Bubble Watching

The S&P500 Index crossed the 2000-mark this past week, fueling more wonderment at the lofty levels of equity prices. As I explained in a recent op-ed, high prices may be telling us something new about innovation that we don’t already know. But in recent meetings with investors, business leaders, and academics, there remains an undercurrent of concern about bubble-like conditions in the markets. The dominant question is, “How do we know if we’re in a bubble?”

What’s a “bubble”?

You must start with the fact that “bubble” conveys a general notion of excessive pricing and irrational investing—but it lends no clarity or bright line to distinguish really dangerous conditions from benign optimism. Peter Garber notes “bubble …is a fuzzy word filled with import but lacking a solid operational definition….if we have a serious misforecast of asset prices we might then say that there is a bubble. This is no more than saying that there is something happening that we cannot explain, which we normally call a random disturbance. In asset pricing studies, we give it a name—bubble—and appeal to unverifiable psychological stories.” [1]

Thus, the absence of science about bubbles summons two rules for bubble-watchers:

· Humility foremost. You have no crystal ball. Therefore, one’s assertions—no matter how emphatically believed—must be tempered with respect for the enormous uncertainty surrounding them.

· Bubbles are best-known in retrospect. Alan Greenspan, Chairman of the Federal Reserve, with all the power and informational advantage of that office, was unpersuaded of a bubble in housing in the mid-2000s. His memoir is worthy reading, on the difficulty of identifying bubbles and of implementing policies to deflate them.

How do we know if we’re in a bubble?

In our book, The Panic of 1907, Sean Carr and I summarized some prominent attributes near the peak of a bubble in asset prices:

  1. Dramatic rise in prices reflected in aggressively high valuation multiples and transactions compared to historical averages.
  2. Buoyant demand for the assets: oversubscribed initial public offerings in equities, numerous participants in auctions for companies, natural resources, and real estate.
  3. Optimism about the sustainability of future price increases.
  4. Entry into the market by naïve, inexperienced, and unsophisticated investors. Bernard Baruch sold his stocks in early 1929 when he started receiving unsolicited stock tips from his shoeshine boy.
  5. Talk of a “new paradigm” rendering long-standing investment maxims invalid. Such was the case during the Internet boom. “This time it’s different” is one of the most dangerous attitudes in investing.
  6. Jumbo deals. These deals change the competitive landscape and/or frame of reference for investors. Travelers Insurance acquired Citicorp in 1998, signaling the end of the regulatory ban on universal banking. The audacity of jumbo deals serves to reinforce “new paradigm” thinking.
  7. Innovations in instruments, institutions, and markets. Leading up to 1907 were the creation of trusts, new national consumer-branded products, and the spread of the telephone, automobile, and household electricity. Joseph Schumpeter heavily emphasized the role of the inventor and entrepreneur in triggering new phases in economic cycles.
  8. Aggressive financing. Banks lower their credit standards to the benefit of borrowers who lots of cheap credit.
  9. Regulators and other watchdogs relax their monitoring of financial intermediaries and investor behavior.
  10. Positive economic news. A recent stretch of growth.
  11. Media hype and considerable popular interest. Rising prices, huge profits, jumbo deals, often to the benefit of Everyman and Everywoman, garner front-page stories.

Several of the items on this list don’t fit the bubble profile as of Labor Day weekend 2014: #10 (positive economic news/growth—few people believe the global economic fundamentals are terribly buoyant); #9 (relaxed watchdogs—the SEC, CFPB, and DOJ seem more rather than less active these days); #5 and #3 (new paradigm thinking and optimism really don’t characterize the investment buzz these days). Absent these points, conditions don’t yet look like a bull market stampede.

On the other hand, some genuine jumbo deals are recently completed or currently pending (#6: USAirlines/American, Valeant/Allergan, Burger King/Horton’s, Family Dollar/Dollar General/Dollar Tree). Global M&A volume is at a seven-year high—so is the global volume of initial public offerings.

And the value of subprime loans is growing, which may go hand-in-hand with the entry of new and inexperienced players in the markets. Recently, the New York Times reported “explosive growth” in the volume of subprime loans for the purchase of used cars.

And, as I discussed in the previous post, prices seem high relative to historical price/earnings ratios. Here’s one measure, favored by Warren Buffett, the market value of US Companies as a percent of the Gross National Product (see more at Bloomberg).


Then, too, there is the concern about aggressive financing. While the whole economy may not feel growing indebtedness, some segments are booming—see the following graph on the call loan market, which fuels equity trading (see more at dshort.com):


Watchful Waiting—and Learning

There is no substitute for vigilance toward bubble-like market conditions. But this doesn’t seem like one of those moments, just before the bursting of the dot-com bubble in early 2000 or the peak of the subprime bubble in 2007. Conditions could melt down for a variety of reasons, unrelated to the bursting of a bubble.

One helpful resource for paying attention to market conditions will be this year’s University of Virginia Investing Conference—November 13-14—the theme of which will be “Investing in Innovation.” Innovation is perhaps the most important foundation for growth, and PVGO. The conference will offer insights about growth prospects in fields such as information technology, energy, health care, and monetary policy. Once again, we are booking an impressive collection of speakers. As of today, speakers will include these (additional speakers are in the offing):

Charles R. Cory (MBA ’82), Chairman of Global Technology Investment Banking & Managing Director, Morgan Stanley
• Richard Fisher, President & CEO, Federal Reserve Bank of Dallas (schedule pending)
• W. Barnes Hauptfuhrer (MBA/JD ’81), Chief Executive Officer, Chapter IV Investors
• Robert J. Hariri, Founder, Chairman & Chief Scientific Officer, Celgene Cellular Therapeutics
• Ned Hooper (MBA ’94), Partner, Centerview Capital
• Robert J. Hugin (MBA ’85), Chairman & CEO, Celgene Corporation
• Samuel D. Isaly, Managing Partner, OrbiMed
• Nancy Lazar, Partner, Cornerstone Macro
• John Siegel, Partner, Columbia Capital
• Michael Sola, Portfolio Manager, T. Rowe Price
• Kathy Warden, Corporate Vice President and President, Northrop Grumman Information Systems  

Today’s financial market conditions are due to a blend of buoyant investor psychology and genuine growth opportunities. If so, this puts a high premium on thinking critically about investment themes, trends, and market sentiment. Conferences are one excellent means of sharpening your own thinking. Join us in November!

  1. Peter M. Garber, Famous first Bubbles: The Fundamentals of Early Manias, Cambridge: The MIT Press, 2001, page 4. []
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Preparing Women for Leadership in Business–What Darden Is Doing

Last April, I blogged about my reflections on the status of women in business schools. My post followed various meetings I’d had with a range of corporate leaders, Admirals in the Navy, and senior counselors in the White House. I was struck by the unanimity with which they expressed the need to develop more women in the rising generation of leaders. I concluded that there is increased consensus regarding the importance of gender diversity and inclusion in American business society and that no one thinks the progress is acceptable—nor do I.

Women hold up half the sky, but they account for only a small fraction of senior and middle-managers, corporate directors, partners of professional service firms, entrepreneurs, etc. The reasons for this have to do with cultural, legal, and economic factors, many of which seem to be changing. Although the women’s movement, which began several decades ago, has led to increased opportunities for women, there still needs to be a larger societal commitment to developing extraordinary women leaders. This development should begin in early childhood and progress through post-secondary education. Leading business schools have a vital role to play.

Where is Darden in this? In 2015, Darden will celebrate 50 years of women business leaders. We want Darden to be the go-to place for women executives of exceptional talent and promise. We have undertaken a range of initiatives to prepare women for leadership in business. Let me describe these.

As preface to this sketch it is useful to state the obvious: schools will find it easy to do something—the question is, “Are schools doing the right things, to ensure that women are well-prepared to excel in business school and in the business world?” As I discussed earlier, b-schools are focused on trying to determine what is right. Therefore, this feels like a pivotal moment. No less is happening within Darden. There is no checklist, guidebook, or user’s manual that dictates what business schools should do right. Thus, Darden is intentionally trying a range of experiments, projects, and prototypes. Distinguishing doing the right thing from doing just something is our intention – both within Darden and in the world of practice. This requires careful design and evaluation that inform ongoing efforts. What follows is not just a list of some things, but rather our path toward the right things.

Consider these activities under three umbrellas:

· Educating women about business school and encouraging them to enroll at Darden.

· Providing opportunities for women to develop as leaders while they are students at Darden. The necessary conditions for development are intrinsic motivation and opportunity, which is why we emphasize “opportunities.”

· Empowering women graduates of Darden to advance their careers through networking and professional development

1. Darden aims to educate women about business school and to encourage them to enroll.

Program for Prospective Student Women. Darden is known for having a tight-knit community. In order to give women in the pipeline a more personalized introduction, the Office of Admissions and the Graduate Women in Business club offer the 1:1 Program for prospective women students. The program pairs prospects with a current woman student mentor in late summer to facilitate a one-on-one connection with a member of the Darden community. Previous participants have found that this is not only an excellent way to learn about the School, the student community and the myriad academic opportunities and resources but also to explore the many issues facing women pursuing graduate business education.

Sponsor of the Forté Foundation. Darden is proud to be a founding partner of the Forté Foundation, a non-profit consortium of top companies and leading business schools committed to helping women pursue leadership roles in business. While every woman at Darden can join Forté, each member school also has the opportunity to select Forté Fellows, who receive merit-based scholarships based on their outstanding professional, academic, and personal accomplishments. In addition to the financial support provided through fellowships awarded by individual Forté member schools ($45MM in scholarships awarded to 2,300+ recipients), Fellows gain exposure to leading companies in the Forté network, as well as an immediate peer group of Fellows that extends beyond their individual business school. Darden typically has approximately 40 Fellows per academic year. All women at Darden with a $10,000 scholarship or greater are Forté Fellows.

2. Darden provides opportunities for women to develop as leaders while they are students.

Darden’s student club, Graduate Women in Business (GWiB), is leading a range of initiatives.

  • Mentoring program. Each year, First Year (FY) and Second Year (SY) female students are paired up as mentor and mentee. This provides incoming women with a resource to ask any and all questions they may have – from how to best prepare a case to getting ready for an interview.
  • Relationships across Grounds. GWiB has connected with the University of Virginia McIntire School of Commerce’s women students in a networking and mentoring capacity. Seven Darden women sat on a panel hosted by McIntire to discuss the process of applying for graduate business school.
  • Annual conference and workshops. GWiB is active in sponsoring a well-attended annual conference, which often features alumnae in key speaking roles. They also sponsor smaller workshops and panels throughout the academic year. Additionally, GWiB held a negotiations workshop with Professor Melissa Thomas-Hunt to teach students how to become better at negotiating their pay/salary/signing offers.
  • Friends of GWiB. The impetus for the program was for women students to invite their male peers to be involved in the conversation about women in the workplace. Men have always been welcome to join as traditional GWiB members, but this initiative was developed to actively seek them out. Some of the goals and activities include: educating male peers on what exactly women discuss when they gather in professional settings and educate them on general “workplace issues”; including faculty members who have had a breadth of experience and could provide an alternate view and voice to the conversation.
  • Points of contact. GWiB has a 1:1 program that matches prospective women applicants with current women students.
  • C-suite contacts. Several prominent alumnae have reached out to GWiB to host small group gatherings in Charlottesville to provide engaging conversation and advice.

Women in Success Seminar (Professors Luann Lynch and Mary Margaret Frank). A popular seminar last academic year, it entailed field interviews of men and women business leaders; class discussions of readings on women leaders and the challenges facing women in leadership (such as Sheryl Sandberg’s book, Lean In); and essays on women leaders and personal reflections on success.

NOLS Leadership Program. Professor Yael Grushka-Cockayne led a National Outdoor Leadership School (NOLS) leadership program that took place in January. Each student had the opportunity to lead a daily expedition in the Arizona desert. Thirteen students attended (7 men and 6 women) and one alumna. The course focused on developing leadership through leveraging diversity and inclusion.

Newly Transformed Career Education for All Current Students. A series of discovery forums take place the first week on Grounds for FY students. The forums include:

· Perspectives on Career Success

· Being an Adviser to Corporations: Careers in Consulting and Investment Banking

· Becoming a Corporate Leader I: Careers in Marketing, Strategy and Business Development

· Becoming a Corporate Leader II: Careers in Finance, Operations and Supply

· Becoming an Owner: Paths to Consider Now and in the Future

· Mission-Driven and Global Opportunities: Perspectives from Darden’s Institute for Business in Society and Center for Global Initiatives

Second Year Coaches. A unique feature of Darden’s career development offerings is the SY Coaches program. In addition to being assigned a professional, functionally-aligned career advisor, all FY students are assigned a SY coach based on various industry categories.

Leadership Speaker Series. Darden actively seeks to bring to Grounds women who are role models of leadership. Four of the nine speakers last academic year were women:

Martina Hund-Mejean (MBA ’88), Chief Financial Officer of MasterCard Worldwide; Carolyn Miles (MBA ’88), President & CEO of Save the Children; Lorna Donatone, Chief Operating Officer, Sodexho; and Sharon Decker, Secretary of Commerce of the State of North Carolina.

Surveys of the Experience of Women Students and Alumnae. We conducted focus group meetings on the experiences of women in their learning teams. In addition, we prepared a survey with GWiB of SY women about their FY experience. Darden’s alumnae are more engaged than the alumnae population of business schools in general.

Women@Darden Initiative. The purpose of this initiative is to examine and recommend actions to improve the quality of the Darden experience for prospective and current women students and alumnae. We are at the beginning stages of an enterprise-wide effort to engage faculty, staff, alumnae and other key stakeholders on how Darden can bolster our women students and alumnae. Under the umbrella of a steering committee, three sub-committees will examine:

· Women student recruitment and admission. Increasing the number and quality of women students is very important to sustaining the strength of Darden’s learning experience. We will focus on increasing the number and quality of women prospectives applying to Darden. The aim is to increase the number of women students enrolled in all of Darden’s MBA programs.

· The experience of women both inside and outside of the classroom. Improving the Darden experience for women students benefits all students. We focus on curricular and co-curricular content and student experiences. And we will consider how to increase financial aid for women students.

· Alumnae engagement. A robust alumnae engagement effort is central to honoring Darden’s mission of developing and inspiring responsible leaders and advancing knowledge. We aim to increase the quantity and quality of alumnae engagement opportunities.

3. Darden empowers alumnae to advance their careers through networking and professional development.

Darden’s Armstrong Center for Alumni Career Services (ACS) provides career help for all alumni—and specific programs for assisting women:

  • One-on-one Career Advising and Coaching. ACS provides unlimited number of sessions to our alumni to assist in all areas of career management with the majority of that coaching in the area of career transition. In this capacity, ACS has worked with 33% of our total number of alumnae. Coaching on how to “stay in,” “get back in,” or “rise in rank” is common.
  • “Re-entering the Workforce” workshop for alumnae conducted by Darden ACS. This two-month long workshop (including pre-work, two day-long sessions and follow-up) has been delivered to over 200 participants in seven locations (Washington, D.C., Boston, NYC, London, Palo Alto, Atlanta, Chicago). The workshop includes self-assessment, evaluation of work-life fit issues, the redevelopment of one’s professional brand and job search techniques after a hiatus.
  • Pay Equity. ACS and CDC coaches assist individuals one-on-one with salary negotiations – assisting in research of market rates and strategies to negotiate for the highest possible compensation often pointing out gender differences in negotiating and helping women avoid common pitfalls.

Volunteer leadership positions on Darden’s boards, advisory groups, and local clubs. We are actively recruiting alumnae into leadership positions. This affords them opportunities to network and exercise skills such as communication, advocacy, facilitation, and team-building. This summer, Elizabeth Weymouth (MBA ’94) was elected Vice Chair of the Darden School Foundation Board of Trustees. She will rise to Chair of the Board in 2016. And the Women@Darden initiative has energized more alumnae to organize new local groups.

Alumnae Engagement. Generally, we are striving to improve and strengthen Darden’s engagement with alumnae. The mission of the alumnae groups in Washington, D.C. and New York is to:

· Engage – through networking and relationship building, our objective is to keep Darden’s women support for one another strong and valuable.

· Education – through relevant and provocative presentations, readings and discussions, our goal is to keep Darden as a key component of our ongoing professional development.

· Service – through monthly interactions, our objective is to collectively create opportunities to serve the Darden community.

In addition, alumnae groups are forming in other localities.

Executive Education. Darden’s highly ranked Executive Education open-enrollment programs focus on leadership development, including The Women’s Leadership Program and The Executive Program. Other programs include: Leading Organizational Effectiveness; Managing Individual and Organizational Change; Power and Leadership: Getting Below the Surface; and Servant Leadership: A Path to High Performance.


Darden’s Class of 2014 graduated last May having achieved some milestones. These include having the highest percentage of women enrolled (35%) and the highest percentage of women in positions of leadership of clubs and student government (60%) in Darden’s history. Women presidents ran some of the School’s largest clubs, including the Consulting Club, Marketing Club, Finance Club and General Management and Operations Club.

I heard the Class of 2014 student evaluation of their learning experience at Darden: women expressed a high level of satisfaction, consistent with men. And this month, two of the three new faculty members hired this year are women—adding strength to a great team of women professors. These and other metrics suggest that Darden is making strides in contributing to the preparation of women for leadership in business. I’m pleased to report that the Class of 2016, which we enrolled last week, is poised to make its mark.

…And I would say that work remains to be done, for Darden and all b-schools. Excellence is a moving target. The initiatives that schools take today are merely a foundation for strides we must make tomorrow. What is at stake is not just the role of women, but rather the caliber of all leadership: Sheryl Sandberg, COO of Facebook, wrote, “In the future there will be no female leaders. There will just be leaders.”

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From Quarterdeck to Forecastle: Welcome to the Class of 2016

[This afternoon, I welcomed the Darden Class of 2016 to the school. What follows are approximately my remarks.]

On vacation some years ago, I signed on as a crew member of a tall ship in the North Sea. This was a reproduction of an 18th Century frigate: three masts, a great deal of rigging, and cramped quarters. We stood watch, four hours on and four hours off, so it was impossible to get a good night’s sleep. When the wind changed, everyone was put to work hoisting sails or stowing them—this had to be done, in good weather and bad. I’m not wild about heights, especially when on a rope ladder high above a rolling ship. The food, prepared by a cook, was mediocre at best. By the end of the week I was exhausted.

When I returned from vacation, I told a friend that I had had a great experience. He shook his head in disbelief and said, “What was great about it? You’re a leader at Darden but you spent the whole week as an unpaid laborer who had to take orders from the captain. Lots of shouting; do this and do that. There was no rest and relaxation. What were you thinking?” My reply to him contains some ideas that are relevant as you embark on your own journey at Darden.

I should say that my reflections on that experience have continued over time. Ann Landers, the advice columnist, famously said that in school you get the lesson first and then the test; but in life, you get the test first and then the lesson. That sailing experience was a real test. And the learnings have followed.

In Herman Melville’s novel, Moby-Dick, the main character explains why he wants to go to sea as an ordinary sailor. The year is maybe 1850 and the voyage is to be on a whaler. It is hard and dangerous work. Why would someone do this? The lead character explains,

“I always go to sea as a sailor, because of the wholesome exercise and pure air of the fore-castle deck. …for the most part the Commodore on the quarter-deck gets his atmosphere at second hand from the sailors on the forecastle. He thinks he breathes it first; but not so. In much the same way do the commonalty lead their leaders in many other things, at the same time that the leaders little suspect it.”

Think about it. Melville is saying that the folks away from the seat of power know something more than do the leaders. To go down from the important place you are used to, to a place at the front of the ship teaches you things that you can’t get on the quarterdeck.

The post on the frigate that I liked best was standing watch at the bowsprit, the forward-most point of the ship. You are there all alone looking forward through the fog, trying to understand what you are sailing into and then communicating it in a way that the people back on the quarterdeck can understand. You are the first person to get a glimpse of the future. This is a view that can’t be had elsewhere on the boat. And the experience is magical. The playwright, Eugene O’Neill, wrote,

“I lay on the bowsprit, with the water foaming into spume under me, the masts with every sail white in the moonlight towering above me. I became drunk with the beauty and singing rhythm of it, and for a moment lost myself. Actually lost my life. I was set free—dissolved in the sea, became white sails and flying spray, became beauty and rhythm and the high dim-starred sky—I belonged within a unity and joy to life itself.”

To feel “lost,” “drunk,” and “dissolved in the sea” is akin to what many artists, athletes, and leaders have described as the sense of flow : fully immersed, energized, and feeling intense joy of being at the head of their field, the top of their game, at the point of the bowsprit. It’s easy to see why flow might happen at the bowsprit: it’s where one is looking out to the wider world, looking ahead, and indeed, looking inside oneself. At that kind of moment, you are fully invested in what you do.

Metaphorically, the bowsprit and forecastle represent the frontier of your field or your enterprise. It’s the place where one learns the most. Today, so much of what we value about business and capitalism—such as invention, efficiency, effectiveness, adaptability—depends on how organizations and people learn. Melville challenges us that the best learning may not be on the quarterdeck (at the back of a ship), but rather on the forecastle (toward the front).

The big idea here is that from time to time in one’s life, one must step down from the quarterdeck in order to take risks, get out in front, learn, and grow as a leader. The quarterdeck can be its own little world, freighted with tradition, security, and old assumptions about how the world works. From the back of the ship, it is certainly more difficult to look out ahead.

I’m telling you this because you-all are like me on the frigate: most of you have left interesting and comfortable circumstances to get out to the frontier of ideas and learning. You’ve been here one week and are probably wondering what you’ve gotten yourselves into.

This is the right time in your lives to be here. Many graduates have volunteered that Darden was a transformational experience; it changed their lives for the better. I believe you will say the same.

So, to conclude the story, what I replied to my astonished friend went something like this: “It was a great experience because of what I learned about myself and others; I grew in confidence. And I gained an incredible new perspective on teamwork and nature that couldn’t be obtained any other way. I learned that followers can lead the leaders. When you lose yourself in a worthy challenge, you can actually find yourself. And I found that the forecastle can be a better place than the quarterdeck. I had to live the experience to learn those insights.”

My experience on the frigate suggests the frame of mind you will need so that 21 months from now, you can say that Darden was a “great experience.”

  • Trust the process. Trust that the questioning by the professors is leading you somewhere. They want to help. And you came to study with the world’s best teachers. So, form a relationship with them that feeds your development. Don’t look for grandiose speeches, easy answers, or compliments; look for wise and candid feedback. Accept and admire professors who demand your very best.

  • Be present. I saw a sign once at a Las Vegas casino. It was hanging over the roulette table and said, “You must be present to win.” This meant that you could not place your bets and then leave the table to get a drink or see a friend, and return later to pick up your winnings. You had to be present when the winnings were declared, in order to get them. So it is at Darden. You must be present to win. “Being present” means being mindful: self-aware of your state of mind and your impact on others. And it means being socially aware of what’s going on around you. You can’t “zone out” and get the rich transformational experience that Darden offers. Mindfulness is one of the top attributes of high-performing leaders. So this is good practice for your future. When I describe Darden as a “high touch” community, I’m referring to a community where students, faculty, and staff are present and engaged actively in the learning process. “Being present” also means engaging others who may be very different from yourself—a different race, nationality, sexual orientation, or gender for instance. Make a serious effort to see the world through their eyes. Befriend those people. Share the Darden experience with them. If you find yourself drawn constantly to a few classmates just like yourself, you aren’t really present. If you don’t test your assumptions about people different from yourself, you aren’t really present. If at the end of two years, your comfort zone is no larger than it is today, you have not been really present.

  • It’s a marathon, not a sprint. Pace yourself. There are lots of enticing activities at Darden. And you don’t need to do them all at once. Find your sustainable stride and patiently head toward the finish line.

One final reflection: the bowsprit and forecastle are vivid metaphors for me yet today. As most of you know, in 11 months, I’ll make a transition from the quarterdeck of the Dean’s office to go back to the forecastle of faculty and staff. I’m content and think this makes great sense for Darden and for my life at this point.

So if I can model something for you this year, it is the virtue of periodically stepping down from the quarterdeck and moving to the forward-most point of your environment or enterprise. Being Dean has been tremendously fulfilling. And I’d like to get back on the bowsprit, looking forward through the fog. In the next 21 months, you and I will be there together.

I believe that you will succeed beyond your dreams if you commit very deeply to the experience ahead of you. Godspeed and good luck.

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Pricey U.S. Equities—Implied Innovation?

What are we to make of the following graphs? Figure 1 presents the long historical view of the Price-to-Earnings ratio on the S&P500 Index. Figure 2 presents a similar view, adjusting the P/E ratio for the impact of inflation on earnings.

Figure 1

Standard Price/Earnings Ratio for the S&P500 Index (average of all companies)

Source: Multipl.com
Current S&P 500 PE Ratio: 19.04 -0.19 (-0.97%)

4:29 pm EDT, Tue Aug 5

Mean: 15.52  
Median: 14.56  
Min: 5.31 (Dec 1917)
Max: 123.73 (May 2009)

Price to earnings ratio, based on trailing twelve month “as reported” earnings.
Current PE is estimated from latest reported earnings and current market price.
Source: Robert Shiller and his book Irrational Exuberance for historic S&P 500 PE Ratio.

Figure 2

Cyclically-Adjusted Price-Earnings Ratio for the S&P500 Companies


Source: Multipl.com
Current Shiller PE Ratio: 25.39 -0.25 (-0.97%)
4:29 pm EDT, Tue Aug 5

Mean: 16.54  
Median: 15.93  
Min: 4.78 (Dec 1920)
Max: 44.19 (Dec 1999)

Shiller PE ratio for the S&P 500.

Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10 — FAQ.

Data courtesy of Robert Shiller from his book, Irrational Exuberance.

Against these measures, stock prices today seem high. Looking over the last 130 years, you see big spikes in P/E ratios suggesting bubbles “irrational exuberance” in advance of capital market instability (1929 stock market crash, the Internet bust of 2000, and the Panic of 2008). Apart from those extreme events, the P/E ratios of 19x to 25x are relatively high. Is this a run-up to another bubble? What questions should the canny observer ask about high P/E ratios?

Let me frame a (wonkish) reply in terms of finance theory, which suggests that the size of a multiple is driven by two main factors: risk and expected growth. For instance, the widely-used Price/Earnings multiple can be decomposed into two factors:

Stock Price/E(EPS) = 1/r + PVGO/E(EPS)

E(EPS) is the earnings per share expected to be reported next year. The factor “r” is the required return on equity, which is determined by risk. And PVGO [1] is the present value of growth opportunities per share, an estimate of today’s value of investments expected to be made in the future. The term, “growth company,” is not defined by the growth rate of sales, earnings or assets, but by the size of PVGO relative to the market value of equity.

In other words, the P/E ratios of “growth firms” are typically sizable, and driven significantly by attractive future growth opportunities. One can decompose other ratios in a similar fashion. But the key idea is that multiples reflect important economic phenomena. To judge whether a multiple is appropriate, one should look into the underlying economic fundamentals and critically evaluate the assumptions of the model. [2]

So, let’s consider the possibilities. Suppose that “r” is 10%, the going risk-adjusted rate of equity return for the average low-growth firm, such as a public utility. Therefore, 1/r would equal 10.0. Compared to the average P/E ratios for the S&P500 (either 19 or 25), this implies that the present value of growth opportunities these days is simply enormous, accounting for 45-60% of the value of the S&P500. What might explain this huge growth component?

One possibility that you hear mooted on financial talk shows is that the market is “overheated,” “getting ahead of its skis,” and even, “a bubble.” We’ve certainly seen frothy conditions before and shouldn’t be surprised to see them again. The problem is that you could summon up some kind of psychological explanation for market conditions virtually any time. Psychology is always useful as a warning flag; but it won’t tell the investor exactly what to do. Generally, if you think that the market is getting overheated, you might cash out, buy put options, or sell short. But research suggests that trying to time the market by trading actively is an easy way to lose money.

A second possibility is that investors embrace some realistic growth phenomena that justify these huge PVGOs. If so, the canny investor should try to identify the source of these growth opportunities. One helpful resource will be this year’s University of Virginia Investing Conference —November 13-14—the theme of which will be “Investing in Innovation.” Innovation is perhaps the most important foundation for growth, and PVGO. The conference will offer insights about growth prospects in fields such as information technology, energy, health care, and monetary policy. Once again, we are booking an impressive collection of speakers. As of today, speakers will include these (additional speaker are in the offing):

  • Charles R. Cory (MBA ’82), Chairman of Global Technology Investment Banking & Managing Director, Morgan Stanley
  • Richard Fisher, President & CEO, Federal Reserve Bank of Dallas (schedule pending)
  • W. Barnes Hauptfuhrer (MBA/JD ’81), Chief Executive Officer, Chapter IV Investors
  • Robert J. Hariri, Founder, Chairman & Chief Scientific Officer, Celgene Cellular Therapeutics
  • Ned Hooper (MBA ’94), Partner, Centerview Capital
  • Robert J. Hugin (MBA ’85), Chairman & CEO, Celgene Corporation
  • Samuel D. Isaly, Managing Partner, OrbiMed
  • Nancy Lazar, Partner, Cornerstone Macro
  • John Siegel, Partner, Columbia Capital
  • Michael Sola, Portfolio Manager, T. Rowe Price
  • Kathy Warden, Corporate Vice President and President, Northrop Grumman Information Systems

“Early bird” registration discounts end tomorrow, August 8th. Sign up this week to get the highest return on your conference investment.

In all probability, today’s high P/E multiples are due to a blend of buoyant investor psychology and genuine growth opportunities. If so, this puts a high premium on thinking critically about investment themes, trends, and market sentiment. Conferences are one excellent means of sharpening your own thinking. Join us in November!

  1. Stewart Myers originally suggested the important role of growth options in the valuation of the firm. See his paper, “Determinants of Corporate Borrowing,” Journal of Financial Economics, 5:146-175 (1977). The decomposition of P/E presented here is discussed more fully by Myers in his book with Richard Brealey and Franklin Allen, Principles of Corporate Finance. []
  2. Though widely used, and simple to use, investing on the basis of P/E multiples is vulnerable to several potential problems, such as the dependence on GAAP accounting practices, which afford managers rather wide latitude in reporting the financial results of the firm. Also, the P/E ratio can be computed using backward-looking or forward-looking earnings. For growing firms, the difference in financial performance between the year just past and the year ahead will be material. In addition, a focus on Earnings per Share ignores important effects of capital investment, investment in working capital, and depreciation. []
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Should I work for this company?

The summer is a time of endings and beginnings. We’re about to enroll the Darden Class of 2016,
among whom many students are looking to end one career path and embark on another. Alums I’ve been
speaking with recently, took vacations, found the time to stop and reflect, and confronted the itch to
change employers. And for the Darden Class of 2015, who have had summer internships, this week is
probably the closing act: companies will start to make full-time offers. About two-thirds of Darden’s
summer interns get offers of permanent employment from their summer jobs. Common to all of these groups is a fundamental question: “Should I work for this company?”  Let me help you reflect on this. [1]

How not to decide

Start by dispensing with some of the most frequently-heard—and worst—reasons to sign on, such as money, power, fame, convenience, or lifestyle. Mind you, these aren’t trivial; and a partner or mentor may place them at the head of the parade. But these considerations can prompt one to make a decision that seems justified in the short run, but that in the long run may be regretted.

Where to start

The way to begin is to start with a sense of purpose, or intent, or calling. As Stephen Covey once wrote, you must “start with the end in view.” For a few people, this “end” will entail a clear vision of exactly what one will be doing in a few decades. But for most of us, the “end” will amount to an intuition about the kind of impact one wants to make, the kind of legacy one would want to leave, or the help one would want to give to others. If you have a vision or intuition about your “end” in view, everything else will be noise. As the Psalmist said, “Without a vision, the people wander.” If you don’t know where you’re going, any road will take you there.

The guiding principle

If you address the question of where to work with the end in view, then you get focused on how to get there. This focus drives you to one overarching principle: You should go where you believe that you can you do your best work. Thinking in terms of one’s “best work” necessarily focuses on the impact of one’s life and helps to define priorities. I don’t mean to suggest that defining one’s focus and priorities is easy. But finding the signal despite the noise is indispensable to charting a course. Think about the implications of this principle:

  • Go. This begs you to reflect on how you will leave where you are now, and how you will gain access to the place you should be. Is now the time to go? Is your team depending on you to finish some vital work? Will you slam the door behind you, and leave bitter co-workers behind? Leaving well is one of the hardest challenges in a career.
  • Where. In what sense is your best work you contingent on a place? Is it a physical location, close to friends and family? A virtual space that grants you connectivity to people who amplify your talents? A spiritual space that gets you in the zone for great work?
  • You. Are you waiting for someone else to decide for you? You must own the issue. Are you straining over the decision because you simply don’t want to face it?
  • Believe. This takes courage. When you decide to work for a company you must embrace a lot of uncertainty about the industry, company, your supervisor, and even yourself. Have you thoroughly assessed all of these uncertainties? Some are certainly groundless. But there may be good cause for doubts, and perhaps some fears. Ultimately, to decide requires a stroke of faith. Some people gain that faith through serendipity, “signs,” or a feeling of being called, a nagging idea that just won’t go away.
  • Work. What is the work that you want to do? Like to do? Are prepared to do? Will this company let you do it? Or at least grow into it? And let’s not define “work” too narrowly. Your life’s work could also include serving a community, nurturing loved ones, or repairing some nagging interpersonal problem. Think about the balance of all of these possible demands over the course of your life.
  • Best. This is the most important word in the whole question. You shouldn’t settle for just any old work. Life is too short for that. One wants to have an impact with one’s life and arrive at a good end. The notion of “best” should trigger some deep reflection on how you define success. If you start with some sense of the end in view, your best work will start to define itself.


“You should go where you believe that you can do your best work.” Spoken plainly, this principle seems obvious, hardly a slap-the-forehead insight. Yet in my decades of working with students, alums, and searchers of all kinds, I observe how slowly people come around to this conclusion. Often late in life, they will wrap their career choices based on money, power, fame, convenience and lifestyle in some rationalization about “best work”–but it always sounds hollow.

It is better to start with the end in view. That way, the steps to get there tend to define themselves.

  1. Those interns who are in the home stretch and really hope to gain an offer might find some of my past
    advice helpful. There is a range of things one can do to improve the odds of getting an offer:

    A. Actually ask for the job. Too many summer interns simply don’t “close the sale” (see this.)

    B. Become known. “Lean in,” in Sheryl Sandberg’s parlance. Too many summer interns lean back and fade out (see href="http://blogs.darden.virginia.edu/deansblog/2010/07/a-question-for-summer-interns-who-are-you/">this.)

    C. Finish at a sprint; don’t coast to the end. Research suggests that the most recent perceptions are very influential to decision-makers. Even if you’re finished with your summer project, walk around and volunteer to help anyone else (see this.)

    D. Quell any sense of entitlement; you must earn the offer. In most settings, arrogance damages, rather than strengthens, career prospects (see this.)

    E. Even if the news isn’t good, exit gracefully. (See this.)


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Why Explorers Matter

Today, we observe the 45th anniversary of the first moon landing (see this for details on the observance). The world justly lionizes Buzz Aldrin, Neil Armstrong, and Michael Collins for achieving a manned lunar landing. And Armstrong’s declaration, “One small step for man; one giant leap for mankind,” remains an iconic marker for the advancement of civilization in the 20th Century. The observance looks like a media event; and much of it seems to be about technology (rockets), big organizations (NASA), geopolitics (the space race), and national will (JFK’s aspiration to put a man on the moon). All of this strikes me the way I encounter anodyne restaurant reviews, political tracts, or economics theories: where are the real people in all of that? What was the experience of the whole team? With what did they contend? What can we learn from them that could be relevant to the rest of us on Earth in our daily lives? Ultimately, the observance asks a radical question: generally, why do explorers matter?

The obvious—but wrong—answer is that explorers matter most because of what they found. Don’t misunderstand me: what explorers found was important and changed history. But in so many cases, the odds seem high that someone else would have made the same discovery in the same era if the explorer we now celebrate had not done so. For instance, records suggest that Chinese Admiral Zheng discovered America in 1421 (see this). Was it a matter of luck to one and misfortune to the other that we today celebrate Columbus instead of Zheng?

I think we should celebrate explorers, but for reasons that transcend what they discovered. Let’s give more attention to the who and how.

First, explorers matter because they can illuminate attributes of leadership. The need for leadership in so many areas is so great today. Explorers can help to orient us to the kind of people the world needs. Mind you, great explorers in the past tended to harbor great flaws; these are not obvious candidates for sainthood. But consider what we learn from the story of Apollo 13, or from the early test pilots and astronauts profiled in Tom Wolfe’s The Right Stuff. Then, too, there is the remarkable story of Shackleton’s voyage to Antarctica, told in Alfred Lansing’s Endurance, and in Roland Huntford’s The Last Place on Earth. Explorers show us that great leadership is less about self-aggrandizement, risk-seeking behavior, or the determination to reach a goal at all costs. Instead, explorers show us the huge importance of team-building, careful planning, faultless execution, and courage.

Second, explorers expand our ambition. They inspire us to think beyond what is possible. How many young girls have been emboldened by astronaut, Sally Ride, to study STEM subjects and become explorers themselves? The song, Northwest Passage, by Stan Rogers describes a modern-day traveler seeking to re-create the trip of Sir John Franklin, who sought unsuccessfully a northwest passage through the Arctic Ocean to Asia—what moves the traveler is

“To find the hand of Franklin reaching for the Beaufort Sea, Tracing one warm line through a land so wild and savage,/And make a Northwest Passage to the sea.”

Finally, the experience of explorers matters because they show how to prevail in the face of great adversity. Indeed, in the experience of explorers, the adversity seems to be the main point. Montaigne said, “It is the journey, not the arrival, that matters.” We want to know how the explorers contended with the journey: the hardship, doubts, setbacks, and even success; we relish the stories of explorers because they show the rest of us how to go far away, and come back again. It is the return of the explorers that creates the example of testing the limits—in Stan Rogers’ song, “to find there but the road back home again.”

History teaches us that we worship heroes at our own risk. But what passes today for the celebration of a profound achievement in the annals of exploration misses some big points. Such commemorations need to bring us face to face with lessons about leadership, ambition, and adversity that the present generation can harness in its own outbound journeys.


The song, Northwest Passage, by Stan Rogers is well worth listening to this day, to give an alternative tone to the media event. The chorus of the song is:

Ah, for just one time I would take the Northwest Passage,

To find the hand of Franklin reaching for the Beaufort Sea,

Tracing one warm line through a land so wild and savage,

And make a Northwest Passage to the sea.

Other verses include:


Westward from the Davis Strait ’tis there ’twas said to lie,

A sea route to the orient, for which so many died,

Seeking gold and glory, leaving weathered broken bones,

And a long forgotten lonely cairn of stones.


Three centuries thereafter, I take passage over land,

In the footsteps of brave Kelso, where his “sea of flowers” began,

Watching cities rise before me, then behind me sink again,

This tardiest explorer driving hard across the plain.


And through the night, behind the wheel, the mileage clicking west,

I think upon Mackenzie, David Thompson and the rest,

Who cracked the mountain ramparts and did show a path for me,

To race the roaring Fraser to the sea.


How then am I so different from the first men through this way,

Like them I left a settled life, I threw it all away,

To seek a Northwest Passage at the call of many men,

To find there but the road back home again.


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The Frontier of Technology and the Educational Experience

“We shape our tools. Thereafter, our tools shape us.”
— Tobias Kinnebrew, Bot & Dolly

The onrush of new technology into higher education is, to most academicians, both wonderful and terrible—not least for the reasons that Kinnebrew suggests: the new tools presage a different world and a different “us.” Now we have “Web 3.0,” according to Tim O’Reilly at a conference last month. O’Reilly is a technology publisher and commentator and the origin of the phrase, “Web 2.0.” What is this new Internet? And what does it portend for higher education?

Most likely this: more of the same, only more so. In previous posts, I have argued that new technology will accelerate the pace of change of higher education, that such change will entail a displacement of instructors and institutions whose material can be easily digitized, and that the emergent champions will be those who excel at digital delivery of knowledge, and those who excel at the delivery of superior in-person learning experiences—to be stuck in the middle will be very dangerous. Acceleration. Displacement. Polarization. My hunch is that “Web 3.0” will advance all of that.

The New New Thing

To refresh your memory, “Web 1.0” gave connectivity of the written word, such as email and blogs. It entailed narrow-band connectivity available through dial-up services such as AOL. Then came “Web 2.0,” which gave connectivity of video, music, and which required more bandwidth and the communication technology to process immense volumes of data. The Internet took on a two-way publishing model in which Internet users contribute content, rather than a one-way system akin to book publishing, in which Web site owners post and publish content directly for a separate audience to read—YouTube is the canonical example.

“Web 2.0” made possible asynchronous education such as Khan Academy and the “flipped classroom” now so popular in K-12 education circles. It also exploded digital instruction into higher education: MOOCs, hybrid program designs (that mixed digital and person-to-person (P2P) instruction), Skype-based learning teams, learning management systems such as Canvas, Cloud-based storage of records and materials, digitized books and case studies, and PowerPoint mashups of video, text, voice, animation, etc. What made all this possible was the growth of bandwidth, and the incredible decline in the cost of computer processing power and of storage of information.

“Web 3.0” is the “Internet of Things” (IoT), which recognizes that Internet connectivity extends well beyond desktop-to-desktop toward a host of different possible things: tablets, smartphones, smart watches, personal activity monitors (e.g. Fitbits), robots in manufacturing plants, and glasses (e.g., Google Glass). Sensors are growing in ubiquity and connecting to form intelligent systems based in the Internet. Tablet computers are widely distributed across military units in Iraq and Afghanistan. A new-model jet engine by General Electric contains over 100 sensors and generates over a terabyte of data per flight; these data are uploaded via the Internet to promote predictive maintenance (i.e., rather than maintenance that is purely reactive to breakdowns). Application software enables the individual person or the large enterprise to customize the engagement with the Internet. The torrent of data that descends on the service providers has riveted decision-makers on “big data” and the need for sophisticated analytics to enable even better provision of service in the future. What made all this possible is the near-zero cost of information storage, the spread of sensors that record the experience of humans, organizations, and things; the invention of hardware devices that achieve the greater distribution information generated by sensors; the development of apps that permit greater customization; and generally, the diminishing cost of innovation. The cost of experimentation with hardware and software is so low that design and development of new software and devices is being pushed out of large enterprises and into the garages, basements, “Fab Labs,” “hackathons,” and “Maker DIY.”

These themes about “Web 3.0” and IoT were explored last month in the Solid Conference, produced by O’Reilly Media. [1] The premise of the conference was that “Physical things—machines, devices, components—are about to experience a profound transformation. The Internet fundamentally changed how software is developed and deployed, and now hardware is on the brink of a similar disruption. Consumers, already carrying smart phones and driving cars that park themselves, have come to demand more from their objects than ever before. They expect their belongings to “know” them, to interact with them, and to adapt to their needs. Industry is realizing that smart networked machines can bring them the efficiencies and new capabilities to do more, faster, and cheaper…Hardware and software are fusing into a single fluid entity….this collision of software and hardware is fueling the creation of a software-enhanced, networked, physical world.” The “Things” form a more intelligent system rather than just a connection of objects. Hardware is starting to resemble software in its capacity to be edited, to adapt to changing needs; and software is starting to resemble hardware (e.g. smartphones don’t have buttons, they have icons on a touch screen). The result is increasingly intelligent information technology systems that are growing in their ubiquity, customizability, and sensing capacity:

  • Networked automation. Prompted by sensors, machines communicate with machines from the consumer’s point of purchase back to the assembly plant, back to the component fabricators, back to the suppliers of raw materials. RFID and GPS systems allow computers to track the movement of supplies from distant locations to sufficient precision that it gives new meaning to “just in time” management. Within manufacturing plants, processes are increasingly automated: machines monitor workflow, inventory levels, quality, and maintenance. Beth Comstock of General Electric calls this the “selfless machine: a machine will sense other machines and what the changing environment requires that the machine should do. No machine is an island.” And machines remove workers from dangerous settings: Rio Tinto described the use of mining vehicles controlled by drivers in the safety of a distant facility. These examples may seem unsurprising and prosaic, since mechanization has been a steady theme for decades. But what is notable today is the extent to which machines and information systems substitute for human interaction and to which humans expect their machines to anticipate their expectations. Reducing human intervention has proved to be a boon to users of taxicabs—just ask clients of Uber—or to people trying to transfer money—just ask clients of Bitcoin.

  • Synthesis of virtual and physical. Google, a software company, bought seven robotics manufacturers last year. In 2008, the number of devices connected to the Internet surpassed the number of people on earth. One of the most provocative examples of the melting boundary between software and the physical world comes from Autodesk, the software company. Carl Bass, the CEO, explained that DNA, or genetic code, is simply a physical manifestation of software. Extending the company’s capabilities in software development, Autodesk has the ability to “print” physical DNA. Bass said, “the age of synthetic biologic manufacturing is right in front of us.” Is Autodesk in software or hardware or biotech?

  • Knowingness. Systems that can recognize a person’s individual identity can adapt to that person’s preferences. Inventors demonstrated systems that adjust household lighting, heating and ventilation. Similarly, systems can aggregate across many individuals to frame insights about mass behavior—inventors demonstrated a system that can distill exabytes of purchasing behavior from iTunes to graphically display the presence of jazz enthusiasts by district in a metropolitan area.

The Limit to Things.

How far will the “Web 3.0” go in displacing the work of humans? It is limited by its ability to produce transformational experiences, to generate high standards of craft, and to create ideas.

Experiences. At the end of the Solid conference, I took a hike. Literally. Backroads.com is one of the best active vacation tour guides on the planet and took me and six others on an exploration of some mountainous terrain along the Amalfi coast in Italy. Heart-pounding trail-climbs and descents. Spectacular vistas. The scent of wild garlic, rosemary, and fennel; the feel of wild orchids between the fingertips; the taste of homemade pasta, mozzarella, and cappuccino. What’s more, the experience was shared with the likes of a physician, two research chemists, a corporate manager, and two homemakers. We corrected one-another’s broken Italian, shared jokes, collaborated on load-bearing, map-reading, and direction-finding, compared perceptions about the surroundings, and challenged assumptions on virtually all subjects—it felt like a walking graduate seminar. I was transformed by the experience: new sensations and their synthesis into something quite impactful.

High Standards of Craft. Can “Web 3.0” define its own standards of excellence? Can it judge true excellence, as opposed to just “good enough” compared to some peers? A highlight of the Solid conference was a presentation by Richard Isaacs, who carries the title of “Organ Builder” at C.B. Fisk, a leading manufacturer of pipe organs. Each of these instruments is one-of-a-kind, a work of art. Isaacs asked, “What has changed in organ-building over the past 150 years?” Relatively little. A tracker organ connects keys to pipes by mechanical means which produces an extraordinary ability of the musician to “feel” the very complex instrument at work, in turn which enables highly sophisticated performance. Fisk’s instruments embody extraordinary craftsmanship.

Ideation. The new book, The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies, by Eric Brynjolfsson and Andrew McAfee of MIT, forecasts the increasing automation of “routine” tasks: “this leads to job polarization: a collapse in demand for middle-income jobs, while non-routine cognitive jobs (such as financial analysis) and non-routine manual jobs (like hairdressing) have held up relatively well.” (p. 139). The authors emphasize that the cognitive work that will fare particularly well in the increasingly machine-dominated environment will be the non-routine cognitive jobs:

We’ve never seen a truly creative machine, or an entrepreneurial one, or an innovative one. We’ve seen software that could create lines of English text that rhymed, but none that could write a true poem…Programs that can write clean prose are amazing achievements, but we’ve not yet seen one that can figure out what to write about next. We’ve also never seen software that could create good software; so far, attempts at this have been abject failures. These activities have one thing in common: ideation, or coming up with new ideas or concepts. To be more precise, we should probably say good new ideas or concepts…Ideation in its many forms is an area today where humans have a comparative advantage over machines. Scientists come up with the hypotheses. Journalists sniff out a good story. Chefs add a new dish to the menu. Engineers on a factory floor figure out why a machine is no longer working properly. Steve Jobs and his colleagues at Apple figure out what kind of tablet computer we actually want. …Ideation, creativity, and innovation are often described as ‘thinking outside the box,’ and this characterization indicates another large and reasonably sustainable advantage of human over digital labor. Computers and robots remain lousy at doing anything outside the frame of their programming. (pages 191-2)

These limiting factors define that “high ground” to which traditional educational institutions will need to climb. Ironically, this ground has always been the domain of higher education; but as the mandate of higher education broadened after World War II, this ground was overgrown by other mandates that are now being seized by digitization. Such other mandates include vocational preparation, compensating for a worsening K-12 educational system in America, and “edutainment.”


As Tobias Kinnebrew said, “We shape our tools. Thereafter, our tools shape us.” That is the dominant message for higher education from “Web 3.0.” Here are some speculative implications for how the tools will shape educators:

  • One way becomes two way. The digital services will not be tied only to computers, but will be delivered through a variety of devices, such a mobile phones, eyeglasses, and earbuds. The Internet of Things will permit educators to engage digitally with students in ways that may feel more intimate and attentive to the learning experience. For instance, this will yield greater opportunity to monitor the reaction of students to their lessons and their progress. Software intelligence is rising above the level of a single instructor, department, or institution. Think of the extensive knowledge that Amazon, Apple, or Netflix accumulates about its customers. Without doubt, networks and markets are accumulating that kind of information about our students. Data accumulation will morph into service offerings to students that are ubiquitous and are increasingly customized to their needs.
  • Automation and Ideation. Digital delivery will serve tools and objective information (such as names, dates, and formulas). If IBM’s Watson computer can learn to beat the world’s reigning Jeopardy champion (i.e., a challenge based on ambiguous questions depending on encyclopedic knowledge of trivia), it may be possible to digitize some aspects of mentoring students. Still, I doubt the ability of machines to recognize subtle variations in human emotion and to empathize appropriately. Above all, P2P (person-to-person) instruction best serves to prepare students for ideation and critical thinking—delivering on this is not a stretch for most colleges and universities worth their name. Big data is very interesting. Big wisdom is even more interesting.
  • Innovation at the fringe rather than the center. Incumbency may not be an advantage. So much of innovation today is occurring on the periphery of the industries rather than by the major players. In previous posts, I have argued that the high cost of digital instruction, and the inevitably rising quality expectations would redound to the advantage of deep-pocketed leaders in the field. But the rise of disruptive new players can eliminate the middlemen and edge out the incumbents (think of Uber versus the big city taxi monopolies, Bitcoin versus banks, or Autodesk versus big pharma).
  • Governance and accountability Much of Brynjolfsson and McAfee’s argument says that we should get better at working with smart machines. Probably so. But let’s not teach students to cede accountability or moral responsibility for the consequences of their collaboration with machines. At issue here is, who shall be the master? A related fact is that today, every school is a software enterprise. Design and delivery of the learning experience for students will increasingly entail a software interface in addition to a human face. If, as the foregoing points suggest, that interface will be an integral part of the curriculum, should not the faculty govern it?
  1. Disclosure: my son, Jonathan, was co-chair of the conference. []
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Graduation 2014: Listen Well

My job this afternoon is to convene the proceedings, set a tone, and introduce three speakers. As popular perceptions might have it, we ought to have three case discussions. Instead of three student speeches, we would have three cold-calls. Maybe a few power points. And perhaps an online simulation thrown in for good measure. Darden’s reputation in the broader world is about active, not passive, learning; about debating with your peers; and about figuring things out for yourself. All true, so far.

And Darden is also about listening really well. That’s what I’m going to ask you to do for our three speakers this afternoon. More importantly, that’s what I’m going to ask you to do for the rest of your lives.

Listening well seems to be a fading art. We’ve learned over the past few weeks about commencement speakers who were disinvited because some students didn’t want to listen to them. Yet free speech is a core value at universities. You might disagree with a speaker, but it won’t hurt you to listen. The newspapers this past week reported the retirement of Barbara Walters, the TV interviewer; she was called one of “America’s last great listeners.” Why is she the last? Aren’t people listening anymore? The likes of McKinsey & Company, Darden Dean’s Executive Fellow, Kevin Sharer, and WikiHow have weighed in on the subject of listening well. Sources like these raise a host of great tactics for good listening. For instance, show respect, establish eye contact, stop talking and be silent, encourage the speaker with body language and active listening techniques, suspend judgment, and so on. These are useful tactics, ones that you have heard about and try to practice. But I think there is more.

There is too much noise and not enough respectful silence for others to unfold their ideas. One sees countless errors such as willful distraction, arriving late, leaving early, pointless interruption, etc. Some of this might be elicited by the speakers themselves. The fact is that we are awash in noise: spam, push marketing, ephemeral stuff. And lazy listening passively digests it all.

Great listening is a process of separating the signal from noise, of discerning what resonates or disagrees with you, and of triangulating or testing what you hear with what you know. Signal, resonance, triangulation.

You can adapt great listening not only to an encounter with one person, but also to the world at large. My advice is that whatever you do next, find some quiet where you can spend part of each day to separate signal from noise. Susan Cain, in her book, Quiet, offers a powerful argument in favor of reflection, and deep listening. In effect, she says to think like an introvert. Introverts think to speak; extroverts speak to think.

Next, I urge you to sample widely across sources of information that you tap each day. Get out of your daily ‘me, ’ that echo chamber of favorite websites, Facebook pages, chat rooms and so on that simply reinforce what you already know and believe. Finally, I urge you to drill deep into what resonates.

So much of the advice for new graduates is salted with action-taking, risk-taking, go get ‘em, and so on. What these messages miss is any sensible direction for the path on which you are commencing. As the saying is, “If you don’t know where you are going, any road will take you there.” The prerequisite to setting any good direction is not just planning, or data analysis, or scenario testing. No, the very first step is to listen really well. Remember to focus on signal, resonance, and triangulation.

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Women in Business and the Role of Business Schools

“We cannot change what we are not aware of, and once we are aware, we cannot help but change.”
– Sheryl Sandberg (COO of Facebook)


Last week, I reflected a lot on the implications for management education from growing gender equality. And how I spent my time last week will tell you why.

On Monday, colleagues and I met with two admirals from the U.S. Navy to start a dialogue on a range of deep human resources questions, most of which grow out of the increasing diversity of people in the service. The U.S. military has led the liberalization of American society, at least since President Harry Truman desegregated the military after World War II. Today, with the collapse of “don’t ask, don’t tell,” and the advent of women into combat positions, the military is again spearheading change for the rest of American society. This will challenge old attitudes. For instance, women will begin serving on fast attack submarines in January 2015. With women on shipboard in very close quarters, the respect for differences will need to be a paramount value in support of the team and its mission. The Navy wants to instill a culture of respect for gender differences.

That same day, I hosted Lorna Donatone, Chief Operating Officer and President of Sodexo Education. She leads Sodexo’s business at nearly 500 public school districts and at more than 850 college and university campuses, overseeing the work of more than 70,000 employees. She has worked to develop Sodexo’s Employee Network Groups, demonstrating her commitment to diversity, inclusion, mentorship and training managers and employees.

On Tuesday, I met with UVA President Terry Sullivan to discuss faculty appointments. She is a courageous and wise leader. And she is a great ally in recruiting diverse colleagues.



On Wednesday, I joined Valerie Jarrett, Senior Adviser to President Obama, and 13 deans of leading business schools at The White House. The purpose was “to discuss the best practices for business schools to prepare their students for the increasing importance of women in the labor force and the prevalence of employees with families where all parents work.”


On Wednesday and Thursday, in the boring interstices of commercial airplane travel, I read Sheryl Sandberg’s Lean In. Very well-written, inspiring, and provocative, the book argues that women are conditioned to “lean away” from professional confrontations in which they would have positive impact were they to seize their place in professional life. This book has important lessons for business educators and leaders.

So, connect the dots of my week: gender diversity is top-of-mind for prominent leaders. It has been on my mind as well: what are the opportunities and challenges around advancing women into positions of leadership in business? What should business schools do about them? While these are big questions, at the White House meeting of deans the other deans raised even more questions about how business schools can play a role in furthering women in business. The answers aren’t simple, but bear with the discussion that follows.

The White House Meeting of Deans

This was framed as a 90-minute discussion among the Deans of business schools at Harvard, Virginia (Darden), Northwestern (Kellogg), Michigan (Ross), Cornell (Johnson), Texas (McCombs), NYU (Stern), Berkeley (Haas), UCLA (Anderson), UNC (Kenan-Flagler), Emory (Goizueta), Carnegie Mellon (Tepper), and Yale. The Deans included four women and ten men. Shortly before the meeting, we were given a list of discussion topics and questions, any area of which would be the focus for a full-day’s conversation—the headline topics were these:

  • Business school timing and the lifecycle: Given the typical profile of a business school student—5 years of post-college professional experience—means that they are often considering having children shortly after finishing their MBA and many may feel that they must postpone having children to get enough years of post-MBA experience. Is this issue raising challenges for female students? Is it raising challenges for men who are increasingly likely to be active co-parents?
  • Retention: Failing to retain female talent is a growing challenge for businesses. It is also a growing problem among men whose obligations regarding work-family balance are shifting. Is there a role for business schools in helping alumni stay connected to their careers? Or to help them reenter after a period out?
  • Pay gaps and career success: How can business schools help address the pay gap between men and women with MBA degrees?
  • Culture: Research has found that women are less likely to re-frame ethical dilemmas to their advantage and instead see them as ethical issues (Kray and Haselhuhn 2012). They also find that women associate business with immorality more than men do. Is there a role for ethics training in helping men and women have more similar outlooks on ethical dilemmas? Are there better ways to teach ethics to make business more welcoming to women?
  • Leadership: How do you broaden the vision of leadership for all students, male and female?
  • Curriculum: How are men and women portrayed in course materials? Has your curriculum adapted to reflect the modern workforce and workplace challenges?

The discussion took a rather free-wheeling path of its own: we touched on some of the agenda questions, but did not reach alignment of opinion. Valerie Jarrett promised the development of a white paper about best practices that would become available to all business schools. I noted a number of interesting points–rather than quoting the attendees or paraphrasing the discussion points I offer them in the form of questions for future consideration. Given the diversity of views at the meeting, readers of this blog will find these points debatable, as I do.

  • In the entire field, there remains a relatively small percentage of case studies that feature women protagonists. What percentage should we aim for? Given that case content turns over 20% per year, how soon should be expect to see significant curriculum change?
  • Should we take gender off the table? Men vs. women is too binary, when what we should do is to consider what all leaders need in coaching and development. Can we “take gender off the table”? The best research in leadership indicates that effective leadership behaviors (Kouzes and Posner) and the stages of leadership development (Joiner and Josephs) are not gender-specific, but are due in part to socialization. Women and men may practice leadership (or be perceived) in different ways. The compelling question is, what do all leaders need in coaching and development? How does gender affect leadership development?
  • Do we really need to teach women to talk more like men? Shouldn’t we teach everyone to talk without bias? And shouldn’t we celebrate individuality?
  • Isn’t the issue really about diversity and inclusion, rather than gender? What role does gender play in the diversity and inclusion conversation?
  • The biggest diversity problem is not the difference of genders, but social class. MBA programs draw mainly from the upper middle class. Shouldn’t we commit to enrolling more women from the bottom quartile of the economic scale?
  • Leadership development requires that we reach out earlier in the pipeline of professional development. If you ask undergraduate students when they decided to become business majors, boys will say “high school,” and girls will say “college.” What will it take to help young women to crystallize their aspirations earlier?
  • Feedback in gateway courses motivates women differently from men: a ‘B’ in introductory accounting will drive women into marketing; men might get a ‘B’ and still go into investment banking. How can we frame early-stage feedback in ways that doesn’t peremptorily drive women out of certain fields?
  • What does it mean to be a leader? If we equate “leader” with “CEO,” the majority of leaders today are men; it doesn’t mean that they are great leaders. What do we really know about traditional characteristics of leadership? Do such characteristics include empathy and the ability to listen, the ability to question assumptions and ask big questions? [1]
  • Undergraduate business is the biggest major in the U.S., with about 50% women. MBA programs are about 33% women students; pre-experience masters programs are about 50%. Part-time and EMBA programs are seeing the entry of very talented women into the professional path. Is the challenge of recruiting women into MBA programs a lifecycle issue around child-bearing? Could we also improve our facilities to support women with young children or that are pregnant with flexible class schedules and/or child care?
  • Re-entry after child-bearing is difficult and fraught with anxieties. The woman wonders: am I capable, ready, and valued? Here’s where emphasis on skills (to build confidence) and mentoring (to handle anxiety) can make a huge difference. She can’t go from zero to sixty in one step; it takes a process of lengthening, frequency, and deepening of contact. The challenge for business schools is to consider how they can prepare and help alumnae to re-enter the workforce following time away to have children.
  • The pay gap requires more transparency and research. Women and men negotiate for pay differently. The issue of negotiation must be broadened to include advocacy and self-promotion. We don’t see enough of advocacy, not just on pay, but also on achievement and career advancement.
  • Is retention more about values than pay? 40% of women in computer science leave because they don’t like the climate in that field. Trust in business is at an all-time low. Isn’t the issue to help build purpose-driven firms? Do women prefer to work in purpose-driven organizations? Do traditional business organization climates drive women away?

The Opportunity

Extraordinary leaders like Terry Sullivan, Lorna Donatone, Valerie Jarrett, and Sheryl Sandberg don’t simply spring out of thin air. It takes decades of training and experience to develop strong leaders. Schools have a vital role to play.

The presence of women itself is hugely transformational—on business and on the schools that train women leaders. As Voltaire said, “God is on the side of big battalions.” The more women who are present, the greater their impact. Simply increasing the numbers of women MBA graduates (the “output”) requires many more applicants (the “input”). Why women aren’t flocking to graduate b-schools is the subject of many theories and rather less research. My guess is that more financial aid and better messaging would help to build the volume—and ultimate impact.

Our experience at Darden shows that even modest increases in the enrollment of women can have a transformational impact on the character and culture of the educational program. Greater representation of women in classrooms, learning teams, and project groups changes the conversation: richer, more diverse, and greater respect for differences. Students (women and men) report higher levels of satisfaction with the learning experience. Faculty report better classroom and team results. And corporate recruiters report greater satisfaction with the pool of talent they encounter. The experience at Darden is confirmed by empirical research elsewhere, some of which was offered as background reading to this meeting.

The Challenge

It would seem that one path to better outcomes would be to enroll more women. Now consider the following:

  • According to the 2010 Census, some 916,000 women graduated from college in 2009; but only about 80,000 women take the standardized entrance exam for graduate business school.
  • Women constitute about 57% of all undergraduate students in the U.S., but only 43% of examinees of the entrance exam for graduate business school.

The following provides a rough estimate of the relevant female applicant pool for the schools gathered for the White House meeting. These data are drawn from the Graduate Management Admission Council (GMAC), which administers the Graduate Management Admission Test (GMAT). Of greatest relevance are the percentages reported by GMAC in Column C—treating these percentages as independent effects gives a lower-bound estimate since the effects are unlikely to be totally independent of each other. Unfortunately GMAC does not easily allow determining the degree of interdependence. This is an opportunity for further research.

Line Group (Column A) Volume (B) % of Line 1 (C) Notes (D)
1 Total Tests Taken by Women 101,336
2 Unique Examinees – Women 81,069 80% Unique examinees were 80% of total tests taken in 2012-13 test year
3 Considering MBA 50,263 62% 62% of GMAT examinees want to apply to MBA programs
4 Considering Full-Time 33,676 67% 67% of those considering MBA want to enroll in full-time programs
5 Scored 640+ 6,062 18% 18% of those considering MBA scored 640+
6 4-9 years of experience 2,122 35% 35% of those considering MBA have 4-9 years of experience

Of the 81,000 women who take the test, only 50,000 have made the decision to apply to an MBA program, of which only 34,000 are considering attending a full-time MBA program. Of these some 6,000 women offer academic potential generally consistent with the admission “sweet spot” of schools at the White House meeting. Taking into account the traditional years of work experience (row 6), leaves about 2,000 candidates. Even if you relax the expectation of years of work experience, the resulting numbers of candidates are small relative to the aspirational enrollment of leading schools. And even the 34,000 women considering a full-time MBA program (line 4) is small relative to the 633 AACSB-accredited institutions in the world (which would yield 54 women per class).

One general conclusion is that if we are to achieve the benefits of enrolling more women in MBA programs, we need more women applicants. Change will come slowly.

Here is some history. The 20-year GMAT volume time-series shows growth in tests taken by women both in absolute number and percentage of total. (GMAC does not report data about unique test-takers, but says that the number of unique test-takers is from 80 to 84% of total tests taken in the years since 2008-09.) The GMAT volume does not directly translate to b-school application volume, especially since GMAT-takers today have many options beyond the MBA degree. Still, from these data, we can infer that more women are applying to b-schools now, at least as a percentage of total b-school applicants, than 20 years ago.



The growth rate in women taking the GMAT is faster than for men. Over the past 10 years, the compound average growth rate for men was -0.06%; for women +1.72%.

Increasing the representation of women in business school programs would enhance the educational experience of both men and women. Achieving this is constrained by the small numbers and proportion of women seeking education in business. Therefore a priority should be to increase the pool of qualified applicants. Actions to support this priority could include:

  • Improve K-12 education to promote entry into, and graduation from, undergraduate programs.
  • Intensify outreach from undergraduate and graduate business schools to undergraduate students.
  • Expand public and private financial aid for women students.
  • Promote programs that help undergraduate women transition into business careers. These include short certificate programs and one-year “Masters in Management” programs to be taken immediately after undergraduate school.
  • Relax H1-B visa requirements for international women seeking to work in the U.S. upon graduation from MBA programs.


The various conversations and readings last week reaffirmed for me the importance of how business schools frame their work to prepare leaders for a society of growing diversity. Sheryl Sandberg got it right: witnessing the growing diversity of enterprises and organizations is a wake-up call to all leaders. Standing still is not an option. The stories and initiatives of which I heard at the White House suggest that all b-schools are moving. And the pace of change within schools may seem unequal to the challenge:

  • Extraordinary leaders like Terry Sullivan, Lorna Donatone, Valerie Jarrett, and Sheryl Sandberg don’t simply spring out of thin air. It takes decades of training and experience to develop strong leaders of either gender. Schools have a vital role to play.
  • The presence of women itself is hugely transformational—on business and on the schools that train women leaders. Growing diversity will have a staggering impact on organization cultures (imagine the leap the Navy will make with the introduction of women on submarines.)
  • One size does not fit all. A growing body of empirical and anecdotal evidence shows that women and men experience school in different ways. Research indicates that women experience the learning process differently than men (see, for instance, Women’s Ways of Knowing the cornerstone study in this area). Shaping the learning experience that best serves the development of women and men is the focus of quite a lot of experimentation at b-schools today—Darden’s experience and the conversation at the White House meeting suggest avenues of such experimentation.
  • It’s a marathon, not a sprint. Women will slowly increase as a percentage of all business students. The response of graduate business schools today will start to have visible impact in society in maybe a decade.
  1. Are we not after a new style of leadership, one that combines characteristics of what might be considered as feminine and masculine characteristics? See, for instance: http://www.johngerzema.com/presentations/tedxwomen-talk and http://www.johngerzema.com/books/athena-doctrine. []

My Transition to Come: Dean to Professor

Yesterday, UVA President Terry Sullivan announced my intention to transition back to Darden’s faculty at the end of my second term as Dean, July 31, 2015. I call on the Darden Community to support the Dean search process with advice, nominees, good will, and the patience that a major executive search demands. The Search Committee will be chaired by Professor Ken Eades and is chartered by UVA’s Provost, John Simon. Their search process will be thorough, professional, and engaging of all of Darden’s constituencies. Given the healthy lead time, I’m confident that the search will be a success.

My choice to return to teaching and writing was the result of a lot of personal reflection and discussion with family, colleagues, alumni, and, of course, the President. It’s been no secret: most colleagues have known about my intention since 2011. But the most frequently asked question is this: if I’m happy and Darden is in a good place, why let up? Here’s my thinking:

  • We’ve finished much of what I hoped we would achieve when I accepted the deanship in 2005. Darden has challenges and opportunities ahead–and the school is in great shape to meet them: the world’s best faculty (say several rankings); distinguished Grounds; devoted alumni; transformational learning experience; awesome students; and large endowment. I didn’t accomplish all that; the whole community did. I’m just pleased to have had a voice in the chorus.

  • I love to teach and write, for which I entered academic life. Being Dean is quite exciting but crowds out the deep reflection required to teach, research, and write very well. And it takes a heavy commitment of time and energy to advancing the school–I’ve averaged 145 days out of town per year for the past nine years.

  • Ten years is a nice round number—think of it as the “Goldilocks” tenure, long enough to have an impact, and short enough to ensure fresh perspective with some regularity. In comparison, the median tenure of a business school dean is about four years—this is not long enough to drive real change in academia. And what a ten years it will have been: Global Financial Crisis, Great Recession, the events of June 2012, Capital Campaign, EMBA, GEMBA, diversity, sustainability, globalization, MOOCs, and more.

  • Darden houses impressive talent and has good depth of leadership. The rising faculty and staff leaders are stars. I’m confident that they will sustain Darden’s momentum and good direction.

In view of these, and of the fact that I’ll be 65 in October, this next year seems like a good pivot point in my own journey. It’s been a deep honor and very fulfilling to serve Darden for a while as Dean.

Onward and upward!