Q2 Fall 2007
Can we manage with(out) markets?
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Comment from Can markets change society?
I have heard that the introduction of market based incentives to China lead to a reduction of a moral framework based on trust and honesty. Has this resulted in any strategic religious tolerance, such as relaxing suppression of Christian practice in society, to create alternative frameworks which re-introduce the values of trust and integrity to society in general?
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Dr Paula Knight
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Can markets change society?
Comment from Can markets change society?
I found this really interesting. I read Alastair McIntosh's book Soil and Soul which discusses a similar transition in the Scottish Hebridean socieites. His view is that the transition to a cash economy is fundamentally damaging to the concept of community and communal sharing which turns us from communities into individuals. "Mutual dependency was the was the glue that facilitated social cohesion. Now, because money (unlike fish and eggs) doesn't rot, it can be invested, yielding interest, a dividend or capital gains...This has the effect of shifting benefit away from the community and towards the individuals. It assists the concentration of wealth and that leads to an increasing rigidity in access to resources for the majority. He argues that a community based on exchange and relationships necessarily understands "the human and biological processes by which goods and services come into being..capitalism reduces human labour and nature's providence to figures on the London or Tokyo stock exchanges"
As someone very interested in the relationship between faith and our treatment of the natural world (www.curlewmedia.com) it seems to be so true that we have gone away from a way of looking at the natural world...
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Mary Colwell
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Can markets change society?
Comment from Can markets help the poor?
Video coverage of “Microfinance — A Market Comes of Age”
Complete video coverage of the Yale SOMAA panel discussion on developments in microfinance, is available for viewing online. The event was hosted by the New York City Chapter of the SOM Alumni Association at the Yale Club of New York on January 30, 2008. The discussion built on an article in Q2 and considered opportunities, pitfalls, and ethical implications of recent developments in the microfinance market. Two of the interviewees in Q2 — Mary Ellen Iskenderian ’86, CEO of Women’s World Banking, and Dean Karlan, assistant professor of economics at Yale — participated in the panel. The other discussants were Deb Burand, former executive vice president of the Grameen Foundation, and Christian Novak, executive director of the Microfinance Institutions Group – Debt Products at Morgan Stanley.
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Can markets help the poor?
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Yale SOMAA to host microfinance discussion in New York
The New York City Chapter of the SOM Alumni Association has developed a panel discussion titled “Microfinance — A Market Comes of Age” that will be held at the Yale Club of New York on January 30, 2008, starting at 6:30 pm. The discussion will build off of this article from Q2 to consider the opportunities, pitfalls, and ethical implications of recent developments in the microfinance market.
Two of the interviewees in Q2 — Mary Ellen Iskenderian ’86, CEO of Women’s World Banking, and Dean Karlan, assistant professor of economics at Yale — will participate in the panel. The other discussants will be Deb Burand, executive vice president of the Grameen Foundation, and Christian Novak, executive director of the Microfinance Institutions Group – Debt Products at Morgan Stanley.
For more information and to register to attend the event, please visit the SOM Alumni Calendar.
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Can markets help the poor?
Comment from How can directors become truly independent?
A critical point of the essay is resist the trend to add ad-hoc consultants to the board. Rather, it is better to establish a framework of research, information and analytical support for directors that is free from any conflicts of interests on an ongoing basis. It is difficult for a director to be independent from management if all of the information it receives and the analysis of that information is from management. New institutions could be created (profit-making or not-for-profit corporations) that could act as the external research-and-information arm of corporate boards and serve as an ongoing, independent, objective, and neutral source of data and analysis as these become relevant in the course of the boards deliberations on company strategies and policies. A new corporate best practice could be made possible by assembling a group of distinguished advisors and staff for the purpose of establishing permanent organizations, large or small, dedicated to providing directors of multiple companies with the requisite knowledge base for effective corporate governance on an ongoing basis.
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Joseph S. Fichera
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How can directors become truly independent?
Comment from How do markets work in your industry?
I did a piece on this for my senior year. basically, developers pay their way into lands that were environmentally protected. They do their biased studies and city planners and organizers sign off on it It's a shame as the result exploitation of the environment for profit. It is sickening, but that is how they make their living. natural habitats for certain bugs, insects, birds and mammals have to leave or mingle with humans and when a tragic incident occurs it is the animals fault. Or if there is a water shortage which is happening in many major cities. Look at Goergia, Colorado, Arizona just to name a few. i am not sure what the solution will be but someone has to put their gavel down and say no this is not helping our environment nor the people.
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Bill Clark
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How do markets work in your industry?
Comment from How can directors become truly independent?
Thanks for this interesting analysis and proposal regarding information sources for independent directors. I infer that anyone from management who has a dotted line to the board (CFO, General Counsel, Chief Compliance Officer, HR) is assumed incapable of being objective, truthful and thoughtful about the information they supply the board. Yet we would all agree that the CEO's influence over the career trajectory of these people isn't omnipotent in the best run companies.
Outside consultants or organizations are offered as an alternative. The current situation is that LOTS of consultants and organizations exist to advise boards because that is a prestigious role, however, they all suffer from lack of context. The dotted line reports from management, on the other hand, just need to be better managed by the board itself. The board needs management skills and handing that off to an outside organization is yet another copout. Realistically, the Board has a lot to say about the career of the GC, CCO and CFO as job references from the Board are essential. Lack of integrity or omissions of facts will come back to haunt these managers.
I think the one area...
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Alex Anvari MPPM 1991
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How can directors become truly independent?
Comment from Can we manage with(out) markets?
i loved reading the articles in this issue... i wonder is anyone left who thinks markets can fix themselves... do we always have to be meddling...
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btrader
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Can we manage with(out) markets?
Comment from Can we fix discrimination in markets?
I think Baron et al are looking in the wrong place for remedies to the breakdowns in markets when people discriminate. It's like they're running around trying to fix a bunch of leaks in a dam. You can fix all the leaks at once if you focus on the real problem, the place where discrimination happens: people's heads. We need better people not better markets.
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SamS
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Can we fix discrimination in markets?
Comment from Can we fix discrimination in markets?
During this conversation, the participants also discussed some of the issues of identity that underlie questions about discrimination in markets.
Rick Brooks: We’re talking about markets and discrimination, but maybe we should try to broaden it and focus on identity, developments of identity in markets and within and between firms. Economists have really not paid that much attention to identity. I don’t even believe the organizational sociologists have paid that much attention, though more than economists, to identity, as distinct from culture. Lawyers and the legal academy, strangely, have paid almost no attention to identity in business transactions. So let me put out one case that I think is relevant, that sheds some light on how broad the notion could go.
In 2003, Sun Microsystems used a contractor called Thinket Information Resources. It was a small IT company that provided a number of services to Sun along with other comparable suppliers. Thinket is a small business, wholly owned by African Americans, and the Small Business Administration had deemed it a minority-owned business. At some point the relationship between Thinket and Sun soured, and Sun started directing contracts to other suppliers. Thinket alleged that this was due to...
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Can we fix discrimination in markets?
Comment from How do markets work in your industry?
I continue to believe strongly in the need for free markets (not an easy task after all these years living in a socialist country, but more acceptable since the arrival of Sarko). Yet, I am struck by the absurdity of our market structures, which inadequately integrate the costs of our unsustainable behaviors. Carbon credits are a good start. Waste and water are increasingly being taxed, either directly or indirectly. But there is so much more we can and should do.... When will certain companies have to foot the bill for the health cost of products that have been proven toxic or addictive? When will polluter-payer principles apply to the pollution we export that is compromising the lives of workers in countries that have no safety standards? The only way that we can make progress is by having business and regulatory bodies act in concert to find the right balance between freedom and responsibility. If organizations like the WTO redefined their missions to integrate these broader principles, rather than emphasizing free trade at all cost, all countries would benefit in the long run. On a more micro level: The biggest challenge for many of my clients is to redefine and agree...
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Leslie Pascaud ’87
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How do markets work in your industry?
Comment from How do markets work in your industry?
From a market perspective I find the renewables industry challenging (and exciting) because it must deal with the peculiarities of electricity markets as well as the immaturity of the new markets (e.g. renewable energy and greenhouse gas credits) that are emerging to address the public good and externality issues posed by renewables and their conventional counterparts. The maturation of these markets could have a major impact on renewables (and the energy industry overall) in coming decades.
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Seth Dunn ’05
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How do markets work in your industry?
Comment from How do markets work in your industry?
As head of the education practice at Korn Ferry International, I am afforded an interesting view of the market for leadership in academic institutions. Higher education in America is presently bucking the trend in many other sectors because leadership tenure has extended and the population of leaders has been getting older. This is certainly different from the corporate sector, where tenure in most industries is trending to shorter stints. A few things seem to be occurring to influence this protraction in higher education: The requirements of leadership have grown more complex and, therefore, more demanding — leaders not only need increased fundraising and financial skills, but are expected to lead an unwieldy institution, almost with a kind of omniscience. And, academic institutions are typically not geared towards succession planning, so change is dreaded and, when possible, transitions are avoided. Meanwhile, with the aging of the baby boomers and top jobs being held by these individuals, academic institutions are facing difficult market factors that will require them to go beyond finite, traditional talent pools to find suitable experience and capabilities. Decision-makers — trustees and academic search committees — are beginning to show more interest in candidates whose principal experience may have...
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Kenneth Kring ’82
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How do markets work in your industry?
Comment from How do markets work in your industry?
I’m currently working in a place (Shanghai, P.R. China) that is quickly transitioning from a centrally-led plan economy to a Western-style market driven by the laws of supply and demand. This transition has been successful in the sense that the local economy has experienced double-digit growth for more than a decade, with little inflation and no serious social or political unrest along the way. There have been growing pains, too, with high income inequality, bureaucracy amongst institutions that have been slower to adapt, and general difficulties dealing with common side effects of strong economic growth such as congestion and pollution. But these are just growing pains, not symptoms of deeper flaws in the economic system. My view is that markets are best left self-regulated within a strong framework of social justice, stability, transparency, and accountability that is provided by strong institutions. It’s like a game of basketball: there are rules, the court’s been defined, we know who the players are, we all have the same information in the game, the interaction between the players follows certain patterns, but once the game is on, we are most effective if we make ad hoc decisions led by the opportunism that comes with...
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Martin Nieboer ’03
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How do markets work in your industry?
Comment from How do markets work in your industry?
As for the role of markets in my recent work, I can relate two incidents that illustrate how the issues involve the invocation of words that suggest market solutions are superior to others, when they are not, and, in fact the issues are really about what rules, if any, should govern the markets.
In Ontario, as elsewhere in the world, property taxes are based on market value assessments. A corporation was spun off by the government, and given a monopoly mandate to determine these market values and charge all Ontario municipalities for its serves. It developed a very complex — and secret (because it might possibly have commercial potential) — regression equation model for assessing market values. When I found out that my house was assessed for significantly more than it had sold for (on an MLS listing after five months on the market), and that the assessment corporation took the view that the predicted sale price of the equation, rather than the actual market price sale, should determine my assessment, I was outraged that the market price was only a data point, but not a market value for assessment purposes, nor could I see or challenge the...
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Lewis Auerbach ’87
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How do markets work in your industry?
Comment from How do markets work in your industry?
What is unique about markets in your industry?
As an investment banker focused on selling private, middle-market companies, my clients are company-owners selling their companies in the merger and acquisition (“M&A”) market.
Unlike the real estate market, a seller of a middle-market company cannot hang a “for sale” sign on the property and list its business for sale. If the sale of a private company became public information, it could begin to lose managers, employees, and customers. Thus, the sale of a healthy private company is usually a confidential process, which works against the ability of its owner to achieve the best possible result in the M&A market.
To remedy this conflict, company-owners often engage investment banks to manage a confidential, targeted, competitive sale process. In most cases, these processes bring forth bids that usually range from a few to a few dozen in number. The valuation range of the bids for a selling-company typically is very broad, with the highest bids often being twice the level of the lowest bids. This variance, which indicates market inefficiency, is understandable for a variety of reasons:
•Companies are not commodities; they are very complex entities that are...
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Bill Jarrett ’82
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How do markets work in your industry?
Comment from How do markets work in your industry?
Can we manage with (out) markets?
The bottom line is that the value of economies is actually based upon human needs, experiences, and relationships. It is not based upon some conceived intrinsic value. Hence, a market place is paramount.
What is unique about markets in “my” industry?
My industry actually has two markets — the “stock market” and “asset management market.”
The stock market is a very fluid and inefficient market. Over a long period, it is efficient (but I must admit knowing at what one point it is efficient may be difficult to judge). This dichotomy is what makes the stock market a difficult space in which to maximize rewards. It is not hard to assume risk in such a market. Regardless of formulas or disciplines, no one has figured out how to “beat” the market consistently — or at least at a rate greater than odds may allow. Many investors acquiesce to a “match” of the market's performance (index). There are various measurements of intelligence quotients, or betas and alphas trying to measure the risk (and an assumed reward) associated with portfolios. To match the performance of the market just on a daily...
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Rudy Hokanson ’81
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How do markets work in your industry?
Comment from How do markets work in your industry?
Patent Monopolies and the Efficient Production of Innovations for the Public Good
If you want to start a lively debate on open markets, mention patents. Some people hold them sacred. Others want them abolished outright. To be honest, many of us MBAs are too confused by the terminology to even know what to say — or how to best protect the interests of our institutions. No matter what sector you are in, you will benefit from a better understanding of this pivotal issue of the knowledge economy today.
Specifically I am talking about utility patents: 20-year legal monopolies granted to innovators who are willing to share their valuable new ideas with the rest of the world. From the cotton gin and the light bulb, to TiVo and AIDS medications, these ideas move our economies and remold our daily lives. For centuries, patents have fortunately given inventors strong incentives to share their discoveries with us all.
What about today? Is the patent system still working? Does it make sense in the information age? Do patents last too long? Are they now inhibiting rather than encouraging innovation? Have they become lottery tickets for small players? Or are they bludgeons...
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Thomas Clare ’03
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How do markets work in your industry?
Comment from How do markets work in your industry?
Listening is the issue with markets. Listening. What are the markets saying? What is the world ready for today? What has to wait? Yale is ready for my reply here in MS Word. Prefer as I might to reply with sound and light on Flash, Q2 is not compatible.
The markets I need are at the boundary of public policy and capital, and why capital is unavailable for such, to me, obvious social needs as educating the poor. I don’t blame the markets. Accountability here I accept as mine. I approach my question with humility and urgency. I’ve issued bonds and ridden corporate helicopters to Wall Street. The markets are fair enough. What makes sense happens, what doesn’t, doesn’t. That so many public questions of health and education, for example, with very positive present values don’t find capital is not the markets’ fault.
I’ve planted the tattered SOM public-sector flag for now at Bunker Hill Community College in Boston. I’ve been to hundreds of Washington and education meetings, and nothing is going to happen for the poor those. I embedded myself at Bunker Hill to listen, to listen on the front lines to the people struggling...
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Wick Sloane ’84
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How do markets work in your industry?
Comment from What is a long life worth?
Will Goetzmann and Geert Rouwenhorst discuss other types of historical securities they’ve studied.
Tontines:
Rouwenhorst: Tontines are annuities issued to groups. They're named after Lorenzo di Tonti, an Italian who was an advisor to the French court in the 17th century. In a tontine, the government borrows from a group and makes interest payments to the group until the last person dies. And the group gets to divide the interest on the capital among the surviving members. As people in the group die, the payout to each remaining individual goes up. Fewer members of the group equals more money for each. That's why tontines feature in crime novels. Tontines were also organized privately by individuals to pool assets and insure each other against outliving their means. In this way tontines are a predecessor of life insurance and modern pension funds.
The perpetual bond:
Rouwenhorst: A perpetual bond is one that theoretically pays interest to the bearer forever. But there are very few perpetuities around, since at one time or another most governments that issued them defaulted on the payments.
We have a perpetuity from Holland that was issued in 1648 and...
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What is a long life worth?
Comment from What moves markets?
In the interview that formed the basis for this piece, Teresa Barger provided the following insights about the development of rules in international markets and how clear rules benefit the poor.
Q: Does the development of a stock market tend to go hand-in-hand with more investment flowing into a country?
Yes, but not solely. It helps when there are also some big macroeconomic forces at work.
We were involved in the creation of the Novo Mercado in Brazil. In 2000, the Brazilian stock exchange, called BOVESPA, was at its wit’s end. They had a huge number of delistings, and liquidity was nowhere. Having fewer and fewer companies listed on your stock exchange is never fun.
Success has many fathers, so we were only one of the parties, but we brought together an investor task force that went down to Brazil and talked about the issues for them, as investors, with BOVESPA. Also, some of the BOVESPA people then went to visit our task force members in New York and elsewhere.
It was very clear that, from the investors’ point of view, there were some structural problems in Brazil. The biggest one was that there...
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What moves markets?
Comment from Can markets help the poor?
Tony Sheldon on the challenge markets present to the social goals of microfinance institutions:
Q: Do markets help the poor?
On the market side, I think microfinance is a good exemplar of how markets can work for the poor. There are certainly limitations within that, one of which is that in some places national governments have said, "Oh, well, microfinance will meet these needs of our poor citizens, therefore, government responsibility is lessened." We need to keep in mind that “market” approaches don’t mean that governments can side-step their responsibilities in terms of social protection, social safety nets, health care, educational systems, basic infrastructure. One of the dangers of the success of microfinance is it can be used as a rationale for irresponsible cutbacks in government services.
Also, the markets work better for certain kinds of clients. Rural and remote clients, as well as clients who are below a certain cut-off of economic capacity, have tended not to be particularly well served by microfinance. So one of the challenges is: can one develop models that, say, use subsidies to provide support and training for a potential client base that is not active in microfinance now, in...
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Can markets help the poor?
Comment from Can markets help the poor?
Dean Karlan on why he founded Innovations for Poverty Actions and reaching the poorest of the poor:
Q: Why haven’t more people taken this approach to understanding microfinance?
The problem is that we have screwed up incentives in academia. I really have almost no incentive to do this, because studies that repeat a result of a previous study are not publishable in a good journal. Someone needs to have an incentive to do these repeated studies – if not in academia, then we need to have more consulting firms or nonprofits whose mission is to do those. That's why we created Innovations for Poverty Action (IPA) – to have an organization where that's your job. Your job is to do implementation number 12, for example. And your job is to do it with enough similarity to the other studies in the series that, when I come in as the academic at the end of the series and I sit there with the data from, say, 16 experiments, you're actually going to have similar designs and data to show me.
There are significant incentives for a business to invest in figuring these things out, too. In the U.S., you...
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Can markets help the poor?
Comment from Can markets help the poor?
Mary Ellen Iskenderian on what the microfinance industry can do next:
Q: How important is it to offer more supporting services?
The single most demanded product is actually not credit. It's savings. And in most jurisdictions, the central bank does require, and rightfully so, some regulation of the institution in order to take public deposits. That requires a fairly major step on the part of the institution, to be able to do that. But where institutions have done that, you've seen the savings just completely outstrip the credit demand. Likewise, insurance products. There's a tremendous need. There's still woefully little in terms of health insurance available. And what health insurance products are out there, almost never have maternal or prenatal care coverage, which is the biggest health need of the population that is the primary clientele of microfinance institutions. Similarly, other types of credit — housing credit, educational credit — are very important.
Q: It seems like a particularly dynamic time.
It is.
Q: Is this new or has it been like that all along, because microfinance has developed so fast?
You know, the answer is both. But this last period has been particularly turbo-charged. I...
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Can markets help the poor?
Comment from Are markets local or universal?
View a slideshow of photographs taken at the City Farmers' Market in New Haven, Connecticut.
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Are markets local or universal?
Comment from Are markets always efficient?
Read more of Martin Whitman’s letters to the shareholders of Third Avenue Funds.
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Are markets always efficient?
Comment from Do markets need integrity?
David Jackson ’93, the CEO of private equity firm Istithmar, recently spoke at the school on topics related to those Jensen discusses in this interview. Jackson addressed the state of the private equity industry after the market upheaval of the summer of 2007, and the particular qualities of running a sovereign fund, or one whose ultimate owner is a sovereign nation. You can watch or listen to the full speech online.
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Do markets need integrity?
Comment from Do markets need integrity?
All of the papers Jensen references in this interview are available online through his SSRN author’s page.
Direct links to the papers Jensen mentioned in this interview:
“Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure”
“Specific and General Knowledge, and Organizational Structure”
“Active Investors, LBOS, and the Privatization of Bankruptcy”
“The Eclipse of the Public Corporation”
“CEO Incentives: It's Not How Much You Pay, But How”
“Performance Pay and Top Management Incentives”
“CEO Pay and What to Do about It: Restoring Integrity to Both Executive Compensation and Capital Market Relations” [Forthcoming, Harvard Business School Press]
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Do markets need integrity?
Comment from How should you sell a public good?
In his interview with Professor Barry Nalebuff, Reed Hundt mentioned that Frontline Wireless (Hundt serves on the company’s board) was awaiting decisions from the FCC about the conduct of the upcoming 700 MHz band wireless spectrum auction.
On July 31, 2007, the FCC announced regulations that Frontline Wireless says will enable the company to bid for spectrum and attempt to build an advanced national broadband network. Learn more at the company's website.
You can also read a commentary about the FCC’s allocation of the wireless spectrum by Judith Chevalier, William S. Beinecke Professor of Finance and Economics at Yale SOM and Deputy Provost for Faculty Development at Yale University.
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