Discussion of the Week - The Right Compensation Model?

Spurred by a Friday headline in the WSJ on CEO pay, an interesting discussion arose about the various ways to compensate employees:

1 - Performance of a group vs. company

2 - Stability of workforce vs. frequent turnover (competitive salaries)

3 - Stock Options only

4 - Vesting of Bonuses (pay it forward)

5 - Other??

Among the people in the discussion; a COO, a Banker, a Director at a company that is owned by a Private-Equity firm, and someone that has seen huge gains and losses from Employee Stock Option Plans.

How to avoid creating compensation models that lead to short-term decisions (profits) that may create long-term destruction of value? How much of the compensation should be tied to individual or group performance vs. company performance? How to create "internal start-up" environments that encourage your best employees to explore their great ideas without losing them to outside opportunities?

We did not come to any hard conclusions, but I suspect this discussion will continue throughout the program, and be heavily influenced by the changes coming out of the economic downturn. It was encouraging to see so many divergent viewpoints being debated openly. The program is really starting to bring together the breadth of topics that drive these types of conversations, and have been changing the thinking of the class.

Discussion of the Week - Financial Pricing Assumptions

This past weekend, we covered a case on pricing equities in FinMgmt. The core of the case was to highlight the various "Cost of Capital" elements and assumptions can create variability in pricing between analysts. How to determine an appropriate Risk-Free rate? How to determine the Cost of Debt?

An interesting side discussion came up from a classmate that works in the financial service industry (one of the remaining banks). He talked about how some of the banks were starting to dissect the algorithms and assumptions that are embedded in the planning software used by other banks (from IT vendors, not proprietary software). They were beginning to use that knowledge to create prediction models for how they would reacted to market conditions and use that to influence their strategy.

It creates an interesting dilemma for financial services. Do you incur the costs to develop your own software and models but give up the time-to-market, or use 3rd-party tools and software in exchange for faster availability? Where can the competitive advantage be gained, or lost?

Discussion of the Week - "What's your hustle?"

Fortune's latest issue has a list of the 100 Most Admired Companies. But the introduction to the article says that being most admired in today's economy is like being "World's Most Trusted Con Men", or "World's Nicest Pit Bull". Their point was that admiration for today's corporations is near an all-time low, both from the public and from employees.

Around 1am on Saturday morning, somewhat blurry-eyed from the FinMgm't case, a classmate and I started talking about how much we trust our current employer and what our future plans might be. Both of us quickly agreed that even the best employees were probably foolish to believe that their employer would keep them around if market conditions changed. The trust between employees and companies has been destroyed over the last 10 years (and especially of late), and that the relationship is ultimately just contract work, breakable at any moment.

Smart people will say that this is common sense, that you shouldn't expect anyone (or a company) to take care of you. I completely agree. We both completely agreed. So, the discussion progressed to how we hedge against having our current contract broken, and more importantly, what are we doing to have the next opportunity ready to hit the ground running? While I'll keep the details of the plans to myself, it became very obvious to both of us that they needed to start now (as a 3rd job, after the paying one and the MBA), and that it needed to leverage the Internet in many ways for the scale. And based on where the discussion went, I wouldn't be surprised if a few of these future hustles didn't interconnect or intertwine in several ways.

Discussion of the Week - Prioritizing Shareholders vs. Stakeholders

Over the weekend, we had our first Financial Mgm't class, with Dr.Sandra Dow. One of the readings for the class was a piece by Michael Jensen (Harvard Business School), entitled Value Maximization, Stakeholder Theory, and the Corporate Objective Function.

[I'm paraphrasing & summarizing here, so my apologies to Dr.Jensen for butchering his theory]

The paper makes the argument that companies need to consistently put the maximization of Shareholder Wealth as their top priority, ahead of goals to enhance Stakeholder "value".

It was an interesting topic for a couple of reasons:

1 - Several other courses have brought up the Balanced Scorecard model as an example of how to manage the business, often showing that Balanced Scorecard provides management with balance across Financial, Customer, Internal Business Processes, and Learning & Growth. This was the first time the Balanced Scorecard was presented as the wrong approach for running the business, and that it led to too many internal conflicts to be able to manage simultaneously.

2 - It was the first class with Dr.Dow, and the first couple hours were spent going over the Pros and Cons of these different prioritizations. Needless to say, it was a healthy discussion as my classmates had very strong opinions (on both sides) about how well each approach worked in their experience, the morality issues, the conflicts of interest with employee/mgm't stock ownership, how much lower-level employees or managers could impact shareholder wealth (ie. stock price), etc.. Dr.Dow has been very generous with her time in extending this discussion with several of us via email since the class, and I expect it will be an on-going discussion throughout the semester, especially given the existing economy (how we got in, and how we might get out).

Overall, it was a good discussion to reflect on how this applies to each of our companies, our existing roles, and if we'd make any changes if we held higher roles within our organizations. I personally used it to contrast some existing thinking I've been having about 20th Century vs. 21st Century thinking that has been inspired by Dr.Umair Haque, and his recent talk at the Daytona Sessions in Sweden.

[UPDATE: An interesting article looking at how Amazon has created an 180* turnaround on their balance sheet (2002-2009) and how it used an unorthodox model of revenue growth vs. profit growth.]

Discussion of the Week (casual) - Where does the Value of the MBA come from?

Sitting a lunch with some classmates this weekend, the conversation revolved to job-hunting, resumes, networking and other things that become top of mind when you read about the economy and layoffs on a daily basis.  The conversation then turned to what value you get from an MBA, especially in terms of it's brand, it's rankings, it's connections, etc...

There were a number of opinions about Wake Forest vs. Wake Forest MBA vs. Wake Forest Executive MBA, and if there should be a distinction between those programs and brands.  There was discussion about how to create opportunities between the Winston-Salem programs and the Charlotte programs (Charlotte is a peer campus for MBA programs).  And there was discussion about how we needed to look for more ways to network and explore with the students within our program.  

My personal opinion is that it's a 30/70 split between the knowledge you learn, and the people/experiences you encounter.  Don't get me wrong, what we read in the books/cases/articles are all very interesting  and valuable, but when you compare that to the 400+ years of experience across 12-15 industries that exists in our classmates, I think that 30/70 breakdown is about right.  

With more focus on case-method learning this semester, I think we're all able to learn more from each other's experience.  I've made it one of my 2009 goals to really focus on learning from my classmates, and I hope that more people make that a priority for themselves too. In December, I think we'll all look back and find ourselves better for taking that approach.

The Pace of Change

Following up on the recent Discussion of the Week, I found myself reading a recent BusinessWeek article on the World's Most Influential Companies. I thought it was worth highlighting this article, as it provides an alternative perspective on the pace of business change, which I previously highlighted. Sometimes really big numbers are good to get people's attention, and sometimes it's useful to bring a more focused lens.

Let's take a quick look at the list, and compare it with the 1990s and even the early part of this decade.

1. Apple - Two things are amazing here - First, we don't call them Apple Computer anymore, because while that is still the core of their business, the influence they have created are in Lifestyles, Telecommunications, Music, and Video. Second, they've overtaken Microsoft. Actually, both Apple and Google (also on the list) have ovetaken Microsoft. 10 years ago, Microsoft was fighting a worldwide anti-trust suit because of their might and size. 10 years later, they are quickly becoming a non-player on the Internet and are seeing their marketshare for computing reduced.
2. Google - The article makes a great comment, "Ten years ago, all Google had was Larry, Sergey and an idea." There it is again, 10 years. That's all it has taken for Google to not only capture 70% market share in Internet search and advertising, become a verb, and crush Yahoo and AOL, but also prove that by freeing information to the masses, people are able to create new economies.
3. Unilever - I don't know as much about Unilever as some of the other companies on the list, but the explanation given for their global success - reaching out to and building emerging communities, giving away knowledge to communities, rapidly adjusting their product at the edge to experiment with new business models - all of these align with the 21st century way of thinking about Edge Economics, Long Tail Economies and building value through Tribes.  This should be an interesting battle to watch between Unilevel and P&G in the consumer space, as P&G has also been extremely active in "Proudly Found Elsewhere" innovation model.
   
4. JP Morgan - While JPM has been around for years, it was their (relative) prudence and foresight that allowed then to come through the crisis head and shoulders ahead of Citi, Lehman (R.I.P.), Merrill, BoA, Wachovia and many others. One interesting aspect for MBA'ers to realize is that Jamie Dimon (CEO) was fired by Citi because he wasn't able to implement the ideas has has since implemented at JPM. It's important to build a network of people that look at the world in different ways, and be willing to understand them (although not always agree), because you never know when you'll be able to tap into that network.
5. NewsCorp - Not AOL, not TimeWarner, not NBC. None of these companies had the foresight to see that two critical elements were needed in a digital entertainment world - First, you have to build a platform. Silos don't allow integration, sharing and flexibility to adapt to new markets and technology. Second, you have to embrace and adapt to the Internet and digital media. NewsCorp has done this better than almost anyone (although ABC/Disney/ESPN isn't far behind...plus they have tight ties to Apple/Pixar because of Steve Jobs).
6. Toyota - Even though all the signs were on the wall, few people truly believed that Toyota could overtake GM as the #1 auto company. Not only are they far and away #1, but nobody really talks about Honda or the Europeans (BMW, Renault, Mercedes-Benz) anymore, other than as a niche. What's amazing to me is that they will let you tour their factories and teach you their model, but we haven't seen any of their executives leave to run one of the other companies.
   
7. Huawei - Never heard of them? You're not alone. Outside of the telecommunications industry (and China), Huawei is a well kept secret. But they are quickly eating into 900lb gorilla Cisco Systems in the race to build the next-generation of connected networks.

10 years!  Just 10 years....  

That's all it's taken for this list to go from Microsoft, Cisco, Citi, Big3 Autos, and TimeWarner to Apple, Google, Huawei, JPMorgan and Toyota.  

A lot of this change had to do with companies that truly embraced the new technology, but it's also highlighted by companies that took a very different view of their markets and changed the rules.  

It's a potentially scary place to be if you're looking for long-term success with models from the 20th century.  But on the flipside, it's an extremely exciting place to be if you're willing to look outside the box (maybe a long way outside) and challenge some conventional thinking, rapidly adopt technology, and explore some of the concepts that will be demanded by the global economy in the 21st century.  

Discussion of the Week - Exponential Times

We had several interesting discussions in class this weekend, but I'll go ahead and pick a discussion from our IT Mgm't course as the introductory "Discussion of the Week" topic.  I actually learned more in the early discussions in the OpsMgm't and StratMktg courses, but I think this discussion had broader relevance to our overall MBA program.

The discussion centered around a snazzy Exponential Times video, looking at the pace at which our world is changing due to this technology they call "the Internet".  Prior to watching the video, we were asked a simple question, "How do you see the trends of the last 10 years continuing (or failing)?"  The responses ranged from Globalization to Big Box Retail to Greater Customization, alot of stuff that you read about in the press on a daily basis.  All good answers, but then we watched the video.  

As a group of (on average) 30-40yr old folks, the immediate response in the room was fairly quiet.  When you're between the Boombers and GenY demographics in the US, and the mass of humanity in both India and China, it's an interesting place to be...to say the least. 

As a group, we face several challenges and opportunities:

• While we're technology literate, we're really the first generation to move through this as a learning curve, not as a part of our DNA (sorry Boomers....you're on the way out, so I'm not counting you anymore)
• We've grown up in a world where companies followed the strategies and models defined in the 20th century.  We learned and been trained in companies that sold locally and regionally, and that survived over many decades.  Our MBA program is somewhat of a bridge between those 20th century models and scratching the surface on 21st century ideas.  

Having lived on Internet time for the past 15 years, I felt comfortable (as much as anyone can be) with the explosiveness of the numbers in the video.  I've lived with growth on that scale for a long time.  What I need to get my head around is the idea that many of the current business models I know will be (or already are) obsolete.  The good news is I have Fred, Seth and Umair to balance my work experience and MBA learnings.

More than a WFU MBA journal

Since I'm still in time-warp mode until January, backfilling a bunch of posts to recap the 1st semester, I'm occasionally going to preview some of the other things that I hope to do with this blog.  If it were just a journal, I doubt anyone would keep reading.  But if I take Seth Godin's advice and create a Tribe, then the possibility exits that we can create interest and expand the conversations we have in Winston-Salem (and Charlotte) each week

1 - "Decision of the Week" - Each week, I will take a recent topic from the Business Press and highlight certain aspects that are worth exploring in more detail.  It may be an executive decision, a competitive market shift, a unique marketing approach, a savvy financial transaction or some other interesting element.  I'll open up the discussion (via blog comments) to my classmates in both the Winston-Salem and Charlotte programs.  We have mechanisms in the program to do this within the context of a class topic, but this should let us explore cross-topic impacts of business decisions, as well as open it to outside input and discussion.

2 - "Discussion of the Week" - This segment allows me to highlight an interest discussion, or person from each weekend's discussions.  These discussions may involve classroom topics, or may center around back-of-the-napkins brainstorming that often leads to great ideas and great companies.  I also hope to highlight some of the gifted personalities from the WFU EXFT2009 class, or across the WFU MBA programs.  

3 - "Connecting the Dots" - Academics are greats, but unless you can tie it to real world activities, it's just learning for learning's sake.  This segment will highlight connections between the topics in class, and real world examples of the concepts in practice.  

4 - "inVinCible Ideas" - What would a MBA program be without the creation of new business models and company ideas?  This segment will spotlight the activities that classmates are exploring and developing as they plan for the next step in their career or life.  VC funding may be required.

[Update - Dec.28, 2008] - The more I think about this, and the more I follow people like Fred Wilson, Umair Haque and the read books like What Would Google Do?, I have to ask myself if the recent worldwide economic crisis doesn't require us to truly think differently about how we conduct business, define government and shape societies.  I don't have a name yet for this segment, but there will definitely be segments where we'll explore this type of thinking, which should be a lot of fun.