Disingenious Analysis

Laura Rich, Editorial Director of the American business monthly Inc. displays some considerable naivety about the functions of capital markets in an article she wrote about the decline in the number of IPO’s last week, belligerently titled “No possibility of an IPO? Who cares. (sic)”

“A story in the Wall Street Journal today makes a big stink over the steadily dwindling number of initial public offerings by start-up companies” wrote the New York Times columnist on Inc.’s weblog, Fresh Inc. “The numbers are indeed bleak: 2005 saw 41 IPOs by venture-backed start-ups, compared to 67 in 2004 and a booming 250 in 1999, according to data from VentureOne, which tracks that sort of thing … The point is, it's hard to see that things are, really, all that bleak for start-up companies. These days, the money's just not in the public market -- it's the private market where it's all happening.”

It is difficult to believe that qualified business journalists would actually put their names to this kind of crude amateur analysis, for it shows a serious flaw in the comprehension of how private and public capital functions actually work. In the first place, any comparisons between 1999 and today are almost universally set aside by professional analysts today as the bull market of the millennium is hardly a fair benchmark for meaningful quantitive data. Secondly, to suggest that there is no difference whether money remains in private equity or heads towards publicly tradable markets displays a gross misunderstanding of the most basic level macroeconomics.

“Who cares?”

Rich asks her readers rhetorically, “So, sure. The IPO market is not what it was for start-ups. But who really cares? Do you?” Well, for one, I’m sure the U.S. Federal Reserve has more than a passing interest in the performance of the IPO market, as it effects the inflow of fresh capital and companies to the NYSE and the NASDAQ, which in turn effects the prices of government bonds and the parameters for rates at which the government can afford to lend and borrow money, and with the current highs of the national deficit, oil prices and the recent ruminations from Beijing that China will now start to cash-in some of her reserves currently held in U.S. T-Bills in favour of international diversification, the establishment of reliable cash flow channels is hardly a done deal right now.

Then there are the numerous retail brokers such as Charles Schwab and their clients, the private investors, who make up a sizeable proportion of the capital markets. While institutional investors such as venture capital funds benefit from private equity placements, private individuals generally only gain significant exposure to these investment opportunities once they are listed as equities on a stock exchange – indeed, this in one of the key functions of an exchange: that it allows a larger pool of individuals who otherwise cannot gain access to investment opportunities to take part in the shareholding process.

In addition, it is retail investors who often facilitate much faster capital market cash-flow as they create easily-available, liquid secondary and tertiary markets for the sale of equity that institutions have realised a capital gain on: this has the effect of freeing up capital that venture capital funds use to finance further investors.

Here the columnist and Editor really might have thought harder about her postulation. To suggest, as Rich does, that “more entrepreneurs are finding it a seller's market,” and that “(they) are doing just fine” is to naïvely assume that only a primary market is necessary in order to facilitate entrepreneurial and innovative growth in an economy. The principle goes back to the age-old law of supply and demand: if demand at the lowest level does not outstrip supply then capital dries up – in the same way, if there is no “re-sell” IPO market for private equity investments then continued funding of entrepreneurial ventures cannot foreseeabley be sustained. Corporate financing activities such as industry trade purchases and big company mergers, as stated as one of the reasons for the IPO decline by The Wall Street Journal in Rich’ s riposte, is hardly a reliable long-term strategy for continued investment funding as there is a significant limit the possibility of these types of deals without fresh capital to cushion the activity.

And so it seems that despite the fact that Rich and her erstwhile team of amateur economists at Inc might not care that much for the number of IPO’s in the market, the very entrepreneurs who she directs so enthusiastically to the publication’s valuation guide – “Take a look at our Ultimate Valuation Guide to get a sense of all the companies that are cashing in” – might end up caring rather more than it seems.

The Quest for Earnesty

The erudite voice of “Biz Deans Talk” and Dean and Professor of Strategic Management at Madrid’s Instituto de Empresa, Santiago Iñiguez de Ozoño, whose predictions for trends in management education in 2006 I recently wrote about here on The Global Perspective gave a benevolent appraisal of this weblog and offered my criticisms an engaging and warm response on the popular high-profile business education site on Sunday, in turn demonstrating a sincere quest for the truth far too infrequently seen in today’s society of both academic and management practitioners.

“One of those precious occasions that academics value and enjoy most is when they are lucky to find sharp and intelligent critics,” he wrote in post entitled “A Community of Constructive Criticism”. “Acute and smart criticism is what has fostered the progress of human thinking in all fields from philosophy to the sciences and the arts. Criticising and questioning lies also at the basis of the methodology used at the fundamental stages of professional academic life, such as the defence of PhD dissertations or the publication of papers and books.”

Professor Iñiguez de Ozoño’s optimistic attitude to the critics is prescient, for if only such brazen willingness to accept challenges to ideas was more commonly embraced in both the Common Room and the Board Room then progression might be made far faster and more often, and consequently everyone might benefit from the increased rapidity and frequency of innovational change and subsequent capital flow that would come as a result. Almost always failure in progressive performance is fuelled somewhere by the inability of someone to let down the guard of humility and admit to occasionally having made a miscalculation.

Professor Iñiguez de Ozoño’s willingness to share in the formation of his ideas so publicly is noteworthy too: writing regularly on a weblog, interacting and commenting with notable journalists such as Della Bradshaw, the Business Education Editor of the Financial Times, he takes steps towards constructing a public dialogue that few in positions of such leadership responsibility can claim to have even considered. With so much of academia and business being permeated by competitive paranoia, it is encouraging to see a public intellectual and professional with great distinction casting off the chains of fear and genuinely pursuing the act of knowledge progression.

With all the draconian attempts at making public organisations more perspicuous to investors over the past five years, managers and market watchdogs alike might learn a thing or two from the continental Dean’s modus operandi, for corporate transparency and accountability is as much about creating an open dialogue about management practice and internal corporate strategy as it is about opening up financial accounting statements. Indeed, the point is perhaps an understatement – after all, it is usually one form or another of corporate paranoia that leads to balance sheets being misrepresented since the construction of financial accounting statements starts with the premise that Management is honestly revealing the strategic intents of the company.

Professor Iñiguez de Ozoño concludes his arguments: “Again, let me thank Mr. Harrison for his comments. I hope he is joined by many other bloggers to expand this community of constructive criticism” – I too hope that a wider audience, both academic and professional, joins him in the search for truth and verisimilitude in the dawning of this new corporate era.

Blowing Hard, Blowing Fast

It’s difficult to see how anyone could be pessimistic in this economy: with consistently low interest rates, a significant increase in big company mergers and acquisitions, growth in the Far East of exponential proportions, and an all-time high in Wall Street and London financial city bonuses, the economy and the markets set look to rock and roll in 2006 – and yet there are still plenty of dissenters. It makes me think that where trouble lurks is in analysts’ and traders’ underestimation about just how large the next bubble is being blown up right now.

Most of the economy naysayers point to inflated oil prices and the unresponsiveness of global equity markets to the impact of artificial ‘tweaking’ designed to get them going again in support of their bearish views, but the examples miss a greater extent of detail in thinking about macroeconomic boom-bust cycles.

When former Chairman of the Federal Reserve Alan Greenspan lowered interest rates dramatically after the market crash of the early turn of the millennium, most were expecting this to have the same designated effect it had had on past markets: namely, to give them a quick shove in the upward direction. When this didn’t happen, people started claiming that the midas financier had lost his touch, but the criticism missed the point. Gone was a market environment where there was plenty of free capital waiting to be released at the right place at the right time: even if equity prices look cheap, if there’s no capital sitting on deposit accounts and in government bonds waiting to pounce on the opportunity of higher investment returns, then artificial processes of bolstering markets are redundant. Having been hit with substantial blue-chip bankruptcies and more than a sixty percent fall in equity prices, it wasn’t just that the U.S. economy was in a dispiriting mood for capital investment, it was that there was very little to go around in the first place.

As is the case with post-scenarios in all market crashes, what capital markets needed was time for the swell of money to accumulate outside the market, and to do that, the right environment had to be present for a sustained period of time. And by all accounts, the environment for capital accumulation couldn’t have been any better than it has been over the last five years. Interest rates have remained consistently low, as reflected in real estate prices. Investment in emerging market economies such as China and India has swelled to an all-time high: not only in the form of direct investment, but this time in the form of corporate cost-saving concepts such as outsourcing.

Add to this that oil prices have been pushing significant highs, for contrary to popular scepticism, periods of high oil prices can be considerable long-term market drivers. For one, just as with any pricing mechanism, what goes up inevitably comes down. The significant uptake in demand from development of emerging market economies such as China and tension in the Middle East has created an over-pricing reaction of oil to above $70 a barrel, but once the global economy has adjusted to this new supply-demand ratio prices will begin ease. And when they do, organisations will find they have more capital than they thought to play with, for the net effect of high oil prices is to force companies to become more prurient with their capital, and cut costs in unnecessary areas that they are only too happy to blow on in times of excess – when the pressure begins to ease, companies accustomed to budgeting for these aberrations feel it first, and the excess capital is felt throughout the market. In addition to this, sustained periods of high oil prices as we have experienced them actually benefit exploration into cheaper technological methodologies of energy usage hugely, as both corporate and government budgets are incentivised towards investment in what otherwise appears like tomorrow’s problem. The irony is that it is in periods of short-term cost-inflations that effective long-term cost-cutting strategies are formulated.

Consider too that there is almost a disdainful belief in another equity boom by some camps. Bull markets are, in a similarly ironic twist, propelled by those of bearish attitudes. It is those that do not buy into the first, second and third rounds of asset price inflation who end up buying in at the fourth rounds, further propelling the bubble to new dizzying heights – in this way, bull markets feed off bearish counterparts, or there would just be one sharp upwards and downward spike in prices – and there are still plenty of bearish speculators to go around to make the next explosion in equity prices all the more viable.

If one looks at the market climate of the early/mid-nineties, and that of today, there are some startling similarities – a post-war Middle Eastern crisis, a booming Asian economy (before the sudden downturn in 1997), post-stock-market-crash bearishness with no shortage of innovation. All are back in vogue, with one key addition: they are more extreme than a decade ago.

Looking at all the indicators, another bubble in tech equity prices seems inevitable, at even more extreme measures. Market regulators ought not to be worried about whether equity prices are going to pick up again, but about how to handle the scenario when they do, for if it takes them by surprise, it may well be more than they are equipped to manage.

Scrapping Discrimination from the Syllabus

An interesting discussion is forming over at The Fredd Kambo Joint, where I have recently been invited to participate as a Guest Author. The host of this weblog, Fredd Kambo, is a Qualitive Analyst on the consulting division of Shell in London, and gave me a very warm welcome a couple of weeks ago after writing my debut for “The Joint”, a casual piece entitled “On Blogging” about the merits of weblogging and the purposes behind it.

My most recent post however has concerned an issue of rather more contemptuous subject matter: discrimination lawsuits. In the piece, “The Cost of Discrimination”, I citied an article I had received by e-mail about how four women from the Investment Bank Dresdner Kleinwort Wasserstein are suing their employer after “having hit a glass ceiling” due to alleged sexual discrimination. The story would be one of a fairly typical sexual discrimination case were it not for the size of recompense the women are asking for: $1.4 billion.

The writer of the cited article, who takes the opinion that this is a few zeros of compensation too far, notes poignantly: “… to put that amount into perspective … the maximum payout, including compensation for pain and suffering, for the victims of the July 7th London terrorist bombings is $877,000 … the families of the victims of September 11th received, on average, $1.5m from the US government and other sources, excluding charities. The payouts are said to have ranged from just $300,000 to $3m. And people died as a result of these tragedies.”

It’s a fair comparison, and Kambo is equally sceptical about the alternate reality that is equally over looked. “From my perspective as a black professional in big business, I think that the time has come for the law to intervene”, he says. “What I would ask for is a policy and action that appreciates and rewards differences. Simply put, I want the freedom to be completely who I am at work. Safe in the knowledge that my rewards are based on what I do and not who I look or act like. And because in 2006 we still haven't solved this one successfully, I think it's time for a greater power in the form of the law to provide the incentive. Is that incentive $1.4 Billion? To be honest, I'm not so sure it's effective in bringing about what is more a cultural change. Of course it will make people sit up and take notice, but I fear that what will really happen is more lawyers watching lawyers watching the company's back.”

Whatever one's take, most poignant in this discussion is the sad fact that a by all accounts successful black professional, in the top educational and career echelon of British society, maintaines that “by 2006 we still haven’t solved this one successfully”. Kambo’s conclusive observation that “the leadership in business will reward those who act and look like them” perhaps points out the best direction for formulating a credible remedy to the archaic injustice of prejudice but whose ears does this advice fall on?

Strategy

For all the hours that Consultants and Management strategists and thinkers spend talking and writing about “building brand equity” and “cost minimisation”, there is precious little time spent on the considerations of “building equalitative human equity” in organisational contexts. Lawuits like this one should make anyone currently involved in business strategy formulation and academic postulation just a little red in the face, because if one can’t formulate an organisational culture in the twenty-first century that is liberal to the acceptance of women in the workplace, then subsequent implementation of grander and far more wider-reaching cultural concepts such “globalised outsourcing” and “multi-country strategies” become almost meaningless in any real sense. The issue of “equalitive strategies” would surely make for a far more useful analysis than all the ruminations about “strategic intent” that is in vast over-supply in the pages of the Harvard Business Review and Mc Graw-Hill “national bestsellers”, and it begs the question why there has not been and is not more considerable study undertaken in this area of research: not many an MBA syllabus, after all, features this topic as a “core subject”, and at best buries it in elusive discussions such as “ethics”.

I expect the answer lies, predictably enough, with prestige and money. It is a sad statement of management consultancy and strategy alike that rather than try and genuinely pursue the ends of bettering and enhancing organisational reach today – which is how this industry started out in the first place – most are out to make a quick name for themselves after expensive educational programmes. A study of “Discrimination” is not likely to bring about very much “hero status” in the still predominantly white-male oriented academic ivy league clubs of alumni snobbery, nor is it likely to bring in lecturing fees of five figures a seminar, and thus is sidelined to the realms of obscure specialist research.

The very fact that discrimination is this much of an issue in an era when organisations cannot get enough of globalisation, outsourcing, and international expansion shows that academics and Management Gurus alike need to think a little more about what they can bring to their discipline, rather than what their disciplines bring to them, for by comparison with these serious issues, books such as "Think Big, Act Small" and "The World is Flat" seem more trivial than the minions they parody as lapses in progressive thinking.

No Nobel for Halverson

It’s not often Norwegian politics makes international headlines, so when it does, you know it has to be a big deal. The Left Wing Coalition government’s Finance Minister Kristin Halvorsen’s recent assertions of support for her own party’s policy of adopting a trade embargo with Israel were no exception then, but they do raise questions as to the recently elected Norwegian government’s sophistication when it comes to international political affairs.

Norway traditionally has a fine international reputation as a global peace broker – from the famed Nobel Peace Prize to one of the few examples of social democracies that actually work, the country has never been one to much disrupt the waters in the fjords of the United Nations. Indeed, Norway is usually the ‘mature child’ of the pack, sedating United States and European conflicts with admirable reason, which is why it is so bizarre to see Halvorsen touting antiquated socialist rhetoric against the official stance of her government and the subsequent role reversal of Oslo and Washington.

Until September 12th last year, Norway was governed by a Right Wing coalition headed by the controversial “spin maestro” Kjell-Magne Bondevik , who brought about some considerable economic growth in the economy. Never being ones to let political stagnation set in however, the Norwegian public rejected Right Wing policies for a coalition between parties of various leftist ideologies at the Valg (election) last year. Halvorsen, as leader of the largest party on the far left, the Sosialistisk Venstreparti (SV), cut a deal with the leader of the slightly more centre of left Arbeiderpartiet (Worker’s Party) as finance minister by forming a crucial part of the coalition to bag last year’s top spot for government.

Conflicts of Interest

Predictably enough, as with all coalitions there have been some embarrassing examples of division in government, most of which have stemmed out of the SV’s camp. Before Halvorsen’s serious slip of the tongue, the young former Socialist Youth member Audun Lysbakken declared that he would have all stock exchanges abolished in the interests of equality, failing to see the fact that not only if this was implemented as actual policy would it cut seriously into welfare budgets as the government were forced to buy back all outstanding shares, but that stock exchanges are the most ancient forms of market equality around by giving everyone the chance to speculate and hold positions in companies and commodities that would otherwise only be available to a selected few.

Still in his twenties, one can write off Lysbakken’s mistake to rookie zealousness, but Kristin Halvorsen really should know better. Tension right now in the Middle East runs high enough for something as trivial as careless western internal political rivalry to potentially ruin present progress by the airing of controversial policies that Ministers never actually intend to implement in the first place. It would have been one thing had Halvorsen actually been suggesting a trade embargo on Israel as policy she was going to implement – but the comment was a slur, which she knew would never be taken seriously by the current coalition in the first place. Halvorsen’s shot-from-the-hip has led Primeminister Jens Stoltenberg into his only possible option – to retract the statement and declare Norway as a “friend of Israel”, in turn just upsetting the precariously fought balance the last government had tried so hard to fight for after evident pro-Palestinian sentiment displayed by the public several years ago.

Halvorsen also seriously misses the point in thinking an embargo will achieve any political outcome other than even more tension on the Gaza strip, for a quick consultation at any grade-school history book will tell her that embargos almost never achieve peace in themselves. Pro-Palestinian SV party members site South Africa as a successful embargo-related result, but the situation was entirely different: for one South Africa, as much as it was divided, was a single country, for another the dispute was racial rather than religious, eliminating the belief on either side of the warring parties that their opinions were justified by the divine truth of an almighty Deity.

Ironically, as much as Halvorsen has created disturbances within her own party, all of this is like a feather in the cap to White House PR corps, who have been faced with the seemingly impossible surmounting challenge of creating positive spin out of a wildly out-of-control civil war in Iraq and numerous Intelligence blunders, for the one area the Bush administration has unequivocally made constructive process in is the area of the Arab-Israeli conflict. Since his first term Bush Jr. has made it clear to his Foreign Secretaries that he won’t stand for continuous appeasement of Israel at any cost, much to the chagrin of his advisors. The hard-line policy however has slowly begun to pay dividends – the difference was, unlike Halvorsen, Bush’s policy regime has been slow and calculated, rather than extreme and outright. At any rate, Halvorsen now leaves her ideological opposite the other side of the pond looking like the broker for democratic solution as all eyes turn further West to sort out the dilemma.

Kristin Halvorsen needs to think hard about her role as Finance Minister of the homeground of the Nobel Peace Prize and the wide-reaching implications that come with such responsibility, for this time, in putting personal political frustration in economics’ place – as with not a few political denizens before her – she has ended up potentially sacrificing the very lamb she has spent her career trying to rescue from the slaughter.

The "F5" Factor

Its high time organisations and educational institutions started doing their homework on how information systems work before they start unleashing them on bands of users more sophisticated than themselves. Only today, a story began circulating on various news providers about a student of a small-town Stark-County, U.S. high school who set his web page encouraging visitors to follow the link to his school’s website and click “F5”, refreshing the page so many times that it began to slow the systems down. Principles at the school detected the intrusion – or “act of terrorism” as it was described – and informed local law-enforcement officers about it who pulled the student out of class and arrested him, charging him with a felony carrying up to a potential sentence of five years imprisonment.

This kind of overreaction is typical of the behaviour of management that implements infrastructure they have no idea of how to use and discovers that there is a perpetration. Instead of viewing the stunt as just a juvenile prank – and it is difficult to see it any other way – they overreact because of the limitations of their own knowledge in the area and in order to save face, take the most draconian possible action they can construe.

There is a further ironic twist to this formerly unremarkable story however. Once the story hit online news wires, it didn’t take very long for teenagers across the world to find out which high school had inflicted the radical punishment, and soon the story with all the relevant links was posted up on Digg.com, an online news search engine where readers submit favourite stories for review and discussion. Needless to say, sleepy Stark-County principles now have a nightmare of unenviable proportions on their hands: with hundreds of thousands of teenagers, all ringing with adolescent sympathy for a fellow student now continuously refreshing the school’s website, the likelihood that they will see functionality back anytime soon is pretty slim. My guess is too that just as the problem seems to have eased up, come Monday morning, the “page refreshers” will be back en force, probably with an even greater camaraderie than before as they have all informed their friends who missed the online spectacle on Friday night for the second round of the showdown after the weekend has finished.

The "F5" factor is depressingly however, not just confined to this one story. This reminds me of a recent conversation I had with the taxi driver who was taking me to Heathrow for my return to Norway over Christmas. The driver was telling me that his thirteen year-old daughter’s school had decided to give the first year students – of which his daughter was one – laptops for use in class,  which much to their surprise and dismay  they discovered were being used for music downloading and file sharing. In order to counter this, the school banned the use of USB sticks – a totally counterintuitive policy as it prevented students from taking work home with them in the evenings, but still meant that the students were sharing files over MSN messanger.

Not so far off the same point, The London Evening Standard recently published an investigative piece by a journalist who drove around the city in a taxi with a laptop and a computer hacker, only to find major international conglomerates with open servers from which confidential client files and account deatails could be downloaded without much effort.

Progressive implementation of technologies is fantastic – but not if the managers and principles of organisations and educational institutions can’t be bothered to learn about how to use them and think about the consequences themselves. The very people who implement these systems would never think of teaching a book on the school syllabus or implementing a strategic policy that they had not vetted previously, so why should they do so when it comes to technology?

Poignantly Predictable Predictions

The prolific and controversial Dean of the Instituto de Empresa in Madrid, Santiago Iñiguez, made some noteworthy predictions for business schools on the last day of 2005 in an article titled “Management education in 2006: Anticipating some trends” which will no doubt raise some eyebrows from those already dubious about the value of business school educations, and in particular MBA programmes, in preparing tomorrow’s managers for the real world of commerce.

While Iñiguez observations that “business schools are a very dynamic segment of education and in 2006 they will continue to transform management practices through the creation and diffusion of knowledge and the preparation of executives and entrepreneurs” would not be refuted by many, the actual value of the supposed “preparation” is a widely controversial topic which has attracted some prominent dissention for years, and the current predictions he makes shed a revealing light on the issues in contention.

In short, the Dean’s predictions for b-school development are that there will be a continued drive towards internationalism (and in particular Asian internationalism), that there will be a more philanthropic focus on business school education this year, that “the development of information technologies will have a deeper impact in forms of delivery and learning methodologies than in the past”, and that in the process, there will be a shift in positions of b-school Deans as institutions search for Professors who act more like managers than academics in the charter of their roles as principles.

What is worrying about much of the predicted shifts forward in management education is not that they are too radical or out-of-touch – as has been the focus with much of the criticism of business schools – but that they seem so long overdue. The embracing of globalisation and information technologies are hardly the likely steps of change for 2006 in any thriving organisation today: companies have been reliant upon computers, software and technology to encompass a wider spectrum of international communication for decades now, and any that haven’t have long ago been elminated by those that have. The fact that Iñiguez feels the need to point them out at all should sound warning signals to even the most passionate traditionalist. Likewise his observation that “I also expect that 2006 will bring the opportunity to foster corporate social responsibility in management education”: if leading managers have not been educated with the fact that their future organisations should be aware of the impact of “social responsibility” in mind then it is little wonder they have suffered as such social misfits in a wider organisation context.

But the prospective remedial actions of shifting management education’s “centre of gravity” from the western world to Asia and searching for Deans who act like managers rather than academics signal the most startling sign of just how much a lack of any coherent strategy most modern business schools have in dealing with the issues at hand. Both actions suggest that academic institutions are content to be led by popular market forces rather than acknowledge their potential as catalysts of the direction of commerce: by their very nature as the starting-point for the career development of individuals who will shape tomorrow’s corporate landscape, business schools potentially wield an enormous amount of power, especially since there is no signal of a slowdown in the uptake of applicants for them.

Overall, Iñiguez paints a confusing picture – for while it appears that business schools have been overtly aware of the intricacies and development of the corporate flock and their own imperious potential to shepherd it, they appear to have being doing so little about it. It should come as no surprise then that the alumni of these establishments enter the workforce more confused about what they should be doing than their academically undecorated contemporaries, for it appears that the sum total of their Bachelors and Masters acolytions amount to the observation of the very activities the latter have meanwhile been engaged in, not, as commonly supposed, the other way round.