an unrestricted gift, but also attained a never-before-seen participation rate: 95 percent. We beat practically all of our peer institutions — in both participation and total dollar amount pledged.

More importantly, such an achievement signals our commitment to each other, and to our school. This is one of the few opportunities our class as a whole had during our two years to work toward a common goal — and the class of 2008 came together in a way that’s never been done before.

It was a challenge from the beginning because there was little structure, precedent or knowledge of how to run a campaign like this. We had a town hall and other education sessions to discuss why we thought the unrestricted gift would be the best choice for the School, and agreed that our class had the ability to make the leap and support such a mission. Then we began to plan our campaign.

We invited Dean Hubbard to a few talks, displayed signs around the school and thermometers in the lobby to publicly gauge our progress. We also had training lunches for cluster representatives so that they could give more in-depth responses to their classmates’ questions and held events for our entire Class to participate in. Our success was also largely due to the hard work of the Alumni Transition and Development Committee, which we created last year to raise awareness about what it means to be a graduate of Columbia Business School.

Because of our early efforts, we were able to get a lot of buy-in before we even started the campaign — and survey results showed that giving unrestricted funds was something a significant portion of our class supported.

Once the campaign launched, more and more students engaged in the process, and even some of the hardest skeptics turned into vocal advocates when they saw how the Class of 2008 had the chance to do something historic.

I’m so heartened and impressed by my classmates. The economy is the worst it’s been in a long time, but we realized how fortunate we are to have a Columbia MBA and to have a huge community of people who will continue to support us throughout our careers.

I care deeply about this school, and it was so exciting to have the opportunity to help the class give back — and build community — in a way that hasn’t been done before.

Thanks to everyone for rallying around such a great cause.

The highlight of my year at CBS is teaching Entrepreneurial Finance. I enjoy interacting with students, putting together the cases and bringing in speakers from the entrepreneurial and venture capital communities.

But what I enjoy most as an economist is the opportunity to think deeply about entrepreneurship. To many, entrepreneurship calls to mind the path-breaking motivation envisioned by Schumpeter’s “creative destruction.” But much of entrepreneurship — and much of what we can teach in business school — is more akin to “nondestructive creation,” in which the entrepreneur puts the pieces of a puzzle together in a way others haven’t seen before.

And many examples bring these economic insights to light: CBS ’01 grads John Londono and Zohar Yardeni discussing how they turned listening to corporate calls into a multi-million dollar business. Ben Rosen ’61 recognizing great potential in Lotus. Russ Carson ’67 taking insights from the healthcare industry to transform a modest hospital contract-management business into a major hospital chain, collecting billions of dollars in value.

The combination of a compelling profit model at a disruptive time by the right entrepreneur can be a winning one. This critical feature of entrepreneurship — identifying and capturing opportunity — is teachable, and is integral to the efforts of many faculty members at CBS. Instead of saying “no” whenever an opportunity has problems (as it always does) one can learn to ask: “What can go right? What can go wrong? And how can I tilt the odds toward success?”

The day after completing my application to CBS, I purchased a world map and a box of thumbtacks and began charting my trip: a 15-week journey to some major cities around the world. I was hoping for the adventure of a lifetime.

At the MBA open house in late February I decided to recruit a few of my future classmates, and the idea of a pre-MBA trip caught on like wildfire. By the following day, a group of admitted students had gathered together to discuss how we could all coordinate our summer travel plans. That’s when we realized we had stumbled onto something big!

Within one week, a leadership team had emerged with each person leading a two-week section of the trip. By the end of the second week, most alumni chapters had volunteered to host a group of students in their cities.

The snowball kept getting bigger and pretty soon several organizations at CBS (including many student clubs, the Alumni Association and the Chazen Institute) joined our cause by providing networking opportunities and advice on how to make the most of our excursions abroad.

Today, nearly 1 out of 10 admitted students plan to participate and almost half of them have a significant leadership role. It’s evolved into a fast-paced and dynamic organization that exemplifies the modern way of doing business on a global scale.

So until August 7, a lot of us pre-MBAs will be on the road, traveling to the following cities: London, Paris, Frankfurt, Zurich, Milan, Rome, Istanbul, Dubai, Mumbai, Delhi Bangkok, Phuket, Kuala Lumpur, Singapore, Manila, Hong Kong, Shanghai, Seoul and Tokyo.

Our hope is that the trip will bring together students and alumni to share cultural and professional experiences, and that our visits with companies and organizations will provide us with a truly global perspective. We also hope to have a great time before school starts in the fall.

You can see the full itinerary and track the progress of our journey at our Web site www.cbsworldtour.com. You can also email me (jshoaf10@gsb.columbia.edu) if you would like to discuss anything in more detail.

And stay tuned for more Public Offering posts from us on the road.

Yasmina McCarty ’08, a graduate of the EMBA-Global program, won the 2007 Cartier Women’s Initiative Award in recognition of GreenMango, a company she developed with business partner Nandini Narula.

On February 1st I moved to Hyderabad, India to officially start GreenMango’s operations. That first day, a lot went wrong.

After a 29-hour journey, I arrived at the Hyderabad airport with my entire life in suitcases and the driver wasn’t there to meet me. Apparently there was a little mix up on the whole a.m./p.m. thing.

When he did finally arrive, he informed me that the guest house my business partner Nandini Narula and I had booked for the month (and secured with a deposit) was no longer available. I found another guesthouse to stay in for the night, and finally had a chance to rest, until someone else walked into my room — they had double booked the place.

I had a very low moment where I thought: “Oh my god, what have I just done?” Two weeks prior I had graduated with my MBA (as part of the EMBA-Global program) and watched my classmates take phenomenal jobs in the world’s business capitals as prestigious bankers, consultants, etc. And here I was moving to a new country, to a city I didn’t know and trying to start a company — what was I thinking?!

As my jetlag faded, my excitement about GreenMango returned, and since then our experience has been absolutely amazing. In our first week here we found a place to stay, set up the office, brought our first staff on board and signed up our first nine customers — it was exhilarating. All the months of planning and preparation were over and we were on our way!

I now stay in a lovely flat, where the rich sounds of life in India waft into my window every morning. We have a small but growing team, who are invaluable with their hard work and belief in GreenMango. And best of all, the customers are excited and signing up for our product.

Every day greets me with an unending list of problems waiting to be solved (e.g., how to get work done when the cricket match is on) and opportunities waiting to be grabbed (e.g., how to structure partnerships with Goliath when you are David).

But I couldn’t be happier and am truly enjoying every minute of this adventure.

One of the more remote places to do business is Tajikistan, a mountainous republic in Central Asia. Recent events aren’t helping: an energy crisis appears to have set in motion a food shortage, and the IMF claims that the National Bank of Tajikistan misrepresented its creditworthiness to secure loans.

Still, the economy is growing, and we were excited to see it firsthand over spring break. All semester we had been working with a local bank, the First MicroFinanceBank of Tajikistan (FMFB), on assessing the viability of providing commercial loans to small and medium enterprises (SMEs). In mid-March Lukas Bauer ’09 and I traveled there to gather research that could help us identify the factors that would determine whether or not that could work.

After arriving in Dushanbe, the capital, we went first to the bazaar to meet with small-business owners. We found retailing practices that would usually cause great concern: bags of cash were transported hundreds of miles to pay suppliers; there was no maintenance of current accounts or accounting books; and monthly sales tracking (or any, for that matter) was conspicuously absent.

In the framework of commercial finance, these business practices would preclude an assessment of the chance of default, a necessary element to judging the risk that the bank would incur by providing a loan. However, the framework of microfinance allows lenders to protect portfolios through diversification: while a default of the size of most commercial loans could cripple the financier, the combination of multiple borrowers and the small size of individual loans protects the bank’s lending portfolio from collapse.

The next day we boarded a plane for Khorog, the capital of the Gorno-Badakhshan Autonomous Region (GBAO), the remote mountainous province that comprises nearly half of the country’s territory. In ninety breathtaking minutes we flew over the 20,000-plus foot Pamir range, observing the isolated villages and seasonally passable unpaved roads below (we would spend nineteen hours driving back). We were beginning to understand the complexity of the challenges faced by GBAO businesses.

Over the next three days we visited clients in the rural districts of Roshtkala and Rushan, discussing the finer points of locally significant activities such as Pamiri residential construction and chicken incubation. They pointed to real challenges facing their business, ranging from changing consumer preferences to across-the-board inflation on basic commodities.

We were awed by the lengths to which owners went to start their businesses. One dentist brought fragile equipment over steep mountain passes from China. Other aspiring industrialists drew deeply on capital loans to create outbound supply chains.

By the week’s end, we had a real sense of the needs of the customers. They called for more credit, lower interest rates, less up-front paperwork and most vociferously, longer loan durations. From the bank’s perspective, however, these requests had to be balanced with risk level, transparency and the costs such changes would pose.

Our challenge now is to resolve this disjunction. Over the next month, our team — Ossama Soliman ’08, Gervasio Guareschi ’09 and Michael Hsueh ’09, along with Lukas and myself — will be researching microfinance institutions around the world that make loans in similarly inhospitable terrain.

After final exams, part of our team will travel to Dushanbe to present our recommendations and plan the next steps with the bank.

Microfinance will not be a panacea for Tajikistan; even if the FMFB succeeds in meeting its clients’ financial needs, deeply rooted economic and political problems will still limit business opportunities.

Nevertheless, the bank has already demonstrated that the provision of finance markedly improves the odds that entrepreneurial endeavors will blossom into productive and profitable enterprises. We aim to convey the insight from more mature organizations that will enable the bank to both succeed commercially and make as broad a social impact as possible.

This consulting project was organized by the International Development Club and sponsored by the Social Enterprise Program.]]> Tue, 29 Apr 2008 15:22:00 EDT ]]> Business Economics and Public Policy Corporate Finance Social Enterprise World Business

In our “Game Theory and Incentives in Business” course, Professor Paolo Siconolfi and I use experimental methods as an active teaching tool, simulating a strategic market environment in which students can actively participate.

In our most recent experiment, we simulated George Akerlof’s market for lemons (faulty used cars). In his paper “The Market for Lemons: Quality Uncertainty and the Market Mechanism,” Akerlof illustrates the failure of a market due to asymmetric information between sellers and the buyers.

For this experiment, we divided the class into two groups: buyers and sellers. Sellers were able to chose a price, quality grade and whether they wanted one or two units. The sellers were told the monetary costs of producing each of their units, and these costs depended on the quality grade: a higher quality grade meant a more expensive unit. Sellers did this all without knowing what their competitors chose.

After all seller decisions had been submitted, both prices and quality grades were provided to buyers. Buyers then were allowed to make purchases of at most one unit at the posted price.

Of course the purpose of all this is to make a profit, so the sellers are trying sell at a price above the cost of a unit and buyers are trying to buy at a price below the value of the unit.

This experiment had two treatments. In the first four rounds, the buyers were able to see the quality grades before they bought a product, whereas in the last four rounds the quality of the product was hidden.

Buying and selling grade-two units is the socially and individually optimal outcome (it maximizes the income for both buyers and sellers) and this was indeed the case in the first part of the experiment: the majority of the transactions involved grade-two units at approximately right prices, with very little excess supply or demand. (You can see the results in the figure below, where the theoretical demand and supply is given on the left hand side.)

However, when the quality became unknown, the buyers reacted to the possibility of buying low-grade products. In fact, in round five, only four transactions (out of a possible 10) took place. The sellers responded quickly to the demand and lowered the prices. The market quickly converged to the lowest possible price level, and only low-grade products were sold.

Some students were playing in groups, and we overheard them reacting to adverse selection and moral hazard effects in a way that proved Akerlof’s theory. Our students were masterful in understanding the incentive problems in the market.

Of course none of this could have worked without enthusiastic students. We were very lucky to have a select group who took the theory and experiments very seriously and brought their insights into the classroom.

We like to conduct these experiments before discussing key economic ideas and principles, and during the spring term we conducted a good number of them: the pervasive winner’s curse phenomenon in auctions; a persistent bubble in a limit-order market; failure of auction mechanisms in the existence of asymmetric information; behavioral considerations beyond rationality in a trust game; and many other phenomena that arise in strategic market environments. Besides giving us a chance to illustrate the shortcomings and teachings of these theories, we find that these experiments allow students to gain firsthand experience with market theories and encourage them to ponder the underlying questions and issues.

My purpose in writing these columns is to help people understand how we economists spend our time, and what we have to contribute to our understanding of the world. So they’re often geared towards illustrating big economic concepts (like barriers to entry, or signaling models, or search frictions in product markets) in a way that the average reader will find to be engaging. It’s a source of enormous satisfaction that I’ve gotten positive feedback on the columns from top-flight economists as well as random people who track me down via the web and let me know that I’ve somehow informed their views on life and society.

For better or worse, to grab people’s attention, you need more than interesting economics — it helps to have some drug smugglers, mafia characters, warlords or Sex and the City thrown in to motivate the reader (my dating column, based on work with Sheena Iyengar, is the closest I’ve had to “a shot heard around the world” — at least in part because it was picked up by the New York Times’s Maureen Dowd and Al-Jazeera’s Riz Khan).

I also try to write about things before anyone else does. It’s, well, unsatisfying to describe work that’s already showed up in a dozen blogs and appeared on the front page of the New York Times. It’s one of the privileges we have as academic researchers that we actually spend a lot of our time listening to people talk about preliminary work before it shows up on professorial Web pages.

In my Slate column this morning, I write about some very recent work on the impact of attending the Hajj (the pilgrimage to Mecca) on racial and religious tolerance. This isn’t economics, per se, but it’s about the hugely important question of whether exposure to people from other backgrounds can help us all learn to get along. It’s impossible to learn much about this by comparing integrated versus segregated communities, for example, since people who are racists probably settle in segregated places and tolerant people move to integrated places.

But the authors have a very clever way of getting around this “self-selection”problem — Pakistanis apply to a lottery to attend the Hajj, so making the pilgrimage is a matter of random assignment, not self-selection. And this means that any difference in tolerance between pilgrims and nonpilgrims is the result of their exposure to other Muslims in Mecca, rather than a preexisting condition (like an openness to travel and new experiences).

I’m always in search of new material, and also feedback on topics that would make for interesting columns. So if you have any ideas, drop me a line.

Excerpts from a talk given at CBS’s 2008 India Business Conference on April 19.

Indian growth is going to depend overwhelmingly on what happens locally in India. The reason India and China went from being peripheral players in the world market in 1980 to the powerful forces they are today didn’t have to do with changes in the global market. It had to do with local changes in India and China. In places where these changes haven’t taken place — in Russia for example — you see their participation in the global economy is what it always has been: just as a supplier of raw materials.

The reason so many Chinese goods now sell around the world is not because the demand for those goods has suddenly materialized, but because productivity growth in China — and it’s the same in India — enabled it to provide goods and compete successfully in global markets.

This trend is going to get more — not less — important in the future. If there is one enormous antiglobalization trend, it is that local services — education, medical care, housing — are becoming much more important for consumption and therefore economic activity than manufacturing or other kinds of services. There is a limited demand for manufacturers — there are only so many suits of clothes you can own, in the same way there is only so much food you can eat, notwithstanding the rising weights of Americans. Manufacturing, in terms of its importance in employment and economic activity, is going to go the way of agriculture in the 20th century.

This applies also to outsourceable services. Remember, for services to be outsourceable, you have to be able to routinize them. If you can routinize them, you can automate them. If you can automate them, those jobs are ultimately going away. So local services are going become much more important in India and all over the world.

Think locally not globally. Big global markets are extremely competitive. Chinese manufacturers do not make significant profits because they are competing with other Chinese manufacturers. In fact, if you look at the top 25 Chinese companies other than the natural resource companies — this is in terms of profitability and market capitalization — they are all local service companies: power companies, mobile companies, banks and insurance companies. If you can dominate local markets, especially where those local markets are growing, that’s where you’re going to do much better.

This applies to finance too. It is a perpetual surprise to me that overseas investors repeatedly get sucked into the kinds of difficulties that the U.S. has gotten itself in trouble with — mortgages, and before that in many other areas.

Also: when it comes to business profitability, it’s important to think not globally, which is what the propaganda is about, but locally, so that you can take advantage of growth and the benefits of growth are not competed away.

The world is not flat. There are very important differences across economies. If you spend time in India versus China, it’s immediately striking how different those two countries are. If you think about problems in those countries, they are very country-specific. I think when you arrive in India, you see the most important thing that is going to affect growth and the quality of life is actually land-use planning, and there are obviously other economies in which that is not so important.

The most striking thing I learned on my recent trip to India is this: when you sit down with Indian business people, they are superb marketers and business strategists. You talk to them about what they have to do to succeed in different marketplaces, and they are just extraordinarily well trained in talking about that. But if you go to the manufacturing plants, and if you compare these to plants all over the world, they are not particularly strikingly efficient — nothing like Japanese plants, where nobody is basically there and yet they produce enormous output. And you talk to them about that and they say, “Oh well, yes, we’re not very good at manufacturing because Indian workers are creative and not obedient as opposed to Chinese and Japanese workers.”

So if you’re going to think about growth in India and the interactions between India and the world, you have to have an appreciation for the cultural realities, and not only of India but of the different regions in India.

India is not destroying U.S. jobs. It has always been the case that productivity growth has caused the loss of many, many more jobs than the overseas movement of jobs. And nobody — not even the people currently running for president — have suggested that we do away with productivity growth. And I think you ought to keep the same thing in mind when you think about loss of jobs to India.

India is experiencing really the miracle of modern life. It used to be that only a very small stratum of the human race had what we think of as modern standards of living — eating a variety of foods, having the freedom to travel and real entertainment. That is happening in India now, and the most important question to keep in mind at this conference is how to persistently generate the local conditions that will allow that to continue.

Photo Credit: Jasvipul]]> Wed, 23 Apr 2008 12:03:57 EDT ]]> Capital Markets and Investments World Business

Does Barack Obama have a better shot at beating John McCain than Hillary Clinton? The answer may lie partly in whether voters are looking for honesty or competence in their candidate. And one clue to how candidates are perceived is the shape of their face. Babyfaces (large eyes, small nose, high forehead and small chin) are judged to be more honest than mature faces, but also as more naïve and perhaps less competent.

A survey of 150 Columbia undergraduates found that they perceived all three presidential hopefuls as having somewhat mature (rather than baby) faces; however, Obama was judged to have a significantly less mature face than Clinton. Consistent with the face stereotype, he was also perceived to be more honest than Clinton.

So is Obama likely to have a better shot at beating McCain than Clinton? Not so fast. In our survey, judgments of babyfaceness were negatively correlated with competence. In other words, the less mature the face is perceived to be, the less competent the candidate is judged to be.

And while Obama and Clinton are rated as equally competent when the question is asked directly, Clinton’s and Obama’s faces could cue voters to perceive Clinton as more competent.

The ultimate question is whether honesty or competence will dominate the election this Fall. Our survey found that George W. Bush was rated to be both dishonest and incompetent (this was a Democratically skewed sample), but judgments of his competence were significantly lower than judgments of his honesty.

In this situation, Obama has two winning strategies. First, make the issue of honesty crucial in the election by highlighting instances of dishonesty in the current administration. And second, provide strong cues to competence so that the face-shape cue is not used to form competence judgments.

What about Clinton? Given her low honesty ratings (even lower than McCain’s), she needs to downplay the importance of honesty and hope that her face helps legitimize her claims of greater competence.

Should the U.S. join the Kyoto Protocol, or at least play a positive role in the search for a successor? Or is this too costly, or otherwise “fatally flawed,” as our president has suggested?

Humanity as a whole needs to address climate change: it has the potential to alter the world around us dramatically, and for the worse. Preventing or at least minimizing climate change will not be cheap, but it will still be a good buy.

Roughly speaking, reducing greenhouse gas emissions to the level consistent with limiting climate change to around 2 degrees Celsius (about 4 degrees Fahrenheit) will cost in the range of 1-2 percent of world income.¹

We need to compare this cost with that of allowing climate change to continue — a harder number to compute. The most thorough and most recent estimate put the cost at “at least 5 percent” of world GDP, with “at least” here indicating that this assumes a rather conservative estimate of temperature increase and includes in the calculation only the costs of climate change that are captured in market transactions.

So this estimate would include the costs of land lost due to increases in sea level, or of reduced agricultural output, but not of species driven extinct by changing environments, or of the spread of disease vectors in a warmer world and many other non-market costs.

My own estimates are that the nonmarket costs are probably going to be bigger than the market costs, so the total could be 10 percent or more of world income.

If you can spend 2 to save 10, that’s a good investment — if the 2 and the 10 are both spent and saved today. A problem in the climate change case is that we spend the 2 now, well before we save the 10: we invest 2 to make 10, but we invest the 2 now and get the 10 spread over many years starting in 2040 or thereabouts. So we have to worry about the discount rate: over long periods it makes a big difference. I argue that the right discount rate for society to use here is very low, so investing 2 now to make 10 in the future still makes sense. But some of my colleagues disagree.

Another element in the calculations is that there is always a small but non-zero risk that the extent and impacts of climate change will be far greater than the central estimates of the IPCC. They admit this and give quite large error bars around their figures. These error bars are asymmetric: the mean increase is in the range 2-4 degrees C with no chance at all of less than 1 degree (we are already at 0.75) and some chance of 6 to 8 degrees. The upper end of this range would not just be costly: it would be disastrous. So we have to see climate policies as insurance policies, insuring against the small risk of a disastrous outcome. We can apply techniques from risk management to work out how big a premium it is worth paying: it could be several percent of GDP.

Back to the Kyoto Protocol. If we want to reduce emissions, then there are three ways of doing this:

• Order firms to emit less (command and control)
• Tax emissions
• Introduce a cap-and-trade system, as the U.S. did for SO2 under the 1990 amendments to the Clean Air Act.

Kyoto chose the last of these three, and the European Union has embedded this in its internal approach to reducing emissions. This also seems to be the preferred method in the U.S. states that are moving to reduce greenhouse gas emissions.

To economists cap-and-trade or taxes are clearly the preferred options, and politically it seems that cap-and-trade is way ahead. Taxes are a political liability, and cap-and-trade has the merit of generating new tradable securities, which the investment banking community loves. If we follow this route, then the CO2 market could become a multi-trillion dollar market within ten to fifteen years.

Photo Credit: Mila Zinkova]]> Tue, 22 Apr 2008 10:07:29 EDT ]]> Business Economics and Public Policy Risk Management Social Enterprise

Rajat Gupta talked with the CBS community on Thursday, April 10, about his life, career and the personal-leadership principles that have shaped his journey. Gupta (pictured at right) is senior partner emeritus and former worldwide managing director at McKinsey.

The big take-away from the event for me was this set of six principles, which I’ve recapped below:

1. Anger, Forgiveness: If someone behaves in a way that is unjust or insulting to you — view it as their problem, not yours. That way, you won’t react with anger, won’t feel the need for revenge and can keep moving on in your work.

2. Non-Attachment to Outcomes: Just focus on your performance and on doing your best — don’t get attached to the outcome. All outcomes can be good.

3. Learning Orientation: Focus on professional development rather than career development. Emphasize the learning opportunities that each situation can provide.

4. Humility: Success comes only partly from your own doing — a lot comes from external factors and from other people’s doing. If you realize this, you’ll keep your pride in check.

5. Making Others Successful: Very little can be accomplished purely via one’s own effort. So focus on making others successful. This will inevitably come back and help you in life.

6. Staying True to Yourself: Don’t wilt to popular pressure and do something that conflicts with your values or convictions. You only work with other people for a limited time, but you have to live with yourself a long time.

These principles are in fact very much in line with what I've observed in “great achievers” such as Abraham Lincoln, Martin Luther King and Mahatma Gandhi. In my experience, cultivating such principles isn’t only a matter of intellectual buy-in, but also of diligently training your mind to respond to day-to-day circumstances with the right thoughts.

What do you think of these principles? Can you envision truly putting these into practice in your own life? And for those who attended the event — any other memorable moments you’d like to share?

For years, I’ve been running “divide the pie” experiments with students at Berkeley to try to understand how people (or at least students at Berkeley) make decisions about giving.

One of my collaborators, Professor Daniel Markovits of Yale Law School, suggested that we take our experiments to New Haven to see how Yale Law students change their pie-dividing behavior after sitting through a semester of classes.

As at CBS, Yale Law students are randomly assigned to instructors in their core classes. But unlike Columbia, there can be very large differences in the material covered, depending on whether you are being taught by, say, an economist or a philosopher.

So with this experiment, we were trying to find out if differences in what and how materials were covered translated into differences in students’ giving decisions.

I must confess that I hadn’t wanted to run the Yale experiments — I have always believed that we teachers exert some influence over our students, but I thought it was more in the domain of ignoring sunk costs and figuring out how to establish entry barriers. And I certainly hadn’t expected any differences in giving decisions to show up after a single semester of classroom instruction.

But as with a lot of things in life, I was wrong. As I wrote in this recent Forbes article, it turns out that exposure to economics makes a big difference in how students split the pie, in terms of both efficiency and outright selfishness.

It’s a sobering message for teachers such as myself: students learn much more than the facts from us. What we do in the classroom matters for students, not just for learning how to maximize profits, but also for figuring out what it is that we should actually be maximizing.

Once upon a time risk management was a highly technical discipline of interest mainly to risk management professionals, but over the past decade it has become a topic of great interest, particularly among managers, investors and regulators. And recent economic news has put an even bigger spotlight on the profession.

Of interest to me is how, and how well, risk management information has been making its way into governance frameworks of companies, and I had the chance to hear firsthand about this when I was at an assembly of large company chief risk officers in October 2007. The topic of my discussion was how risk management organizations (RMOs) and boards of directors interact — and it was clear from the group interaction that top-level practices differed extensively.

So as a followup to that assembly, my colleague David R. Koenig, the former chairman of PRMIA, and I conducted a survey of very large corporations around the world, and the results confirmed that a standard of best practices for employing risk management within a governance structure does not yet exist.

Our survey results also confirmed something else: there is substantial change occurring within governance structures toward a more robust incorporation of risk management. And we found that while some companies employ ongoing efforts for the communication and improvement of governance and risk management practices within their board and employee populations, a very substantial number of others do not have such capabilities in place.

Our survey shows a wide variety of approaches currently being used to facilitate interactions between RMOs and boards — even within the same industry — and that meaningfully different approaches to risk/governance implementation exist at many levels in the companies: at the board committee and executive level, in the chains of reporting within the executive suite and in patterns of communications to governance structures.

Not surprisingly, an audit committee is the most frequent choice for board oversight of risk management, but still was the choice of less than one third of our survey respondents. The remaining choices span a wide range of board entities. Risk committees are emerging as an important board-level committee, but they only accounted for 17 percent of the risk oversight assignments reported to us. There are many factors that can account for this wide dispersion of choices, but it certainly suggests that the board of directors interface with the risk management organization is far from settled into a widely acceptable pattern, and the relationship will continue to evolve.

We asked participants about their objectives for risk management and found they also differ even between participants in the same industry and are almost always multifold. Most of our survey participants agreed on loss avoidance and control as objectives, while a smaller number — but still a majority of respondents — also identified securing a competitive advantage as an objective.

Finally, we found the most significant task lacking with many (but certainly not all) of our survey group was effective communication and education on risk policies for employees, a surprising gap in this important element of good governance practice.

It’s clear that further study of means for effective communication of the corporate appetite for risk, risk policy and risk data/reporting expectations is warranted to ensure that firms are creating the kind of effective culture that boards are increasingly seeking to foster. And if there is an expectation that employees are engaged in best practice governance and risk management, it must be modeled and communicated from the top to be achieved.

The full study is scheduled for publication by Wiley-Blackwell later this year in their monograph series, “Corporate Boards: Managers of Risk, Sources of Risk.”

Dear Friends,

Thank you for your shipment of medical supplies. The boxes arrived Friday and I will take them to the clinic on Monday afternoon.

Visiting this clinic has been the highlight of my experience in Iraq. While I was there last week, I spoke with a veterinarian named Yousef. He runs a business tending to flocks of sheep and other livestock in the area. He also works at the clinic as a linguist.

On busy days, Yousef assists the doctors in treating patients. He told me that conditions [in west Baghdad] have improved in the last six months. Things were pretty gruesome in 2006 and early 2007, but they seem to be getting better. He also noted that recent violence has been a disruption to life and business in Baghdad.

Yousef and his wife (another veterinarian) are hoping to open a veterinary clinic in a building soon. USAID will be providing the equipment needed to make their vision for the clinic a reality. Coincidentally, USAID has partnered with Columbia’s Center for International Conflict Resolution in planning provincial reconstruction teams (PRTs). PRTs are civil/military teams that go about the business of smoothing “resource based conflicts.” So your contribution is working in tandem with a Columbia University initiative over here!

Your donations will help an Iraqi medical staff give their fellow citizens free medical treatment three days a week. The staff is now comprised of a pediatrician, two doctors, a dentist, a pharmacist and Yousef. The clinic is small, and often operates without electricity. Donated materials are the only supplies they have. Since supplies are limited, your contributions are a wonderful addition.

As [fellow EMBA student] Ann Marie noted, I will be heading home in another three weeks. If you have any desire to send further supplies this way, you can forward them care of the Army Major who oversees the clinic. [Diapers, formula and other basic medical supplies are all in need.]

Major Peter Buotte
411 Civil Affairs Iraq
HHC, 3BCT, 101 ABN
APO AE 09344

By the way, if anyone has an old microscope, Yousef told me he hopes to get back to his roots as a medical and veterinary researcher. While the promised USAID veterinary kit should include a microscope, there is no timetable for the kit’s arrival.

Ann Marie, thank you for coordinating this effort. Classmates, I am humbled by your generosity.

Best Regards,
Todd Morris

After spending a few months over here, I wanted to offer some perspective on the situation.

The surge and its underlying counterinsurgency (COIN) strategy seem to be making gains. I see the impact each day during intelligence briefings on local area operations. The shift in media attention away from Baghdad, and toward Afghanistan and Waziristan, serves as further evidence of the muted successes of COIN.

Recent improvements aside, I stand quietly skeptical as the postsurge drawdown looms in the near term. A key tenet of the COIN strategy has been battle-space denial through troop presence. Simply stated: peaceful gains have been made by increasing our presence in the neighborhoods of Baghdad. America’s forthcoming surge drawdown will increasingly foist the burden of peacekeeping upon local Iraqi leadership.

Unfortunately, lasting strategic success relies largely on the Iraqi people’s ability to assume control of security. Reviewing Iraq’s formation, and the eight decades of sectarian rivalry that ensued, would force most objective observers to wonder about the likelihood of peace in the wake of troop drawdowns. Furthermore, our military is incapable of sustaining current troop levels.

On a personal level, this has been an eye-opening experience. Life in Baghdad is surreal. My unit has not been tasked with off-base operations, so the largest threats remain rocket and small-arms fire that insurgents shoot into the base.

I live in a trailer park named Dodge City North near the base’s eastern edge. Typical mornings include the sound of explosions and automatic-weapons fire in the neighborhood to my east. Low-flying helicopters zoom overhead around the clock, the thumping of their rotors vibrating the walls of my trailer as they pass.

Peppered about the base are trailer parks similar to my own with other choice names like Freedom Village and Liberty East. Among the maze of trailers sits “The Oasis” chow hall. Though the menu varies each day, corn dogs are readily available year-round, and the facility’s Sunday morning telecast laughably features Ultimate Fighting Championship bouts aimed at keeping the warrior spirit freshly invigorated.

I recently made a trip to visit our few remaining British allies near the Iranian border in Basra. Basra is different from Baghdad, as the Iraqi Army has already assumed control of the southern portion of Iraq. The Brits are paring down their forces. At present they have just 5,000 service members remaining, and those souls are getting shelled regularly by Shiite militia in the area. The threat of rocket fire requires sleeping in steel and cinder-block coffins. These truly unique confines allow one to rest knowing that only a direct hit will bring harm.

It is amazing to think that you are now just a few short months shy of graduating from EMBA. I wish I was there with you all. Hopefully I will be home in time to crash a Friday evening social event in May.

With that I leave you with this quote:

“The deepest fear of my war years, one still with me, is that these happenings had no real purpose.”

J. Glenn Gray, The Warriors: Reflections on Men in Battle

(J. Glenn Gray was a WWII veteran who received a PhD in philosophy from Columbia before the war.)

Best regards,
Todd Morris

Now Reed and Eric Chesin ’09 have come up with a way for pharmacies to organize medications that increases the chance of compliance. The idea, Bluepak, recently won CBS’s 2008 Outrageous Business Plan Competition; their elevator pitch is below.
 

The competition, which is in its ninth year, drew 46 submissions in a diverse cross section of industries. You can see all the pitches in this real media video, including a crêpe business pitch that shows how to make crêpes right in a manila folder.

This new standard formalizes the accounting industry’s age-old concept of fair value. It redefines fair value as the present-day cost to sell an asset or transfer a liability in an orderly transaction.

Previously this definition was used only to define investments in debt and equity securities, but now it has been expanded to include most assets and liabilities that take up space on corporate balance sheets. And it requires both public and private companies to adopt it.

As a result, companies — particularly those that invest in the alternative investment space — will find it increasingly challenging to mark many of their complex investments according to the new fair value definition. In addition, accountants will be required to dust off older contracts and agreements previously held at historical cost in order to comply with new requirements. (Valuation of publicly quoted investments, however, remains straightforward).

Although market volatility and subjectivity will riddle this process with uncertainty, one thing is for certain: this new fair value landscape will stimulate growth in several related career paths in 2008. Companies will need to employ more quantitative gurus in order to price these securities. In addition, regulators and auditors are likely to place a higher level of reliance on third-party valuation estimates, thereby creating a larger demand for independent valuation experts.

More good news is that this will enhance the tradability of assets and liabilities among firms by making the values of such investments more transparent to both buyers and sellers.

This new pronouncement presents fresh challenges for public and private organizations, many of which have long struggled with placing a value on complex financial instruments. Now that companies are filing quarterly financial information, we’re likely to see the effects of improved measurements and a clearer concept of what an asset or a liability is really worth.

“To be where the consumers are just before they get there and offer them what they didn’t know they wanted.”

This ability to see change before it happens — or to imagine change and create it — can result in billions of dollars. We know the legends well:

Bernie Marcus was fired as CEO at Handy Dan, a small home-improvement chain. Together with a colleague who had also been axed by the board, he developed a customer-centric supersized chain known today as Home Depot.

Jerry Perenchio co-purchased Univision television network for $500 million in 1992. Since that time, Univision Network grew to become one of the top five networks in the country in any language, and in 2006, Perenchio sold Univision for $13.5 billion.

Howard Schultz was an executive at a housewares manufacturer when he noticed that a client was ordering an unusually large number of specialty coffee machines. He visited the client, a four-store operation called Starbucks Coffee, Tea and Spice — and today he oversees more than 3,300 stores worldwide.

Ted Turner bought two failing TV stations in the Southeast and launched a revolution in the way we watch and receive the news. In 1970, he believed that a 24-hour all-news network would turn a profit and transform the news business. By 1980, that vision became CNN.

In all of these, it’s easy to see that innovative thinking was critical in their success.

But can we be taught that? Or is innovation instinctive?

While you consider your answer, I asked experts on the topic to weigh in:

Tom Kelley:

I absolutely believe that innovation can be learned. And the good news is that everyone has that innovator’s mindset already inside them, so the challenge is not so much to learn innovation as to recover some of the open-minded creativity of youth. Baudelaire said “Genius is childhood recalled at will,” and the innovator’s challenge is to tap into that latent talent hidden within their team.

Kelley is the author of The Art of Innovation and general manager of IDEO, the award-winning design and development firm that produced the Apple mouse, the Palm V and the revolutionary and deceptively simple Shimano Coasting bike. Kelley’s work deconstructs the practice of creativity and examines the genesis and execution of an original idea.

John Maeda:

It is this basic question the innovator asks herself, “Am I normal” or asked another way: “Am I different?” Innovators are born when they choose to leverage their mind to the fullest — when they flip the simple switch in their mind from “normal” to “different.” Keeping the switch flipped ON while the pressures of the world keep flipping it OFF — now that’s the hard part and the real challenge: how to stay innovative for life. That’s the greater question in my mind.

Maeda is from MIT’s Media Lab and soon will assume the reins of the Rhode Island School of Design. He is a world-renowned graphic designer, artist, computer programmer, educator and theorist. Esquire magazine named him one of the most important people in the 21st century. I.D. magazine selected him as one of the year’s 40 most influential people in design.

Bernd Schmitt:

Many view innovation as technical innovation; that’s a narrow engineering mentality. From a customer-oriented perspective, innovation is anything that improves customers’ lives in product design, but also communications, shopping environments, on web sites, etc. Think Dove’s Campaign for Real Beauty (the message and the innovative You Tube ads); think Abercrombie’s hip retail space; think Facebook. And that type of innovation can certainly be learned and taught — just like technical innovation. In my marketing courses and in my writings I equip students and executives with tools that marketers can use to challenge marketing and communications assumptions (the sacred cows), look outside the industry for inspiration (outside-industry benchmarking) and examine the core of a strategy and take it to an extreme (strategy stripping).

Schmitt is executive director of the Center on Global Brand Leadership at CBS and has written about the limitations of traditional corporate culture, the need to promote creativity and innovation and the unique challenges of establishing and cultivating a powerful brand.

What do you think? When it comes to entrepreneurship and innovation, what can and can’t be taught?

Before working at a venture capital company, I tried for years to figure out how to quickly determine if something is a venture capital investment or a private equity investment.

Some suggested that private equity is a super-umbrella term that is called venture capital when the investment is at an early stage. However, some companies have operated for 6–10 years before they come for venture funding.

Others believe that venture capital is the original term that became popular after World War II, and private equity is the term coined in the 80’s after famous people like Henry Kravis ’69 invested in bigger companies.

But I’ve found that determining by size of the company gets tricky, as revenue of $2 million might be considered small in a developed country but large in a developing country.

The size of the investment doesn’t work either if you base it on country. An investment of $10 million in a U.S.-based company would be considered a venture investment, but might be considered a private equity investment in the developing world.

Some professionals strictly define private equity as a leveraged buyout (LBO) activity. But in developing countries like India, there is almost no LBO activity due to banking regulations, and yet billions of dollars are invested in large corporations by private equity players as equity or convertible debt. This sure looks like private equity investment, but does not fall under the LBO or management buyout (MBO) category.

There is also conventional wisdom that says if a company is not yet successful but the promoter is very confident, it is a venture capital investment, but if the reverse is true — if a company is successful but the promoter is not that confident and wants to either restructure using LBO or wants to exit — it is for sure a private equity investment.

Though there may be some truth in that, it’s not quite scientific enough and does not cover all investment scenarios.

So here’s my own litmus test: if a company has no additional bank-debt carrying capacity due to its current financial state, an investment in it should be considered a venture capital investment. Otherwise, it should be considered a private equity investment. This works for companies of any size, stage or location.

Dateline: London

I think to really understand the ramifications of what happened, you just had to be there. At London’s Heathrow Airport that is.

On Thursday March 27, I took British Airways’ (BA) day flight from JFK to Heathrow. On Saturday I was due to talk about customer value to a group of high-level strategic account directors at a global software company. I planned to tell them that success in value delivery would guarantee customer satisfaction and enable them to retain and grow their customers, increase profits, and lead to greater shareholder value. I relaxed in my Club World backward-facing seat and concentrated on the task ahead.

On Thursday evening I landed at Terminal 4; little did I know what was unfolding at Terminal 5.

Terminal 5 was BA’s long-planned new $8.6 billion state-of-the-art facility at Heathrow. CEO Willie Walsh was on hand at 4 a.m. when the first flight arrived early from Hong Kong.

After that, everything went downhill. In a word, BA’s baggage-handling operation failed. Apparently, the system had functioned well in a 2,000-passenger test, but could not handle the 40,000 who that day crowded into the terminal.

By the following mid-week, BA had cancelled over 300 flights, 40,000 pieces of baggage had been separated from their owners (many sent overland to Italy for resorting), and thousands of passengers did not reach their destinations. To make matters worse, Britain’s aviation regulator reacted swiftly to stranded passengers’ complaints that BA failed to provide hotel rooms, in possible breach of European Union requirements.

In a stroke of genius, the Terminal 5 debacle occurred just three days before an open-skies agreement between the U.S. and Britain came into force. In addition to increased competition from European airlines flying from the U.S. to continental destinations, BA would now have new U.S.-based competitors at Heathrow. Continental, Delta and Northwest Airlines each offered flights on day one. Some analysts’ estimates of BA’s losses from canceled flights, additional costs, and reduced future bookings approached $100 million; Goldman Sachs downgraded BA shares to sell.

So what lessons can we learn from BA’s experience?

First, service businesses are tough to manage. Operations occur with the customer in close proximity and problems are quickly highly visible — very different from a factory making products.

Second, sophisticated systems are great when they work, but when they fail, disaster is close behind.

Third, when you put in sophisticated systems, test, test and then test again; it may take time and it may cost money, but consider the alternative!

Fourth, customer satisfaction depends on the difference between expectations and performance. BA had so hyped its new terminal that any failure hurt even more.

As for me, when I arrived back at terminal 4 on Saturday afternoon, British Airways could not get me on their JFK flight. The agent sent me to Virgin Atlantic where I gratefully accepted one of the few remaining Premium Economy seats to Newark. The counter clerk cheerfully phoned New York so I could change my car service pick up and I headed for the gate. As I was boarding, the gate clerk told me there was a change — an upgrade to Upper Class. Thank you Sir Richard!

Footnote: The following Wednesday, British supermodel Naomi Campbell was reportedly taken off a Los Angeles-bound BA flight and arrested. Apparently Campbell became agitated when told one of her two bags had been misplaced.

You can find Noel Capon’s new marketing planning workbook, The Virgin Marketer, and his textbook, Managing Marketing in the 21st Century, at www.mm21c.com.

On March 21 I flew to Omaha — along with 150 of my classmates — to meet Warren Buffett, MS ’51, a man I have admired (some friends would say fanatically idolized) for close to 15 years.

After a tour of the Berkshire Hathaway-owned Nebraska Furniture Mart, we were brought to a room at the Omaha Field Club. Warren Buffett stood at the front — two of his five daily cans of Cherry Coke nearby — and for the next two and a half hours, answered our questions.

The questions covered a wide range of issues, including what he looks for in a business, the current financial situation, recent events at Bear Stearns, ethics, emerging markets, commodities, his relationship with Benjamin Graham and his typical day. His answers were a powerful reminder of his unique ability to distill complex issues down to their bare essence.

When asked about how long the current financial crisis would last, he replied, “I don’t know. I have never made money on macro calls.” Buffett said that even if he had perfectly predicted macro conditions in 1973–74, he would not have bought See’s Candies in 1972 going into a recession and would have missed out on a company that he has referred to as “the prototype of a dream business.”

After joking that our graduation was not perfectly timed, Buffett warned that we should not be discouraged from pursuing a career in finance. Finance is only going to become more important as time goes on, he said, and it is a field where one can truly stand out and be recognized.

He advised MBA students to learn as much about accounting as possible, adding that, “accounting is the language of business.” He also said that writing and verbal communication are extremely important in the business world and that students should seek out ways to improve these skills every chance they get.

Buffett urged students looking for jobs not to pay too much attention to salary. “Who you work for is extremely important, so choose carefully,” he counseled, adding that the most important decision of his own career was going to work for Benjamin Graham.

As MBA students, we are beginning our careers in an age where the image of a corporate executive has been bruised. Spending time with Warren Buffett — an astute businessman, a legendary investor, a rational and disciplined person and a generous philanthropist — afforded us the opportunity to learn much more than just how to pick stocks.

Before the trip, I was certain that no one could ever live up to the sincere, humble and generous image depicted of him in books, shareholder letters and TV interviews. I was wrong. Even that lofty image did not hold a candle to the man I was lucky enough to spend half the day with in Omaha.

The following is based on a PBS interview and is part of our series this week on leadership and ethics.

What I try to convey to students is that it’s not so much that bad things are done by bad people, it’s that the world is one vast gray space. And we, as human beings, are incredibly good at coming up with rationalizations for doing that which is expedient.

The problem is that it’s never really clear what’s right or wrong, and we will take that ambiguity and use it effectively as a tool to align what is expedient with what we tell ourselves is actually the moral course of action. I tell students that I’ve probably engaged in a dozen self rationalizations by the time I walk into the classroom at 9 a.m.

Take for example the coin-toss experiment. It runs something like this: You give a subject the following instructions: go into that room and flip a coin. If it comes up heads you’ll get $10, and if it comes up tails you get nothing.

(By the way, this is also something we economists couldn’t do, because we can’t lie to subjects or mislead them, and in this experiment there is a hidden camera in this room.)

What we find is that people don’t just walk in to the room, stand there for five seconds, and then walk out and say it was heads. Some flip the coin, so they at least have a 50 percent chance of not having to lie. But the most common outcome is that they flip the coin until it comes up heads. Then they walk out and say, “I got heads.” So they are taking advantage of the ambiguity in the instructions to do what is clearly expedient (the instructions don’t specify how many times you flip the coin).

When I tell the students about this, I tell them what I would do: walk into the room, wait for five seconds, and walk out and say I got heads. The reason I would do that is that I would be thinking to myself: This is a ludicrous experiment; I’m sure this psychologist is misleading me in some way, and in general this is just an illegitimate exercise so I may as well get $10 out of it. Which is just a self rationalization of another sort.

This post is part of a series in honor of the School’s Leadership and Ethics Week and was first published in the Columbia Daily Spectator.

A common way to define business ethics is as the interplay between two agents: the company’s stakeholders and the law. But a company has many stakeholders, and since it’s impossible to do what’s best for each one — how do companies decide where the tradeoffs occur?

Consider coal mining in West Virginia. In the Appalachian Mountains, coal companies employ techniques called mountaintop removal and valley fill, in which they use huge amounts of explosives to remove tons of topsoil and rock in order to access seams of coal within the mountain. This resulting topsoil and rock is than scraped by dragline cranes into the adjacent valleys.

Photographs of this process are quite striking — the environment around these mines is devastated. The clear-cutting and topsoil removal destroys whatever native forest existed on the site. The valley fill creates havoc in the local watershed, and thus the surrounding water table is often unsuitable for anything, let alone human consumption.

Ask an environmentalist about this process and watch out. The destruction of pristine mountain wilderness eliminates the possibility of sustainable tourism revenue for the local inhabitants and destroys the intrinsic value found in the natural world (although some would argue against this point). Burning coal also produces a great deal of harmful emissions, including carbon — the main culprit in global warming.

Ask a union worker and you’ll get a slightly different — but equally big — response. Mountaintop removal has caused the coal industry to shed thousands of mining jobs over the past few decades, effectively breaking the power of the mining unions and the protection they engendered.

But in looking for solutions, this example unravels into a more complex ethical dilemma.

Underground coal mining is extremely labor intensive and dangerous, and the additional costs are likely to be absorbed by the end consumer — raising a number of issues as to how low- and middle-income families could afford higher energy prices.

And according to the Energy Information Administration coal generates 48.6 percent of our country’s electricity — yet there is no easy alternative. Natural gas is subject to severe price fluctuations and requires importation terminals near which no one wants to live. Not to mention that most of the world’s proven natural gas reserves are located in Russia and the Middle East — not exactly regions that one would categorize as ideal sites for a reliable energy source.

Oil carries the same risks, and solar, hydro, wind and nuclear power are in no position to provide this much electricity. Based on their current levels of output, it will take decades until they are as efficient as coal.

So the fact remains that coal companies are providing an affordable and necessary service to the electricity consumer and high returns to their investors, and yet industry practices are ruinous to the natural environment and the human communities around the mines.

Here lies the new frontier of business ethics. The idea that an ethical business must simply follow the law and provide the highest returns to shareholders while doing so is dying a long-overdue death. There are far too many examples of laws being designed and interpreted to suit powerful industries for this myopic belief in the rightness of the letter of the law to be anything but wishful thinking.

Right and wrong in the business world must be constantly examined by all participants in the decision making process and answer the question: What are our priorities? Tradeoffs must be weighed, sacrifices must occur and eventually, a decision must be made in which there are winners and losers. As a society — and especially as a business community — it is our responsibility to determine the balance between these winners and losers in a manner that reflects the ideals we wish to pass on to future generations.

Bill Baker: What are the characteristics of successful businesses and successful business leaders?

Dean Glenn Hubbard: Successful businesses tend to be very entrepreneurial. They tend to seize opportunities as they come about in the marketplace, in a way that somebody else hasn’t. So successful business leaders are, in a sense, entrepreneurs, even if they didn’t start the business. They are also people who have a great global sense, and an enormous sense of the social context.

BB: Is it a lot more difficult to run or work in a business today and become successful than it was decades ago?

DH: It is. Businesses have always been very complex organizations, but all the more complex today. The pace of change has picked up so rapidly, in part because of glo