As the vitriolic debate on healthcare reform dominates the news, healthcare industry leaders continue to focus on several issues: innovation to drive growth and promote cost efficiencies; new offerings to generate higher value for each healthcare dollar invested; and the emergence of attractive new global markets and technologies. They recognize that continued economic weakness and new sets of competitive and regulatory pressures create a more challenging environment to drive business growth. At the same time, they see tremendous opportunities to develop cost-effective products and services that can dramatically improve patient care on a global basis.

At Columbia Business School’s 6th Annual Healthcare Conference held on November 6, nearly 500 students, alumni and other professionals heard more than 35 speakers and experts discuss these issues. The attendees benefited from panels on an array of healthcare topics including biopharmaceuticals, medical devices and diagnostics, healthcare services and information technology, venture capital/private equity, mergers and acquisitions and emerging markets. The day concluded with a networking reception and career fair where attendees met with the event’s 20 corporate sponsors.

Fred Hassan, chairman and CEO of Schering-Plough, gave the opening address. Despite economic, competitive and regulatory pressures facing the pharmaceutical industry, he was confident that new therapies and vaccines would be developed to address large areas of unmet needs, most notably Alzheimer’s disease, which represents a devastating social and economic threat to society.

Following his remarks, three concurrent panels took place in the morning. They focused on information technology solutions, growth strategies of Big Pharma and small-cap biotechnology companies, venture capital and private equity investment strategies in healthcare, and the impact of proposed healthcare reform initiatives on payors and providers.

Mike Barber, vice president and head of Healthymagination for GE, reviewed GE’s new $6 billion global commitment to develop new technologies and services to reduce costs, improve quality and expand access for millions of people around the world. Among other objectives, this initiative will accelerate healthcare information technology, support consumer-driven healthcare, create new wellness and healthy worksite programs and facilitate access to cost-effective healthcare in rural and underserved areas.

Three concurrent afternoon panels covered healthcare mergers and aquisitions, medical devices and diagnostics, and challenges and opportunities for healthcare companies in the emerging markets. Alex Gorsky, worldwide chairman for medical devices and diagnostics at Johnson & Johnson, discussed emerging opportunities to develop new therapies to extend and improve a patient’s quality of life, as well as new cost-effective and less invasive medical devices and procedures. He also commented on the changes underway in global healthcare companies and how employees need to expand their skills and experiences, such as seeking new functional roles and positions in new geographic regions to broaden their understanding of different healthcare systems and customers.

Photo courtesy of the Healthcare Conference

They are two icons of American business — Warren Buffett, MS ’51, and Bill Gates. On November 12, Columbia Business School students will have the opportunity to connect with them in person. They will appear together in a special hour-long community forum at Columbia Business School, which will be filmed by CNBC for global broadcast. During the event, Buffett and Gates will field questions from students about the economy, the future of capitalism and corporate social responsibility.

It is the first time Buffett and Gates, who met each other in 1991, have appeared together at Columbia University. The last student forum they participated in was in 2005 at the University of Nebraska at Lincoln. Of the many bonds in their friendship, philanthropy and a shared philosophy of giving back to society is one of the strongest. In 2006, their relationship made the history books when Buffett announced that he would give the bulk of his estimated $40 billion fortune to the Bill & Melinda Gates Foundation.

Gates and Buffett’s latest ventures have been in recent headlines. Last week, Berkshire Hathaway announced a $26 billion deal for the railway company, Burlington Northern Santa Fe. Earlier in this year, Berkshire invested in BYD, a Chinese electric car company.

In a speech in October, Gates called for a new green revolution in agriculture and announced a $120 million package of agriculture-related grants to nine institutions around the world. Taking a page from Berkshire’s playbook, Gates wrote the foundation’s first annual letter this year and said the foundation will give away $3.8 billion in 2009.

CNBC will broadcast “Warren Buffett and Bill Gates: Keeping America Great” moderated by CNBC’s Becky Quick on November 12 at 9 p.m. and 12 a.m. ET . Join the conversation with other students on Facebook and on Twitter.

Photo courtesy of Columbia Business School

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

	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

	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

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

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

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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

	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 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.

	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.

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

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

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

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

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

	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

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

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

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

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

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

Photo courtesy of Schering-Plough

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

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

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

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

Photo credit: Dan Buczynski

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

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

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

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

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

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

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

Photo courtesy of Hootan Mahallati

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

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

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

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

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

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

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

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

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

This article originally appeared on Forbes.com.

Photo credit: theCarol

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

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

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

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

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

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

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

Photo credit: James Cridland

This post contains an update.

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

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

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

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

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

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

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

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

Photo credit: Christopher Chan

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

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

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

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

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

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

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

Photo credit: Columbia Business School

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

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

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

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

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

Photo credit: Courtesy of Lulu Wang

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

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

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

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

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

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

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

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

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

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

Photo credit: Travel Aficionado

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

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

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

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

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

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

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

Photo credit: White House/Pete Souza

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

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

Photo credit: Keso S.

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

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

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

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

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

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

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

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

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

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

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

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

Photo credit: Daniel Beunza

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

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

Several key points/questions were raised:

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

Photo credit: Public Offering/Catherine New

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

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

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

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

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

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

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

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

Photo credit: Julie Galluzzo

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

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

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

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

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

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

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

Photo credit: Liz Marie

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

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

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

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

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

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

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

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

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

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

Photo credit: acaben

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

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

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

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

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

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

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

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

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

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

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

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

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

We would love to hear your thoughts about the blog or tips on what we should add to our blogroll. Please leave your comments.

Photo credit: Enrique Dans

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Image courtesy of the Frick Collection.

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

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

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

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

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

Photo credit: Anna Vignet

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Photo credit: Daniel R. Blume

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This column also appeared on Forbes.com.

Photo credit: T. Shein

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

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

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

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

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

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

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

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

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

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

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

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

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

Photo credit: Leslye Smith

The term “endgame” refers to the second half of a product’s life cycle, during which firms producing products face slow growth, no growth or negative growth in consumer demand. Are U.S.-based automakers prepared for theirs?

General Motors, Ford and DaimlerChrysler Daimler AG are facing declining demand primarily because their products are less popular than those manufactured by competitors on U.S. soil such as Acura, Isuzu, Mercedes-Benz, Mitsubishi, Nissan, Toyota and Volkswagen. But this decline in demand is not the result of U.S. consumers buying significantly fewer cars; American autos are less popular because these automakers have failed to innovate to match consumer demand.

Yet even before this reality was recognized, General Motors had 22 idle factories that no incoming competitor wanted to acquire. Those plants weren’t attractive to new buyers because they were antiquated and because GM’s laid-off laborers had high wage expectations. In the 1960s, the era of domestic market share dominance and the time when “a good time was had by all,” the employees (including the managers) of U.S. automotive firms enjoyed lavish compensation packages, especially with respect to retiree benefits. But those good times had a steep price for American industry, opening the door to offshore competition in Detroit’s own backyard.

Look at the steel industry, for example, where similar “legacy” costs have in the past bankrupted more than 35 U.S. steelmaking firms. When the government-backed Pension Benefit Guaranty Corporation (PBGC) created a way for investors to revive mothballed steel mills, U.S. steelmaking assets became hot properties. They were acquired by offshore competitors, such as Arcelor-Mittal NV from India and WCI Steel, which is owned by the Russian Federation, who bought their way into the U.S. market for steel with vastly reduced operating costs.

This phenomenon — offshore competitors becoming “domestic” — has already occurred in the automotive industry, where offshore competitors jumped the tariff wall long ago to become “local” and built their greenfield plants in regions where there were no legacy costs (or manufacturing practices) to hobble their cost structures.

Today, the automobile industry’s endgame problem is determining how to scale back the manufacturing capacity of those firms whose products are no longer economical to produce. However, in spite of this endgame for some firms, many others that are producing cars in the U.S. are doing just fine.

Photo credit: Pennilicious

We must admit that we knew very little about Grameen Shakti when we filled in the application for the International Development Club project at the beginning of the summer of 2008. The information package outlined a rural energy company related to the Grameen Bank, the Bangladeshi microfinance organization created by 2006 Peace Nobel Prize winner Muhammad Yunus. However, the intersection of microfinance and rural energy piqued our interest.

On the one hand, energy needs in developing countries’ rural areas are overwhelming: more than two billion people do not have access to modern forms of energy like electricity or oil while a third of the energy consumed in these countries comes from burning wood, crop residues and animal dung (PDF). On the other hand, microfinance, pioneered by Professor Yunus in the 1970s and probably the most successful business innovation to serve low-income consumers, has opened new possibilities to fight poverty beyond traditional government programs and international aid.

How can innovations in microfinance be applied to rural energy?

Yunus and Dipal Barua, one of his students when he started Grameen Bank, founded Grameen Shakti (the name literally translates to “Rural Energy”) in the mid-1990s with the mission of empowering rural people by giving them access to green energy and income. Grameen Shakti’s clients purchase green energy equipment such as solar panels with an in-house microloan that they can pay back over three years. After that, they own a source of electricity that usually lasts up to 20 years. In addition to solar energy, Grameen Shakti provides energy products like Improved Cooking Stoves and Biogas Plants.

The organization also makes smart use of available technology; for example, Barua receives daily text messages with solar panel sales per office. And they are a truly grassroots organization: all employees are Bangladeshis and most of the funding comes from their own operations.

Like the bank, Grameen Shakti achieved almost immediate success and has grown very quickly. Barua now heads the organization, which employs more than 2,000 people and has offices all over rural Bangladesh. It has installed close to 200,000 solar panels in households across the country and plans to reach one million in the next three years.

During the three months we worked in New York and the two weeks we spent in Dhaka, we helped them refine a plan to train young women to install and repair the solar home systems. We had the opportunity to see first hand how poor rural women provided with appropriate training and tools are able to earn a living by producing and repairing electronic accessories for the solar panels.

Nilufa, pictured at the top of this post, left a profound impact on us: she is 21 years old and has one son. Abandoned by her husband, she is now supporting her son and her family by producing at home hundreds of electronic accessories every month.

We returned to New York with the feeling that we had learned much more from them than they had learned from us and convinced that local social businesses have a great potential to change the lives of the poor.

Above: Part one of Jeffrey Immelt’s Botwinick Prize acceptance speech on October 24. Watch the speech in its entirety.

Jeffrey Immelt, chairman and CEO of General Electric, visited Columbia Business School on October 24 to receive the Botwinick Prize in Business Ethics, which is organized under the auspices of the Sanford C. Bernstein & Co. Center for Leadership and Ethics and its director, Professor Bruce Kogut, the Sanford C. Bernstein & Co. Professor of Leadership and Ethics.

The three keys to ethical leadership, Immelt told a capacity crowd at Riverside Cathedral, are keeping the company financially safe, operational excellence and protecting the future. He shared his thoughts on the industry’s future, citing its need for “a regulatory structure that is industry focused, led by domain experts” as well as more investment into technological research and development. He also encouraged the education of more engineers.

GE spends $6 billion annually in R&D, Immelt said. While this investment may not show returns on GE’s near-term balance sheets, it signals Immelt’s intent to lead the company into a clean energy future. He said:

We can make a clean energy future. This is an extremely solvable problem. Most of the technology is on the shelf today. There’s been a pitiful amount that’s spent in energy technology over the past 25 or 30 years. Even if the price of oil is considered low today at around $70 or $75 a barrel, maybe half what it was two months ago, it’s still four times higher than it was the previous 25 years. So the need to create this clean energy future, I think, is both a social imperative as well as an economic windfall for the people that figure out how to do it, and in my mind should be job one of the next administration because it’s so highly solvable. It requires investment in renewable technology; it requires rejuvenation of core technologies like clean coal, nuclear power.

It requires a build-out of the national grid. It requires the evolution of new technologies like battery and solar and technologies like that. But I would say in the next 10 or 20 years, countries like the United States and much of the developed world can really develop an energy infrastructure that is diverse, that is protected, that is economical and that can create lots of jobs while we’re at it. So the first thing I would say in our new society, in our innovative society has got to be an incredible focus on energy because it’s so solvable.

Above: Xerox’s Anne Mulcahy spoke to Columbia MBA students as part of the Silfen Leadership Series on Oct. 6 (part 1). View entire speech: part 1, part 2, part 3, part 4.

It is one thing to turn around a troubled company — it is another to transform it. Anne Mulcahy has done both. As the CEO and Chairman of Xerox, she led the company from near bankruptcy in 2000 to $17 billion in revenues today. She recently spoke to Columbia Business School students about her experience guiding a corporation out of a time of crisis — more relevant than ever, she noted — and creating one of the most respected and enduring businesses in the world.

A few of Mulcahy’s lessons on leadership:

Take time

“Understand the issues in the company and know what the problems are that you are facing. When I started … I traveled the world for 90 days listening to the problems through the eyes of our employees, investors and customers. A lot of our problems were masking fundamental issues in the business; we were trying to put out fires when we didn’t even know were the fuel leak was. Taking the time to understand the issues in a company is important.”

Communicate openly

“With our people and in public I was very candid about the issues. The level of transparency with regard to the problems you have is becoming more important by the day; an ability to talk about what will be done to overcome them is the other part of the communications strategy.”

Believe in it

“You have to have people aligned with your goals and objectives. It’s the scale of belief that is the single most important thing to making progress and without that, it is a disadvantage being big. It was the single most important thing for [Xerox] to make as much progress as we did.”

Make decisions

“Be bold and decisive in a time of crisis. Moving quickly and decisively and making a few mistakes is much more important than being as thoughtful and as perfect you can be when you don’t have time to put that perfect solution in place.”

Simplify your business plan

“We undid all the complexities and engineering so that there was this incredible logic about revenue, costs, expenses and profits that we hadn’t seen in a while. … It’s about strengthening the business fundamentals, discipline and control; it’s about having the discipline be focused on productivity and improvement.”

Don’t wait to change

“Use good times to change; don’t wait until the crisis. ... You have the luxury of time and [change] can thoughtful and it’s easier on the people.”

Follow your instincts

“Use your experience to make decisions. We had a five-dimensional management matrix [when I took over as CEO] and each step of it was logical, but when I looked at it, I couldn’t really find anyone who was accountable. It’s far less important the choice you make, than making a choice for clear accountability. So we made a choice: geography is our P&L center. At the end of the day, when I want to know what’s happening in Europe, I call the guy who is managing in Europe. It’s not perfect, but it’s clear and it enabled us to move quickly and efficiently.”

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

Each semester, the International Development Club (IDC) matches student teams with organizations around the world to work on over a dozen consulting projects. The aim is to put together teams that can apply the business thinking that we study at CBS to help organizations that work to improve lives across the developing world. At the same time we want to provide students with the opportunity to gain exposure to working in the field of international development. We have served a wide range of clients (PDF) that includes foundations, non-profit organizations, multilaterals, non-profit consulting firms, social entrepreneurs and for-profit businesses that have a positive social or environmental impact.

Teams work from New York with their clients throughout the semester and travel to visit them during breaks with support from the International Development Consulting Project Travel Fund from the Social Enterprise Program. Donors include the program’s advisory board members and Deutsche Bank. Each team is matched with a project advisor that provides mentorship throughout the project. Project advisors are typically international development practitioners, consultants at firms here in New York, or CBS faculty members.

But where do IDC projects come from? In the past, the IDC has sourced projects from organizations that have experience working with students or from organizations that we have partnered with in the past. A number of projects each semester also come together as organizations are networked with the IDC.

This semester the IDC is working to restructure its projects program to relaunch as a branded pro bono consulting group in the spring semester. The new structure will raise the profile of the important work that our members are doing and help us to source more and higher quality international development projects each semester. Additionally, the relaunch aims to:

1. Source a balanced portfolio of projects each semester that matches student interest in geographies, industries and organizations
2. Increase impact for client organizations by consistently providing high quality deliverables
3. Identify an advisory board to advise and oversee the student-run group
4. Create ongoing relationships with the most exciting clients in order to have a pipeline of high-quality projects
5. Create ongoing relationships with project advisors who can provide appropriate mentorship to teams semester after semester

The IDC Projects team is hard at work preparing to relaunch for the spring semester. However, we urgently need a name for this exciting new IDC initiative. The name should capture the uniqueness of the IDC brand and be fitting of an MBA student-run pro bono consulting group that works with some of the most innovative organizations in the field of international development. With a community full of consultants — not to mention aspiring marketing gurus and budding entrepreneurs — there must be one of you out there who can come up with the perfect name for the new group! Submit your ideas online here by Friday, November 7th. If you have more than one, please feel free to share them all.

The International Development Club aims to cultivate passionate leaders who aspire to make a global impact by applying cutting-edge business thinking to development issues. The IDC offers consulting opportunities with enterprises throughout the developing world, a speaker series and an annual Washington DC careers trip. Last year, the IDC spun off Microlumbia, the first student-run microfinance fund of its type.

Lindsay Kruse ’06 is speaking on a panel as part of the Social Enterprise Conference on Oct. 24, 2008. The panel will discuss ways to lead and implement change in K-12 education, with a focus on improving teacher quality.

There is no more urgent or important work than providing children from low-income communities the same high quality education that their affluent peers receive. There is no more effective means to accomplish this end than by creating schools of the highest quality. Uncommon Schools (Uncommon) was founded to create more “uncommon” schools — uncommonly good, extraordinary, autonomous and distinctive.

We aim to serve 11,500 students. Recognizing that leveraging human capital in this work is critical, we must do the following in order to achieve our goal:

• Ensure that teaching is seen as a challenging profession that provides ongoing growth and development
• Recruit the highest quality teachers
• Develop purposeful and strategic efforts to retain teachers and leaders
• Recruit and develop tenacious school leaders who drive student achievement
• Foster strong management support and processes
• Define clear performance feedback to align the goals of student achievement with teacher performance
• Ensure that our workforce is diverse and represents the needs of the students we serve

We are working to recruit diverse, high-quality teachers and to ensure that our teachers receive regular feedback as well as opportunities to stretch and develop professionally. We have created a dual-leader model to allow instructional leaders to focus on the core of student achievement while operations leaders manage all non-instructional functions. We have created a yearlong fellowship program that includes a residency within one of our schools and a personalized development plan.

Uncommon has built — and continues to build — a diverse home office staff of educators, MBAs (including six CBS alums!) and other driven professionals to ensure that our organization is poised to address these challenges in a systematic, sustainable way. Uncommon provides a great opportunity for MBAs than to have a deep and lasting impact on this, the greatest civil rights issue of our time. MBAs are bringing their skills to bear across all aspects of the education world. At our organization, we have MBAs working as managing directors, as school-based operations leaders, and from the home office in finance, leadership development, operations, and real estate.

Should you be interested in exploring opportunities at Uncommon, feel free to contact us.

Photo credit: Uncommon Schools

In recent years, compensation packages for CEOs and other senior corporate executives have been criticized for both their high level and their growth, often despite poor company performance. Are patterns such as this likely to continue in the aftermath of the recent financial meltdown?

You might think the answer would be obvious. For one thing, the precipitous drop in the stock market reduces the value of stock options, typically the largest component of executive compensation. Even companies that have a history of granting a fixed value of stock options may be unable to continue the practice.

“It may simply be too dilutive to grant the number of options required to maintain fixed value,” says Irv Becker, managing director of the compensation consulting firm The Hay Group, in New York. Second, current economic conditions are likely to depress corporate earnings, which are commonly used to determine incentive-based bonuses. Third, executive compensation packages are designed to attract and retain the best managerial talent, so an executive being recruited by company A is likely to be “made whole” for any compensation that he or she might lose if they leave company B, including unvested stock options. Since the current market is likely to leave many previously granted options “under water,” the cost of attracting and retaining employees is likely to decline.

In other words, when we “pay for performance,” if performance is down, shouldn’t pay go down with it? In theory yes. But many of my academic colleagues and I have observed a very robust pattern in executive compensation over the years that we like to call “pay for pulse.” The pattern is as follows: Suppose we split all companies into two groups: Group one, in which shareholders saw some positive returns to their investment for the year, and group two, in which returns were negative. As you might expect, the executives in group one receive compensation that is greater, with better returns corresponding to larger increases in compensation. So in group one we observe “pay for performance.”

In contrast, executives in group two typically also receive more in compensation, despite their poor performance. Historically this increase has been more than double the rate of inflation in most years. What’s even more troubling is that there is typically no difference between pay for executives in firms with marginally poor performance compared to those in firms with worse performance. Hence the term “pay for pulse.”

What’s driving this?

When performance is poor, the company’s board of directors and its compensation committee face the difficult task of separating the role of the economy from the contribution of management. So when the economy is bad, boards may be tempted to conclude that their management team did a great job given the circumstances. Typically boards rely on two mechanisms to reach such a conclusion.

First, compensation committees typically benchmark their company’s compensation and performance with that of a peer group. Correspondingly we see better compensation in firms where the board concludes that the company has outperformed its competition. Second, executive compensation typically allows the inclusion of subjective assessments of factors such as leadership, which are difficult to measure objectively.

Are there reasons to believe that “pay for pulse” will go away?

I think so. The revised compensation disclosure requirements enacted by the Securities and Exchange Commission (SEC) in 2006, combined with the observed growth in shareholder activism in recent years, is likely to reign in the board’s use of peer groups and subjectivity in awarding compensation. With broader disclosure, shareholders have substantially more information from which to form opinions of the fairness of their company’s executive compensation. For example, companies must disclose the peer group that they used in the compensation process, so shareholders can form their own opinion on whether a reasonable peer group was used or whether the board “cherry-picked” the peer group to justify higher compensation.

Even before the economic meltdown reached its peak, we began seeing examples of the effectiveness of the SEC’s regulations and the actions of shareholders. Specifically, a survey of executive compensation in 2007 by The Hay Group showed — for the first time in recent history — decreases in compensation when firms had decreases in stock price. In prior years, we typically observed small increases in compensation for firms when stock price decreased, and larger increases in compensation as stock price increased.

In addition, we recently began to see firms take steps to curtail “golden parachute” severance packages. Finally, in 2007 we saw the growing use of “claw backs,” which permit firms to take back the portion of compensation that was awarded to executives using misstated accounting numbers.

Overall, the executive compensation process is shaped by many forces, but in our current environment scrutiny from both regulators and investors is particularly high. The rescue of Fannie Mae and Freddie Mac, and the $700 billion federal financial rescue package, impose executive compensation restrictions including the elimination of golden parachutes and provisions for claw backs.

But as you might expect, there are efforts underway to negotiate exceptions to these compensation restrictions. Will our current economic meltdown, combined with regulatory scrutiny, shareholder activism and increased disclosures, eliminate “pay for pulse” going forward? Let’s hope so.

This column also appeared on Forbes.com.

Nonprofits around the country are wondering how they will weather the economically turbulent days ahead. If a recession — or worse — hits, charities can expect to see their contributions decline along with the incomes of the individuals and companies that fund them (conventional wisdom among economics researchers is that a 10% decline in income generates around a 4-8% drop in giving). Government funds won’t take care of the shortfall, as budget-balancing states cut back, as well.

Some charities have a “rainy day fund” that they will use to cover their deficits; some will even choose to eat into their endowments. But few organizations have the billion-dollar cushions of the Harvards and Yales of the world, and endowments’ returns are being hit by the market decline, too. This leaves no option but to cut back on programs — a cruel irony since for many nonprofits hard times are precisely when their services are needed most.

In the current environment of greater needs and lesser means, what's a philanthropist to do? First and foremost, the current environment underscores the importance of giving thoughtfully and strategically. The best predictor of someone’s choice of charity today is whichever one he wrote a check to last year. But this isn’t a time for philanthropic inertia — a dollar given to one organization means one dollar less that’s available to give to some other, potentially more worthy cause, what economists refer to as the opportunity cost of funds.

Think hard about the biggest problems out there to be solved and survey the charity landscape for organizations that most effectively address your chosen set of needs. The focus should be on outcomes: How many indigents were fed by a soup kitchen? How many unemployed — who would otherwise have remained jobless — were taken off the welfare rolls by a job training program? And what did it cost to generate these outcomes? Identifying and funding the “highest productivity” charities is more important than ever. With increasing number of watchdog organizations as well as large foundations carefully assessing charities’ activities and publicizing the results, it’s possible for even smaller donors to evaluate and compare potential beneficiaries and to give strategically.

Economic hard times may also be cause to reprioritize what you see as the greatest needs. The arts are an eminently worthy cause, for example, but art museums’ needs do not wax and wane with economic cycles in the same way that those of social service organizations like soup kitchens and homeless shelters do. So, at least while times are bad, you may wish to reshuffle your giving portfolio to focus on causes designed to buffer the impact of economic downturn on those most affected.

Organizations with sizeable reserve funds may not face the same financial crunch right now as those living hand-to-mouth. For years now, Harvard alums have been questioning the merits of writing checks that effectively get direct-deposited into the school’s 30-something billion dollar endowment. With rising needs elsewhere, the case to be made for giving to the fat cats of the nonprofit world becomes ever-harder. It’s hard to imagine that Harvard’s students or faculty, cushioned as they are by an outsized endowment, will face see too much of a cutback in services in the days ahead, even in a worst-case economic scenario.

Finally, think about how much you can really afford to give. I’ve already argued that whatever you choose to give, you should do it strategically. But if you truly want to practice strategic philanthropy in tough economic times and have the means to do so, practice “countercyclical philanthropy,” giving more when the needs are greatest.

A version of this article also appeared on Forbes.com.

Photo credit: Oblivion Ratula]]> Thu, 9 Oct 2008 13:22:46 EDT ]]> Organizations Social Enterprise

This is the first in a series of posts exploring issues of careers and women that were discussed at the “Universities, Careers and Women” symposium on Sept. 19, 2008.

Historically, the women’s movement has focused on providing equal opportunity and access to education for women. By any measure, it’s been a roaring success: since 1980, women have comprised the majority of BA holders and more recently, the majority of newly minted MDs and JDs.

However, as more women than ever enter the professional labor force — equal with men in both numbers and stature — there remains a persistent fault line: the earnings gap. Complicating the equality landscape is how education, especially at the top tier, and so-called “opting out” are playing into — or out of — this gap.

The topic was the subject of last month’s research symposium, “Universities, Careers and Women”, hosted by Columbia Business School and the Sanford C. Bernstein Center for Leadership. Keynote speaker Harvard economist Claudia Goldin and her colleague Lawrence Katz presented their findings from their recent “Harvard and Beyond” (download PDF) study, the first to examine how the earnings gap plays out at the top-tier education level. (They co-authored The Race Between Education and Technology, published in June 2008.)

Goldin and Katz found that the earnings gap widens the further up the educational and professional food chain the female college grad goes. There is a 67% difference in earnings between Harvard men and women compared to 40% for college grads nationwide.

For MBA women, bottom line parity is especially elusive. Economist Marianne Bertrand from the University of Chicago’s Graduate School of Business also presented her research at the symposium. She found 60% earnings difference between female and male Chicago GSB alums 10 years out of school.

“There is a big earnings difference,” Bertrand said, “and it is affected by whether or not you have children. There are no signs that there is discrimination affecting gender gap in earnings, although there is a penalty for stopping out to raise kids.”

Katz found in his data that for MBA holders, any work interruption led to a 30% drop in earnings, and the longer the stop-out, the bigger the loss. A timeout of 15 to 18 months sunk earnings by 35% immediately; once lost wages were factored in, this decline reached 50%. (download presentation PDF)

An interesting twist, however, was the key role of spouse choice. According to Bertrand’s research, MBA women with high-earning mates were more likely to move off the fast track; whereas women with husbands not on the fast track were more likely to return to full-term office work sooner and purchase childcare. (download presentation PDF)

The symposium discussion went on to consider the issues that might close the gap and allow women to pursue career and family in a mutually beneficial fit. Mentoring and coaching, male behavior modeling (e.g. paternity leave), job sharing and career development programs are some of the issues that were discussed.

The takeaway: Women face steep economic penalties for stepping out of the labor force (for children, eldercare, etc.). This, of course, drills down right to the core of womenomics and has serious implications for firms competing for human capital and knowledge. A perplexing question remains at large: how to shift the corporate paradigm so that women not only make equal pay for equal work but have equal work and family opportunities at equal pay? The next blog post will consider some of the ways this is happening.

Photo caption: Left to right, panelists Marianne Bertrand, Lawrence Katz and Anne Preston

Photo credit: Leslye Smith

An article in the New York Times on Sept. 28 (“Wall Street R.I.P.: The End of an Era, Even at Goldman”) which proclaimed the death of Wall Street, refers to the growth of “pointy-headed” quantitative analysts in the industry. It is an epithet that fits well with the roll-your-eyes-and-don’t-even-try-to-understand-it angle of much coverage of the financial crisis. Derivatives are invariably “arcane” or “dizzyingly complex” and, worst of all, unwelcome in Omaha. The geeky dad went to work at a bank, and now we’re all living “Honey, I Shrunk the Credit Market.”

Rewind to just a few months ago. Alarms were being raised about New York losing its prominence in the global financial services industry. Mayor Michael Bloomberg and Senator Charles Schumer commissioned a study on how best to buttress New York’s leadership position. A key finding of the 2007 Bloomberg-Schumer report (PDF) is that New York needs to expand its supply of quantitative talent to keep up with global competition. London may already have edged out New York in some markets, and increased competition from Asia is inevitable.

The current crisis does not change the logic of the Bloomberg-Schumer report. A complex industry requires a highly skilled workforce. Whereas a high school diploma may once have been sufficient for work as a trader, you’re now more likely to find someone with a graduate degree making markets. Risk management needs to be at least as sophisticated as the trading it monitors. Financial intermediaries are modern factories, producing products to manage and transfer risk. Yes, we need new measures to guard against toxic waste, but we especially need people who understand the machinery.

If Wall Street is drained of its quantitative talent, the effects will be felt within months, not years. And as the industry recovers, the consolidation wrought by the current crisis will open the way for new and smaller firms. Technology will be critical to financial innovation, while more routine work may move off shore. Will the sequel be “Revenge of the Nerds?” No, New York’s competitive advantage will rely on a base of highly educated professionals with a combination of quantitative and managerial skills, heads that operate in both pointy and broad modes. The opportunity and challenge for business schools is to develop this talent.

I am an economist, so naturally I believe that a lot of behaviors can be explained by the incentives people face and the cost-benefit calculations that ensue.

But I like to think I’m not a narrow-minded economist. I can acknowledge that the foibles of human psychology also account for a lot of what we do. And sometimes the two interact in surprising and interesting ways.

In understanding who does — or does not — get ahead in the workplace, some (economic) discrimination surely plays a role – a subject not unfamiliar to many working women. But it also appears that some women may be leaving the work force as a pre-emptive strike; why stick around when all that hard work isn’t going to pay off?

Some years ago, I had a conversation on this topic with Maura O’Neill, who at the time was an MBA student in the Berkeley-Columbia program. Maura suggested that active discrimination accounts for only half of a vicious cycle. The other half, she said, is women simply choosing not to compete for leadership positions in order to avoid facing such dispiriting discrimination. This, of course, only reinforces the idea that women are unwilling to or incapable of fulfilling such roles, perpetuating the cycle.

And so began our very happy academic collaboration to study the difference in attitudes between men and women and return on effort in the workplace.

In the resulting study, which will be published next year in the Journal of Human Resources, we discovered that women are more likely to view success as a matter of luck or connections rather than hard work, a result consistent with Maura’s description of the discouraging prospects for promotion for many women. We used data from the World Values Survey, which allowed us to look globally at the relationship and find that this gender difference in viewpoint is remarkably persistent over time and across countries. Perhaps more concerning for those with leadership ambitions is that this “gender perceptions gap” is far wider for those in managerial positions.

But these findings represent something that concerns us all. As Maura wrote in a column on the study last year, “I worry that if women don't think that the workplace is a level playing field where effort generates promotions, they will not feel compelled to invest their best efforts. As a result, corporate America will lose out on a vast reservoir of talent.”

Well put, Maura. Now that we have a better sense of the problem, how about some suggested solutions?

Columbia Business School and the Bernstein Center for Leadership and Ethics are hosting a research symposium on “Universities, Careers and Women” on September 19.

Photo credit: Ricardo Motti]]> Fri, 19 Sep 2008 15:56:44 EDT ]]> Leadership Organizations

On Tuesday at lunchtime, students navigated pizza boxes and a packed auditorium for the semester’s first Town Hall meeting. Dean Glenn Hubbard addressed the school-wide audience about the near and long-term economic impact of the current Wall Street crisis. He also addressed the job market, a source of great concern for many students, saying:

A question that may be on your mind is “Does financial services need to shrink?” There will be job losses and exits, not only with the firms that have exited but probably more. But I have considerably more optimism for the medium term in financial services, and there are three simple reasons for that:

1. The global phenomenon of an aging society puts pressure on the demand for a whole variety of financial products and services. This isn’t as well developed as it should be in the U.S. or the U.K., let alone in many emerging economies, and the number of return income vehicles, insurance products and so on will increase.
2. Many of the big emerging economies are improving their domestic demand, which will generate a huge demand for financial services as they exit from the state provision of services to the market.
3. The overwhelming forces of globalization and the demands for international finance. Anyone who says that the financial sector is going to shrink out of business has not been through these cycles before.

Dean Hubbard urged students to remain flexible and keep perspective.

“We are behind you,” he said. “Ask yourself, ‘What are the right jobs for me on my career ladder?’”

Photo credit: Catherine New]]> Thu, 18 Sep 2008 09:56:53 EDT ]]> Corporate Finance Leadership Organizations

This the final stop on the “Pre-MBA World Tour,” organized by John Shoaf '10 and members of the class of 2010.

At 5:30 a.m., we arrived on the market floor in time for the opening bell, which, to be precise, is an old-fashioned hand bell, rung by an auctioneer standing on a small stool.

We were at Tokyo’s famous Tsukiji Fish Market, perhaps one of the few places in a developed country where business is transacted quickly and efficiently without the aid of technology.

Every day before dawn, frozen tuna of all sizes arrive at the market and are spread across the floor of a warehouse. Buyers called “middlemen,” who wear special numbered hats, inspect each fish and take notes on quality, internally calculating value.

The auction commences as the auctioneer calls out the number painted in red ink on each fish and announces the opening bid. The middlemen use a gesture called “Teyari” to inform the auctioneer of their respective bids. The final price of each fish takes merely seconds to determine.

After each lot of fish is auctioned, assistants arrive with hand-pulled wooden carts. The fish are loaded onto the carts and moved to a nearby stall in the market for processing. The fish are then cut, packed and shipped to retail establishments around Japan.

Japan’s Central Wholesale Market Law of 1923 laid the groundwork for the country’s wholesale market system. Unique in the world, the law requires that prices be fixed on the basis of an auction regardless of the quantity of goods involved in the transaction. The law restricts transactions in the markets in order to maintain impartiality. According to the Tokyo Metropolitan Government, the role of the Central Warehouse Market is to stand between producers and consumers, promote the smooth distribution of perishables and contribute to a stabilized diet through fair and speedy transactions between wholesalers and jobbers in clean and functional facilities.

It was refreshing to see that there still exists a public market built solely on human-to-human interaction. While technology has certainly changed business for the better, we on the Pre-MBA World Tour were reminded that business is fundamentally about people and, very often, speed to market. When participants in a transaction meet face-to-face, a personal bond forms and a sense of trust emerges. People, unlike machines, can exhibit raw emotion, feelings and perspectives, allowing us to adapt to our surroundings and strategically intuit things that machines are incapable of comprehending.

All this begs the question, what might technology-reliant markets learn from the human-to-human model? Some insight can be gleaned from specialist-style auction markets, such as the floor of the New York Stock Exchange. These markets allow for the personal interaction and expert judgment that is often cited by proponents as helping to maintain orderly markets, especially under extraordinary conditions. Most importantly, technology-reliant markets should learn that technology exists in order to aid people, not the other way around.

As we increasingly rely on technology to put business practices into effect, how can we retain the best elements of human-based systems in order to sustain optimal efficiency? In our zeal for acquiring newer and faster technologies, are we also losing something?

This is the first in a series of blog posts on healthcare industry topics that will be discussed at the upcoming Columbia Business School Healthcare Conference on November 21.

As growth slows in the pharmaceutical sector, shareholders are putting pressure on companies and their executives to make some difficult decisions. Pure-play companies — the ones focused on discovering, developing and marketing breakthrough prescription medicines — must decide whether to remain as is, diversify into other healthcare businesses, merge with another global pharma company or find other means to grow their businesses and/or diversify their risk.

Major pure-play drug companies generate more than 90 percent of their revenues from branded, not generic, prescription drugs. Top-line industry growth is slowing from the double-digit figures we saw between 2000–2003 and is now expected to reach low single-digit growth over the next five years. There are several reasons for this:

• Companies face patent expirations of their largest drugs and eight of the 10 largest products today will lose exclusivity in the next four years, which represents more than $50 billion in sales
• New product approvals in the past year were the lowest in a decade
• Cost–containment efforts by third parties that pay for drugs (governments, insurers) are forcing companies to prove that their drugs are not only safe and efficacious but are also cost-effective

On the plus side, there remain large areas of unmet need (cancer, Alzheimer’s disease, obesity, diabetes, vaccines) and new developing markets (BRIC) to penetrate. As well, better technology is improving drug’s chances for success. Despite the industry’s declining growth rate, these pharma companies have among the highest profit margins and most are sitting on hordes of cash with little debt. They are among the highest valued companies in the world — a far different scenario compared with other industries under assault (auto, airlines, financial services, retail, etc.).

Diversify or stay “pure”?

So is this the time to pursue a new diversification strategy for these global pharma companies?

Drug giant Novartis apparently thinks so. In the past few years, the company has spent $8 billion to acquire a large generics business (Hexal), $5 billion to acquire a vaccines and diagnostics company (Chiron) and recently announced a two-step $40 billion acquisition of a 77 percent interest in an eye care company (Alcon).

Contrast that strategy to drug company Bristol-Myers Squibb, which spun out its orthopedics business (Zimmer) and sold its U.S. consumer health business (to Novartis). It recently announced the sale of its wound care business ConvaTec and plans to spin out a portion of its nutritionals business (Mead Johnson). All this is in order to focus more on its core branded prescription pharmaceuticals business.

A major acquisition of a large, faster-growing healthcare-related business may diversify the risks inherent in drug development and enhance growth; however, companies will pay for this growth in high acquisition costs (using cash and/or lower PE stock) without assurance that sufficient synergies will be generated to cover the acquisition premium.

Purchasing a large generics business may be a possible solution given the large number of drugs coming off patent, the attractiveness of “biogenerics” and use of generics in emerging markets. However, operating margins are lower in that competitive segment due to heavy price competition (especially in the U.S.), and the generics business is a very different business/operating model from the research-based branded pharma companies.

The “urge to merge” was strong in the mid 90s. Today it has lost some luster. Companies (and investors) are concerned about the integration risks of combining two global drug companies and question whether this would indeed enhance top-line growth.

Stay the course

The likelihood is that these major pure play pharma companies will stay the course — at least for now — with the belief that their research pipelines, augmented by targeted acquisitions, will generate a sufficient number of innovative drugs and vaccines to sustain competitive growth rates. Payers and investors should continue to reward innovation. Meanwhile the companies are cutting costs and seeking efficiencies in their global businesses to sustain modest growth, high profit margins and favorable dividend yields.

Will this strategy work? Stay tuned!

Photo credit: Michelle Tribe

Ron Gonen ’04 will change the way you think about recycling. He’s been honing his strategy ever since the day he convinced his high school of the economic benefits of purchasing reusable metal silverware instead of plastic.

Get tough love

When you’re an entrepreneur in the midst of traditional businesspeople, everyone wants to pat you on the back and encourage you. But when you get into something like the Entrepreneurial Greenhouse Program and you’re in the company of other entrepreneurs, you get a much higher degree of constructive criticism, which is critical to the success of any new venture.

You have to believe in yourself when starting a business like this. Before you pitch the idea to anyone else, you first thing have to sell it to yourself, and keep convincing yourself of its potential every day. But you also have to be humble enough to acknowledge areas for improvement.

Once I had committed myself to launching RecycleBank, I needed people who were going to tell me at key junctures: “That’s not going to work.”

Articulate the benefits

People want to do good things, but it helps when they’re given an incentive.

In the RecycleBank program, we make the incentives explicit, by rewarding people with points based on how much they recycle. These points can then be redeemed through our corporate partners — vendors as diverse as Apple, Chipotle and Zales.

I’ve tried to communicate to a variety of constituents that in all the actions that we take, if we think about the environment, we can also think about the ways to cut costs. I don’t want people to think about helping the environment as just the right thing to do — which it is — I also want them to see that it’s an effective way to generate positive financial return.

Make it scalable

In 2004, I was operating this business out of my apartment on the Upper West Side, and now, in 2008, we’re already providing service in 10 states.

In the beginning, growth was largely supported by millions of dollars in private equity investments, but at this point, I hope that we’ve done our last round of fundraising.

Since RecycleBank’s revenue comes from our ability to divert trash from landfills, this program is naturally sustainable.

I believe we can continue to grow with the support of our Reward Partners, leaders in local government and our team. We’ve been incredibly successful, reaching 90 percent of households in the areas we’re operating within and increasing recycling rates by more than 100 percent.

And I’m confident that we’ll soon be able to reach the entire country, as we keep making it easier for more people to see the immediate rewards of their recycling efforts.

Photo Credit: RecycleBank

Yesterday I suited up in my shalwar kameez and GreenMango uniform and joined my team for their daily fieldwork. As we made our way through the slow moving Hyderabad traffic, someone started a discussion on marriage. And then one of my female staff members, who often goes to temple, said, “Actually, madam, we are also praying for you that you will have a marriage!” We all had a good laugh.

When I decided to move to Hyderabad, India, I knew I would not exactly be the norm. I would be a single, Caucasian woman running an internet business for low-income clients. If anything, I figured I would stand out because I wasn’t Indian or because I wasn’t from Hyderabad.

In fact, it’s being a female entrepreneur that makes me an anomaly. Some 95 percent of the meetings I have in a given week are with businessmen, nearly all of our company investors are businessmen and my most trusted advisers are businessmen.

When my business partner (another woman) and I went for our legal incorporation in Hyderabad, our lawyers kept asking for our fathers’ and husbands’ signatures. This would not be possible, we explained. This started a long line of questioning and a lot of laughter as to why a single woman would start a business. One of my most memorable experiences in this regard came when I tried to get a wifi internet card from Tata Indicom. As I was applying, the staff kept asking me funny questions about my living situation, for example: Did I stay with someone?, Where did my family stay?, etc.

When they finally learned that I lived alone and did not have a husband, they triumphantly proclaimed, “Ma’am, you will need to fill special application. This is the spinster application!”

Of course, the irony of all of this is that women in India and Indian women around the world are incredibly accomplished. At the highest levels, you see amazing women as leaders in business, politics, law, medicine, science and academia. So, I wonder why do I not encounter these women more often? Are there too few of them? Are they only at the huge corporations, but not in the small and medium businesses that I interact with? Are they not in my sector? Are they not in my city?

Perhaps after a few more years here, I’ll understand. But at the end of the day, I’m not too bothered and recognize that all I have to do is accept the reality and move forward. Sometimes standing out disadvantages you. Sometimes it helps. At this point, my primary focus is making my business a success, regardless of the roadblocks or how I am perceived.

I devote much more energy to thinking about how to build a company that creates opportunities for my clients (both male and female business owners) to succeed. It is a task that is easier said than done, especially given the divisional realities I’ve observed: Having spent less time in the public sphere, women tend to have less local knowledge, such as where to go for certain goods, who to contact for certain services. Women and men come into GreenMango with very different salary histories, which seems only partially due to their work experience levels. As we build up our team, there are certain positions where I know a man would be more traditionally suitable. And I also know that the way I handle hiring decisions is what impacts whether or not women like me will continue to be anomalies in Hyderabad.

Adapted from remarks delivered at the Kikkoman conference, “The Economics of Green: Finding a Balance between Economic Growth and the Environment,” hosted in honor of the 35th anniversary of Kikkoman’s opening of its plant in Walworth, Wisc. — the first manufacturing plant of a Japanese company in the United States.

The challenges of climate change have inspired myriad debates about how best to arrive at an appropriate solution. Within these debates, many wonder: Who is ideally suited to spearhead the charge?

We’ve already seen that, despite public policy foot-dragging, the business community has played a very constructive role in working to solve the problems caused by global climate change. And I believe that in the future, it should be business leaders who shape the proposals currently debated in the political process.

The demands of globalization have long motivated the business community to develop creative solutions to multifaceted problems.

In 1972, Yuzaburo Mogi ’61, chairman and CEO of Kikkoman Corporation, made Kikkoman the first Japanese company to open a manufacturing plant in the United States, an accomplishment that has proven its worth by withstanding the test of time.

Kikkoman has maintained positive relationships with the surrounding community in Wisconsin, and paved the way for other foreign transplants.

Today, the company is a model of corporate citizenship at every level — from the local to the global.

Mogi recently announced that Kikkoman will sponsor an Environmental Studies Scholarship in cooperation with the University of Wisconsin-Madison, and this fall will open a research and development laboratory in Madison’s University Research Park.

This is the kind of active partnering and collaboration that will be the key to delivering workable and sustainable answers to the potentially crippling environmental challenges we face.

As we move forward, the United States should lead and take action early in the mission of environmental stewardship, while encouraging and regularly reviewing the actions of other key nations. The work of the global community needs to be coordinated to address the seriousness of the problem — and it is possible to do this while protecting U.S. economic interests.

All of these things are surmountable.

There are certain practices that take place in the for-profit world that can benefit us in this sense. For example, strict accountability, transparency and financial purity are the kinds of things that, like it or not, Sarbanes Oxley has taught us. I think a lot of this can be applied to the nonprofit world.

Having said that, for the most part people work here because they believe in a noble cause and want to do good works. As we borrow some of these techniques in the for-profit world, we have to be very mindful of making sure that we don’t turn antiseptic and lose our soul and our heart.

We do amazing things every single day. We’re filled with heroes here, and it’s so easy to feel inspired. In my former life I definitely worked for companies with higher purposes, but at the end of the day you’re counting widgets, you’re counting dollars. Here, we’re counting lives impacted — it’s extraordinarily inspiring.

The conversations at the Red Cross are so different than the conversations that go on in the corporate world. Here, we ask: How do we galvanize people from 42 states to get into Iowa and help people clean up after the flood? How do we get enough emergency response vehicles to drive around with hot meals to keep these people fed? How many people can we shelter in high schools and dormitories?

So when I say we have to revitalize the brand, I don’t mean redo or replace. We don’t want to change what the brand stands for, since it’s such an international treasure. You see that red cross and think: help is on the way. I don’t want to change that. I just want to turn it into something hip and exciting. Part of that involves becoming more consumer-focused. Here, it’s all about putting our brand in front of people so that they donate time, money and blood.

UNICEF is a good example of brand revitalization. And I think when you have a beautiful legacy, it shouldn’t be that hard. Our favorability and affection rating is highest among 18 to 34 year-olds, so we just have to tap into that and make it so that the Red Cross becomes part of the fabric of the way they become philanthropic. That generation is so in tune with community service. They want to change the world, and we just have to let them change it with us.

Gail McGovern ’87 was named President and CEO of the American Red Cross on April 8, 2008. In both 2000 and 2001, Fortune magazine recognized her as one of the 50 most powerful women in business. She is a graduate of the Executive MBA Program at Columbia Business School.

Yasmina McCarty ’08, a graduate of the EMBA-Global program, was a recipient of the Cartier Women’s Initiative Award last year in recognition of GreenMango, a company she developed with business partner Nandini Pandhi.

On May 31st, my business partner Nandini and I got the call we had been waiting for all month. It was from Echoing Green, an organization that provides seed funding and support to social entrepreneurs with “bold ideas for social change.” This year the fellowship had been ridiculously competitive, with nearly 1,500 organizations applying for just 20 available spots. When we learned we were one of the lucky 20, irrepressible smiles rose to our faces and we danced for joy around the apartment. It was an honor to be included with such an inspirational group of individuals.

But what exactly is a social enterprise? And how are we delivering on our bold idea for social change?

Last Saturday, I had my weekly conference call with a top strategy consulting firm that generously donates their time to support GreenMango. While we were talking about GreenMango’s revenue model and customer segmentation, our consultant realized exactly how “bottom of the pyramid” GreenMango is.

“Yasmina,” he said, “why on earth are you focusing on these businesses making a few dollars a day? Have you come here to run a business or do some charitable work? Creating a viable business with this customer segment is damn difficult. Damn difficult. And I’m really not sure you can pull it off.”

Indeed, building a social enterprise is one of the toughest things I have embarked on yet. And of course, it’s not just me who finds this challenging. McKinsey’s recent global survey of 4,000 executives in 116 countries found that 84 percent embrace the idea that a corporation has some social role in addition to its responsibilities to its shareholders. Just three percent of these executives think they are doing a good job delivering this social aspect.

Our vision is to build an organization that delivers financial returns to its investors, provides a positive workplace for its employees and increases the income of millions of low-income entrepreneurs. The customer element is a challenge but to me, tenable; it’s the core of our business. There are millions of informal entrepreneurs in developing countries — carpenters, tailors, electricians, plumbers, mechanics, embroiderers — who struggle to grow their businesses because they are invisible. GreenMango is an affordable marketing platform for them to promote their business and find new customers locally.

Now add in the benefits for our employees. We are operating in India, where staff turnover last year was 40 percent (i.e., nearly half of the country changed jobs). To counter that, we have built a dynamic environment: we spend for staff development and training and have clear career paths. We invest into our employees not only because it’s good for them, but also because it’s good for us. Year to date, we have had zero percent attrition.

Finally, we come to the third tenant of our vision: Delivering an excellent ROI for our investors. Our model is generating revenues but in order to succeed, we must deliver a high level of profits quarter after quarter.

Only time will tell if we can pull off all three elements of our plan.

In the end, of course, there is no clear definition of a social enterprise. And the longer I work at building GreenMango, the more I believe it is just the sum of the many small decisions I take every day. To what lengths will I go to ensure our employees are taken care of? How far will I challenge our team to find ways to serve the poor and semiliterate? How far will we push ourselves to find a revenue model that works at the bottom of the pyramid but delivers topline profits to our investors?

At our EMBA Global graduation, we were challenged and inspired with this quotation from George Bernard Shaw: “The reasonable man adapts to the world. The unreasonable man adapts the world to himself. Therefore progress rests upon the unreasonable man.”

CBS Professors Nelson Fraiman and Medini Singh recently offered their views on the pace of economic development in Uruguay to the newspaper El Observador (download pdf of article here), addressing how the country could increase its levels of productivity and innovation in order to rival global competitors.

Calling Uruguay “stuck in time,” Fraiman and Singh asserted that the mindset of Uruguayan entrepreneurs has to change in order for the country to catch up to the rapid pace of development in other emerging nations, particularly India and China.

“Unlike India or China, here I don’t see hunger in the people,” Fraiman said. “Uruguayans are content, and that can be a problem.”

Both Fraiman and Singh said that Uruguay’s small geographic size should not hold it back, and proposed that if local entrepreneurs could optimistically embrace change and let go of a compulsion towards conformity, the country would be able to take advantage of limitless possibilities.

The only challenge now is to identify which business activity to focus on in order to distinguish Uruguay from other emerging nations and add unique value to the global market.

Fraiman proposed that Uruguay could exceed competitors in offering knowledge-based services, and Singh said he believes that it’s necessary for the country to focus on technical education in management and technology, “because this is what the world needs today.”

This discussion came out of a workshop to Uruguayan entrepreneurs last month on “Strategy and Operational Excellence for Global Competitiveness.”

This post is part of a series following the “Pre-MBA World Tour,” organized by Shoaf and members of the class of 2010 with professional, cultural and social objectives. Over the course of nine weeks, the Tour will be visiting 24 major cities throughout Europe, the Middle East, Asia and South America, meeting with prominent alumni and business leaders.

Traveling through Thailand, Malaysia and Singapore this week, we had the opportunity to visit with the senior-most executives of several different types of institutions and discuss the challenges of competing in a global industry — and within the emerging markets.

After meeting with the executives of some major financial institutions, we started to reflect on the contrasting strategies of regional and global entities. For example, how must the perspectives differ between OCBC (a regional bank in Singapore) and Citi (the ubiquitous giant in global banking)?

Any successful organization requires growth in order to stay competitive, but how does a comparatively small company like OCBC continue to grow if it has a limited domestic market? The obvious answer seems to be that it must look outside its own country and consider entering new markets, and particularly emerging markets.

It may sound simple, but the problem is that entering a new market can require the company to stomach years of losses and investment — anywhere from 3 to 15 years.

This means that only companies able to subsidize these unprofitable years will be able to sustain themselves. These are typically either large companies with large domestic markets (such as Citi) or companies backed by another large institution (such as a sovereign wealth fund). A firm with a small domestic market of, say, four million people is not able to sustain such losses, and the investment may not provide value to shareholders in the short run.

But the real problem is this: if the target market is not large enough to give ample returns on this investment (in countries such as Vietnam or Cambodia, for example), there may not be sufficient returns in the long run, either. The payback period is simply too long.

So how can a regional player compete in a globalizing industry? Perhaps the best way is to specialize, catering to the local market and focusing on profitability and efficiency rather than top-line growth. This would make the company an attractive acquisition target for a global player with a larger domestic market (such as Citi) that can grow through acquisitions, rather than organic growth. This in effect shortens the learning curve and increases the company’s ROI.

This leaves two questions: First, does it make sense for a regional bank apply a similar strategy to compete in emerging markets? And second, with local expertise, can a regional bank be more effective in servicing its customers than a global bank?

The challenges of global expansion are complex and the appropriate solution will differ with each unique institution. Our trip to Singapore gave us a valuable lesson, pushing us to consider the variations in strategy among firms with different sets of resources and at times, different goals.

The U.S. government has made it clear that Fannie Mae and Freddie Mac, the two big mortgage guarantors, are not going to run out of cash. Yet the stocks of both are still tumbling; what is going on?

The issue is equity capital. Both institutions are seriously undercapitalized compared to their risks. The right solution is to issue more capital, lots of it. But the price of both stocks is very low, so lots of new capital implies major dilution of the old capital. The more the stocks fall, the more dilution new capital implies; and the more dilution is anticipated, the more the stocks fall. It is a vicious circle.

The basic facts about capital and risks are simple and stark:

For comparison, commercial banks are required to hold a minimum of 8 percent capital against their risk assets, and most choose to hold at least 10-12 percent.

Both Fannie and Freddie insist they are in compliance with the statutory and regulator-imposed capital requirements. That is true. The trouble is that neither institution has ever been required to hold a level of capital appropriate to their risk, and that is now coming home to roost.

Once an institution is in financial stress, it is very hard to sell equity capital because the price falls and stock buyers become frightened. The time to sell new issues of stock is when things are going well. As with friends, the time to make friends is when you don’t need them.

Raising capital is not impossible, just very slow and painful. Fannie Mae raised $7 billion of new capital in the second quarter. But the above table makes it clear how very much further both companies have to go.

Is government the solution? The last thing we need is for government to take over the two institutions. Some people are advocating this because they say that private ownership is a sham. But it is not a sham — real investors are losing real money here, and real investors can put pressure on managements to behave responsibly.

If government were to take full control of Fannie and Freddie, you can be sure that both institutions would soon own the entire subprime crisis. Politicians could not resist forcing both institutions to lower their standards so far that they absorbed everyone else’s mistakes. Even though some of this is going on, it is small compared to the total of subprime assets. Fannie and Freddie are prime lenders/guarantors and should remain so. They have trouble enough without taking on the nation’s subprime portfolio.

Rather, the government should begin by raising both companies’ capital requirements. It then might purchase a large issue of nonvoting preferred stock in each to help meet such requirements. The nonvoting feature would help to suppress political intervention. If the preferred carried an appropriate dividend, the government might someday sell it to the public after the present crisis has passed.

Fannie and Freddie are a mixture of public and private interests; the public interest is to preserve liquidity for prime mortgages. They should not be tools to bail out imprudent subprime lenders — they should be preserved in their present state with adequate capital.

Taking organizational service to the next level is not just about executing key strategic goals. According to Professor Awi Federgruen, companies need to focus more on considering the relationship between strategic options and operating cost.

“It is challenging but relatively easy to come up with planning approaches that will take out the organizational fat to reduce operational costs for given strategic goals,” Federgruen told the FT in a BearingPoint podcast. “But what is much more challenging and ultimately much more important for most organizations is to understand how the required operating costs interact with the strategic goals of the company.”

Within a corporate landscape that’s becoming more and more competitive in terms of the quality, accuracy and timeliness of services provided, organizations need to take a step back and weigh the implications of certain initiatives to the bottom line.

“Those tradeoffs between operating costs and strategic goals are not easy to figure out . . . and yet [they’re] something that organizations should indeed stay awake about, because without having a good understanding about what indeed the revenue implications are of strategic choices . . . one may be missing the big picture,” Federgruen said.

What challenges does your organization face in thinking about strategy choices in terms of operating cost — and do you agree that the task deserves greater attention?

If you are planning to pursue a career in venture capital after business school, a word of advice: get experience doing market sizing (OK, market estimating is probably more like it) and practice, practice, practice.

By market sizing, I mean taking a given market (e.g., the market for HD televisions or widgets or oatmeal cookies) and slicing and dicing it based on a series of assumptions.

I have had some opportunities to practice this through my internships (looking at market sizes to inform business plans or VC investments) and to a small degree in classes, but you can always improve — and the only way to improve is to practice.

If I could rewind to last summer, I might have spent some time practicing management-consulting case interviews (even though I didn’t want to go into consulting) for that very reason.

Why?

Well, case interviews require you to quantitatively walk through a business problem and figure out the magnitude of profit, revenue, etc., which guides your decision making. More important, they force you to develop your own analytic process.

Doing this repeatedly is bound to make you improve.

Bonus VC job tip: Pick an industry you know little or nothing about and spend about 10 hours (give or take) during a one-week period looking at the industry trends, value chain, competitive landscape, market sizes and value proposition for key players, and think about what you would like to invest in (if anything). After doing this, you’ll be familiar with yet another space and have another set of insights to share during your informational and formal interviews.

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

Dubai is clearly one of the fastest-growing cities in the world. Just compare a satellite image of five years ago with that of today. What was once a small desert city along the gulf coast is quickly becoming a large metropolis with miles of skyline and hundreds of man-made islands emerging from the Arabian Gulf.

What is most fascinating about this rapid growth is that it’s not based on slow economic progression. It’s based on the decision of a single ruler who has realized that the emirate’s oil reserves may be gone someday and he needs to diversify the framework of his economy . . . and quickly.

To understand what is happening in Dubai, simply take a blank sheet of paper and use your imagination to design a brand-new city that would rival any of the world’s largest — including New York, Los Angeles or London. And then, find a way to build it within 10 years.

In Sheikh Mohammed bin Rashid Al Maktoum’s design, he subdivided the city into several economic free zones intended to be the world’s hub for nearly every major industry. Some of these zones are designed for the services sector (e.g., Media City, Internet City, International Financial Center, etc.), while others are designed for education and liberal arts (Knowledge City, etc.).

Another important component of Sheikh Mohammed’s plan was to establish Dubai as the most visited tourist destination in the world. In order to attract tourists, he commissioned several iconic attractions (such as the World, the Palm Islands and the Burj Dubai) that would give tourism magnets such as the pyramids or the Eiffel Tower a run for their money.

Right now the population in Dubai is nearly 1.5 million (and it’s estimated that only 15 percent are actually Emirati citizens), and there are hotels and housing developments being built with an expectation for more rapid growth.

The obvious question is: If you build it, will they come?

Fortunately, much of this investment seems to be trickling down into every level of the emerging market economy, and everyone in the system seems to be making a lot of money. This new land of opportunity is creating such a huge demand for jobs and materials that it’s attracting top talent and capital investment from all around the world.

The other important component of this economic plan is that the large sovereign wealth funds and government agencies have two bottom lines: profit and GDP growth. From what we can tell from visiting with several of these organizations, Dubai is probably experiencing a real estate bubble, but it is still on a fast track to becoming one of the most fascinating and diverse cities in the world.

Next Stop: Mumbai

Photo Credit: .EVO.

Even as U.S. consumers are trimming spending, Coach chairman and CEO Lew Frankfort ’69 is going on the offensive, according to an interview in the WSJ. Frankfort has opened nearly 30 stores in China and has plans for 50 more. He is also broadening Coach’s consumer base by introducing more high- and low-end styles.

Will this dilute the brand? Here’s what Professor Bernd Schmitt told Public Offering:

Judging Coach’s approach by the traditional standards of “Perhaps we are decreasing the overall image and prestige of the brand by making it too widely available” is not necessarily the right way of looking at it.

The concept of luxury has been changing over the years. The old “elitist” concept of luxury, which is high-priced, hand-crafted goods manufactured in Europe, is not the only concept anymore. Luxury nowadays is much more associated with lifestyle, with doing innovative things, doing something special for the consumer. And “special” can mean various things — it can mean using high-end materials or using low- and high-end materials together or bringing the brand close to where the consumer lives.

Coach’s approach makes a lot of sense to me. What Coach is saying is that while you of course need a presence in all the major cities where luxury products are bought — the world cities for example, including New York and Hong Kong and Tokyo and certain European cities — you also need to bring the luxury product to other cities where consumers live and shop, so as not to make the consumer come to you.

There has been a lot of emotionally charged rhetoric surrounding sovereign wealth funds, especially with politicians and the media magnifying the “straw man” of suspicious foreign motives to conjure up advantages and ratings.

I just don’t buy it. Calls from politicians and the media for sovereign wealth fund regulation miss the larger point. Singling out sovereign wealth funds as bad guys suggests that they have the potential to be more hazardous to U.S. interests than other funds — and allows the rest of the investment field to roam freely, going largely unchallenged.

We should ask whether a fund’s national origin even matters. After all, hedge funds have an enormously extended reach and diverse investor bases. What if 49 percent of a hedge fund’s investors were U.S. endowments and 51 percent were foreign entities? And what if that calculus was opaque because the capital was disbursed through an offshore fund of funds? Variables such as these can make determining who wins and who loses far from clear-cut.

In the final analysis, it isn’t just what type of company, how big of a stake or what debt or equity instrument is owned that underlies plausible U.S. vulnerability — it is whether we have a strong political alliance in place, and the extent to which our dependence can be used against the U.S. in a negotiation for trade, security, intellectual property or what have you.

For the global economic environment to survive, we must cooperate with each other. The U.S. has a spiraling current account deficit that some argue resembles precrisis Argentina: the dollar has slid precipitously, oil prices have risen.

That we haven’t had a severe avalanche of dollar selling seems to be due to political good will with foreign central banks and the moral persuasion of the Treasury and the Federal Reserve. None of our trailing data are owed to the alpha-decision making of supposedly sovereign-neutral portfolio managers.

Given all this, pointing a finger exclusively at relatively mundane entities, such as Singapore’s GIC, seems like a diversionary tactic to distract the public from much larger, more complex issues.

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

To better understand the business environment in Italy, we attended a private equity conference, where we had the opportunity to meet with the U. S. ambassador to Italy.

After a successful career at his private equity firm, Freeman Spogli, Ambassador Ronald Spogli entered the U.S. State Department, where he came to believe it was in the best interest of the United States to help modernize the stagnant Italian economy. The embassy recently established an initiative called the Partnership for Growth, which is designed to help foster the entrepreneurial mindset in Italy through four main objectives: (1) stimulate the venture capital industry and promote Italian entrepreneurial role models, (2) modernize the country’s capital markets, (3) spur innovation by protecting intellectual property rights and (4) send Italian students to U.S. schools to learn the American way of doing business.

In fact, the Italian venture capital industry is really quite nascent. A major constraint is that the entrepreneurial mindset — which is quite common to most people here in the U.S. — is foreign to most Italians. One of the reasons for this lack of entrepreneurial drive is the fear of bankruptcy. In the U.S., most new businesses fail . . . and it’s okay to fail and try again. But in Italy, if a new business fails, it’s not just the business that fails, the entrepreneur’s personal life might be ruined as well (e.g., the person would no longer able to vote or get another loan, would experience social failure, etc.).

Italian investors are also not typically comfortable with stomaching the risk required for PE/VC investments; they prefer to invest in more traditional asset classes, such as public equities and bonds. As evidence, consider this statistic: in the U.S., pension funds typically supply nearly 60 percent of the total capital invested in new private equity funds. In Italy, pension funds supply only 1 percent of such capital.

The embassy is already seeing some good results. Last year, it sent several Italian investors to Silicon Valley to learn the American approach to venture capital. Within three months of their return to Italy, these investors have already established a formal angel network and reviewed nearly 200 new business plans! As you can imagine, there was a great amount of energy in the air at the conference.

We’re looking forward to the many opportunities to learn entrepreneurial skills at CBS — which hopefully can inspire a similar energy among our class, and perhaps serve as catalysts for change in the renovation of the Italian economy.

Photo Credit: Diliff

At Columbia’s BRITE ’08 conference in February, Mike Hemingway of Ogilvy discussed how his company has helped Dove build a PR, social media and viral video campaign aimed at fostering conversation and community around a new definition of beauty — one that runs counter to the narrow, air-brushed definition of mainstream fashion.

Here’s a 90-second clip from his talk:

It turns out that Dove’s refreshingly atypical beauties from its print campaign (freckled, wrinkled, flat-chested, large-thighed, etc.) may have been. . . airbrushed!

The scoop came out in a New Yorker profile on airbrush maestro Pascal Dangin, igniting commentary in the blogosphere and advertising press.

Anyone in the advertising field knows that minor photo correction is standard. But had Unilever betrayed the very values of authenticity that the entire Campaign for Real Beauty was based upon?

In an Ad Age article, an Ogilvy spokeswoman expressed doubt that any significant alterations were made. But in the New Yorker, Dangin is quoted as saying “It was. . . a challenge, to keep everyone’s skin and faces showing the mileage but not looking unattractive.”

But even if Dangin’s account is true, is that really hypocritical? After all, Dove’s message was that a freckled/wrinkled/etc. woman can be as beautiful as anyone else. Not that she shouldn’t be well lit, sharply dressed. . . and using Dove products.

What matters is the customer’s opinion, however, and the airbrushing story has the potential to tarnish a powerful brand image.

It also highlights the importance of transparency in an age of blogs and the growing flow of information among and between customers. Media companies, like newspapers and record labels, have been hit hardest by this technological change, but the revolution is also impacting consumer packaged goods like Dove.

As Clay Shirky writes in his new book on social media, Here Comes Everybody:

We are plainly witnessing a restructuring of the media businesses, but their suffering isn’t unique, it’s prophetic. All businesses are media businesses, because whatever they do, all businesses rely on the managing of information for two audiences — employees and the world.

In an age of interactive media, managing that flow of information will get harder and harder.

Life often gives us hard decisions to make, and in my line of work — M&A at GE — hard decisions come fairly often.

But good decision making requires skills, and one way to learn these skills is by practice. Last year I got to take part in developing case study materials for CBS’s core strategy class, which gives students the chance to practice real-world decision making. It involved creating a video to record the decision-making process that a colleague and I participated in at GE in a way that allowed students to think about what they would do if faced with the same circumstances. Students got experience, and also got to see how a major corporation evaluates tradeoffs and makes decisions.

Another facet of good decision making is learning how to ask the right questions. I was just telling EMBA students in Donna Hitscherich’s M&A class that when we evaluate divisions at GE we don’t just ask, “How is this business unit performing?” but rather “How will this business be performing three, five or ten years from now?”

One recent example is the divestiture of our plastics business. GE Plastics was performing OK, but we decided it would be difficult for us to grow the business due to our inability to hedge the ever-increasing cost of benzene (an oil-based derivative and the primary ingredient for plastic pellets). GE Plastics had an excellent valuation, so we decided to monetize the business in favor of reinvesting the proceeds towards some of our faster growing, more profitable businesses.

The key point is that good decision making is a process, and learning how to analyze and interpret the tradeoffs among choices is a critical skill. Ultimately, the goal is to make good decisions that result in positive outcomes, but a robust decision-making process will also mitigate the risk of bad outcomes over time.

As CBS’s Michael Mauboussin quotes Robert Rubin in the book More Than You Know:

Individual decisions can be badly thought through, and yet be successful, or exceedingly well thought through, but be unsuccessful, because the recognized possibility of failure in fact occurs. But over time, more thoughtful decision-making will lead to better overall results, and more thoughtful decision-making can be encouraged by evaluating decisions on how well they were made rather than on outcome.

]]> Fri, 16 May 2008 12:21:53 EDT ]]> Leadership Organizations Strategy

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.”

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.

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.”

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.

But a huge shift has taken place in consumers’ choices and the fluidity with which they move between them. Nowadays, McDonald’s is as likely to compete with Starbucks for a diner’s time and dollar as with another burger joint (“Do I want a quick bite with fries? Or maybe a sandwich and latte?”). NY–to–DC commuters are not just picking between Delta and United, but considering the Acela train as well. And book lovers can skip the bookstore for Amazon.com — or even skip the book itself, opting for something from an RSS feed, a podcast or a Kindle. Companies no longer compete in functional product categories, but within the contexts of consumer needs and experiences: a casual meal, a productive commute, a thoughtful read.

This was the argument put forward by Sirius to the Department of Justice in its bid to acquire XM, its sole competitor in the field of satellite radio.

From a traditional view of competition, this would be an open-and-closed case of free-trade infringement. If Sirius buys XM, it will be the only satellite radio game in town. Zero competitors equals zero choice for consumers and an anticompetitive monopoly — right?

But Sirius argued that its real competition is not XM, but all the other options consumers have for incorporating audio and media into their drive time: from hi-def radio, to MP3 players (my 2007 car came with a plug where my iPod fits right in), to cellphones and backseat DVDs.

Today, the Department of Justice announced that it had accepted Sirius’ argument and is greenlighting the acquisition (still to weigh in: the FCC). Antitrust regulation is still vital to preserving competition, but for many areas of the market, the scope and dynamics of competition have expanded greatly. Watch out Starbucks: even McDonald’s is starting to offer lattes of its own.

Blankfein insisted that this is not pure philanthropy, but that it is in Goldman’s business interest. Shareholders should like it.

Here’s his argument: Educating women — especially in business — promotes growth. If developing economies grow faster, that’s good for Goldman’s business. The firm manages IPOs from the newly formed companies, gets to finance them, merge them, invest in them through private equity deals, etc. So promoting global growth is good for Goldman, and promoting women’s education is a cost-effective way of promoting global economic growth.

Mark Tercek, a senior executive at Goldman, spoke to my class last week about Goldman’s environmental policies, which are equally spectacular. The firm gave away a huge parcel of land in Patagonia to the Wildlife Conservation Society; built some of the greenest buildings in the United States; acquired a fleet of hybrid limos; forced TXU to drop plans for eight new coal-fired power station in the recent buyout of TXU by Goldman, KKR and TPG; invested heavily and early in renewable power; and has persistently and forcefully promoted green behavior by its clients. Tercek gave similar arguments for why they do this: it’s good for Goldman. Why?

We need a healthy environment to survive and prosper, and only if we survive and prosper will Goldman do likewise. There were some other arguments too, in both cases, the most interesting being about motivating the firm’s employees and making them proud to work for Goldman.

Bottom line? What’s good for the world is good for Goldman. Remember the old saying — attributed to “Engine Charlie” Wilson, the then CEO of GM — “What“s good for General Motors is good for America”? There’s been an interesting order reversal here. And we’ve gone global too.

It’s a striking claim: by giving money away, we make ourselves better off — not just psychologically or ethically, but financially too. For every $1 we give away, more than $1 comes back.

Can this be true, or is someone deluding him- or herself here?

I have to plead the economist’s occupational disease — skepticism. But there is a possibility of validity.

Analytically, the issue is whether someone gains from providing a public good at his or her own expense. Global growth is a public good, as is a better environment. Generally the answer is no, it doesn’t pay any individual to provide a public good. But if the provider is also a major consumer of the public good, it could be the case.

So the issue is whether Goldman is dominant enough in its field to be sure that the lion’s share of the new banking business generated by growth anywhere in the world comes to it. Maybe that’s the case; certainly that’s what they are banking on.

In a similar spirit, Capon’s Customer-Centric CEO Index (C4I) is a simple measure of your firm’s degree of customer orientation.

There is scarcely a senior executive today who doesn’t recognize the importance of customers to the firm’s financial health. Relationships with customers drive the firm’s top-line performance; hence the role of NPS in trying to understand the customer-firm relationship.

My concern is broader; I want to understand the degree to which the organization as a whole puts customers at the center of its activities and is committed to using its entire set of resources to deliver customer value. What could be a better basis for determining your firm’s degree of customer orientation than the behavior of your CEO?

So, the C4I is very simple: C4I = the percentage of time your CEO spends with customers. Consider some polar opposites: for example, C4I = 0 and C4I = 30.

We could label the C4I = 0 CEO as the bureaucratic manager, internally focused and presiding over the entire organizational apparatus. Far from being central to the CEO’s concerns, relationships with customers are something to be delegated to the marketing or sales departments. Organizational layers shield this CEO from the realities of the marketplace — from competitors, customers and customers’ customers. Lack of firsthand customer interaction means that the firm likely makes all critical customer-oriented decisions at lower organizational levels. Alternatively, if the CEO does make these decisions, they are based on information filtered through the organization.

By contrast, a C4I = 30 CEO is highly engaged with customers. In B2C, some CEOs spend time on customer-complaint phone lines; former Southwest Airlines CEO Herb Kelleher was famous for interacting with passengers; and Terry Leahy, CEO of British retailing giant Tesco, and Mickey Drexler, CEO of J. Crew (formerly CEO of Gap), frequently walk around their stores talking with customers.

C4I = 30 CEOs recognize that the firm’s revenues are probably based on an 80:20 distribution — 80 percent of revenues generated by 20 percent of customers. In B2B, or in B2C where channel entities are increasingly important, powerful customers play an ever more critical role in deciding the firm’s future. C4I = 30 CEOs use direct customer input to help plot the firm’s strategy — recall Lou Gerstner’s early days at IBM as he met with customers in the process of developing the strategy that would turn IBM from a lumbering and declining giant into a preeminent industry player. And a few years ago, EMC’s CEO Joe Tucci changed his firm’s direction only after meeting with the CEOs and CFOs of customers’ customers.

Furthermore, as strategic/key/global account management practices become more widely entrenched, the potential roles for customer-driven CEOs become increasingly obvious. Hank Paulson was an obsessively customer-focused on-the-road CEO at Goldman Sachs, and Larry Ellison is Oracle’s point person at major customer General Electric. Other CEOs, like Sam Palmisano at IBM, are ready to directly engage with customers to close a deal or redirect a contract that was headed for a competitor.

The message should be clear. As IBM’s Thomas Watson Sr. famously said, “Nothing happens until a sale is made.” Even if you only half believe this statement, you must ask the question, “What is my CEO doing directly to help make this happen?”

As a starting point, I suggest you figure out your CEO’s C4I score. If it’s in the doldrums, you owe it to your firm and the shareholders to do what you can to inch it upward. CEOs, take note!

Professor Capon is author of Key Account Management and Planning, Managing Global Accounts, and The Marketing Mavens. His new textbook, Managing Marketing in the 21st Century, is a quarter the price of most competitive offerings; see www.mm21c.com.]]> Wed, 12 Mar 2008 16:06:42 EDT ]]> Leadership Marketing Organizations Over the past decade, leading African business schools have adopted the traditional case method. But how much can students really learn from these cases when they are about American companies that routinely leave Africa out of their operating plans altogether?

So during winter break, I was one of 30 CBS students who traveled to Africa to write case studies about successful entrepreneurial businesses on the continent. (See previous posts here and here.)

Our goal was to develop a world-class business school case study about Computer Warehouse Group (CWG). This project presented the opportunity to dispel the myth that there are no sophisticated businesses on the African continent — or worse, that businesses there can only get ahead through corruption.

We knew only that the firm had experienced explosive growth over the past few years, achieving some $100 million in revenues in 2007. We knew the firm was an early reseller for Dell, and that it was an important partner for a variety of blue chip Silicon Valley firms, including Cisco, Sun Microsystems and Oracle. We understood CWG’s strategy to position the firm as a strategic partner capable of delivering turn-key IT solutions for big companies, and we knew that a well-known global private equity fund had made an offer to purchase a minority stake in the company.

And until we got to Lagos, we didn’t have any sense of this company’s culture. Was it a one-man show, heavily dependent on its charismatic founder, Austin Okere? Or did it have people and processes in place to ensure continued growth into the future? Did employees at the bottom live the values expressed by those at the top? Or was it more of a show to impress customers, potential investors or other stakeholders?

To answer these questions about the company’s culture, we interviewed dozens of employees, from the most senior management to the most junior customer service and sales teams.

As it turned out, we couldn’t have picked a better company to lay these stereotypes to rest. The company has thrived in difficult circumstances because of an entrepreneurial culture that embodies the work ethic, personal responsibility and integrity of its founder. The firm has distinguished itself from the competition by consistently delivering on promises to customers and is one of Nigeria’s 50 fastest growing companies.

A rep from Cisco told us that the firm is “probably the most entrepreneurial company in Nigeria, certainly in the most entrepreneurial in IT sector.” The founder of the competing firm, who has since sold his business to a larger international player, expressed similar respect for his former rivals.

Because the case study requires a valuation of the company, we also spent a good deal of time learning about the country’s capital markets in general and the private equity group’s offer in particular. We interviewed senior leaders at several private equity firms, the founder of a local investment bank and high-ranking officials from Citigroup. The information we gained from these meetings was invaluable for understanding the similarities and differences between Nigerian capital markets and those of more developed economies.

We concluded our trip with a visit to the Lagos Business School, a member of the Association of African Business Schools and a huge supporter of our project. The folks there not only linked us up with Computer Warehouse Group at the outset but also booked our hotels and even provided our team with a driver during our stay. The school’s ultramodern facilities and helpful administrators were very impressive. We are excited that our work will help contribute to the world-class institution they are building in the heart of Africa.

But my nervous tension is dwarfed by the excitement that only a once-in-a-lifetime opportunity can create. Columbia’s new Entrepreneurship in Africa Master Class has me traveling to Nigeria to write a case study on Computer Warehouse Group, West Africa's leading IT systems integrator.

I’ll be working alongside three close friends from Columbia’s class of 2008, Jindrich Zitek of the Czech Republic and two Lagos natives, Gbolade Arinoso and Lara Junaid. We'll interview many of Nigeria’s leading banks, private equity groups, IT firms, oil companies and telecommunications providers to flesh out the company’s story.

Ultimately it’s the chance to tell this story that generates the most excitement for our team. Computer Warehouse Group started in 1992 as a tiny Dell reseller committed to empowering its employees to provide superior customer service to business clients. Over the past 15 years, these principles, combined with the entrepreneurial spirit of its founders, have allowed the company to grow into a $100 million IT powerhouse providing comprehensive hardware, software and networking solutions for corporations throughout West Africa.

Over the next week, our team intends to write a case study about Computer Warehouse Group's phenomenal rise. We hope it will provide locally relevant teaching material for Africa’s leading business schools.

More next week . . .

Two weeks ago, I blogged about the mounting combination of anxiety and excitement leading up to my trip to Nigeria. Outside of the exceptional opportunities for investors in the country’s capital markets — which did little to soothe my fears as a traveler — I’d heard few reassuring stories about Lagos. Meanwhile, my imagination went to work on the news reports, rumors and exaggerated tourist tales I had heard, conjuring up images of an urban center descended into anarchy.

I should have known better!

Jindra Zitek ’08 and I arrived at the Lagos airport expecting to be harassed by an unruly mob of aggressive taxi drivers, con artists or worse. We found instead only a few families waiting for their loved ones. The first person to approach us was our smiling classmate, Gbolade Arinoso ’08, wearing his finest traditional Nigerian clothes. From the moment we exited the airport, we knew we’d have to throw all preconceived notions about Lagos out the window.

In fact, throughout our week in the city, we were struck by how poorly we’d misimagined the place. At no point did we feel threatened in any way. Rather, we were welcomed warmly by everyone we met, from security guards and restaurant workers to private equity investors and government officials.

In the end, it was this inviting stance toward foreigners that made our project such a success. Our goal was to write a world-class business school case study about Computer Warehouse Group, West Africa’s leading IT systems integrator. As soon as we explained our project, we found that the local business community was quick to rally around us. Even normally secretive private equity firms were willing to openly discuss their valuations of the company!

Ironically, it was the very hospitality that made our trip so exhausting: the 9–5 work days were simply too short to speak with all the people who so generously offered their time. We frequently found ourselves meeting deep into the evenings, exploring the intricacies of valuing the IT services company in the Nigerian context. We learned more than we ever imagined — about the firm, the country and, most of all, about the tricks our imagination can play on us when we operate on incomplete information!

Photo credit: The New Black Magazine]]> Wed, 12 Mar 2008 15:56:17 EDT ]]> Business Economics and Public Policy Organizations Social Enterprise World Business At 11:30 one Friday morning, hundreds of middleschool kids in Lerner auditorium were screaming with excitement. On the giant video screen on stage, students’robot avatars armed with space-age immobilizers competed against one another in a 3D landscape.

But to win, players must answer algebra questions.

The video game, Meltdown, is being tested as a new way to teach math to middle schoolers, including pilot programs in some of the country’s biggest school systems, such as Miami, Chicago and New York.

“It's a paradigm shift in thinking about education,” said Ntiedo “NT” Etuk ’02, who is also cofounder, chairman and CEO of Tabula Digita, the maker of Meltdown. “I really believe that the reason kids are doing poorly is because what is happening outside the classroom is not being translated to what is happening inside the classroom.”

Preliminary results suggest that the game helps students’ standardized test scores, and that students in classes that use the game have better attendance and are more engaged in learning.

With Virgin Galactic (VG), Richard Branson is trying to change that. Last Wednesday at the American Museum of Natural History, throngs of reporters were on hand to capture the unveiling of his prototype spacecrafts, which are being built to send everyday people — 100 of them by 2009 — into space.

Also in attendance at the event were 28 students from Professor Ketty Maisonrouge’s luxury markets class. They had special permission to be there for a different reason — to do marketing research on VG and the space-travel industry. The students met privately with Branson and Brian Binnie, who piloted SpaceShipOne’s second Ansari X Prize flight.

And the following evening on campus, a group of future VG “astronauts,” along with VG president Will Whitehorn and other senior VG executives, met and talked with the students for five hours.

“This was really one of these rare moments in life when you feel that you are somehow a small part of a historic event,” said Maisonrouge.

This is the first marketing class at CBS — and likely the first class anywhere — to take on space tourism. Students will examine what is at stake, the history of the Virgin Galactic brand and the quantitative and qualitative research surrounding these markets. They will present a marketing plan to Virgin Galactic executives in April.

“We are working in an industry that doesn’t exist yet, so to be part of these first steps is really a privilege,” said Maisonrouge. “I really feel that the students are sharing in the passion and enthusiasm for this project, and it will definitely be an amazing semester.”

My heart went out to two companies who had to make those painful decisions. In one case, that of Polaroid, the decision was to stop making instant film, a product deeply linked to the company’s identity. They have just announced that they plan to close factories in Massachusetts, Mexico and the Netherlands that make instant film. They’ve stopped making instant cameras for some time now. The other, even sadder case is that of Toshiba, whose high-definition DVD format has now lost out in the standards war and will be discontinued.

Fans of the instant-film format are howling, but the relentless realities of declining sales and the relegation of instant film to a footnote in the photography industry leave Polaroid with few options.

The good news is that perhaps a smaller company will license the rights to manufacture the instant film and keep some supply available.

Toshiba, in contrast, sees no hope, resigned to the fact that its HD DVDs have irrevocably lost the standards war to Sony’s Blu-Ray technology. This must feel like sweet justice for Sony and its CEO Howard Stringer (c’mon, everybody remembers Betamax vs. VHS) and be a bitter disappointment for Toshiba. Standards battles are hard to predict, and both sides went into this one well armed for a long war of attrition. With computer manufacturers, content providers and others unprepared to place a compelling bet on one or the other standard, the battle could have dragged on for some time.

I find it fascinating that the critical blow (after some others had been cast, of course) came from a third party that stood to lose a great deal in a protracted standards battle, and that’s Wal-Mart. Wal-Mart has no interest in shoppers holding off their purchases for fear of spending a lot of money on a piece of obsolete junk. The superstore’s perspective is: who cares who wins, as long as the situation gets resolved and commerce can chunk merrily along. So when one of the big film studios went with Blu-Ray, that was enough to convince Wal-Mart that it was time to place a bet. Toshiba’s capitulation came within days.

While both stories are sad, they do serve to remind us that for innovation to progress, some established practices, offers and products have to give way. It sure isn’t the most pleasant part of the innovation process, but it is necessary. So best of luck to both companies, and may something brighter offer some excitement down the line.