Columbia University Press

In the following video Howard Marks, author of The Most Important Thing: Uncommon Sense for the Thoughtful Investor, discusses his new book and investing with James Flanigan.

William Klepper, author of The CEO’S Boss: Tough Love in the Boardroom, recently posted an article on Boardmember.com on how corporate boards can better improve their relationships with their business’s CEO through tough love.

In the article Klepper explains that “The board’s commitment to the CEO is ongoing and must be approached deliberately and with a dedication to providing tough love in the boardroom. At its core, tough love demands ongoing feedback. A productive partnership between the CEO and the board distills down to teamwork. Teamwork doesn’t happen by chance any more than does an effective partnership.”

For additional information visit the author’s website.

TheStreet has been featuring Kenneth Posner’s new book Stalking the Black Swan: Research and Decision Making in a World of Extreme Volatility and his explanation of how “black swans” can be detected.

The concept of a “Black Swan,” was popularized by Nassim Nicholas Taleb and refers to a “a highly improbable event that seemingly could not have been anticipated by extrapolating from past data.” While the term gained currency to explain the dramatic global economic events of the past two years, there are also more “mundane swans, whipsawing individual stocks and sectors, even when the rest of the market is calm.”

Black Swans often come about as a result of information asymmetry or when one party has more information than another—a condition that can adversely affect investors who often rely on company managers and executives for data. How to mitigate information asymmetry? Posner writes:

There are broadly two strategies for mitigating information asymmetry. The first involves monitoring a company’s message for signs of cognitive dissonance. The second involves crafting interview questions to elicit information with diagnostic power.

Overcoming Information Asymmetry in Interviews
* Confine the agenda to critical issues
* Bring specific questions with diagnostic power
* Ask “how” and “why,” not “what”
* Pay attention to ducked questions and nonanswers
* Avoid debating your own views

Posner outlines other ways investors can become better judges of what they are being told by forcing company representatives to answer inconvenient questions and move away from scripted answers.

Ken Posner, author of of Stalking the Black Swan: Research and Decision Making in a World of Extreme Volatility, recently appeared on Yahoo Finance’s Tech Ticker to discuss among other things about how Fannie Mae and Freddie Mac continue to be a major drain on the economy. From the interview:

I don’t think it’s time to celebrate [because] the losses inside Fannie and Freddie can’t be calculated. Not only do we have those [CBO estimated] losses but we still have $5 trillion in mortgage-backed securities that they guarantee and $2 to $3 trillion in debt. All of this is potentially on the U.S. government’s balance sheet until we figure out how to restructure these entities.

Instead of dismantling Fannie and Freddie and putting the housing recovery at risk, Posner recommends auctioning the mortgage guarantee role to a group of large banks. “Make [banks] pay taxpayers for the right to issue those securities [and] let them do it with their deposits and shareholder equity.” In a recent article in American Banker, Posner also offered some solutions for how a combination of big banks and government could run the Mortgage-based-securities business in a way that would be both effective and politically palatable.

Here’s Posner’s appearance on Tech Ticker:

In an interview with Business Insider (see below), Edward Hess, author of Smart Growth: Building an Enduring Business by Managing Risks, challenges Wall Street’s accepted wisdom about growth.

Hess argues that growth is not always good; bigger is not always better; companies don’t need to grow to survive; and that there is more to a successful business than good quarterly earnings. The emphasis on growth has led companies to led to short-term strategies that are not always in a company’s long-term interests, such as deferring investments to make quarterly goals.

Hess also cited the example of Toyota as a case in which the emphasis on growth ended up hurting the company, by shifting its focus from being the best to the biggest, they created risk they could not manage.

Here’s the video of his interview:

Edward Hess discusses his new book Smart Growth: Building an Enduring Business by Managing the Risks of Growth.

For more on the book, you can also read an interview in which Hess challenges conventional thinking regarding growth and business. From the interview:

Q: What are some of the key lessons from your research?

E.H.: Some findings are (1) “Grow or die” is not based in science or business reality; (2) consistent above-average growth for five years or more is the exception not the rule; (3) growth creates risks that need to be managed because it can stress culture, customer value proposition – the business’s differentiating value delivered to the customer, – quality controls, and employees; (4) growth is much more than just a strategy. Growth is a mindset; an experimental learning process; and growth requires an internal enabling growth system.

William Duggan, author of Strategic Intuition: The Creative Spark in Human Achievement and the forthcoming The Aid Trap: Hard Truths About Ending Poverty, was recently profiled in a Wall Street Journal article that looked at the decision of some major companies not to cutback on research.

In “Don’t Bet on R&D,” Duggan argues that this decision might not be so prudent. Duggan suggests, “there is zero correlation between how much you spend on R&D and your company’s success.” What’s crucial for business is not necessarily their ability to discover or invent new technologies but their ability to exploit a market, product, or trend.”

Duggan points to General Electric, which under Jack Welch succeeded because of they focused on finding good technologies “that others spent money to develop, and then acting quickly to buy the technology or develop it in house, calling the approach ‘legitimate plagiarism.’”

On the national level, Duggan points to other scholars who are challenging the notion of “techno-nationalism” that suggests America must fund innovation to remain successful. Instead, some of the skeptics point out American companies should capitalize on innovation wherever it occurs, in India, China or the U.S.

The Columbia Business School’s Web site Ideas at Work recently interviewed Charles Calomiris, the co-editor of Sustaining India’s Growth Miracle.

In the interview, Calomiris discusses how India’s growth and potential for growth compares with that of China; the challenges confronting India; and the shifting patterns of labor away from the agriculture and into the IT sector.

Here is an excerpt from the interview in which Calomiris discusses the political and economic impact of globalization on India:

How has India’s place in the global political field changed over the last several decades?

I think that global political economy and India’s ideological predisposition contributed to India’s isolation during the Cold War era. India was opposed to the kinds of things that have proved to be big parts of the solution to its poverty, especially participating in global markets. There was a protectionist view of the local industries and maintaining a commitment to workers’ rights rather than a commitment to creating jobs. If India were a rich country, that would be fine, but poor countries first need to find people jobs. That’s not saying that workers should not have rights, but that there is a need to balance the creation of jobs and the rights of workers who already have them; India’s lack of balance in this regard worked against its growth.

One could argue that part of what inspired India to change was China. When India saw China, the other huge and impoverished economy in the world, its very poor next-door neighbor, start doing great things, it took notice. In Latin America, similarly, the progress of Chile in the 1980s had a similar effect on Argentina in the early 1990s.

Globalization allows countries to learn from each other’s experience: a country can see the visible advantages of orienting itself toward being able to take advantage of participating in global markets to elevate its people out of poverty. Many people were skeptical of this back in the 1950s and the 1960s when socialist, protectionist dogma reigned in many developing economies. Now the successes of China and India make it evident that such skepticism is no longer reasonable. The main contribution of globalization in both countries has been to reduce extreme poverty and to create a burgeoning middle class.

The always interesting Policy Innovations recently excerpted from William Duggan and R. Glenn Hubbard’s article “The Forgotten Lessons of the Marshall Plan”, which originally appeared in Strategy & Business. Duggan, author of Strategic Intuition: The Creative Spark in Human Achievement, and Hubbard argue:

A thriving business sector is the key to improving political and social conditions in Africa today. And Africa today needs that sort of help. The first Marshall Plan accomplished even more than its creators had hoped; if its successor is designed with the same conceptual base, then history could repeat itself in another part of the world.

Many policymakers have suggested using the Marshall Plan to improve conditions in Africa. Duggan and Hubbard agree that such a plan is necessary but

most of the existing proposals represent a great misunderstanding of the intention of the original Marshall Plan and the way it worked. It was less a sweeping program of foreign aid to governments and agencies than a large-scale effort to restore the power of business as a growth engine. A true Marshall Plan for Africa could ignite growth and reduce poverty, but only through a set of institutions that are different from those the current aid system is currently using.

While recognizing that Africa today is far different than war-ravaged postwar Western Europe, Duggan and Hubbard believe that elements of the original Marshall Plan, properly understood, can be successfully applied. They suggest:

* An effective Marshall Plan for Africa should focus exclusively on business development

* There should be a focus on creating local financial institutions, business schools and associations, anti-corruption units, and courts

* An international commission should be create to oversee, collect, and manage funds from governments and donors

* African countries should be encouraged to create policies to foster business development

* Funds should be dedicated to a variety of purposes. Above all, they should not go for government-designed economic development plans, whose track record has not been successful

Duggan and Hubbard also wrote about this issue in an editorial that appeared in the Financial Times.

This post is by Devin Stewart and was originally posted on Fairer Globalization, a blog devoted to reflections on articles and events related to the Carnegie Council’s online magazine Policyinnovations.org.

Companies can’t succeed in a society that fails.

That expression nicely captured the message at Geoffrey Heal’s talk at the Carnegie Council’s Global Policy Innovations program on his new book When Principles Pay: Corporate Social Responsibility and the Bottom Line. Heal, a professor at Columbia Business School, credits the phrase to a friend of his.

Does it really pay to be ethical? Do principles pay, as the book’s title suggests? Not only does Heal touch on CSR’s manifestations from Adam Smith to Starbucks in an elegant sweep, he makes an argument that principles do pay, pointing to philosophical, empirical, and anecdotal evidence.

In the book, Heal sets the philosophical stage. Adam Smith, he reminds us, argued in 1776 that if everyone acts in his or her own interest, society would benefit—the concept known as the invisible hand. From Heal’s book:

He was arguing against do-gooders and in favor of self-interested behavior, at first sight a strange position for a moral philosopher. What was counterintuitive is the claim that self-interested behavior by each individual in society is good for society as a whole—‘By pursuing his own interest he frequently promotes that of society.’

The invisible hand has two problems, however. One was less relevant in Smith’s day. That is the issue of external costs. Private costs are those paid by the person carrying out an action. In the case of driving a car, those would be the cost of gas and insurance, notes Heal. Meanwhile, the external costs are those that everyone pays, in pollution, climate change, and congestion, for one person using a car. The same applies to the operation of a company. Some costs are borne by the company while others are borne by society.

The second is fairness. Fairness may sound removed from modern economics. But Heal reminds us that it is not. Just as some measures in the name of efficiency could be inhumane, Heal points out that insider trading and favoritism are not condoned in the ethics of our modern capitalism, whether we think about it that way or not. Similarly, as Heal put it yesterday, is it fair to pay someone a dollar a day even if that is the market clearing wage?

Since the birth of the corporation, these organizations have somewhat lost their way. We might need a Thomas Aquinas, Martin Luther, or Nagarjuna of the business world to come around and remind us that corporations should be run for the good of society—the second part of Smith’s invisible hand formulation: …promotes that (interest) of society. Shouldn’t we recall that promoting society’s interest was the original goal of corporations?

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