Making a Start

Published on August 15, 2010 in Uncategorized. 0 Comments

“There are two mistakes one can make along the road to truth…not going all the way, and not starting.” –Hindu Prince Siddartha Gautama, the founder of Buddhism

This is it: the end of summer. For my colleagues and me, the new school year formally begins tomorrow, when we gather together the new class of students. A farewell to summer is overwhelmed by the sense of anticipation that a terrific experience is about to begin. We are making a start. Doing this well entails at least two tasks.

First, a good start acknowledges the context. Certainly, the circumstances of the U.S. economy are bearish. There’s never been a recession without a recovery. But it seems likely to take several years to restore the global economy to the level of activity it enjoyed before the onset of the recent recession. To give you a visual image of the “hole” created by this recession, consider the following graph from the blog, Calculated Risk. It compares the unemployment in the U.S. economy in the most recent downturn versus several previous downturns. The hole is deeper than any recession since the Great Depression. Until employment recovers, consumer spending won’t rise much. Until consumer spending rises, the economy will feel anemic. Until the economy grows robust, we won’t return to the heyday of MBA recruiting: multiple offers, good salaries, and rising promotion prospects.

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One way to think about this context is as an opportunity. Every trough contains the seeds of the next recovery. A number of famous companies (e.g. Apple, Microsoft, Facebook) were founded in troughs. In the face of the bearish economy, my advice is, don’t look back. Envision the economy to come, not just the one that exists. Live into the vision. It is pretty clear that the conventional wisdom in a variety of industries is being rewritten. In the past year, we have seen new legislation that will dramatically reshape industries as varied as banking, health care, and energy. Develop a view on where these fields are heading. As the hockey star, Wayne Gretzky said, you must “skate to where the puck will be, not to where it is.”

The second task of making a good start is to take responsibility for your own learning. Reaffirm what you are embarking on, and why. The conventional wisdom is that students go to business school to get a job. But that’s not quite right. The point is to get the knowledge and skills, and to build the attributes of character that will help you get a job. The best safeguard you have against a difficult economic environment like this is what’s between your ears!

Some recent reading has shaped my thinking on this second point. I commend to students and teachers alike the book, Why Don’t Students Like School? A Cognitive Scientist Answers Questions About How the Mind Works and What it Means for Your Classroom. It is by Daniel T. Willingham, a colleague in UVA’s Psychology Department. He asks, why does learning “click” with some students, and not others? What drives real learning?

The short answer to the question in the book’s title is summarized on page 1: students don’t like school because “People are naturally curious; but people are not naturally good thinkers; unless cognitive conditions are right, we will avoid thinking. The implication of this principle is that teachers should reconsider how they encourage their students to think in order to maximize the likelihood that students will get the pleasurable rush from successful thought.” OK, cognitive conditions promote good thinking.

At Darden, we take seriously the quest for the “pleasurable rush from successful thought.” Simply yakking at students or demanding rote memorization does nothing to promote the rush. Our approach relies on the much more stimulating approach of high-engagement discussion. We apply a key principle: start from where the student is, not from where the teacher wants to be. One reason we have successful graduates, a highly bonded alum community, and very high rankings for our classroom experience is that we structure our programs in ways to elicit the curiosity, energy, and determination of our students. Telling students the solution to a problem does nothing for their capacity to think. Everything depends on questions—this was the subject of my remarks at Darden’s last graduation: how we teach is what we teach; you can manage by asking questions, and thereby empower your employees to figure things out for themselves. The teacher and manager need to promote puzzlement in constructive ways.

What is the role of the student in promoting good thinking? Graduate school is very different from undergraduate school or high school in that grad students bear much more responsibility for the success of their own learning. How does a student take responsibility for his or her learning? Thinking [1] is effortful, slow, and unreliable—in no small part because we sail through quite a lot of our day rather automatically, applying past approaches that granted us success. Willingham says, “when we can get away with it, we don’t think. Instead, we rely on memory. Most of the problems we’ve faced are ones we’ve solved before, so we just do what we’ve done in the past.” (p.5) But old capabilities don’t necessarily work in graduate school. In fact, the whole purpose is to develop new capabilities. I’ll offer two suggestions:

· Turn off your autopilot, pay careful attention, and adapt. In previous blog postings, I’ve written about mindfulness (see this, this, and this) and the need to be present (see this, this, and this).

· Find the joy in grappling with the new cases and problems. Willingham wrote, “Solving problems brings pleasure.” (p.8) This is what the Nobel Laureate Richard Feynman called, “the pleasure of finding things out.” Indeed.

Buddha’s words capture well this moment for students, faculty, and staff. We are leaving the summer, the interregnum between job and student life, or the summer internship. The academic cycle starts anew. We are all looking for Truth and seeking to strengthen our capabilities. We wish the context were buoyant, but let’s view it as an opportunity. Graduate students should take a large measure of responsibility for their own learning. Let us make a successful start.

  1. Thinking, according to Willingham, means “solving problems, reasoning, reading something complex, or doing some mental work that requires some effort.” [↩]

Practical Affairs

Published on August 3, 2010 in Uncategorized. 0 Comments

“This time spent in self-examination has been a mountaintop experience.” – Participant in Darden’s Emerging Leaders Program

I am often asked about a phrase that appears in Darden’s mission statement: practical affairs. Why doesn’t the mission state that Darden will prepare principled leaders in the world of business? What’s with preparing leaders for the world of “practical affairs”?

A retired faculty member once told me that the phrase draws from the writings of Thomas Jefferson, the founder of University of Virginia and third President of the United States. Jefferson himself was a farmer, architect, small businessman, lawyer, diplomat, and politician. His career observed no guard rails that kept him in one narrow career track. He had an appetite for what came along in whatever field of practical affairs in which he worked.

Thus it is with the Darden alums today. At the most recent reunion, I asked the several hundred people in the Abbott Center Auditorium several questions about their careers. How many had worked as general managers in some fashion? A sea of hands went up. How many had worked in the not-for-profit sector or served on the board of a not-for-profit? Again, the overwhelming majority of hands went up. How many had served in government, either in an appointive or elected position? A large number, but a little less than half, of the hands went up. Hands kept going up as I surveyed the military, media, the law, and even religious institutions.

Increasingly, I see that our graduates contribute widely across many sectors of practical affairs. People once thought that if you started out in one field, you had to stay there for the rest of your career. That’s just not true anymore. The boundaries between business, not-for-profits, government, and other fields are permeable.

The big implication for business schools is that the scope of educational focus needs to widen to encompass not only business, but also the variety of fields in which the insights of business might benefit society. Fortunately, we already practice this at Darden. Here are two of many possible examples:

· The Partnership for Leaders in Education (PLE) is a joint venture between the Darden School and the Curry School of Education at UVA. This program trains leaders of underperforming schools in the strategies of turnarounds and the techniques of change leadership. PLE has been a leader in its field; its model is being adopted by other universities in the U.S. and abroad. The best thing is that within one year, about two-thirds of the schools who have sent representatives turn themselves around. Saving America’s K-12 schools is a pretty important field of practical affairs.

· Last month, my colleagues delivered the Program for Emerging Political Leaders (EPL) to 52 state legislators from 38 states. The aim of EPL is to explore political leadership in general and how the participants could improve their own leadership to make a difference in their states. Philosopher Dominic Scott led sessions on Plato’s Republic and its relevance to our modern times. Leadership Professor Ryan Quinn led a session on positive psychology and his latest book on “Lift” and its applicability to the political world.  Strategy and Ethics Professor Jared Harris led sessions on ethical dilemmas in politics, how to improve education and what to do about the global education gap, and trust and collaboration.  Faculty leader Professor R. Edward Freeman led sessions on the new realities of globalization, and how to personally improve leadership capabilities.  The legislators also attended a session in the Dome Room of the Rotunda where Legislators Mike Villines and Speaker Karen Bass of the California State Legislature spoke about their efforts to craft a bi-partisan budget, and the consequences of doing so.  The participants left full of ideas for action, and ready to make a difference in their states.

Darden is making a difference by carrying the tools and concepts of business into the wider field of practical affairs. I think Thomas Jefferson would have wanted it so.

Reform of the Financial System: The Limits to Limits: The Photo

Published on July 28, 2010 in Uncategorized. 0 Comments

Just FYI, here’s the photo of the end of The Fence that I referenced in my earlier post, “Reform of the Financial System: the Limits to Limits”

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The Rockwell Moment

Published on July 24, 2010 in Uncategorized. 0 Comments Tags: , , .

Recently I saw the special exhibition on Norman Rockwell at the Smithsonian Museum of American Art in Washington D.C.  You must see it.  There, until January 2, 2011, you will find 57 of Rockwell’s paintings and drawings as collected by the Hollywood moguls, George Lucas and Steven Spielberg.  The exhibition gives an object lesson in telling a story in one picture—this is a useful reminder to just about anyone, including business professionals.

Rockwell was a leading American magazine illustrator in the 20th Century.  Not impressionistic or abstract, Rockwell’s style is realistic and precise.  He captured small dramatic moments among people in everyday life, such as a scared kid on the high-diving board; an obstinate woman in a jury room; and a soldier and his family just at the moment of returning home from war.   Rockwell’s special gift was to portray a wide range of emotions in his subjects—and to evoke them in his viewers.  Rockwell makes it easy to see a story.  Each of his paintings is a snapshot of some tableau in motion.  Maybe that’s why the critics haven’t liked him: it’s too easy to envision a story—in contrast with abstract painters and the frozen people in formal portraits.  Critics said that Rockwell’s art was bourgeois kitsch and that it reflected a nostalgic America that never really existed.  Certainly, Rockwell was leaning against the tide of cultural change: modernism, post-modernism, social and political upheavals of all kinds.

Now, the pendulum of critical assessment seems to have turned.  The U.S. is experiencing something of a mini-boom in Rockwell’s art—in addition to this one, two other Rockwell retrospectives have traveled the country recently.  And Rockwell has been the focus of a new biography.  In her catalogue for the Smithsonian’s exhibition, Virginia Mecklenberg wrote,

 “Rockwell was a keen observer of the world who captured the realities of individual lives as well as the mores that society held dear…Rockwell was a master humorist with an infallible sense of the dramatic moment.  Like a movie director, he determined the pose and facial expression of each character, positioned each prop, and lighted his sets for maximum scenic effect. …A magazine cover…had only a spit second to reach its audience. …The most successful covers grabbed the reader through sheer visual impact….Rockwell told stories that Americans wanted, and sometimes needed, to hear.” [1]

Business life is filled with story-telling: selling, persuasion, and influencing.  Leadership, the capacity to enlist others in a cause, asks people to embrace a story.  Teaching of almost any kind involves students in constructing the meaning in a story.  Most entry-level jobs for MBA graduates are to be assistant story-tellers, or just people who gather and assemble the raw material.   

Rockwell sets an extremely high standard for story-telling: do it with just one image.  The way he achieves this is to invite the viewer to co-create the story with around the dramatic moment.  You imagine what happened leading up to this very moment and what is likely to happen next.  To do more would be to dilute or destroy the enormous impression he creates. 

Rockwell’s achievement is consistent with great management communication: keep it simple; stay focused on the headline message; help your audience come to the conclusion on their own rather than bash them with the obvious.  Great business practitioners get this.  Bill Gray, (Darden MBA, 1978) was President of the leading advertising agency, Ogilvy & Mather; he told me recently, “Every brand entails one big ideal.  If you want to advance the brand, you must convey that single ideal clearly and consistently.” (For more on Bill’s views, see this.)  Robert Greenleaf, Director of Management Research for AT&T said, “Many attempts to communicate are nullified by saying too much.” [2]  John Johnson, the founder of Ebony magazine, said that he could “sell anybody anything in five minutes or less” by focusing on just three things: grabbing “the client’s attention with a fact or an emotional statement that hits him…find[ing]the vulnerable spot, and emphasiz[ing] the common ground…the values, hopes, and aspirations that bind you together.” [3]  And Edward Tufte, the expert in the graphic presentation of quantitative data, offers masterpieces of succinct, but rich, displays. 

Can business schools promote this kind of communication?  Thanks to advances in information technology, we are awash in data and messages.  Each year, I absorb numerous presentations and articles, in the middle of which I yearn for the “Rockwell moment”—that point of significance at which I can begin to make my own meaning of the ideas at hand.  Given the vast size of the field of management education (some 12,000 schools in the world), it is hard to know how well we are doing.  But speaking for one school, I can say that Darden is focused on preparing who are ready and able to get to the point.    The case method of instruction promotes the ability to make your point succinctly.  Our courses in Management Communication are some of the most transformational for our students and beloved among our alumni.  Recruiters tell me that our graduates are excellent communicators.  If our experience is any indication, B-schools can promote the kind of powerful communication that Rockwell perfected.

In a video commentary on the exhibition, George Lucas called Norman Rockwell, “the leading story-teller of the 20th Century.”  Perhaps reality imitates art: our task as educators and business practitioners is to focus on developing communications and messages that reach audiences as effectively as did Rockwell.  We need our Rockwell moments.

  1. Virginia M. Mecklenburg, Telling Stories: Norman Rockwell, Smithsonian American Art Museum, Washington D.C. 2010, pages 25-27 and 190. [↩]
  2. Robert Greenleaf, Servant Leadership: A Journey into the Nature of Legitimate Power and Greatness.  1977. [↩]
  3. John J. Johnson, “How to Sell Anybody Anything in Five Minutes or Less,” in Peter Krass, ed., The Book of Business Wisdom , John Wiley & Sons, 1997, pages 233-34. [↩]

A Question for Summer Interns: Who Are You?

Published on July 18, 2010 in 2010 Archives. 0 Comments

“I think, therefore I am.”  — Descartes

“I yam what I yam.”  — Popeye

The recruiter tried to tell me why the MBA summer intern wasn’t given an offer of permanent employment: “She seemed to be technically proficient as did the other candidate.  She was nice enough as a person.  But we had two interns and were able to hire only one.  The decision came down to “fit.”  It wasn’t that she would have been a bad fit, but we just didn’t know her well enough to say that, in this tight employment environment, she would be a good fit.  We knew what she could do; we just didn’t know who she was. The other candidate got the offer; there was less uncertainty about how well she would fit in.” [1]

Let’s face it: some eight months after the end of the Great Recession, this is still a tough employment market for MBAs.  The MBAs headed into this market—many of whom are smart and ambitious—tend to expect employers to figure out the Millennial Generation for themselves.  But this is a buyer’s market in which employers expect to be sold.  Simply proving that you know the stuff of good business isn’t enough: the intangible “fit” with the company’s culture can become a deciding factor.   In short, to get a job offer, you must not leave your employer guessing about who you are; what you stand for; and the extent to which all this is congruent with the values and culture of the firm.

A year ago, I blogged on the importance of “closing the sale,” of finishing strong, and of asking for an offer in an appropriate way—this message is still highly relevant (if you have not seen it before, read it now).  To that earlier posting, I add the advice here: leave an impression about who you are.  Most summer internships for MBAs will end in a couple of weeks or so.  This is late—but not too late—for you to put this advice to good use.  The careful judgment is not whether, but what to say, and how to do it.

What to say. The average twenty-something MBA candidate is still figuring out the finer points of his or her identity [Note: it is not clear that a sentient being ever stops reflecting on his or her identity]; if you seem to be a work-in-progress, it may feel awkward to say frankly and sincerely something about who you are and what you value.   But if you are already in an MBA program, the odds are that you’ve had some practice at this: most applications to selective MBA programs require some insightful disclosure about yourself in those essays.  Been there, done that.  As a general rule, you should focus on relevance and truth.

Think about your listener and what he or she might be interested to learn about you. The vast catalogue of your attributes may not be very interesting to your prospective employer.  Based on your summer internship, what seems to matter most to this firm and its competitors?  What about who you are would be most relevant to the things that matter?  Whom and what do you serve?  What sense of purpose gets you up in the morning?  Is there anything in the mission statement of your employer with which you especially identify?  If you work for a firm in the health care industry, do you feel a commitment to health and wellness?  Companies in the food industry may express a commitment to wholesome nutrition.  In entertainment, it tends to be delight.  In media, it is informing the public.  And so on.

Tell the truth. It will be tempting to say something about yourself that is gauged to please the listener, but is not wholly accurate.  The less diverse the culture (and the more you want an offer) the greater may be the temptation.  But take it from me: it is a very bad idea to deny who you are, and even worse to represent yourself as something different.  The best corporate cultures embrace diversity.  In fact, the company may be interested in you precisely because you bring a different point of view that in the future might help them.

How to say it. “I am” statements are the blunt instruments of helping someone get to know you.  These are really powerful and tend to draw a line in the sand.  Such statements range from the sublime to the ridiculous so be careful.  Descartes tells us he is a thinker; Popeye tells us to look at him and judge for ourselves.

Alternatively, you can tell some stories.  If “I am” statements are the blunt instruments of impression-making, stories are the stilettos: subtle, and highly effective.  Daniel Willingham, a professor in UVA’s psychology department, has written, “The human mind seems exquisitely tuned to understand and remember stories—so much so that psychologists sometimes refer to stories as “psychologically privileged,” meaning that they are treated differently in memory than other types of material.” [2]  He says that stories are easy to comprehend because the audience helps to interpret the action; and stories are much more interesting, which makes them easy to remember.  Willingham says that stories consist of several elements:

·         Causality. Events in the story have some linkage.  “Both of my parents worked, so I spent a lot of time at home alone.  I became adept at entertaining myself.”

·         Conflict. The main character in the story encounters an obstacle on the way to a goal.  “I invented a new software application, but had no idea how to bring it to the market.  I approached some investors and eventually raised some Angel money from family and friends.”

·         Complications. A good story offers some tension: will the protagonist succeed?  “Then Megacorp threatened to sue me for patent infringement and at the same time gave me a low-ball offer to buy all the rights to my software.”

·         Character. Ultimately, a story says something substantive about one or more people—this is the point of telling the story, to say something memorable about you. “I fought the lawsuit, and won.”  Or “I saw how rapidly the field of applications was changing.  So I sold them the software and used the money to bootstrap the founding of my next company.  We invented—and successfully patented—the second generation of application software.”

Close well. Whatever you decide to say, do not lose the opportunity to link who you are with the company you seek to join.  Why is a job with this company consistent with where you’ve come from and who you are?  It would help if there were some joy and enthusiasm in your closing.  In my experience a strong expression of who you are—in a way that is consistent with what the company needs–helps to clinch a job offer.

  1. I have a conversation of this sort at least annually.  Given here is a pastiche of such conversations.  Any implied reference to a specific person is unintentional. [↩]
  2. Daniel Willingham, Why Don’t Students Like School?  A Cognitive Scientist Answers Questions about How the Mind Works and What it Means for the Classroom” Jossey-Bass, 2009, pages 51-2. [↩]

Reform of the Financial System: The Limits to Limits

Published on July 13, 2010 in 2010 Archives. 0 Comments Tags: , , , , , , , , , , .

Something there is that doesn’t love a wall,…

The gaps I mean,
No one has seen them made or heard them made,
But at spring mending-time we find them there….

Before I built a wall I’d ask to know
What I was walling in or walling out,
And to whom I was like to give offence.
Something there is that doesn’t love a wall,
That wants it down.

Robert Frost, “Mending Wall”

Last March, my wife and I took a bicycling trip in southern Arizona.  Staying at an inn near the border with Mexico, we climbed up a hill to see The Fence, the barrier that runs along the border.  This fence is 15 feet high and consists of vertical steel tubes filled with concrete, quite imposing.  But both sides of the fence are littered with empty water bottles, left by immigrants crossing the border.  You see, the fence is surmountable with the help of a ladder.  More importantly, the fence does not run along the border from sea to shining sea.  Some parts of the border aren’t fenced.  When we got to the top of the hill, we saw the end of the fence in the middle of the desert.

U.S. Indian reservations abut the border; the reservations retain just enough autonomy to deny the U.S. government permission to fence their part of the border.  One would think that crossing the border at the Indian reservation would be preferable to surmounting the fence.  And sure enough, from our hilltop vantage point, we saw a file of 20 or so pedestrians a mile distant snaking their way toward the end of the fence.  A momentary transit by a U.S. government helicopter caused the pedestrians to dive under the scrub brush.  But my guess is that they weren’t deterred.  This impression was confirmed later by some officers from the border patrol.  They said that The Fence had slowed, but not stopped, the influx of undocumented aliens.

The Fence is a metaphor for what we are likely to experience after the likely passage of legislation in the U.S. and Europe aimed at tightening regulation of the financial system.  Any day now, the U.S. Senate will likely vote to approve the “Dodd-Frank Wall Street Reform and Consumer Protection Act,” which will

·         allow the Fed to inspect and regulate any institution (bank, hedge fund, insurance company) that is deemed systemically important. 

·          engineer a smoother process for the government to close down insolvent institutions through a process of orderly liquidation. 

·         create the Consumer Financial Protection Agency to fight fraud and abusive financial products and practices.  

·         give shareholders an annual, nonbinding “say on pay” for corporate executives. 

·         regulate the over-the-counter derivatives market.

The influential blog, ft.com/alphaville, opines that the legislation might actually help the hedge fund industry by putting a drag on the proprietary trading operations of large financial institutions.   On the other hand, the swaps and derivatives dealers are unhappy with the uncertainty the bill creates around future rule-making, and who will make them.  Most importantly, no one is ready to declare that this legislation will forestall the next financial crisis.  James Surowiecki, writing in the New Yorker, declares that the legislation is no “panacea.”  And Republicans generally have condemned the legislation as an “empty effort.” 

Doing nothing is not an option: a relatively stable financial system is in the public interest.  The whole debate, in my view, is around the cost of that stability.  Imposing regulation on an industry is like buying an insurance policy.  A savvy consumer should always ask about the price of the insurance and its effectiveness.  Two new books give excellent reviews of the need for regulation and the various proposals.  The Squam Lake Report by Ken French and others condenses the views of leading academic thinkers: it is succinct, dry, abstract, and yet persuasive.  French et alia are careful students of the modern financial system, not wild-eyed Tea Partiers.  The other book is Crisis Economics by Nouriel Roubini and Stephen Mihm, two economists—their outlook is edgier, more critical of one and all, and well informed by research, history, and current events.  Any reader will find at least something to disagree with in each book.  But comparing their discussions to the 2300-page Dodd-Frank Act, one has to conclude that the Act seems to address the important areas of concern. 

But think about The Fence.  Will the legislation prove to be effective at reasonable cost?  We don’t know.  Dodd-Frank gives great discretion to regulators to set rules in several important areas.

1.       Transparency.  In The Panic of 1907, Sean Carr and I argued that systemic instability has at its core an information problem: because of complexity in the system and in individual institutions, it is hard for decision-makers to know what is going on and to take effective action.  As a result, those decision-makers act out of fear rather than rationality.  Thus does a panic begin.  As the authors of The Squam Lake Report write, “Regulators cannot assess the status of the financial system without knowledge of the intersections between firms.  Currently, U.S. regulators do not systematically gather and analyze much of the information outlined above, and the information they do have is often difficult or impossible to aggregate across institutions.  This constrains the government’s ability to foresee, contain, and ideally, prevent disruptions to the overall financial services industry.” [1]     

2.       Adverse incentives.  Dodd-Frank does not resolve the huge moral hazard created by the government interventions of 2007-2009.  Many people supported those interventions on the principle that if your neighbor’s house is on fire, you should help to put it out, lest the fire spread to your house.  But now we must deal with the legacy of those rescues: creditors may now believe that the government will always rescue them—henceforth will they make riskier loans?  “Capitalism without bankruptcy is like Christianity without hell,” said Frank Borman, CEO of Eastern Airlines in the 1980s.  Will market participants devoutly observe sensible practices if there are no consequences?

3.       Global linkages.  The Act considers financial enterprises in the U.S.  But the potential sources of instability extend well beyond our borders.  Nouriel Roubini and others have explored the possibility of establishing a global regulator of financial institutions; but no country seems particularly willing to give up sovereignty to achieve the kind of comprehensive regulation that would be required.  If you want my nomination for the “End of The Fence,” this is it.  Asymmetries in the ways countries regulate the financial services industry will stimulate “regulatory arbitrage.”

4.       Executive compensation.  An annual, nonbinding “say on pay” vote by shareholders may well focus attention on the wrong aspect, the level of executive compensation.  Instead, the recent bubble and financial crisis were rooted in the heads-I-win-tails-you-lose payoffs embedded in the bonus compensation plans of some financial institutions.  The market for talent should dictate the level of compensation.  Let traders and managers be rewarded for excellent performance; but why not let their bonuses be paid in deferred compensation so that they must bear the longer-term consequences of their actions?  It may be that regulators will start to dictate the structure of bonus schemes.

5.       Institutions.  The legislation does not address the failures at Fannie Mae and Freddie Mac, institutions that formerly operated with an implicit government guarantee and were taken over by the government in 2008.  Henry Paulson, interviewed in today’s New York Times, said, ““The root causes of all this are housing policies — not just Fannie and Freddie,” he said, referring to the giant mortgage companies. “That hasn’t been dealt with.””  The Act does address the credit rating agencies, though the regulations may be too little, too late.  William Gross, the iconic investment manager and co-founder of PIMCO said that the NRSROs  “’no longer serve a valid purpose for investment companies free of regulatory mandates’ and urged investors to dismiss their judgments.” 

6.       Too big to fail.   The Act takes no position on busting up banks that are so big that their failure would endanger the stability of the financial system.  But the Act implicitly defers to the regulators’ powers to dictate reserve requirements and require the orderly dissolution of insolvent banks.

Any fence has its own limitations.  On many of the items listed above, Dodd-Frank grants significant rule-making discretion to regulators.  In one respect, it is fortunate that Congress chose not to micro-manage an incredibly complex system.   Even Barney Frank told NPR today, “”If you do it too inflexibly, you’re inviting the businesses to get around you. You need to give the regulators discretion. And people said, ‘What’s the guarantee that this discretion bodes well?’ And the answer is: In democracies, there are no guarantees. Elect good people.”

Might those regulators themselves become victims of “regulatory capture,” the co-opting of regulators by those they must regulate?  Much of the mentality of successful entrepreneurs and business people is aimed at surmounting obstacles in order to grow a business and fulfill its mission.  They will accept the laws and regulations as a constraint and then optimize within and around those bounds.  But the bounds are bounded: the regulations cannot anticipate the ingenuity of business people in the future.  I have sounded similar concerns before (see this, this, this, and this.) 

Above all, this legislation will not “fix” the problem of panics, crashes, and financial system instability.  The authors of The Squam Lake Report suggest that there may be no “fix”: “The economic hardships triggered by the World Financial Crisis have caused government officials and citizens around the world to demand regulatory reforms that will prevent financial crises.  There is no reasonable way to accomplish this goal.  Financial crises have recurred throughout modern history.  …We expect that financial crises will continue to happen for centuries into the future.  Our goal is not to prevent such crises but to reduce their frequency and severity.” [2]  Similarly, Roubini and Mihm wrote, “Far from being the exception, crises are the norm, not only in emerging but in advanced industrial economies.  Crises—unsustainable booms followed by calamitous busts—have always been with us, and with us they will always remain.” [3]

It is said that most dieters successfully lose some pounds—and eventually regain them.  For a person to shed weight and keep it off requires not merely the gimmick of the diet, but actually a transformation of one’s lifestyle, an internal discipline, a wall.  Most dieters aren’t willing to give up the way they used to live: too much food, too little exercise.  They circumvent the wall.  Like the overweight dieter, America is carrying too much debt, is running a negative trade balance, has huge fiscal deficits, and hopes that the dollar will continue to be the stable reserve currency of the world.  The Dodd-Frank Act may have some modest impact on our national health.  But in order for us to avoid the kind of financial instability we’ve just lived through, we’ll have to change our lifestyle: save more, consume and import less, retire later, and for a while, endure more unemployment and perhaps pay more taxes.  Whether Americans have the discipline for this is the main question.  Something there is that doesn’t love a wall.

  1. The Squam Lake Report, page 48 [↩]
  2. The Squam Lake Report pages 149-150 [↩]
  3. Roubini and Mihm, Crisis Economics page 4 [↩]

4th of July 2010: Independence From and To

Published on July 4, 2010 in 2010 Archives. 0 Comments Tags: , , , , , .

A few score of immigrants were sworn in today as U.S. citizens at Monticello, the home of Thomas Jefferson (third U.S. President and founder of University of Virginia.)  The new citizens pledged to “absolutely and entirely renounce and adjure all allegiance and fidelity to any foreign prince …potentate, state or sovereignty.”  These words sound quaint in a world where oath-taking has become a rarity.  But the solemnity of the event ensured that none of these new citizens was kidding.  They are buying in to America seriously.  A reasonable question on this Independence Day is “Why?”    

America does have its problems: hostilities in Iraq and Afghanistan, historically high indebtedness, high unemployment, sagging economic confidence, an environmental catastrophe in the Gulf of Mexico, rising distrust of major institutions in society such as government, the media, and business—to name a few.  (One can’t find a developed country in the world that isn’t feeling considerable pain at present.)  But whatever impulse toward triumphalism and exceptionalism that an American might feel today, the current state of the world might warrant some humility.

Still, naturalized citizens tell a bright story: liberty, freedom of speech, and opportunity motivate their move.  They want to make a better life for themselves—this is what used to be called, “the American dream.”  Out of some 210 countries in the world, worldaudit.org ranks the U.S. in the top 10% on the basis of democracy, press freedom, economic freedom, civil liberties, and low corruption.  This is consistent with other rankings, such as those by the Heritage Foundation, Reporters Sans Frontieres, and the World Bank.   The U.S. remains the world’s largest economy.  It is an extraordinarily creative country, judging by the success of industries as varied as entertainment (Hollywood), media (cell phones), information technology (Apple, Google),  transportation (Boeing), medicine (Amgen, Celgene, Genzyme), retailing (Wal-Mart, Target, Best Buy), and so on.  It remains a leader in research.  Each year, it draws a large share of Nobel Prizes and similar recognitions for high achievement.  Its universities are strongly represented in various global rankings.  And it offers one of the most welcoming environments for entrepreneurs and inventors.  Each year, a huge volume of new businesses is started in the U.S.  Though many of these do not survive indefinitely, America offers a culture of second chances.  In short, this country offers the opportunity to take risks toward the goal of making a great life.

One other motive merits some consideration.  Each year, I get to know dozens of international students who enroll in Darden’s MBA programs.  These people are pioneers in the best sense of the term: making a big gamble with financial support from family and friends; surmounting differences in language and culture; working hard; looking forward with optimism; and taking risks.  Many aspire to start and lead a company (research suggests that immigrants are 30% more likely than native-born Americans to start their own business.)  These students tell me in many ways that they have come to Darden and America to prove what they can do in the context of other excellent students. 

Perhaps America is a magnet for talented visitors and immigrants because it is a proving-ground for excellence.  Two other bits of information lend some credence to this:

1.  Why do foreign firms choose to offer their stock for sale in the U.S.?  In a couple of research articles, Susan Chaplinsky, Latha Ramchand, and I looked at initial public offerings of stock in the U.S. by foreign firms.  You might think that distance and unfamiliarity would prompt U.S. investors to demand a higher return from these foreign issuers.   In one article, we reported that there are no discernable differences between U.S. and foreign firms in the cost of issuing stock in the U.S.   And in the other paper, we concluded that even for firms from the riskiest countries (i.e., the so-called “emerging markets”) the costs of issuance were immaterially different.  We found that the markets weren’t necessarily indifferent to the riskiness of the foreign home countries.  But rather, only the best firms actually made it to the U.S. markets.  Thus, to make a successful initial public offering in the U.S. is quite a mark of quality.  This is consistent with anecdotal evidence from CEOs and CFOs that the very demanding securities laws and listing requirements, and the sophisticated investment community in the U.S. hold a high standard relative to many other countries in the world.  To issue stock here is to be world-class.

2.  Why are foreign b-schools setting up shop in the U.S.?  I chair a task force of b-school Deans on the globalization of business education.  (More about this in coming months.)  In that capacity, some journalists called me to invite my comments on the entry of non-U.S.-headquartered b-schools into the U.S.  I said to one journalist, that entry is an interesting choice on the part of these schools: “We have an abundance of schools here and usually the idea is to go where the competition isn’t.  The schools are driven a desire to establish and succeed in the U.S. as a basis for validating their models. Aiming to have a successful business school in the United States is like wanting to see your plays produced on Broadway — the audiences are most discerning.”  To another journalist I said, “”The U.S. is where the MBA was invented and, to some extent to establish a footprint in this market, is an additional means of legitimizing a school’s brand and stature globally.”   Alice Guilhon, Dean of the French b-school, SKEMA, said, “For European students, this is a dream; America is a dream for them.  And it is a dream for us, to be known in the U.S….To be in America is to be close to the headquarters of all the big firms, to be where the story began. …To be well-known in America, it is leverage for the visibility of the school in the world.”  David Bach, dean of programs of Instituo de Impresa, another entrant, said, “… you have very sophisticated customers. … we want to show that we can have success in such a competitive, difficult market.”

All of this has led me to reflect on what all of us are celebrating this day.  Is it independence from?  Or is it independence to?   Much of the focus is on the Declaration of Independence from Great Britain on July 4, 1776.  But I will lift a toast to the notion of independence to –through the Declaration of 1776, our founders created an independent society where it is possible to strive in world-class competition, to prove your personal best, to test yourself against strong competition, and to leave a mark on the world of which you will be proud.

Graduation 2010: Figuring Things Out With Questions

Published on June 11, 2010 in 2010 Archives. 0 Comments Tags: , , .

“The more I know, the less I understand/ And the things I thought I’d figured out, I have to learn again.” — India Arie, The Heart of the Matter

Hearing the words of this popular song inspired my remarks at Darden’s graduation ceremony last month. My experience as a teacher and leader leads me to doubt that one definitively “figures things out,” attains pure understanding. All kinds of things get in the way: we see, but don’t recognize; we listen, but don’t comprehend; insights are garbled in transmission; or there is simply too much noise in the environment. Maybe the best we can aspire for is an approximation of true understanding, like the curve that asymptotically approaches but never touches the ray. If so, India Arie is correct that we have to learn again and again. What matters therefore is the process of questioning by which one tries to figure things out. So it was that on May 24th I offered the following comments:

I have some advice for the Class of 2010. I welcomed you to Darden in August 2008. Over the following months, the world changed profoundly. In a short space of time governments around the world rescued financial institutions, took over industrial companies, and mounted enormous economic stimulus packages. And you know the rest of the story. Your time at Darden has witnessed extraordinary events in markets and the world, which may well mark the end of one era and the beginning of another. At moments like this, the ability to ask good questions becomes a competence of paramount importance.

Darden has quite a lot to say about this competence. Indeed, how we teach is what we teach. The case method classroom is all about inquiry. As a method of teaching, this is quite successful because conversation is transformational.

What makes it so? The quality of the questions one asks. Our alumnus, George David, recently retired as CEO and Chairman of United Technologies Corporation, which is one of the largest firms in the world. He has a process that he calls “fifty questions.” When he visited a manager or a plant, he didn’t settle to listen passively to a set-piece presentation. Instead, he actively engaged his managers in a curiosity-driven process. Darden teaches you not to be shy about questioning. The Chinese have a proverb: “He who asks a question is possibly a fool for a moment; but he who does not ask a question remains a fool forever.”

You can manage by questioning. Engage your people at work the way we engaged you here: question-question-question. Good questions outrank easy answers. Those who question tend to do better than those who give answers. Be a curiosity-driven manager. If you’re not satisfied with the answers you get, ask again and ask differently. Use questions to coach one another. Use questions to set high standards. Most of all, use questions to set a tone of integrity. This is what Thomas Jefferson would have wanted.

I tell you this, because to question well requires an acute level of attention. When I welcomed you to Darden in 2008, I told you that “You must be present to win.” What does it mean to be “present”? It means to be prepared, to participate, and to reach out to others in the community. You’ve probably heard that Woody Allen once said, “showing up is 80% of success in life.’ Well, I disagree. More accurately, being present is 80% of success. Just showing up doesn’t cut it anymore.

And be present for Darden. Recognize that you are the brand. Everything you do will make an impression about what the Darden School is: what we value, how we do things, the quality of our thinking and teaching, and so on. Part of being present for Darden involves speaking up for Darden. Through your actions and words, let the world know who we are. Truly, at Darden, how we teach is what we teach. We wish you well on the life journey that lies before you. Good luck and Godspeed.

Return on the Educational Investment

Published on May 21, 2010 in 2010 Archives. 0 Comments Tags: , , , , , , , , , , , , , , .

Here we are at Darden’s graduation weekend. The Class of 2010 justifiably celebrates the achievement of an MBA degree and various other awards and recognitions. This follows a great deal of hard work, long hours, and the expense of a lot of money. By now, I never hear students question whether it was worth it. They know the answer: yes.

A new piece of research by Robert Barro of Harvard and Jong-Wha Lee of the Asian Development Bank confirms what the students already know. The researchers find that the return from investing in a year of tertiary education (college or graduate school) averages 17.9%. Compare that to the returns from investing in real estate, stocks, bonds, or most other asset classes, and you conclude that investing in your own human capital is about the best investment you can make.

Of course, monetary returns measure only part of the gain. Richard Feynman, the physicist and Nobel Laureate once said that the accolades meant little to him—what mattered was the “joy of finding things out.” Universities are replete with students and scholars who study simply for the joy of finding things out—and joy can’t be measured. Sure, come to a university to qualify for a higher salary. But better yet, come to a university for an education that prepares you to enjoy a life full of nuance, social awareness, and personal impact.

My hope for the graduates in Darden’s Class of 2010 is for educational success defined not merely in ROI, but also in joy.

Choosing an MBA Program–Where Can You Do Your Best Work?

Published on May 6, 2010 in 2010 Archives and Archives. 0 Comments Tags: , , , , , .

Darden is in the talent discovery and development business. We look pretty far and wide for excellent inbound talent with which to fulfill our mission, “to improve society by developing principled leaders for the world of practical affairs.” And then we work very hard to develop that talent to have a transformational impact in the world. At this moment every year, we are well into the talent discovery cycle. Letters of admission have gone out for our MBA Full-Time Program and our MBA for Executives Program. About now, the candidates’ questions focus intensely on parsing out the differences among schools. Deposit deadlines are approaching. The candidates must decide, “Which school should I attend?”

As I told a group of admitted applicants at Darden recently, I have one consideration that dominates most others. Issues such as cost, convenience, geographic location, brand, alumni network, job placement, and others all arise in the candidates’ thinking, and justifiably so—but they are dwarfed in significance by the consideration I will tell. All too often, this consideration is a stealth issue that is overlooked entirely in choosing a school and then later discovered too late and with regret. My point is that it is far better to grapple with it now.

A few years ago, I was counseling a second-year student who had received two job offers and was trying to choose between them. The dilemma was stark: on one hand, high pay at a large, well-known firm in a big city to be part of a three-year leadership development program that would rotate him through many different jobs quickly. On the other hand, there was an offer for frankly low pay, to work for an unknown rapidly-growing small firm located in a dodgy neighborhood where the student would be a general manager from day one. The realities of student loans and economic uncertainty being what they were, the student was leaning toward the high-pay job offer. He seemed to be looking for my blessing on the choice.

Instead, I asked him, “where can you do your best work?” The look of astonishment on the student’s face told me that this was a new way of thinking to him. He offered some blah blah blah about hypothetical career progression. I politely suggested that he go away and think some more about my question. Not long after, he accepted the job with the small company. A few years on, he is successful in every way: happy, well-compensated, a big cheese in a much bigger company, and doing the work he feels ready and able to do. I’m glad that he and I had the conversation when we did. But the end of an MBA program is a little late to start thinking this way.

My advice to admitted applicants is to start wrestling with the question right now. “Where can you do your best work?” It’s deceptively simple and radically challenging. You must define for yourself two words in particular: