When I closed my eyes and just listened to the conversation, it was 40 years ago in the fourth floor walk-up that the four of us shared in Allston. Here was Johnny’s in-depth analysis of almost any business subject; Jim’s minute-by-minute assessment of the vagaries of the stock market; Mark’s perspective on the woes of U.S. and British capitalism – the issues had changed, but not our personalities. We had had lots of experiences, but we retained a lot of the same biases. It was like we were all back at business school.
In fact, we were back at the School two weekends ago. And, in some cases, we were back in the same seats that we occupied in the same classrooms in 1969. Well – not exactly the same seats: the new ones are a lot softer and arguably easier to fall asleep in. But no one was falling asleep this time around – there was too much to absorb in too short a time – seventy 75-minute interactive symposia in six time slots over two days led by the School’s top faculty members.
Oftentimes, finding the nuggets in meetings and conferences requires sifting a lot of sand. When we were students, it was hard to be certain that any particular class or subject was going to have particular relevance to one’s career. In October 2009, however, with my multiple clients finding challenges (and occasional opportunities) at almost every turn, it seemed like each classroom session had relevance for small businesses.
A sample from the smorgasbord:
From Professor Regina Herzlinger – referencing her new book Who Killed Health Care?
“Current tax policy generally permits employers, but not individuals, to use pre-tax income for buying health insurance. Therefore it is much cheaper to buy insurance through an employer than in the individual market. Because tax-exempted employer-based insurance is not portable – workers can’t take it with them when they change jobs – this harms labor mobility: people hesitate to leave jobs at big firms that provide health insurance to work for small firms that might not, a phenomenon known as ‘job lock.’
“A simple solution would be for Congress to simply extend the present tax exclusion to all employees: an employer who today spends $17,000 on health insurance for the family of an employee, for example, could instead offer her $17,000 in wages, provided the employee purchases at least a catastrophic health- insurance plan that is appropriate for her income. The amount spent on health insurance would remain tax-free.”
Stock-taking from the Bayou: What a boon to businesses everywhere not to have to deal with health insurance. Increasing each employee’s pay by the amount of the employer’s avoided premium would still leave major cost savings for the business. And the individual could then customize his/her own health plan from the market options that would quickly develop.
*****
From Professor Bill Sahlman – “Managerial Lessons of the Financial Crisis”
“While the magnitude of this financial crisis is startling, in reality nothing new has occurred. The crisis was based on incompetence, strong incentives, and flawed accounting and control systems – and everyone is responsible.
“More regulation will occur, but it will do more harm than good and will not prevent a future crisis. This entire episode will be repeated (at least in part) within a decade.
“Incentives are critical to everything in the economy. In many companies and roles, there is an asymmetric payoff structure. This means that if an individual is involved in a positive, highly profitable result, the individual enjoys significant upside (i.e. a big bonus), but is shielded from negative downside consequences.”
Stock-taking from the Bayou: The owner/president of a small company has to have outside perspective. Being totally focused on the company and its industry is the equivalent of being tone deaf when you’re a mouse dancing with elephants – you’ll zig when you should have zagged and get flattened.
*****
From Emeritus Professor Ben Shapiro – “Tighten the Belt without Strangling the Business”
“Many financial models don’t take into account how business factors are correlated with one another. However, when the economy is weak, correlation causes financial traps to emerge. These pitfalls may be related to inventory, accounts receivable, or other key business indicators. This is illustrated well by the Covenant Trap:
“When sales go down, inventory goes up. Next, prices go down so the inventory is worth less. Customers pay more slowly or don’t pay. EBITDA goes down. As a result, financial needs increase because the business has to support its working capital. Consequently, the ratio of debt to EBITDA, which is built into loan covenants, goes up. Banks then raise the interest rate, and the company’s interest expense goes up.”
Stock-taking from the Bayou: Since the days of 13-column worksheets and pencils with erasers, the basis of corporate financial management hasn’t changed. You develop the detailed financial projection, and then you factor in the “what-ifs.” You review and update your assumptions and the financial implications at least quarterly, making sure that you test the downside (e.g. the unit price drops at the same time that raw material cost rises). Then, having quantified your risk, you begin making decisions.
*****
You really can go back, if you’re still in the game. Johnny, Jim, Mark, and I – we’re all still players. Yielding to each other’s expertise, we don’t argue as much as we used to, and we’re all very much aware of what we don’t know, about a lot of things. But when the day is done, we are agreed on at least one thing – there’s nothing like returning to the classroom with recognized expertise in at least one area. Even if you didn’t read the case, as Dean Jay Light observed, “you were prepared for life’s cold calls.”
Alligator Bites
A caution flag for reunioners of all vintages was raised by Professor Tom DeLong in his seminar “Why Smart People Won’t Change” [adapted, as follows] –
“High achievers work hard to resolve three psychological tensions:
- A quest for significance/purpose. People work not just for money but for significance, a sense that they are making a difference and have a purpose.
- The need for identity management. People strive for an identity they feel proud to own.
- Fear of abandonment/loneliness. No one wants to be ‘voted off the island.’ An individual’s perception of how accepted he or she is by a group matters. A Gallup poll found that the number one factor in whether an employee stays at a firm is whether anyone asks during the day how he or she is doing. Number two: whether the employee has a close friend in the organization.
“To develop high achievers to their full potential, managers need to understand their motivations and fears – and help them get out of their own way. Managers and co-workers can influence how successfully an individual resolves these anxieties since all three depend to some extent on the perceptions of others.
“Service-oriented firms whose success depends on high achievers often compensate well enough to retain talent while ignoring individuals’ personal needs. This negligence can lead to a disgruntled workforce, hurting engagement… The difference between organizations where the employees feel engaged versus those who are just going through the motions is night and day.”
Draining the Swamp
“Screeching to a Halt: Growth in the Working-Age Population”
| Growth – | 1970-2010 | 2010-2050 |
| Country: | ||
| Mexico | 200% | 25% |
| Brazil | 150% | 20% |
| India | 140% | 40% |
| China | 120% | – 20% |
| South Korea | 110% | – 25% |
| Australia | 75% | 10% |
| Canada | 70% | 0 |
| United State | 60% | 25% |
| Netherlands | 40% | – 10% |
| Spain | 35% | – 40% |
| France | 25% | – 10% |
| United Kingdom | 20% | 0 |
| Russia | 20% | – 46% |
| Italy | 15% | – 40% |
| Japan | 12% | – 35% |
| Germany | 10% | – 25% |
Source: Deloitte Research / UN Population Division , as presented by Tamara Erickson