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.

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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:

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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.

Irrational fear: No good at risk

The Economists reviews of “Risk: The Science and Politics of Fear” by Dan Gardner
THE official death toll from the September 11th terrorist attacks in 2001 was 2,974. But in 2002 America’s death toll on the roads grew by more than 1,500—casualties of the terrorism-inspired exodus from safe aeroplanes to dangerous motor cars. A swan washes up on a British shore, dead from bird flu, and the press panics, while the 3,000 people who die every year on the country’s roads (13 times the number of people who have ever died from bird flu) go largely unremarked. Human beings are notoriously bad at dealing with risk. Two new books explore why, and investigate the effects that misunderstanding risks can have on public policy. The first, an excellent work by a Canadian writer, Dan Gardner, is a broad meditation on the nature of risk, beginning with a psychological explanation for why people find it so difficult to cope. Mr Gardner analyses everything from the media’s predilection for irrational scare stories to the cynical use of fear by politicians pushing a particular agenda.

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Introducing the Meeting Meter?

Are you participating in too many meetings? Are these meetings too long? Time is money and group time costs much more money than the time of a single person. With the Meeting Meter™ you can develop an agenda and calculate the true cost of meetings while they take place. The Meeting Meter™ is a simple tool for creating more effective meetings.

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You can download the Meeting Meter™ for free.

What CEOs are Reading

The common perception is that CEOs are reading the latest popular management books to help them with their difficult job. An article in the New York Times suggests otherwise. I am not sure if the CEOs that Harriet Rubin portrays in here article are representative of all CEOs and I think the title of the article “C.E.O. Libraries Reveal Keys to Success” is an overstatement, but any manager should read what she has to say. 

Harriet Rubin: Michael Moritz, the venture capitalist who built a personal $1.5 billion fortune discovering the likes of Google, YouTube, Yahoo and PayPal, and taking them public, may seem preternaturally in tune with new media. But it is the imprint of old media — books by the thousands sprawling through his Bay Area house — that occupies his mind. “My wife calls me the Imelda Marcos of books,” Mr. Moritz said in an interview. “As soon as a book enters our home it is guaranteed a permanent place in our lives. Because I have never been able to part with even one, they have gradually accumulated like sediment.” Serious leaders who are serious readers build personal libraries dedicated to how to think, not how to compete. Ken Lopez, a bookseller in Hadley, Mass., says it is impossible to put together a serious library on almost any subject for less than several hundred thousand dollars. Perhaps that is why — more than their sex lives or bank accounts — chief executives keep their libraries private.

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New School of Strategy & Entrepreneurship launched in Sydney

The UNSW Academic Board has approved the creation of a new School of Strategy and Entrepreneurship within the Faculty of Business (incorporating AGSM) to continue AGSM’s general management teaching and research. To be headed by Associate Professor Peter Murmann, the new school will focus on innovation and entrepreneurship as a subject within general business. Welcoming the move, Professor Alec Cameron, Dean of UNSW’s Faculty of Business (incorporating AGSM), said the new schools’ vision was to be recognised as Australia’s leading cluster of scholarship in the area of strategy and entrepreneurship research, teaching and executive development. “After the integration of AGSM and the Faculty of Commerce and Economics there were several existing schools but none was dedicated to general management and strategy,” said Professor Cameron. “So as part of the integration the idea was to create a separate school, and to include entrepreneurship to highlight the fact that the concerns of the general manager and the entrepreneur were both being addressed and people were being prepared for these roles.”

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The Global Climate Crisis

The website for An Inconvenient Truth provides the basics facts about the science of climate change.  Watch the trailer for film.

Give the DVD to your friends this holiday season.

Commissioned by the British government, the economist Stern published on October 30th his study evaluating the economic consequences of global warming. He writes: “The scientific evidence is now overwhelming: climate change presents very serious global risks, and it demands an urgent global response (p. i) ...There is still time to avoid the worst impacts of climate change if strong collective action starts now.” (p. xxvii) You can download a summary of his review here. If you don’t have time to read the 27 page summary of the 600 page report, here is a short review of its conclusions in the New Yorker.

Reflections On “The Long Tail” - Give me Good Data!

A few days ago, I came across a very positive review of The Long Tail, a new book by Wired Maganize writer Chris Anderson. The book’s main thesis is that “the future of commerce and culture isn’t in hits, the high-volume head of a traditional demand curve, but in what used to be regarded as misses - the endlessly long tail of that same curve.” The books purports to show that the 80/20 rule (most sales derive from a few products) does not apply any more with internet retailing because internet retaling can stock many more items. This morning Lee Gomez in his Wall Street Journal column trashed Anderson’s analysis, claiming that Anderson’s data was flawed. (You can read the Gomez colum “Long Tail’ May Not Wag the Web Just Yet”  on WSJ.com or through your library’s article database.) Anderson in turn claims that Gomez did not get the data right and wrote a facinating rebutall on his website. What this exchange underlines is that getting good data and working meticulously to draw the correct conclusion often is worth a “fortune” for managers. More broadly, before you adopt a new fashionable business idea, ask yourself what data supports that the idea in fact is going to work. With more data you might have realized that the idea hurts as often as it helps.

The Essential Drucker: The Best of Sixty Years of Peter Drucker’s Essential Writings on Management

One of the things that made Peter Drucker such a superb writer on management was his intense and wide ranging curiosity about everything in the world and his keen eye for the essential aspects of reality. Unlike many other people who paid with their life for not wanting to see reality, Drucker, for example, extrapolated from what Hitler had said in the years before becoming Chancellor of Germany in 1933 and left for England the moment Hitler rose to power. Drucker died a few days ago at age 95, but many of his insights are as valid as ever. Drucker’s writings have been edited into one book a few years ago, which is available electronically on Kindle. The value of the book lies not so much in giving concrete instructions about what you should do as a manger but in making you think about your own situation. Here are some of the key insights, the foremost being that management is about human beings.

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Even the Best Cannot Predict the Future

It is very useful to recognize that the social world is too complex to predict well what will succeed and what will fail. Those who think they know with great certainty what will succeed run the danger of overinvesting in their pet scenarios. What is the lesson? Just like with stocks, we should always have a portfolio of beliefs about the future, reducing the risk of getting stuck with the wrong scenarios.

“I think there is a world market for maybe five computers.”
—Thomas Watson, chairman of IBM, 1943

“I have traveled the length and breadth of this country and talked with the best people, and I can assure you that data processing is a fad that won’t last out the year.”
    —The editor in charge of business books for Prentice Hall, 1957

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Who Says Elephants Can’t Dance: Inside IBM’s Historic Turnaround

In the early 1990s, IBM was in danger of going bankrupt. Loius Gerstner was called in to turn the company around.  Anyone who is trying to change a formerly successful orgazation will benefit from reading Gerstner’s thoughts on change management. Beware: the book starts out slow, turning off many readers. But after the first 20 pages, Gerstner’s training as an organizational consultant provides him the analytic language to lay out what are the key challenges in changing large organizations. Because he was an outsider at IBM, he has no reservations to analyze how IBM got itself into a near death experience.  I highly recommend this book.

The Freedom Tower Case: Why is group decision making not better individual decisions

Individual human beings have limited skills, knowledge,  and expertise can get carried away by emotions when making decisions. One would think that involving multiple people in a decision could overcome the limitations of individual decision making but social psycholgoists have long known that groups have their own limitations. The New York Times published a pertinent article on how a comittee came up with the redesigned Freedom Tower that architectual critics find dissappointing given the grandeur of the originial proposal.

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