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.

BP does not try to run its rural service stations in Australia

Excerpt from BRW: For an expanding independent petroleum retailer, customer relationships are everything.
Biq organisations are usually considered to be more efficient than smaller enes - but rarely more customer-friendly. Case in point, big banks. sharehelders love their taut back offices and fat profits; customers hate their skinny front lines and rate them well below small credit unions and building societies in satisfaction surveys.
It is a business theory that influences how oil companies distribute fuels in Australia. In cities, drivers have choices and can seek out the service station offering the cheapest petrol. In the country, the distance between service stations is qreater and what people expect from them - mechanical repairs and farm deliveries as well as fuel - is more varied.
Accordingly, the local arms of some of the world’s biqgest companies run city statiens themselves but use independent operators elsewhere. “I don’t think we have the ability to understand and build the sort of relationship with customers that is really important in rural Australia,” ‘BP Australia’s vice-president of wholesale reseller and retail, ‘Dean Salter, says.  However, ene of Salter’s independent operators, led by a predecessor in his position, is trying to prove that big orqanisations can be intimate as well as efficient.

Read Full Story.

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

Paulson on the diversity of firm in the financial industry

Trying to imitate high-status Newtonian physics, management scholars over the past fifty hear have tried to formulate general laws about the behavior of organizations.  In his statement after the passing of the $700 billion bailout of the financial industry, Paulson in my view correctly emphasized that the salient fact about most industries is the diversity and not the sameness of firms within them. 

Paulson Statement: By acting this week, Congress has proven that our Nation’s leaders are capable of coming together at a time of crisis, even at a critical stage of the political calendar, to do what is necessary to stabilize our financial system and protect the economic security of all Americans.

The American people will appreciate the leadership of their elected representatives and senators who took bold action to help stem a severe credit crunch that threatens to cost many jobs and undermine access to credit for working Americans.

This bill contains a broad set of tools that can be deployed to strengthen financial institutions, large and small, that serve businesses and families.

Our financial institutions are varied – from large banks headquartered in New York, to regional banks that serve multi-state areas, to community banks and credit unions that are vital to the lives of our citizens and their towns and communities. Each institution has its own unique benefits, and their collective strength makes our financial system more resilient, and more innovative. The challenges our institutions face are just as varied – from holding illiquid mortgage backed securities, to illiquid whole loans, to raising needed capital, to simply facing a crisis of confidence. This diversity of institutions and challenges requires that we deploy the tools in this rescue package, in combination with the tools the Fed, the Treasury, the FDIC and other bank regulators already have, in a variety of ways that addresses each of these needs and restores the ability of our financial system to fuel our broader economy.

There is no one-size-fits-all solution to alleviating the stress in our financial system. Each situation will be different and we must implement these new programs with a strategy that allows us to adapt to changing circumstances and conditions, and attract private capital. The broad authorities in this legislation, when combined with existing regulatory authorities and resources, gives us the ability to protect and recapitalize our financial system as we work through the stresses in our credit markets.

We will move rapidly to implement the new authorities, but we will also move methodically. In the coming days we will work with the Federal Reserve and the FDIC to develop strategies that deploy these tools in an expedited and methodical way to maximize effectiveness in strengthening the financial system, so it can continue to play its necessary and vital role supporting the U.S. economy and American jobs. Transparency throughout this process will be important, and I look forward to providing regular updates as we move ahead to implement this strategy.

Source

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

Scorecard: Wesfarmers after Coles Acquisition

In the 1990s and early 2000s, Wesfarmers showed how a corporation could be successful with a similar strategy as GE in America: buying and selling unrelated businesses. But then private capital entered the acquisition market,  bidding up the price for Australian corporations that were up for sales. Wesfarmers found it more difficult to pursue it disciplined strategy of finding acquisitions that you be managed more effectively and unlock shareholder value. Almost two years ago Wesfarmers but the underperforming Coles supermarket chain. Plenty of commentators were worried that Wefarmers, breaking its traditions, overpaid for Coles and would never be able to improve the performance of Coles as the Perth-based conglomerate had done with earlier acquisitions such as Bunnings.

So far the Coles acquistions is not perceived as a great success story. Wesfarmers stock has underperformed compared to the index.

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. 

Hong Jiang

Selection Committee for TIM Best Dissertation Competition, Academy of Management

Charles Tilly 1929- 2008

I don’t know anyone who has come in contact with Charles Tilly and who was not inspired by him. For those who have never met him, here are wonderful tributes to this exemplary scholar.
Social Science Research Council Tribute Website
Tributes by Scholars
NY Times Obituary

April 29, 2008

Columbia University: President Bollinger’s Statement on the Passing of Professor Charles Tilly

Columbia lost one of its finest citizens when Professor Charles Tilly passed away April 29. Most recently the Joseph L. Buttenwieser Professor of Social Science, serving the departments of Political Science and Sociology, he was a scholar of boundless energy and intellect. Few could, or will ever, match his scholarly output and lasting impact. His 50 years of teaching, writing and intellectual inspiration will be missed here at Columbia and everywhere people seek to understand how history and societies move forward.

The extraordinary half-century career of Charles Tilly continuously demonstrated scholarship that transcended disciplinary boundaries. It seemed that he could write, interpret, and explain virtually anything to curious minds. With more than 600 articles and 51 books and monographs bearing his name, Charles Tilly literally wrote the book on the contentious dynamics and the ethnographic foundations of political history.

Though he received an extraordinary number of special awards, scholarly inductions and honorary degrees during his long and productive career, we will remember that, since 1996, he was a distinguished member of the Columbia community. His students, fellow faculty members and friends will all remember someone not only who reached and remained at the pinnacle of his field but also a warm and valued colleague who never stopped asking profound questions.

Lee C. Bollinger
President

http://www.columbia.edu/cu/news/08/04/tilly.html

Alcaltel & Lucent: The French American Merger does not realize the promised benefits

WHEN Alcatel, a French maker of telecoms equipment, announced its plan in 2006 to merge with Lucent, an American rival, reactions were mixed. There was general agreement that bigger was better and that the combined firm would benefit from greater geographical reach. But there was also scepticism that its French and American managers would be able to get along. With good reason, it seems: on July 29th Alcatel-Lucent announced its sixth consecutive quarterly loss and the resignations of Serge Tchuruk, its French chairman, and Patricia Russo, its American chief executive. Their firm’s troubles stem in large part from its internal clash of cultures. Read more on Economist.com

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.

Automatic Coding of Printed Materials

Traditionally most researchers working with printed data sources have entered data by hand to convert it into electronic format. If a research project involves large amounts of data from similarly formatted sources – for example, when one tries to create a longitudinal database of directory information spanning many years – entering this data by hand is a very labour intensive and tedious task. We wanted to automate the coding of printed directory information in order to cut down the time it takes to transfer this information into electronic data. Once the data is in electronic format, it can be further analysed with a plethora of software packages ranging from Microsoft Excel, FileMaker, SAS and SPSS, depending on the needs of the particular researcher. The purpose of this technical paper is to share with other scholars in a clear and practical way the methods we developed for automating the coding of printed information. Download article.