Archive for June, 2009
Tuesday, June 30th, 2009
The Academy of Management’s Entrepreneurship Division has selected a paper by Smeal’s Tim Pollock as the recipient of its 2009 IDEA Award in the Thought Leader category, which is representative of the best published papers in entrepreneurship in 2008. Pollock and his co-authors Violina Rindova of the University of Texas and Patrick Maggitti of Villanova University will accept the award in August at the 2009 meeting of the Academy of Management, the leading professional organization for scholars in the field of management and organization.
Their paper, “Market Watch: Information and Availability Cascades among the Media and Investors in the U.S. IPO Market,” is available online.
Thursday, June 25th, 2009
In a letter to U.S. senators released this week, the heads of America’s Health Insurance Plans and the Blue Cross Blue Shield Association argue that a government-run health insurance plan, like the “public option” promoted by President Obama, would spell the end for employer-based coverage while greatly increasing insurance costs for those who retain private insurance.
Smeal’s Keith Crocker, Elliott Chaired Professor of Insurance and Risk Management, explains the economics behind the insurance industry claims:
On the surface, President Obama’s “public option” health insurance plan sounds innocuous and perhaps desirable, and I think his goals are laudable. The question that has caused a lot of the opposition is, “How will this public insurer work in practice?”
Private insurers are forced to, at a minimum, break even. They can’t afford to lose money promiscuously. A public insurance company, on the other hand, faces no such constraints. Look at Medicare, which is hemorrhaging money in terms of its future liabilities. In an attempt to reduce these future liabilities, Medicare is reducing the reimbursements rates that it pays to hospitals and doctors for providing services.
The problem with this approach is that a big chunck of health care expenses are fixed costs, and if Medicare, or this new public insurance option, chisels down what it’s going to pay doctors, somebody else has to pay those costs. They end up getting pushed onto private insurance companies, which will see their rates have to go up as a consequence, making them eventually unable to compete with the public option.
In a nutshell, forced under-reimbursements from the public option will cause health care providers to look for remuneration elsewhere, forcing them to charge higher rates to private insurance companies, and ultimately driving these private insurers out of the market. That’s the fear, and given what’s happened with Medicare reimbursements over the last decade or so, it is a legitimate one. If there’s a government plan that doesn’t have to break even, it’s going to ultimately torpedo private insurance coverage.
Tuesday, June 23rd, 2009
In Sunday’s New York Times, Smeal’s Barbara Gray is quoted in the “Career Couch” column about how to handle annoying and irritating colleagues. Gray says that a colleague who really grates your nerves could be your “nemesis,” or someone who irritates you on a psychological level unrelated to work.
In a 2007 article she penned for Smeal’s annual report, Gray offers some advice for negotiating with these nemeses:
We need to learn to “handle” our emotions, rather than hiding them, and remain open in the face of the other’s strong feelings. When it seems like your opponent is pushing all your hot buttons, it’s best to take a moment to assess the situation and confront the emotions that you’re feeling. This process is what I term “negotiating with your nemesis,” and mastering it makes negotiations with other people much more productive.
… In order to counteract our nemeses and their potential for emotional escalation, we must understand our reactions and learn how best to deal with them. The following steps can help in this difficult task:
1. Label your opponent’s behavior (to yourself). It’s okay to tell yourself that your counterpart’s behavior during the negotiation process is disturbing, distasteful, or even despicable; it may well be just that. But you must separate this judgment from the emotion you experience.
2. Label your own feeling. Take the time to notice and experience what you are feeling before you react. If you have a strong reaction to your opponent, this may be your nemesis. It’s perfectly fine to step away and calm down before returning to the negotiating table.
3. Step outside of your comfort zone. Handling emotions while negotiating can be upsetting. This process will likely make you feel uncomfortable. It’s important to recognize this and understand that both your reactions and those of your counterpart are normal and worth examining.
4. Identify and examine the assumptions that lead to your emotional reaction. Feelings arise when an assumption or taboo that we hold is violated. Finding the root assumption and realizing that it may not always be true can help us deal with the emotions that arise.
5. Express your own feelings appropriately. Rather than acting out your emotions, explain how you feel about the action of your opponent and why. This will help you express the emotion appropriately and ensure that your interests get a hearing without escalating the conflict.
Monday, June 22nd, 2009
Thursday, June 18th, 2009
The New York Times‘ “Room for Debate” blog posed the question yesterday, “Should Obama Speak Out on Iran?” One of the experts asked to weigh in was Smeal’s Fariborz Ghadar, director of the Center for Global Business Studies. He supports the wait-and-see approach, arguing that any statement other than an expression of support for the genuine will of the Iranian people would be counterproductive at this point.
You can read Ghadar’s complete statement here.
Wednesday, June 17th, 2009
President Obama today unveiled a new financial regulatory structure aimed at preventing future economic meltdowns. Below, Smeal’s Jean Helwege explains the impetus for the new oversight rules and explores the regulatory strengths and weaknesses of the Fed and the FDIC:
A prominent element of President Obama’s plan is to create a systemic risk regulator. The idea is that one agency will be charged with regulating financial entities that pose a risk threat to the economy as a whole. This agency will ensure that firms that fit into the “too big to fail” category will be more prudent and thus taxpayers in the future will not be asked again to pony up billions to bail out reckless financial firms.
The idea of a systemic risk regulatory really embodies two major reforms: consolidation of depository regulators and creation of a new body to focus on systemic risk. Our current system allows financial firms that offer deposits to choose one of several regulators: The Federal Reserve is the regulator for bank holding companies, such as Citigroup; the Office of the Comptroller of the Currency (OCC) is the regulator for nationally chartered banks; and the Office of Thrift Supervision (OTS) is the regulator for savings and loans, which surprisingly is the charter chosen by AIG, American Express, and several other behemoths that are not typically thought of as depository institutions.
While AIG is mainly an insurance company and its insurance subsidiaries are regulated by state insurance commissioners, AIG finds it convenient to offer checking accounts to its customers, and therefore has a thrift charter. All of these deposits are insured by the Federal Deposit Insurance Corporation (FDIC), which became the single regulator for deposit insurance in the 1990s for most checking and savings accounts (except those offered by credit unions). If you open a checking or savings account in this country, the firm offering you the account could be operating under the regulatory authority of the Fed, the OCC, the OTS, or it could be an account at a state-chartered bank that has no federal oversight. Moreover, the regulator of your bank is not assigned randomly—firms choose the charter they want, which means they effectively can shop for the regulator they view as most appealing. Frequently, they choose the regulator they believe is the most incompetent and therefore the least likely to exercise any authority. Since its inception in the late 1980s, that regulator has consistently been the OTS. Among the many sweeping changes in the proposed plan of reform is the intent to eliminate the OTS. If no other part of the plan is passed, this part should be.
Tuesday, June 16th, 2009
Smeal’s Al Vicere has written a new white paper that features insights from nine business leaders on management during the recession. Vicere interviewed the participants over the past several months to see how they are leading their organizations through this lean economy. He gleaned five points of advice from his conversations:
- Look Out: Focus intently on developments external to your organization—social trends, economic shifts, technological innovations, etc.—and consider them when making critical business decisions.
- Look Around: Be aware of your competitors’ reactions to these trends.
- Look in the Mirror: Take an active and personal approach to leadership in order to inspire, energize, and deploy your leadership teams.
- Look to Your Team: Build and rebuild your leadership teams by finding the right people and getting those people in the right places.
- Call for Action: Frame new targets, new goals, and new levels of achievement to define your organization’s future.
For more thoughts, insight, and advice from business leaders including, Christina Gold, CEO of Western Union, and Ed Stack, chairman and CEO of Dick’s Sporting Goods, download Vicere’s paper, “Surviving the Terrible Two(thousand)s: A Participant’s Guide.”
Thursday, June 11th, 2009
With Michigan’s unemployment rate growing right alongside the constricting U.S. auto industry, the state is looking to reinvent its economy in industries other than auto manufacturing. The state is wooing Hollywood film crews and venturing into wind and solar energy manufacturing. In fact, a new report from the Pew Charitable Trusts finds that Michigan gained 23,000 jobs in clean energy between 1998 and 2007.
Smeal’s Gerald Susman, associate dean for research and director of Center for the Management of Technological and Organizational Change, studies the economic impact of the clean energy industry and says that Michigan is well suited to excel in the green economy:
Michigan already has some very good alternative energy companies that are growing rapidly. One is Hemlock Semiconductor Corp. (HSC), a Dow Corning joint venture that makes polysilicon for use by solar cell manufacturers. Also, Dow Corning Corp. is building a facility to manufacture monosilane gas next to HSC. This specialty gas is used in making thin-film solar cells. Another company is United Solar Ovonic, which manufactures solar cells. These examples suggest that Michigan has a good base upon which the solar industry can grow. Growth may not be dramatic, however, as a typical expansion creates 500 to 600 permanent jobs (excluding construction jobs) and Michigan’s unemployment rate is the highest in the nation.
Another area that could result in job growth is solar energy installation. Although more service than manufacturing, the solar installation business is labor intensive and market entry into it is easy. Job growth prospects may be higher here than in manufacturing.
Additionally, Michigan is well placed to transfer existing technology and skills in metal fabrication from the auto industry to the wind industry. Gear boxes and generators used in wind turbines are similar to those used to make auto transmissions, for example.
One problem is that most of the major turbine manufacturers are foreign owned (mostly European) and have developed their supply chain relationships with European suppliers, especially for high-value added components. Currently, they would rather source from Europe, even with high transportation costs, than develop new relationships with American suppliers. The exceptions are for low-value added items like engine mounts or nacelles. These products contain little intellectual property and low risk of IP leakage to new and untested vendors. Also, towers and blades are too large and bulky to import so they tend to be manufactured close to where they will be installed.
One prominent study estimates that every 1,000 MW of additional installed capacity would create 3,000 manufacturing jobs, 700 installation jobs, and 600 operations and maintenance jobs. More than 8,500 MW of wind capacity was added last year, which should have created about 36,500 new jobs. Before 2008, this rate of job growth would have been considered highly optimistic. However, recent data from the American Wind Energy Association suggest that such projections are becoming realistic. A recently released study by the Pew Charitable Trusts indicates that California, Texas, Pennsylvania, Ohio, New York, and Florida (in that order) created the highest number of green jobs from all renewable energy sources in 2007. Michigan should look to those states as examples of how to grow its green energy sector.
Wednesday, June 10th, 2009
The New York Times recently reported on an area of investment that has remained lucrative even during the economic downturn: investing in lawsuits in exchange for a share of the winnings.
According to Smeal’s Anthony Warren, this is not a new investment trend. Law firms often accept cases on contingency and now some smaller companies are realizing the benefits that come with investor-backed suits.
More from Warren:
Originally, the concept was a way for small, undercapitalized companies to fight legal battles against large companies, which have a propensity to outspend small companies that file patent infringement suits. There are a number of law firms that take such cases on a “contingency basis,” whereby the legal work is not charged to the client. The law firm then typically takes 50 percent of any settlement that is reached with the large corporation.
For example, lawyer Morgan Chu took on a case against Microsoft on behalf of Stac Electronics. It was alleged that Microsoft had used Stac code for data compression embedded in a version of the MS-DOS operating system. Eventually the case was settled for more than $80 million in favor of Stac. Ron Chasteen, an entrepreneur in Minnesota did not have the $1.5 million dollars to fight an alleged technology theft case against Polaris Industries. Law firm Niro, Scavone, Haller & Niro took on the case contingently. The settlement was for $70 million—not a bad return for the law firm taking on the case.
Smaller companies are now realizing that raising funds to fight a law suit against a large company may be a better strategy than sharing 50 percent of the proceeds with a contingent law firm. For example, venture capital-funded AmberWave Systems raised additional equity funds of $15 million to fill its cash war chest when it filed a lawsuit for patent infringement against Intel Corp. Once Intel realized that there were sufficient funds available to AmberWave and that outspending the small firm in legal fees was no longer an option, a fair settlement was promptly reached, meeting the requirements of both parties.
Thus paradoxically, once a large company realizes that a smaller firm has the wherewithal either through investors willing to fund litigation, or an aggressive law firm with a strong litigation department as a partner, a settlement can usually be reached without a long drawn-out battle, or the need to spend a lot of money.
Small companies should therefore choose their patent law firm carefully, seeking a large practice with a record of winning in infringement cases and a willingness to take on contingent work. Such a choice may well avoid any litigation in the future.
Tuesday, June 9th, 2009
“The Obama administration plans to require banks and corporations that have received two rounds of federal bailouts to submit any major executive pay changes for approval by a new federal official who will monitor compensation,” according to The New York Times. Kenneth Feinberg, supervisor over the payouts to the families of the victims of the September 11, 2001, terrorist attacks, will enforce these compensation restrictions as the government’s new pay czar.
Smeal’s Tim Pollock, who studies executive compensation, is skeptical of the plan, stating the new position will create more problems than solutions.
More from Pollock:
Executive pay is out of control and it can’t be fixed by government regulation. Whenever the government tries to regulate compensation, compensation consultants always find a way around the regulations. In the early ‘90s, the Clinton administration tried to rein in executive compensation by limiting the tax deductibility of executive compensation in excess of $1 million, unless it was tied to company performance. This led to the increased use of stock options and instead of limiting executive pay, their pay skyrocketed over the ensuing 15 years and led to some of the risk-taking we see today.
Another problem arises with the current regulations only applying to companies that have received funds from the Troubled Asset Relief Program (TARP). If they are limited in what they can pay and their competitors are not, it will create an uneven playing field, making it even more difficult for these firms to recover.
It is also important to keep in mind that when talking about the financial services industry, the compensation of the traders and other mid-level employees is just as great an issue. They are the ones making the trades and engaging in excessive risk-taking that hasn’t gotten the financial services industry into trouble.
Nothing is going to change as long as 1) traders and mid-level employees are rewarded for taking risks that pay off and don’t suffer any consequences for the risks that don’t, 2) their compensation and the compensation of executives are tied to short-term performance measures, 3) analysts, directors, and others continue to focus excessively on short-term performance metrics (quarterly earnings) and over react to hitting or missing their expected earnings, and 4) most of the players involved have little or no understanding of how the financial instruments they have created work.
There has to be a massive culture shift on Wall Street that takes a longer term perspective on rewarding performance and making the traders and decision-makers responsible for failures as well as successes. The well-being of the system as a whole must be taken into account and not just the narrow self-interest of the traders, executives, and their firms.