Archive for July, 2009
Friday, July 31st, 2009
Fresh off his prison sentence for his role in a dogfighting ring, former NFL quarterback Michael Vick was granted a conditional reinstatement on Monday from NFL Commissioner Roger Goodell. The conditions allow for Vick to sign with a team and participate in preseason games, but forbid him from playing until at least week six of the regular season. So far, however, no team seems to be interested in Michael Vick.
I would be surprised if Michael Vick isn’t playing in an NFL uniform for the preseason games allowed and then after his suspension is lifted later this fall. I would also be very surprised if he’ll be an NFL quarterback as early as this season, barring an injury or very poor performance by a starter. As a football fan I have to admire his athletic talent—something some NFL teams need as a roster spot.
What about the dogfighting conviction and jail time? Signing Michael Vick would be tough for teams whose ownership and management find the crime onerous and/or fear a public relations backlash from the media and fans. Other teams and their fans might counter that he pled guilty and served the sentence imposed by the courts. Without naming names, I bet most of us could guess the uniform colors of both sets of teams. Remember, both the Steelers and the Raiders wear black.
Thursday, July 30th, 2009
A recent article in The Wall Street Journal looks at handbag retailer, Coach Inc., and its efforts to maintain its luxury image while lowering prices to meet weakening consumer spending. Chief Executive Lew Frankfort says he doesn’t believe consumer spending will return to prerecession levels, so he wants to keep Coach within the “sweet spot where we believe the market will settle.”
Smeal’s Lisa Bolton studies pricing and consumer spending and offers additional strategies for marketers to position luxury brands:
Coach and other luxury brands face a dilemma in the present economic situation: how to accommodate more frugal consumers while defending the luxury image of the brand? One approach is to use price promotions but such promotions can cheapen the brand image and “train” consumers to expect price discounts in future. (It doesn’t do profit margins any favors either!)
Another approach is to extend the brand into lower priced offerings, as Coach has done with its new Poppy line, for example. Although doing so also runs the risk of undermining the brand image, Coach is moving in this direction because the company believes that the changes in consumer spending will be long-lasting. Indeed, why are consumers willing to pay hundreds of dollars for a handbag? Understanding that question is more critical than ever in today’s marketplace. Research suggests that consumers purchase luxury brands for a variety of reasons—including a belief in the superior quality and workmanship of the products, the desire to reward oneself and self-indulge, and of course, the status and exclusive image of the brand.
For consumers, a lower-priced luxury brand offers a reference point for evaluating whether a higher-priced brand offers sufficient luxury to offset the price. The risk, of course, is that consumers will simply see the lower-priced brand as luxury for less, undermining the higher-priced brands. Hence the need to offer unique associations to differentiate the luxury brands further and justify the price differences—as Coach has tried to do with the “youthful energy” and “playfulness” of Poppy.
To manage the impact of extending the brand downward, marketers will need to carefully position luxury tiers and communicate that positioning to consumers, while at the same time watching out for the bottom line.
Looking for an upside to all of this? Well, the price of a nice handbag is now cheaper … if you can afford it to begin with, that is.
Wednesday, July 29th, 2009
“Executives are always trying to sell you on their companies when you talk to them,” says Gina Moore, portfolio manager at a Philadelphia investment firm, in the current issue of BusinessWeek. “Insider transactions signal where they really think the company is going without the corporate spin.” Author Lewis Braham goes on to discuss various ways to profit from watching insider’s buying and selling transactions.
Smeal’s Steve Huddart, KPMG Professor of Accounting, offers additional techniques and insight into the world of insider trading:
A different technique not mentioned in the article is to interpret carefully the insider filings of a company an investor is already following. For instance, the filing may disclose whether the trade is a planned trade that is undertaken within a so-called 10b5-1 plan.
Surprising research by Alan Jagolinzer, who graduated from Smeal in 2004 with a Ph.D. in accounting and is now on the faculty of Stanford University, shows that these planned trades predict future stock movements better than trades made outside of such plans.
As another example, trades are sometimes accompanied by a press release in which the company describes the reasons why the insider is trading. Many trades are for reasons that have much to do with the insider’s personal financial objectives and little or nothing to do with the company’s prospects. The disclosed reason is never as explicit as “the CEO is selling because he thinks the company’s prospects are in the toilet,” but each reader of the press release is free to form his own opinion of the explanation offered for the transaction. The absence of an explanation for a big transaction might also be revealing.
Tuesday, July 28th, 2009
A report commissioned by the Federal Accounting Standards Board and due out today accuses Congress of meddling in accounting rulemaking and strong-arming FASB into changing accounting regulations. “While it is appropriate for public authorities to voice their concerns and give input to standard setters, in doing so they should not seek to prescribe specific standard-setting outcomes,” the report reads.
More from Ketz:
Previous leaders of the FASB, including Armstrong, Kirk, and Wyatt, have acknowledged the presence of political factors and how they prevent standard setters from finding technical solutions to technical problems. And they yearned for a world in which standard setting would be insulated from politics. Alas, such a world does not exist.
Leaders of the FASB would be much better off if they just accepted the world as it is instead of bemoaning the one they face. Then they should embrace the political challenges and take the offense, as staying on defense is almost always a losing proposition. And they should not wait until the political pressures are too great when little or nothing can be done.
For example, immediately after the collapse of WorldCom, the FASB should have seized the moment. Investors and creditors were yelling and screaming for justice after the implosions of Enron and WorldCom, so much so that the almost economically comatose White House woke up, the Congress went from almost killing Sarbanes-Oxley to speeding up and ensuring its passage, and even Harvey Pitt found religion. The FASB should have taken immediate action to require the expensing of stock options. It also should have taken steps to change the accounting for special purpose entities. And, in the process, it could have dared anybody to prevent them from mandating more truthful and more transparent accounting.
… Let’s quit wishing for a world that doesn’t and won’t ever exist. That’s a child’s game. Let’s engage the enemy in the world we have. The FASB has something to contribute to the investment community, and its work is too important to whine about the tactics of the enemy. Let’s take the fight to the public. If the FASB did this, I think it would win. And we would all be better off.
Friday, July 24th, 2009
“The U.S. Congress is moving forward on a measure to give public company shareholders a nonbinding annual vote on executive pay, a concept backed by President Barack Obama that has gained traction amid the recession and credit crisis,” Reuters reports. “Critics—including some investor rights proponents—argue that say on pay will not rein in U.S. business leader compensation or help spotlight companies where pay practices need a serious overhaul.”
Smeal’s Edward Ketz has another solution for excessive executive compensation: Give shareholders more influence over corporate boards.
“The executive compensation issue remains a hot-button item,” Ketz writes in a recent column. “I think the key institution in this matter is the board of directors. If empowered and if held accountable for their decisions, I think the board of directors could properly address the issue of executive compensation.”
More from Ketz:
The board of directors supposedly represents the shareholders, but often belies that point by assisting managers in their grab for power and wealth. The Congress could help by enacting legislation that would allow investors to sue directors when the directors abrogate their duties to the shareholders. (Recall that the Supreme Court greatly restricted the liability of directors in Central Bank of Denver v. First Interstate Bank of Denver.)
Of course, the impotence of most boards of directors is frequently the consequence of allowing managers to choose their buddies to be on the board. “Independent directors” is a joke; I doubt if very many of them are really independent. So another thing that should be done is to give shareholders the right to vote for the directors. And not with a manager-stacked deck of choices as if we lived in some communist country. Give the shareholders the opportunity to add candidates to the ballot. Again, they are the owners!
Wednesday, July 22nd, 2009
In the latest issue of BusinessWeek, Ernst & Young Partner Billie Williamson offers tips for managing employees who work remotely. “A lot of companies are now looking at having people work virtually,” she writes. “It’s easy to accommodate differing schedules, schedule meetings on short notice, reduce travel expenses, be more ecologically friendly, and decrease unproductive travel time.”
Telecommuting also results in higher morale and job satisfaction and lower employee stress and turnover, according to research by Smeal Ph.D. student Ravi Gajendran and David Harrison, Smeal Professor of Organizational Behavior and Human Resource Management. Gajendran and Harrison examined 20 years of research on flexible work arrangements, including 46 studies of telecommuting involving 12,833 employees, and found that telecommuting has mostly positive consequences for employees and employers.
“Our results show that telecommuting has an overall beneficial effect because the arrangement provides employees with more control over how they do their work,” Gajendran says. “Autonomy is a major factor in worker satisfaction and this rings true in our analysis. We found that telecommuters reported more job satisfaction, less motivation to leave the company, less stress, improved work-family balance, and higher performance ratings by supervisors.”
Their study, “The Good, the Bad, and the Unknown about Telecommuting: Meta-Analysis of Psychological Mediators and Individual Consequences,” was published in the Journal of Applied Psychology.
Tuesday, July 21st, 2009
The Economist reports that drugmakers GlaxoSmithKline, Novartis, and Roche are relaxing patent restrictions on their pharmaceuticals to allow for greater access to the drugs in poorer countries. “Health care activists have long maintained that the system for granting patents on drugs denies the poor access to essential medicines and discourages pharmaceutical firms from collaborating to develop new ones for neglected diseases.”
According to Smeal’s Daniel Cahoy,the international rules outlining when and how governments may “break” pharmaceutical patents also reduce incentives for innovation, in addition to failing to increase access to medicines in poor nations. In his 2007 paper “Confronting Myths and Myopia on the Road from Doha,” Cahoy proposes a new, compensation-based approach to drug patent compulsory licenses, which force drug patent holders to relinquish their property rights during a time of crisis.
Cahoy’s proposed licensing regime keeps innovation incentives intact, but also ensures that developing countries have access to pharmaceuticals.
During public health crises, he argues for a three-tiered arrangement, in which remuneration is based on the economic status of the country issuing the compulsory license. Industrialized nations will be required to pay full market price, even during a pandemic. Developing countries would be allowed a limited free ride, with royalties based on the individual country’s ability pay. Finally, the world’s least developed countries would be granted the ability to issue royalty-free compulsory licenses during health emergencies.
More on Cahoy’s plan is online here.
Friday, July 17th, 2009
The Congressional Budget Office warned legislators yesterday that the proposals currently being considered to reform the U.S. health care system “would fail to contain costs—one of the primary goals—and could actually worsen the problem of rapidly escalating medical spending,” according to The Wall Street Journal.
Smeal’s Keith Crocker explains that there is really only one way to lower the costs associated with health care—reduce its utilization:
There is no mystery about how to reduce health care costs. You reduce costs by withholding care. Period. Having said that, nobody wants to make that policy because when you talk about withholding care, we all get a bit nervous. Everybody wants to withhold somebody else’s unnecessary care; but if you or someone you know is sick, you want the best care on the planet, and because it’s free for you, you’re not constrained at all by what you demand.
I think the elephant in the room is the fact that there has to be some way of reducing the utilization of health care services to bring costs down. To do that, there are two options: We can either get people to voluntarily choose less or we can put a structure in place that withholds treatment using rationing, administrative rules, or something like that. As an economist, I believe in markets and I believe in consumer sovereignty; that is, consumers are the best judge of what’s in their best interest. I think the best way to solve a problem like this is to have well-educated consumers guarding their own pocketbooks. The other option is a public plan that has government employees telling us what services we can and cannot utilize.
Thursday, July 16th, 2009
Smeal’s Glen Kreiner, assistant professor of management, studies the organizational identity of the Episcopal Church, and explains how this latest development stretches its identity:
The vote this week by Episcopal Church lay and ordained leadership is really the latest step in a move toward full inclusion in the Church. In some ways, though, it’s surprising, particularly given the Archbishop of Canterbury’s plea earlier in the convention to avoid controversy. But with many conservatives having now left the church, there are fewer roadblocks for such a vote to pass.
The central question is—and has been for some time—how far can the identity of the Episcopal Church stretch without breaking? For some people, parishes, and dioceses, it’s already broken; they’ve left or have one foot out the door. For others, the identity still needs to stretch more—to be more inclusive. Still others see it right where they want it to be, or simply don’t care enough about the national church politics to take action. In our research on the church, we’ve heard many comparisons to marriage and divorce; for some, this vote means even less hope of reconciliation.
Another key question is, what will the response be by various parts of the Anglican Communion? Conservative provinces will likely see this as fuel on the proverbial fire, and more justification for leaving the Communion or demanding a significant restructuring of it. It’s really a contest for the identity of the Anglican Communion. For some, holding the Communion together is the priority, and theological or values differences are secondary. For others, the Communion is not worth holding together (at least in its current form) if it does not collectively reflect the same core values.
Friday, July 10th, 2009
Warren Buffett yesterday joined the chorus in favor of a second economic stimulus package to stem the rising unemployment rate and boost consumer confidence. Smeal’s Terrence Guay, however, argues that the timing isn’t quite right for another round of stimulus:
It’s hard to justify a second federal stimulus package at this point in time for economic or political reasons. Much of the $787 billion package from earlier this year has not yet worked its way through the economy, so there’s very good reason to give it more time to have its effect. Even with the unemployment rate just short of double digits, other parts of the economy such as housing and consumer spending appear to be stabilizing. And growing public concerns over the size of the federal budget deficit, projected to be near $2 trillion for the fiscal year ending in September, would make a second stimulus package politically explosive. Perhaps most importantly, the Obama administration has more important priorities now, including health care reform and a more serious U.S. commitment to climate change. Wasting political capital on an unpopular second economic stimulus package just doesn’t make sense this summer, if President Obama is to have any chance of success on these other two issues.