GE’ s Jeff Immelt refuses bonus for 2008

Very few executives have taken the step to cut their own bonuses when stockholder make big losses. Reading the national mood and the outcry over Wall Street bonus payments when the bank are bailed out by taxpayers, Jeffrey Immelt demonstrated leadership by refusing a bonus for 2008.

General Electric Co. Chairman and CEO Jeffrey Immelt passed up a $12 million bonus in 2008, a year that saw company’s stock price slide 56% amid a global economic crisis and declining profits at GE. “Earnings came in below where we expected,” Mr. Immelt wrote in a note Wednesday, citing declining equity markets and a sliding GE stock price in 2008. “In these circumstances, I recommend to GE’s Board of Directors that I would not receive a bonus in 2008.” He also said he declined a special three-year cash payout that goes to senior executives and which the board’s compensation committee said he earned.

Radical Rethinking of Cash Management

The Economist summarizes the profound implications of the financial crisis for the management of cash in firms.

SELDOM has corporate strategy been turned on its head so quickly. Barely a year ago, cash was a dangerous thing to accumulate: activist investors stalked companies, urging boards to return it to investors, to pay special dividends or to buy back shares. Ever since the 1980s the fashion had been to make companies as lean as possible, outsourcing all but your core competencies, expanding your just-in-time supplier system around the globe, loading up with debt to “leverage” your balance-sheet. Old-style defensive conglomerates, such as Arnold Weinstock’s General Electric Company, were dismantled. Companies that hoarded cash—even ones as good as Toyota and Microsoft—were viewed with suspicion.

No longer. For many big American companies, the day of reckoning came two months ago when the deepening financial crisis brought about the abrupt closure of the overnight commercial-paper market. This briefly sent even the most solid companies into a desperate scramble to find money to meet such basic obligations as paying their staff. Since then, the guiding principle for managers everywhere has been to gather up whatever cash they can find, and then do their damnedest to keep as much of it as possible for as long as possible.
Read full article.

Short History of Modern Finance

In it’s appraisal about the current state of capitalism (Capitalism at Bay) the Economists gives a useful summary of want went wrong.
Without doubt, modern finance has been found seriously wanting. Some banks seemed to assume that markets would be constantly liquid. Risky behaviour garnered huge rewards; caution was punished. Even the best bankers took crazy risks. For instance, by the end of last year Goldman Sachs, by no means the most daring, had $1 trillion of assets teetering atop $43 billion of equity. Lack of regulation encouraged this gambling (see article). Financial innovation in derivatives soared ahead of the rule-setters. Somehow the world ended up with $62 trillion-worth of credit-default swaps (CDSs), none of them traded on exchanges. Not even the most liberal libertarian could imagine that was sensible.

Read the Short History of Modern Finance courtesy of Economist.com

THE RECKONING: As Credit Crisis Spiraled, Alarm Led to Action

Background:The NY Times reports on the what triggered Paulson and Bernacke to seek an immediate 700 billion fund to prevent the American markets from collapsing. Read full story on NYTimes.com.

Risk will always equal potential reward

Greed, as it periodically does when traders and bankers forget the lessons of the past, clouded judgments. Some very smart people talked themselves into believing in the repeal of one of the fundamental laws of economics: risk will always equal potential reward. The idea that risk can be eliminated and high yields guaranteed is as idiotic as the idea that gravity can be suspended. Remember Long-Term Capital Management? Ten years ago it figured out how to eliminate risk using highly sophisticated computer programs and rolled up annual returns averaging 40 percent — until it collapsed in a heap.

Read more by John Steele Gordon on the Financial Mess: Greed, Stupidity, Delusion — and Some More Greed here.

The F.A.Q.?s of Lehman and A.I.G.

Doug Diamond and Anil Kashyap of the University of Chicago explain the recent financial crisis.

For most of the last 20 years we have been studying banks, monetary policy, and financial crises. So for us the events of the last year have been especially fascinating.The last 10 days have been the most remarkable period of government intervention into the financial system since the Great Depression. In talking with reporters and our noneconomist friends, we have been besieged with questions about several aspects of these events. Here are a few of the most frequently asked questions with our best answers.
Read more on NYTimes.com

Management Wisdom Courtesy of Jeff Pfefer

Jeff Pfeffer has spent the past twenty years figuring out what management ideas have some systematic data behind them and what ideas are make for a good story but are simply wrong. Guy Kawasaki (who wrote a fantastic little book on entreprepreurship, The Art of the Start, which I am using in one of my classes) has sat down with Pfeffer and asked him questions on his book What were they thinking?. Read the interview.

What Don Quixote Can Teach Managers and Entrepreneurs

Miguel de Cervantes. 2003. Don Quixote. HarperCollins Publishers, New York. Translated by Edith Grossman.

When I first encountered Don Quixote, I thought that a manager or entrepreneur could not possibly learn anything from this lunatic Spaniard. But on reflection I realized that Don Quixote provides some valuable insights into leadership and the challenge of dealing emotionally with the uncertainties inherent in any new venture. Let me briefly summarize the book:

Alonso Quixano, an unmarried retired country gentleman, has become addicted to reading fictional accounts of chivalrous knights who allegedly secured peace, justice, and prosperity for medieval society and were rewarded with great social prestige and extraordinarily beautiful maidens. Not realizing these knight tales are fictional, he commits himself to fight the evils in his native land by becoming a knight-errant, renaming himself Don Quixote. The book documents his adventures that invariably lead to failure and ridicule. Except for his neighbor Sancho Panza, who becomes Don Quixote’s squire, everybody realizes that Don Quixote is mad.  His imagination transforms the real world into the fantasyland of a medieval knight:  His castle is a commonplace inn, his ladylove—a peasant woman once met many years ago. The invading armies are flocks of sheep. The giants he attacks are just windmills.

There are two main lessons in the book: one for leaders and one for entrepreneurs.

A great vision is not sufficient to be successful. Without a good grasp of reality, you cannot make vision come true.  But when you are an ultra-realist as Sancho is, you cannot inspire anyone to follow you.  Don Quixote is able to lead and later keep Sancho from defecting in the wake of constant setbacks precisely because Don Quixote has no doubt that his vision is right and that they will succeed in the end. Sancho cannot take over this leadership role from Don Quixote because he lacks the ability to imagine a different future.  Therefore, to become effective leaders we also need to cultivate the imagination. When I help organizations develop their leadership, I will put more emphasis on the need to recruit skills to imagine a new future as well as skills to develop and execute the current strategy. Those skills don’t need to coincide in the same person.

The second key insight from the book for me is that we can deal much better with failure when we take on a job because we truly want to spend our lives in this line of work. Failure will almost certainly occur in some form for entrepreneurs, and in this book, Don Quixote repeatedly fails as a knight-errant.  Someone with little commitment to their work would perceive these setbacks as a reason to abandon the quest, but Don Quixote simply sees them as the cost of becoming who he wants to be.  As entrepreneurs, we had better not start a new business just for the money! When I recruit people in my organization for important jobs, I need to make sure that they are not doing it just to increase their paychecks.

Taming Your Inner Homer Simpson

My Kellogg students will remember that I asked them to rate their intelligence vis-a-vis the average member of the class. I routinely had 75 percent of all student who rate themselves above average. That is 25% too many. A colleague of mine warned me that 90% academics feel undervalued by their institution. But until now I read Dahlia Lithwick review of Richard Thaler’s and new book Nudge: Improving Decisions About Health, Wealth, and Happiness I did not know that 94 percent of professors at large universities to believe themselves better than the “average professor.” Read Lithwick excellent review of the book.

The Latest Reasoning about our Irrational Ways

Elizabeth Kolbert reviews in the New Yorker the latest on findings on how people behave in irrational ways when making economic decisions.  Read her Reviews of two new books.
“Predictably Irrational: The Hidden Forces That Shape Our Decisions” (Harper; $25.95); by Ariely, Dan;
“Nudge: Improving Decisions About Health, Wealth, and Happiness” (Yale; $25); by Thaler, Richard H.