A Publication of the Foundation for Student Communication, Inc.
Women’s Work Businesswomen revolutionizing American consumerism
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Words from the Editor T
he results of the National Economic Council’s recent report on women in the American economy presents a puzzling portrait of the status of businesswomen in 2011. While females represent nearly 50 percent of the American workforce and a majority of college graduates, a mere 2.6 percent of Fortune 500 companies are led by a female CEO. This spring, Business Today sat down with women who are leading major retail, media and philanthropic organizations to discuss their climb to the top and strategy for the future. Lauren Bush, a former fashion model who once graced the covers of Australian Vogue and Vanity Fair, has collaborated with the UN World Food Program to launch FEED Projects. FEED’s mission is to manufacture clothing and accessories like bags and shirts and use the proceeds to eradicate hunger. Stamped on the front of each FEED bag is a number one to signify that the sale of one bag can feed a child in school for an entire year. At the top of the retail food chain, Karen Katz serves as CEO of Neiman Marcus. Katz came to the company as a merchandise manager in 1985 and worked her way up to the position of Chief Executive last spring. Her challenge was to bring the luxury brand back from the depths of the recession. With couture consumption on the rebound, Katz is now looking to make the Neiman Marcus experience more customized by incorporating the internet and social media tools into shopping. Between television, print, consumer goods and even satellite radio, Martha Stewart juggles her media empire while maintaining true to her creative roots by constantly innovating. As a Wall Street saleswoman turned domestic diva, she launched Martha Stewart Living Omnimedia over a decade ago and has served as chairwoman, president and CEO. With ventures as far ranging as a line at Kmart to her very own line houses, Stewart has a unique perspective to offer BT readers. As graduates of Princeton University, University of Texas and Barnard, these entrepreneurial women graduated from top undergraduate programs and launched incredible careers that are still unfolding. With statistics reporting that so few women at the top of the corporate world, it is abundantly clear that there are still barriers for females. But it only takes a glance at our last Women in Business issue (Fall 1974) to see that we’ve come a long way.
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Fall 1974
Business Today Women in Business Issue
BUSINESS TODAY SPRING 2011
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48
32
60 38
18
40
28 CONTENTS
[Spring 2011. Volume 48. Issue 1]
FEATURES 10 For-Profit Universities 14 Ethics of University Endowments 16 Give Running 24 Working Girl 34 Privacy and Ad Targeting 36 Brand Loyalty 38 Toxic Asset: The BP Oil Spill 46 Feed the Future 48 Debating Net Neutrality 50 The Obama Tax Plan
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INTERVIEWS
20 Lauren Bush 26 Karen Katz, Neiman Marcus 30 Martha Stewart 42 Charles McDonough, World Bank 52 George Kappaz, Astrata 58 Young the Giant 62 Brendan Wallace, Identified.com
ORIGINALS 06 BT Bits - the market’s latest and greatest 08 BT Books - reads to sharpen your mind 18 Suit Yourself: Choosing a Finance Job 53 Executive Contribution: Phillip Miller and Kurt Mosley, AMN Healthcare 56 Executive Contribution: James Orsini, Satchi & Satchi
3/6/11 10:03 PM
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Metal Coaters
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THE
eam
THE MAGAZINE CAROLINE HANAMIRIAN Editor-in-Chief ERIC REHE Executive Editor MiLES WU Design Director MAY LI Publisher
Business Today is America’s largest student-run publication, reaching 200,000 readers nationwide. Published at Princeton University, the magazine is distributed at over thirty of the top schools in the country and has extensive online readership at our website, www.businesstoday.org. Business Today is dedicated to presenting the opinions of students and business leaders. By examining controversial issues facing our world and exploring life after college, we hope to help readers prepare for their futures. The magazine has been published by Princeton University undergraduates since 1968. ALEX KATZ President MATTHEW MEDINA Managing Director JULIA VILL Seminar Series Director ALLAN AMICO Texas Conference Co-Director BRIAN REISER West Coast Conference Director ANDREA WOLBERG International Conference Director EILEEN CHEN Executive Relations Director ANDREA SCHILLER Online Journal Executive Director RAJA GOEL Online Journal Editor-in-Chief JAMES LUO Corporate Contacts Director ANDREW LEWIS Finance Director Emerson moore Investment Director TIANTIAN ZHA Design Director SLOAN RUDBERG Marketing Director MAY LI Magazine Publisher CAROLINE HANAMIRIAN Magazine Editor-in-Chief BRYTON SHANG Technology Director
Editorial SAM HEFFERNAN ALINA JENNINGS NICK LULLI MARK LOCK GEORGE MALIHA MARGARET MEYER KAREN O’NEILL OCASIO ALISA TIWARI
Design ALEX CHUKA AJ KOGER LINDIE WANG TIANTIAN ZHA Cover design by Genevieve Irwin Business Today Princeton University 48 University Place Princeton, NJ 08540 609.258.1111 magazine@businesstoday.org
Business Today is a publication of the Foundation for Student Communication, Inc.. FSC, a 501(c)(3) non-profit foundation, is run entirely by students for students at Princeton University. In addition to the magazine, FSC sponsors International and Regional Conferences held across the country that bring together students and executives to discuss the future of business. For more information, visit our website, www.businesstoday.org.
SPRING 2011 BUSINESS TODAY
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Meeting in the Sky
BT
Daunted by the thought of boring meetings in windowless conference rooms? Fear not, there is now a service that allows companies to transform their meetings into unforgettable experiences as “Meetings in the Sky.” Developed by Events in the Sky partnered with the Fun Group, Meeting in the Sky gives its clients the opportunity to host their meetings and events on a platform suspended 50 meters in the air. The platform accommodates 20 or 30 guests, plus entertainment such as movies, concerts, and lectures. The events can be held anywhere, allowing the clients imaginations to run wild. Operating in a number of countries, you can also partake in Dinner in the Sky or Marriage in the Sky. And don’t worry, safety is one of the company’s top priorities.
B
Prepidemic Celebrate style, revere refinement—that’s what a group of Princeton undergraduates set out to do when they launched Prepidemic, a style blog that promotes throwbacks to classic men’s style with the latest and greatest in prepster trends. Its top ten lists, store profiles and “piece by piece” guides mix staples like Barbour jackets and L.L. Bean hunting boots with lesser-known brands like the New England Shirt Co. One popular original interview was with the Dr. Cornel West on the relationship between style and clothing. Prepidemic is now looking to expand to a full-fledged online men’s magazine, offering more substance and intellectual flair than current mainstream publications. For any grungy college guy who wants to transform himself into a stylish gentleman, look no further than Prepidemic.
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BITS BITS TikTok
Time to buy a new iPod? Consider entrepreneur Scott Wilson’s collection of watchbands that feature iPods instead of traditional watch faces. He personally funded the development of prototypes for two models of the watchbands and later posted his invention on Kickstarter, one of a new breed of “crowdfunding” websites in which consumers provide the initial funding for products they like. Within weeks, Wilson had received nearly $942,000 from 13,512 customers, far surpassing his initial goal of $15,000. This product comes in two models, TikTok, featuring a simple snap-in design offered for $34.95, and LunaTik, featuring a more permanent metal casing offered for $69.95.
ecoATM Only three percent of cell phones are recycled worldwide, damaging the environment with toxic metals. Now, ecoATM has introduced a cell-phone recycling kiosk that pays out money to the recycler. The kiosk identifies the phone’s model by scanning the exterior and comparing the image with its database. After finding the model, the phone is connected to the machine to be tested for functionality and external damage. The kiosk then evaluates how much to pay the owner, who can take a trade-up coupon, a gift card, cash—or just donate to charity. The 11 ecoATMs currently in use have recycled around 33,000 cell phones. ecoATM plans to install 500 more kiosks this year and eventually recycle different portable electronics.
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Bt BOOKs
Probing for Wall Street’s Secrets... The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed it Scott Patterson’s The Quants is an enjoyable read that does just what it sets out to do: it traces the meteoric rise and fall of quantitative traders, or quants, who went from being at the bottom of the Wall Street totem pole to being amongst its most celebrated stars. Quants, who make trades based on complex quantitative analysis, made billions of dollars for independent hedge funds as well as within more traditional Wall Street firms. Mr. Patterson’s book describes their complicated techniques while escaping a didactic tone by choosing a cast of quants for whom he provides faces. An easily readable narrative, the book is an excellent introduction to the esoteric world of hedge funds and quantitative analysis that acknowledges the quants’ brilliance without overlooking their role in the 2007 financial meltdown. The judgment Mr. Patterson delivers on the quants is decidedly less glamorous than the many descriptions he pro-
vides of their extravagances. One of these richly detailed events is the poker night that opens the book. With the jaw-dropping amounts at stake, Mr. Patterson parallels the quants’ aggressive poker playing with their obsessive hunt for alpha – the ability to beat the market – and for the Truth – the “universal secret about the way the market worked that could only be discovered through mathematics.” However, while they factored in their human opponents in poker, the mathematical models used by the quants for trading did not do the same, and therein lay the flaw, according to Mr. Patterson. Unlike the mathematical world, the financial world is not perfectly orderly because of human factors that mathematical models cannot always account for. Mr. Patterson’s book reaches its climax with the 2007 financial crisis. He details the quants’ stunning drops in profitability and their response to scale back from the use of their old models. Having previously described the flaws with the quants’ models, the book concludes with the re-emergence of quant techniques in other areas of finance. One problem with the book is the lack of sufficient explanation for the financial jargon used. While a small glossary is provided, those without extensive knowledge of trading lingo will probably find themselves going elsewhere to clarify terms and re-reading passages that are particularly difficult to understand. All in all, Mr. Patterson’s book is a remarkably clear and instructive read. Anyone, from financial novices to Wall Street titans alike, would be able to learn a great deal about the important role of quants in the recent financial crisis from reading this book. by Alina Jennings
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BUSINESS TODAY SPRING 2010
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Bt BOOKs
...and Solving the Green Problem Ecology and Socialism “There is a giant death sentence hanging over much of our world,” begins ecologist and Pace University physics professor Chris Williams. His latest manifesto, Ecology and Socialism: Solutions to Capitalist Ecological Crisis, makes the case that without drastic systemic change, the world lurches towards a slow-motion ecological catastrophe. Worse still, according to Professor Williams, the same shadowy corporations whose productive forces created the environmental disaster prevent us from stopping it by “bringing the whole of science into disrepute,” putting forth “false solutions,” and lobbying all government representatives to such an extent that government bills intended to alleviate the crisis risk worsening it. According to Professor Williams, while not a ruse, the capitalist cure is worse than the disease. Whether you consider income, technical advancement, or life expectancy, the progress of socialist nations such as Cuba and North Korea falls far short of their capitalist counterparts’ success. Professor Williams argues that these heretofore successes have born a hidden cost on the environment and will threaten civilization as we know it. Of course, this line of argument immediately begs the question: if Capitalist societies are so good at creating wealth, why can’t those same energies be turned towards removing pollutants from the air? Professor Williams acknowledges that, “There is nothing inherent to capitalism that sets it against deriving energy from renewable sources. Indeed, in theory, there is nothing capitalism will not and cannot make profitable,” but refuses to believe that any solution offered by “the system” can solve the problems he outlines. Unfortunately, Williams’ basic thesis demands far more of his socialist solutions than they can provide. First, socialism cannot “allow for a calculation of the true costs of creating useful things,” as he requires, without a definition of useful. And who can provide us with a definition of useful? As absurd as the millions of referendums that would be required of the public to determine whether a good is useful enough to be placed into production might sound, surrendering control over every individual’s freedom to produce to a planner might be worse. While in a capitalist economy entrepreneurs seek to identify the needs of consumers and meet those needs in a decentralized fashion, no equivalent exists in the type of Williams’ socialist economies. Williams’ economic illiteracy prevents him from analyzing our problem and presenting a coherent solution. Although he claims that entrepreneurs can’t solve the problem of global warming, history suggests that only government intervention and entrepreneurs will be able to solve the problem of global warming, just as their combined forces had solved the ozone depletion and acid rain problems in the past. By embracing a dated Marxist paradigm, Professor Williams denies himself an opportunity to make insightful analysis of these tradeoffs, preferring to claim that these obvious tradeoffs are the results of machinations by capitalist boogey men, rather than fundamental features of our reality. by Michael Lachanski
SPRING 2010 BUSINESS TODAY
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On Campus
THE EDUCATION FACTORY
Sam Heffernan Princeton University 10
Accounting for over 10% of our nation’s undergraduates, for-profit universities have an average graduation rate of 22%, leave their students with more debt than students at more traditional institutions, and spend more on advertising than on teachers. Are they harming their students more than they are helping?
BUSINESS TODAY SPRING 2011
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On Campus
S
ometimes labeled “McUniversi- 30 and 50 million working American solving, and allow them to focus on one ties” or “degree mills,” for-profit adults who have not finished a college particular subject area of choice. For universities have become increas- degree, but there are increasing num- people who do not have this luxury or ingly popular over the last decade and bers of high school graduates who can- who are not academically motivated have dramatically changed the Ameri- not attend community college due to by this educational system, vocational can higher education landscape. The space and budget constraints. American training and job-specific degrees proindustry was started in 1976 when community colleges are over enrolled vide them with a solid education that John Sperling, a Cambridge-educated and under funded, so for-profit insti- will, unlike many liberal arts majors, tenured professor at San Jose State tutions, largely as a result of persuasive, translate to the workplace. It is imporUniversity, founded the University of Phoenix as a for-profit university for adults looking to earn a college degree. Admission to the University of Phoenix originally required that applicants be at least 23 years of age, have two years of work experience, and previous college credits. The university’s parent company, Apollo Group, went public in 1994, and, as a result of unrelenting pressure for growth from shareholders, chose to abandon the original admissions crite- multi-million advertising campaigns, tant to note that for-profit universities ria in 2001 in order to greatly increase have attracted many of those excluded also offer undergraduate, graduate, and, the number of eligible students. students. For students who cannot up- sometimes, post-graduate degrees in the A staggering 12% of all Ameri- root their lives for two or four years be- arts and sciences which broadens their can college students attend for-profit cause of family or work commitments, appeal to include students looking to universities, of which the University for-profit colleges are an attractive op- pursue a more traditional academic deof Phoenix leads enrollment by far. In tion because of their many campuses gree. This flexibility in academic profact, the growth has been so rapid that and online programs. grams attracts a wide variety of students the University of Phoenix enrolled The University of Phoenix, for ex- with varied interests and academic capamore students in the fall of 2009 than ample, builds campuses along major bilities while providing the appropriate the entire for-profit sector enrolled in highways roughly 20 minutes apart so educational program for each individu1991. Such high enrollment figures are that people from the area can easily com- al student. a result of aggressive recruitment tac- mute to class after work or between jobs. Proponents of traditional higher tics which both promote the enrollment Not surprisingly, most of the growth in education have raised questions about of students who struggle academically this sector over the last fifteen years has a possible inherent conflict of interest and saddle unsuspecting, low-income been in online enrollment. At Grand between providing educational services Americans with debt. As Education Canyon University, another for-profit and seeking profits for university adTrust reports, in 2008, the overall grad- university located in Phoenix, 90% of ministrators and shareholders. Robert uation rate in the for-profit sector was students take classes exclusively online. W. Tucker, a former Phoenix senior only 22%, less than a third of the 68% For-profit institutions have welcomed vice president, told Business Week, “At graduation rate at non-profit private this trend as it greatly enlarges the critical junctures, John [Sperling] chose universities. More disturbing, however, pool of eligible students and the profit growth over academic integrity, which is that students at for-profit universities margin for online enrollment is signifi- ultimately diminished a powerful eduaccumulated on average $31,190 in debt, cantly greater than that of on-campus cational model.” In order to maximize almost all from the federal government, enrollment. profits, for-profit universities hire compared to only $7,960 and $17,040 in Unlike liberal arts colleges, for- teachers on short-term contracts for public and private non-profit universi- profit universities generally offer practi- ease of hiring and firing, and, in some ties, respectively. cal degrees in growing industries such cases, spend more on advertising than Originally conceived with the as nursing, business management, and on educational services. For some formission of educating returning adult information technology to prepare stu- profit institutions, College, Inc. has students, for-profit universities fill the dents for the workplace. A traditional reported that advertising consumes gaps in traditional higher education by liberal arts curriculum is designed to roughly a quarter of the overall budget providing services to those students for acquaint students with all major aca- whereas teachers’ salaries represent a whom non-profit institutions are not demic disciplines, provide them with mere 10 to 20 percent. The University accessible. Not only are there between the tools and information for problem of Phoenix spent $130 million on ad-
A staggering 12% of all American college students attend for-profit universities.
SPRING 2011 BUSINESS TODAY
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On Campus
vertising in 2008, most of which was attained through federal student loans which, when not paid back in full, become the responsibility of the taxpayer. Federal student aid is the lifeline of most for-profit institutions accounting for up to 90% of tuition revenue. More specifically, the for-profit sector represents little more than 10% of American college students but consumes 24% of federal aid, which amounts to more than $24 billion, according to Education Trust. The University of Phoenix is
private universities rely on both tuition payments and donations to cover operating costs, the US government is essentially fueling the for-profit sector and this indirect investment has allowed it to grow over 230% from 1998 to 2008. Though they are the first to do so in the education sector, for-profit universities are not the only institutions in recent history to burden uninformed, low-income Americans with insurmountable debt. The recruitment tactics employed by some for-profit universities
Federal student aid is the lifeline of most for-profit institutions accounting for up to 90% of tuition revenue. the number one recipient of Pell Grants, awarded by the federal government to students from low-income backgrounds, bringing in over one billion dollars of revenue last academic year. Because these grants are so incredibly lucrative, recruitment officers have at times targeted low-income prospective students who are often not able to pay back those loans. The tremendous debt that students find themselves burdened with after graduation is not, however, the university’s problem. This creates a perverse financial incentive for universities to willingly enroll low-income students and to seek government loans for those students, many of whom will clearly not be able to afford the future loan repayments. Not surprisingly, the rate of default on these loans is staggeringly high at 19.1% within three years of graduation, and, unfortunately for those students who were unprepared for such huge debt, defaulting on federal student loans can have lasting consequences, according to Education Trust. The federal government reserves the right to decline future loan applications, take portions of future income to repay the loan, and sue the borrower at any time in the future for full repayment. Whereas traditional 12
are eerily reminiscent of the predatory lending that caused the housing bubble and, indirectly, the subsequent financial crisis. Much like mortgage originators during the housing bubble, recruitment officers at several for-profit universities have quotas for the number of students they must enroll each month. At one institution, each telephone operator was instructed to make 150 calls a day to enroll 12 students a month, and, if quotas were not met, the number of calls per day would be increased to 300 or 400. College, Inc. cited one recruitment officer as claiming that she was told to “Dig deep and get to their [the prospective students’] pain so that you [the recruitment officer] can convince them that a college degree will solve all of their problems.” Once a student had committed, financial aid officers were pressured by superiors to match that student with a federal student loan as quickly as possible. This pressure has caused tens, if not hundreds, of thousands with little or no credit history to take on debt beyond their means. These lending practices parallel those exhibited by the originators of subprime mortgages leading up to the housing crisis, and, as with the mort-
gage originators who quickly sold the mortgages to larger financial institutions, the universities bear no cost in the event that a student defaults. In fact, it is the taxpayer who is ultimately responsible for covering the difference if a federal student loan is not repaid in full. And though this may seem unjust, it is more unfair to see the destruction that crippling federal debt has on the lives of students who may or may not have graduated and are unable to secure jobs lucrative enough to cover escalating debt payments. Unlike a physical commodity which acts as collateral and can be repossessed in the event of mortgage default, an education can not be taken away, so the lasting effects of defaulting on federal student loans are some of the worst in the lending industry. While no one would argue that forprofit universities do not fill an important gap in our educational system, the growing costs may fall on unprepared students and unaware taxpayers. On the one hand they cater to a demographic that traditional higher education has essentially left behind. Those people who are not interested in or qualified for a four year institution and who have been excluded from the community college system have turned to for-profit universities in their quest for a college degree. Given the value our society puts on a college degree, this opportunity is crucial for the nearly three million students who choose to attend for-profit institutions. Moreover, these schools offer greater numbers of technical or vocational degrees in growth industries hoping that graduates will secure jobs that would be unattainable to someone without significant higher education. Where these universities fail, however, is in providing the service in the best way possible for the students. With low graduation rates, high debt upon graduation, and allegations of predatory enrollment practices, it can be challenging to see whether these institutions are achieving their mission of providing higher education. Maybe the value of this education is not simply a factor of the university itself, but rather a combination of the university program and the student’s personal situation. BT
BUSINESS TODAY SPRING 2011
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ON CAMPUS
Ethical Endownments?
How universities are moving towards responsible investment by Brandon Iglesias, Tulane University
W
hile institutions of higher learning are recognized for academics, athletics and the arts, students often overlook their critical business function. Over $300 billion is managed by colleges and universities in the United States, giving higher education real power to affect local and global communities through their investment choices. Universities have missions of emphasizing community service and global justice through curriculum structures and study abroad programs, but students are increasingly questioning the ethics of endowment investment. A group at the forefront of the socially responsible investing movement is the Responsible Endowment Coalition (REC). Founded in 2004 by students from Duke, University of Pennsylvania, Barnard, Swarthmore, and Williams, the REC aims reallocate investments to catalyze positive change in corporations. Executive Director of REC Dan Apfel told Business Today that there are several barriers to responsible investment practices. First,
14
BUSINESS TODAY SPRING 2011
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ON CAMPUS
the incorrect belief that responsible in- are not required to disclose the managers I wasn’t involved on the activism side of vestment will limit returns often makes they use or specific investments they have. the campus as much, I was very interested administrators and trustees resistant to One of the ways that universities can in how the school funds are invested.” In change. There are also rarely incentives move towards more socially responsible terms of the dynamics of the group, Riin place for investment officers to alter practices is to hire fund managers who ley described “the relationship between current policies. The responsibility of are experts in specific areas. These fund the investors, the managers of the funds, holding investors accountable also falls managers screen for bad companies and and the faculty who are on it is very open.” to students. One of the most critical roles include in their analysis how good com- Green Mountain College has achieved of students who are stakeholders of en- panies are. progress so far but the committee is lookdowment funds, according to Apfel, is Despite these challenges, REC is en- ing to allocate a more substantial of the being able to make a convincing case to gaged with nearly 100 campuses across the school’s money to socially responsible the trustees. Th is takes research and ex- country to work towards more responsible funds. “Our schools currently invests perience to be able to speak a common investment practices. To catalyze change 10% of its endowment in a SRI [Socially language. Finally, the actual methods of within universities, the REC coordinates Responsible Investing] fund portfolio investment practices can present a prob- Committees on Investor Responsibility. 21, but we’re aiming to increase that over lem. There is lack of transparency around The Committees are composed of various time. One of the aim of our committees investments in the modern economy that stakeholders—students, alumni, faculty, is to increase that 10% up to a level that makes understanding how universities administrators and trustees and serve to is more consistent with our school’s misactually invest their endowments diffi- educate and provide suggestions to the sion” cult for people to understand. university community. Their functions REC also works with student-led How do universities manage their include proxy voting and having dialogue organizations that are working to change money? Over the past 50 years, fi nancial with companies and managers to encour- their university investment practices markets have changed dramatically as a age them to improve their practices to the from the inside. A group of Yale Uniresult of deregulation and the prolifera- standards of the university. versity students started The Responsible tion of new fi nancial products, like quanIn one recent case, REC collabo- Endowment Project which has fought titative hedge funds (hedge funds where rated with Loyola University of Chi- against the investments of the University analysis is done by computer algorithm). cago and other institutions to encourage that have had negative impact on society. In the past, the investment portfolio for a JPMorgan Chase to create a policy that Some examples of these included a partuniversity endowment featured a balance would end their fi nancing of companies nership with a fi rm that would have pobetween stocks and bonds, weighted to involved in mountaintop removal coal tentially harmed the Great Sand Dunes minimize risk and maximize return. In mining. At Seattle University, REC of Colorado by draining the aquifer unthis simple system, investment boards worked with their committee to start derneath, and investments in a private and committees were able to monitor so- making more community investments prison company that has been involved cially responsible investing because of the that supports low-income communities with humans rights violations according transparency, and voting rights that came and around the world. The organization to Amnesty International. Th rough a pewith the direct ownership of shares in a has also worked with the Committee at tition and meetings with Yale’s Advisory corporation. Middlebury College to invest $4 million Committee on Investor Responsibility, Today, however, there are multiple in the sustainable investments initiative, this dedicated group of students has been layers between university investment a fund set up by Middlebury and other outspoken advocates of change to the offices and their investments. Th is com- institutional investors. University’s near $17 billion endowment. plexity comes investing in mutual funds, Apfel described, “We’ve really When making their case to the adhedge funds, REITs, derivatives, and worked with students to bring the com- ministrators and trustees that are charged global equities. Some of these methods mittee model, which was fi rst created in with the responsibility of overseeing minimize the direct exposure that uni- the 1970s, to schools around the country. University endowments, Apfel urged versities have to the actual fi rms that they Students are a key group of stakehold- that schools should not view fiscal and are investing since such funds may lump ers that care about these issues and ben- social responsibility at odds with each multiple investments into one package. efit from the existence of the endowment. other, and in fact can be complimentary. Traditional stocks and bonds may be rela- Students and research are really why col- “Schools don’t have to make long-term fitively transparent, while the waters are leges and universities exist.” nancial sacrifices to be responsible invesmurkier with the mutual funds and hedge Daniel Riley, a student at Green tors and these decisions can truly benefit funds. For example, hedge funds and as- Mountain College in Vermont, ex- their stakeholders,” he said. “It can also set managers with over $100 million as- plained his experience serving on a com- be a fabulous educational opportunity sets under management are required to mittee to Business Today. “I decided for students to learn about the endowdisclose their long equity positions, op- to become involved on the Committee ment. Institutions of higher education tions, notes, and convertibles. However, because Green Mountain College has a have lots of good reasons to be leaders in hedge funds and many other asset owners very strong environmental focus. While responsible investment.” BT SPRING 2011 BUSINESS TODAY
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On Campus
IN MALI
The Gift of a Lifetime
By Greg Woodburn, University of Southern California
A
s I slipped the new pair of running shoes onto my host’s calloused feet, adrenaline surged through my body. Even though I had anticipated and imagined this scene many times over, I was still overcome by the joy of giving these shoes to the dignified elder Chief of Sikoro, a tiny and impoverished village in Mali, West Africa. My hands trembled. My heartbeat raced. The scene unfolded a few days
16
after Christmas 2009. I had traveled to ing the rainy season, the nearby river Sikoro with eleven fellow University floods, leaving Sikoro isolated from all of Southern California students on a schools, all commerce and, often tragithree-week humanitarian trip through cally, all medical services. the USC African Health Initiative. Our Less drastically, but no less wellmission included building an irri- intentioned, I brought along 113 pairs gated “Community Garden” to enrich of running shoes – as many as I could the 500 villagers’ diets with fruits and squeeze into five extra duffle bags – to vegetables as well as using funds we give out to the villagers. raised to purchase building materials Three years prior, as a student at for a desperately needed bridge. Dur- Ventura High School, I founded “Give
BUSINESS TODAY SPRING 2011
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e
On Campus
Running” to collect, clean, and donate new and used running shoes to disadvantaged youth. This original holiday project with a modest goal of 100 pairs of shoes has snowballed into an official 501(c)(3) non-profit organization (www.giverunning.org) that has distributed more than 8,600 pairs of running shoes to underprivileged kids – or, more accurately, children with no privileges at all – near and far, from inner-city Los Angeles to indigent villages and orphanages in Third-World nations including Kenya, Liberia, Uganda, Sudan, as well as earthquake victims in Haiti. Sikoro, however, was the first time outside of California that I was able to carry out our motto in person: “Give opportunity. Give joy. Give Running.” As is often the case when one gives to others, I found I received so much more in return. I am so thankful for the opportunity I had to visit Sikoro. Mali ranks as the third-poorest nation in the world, but to me it seemed like its people must rank among the happiest. To an outsider from the Western world, this is at first surprising if not downright perplexing. After all, the villagers in Sikoro live in mud-brick huts; they sleep on woven mats on hard-dirt floors; they pump their water – ji in Bambara, their native language – from two wells. And, as mentioned, they lack enough fruits and vegetables, adequate medical care, and year-round schooling. While living what seems a difficult life, theirs seems a happy existence: they smile constantly, laugh easily, and dance freely. Worries about car payments and mortgages and pension accounts and work promotions do not weigh on their minds. They don’t have much by our standards, but they have enough – and most importantly, what they have they graciously share. Dumuni (food), especially sogo (meat), is in short supply, yet the villagers slaughtered a ba (goat) to treat us to a celebratory feast. In return I could not wait to djan (give) them the gift of running shoes. Unfortunately, our USCAHI group’s luggage was lost on our connecting flight from Paris. Over the next week the rest of our
group’s luggage trickled in…but not mine. lage, I met this teen at his tin-roofed mud For two weeks I made do with the clothes hut and asked him to try on my pair of on my back, an inconvenience that would running shoes – the only pair of shoes (behave been infuriating had I not taken to sides flip-flops) I had brought for my own heart Coach John Wooden’s wisdom: use in Mali. “Things turn out best for those who make My Adidas SuperNova Glides fit Lathe best of the way things turn out.” meen perfectly. “I ni che, Amadou (Thank Indeed, I embraced the turn of events you, Greg),” he said, using my adopted as it allowed me to more fully relate to, and Malian name. appreciate, the people of Sikoro because “I ni su (You are welcome),” I replied, for a brief while I was living with almost smiling. as few possessions as they did. Still, I was As we shook hands in friendship, worried sick that the five duffle bags filled adrenaline again surged through my body with running shoes would not be found. and my heart again raced. I realized how At long last the duffle bags arrived each pair of Give Running shoes handed and my dream of handing out the run- out serves as a bridge between two people. ning shoes was realized. Recalling it still While the giver and receiver of each pair gives me goose bumps. For many of the of shoes may not meet face-to-face as LaSikoro villagers, these were the first shoes meen and I did, through the shoes they they have ever had! Indeed, so precious nevertheless meet “foot-to-foot.” were the shoes that if we at first guessed Visiting Africa, I found, breaks your wrong and gave a person shoes that were heart – and opens it wider than ever betoo small, he or she would crunch up their fore. I am certainly a better and more fultoes and insist they fit just fine. Having filled person for the experience. painfully small shoes was better than havThis past holiday season, amongst all ing none at all; they would not let us take the bounty, I thought of the special dinner them off their feet until we brought over a I was treated to in Sikoro. I gave thanks for larger replacement pair. all that I have, and all that I learned from As special as was honoring the Chief those who have so much less. As I laced with the first pair of running shoes, lacing up my new Adidas to go for a run, I also up each pair on the other recipients’ feet thought of Lameen. BT was equally touching. However, one gift pair stands out in my mind and heart as distinctly as does the greatest run of my life. The day before leaving Sikoro, I went on a six-mile run through the village. The first few laps of my quarter-mile loop I ran in solitude, but then several children began to run with me. They would keep me company for one or two circuits, then drop out and take a rest, only to rejoin me the next time I came around. Before I knew it, my running group had swelled from three to ten to twenty-plus smiling kids – many of who were wearing the gift shoes they had recently received. During this most memorable run of my life, one training partner stood out because he had to stop – not from exhaustion, but because there was a rocky section of the trail and he was running barefoot. Lameen Sacko, I learned, had not received a pair of Give Running shoes the day before. The following day, my last in the vil-
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Suit Yourself:
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BUSINESS TODAY SPRING 2011
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Women in Business
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BUSINESS TODAY SPRING 2011
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Women in Business
Lauren Bush Co-Founder & CEO, FEED Projects – On Trendsetting to Change Lives Lauren Bush has helped develop a new model for international food aid. A 2006 graduate of Princeton University, she became an Honorary Spokesperson for the UN World Food Program (WFP). This brought her to eight countries to visit WFP operations. She also helped kickstart the Universities Fighting Hunger Campaign in the United States. A former fashion model, she has been on the cover of publications such as W and Glamour.
Business Today: What inspired you to become involved with food aid programs? Lauren Bush: My involvement with the World Food Program started as a sophomore in college, seven years ago now. At the time, it was working on starting its Students Fighting World Hunger Campaign to encourage young activism on college campuses. It was looking for a student-aged spokesperson to travel on a number of trips and then visit American schools to share her experience with kids. I met with them and began to help them build that campaign. BT: The FEED foundation has adopted nontraditional tactics to raise awareness and funds for hunger in Africa. There aren’t many organizations that have aid recipients produce products to be sold here as a means to improve access to education. What inspired this model?
also made out of eco-friendly materials. For every bag you buy of the first bags we started with, the FEED 1 bag, you feed one child in school for one year. It’s a really definable result- as a consumer you know what impact your purchase is having.
to tackle giving healthier school meals to kids in America. In America, we are lucky to have a bit of a safety net, and if you go to school and your family is under a certain income level, you are given a free school lunch and, perhaps, even a breakfast. But often what kids are being given is not nutritious. It fills them up, which is great, but it doesn’t necessarily give them nutrients to really grow into healthy adults. And also, it doesn’t teach them healthy eating habits.
BT: I have read that FEED is planning to expand its operations worldwide, including to the United States. What have been the challenges of expansion, and how are you adapting your model for Africa to other places? We partnered with a great organization called donorschoose.org, where teachers LB: From the beginning, we have mainly in thousands of schools nationwide resupported the UN World Food Program quest things like pencils or chalkboards School Feeding Program; now we are or fieldtrips. But, it wasn’t addressing supporting a lot of UNICEF food nutrition programs as well. Those organizations obviously work around the world in the poorest countries, including some in not only Africa but also Latin America and Asia. In thinking about how to tackle issues here in America, where there is definitely a different type of need and there are so many different organizations already doing wonderful work here, the challenge is how to effectively continue with the FEED model of a tangible donation attached to a consumer product. We also still want to make a big impact- that is important to us.
LB: I have always loved design. I previously worked as a model, so I was already involved in the fashion industry. I thought that creating a product would be a really tangible, easy way for people to support the cause by allowing them to shop while making donations through their purchases. It just came about as a simple idea to attach a very measurable donation to a consumer product- a reus- The solution we came up with, which able shopping bag in this case, which is is reflected in the FEED USA line, is
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Women in Business
anything to do with the cafeteria or nutrition education. So, we went to them and partnered on a FEED USA platform which really addresses and targets getting healthier school meals, which means actual physical equipment, such as salad bars and blenders, that cafeteria workers and schools can use to actually prepare healthier school meals. We also partnered to work on better nutrition education, providing opportunities such as field trips to farms or school gardens that give kids hands-on learning experience about what is healthy and how the food system works. BT: What place (or places), in your opinion, require the most assistance from developed countries? LB: There is such a need everywhere. The world is facing the challenge to figure out this problem of hunger and of obesity. We have a very different problem in America, which is hunger too. It’s a different form of hunger that is a type of malnutritionwhen you’re getting calories from food but it’s not nutritious food. The food system definitely needs help, and what
gives me hope is that there are great organizations out there, like UN World Food Program and UNICEF. And now, with Donors Choose and a lot of great soup kitchens, programs are not only trying to feed hungry people but also trying to do it in a sustainable and good way.
hand-in-hand ... I think that the organizations that do take a holistic approach or those that really work well with other organizations are the ones that are most effective in actually making change happen.
BT: What do you see as the future for BT: One of your uncle’s, former Presi- food aid, and how do organizations like dent George W. Bush, signature accom- yours and donors need to adapt? plishments in Africa was his strong commitment to fighting AIDS. One of your LB: There are a lot of new, innovative organization’s main goals is improving things even since I’ve been focused on it education, which is a cornerstone in the within the past seven to five years. One fight against AIDS. Do you see that your thing we are supporting through UNICEF are these micronutrient powder efforts have complemented his? packets. If kids are getting maybe just LB: I’m very proud of everything he did rice or beans- nothing that’s really goto support Africa and the fight against ing to sustain them and they are often AIDS. I would say that everything is in- still chronically malnourished- they can terconnected in development work, and sprinkle this innovative micronutrient once you start diving into it, the obvi- powder over their food. It requires no ous fact is that people are starving. Even water, so there’s no risk of kids consumif they are able to get ARV drugs [anti- ing dirty water, and from that multiviretroviral drugs], they are not going to tamin, they are able to get the nutrients survive if they do not have food. Food they need to grown and thrive. That’s is a necessary complement to ARV treat- one example of a new innovation in the ments of HIV and AIDS. Same with food aid world- something that’s easy to clean water, proper healthcare; it all goes distribute, easy to produce, and really does make a huge difference. Similar to that is a substance called Plumpy’nut, which Nutriset (a French company) invented, and organizations, again like UNICEF, distribute around the world to kids who are severely malnourished. It’s basically peanut paste, and it’s super-high-calorie, super-highnutrient, and really is lifesaving. One thing we’re supporting, in a small way with one of our products, is called Purchase for Progress, which is supported by the World Food Program. It actually buys locally and feeds locally instead of (often what food aid is and why people are weary of it) using grain from developed countries. Sometimes it is necessary to import food, but it can also cripple local farmers and local markets; a farmer can’t compete against free food. So a cool thing that the World Food Program is trying to do is to buy a good portion of its food locally, supporting local farmers while feeding those who really need the food.
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Women in Business
ing with a minor in photography. Both of these disciplines, which I was naturally interested in, played nicely into what I am doing now. I had to write a thesis, which was a graduation requirement, so I wrote mine about women and gender inequality in the developing world, which was something I was exposed to through my trips with the World Food Program. And, I was able to get some funding from Princeton to go on more of those trips, which allowed me to learn more, see more, and photograph more, which was really the best experience. BT: What are your future plans? BT: You have also launched your own clothing line, Lauren Pierce. How do you balance the demands of starting a new business with your commitments to FEED? LB: The two [FEED and Lauren Pierce] are obviously very different companies, with very different missions. But, I would say that Lauren Pierce is similar to FEED in the sense that it is making a consumer product with good morals, in that we source fabrics from around the world and support women artisans, primarily in the Congo. We ship them fabric, they dye it--it’s beautiful--or they source it locally. It’s really their creativity coming through. Then they send it back and we make the garments in New York that are sent to stores. It’s trade, not aid, in that sense. While it’s different from FEED’s mission of building a donation into a consumer product, it is the same feeling of doing something good and creating something that is good for the world through design--whether clothing or bags. BT: What has been the most fulfilling part of your work at FEED? The most frustrating? LB: Every day is fulfilling, and every day is different. I think it is exciting to be an entrepreneur and really have a small, great team of people that I work with everyday. We are figuring it out as we go for the most part, which is exciting. I think
LB: FEED is at a great coming-of-age moment. We have a lot of great retail partnerships under our belt now, and I think we are just figuring out where we That obviously comes with challenges, can improve and what we can do better. but with every challenge that you over- We have a great website now, which I’m come, you learn more. In the end, what really proud of. More importantly than I’ve learned in my short time is that some getting people to buy our products, it’s things are not meant to happen the way about spreading awareness, opening you might envision. You work hard, and people’s consciousnesses to the fact that you think it’s going to happen a cer- hunger exists- but don’t be overwhelmed, tain way. But then in the end, it wasn’t here’s a small action you can do that will meant to be, or something else better make a real difference in someone’s life. comes along. Always have faith in your That’s always been the goal, and I think ideas- keep at it even if you hit some road we can meet it. bumps. We also have the FEED Foundation as BT: What advice would you give to as- well. The purpose of that is so that if piring female entrepreneurs? you don’t want to buy our products or you have a bag already, there is still a LB: I think most people think of entre- way to give and become involved. We preneurs as men and that is generally the are just giving people entry points and case. However, I think women naturally understandable ways to help solve world have a lot of great qualities that make hunger, which can be overwhelming for them great entrepreneurs. It is about tak- anyone We want to break down this ing a risk and going out there with your seemingly huge problem and make it reideas and believing in them, and really ally tangible and easy for people to give seeing them through. I think that’s the back. core of any entrepreneur. BT: If someone wanted to donate or beBT: How did your undergraduate work come more involved with FEED, where at Princeton influence your career path should they go? so far? LB: I would direct people to feedprojLB: When I was contacted by the UN ects.com and then from there, link to World Food Program, I was actually al- the FEED Foundation if they are interready really interested in studying devel- ested in looking into that. opment work. I was thinking of majoring in anthropology, which I did end up do- Interviewed by George Maliha BT that when you don’t fully know the rules, you can break them more easily.
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Women in Business
Working Girl How far has the American businesswoman come, and how far does she have to go? A new report from the National Economic Council details the incredible advancements that working women have made over the past fifty years, the crucial role that they play in the economic recovery and the challenges that continue to confront them. By Karen O’Neill Ocasio, Margaret Meyer and Caroline Hanamirian, Princeton University
I
n the business world of the 21st century, the stereotypical image of women confined to the roles of secretaries, nurses and housewives has long been shattered. From running the boardrooms of Fortune 500 Companies to breaking into the “old boys” networks of Wall Street investment banks, the American alpha female has risen to positions that were unattainable as recent as fifty, even thirty years ago. A recent report from the National Economic Council provides a clear picture of where women stand in the corporate ladder today and what the future will bring. The report, entitled “Jobs and Economic Security for America’s Women,” lays out the “economic landscape” of women in the American workforce. Today,
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women represent 47 percent of American workers, a significant increase from 33 percent reported in 1960. Perhaps most dramatically, only forty years ago, women owned a mere 5 percent of all small businesses. In today’s economy, however, women run 30 percent, or 7.8 million, American small businesses. How do female owned businesses fare, as compared to their male counterparts? The report interestingly highlights that between 1997 and 2007, the total sales of women-owned, privately held firms added almost 500,000 jobs, whereas private firms actually lost jobs. The Small Business Jobs Act, recently signed under President Obama, aims to extend the Small Business Administration’s loan program. This is a promising measure
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WOmen in Business
as women and minorities are three to economy and society as a whole is their come into play such as starting a family five times more likely to receive Small performance—rather, outperformance and taking care of elders. Their finding Business Administration loans than more of males—in the education realm. suggests that some women are still having conventional businesses. Forty years ago, many institutions of trouble juggling family commitments and Marjorie Scardino of Pearson, Indra higher learning in the United States work. Thirty-seven percent of women Nooyi of PespiCo, and Andrea Jung of still barred the admission of women for surveyed had taken voluntary time out Avon are just some of the female leaders undergraduate and graduate programs. of work in comparison to 24 percent of who consistently make headlines by Today, women actually comprise a men. Clearly, time management and the heading leading companies today. As majority of students pursuing a secondary role of women in family dynamics still the CEO of Pearson, Scardino was the education, comprising 57 percent of influences how women contribute to the first woman at the forefront of a Top 100 undergraduate students, 60 percent of work environment. company traded in the London Stock graduate school students and 50.4 percent In addition to the gender wage gap, Exchange. As the head of a firm with 50 of PhD candidates. there are other factors which face specific percent ownership of The Economist, she Despite these advancements, women groups of women that may hinder their was responsible for refining the vision still face persisting challenges. It is advancement in the economy relative to of the media conglomerate towards shocking to learn that in 2011, almost 50 other women. African American women, education and publishing initiatives. years after the Equal Pay Act was signed for example, are nearly twice as likely to be In the beverage industry, few into law, women are still only paid an unemployed as their white counterparts. strategic business plans are as effective as average of 77 cents for every dollar paid Unemployment rates among single those crafted by Indra Nooyi of PepsiCo. to men. At the top of the corporate food mothers are also higher than among With Nooyi as Chief Financial Officer, chain, a mere 2.6 percent of Fortune 500 married women, posing a significant PepsiCo’s annual revenue increased companies are led by a female CEO and problem as single mothers are the sole by 72 percent since 2001, doubling net only 15.2 percent of those companies’ breadwinners of their families. profits. Today she serves as the CEO of board seats are occupied by women. In the Though the increased presence the corporation, having overseen the field of law, at the country’s top 100 law of female leadership at all levels of the acquisition of Tropicana, the merger with firms, only 17 percent of equity partners economy is starting to signal a more Quaker Oats Company and the addition are women. productive and egalitarian world economy, of Gatorade to the company’s products. These troubling statistics may be these problems continue to present One clear advantage for women as attributable to an inconsistency in the themselves as barriers for females to lead business leaders is their insight in female- trend of women’s career paths. Sylvia the business world in the near and long oriented markets, such as retail and Ann Hewlett and Carolyn Buck Luce term future. Age-old hurdles, including cosmetics. Andrea Jung, CEO of Avon, of Columbia University found that 58% workplace discrimination and workhas capitalized on this expertise within of women consider their careers to be family balance, still clearly confront the the direct sales and beauty industry. non-linear. Rather than climbing up the modern workingwoman, but do not With more than $10 billion in annual career ladder as time passes, other factors necessarily constrain her. BT revenue, Avon’s business strategy helps women support themselves financially as direct sales consultants by selling beauty products. Avon describes itself as a company that not only brings beauty to doors, but also opens them. The company has also used its focus on female consumer behavior for philanthropic 30% of businesses are owned by women, totalling to 7.8m businesses purposes. The Avon Foundation is the largest corporate foundation dedicated to women’s issues internationally. Currently, its philanthropic initiatives focus on breast cancer research and facilitating patients’ access to treatment. Avon has also collaborated with United Nations women represent 47% of the workforce, compared to 33% in 1960 Development Fund for Women in order to promote female empowerment and speak twice as many men earn over out against domestic and gender violence. $100,000 per year, as comAnother key indicator of the pared to women advancement women in the American
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Photo Credit: needleplusthread.com
Women in Business
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Women in Business
karen katz CEO, Neiman Marcus – On Being Business and Style Savvy Karen Katz, a graduate of UT and Harvard, became CEO of Neiman Marcus in October 2010. She became a handbag merchandise manager in 1985, then filled several positions within Neiman Marcus, including president of Neiman Marcus Direct and Executive Vice President of Neiman Marcus Stores. Notably during her career at Neiman Marcus, she brought Prada to the U.S. and helped bring the luxury brand back from the depths of the recession.
Business Today: In the past you have been recognized for identifying and promoting the sale of luxury handbags. Which do you be believe to be the next pivotal trend in women’s fashion?
Photo Credit: needleplusthread.com
Karen Katz: It’s all about the color coral and the coral family. That’s going to be the most important trend for the spring. I don’t know if you watched the Golden Globes, but Clare Danes had an amazing dress on that was a coral color. There was another young actress who had on a beautiful Calvin Klein dress in coral. So that color is going to be very important. I do believe that women are investing a significant amount in shoes and bags. I think that you maybe wear jeans everyday to school, but you want to make sure that if you go out on a date or go to a party on the weekend that you look pretty cool, and many times that starts with an amazing pair of shoes or a great bag. It used to be a ready-to-wear clothes driven business, and clothes are obviously still very important to our business, but I also think that shoes and bags have become equally important. There has been a big shift in that over the past five years. BT: In light of the recession, have you found that high-end shoppers are purchasing less or demanding fewer designer products?
KK: The recession did hit all luxury retailers quite hard because people perceived that they had less money and so they pulled back or they just didn’t feel like shopping because of the state of the world. They just stopped coming in. But the recession really began ebbing probably about a year ago. We definitely started seeing our customers coming back and they’re definitely buying at the highest end of luxury as well as what we call our “opening price points,” but they are being extremely deliberate about how they’re shopping. They’re willing to spend whatever the high price is for a handbag or beautiful dress, but it has to have real quality, luxury, and great value to it if they are going to spend money on it. I think that that’s the big difference. Pre-recession—they bought with abandonment. Post-recession—they’re buying with a real deliberate focus on each and every item they purchase. BT: In what ways has Neiman Marcus adjusted to make up for the losses it felt? KK: We had to do a pretty major expense cut. Unfortunately, we had to let some people go—we just had too many people for the level of business we were doing. We went through what we called a major rebalancing of our price points from the glory days of 2005, 2006, and 2007. We were able to move some of our prices up, mak-
ing things more luxurious and more over the top, and we moved away from opening price points. We also reached out to our best customers in a pretty aggressive way, giving them all kinds of good offers and incentives to come in and shop. BT: When searching for promising new brands, what specific criteria do you keep in mind to evaluate them? What are the biggest challenges involved in picking up a new brand? KK: The first thing that we think about when we see a new brand or a new young designer is: is the product compelling? Because that’s what we’re selling to our customers—a great product. Our buyers are the best at editing through the market, trying to really figure out what is the best product from our current vendor structure and what is the best product from new vendors that are out there that we might try to tap, who seem like they have talent for the future. So it’s all about product and whether it is really compelling. Underneath are questions like: Are they using quality fabric? Is the production of the product done in a quality way? All of those things are very, very important. In many cases there are some new brands and new young designers who are fulfilling a fashion need—so they maybe would go in the contemporary area of our store. SPRING 2011 BUSINESS TODAY
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Women in Business
Quality is important, but it’s not as important in contemporary as it is in what we call our couture area. It really depends on where the designers have positioned themselves in the market. I would say that
what’s next and what’s new. There are lots of emerging brands, both in the United States and Europe. Our buyers will look at products again and decide if it would be right for the customers. Is it the right
There is always going to be a real balance between stores and online. The lines are blurring between them as mobile shopping comes into play. some of the young startups have dreams of grand plans and believe that they can really influence the world through their designs, but they forget that it is a business—they have to have some balance between the design and the aesthetic of the product and the business part. Can they actually produce the product that they’re showing? Can they deliver it in a timely manner? It’s about bringing together the design, the aesthetic, the beautiful product, and the practical thinking. Practical thinking like, “Do I have money to go buy fabrics so that I can actually go to a factory, have the product made, and send it to a store?” Designers sometimes forget how important that part is. BT: Does Neiman Marcus have specific outreach programs or do most new designs approach the buyers?
quality? Does it have the right look? Is it a true luxury product or is it a fashion right product? That is what a buyer’s job is—to be out on the market, always looking for what’s new and next. BT: How does Neiman Marcus cater to students and younger clientele, who are often on a tighter budget than adults? KK: Our core customers are probably the parents of the students that go to Princeton, or Harvard, or any of the other great schools around the country. In our contemporary area, we do cater to what we call “the mother and the daughter” and we probably do a really good job of that. In a lot of cases the daughter (or student or anyone in their mid-to-late twenties) wants to have one great piece. They have a party to go to and really want to look amazing… so they decide they are going to come in. They find an Alice and Olivia top and are willing to spend a little more on that than if they bought a top at H&M or Zara because they know that its better quality, great fashion, and a real designer behind the product. Our contemporary area has been the best place for us to reach out to a younger client.
KK: It’s a combination. We have a very robust fashion office that is always on the lookout for new talent and new product. But, if somebody has a great product that they believe is right for Neiman Marcus, they can email us and we are very willing to send someone over to take a look at it. Or they can send product to us and we’ll take a look at it. We’re pretty open about trying to see as much new product as pos- Also, lots of young women, whether sible! they’re in their teens or twenties, love to have a great handbag—whether it’s a LouBT: You helped to bring Prada to the U.S, is Vuitton, Gucci, Prada or something like where it was very successful. How are you that. We’re really the headquarters for all able to recognize what brands would do of those brands so they inevitably have to well in the US? go to Neiman Marcus to buy. KK: Our buyers know our customers quite well and they are always looking for 28
BT: You entered this business in the late ‘70s. How has the culture of department
stores changes since that time? KK: I think the biggest change came about fifteen years ago when ecommerce started up. I guess when I think about the thirty years I’ve been in the business, that’s the biggest change. Its huge and it just keeps getting bigger and bigger. I think maybe one step below that is the advent of “fast fashion.” That has changed the way people think about trends. If sometimes showed up on the runway, it used to take three, maybe four, seasons before it showed up in more mid-level pricing. Now, I’m sitting at the fashion show, and you get to see it the next day through the Internet on your computer. In my mind those are probably the two biggest changes I’ve seen in my career. BT: With sites like GiltGroupe and Rue La La, how does Neiman Marcus remain competitive in the age of online bargain hunting? KK: Our goal or master plan is not to be a place for bargain hunters. We sell lots and lots of product at what we call full price selling because it’s unique, not so out there in the market, or exclusive to Neiman Marcus. I do think that GiltGroupe and Rue La La have disrupted the market in some way and that they are definitely attracting a younger customer, but I think that if people want the fashions from the runway, they typically can’t get that in the same timeframe as they could get it at Neiman Marcus. We’re in great admiration of what those companies have done, but it’s definitely a different business model than what we do at Neiman Marcus. BT: Do you see the future of the Neiman Marcus’s shopping experience one day as completely online? KK: I think that there is always going to be a real balance between stores and online. I think that the lines are blurring between them as mobile shopping comes into play and as social media changes the way we think about shopping. But from an experience point of view or a relationship point of view, the stores are still going to be an important part of the business.
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Women in Business
Ecommerce is definitely the fast growing part of the business and has the biggest upside potential. BT: How much of running a retail business is trying to appeal to consumers versus following your own personal ideas? KK: It’s all about staying focused on the customer, their needs and wants, and how they perceive the shopping experience. As the CEO, I obviously set the strategy, but we spend a lot of time talking to our customers and the people who we want to be our customers to really understand how they’re thinking about shopping and merchandise. That’s really how we set the strategy and is at the core of how we think about our business. The customer is at the center of everything we do, and depending on how she thinks of her shopping experience, whether its online or in store, that’s what really gives us the passion and energy to move the business forward.
experience—we want that to be a more seamless shopping experience for the customer. We want her to be able to shop any place and any time she wants—24/7. She can go to NeimanMarcus.com, do research, and really understand what the trends are for the season. Then she should be able to go to the Neiman Marcus app on her iPhone or iPad and buy it, or go to the Neiman Marcus store because she wants to try it on and see how a certain item fits her. BT: You’ve managed to balance raising a child and a maintaining highly successful career. How did you achieve a balance between work and family?
BT: What are the major goals in store for Neiman Marcus in 2011?
KK: I had a lot of support from immediate family. My son’s grandparents were around when he was young and we had the right kind of help in the house. It’s not easy. You have to have a good support system—and I was lucky that I had a good support system. My husband was very supportive. At the end of the day, I’m a better person for having to figure out the balance and my son is probably more independent because he knew that I wasn’t going to be around every minute of the day. And I think that as he looks back he feels like I was around enough to celebrate his successes while he was growing up. It really is just about having good support.
KK: We want to bring together our online shopping experience with our store
BT: How did your initial rejection from Harvard Business School and
BT: When you walk through a Neiman Marcus store or looking at your merchandise online, do you usually agree with the products that the buyers pick up? KK: I would say 80% of the time.
Spring trend? Layering long necklaces with pendants at the bottom. Favorite Neiman Marcus Department? The handbag department. But also the cosmetic department—there are always new and fun things to buy! College shopping addiction? I’m from Dallas, so Neiman Marcus was my favorite store growing up and in college. Favorite college course? Anthropology.
KATZ’S CLOSET
Favorite thing in your closet? My handbag collection.
working at Neiman Marcus influence your career path? KK: Those kinds of rejections make you work harder to prove people wrong. So I may have been rejected from Neiman Marcus initially, but I ended up with the winning spot. I tried to get past it quickly and move on. BT: Were there any people that you looked to for inspiration as you moved forward? KK: Diane Von Furstenberg, the designer, is an amazing woman. She was a success when she was 21 years old, had to completely remake and refashion herself, and did it. She is just really an extraordinary woman who had a second major comeback. It’s great what she’s been able to do. BT: What advice would you give to someone who wants to get involved in the fashion business? Any specific pointers for topics or courses college students should explore? KK: I do think that outsiders looking into the fashion business view it as a very glamorous business. And parts of what we do are very glamorous, but there is a big part of it that’s just hard work. People need to understand that. A lot of people that we talk to about getting into the fashion business think that they are going to be a buyer tomorrow, travel to Paris and Milan, and watch fashion shows, but it’s a little more complicated than that. There is a lot of hard work before you get to do those sorts of things. People who enjoy art and design tend to appreciate being in this business. But if you want to be in the buying part of this business, there is a lot of financial acumen that goes into being a really good buyer, so keeping up with your math skills can be important. I think it’s a real balance and that the people who are the most successful in the business from a retailer’s side are those who have a balance between great financial acumen and an appreciation for art and design. BT
Interviewed by Alisa Tiwari
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Women in Business
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Women in Business
Martha Stewart Founder, Martha Stewart Living Omnimedia - On Launching an Empire
Martha Stewart, an icon of American domesticity, has been a leading innovator for thirty years in industries ranging from catering to magazine publishing. She worked as a model to cover tuition expenses while pursuing degrees in history and architectural history at Barnard College and became a Wall Street stockbroker after graduation. After moving to Westport, CT, she opened a catering business that served as the inspiration for her first book, Entertaining, published in 1982. Her current endeavors include award-winning magazines Martha Stewart Living and Martha Stewart Weddings as well as the Emmy Award-winning television series, “The Martha Stewart Show.” She has bestselling books such as Martha Stewart’s Cooking School and Martha Stewart Living Radio is on Sirius XM. There are also Martha Stewart branded products at stores such as Macy’s and Kmart.
Photo Credit: Scott Duncan
Business Today: Choosing a major is one of the most important decisions a college student will make make. You switched majors from chemistry to art and architectural history at Barnard. How would you suggest students go about choosing their major in college and what influence, if any, did your major have on your career? Martha Stewart: The most important thing in college, as in your career, is to pursue what most interests you. Choose a subject about which you are deeply curious and passionate. If you love what you do, it’s not work. I took a lot of different courses. I found out I wasn’t as prepared as I thought I was for very advanced chemistry and finance courses and found that my real interest is more in the humanities—literature, world history, art and architectural history. I
took many of my courses at Columbia and got as broad an education as possible. Having this broad knowledge has been really important to me in my career as a writer, editor and creator of content and design. My background in art and architectural history has certainly informed my design sensibility and, in turn, our company’s design style from our magazines, websites, blogs and apps to our merchandising offerings at The Home Depot, Macy’s, and PetSmart, to name a few. I like to think my architectural history professor would have appreciated our Martha Stewart-designed homes with KB Home! BT: What lessons did working on Wall Street as a stockbroker teach you? MS: My work on Wall Street as an institutional saleswoman was focused
primarily on research and selling recommended stocks to institutional investors. Because I had to be very informed about the companies we were recommending, I worked very closely with analysts studying the business plans, the focus, and the financials of these companies. This taught me a tremendous amount about what made a company a good company. I learned that I was drawn to entrepreneurial companies with single founders who had great ideas, such as McDonalds, Electronic Data Systems, Levitz Furniture, the first big warehouse furniture company in the world, Leasco Data Processing and others. I learned what made a good leader, a good operator, and a good work force. BT: Did you have a grand vision of where you wanted to take the company or did it evolve over time? Is Martha Stewart SPRING 2011 BUSINESS TODAY
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Women in Business
Omnimedia at all different than you had originally imagined it to be?
uct, television and internet—and all this was 20 years ago! The business plan is still workable today, though the weight of the different segments has changed.
MS: My vision statement and business plan for Martha Stewart Living Omnimedia was extremely well planned, visu- BT: You have a big magazine and we ally viable and enticing to investors. It have a little magazine. This is a busiwas much more than a single magazine. It ness under siege from electronic media. incorporated synergies of content, prod- What are your thoughts on the future of
I love print and digital media and believe they can comfortably coexist so that consumers may access content in whatever format they prefer. this industry and will some magazines survive while others will fail?
Anders Krusberg/The Martha Stewart Show
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MS: While this is a challenging time in the publishing business, it is also a very exciting time with the advent of new tools and technologies. The future is bright for digital and we have to take a wait-and-see attitude towards print. I love print and digital media and believe they can comfortably coexist so that consumers may access content in whatever format they prefer. To that end, we are offering print and digital editions Photo by Paul Costello. Copyright © 2011, for both our Martha Stewart Living and Martha Stewart Living Omnimedia, Inc. Everyday Food magazines. We also have Originally published in the March 2011isseveral interesting and useful new apps sue of Martha Stewart Living magazine. that allow readers to interact with our ing at Mount Sinai Hospital, on envicontent and experience it in new ways. ronmental causes, and on local medical facilities. The Martha Stewart Center BT: You must get an onslaught of phil- for Living is an outpatient facility for anthropic request how do you pick your geriatric medicine, providing clinical causes? Where do you feel your philan- care and education for patients, offering thropy has had the biggest impact and training for physicians and coordinating why? healthy-aging research and practices. It is dedicated to my late mother, Martha MS: As a company, we contribute to a Kostyra, who remained active and enbroad range of organizations that repre- gaged in life to the age of 93. As the popsent who we are, including groups that ulation ages and people live longer, the support the culinary arts, public parks health care needs of older adults—and and gardens, animal welfare, and educa- the challenges family caregivers face—is tion, to name a few. My personal philan- a very pressing issue that affects each BT thropic endeavors are focused primarily and every one of us. on the Martha Stewart Center for Liv- Interviewed by Sam Heffernan
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WOMEN IN BUSINESS
Papaya-Ginger Smoothie
Martha’s Secret Family Recipes #109 from new cookbook ‘Power Foods’
Ser ves 4
1 large Papaya (Mexican or Solo, about 1 pound), peeled, halved lengthwise, seeds removed, cut into ½-inch dice 1 cup ice cubes 2/3 cup plain low-fat yogurt 1 tablespoon finely chopped peeled fresh ginger 1 tablespoon honey Juice of t wo lemons 16 fresh mint leaves, plus 4 sprigs for garnish
Martha Stewart Pets Bed
Puree first 6 ingredients in a blender. Thin with water. Blend in mint leaves. Divide among four glasses. Garnish with mint leaves; ser ve.
Martha Stewart Collection at Macy’s: Breakfast-on-the-go
MARTHA’S EXCLUSIVE PICKS FOR BT READERS
Martha Stewart Living Paint at The Home Depot
Martha Stewart Area Rug from Home Decorators Collection SPRING 2011 BUSINESS TODAY
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COnsumer Culture
Watched on the Web Targeted content, cookies, and the battle for anonymity in the Digital Age. By Scott Norgaard, Rice University
I
magine yourself at a mall browsing through a store for shoes. A nice pair of Nikes catches your eye, and you pause to linger in front of it for a minute or two but eventually decide that it’s too pricey. So you leave the store. Then, on your way to the mall exit, you spot something strange on the back of the mall directory. Men are putting up an advertisement for the exact kind of shoe you were looking at earlier. Coincidence? In the physical world, seeing an ad like this may just be a strange coincidence. But on the Internet, it’s probably
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not. It is well known that many Internet advertisements match the content of the site on which they are shown. For instance, if you are looking at a newspaper article about sports, it is likely that there will be a sports ad on the side of that page. But advertising companies have gone one step further. Now, internet marketing companies are not just matching ads with the content of a webpage, they are actually tracking what you are doing on that page, which is a completely different matter. Th is is called behavioral targeting. Companies are now tracking what
users are doing on the internet, recording everything from what sort of sites a viewer visits, what ads they respond to, and even what sort of keystrokes they enter into their computers. Ad companies use this tracking information to profi le their users so they can target ads uniquely to them. How do companies recognize specific users? Or, more accurately, how do companies recognize the browsers of specific users? That’s where the cookie comes in. A cookie is a text fi le a site transmits to a user’s browser. It contains a unique
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Consumer Culture
ID number that the ad company uses with Facebook.” It records your actions users to opt out of its tracking system. to identify a user’s particular browser. on the site—actions like sending a gift, Users who choose this option will conWhen a user surfs the web, the ad company with a cookie in his browser can build a profile of the user based on his surfing habits. If, say, the user goes to a site on baseball, the company may profile him as a “sports junkie” or a “baseball fan.” Ad companies also like to acquire demographic information, so they may guess he’s male, or in a particular age group. The company then associates the ID number stored in its cookie on the user’s poking another user, and even attending tinue to receive ads provided by Google, browser with specific category names. an event. Facebook says that the infor- but these ads just won’t be targeted based That way, when the user visits another mation gained by this sort of tracking is on information gathered from their site with an ad provided by the same used to “provide a safe, efficient, and cus- browsing history. Users can also provide agency, his ads will be targeted to match tomized experience.” But beware of the more information about themselves usthe demographic information about him fine print—it also says the information is ing Google’s Ads Preferences Manager based on his web surfing habits. used “to serve personalized advertising.” if they find Google’s ad services helpHow common are these cookies on The high prevalence and possibly ful. the web? Very. A Wall Street Journal nefarious behavior of these cookies has Some other Internet ad companies study found that some sites placed a large privacy advocacy groups very concerned. allow similar sorts of opt out options, but number of pieces of tracking software on They want to have control over what it does not appear that such an option is a user’s computer. Dictionary.com, Mer- companies know about them and what widespread in the Internet advertising riam-webster.com, Careerbuilder.com, those companies are doing with that in- industry, which is now a $25 billion inand MSN.com are among the sites with formation. Individual users can delete dustry. the most tracking, each placing over one cookies in their browsers, but even this In response to the increasing numhundred pieces of tracking software in is not guaranteed to be completely ef- ber of tracking cookies, initiatives have the Journal’s tests. fective. One particular flavor of cookie, been started that would give consumers The astounding volume of these the Flash cookie that is associated with more choice over what is known about tracking tools begs the question of how Adobe’s Flash software, has been known their browsing history. One of these dangerous they are. The answer? It de- to have the ability to reinstall many reg- initiatives is the program Better Adverpends. In addition to being used for ad ular cookies after the user has deleted tising, which would allow consumers to targeting, cookies also have a variety of them. know what sort of information has been innocuous, if not helpful, functions. The Things like the ‘breach’ in Facebook, gathered about them. It would also allow cookie was originally developed as a tool identified in 2010, have these consumer users to opt out from being tracked by a to remember what a user had in his shop- protection groups concerned. It became large number of ad agencies. ping cart. Without a cookie on the user’s publicly known that some third party The Federal Trade Commission has computer, the shopping cart would emp- applications within Facebook, such as been involved as well. One initiative it ty if the user left the site. Some types of Farmville, Phrases, and Texas HoldEm, is pursuing is Do Not Track legislation. cookies are also used to remember a us- had been acquiring information that This legislation—like the Do Not Call er’s preferred settings, such as how loud could be used to identify individuals. A list for phones—would allow customor soft a user likes his volume. Facebook representative maintains that ers to opt out of information that tracks Many sites like Amazon.com use steps were being taken to limit these them. The FTC’s proposed legislation cookies to suggest products to people sorts of “breaches.” Facebook’s own pri- would require the compliance of browsbased on what they have viewed in the vacy policy urges users to “be aware that er manufactures. past. If, for instance, you look at a book no security measures are perfect or imHowever, this could provoke a on motorcycles, you may find the site penetrable.” potential conflict of interest, as many suggesting material on motorcycles even How are companies handling con- browser makers, including Microsoft, after you’ve gone on to a different page sumers’ increasing concerns? Some com- Apple, and Mozilla, also have online adwithin Amazon. panies, like Google, seem to have taken a vertising networks or benefit from such Facebook also uses tracking technol- sort of high road. Their privacy material advertising. As different initiatives are ogies to build a profile of each of its users. promises “transparency,” “choice,” and being considered, the best thing to do is Facebook’s privacy policy states that it that they won’t collect personally identi- keep yourself aware of your own activity collects information when you “interact fying information. In fact, Google allows on the Internet. You’re being watched. BT
Privacy advocacy groups want to have control over what companies know about them and what those companies are doing with that.
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Consumer Culture
Brand Loyalty by Mark Lock, Princeton Univeristiy
B
rand loyalty is every marketer’s brands, brand loyalty incites resistance in dream. A strong brand gives a prod- the form of intensified love for the original uct, a service or an idea the ability brand and, ironically, hatred for the compato create activists and life-long consumers. ny that created the brand in the first place. Red Bull, for examples, gives partygoers Two classic cases showcase time and again the ability to have “wings” during the night. how consumers’ resistance to changes in In return, the electro-DJ crowd insists that branding strategy has created considerable nightclubs carry only this particular energy backlash – the introduction of New Coke drink. After heavy marketing campaigns in 1985 and Tropicana’s packaging change and a proliferation of its catchy mascot, the in 2009. bull, Red Bull has established itself as an inNew Coke in May 1985 is a classic ternational leader in energy drinks. Brand case of a brand crisis. Much of the controloyalty is a powerful weapon in the business world when one is able to gain the attention, love and respect of consumers again and again. However, brand loyalty, while it creates love, may also cause backlashes in certain circumstances. Loyalty to a brand is what drives enormous, superstar profits for companies like Coca-Cola, Nike and Apple. Brand loyalty can be broken down into two aspects, respect and love, according to Roberts. When a brand has reached high levels of respect and love it becomes a “lovemark.” Lovemarks inspire an intense, lasting commit- versy stirred up by New Coke was centered ment to the brand’s ideas, what the brand around the product itself and consumers’ stands for, what it will promise in the fu- love of the classic taste they associate with ture and what its rich history means to its the Coca-Cola brand. The Coca-Cola consumers. Company introduced a formula that was While companies want loyalty to sweeter and more similar to Pepsi in efforts translate into love and ultimately increased to gain back market share from their main consumption, the intense feelings that competitor, PepsiCo. While four million brands create may be so powerful that cor- dollars of market research before the launch porate decisions to move a brand in a new indicated that the New Coke was preferdirection stir up major controversy. In such able to traditional Coke, loyal Coke fans rea situation, it becomes clear that brands are belled against the change using drastic meanot owned by their companies but by the sures. Public protests ensued. Consumers people who consume them. Consumers imported classic Coke from overseas where have their own perceptions of what a brand New Coke had not yet been launched. Gay should be. When companies change the Mullins, a Seattle retiree, even formed an core associations attached to much-loved organization, Old Cola Drinkers of Ameri-
36
ca, to reverse the Coca-Cola Company’s decision to stop producing traditional Coke. His organization received over 60,000 phone calls and considerable media attention as the Old Cola Drinkers of America filed a class action lawsuit against the company. The Coca-Cola Company stopped production of New Coke and restarted production of the Classic Coke formula in July 1985, a mere three months later. By the end of 1985, Classic Coke sales skyrocketed and exceeded those of New Coke and Pepsi. Intensified love. Marketing and branding as business disciplines are undoubtedly concerned with products and verbal communication, but symbols and visuals also make up the backbone of branding. Humans are largely visual creatures and therefore put great importance in vivid imagery and its associations. Marketers who want to build a brand that “sticks” often carry this basic assumption when designing campaigns. The Tropicana orange juice’s iconic logo is so rich in meaning and history that when PepsiCo introduced the new package in January 2009, countless consumer protests resulted. Tropicana’s brand has always been marked by the image of an orange with a straw stuck into it, an allusion to tropical coconut drinks that are drunk straight out of the shell. The thick, dynamically-arched Tropicana logo with its banana-leaf green color sits right above the orange. To consumers of Tropicana, the visual of the traditional packaging conveyed what Tropicana meant in their lives whereas the new packaging created enormous dissonance with the mental brand identity that consumers had built up over the years. The visual suggests that drinking Tropicana is literally like drinking juice fresh from the orange. The colors of the brand
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CONSUMER CULTURE
suggest a vibrancy and brightness that can jumpstart a dreary morning, and these associations have played a large part in Tropicana’s success over the years. Louis Cheskin, one of the founding fathers of marketing psychology, attributes these associations to Sensation Transference – a phenomenon whereby the multiple senses can add value to an experience even when that experience is limited to one sense only. Cheskin would say that consumers not only drink juice but also drink the packaging with their eyes. On the contrary, the new packaging, with its sparser arrangements, more muted colors and “cleaner” image of an oversized glass of orange juice, was more abstract and modern. While PepsiCo might have intended to rejuvenate life into an old brand visual, PepsiCo alienated its consumer base by sacrificing the brand’s individuality and the collective associations of “freshly-squeezed” that only Tropicana can offer. According to Information Resources Inc., PepsiCo paid a steep price for its rebranding attempt as unit sales dropped 20% and dollar sales dropped $33 million between Jan. 1 to Feb. 22, when PepsiCo reverted to the traditional Tropicana packaging. Costly branding missteps may not only occur in changes with the product itself, such as in New Coke’s case, but also in the packaging and the visual aspect of a brand. Tropicana and Coca-Cola’s fiascos prompt us to ask whether any sort of change in a firmly established brand can be successful. The answer is yes. Brands have been able to morph over the years. Armani Exchange was able to do so by implementing small changes that accommodated existing consumer brand perceptions while adding something new. In Dec. 2009, Armani Exchange rolled out their new logo featuring the well-known A|X letters. The new logo inverted the coloring of the old logo, which was black letters on white, creating a block background for the letters that could be changed to different colors. This allowed the A|X logo to stand out from the medium it would be printed on and to become
a more self-contained entity. The dividing line between the A and X became implied as the blank space between the black blocks creates an illusion in line with the youthful character of the brand. Because Armani Exchange is a luxury brand, designer Sagi Haviv tweaked the diagonals of the A and X to be parallel to each other while thickening them to create the robustness and clean geometry required of a modern luxury brand. The comparison between Armani Exchange and New Coke highlights the difference in rebranding approaches that create success or failure, providing a model for what companies who wish to revamp their brand should or should not do. Armani Exchange took baby steps, focusing on the subtleties their brand conveys to public and making sure that their change would not be drastic enough to engender anger in Armani Exchange followers. Coca-Cola modified the core of its product, creating a change that betrayed the brand, despite positive feedback in objective taste tests and focus groups. Why do rebranding fiascos happen over
and over again? John Gourville, marketing psychology professor at Harvard Business School, details in his research that biases to overvalue what one owns (the endowment effect) and to consider losses more painful than the benefits of an equivalent gain (prospect theory) creates problems for new product adoption. Due to the endowment effect, companies often overvalue the developments they propose in-house, thinking that they will be more successful and useful than what consumers would think. When consumers see a change in their brand they are forced to give up certain associations, meanings, values and emotions attached to that brand in exchange for new ones. While Tropicana’s revamped packaging may have been objectively more pleasing to the eye for those in marketing focus groups, when it was introduced to consumers who had to give up aspects of the old packaging for the new, consumers’ skewed perceptions of losses and gains came into play. Resistance ensued as loss-averse consumers compared the psychologically-magnified losses in brand identity with the benefits gained from the new packaging. While there is no hard and fast rule for how companies should execute branding changes, there is no doubt it is an unpredictable and difficult endeavor. The line between love and hate turns out to be quite thin. BT
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A
s modern day Americans, our lives are tied to drops of oil and molecules of gas that provide the chemical basis for nearly all of today’s conveniences and transportation systems. The need for low-cost energy and the tough foreign competition from supply-side cartels such as OPEC have driven domestic drillers, operators, and oil service corps to deeper and deeper depths. Deepwater drilling plays take place between 1,000 and 5,000 foot depths and ultra deep water drilling takes place in depths greater than one mile. On April 20, 2011, the Transocean Deepwater Horizon was executing a routine, temporary well abandonment procedure designed to prepare the reservoir for a completions rig move-in and subsequent production platform installation. This drilling rig, a requisite for oil exploration and production corporations, was well known for consistently generating recurring cash flow. But in only a few hours the rig negated years of profit. Its Macondo Block 252 exploratory well blew out, taking 11 lives and decimating the Gulf of Mexico’s fragile ecosystem. In response, on May 22, 2010, President Barack Obama created the National Commission on the BP Deepwater Oil Horizon Oil Spill and Offshore Drilling. He tasked this independent and nonpartisan commission comprised of seven appointed members with the investigation of the disaster and making recommendations for improvement. The National Commission’s final report was issued on January 11, 2011.
Who’s at fault: In its report, the Commission scrutinized the government entity responsible for offshore exploration and production oversight: the Mining and Minerals Service (MMS). The Commission contended that the MMS failed because of conflicts of interest within its responsibilities. For example, the MMS is responsible for both revenue collection and offshore leasing. It has a profit incentive to maximize earnings but also must prudently restrict the supply of permits to avoid negative environmental externalities. Safety and oversight can easily take the backseat in such a scenario. There also appears to be a structural flaw on the checks and balances side. Although the National Oceanic and Atmospheric Administration (NOAA) was authorized to make recommendations on environmental related issues to the MMS (per the Magnuson-Stevens Act and the Marine Sanctuaries Law), the Service was not obligated to heed their advice. Another conflict of interest occurred in the U.S. Geological Survey’s Conservation Division. Its responsibilities included both offshore exploration oversight and enhanced energy production. Finally, previous incidents had not motivated MMS to adopt a mandatory safety and environmental management program or system (despite even Exxon Valdez).
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the GOvernment hand
TOXIC ASSET
The Obama administration’s analysis of what went wrong at the site of the BP oil spill and what needs to change By Brandon Iglesias, Tulane University
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the need for technological advances to be sort of rigorous risk analysis procedure What has changed: made in safety, oil response, and contain- of both deep water drilling and spill rePost-BP Deepwater Horizon, the Dement solutions. New well-killing tools sponse. Congress should fund the DOI’s partment of the Interior renamed and reneed to be developed for ultra deep water efforts and, likely through subsidies, proorganized MMS into the Offshore Safety to prevent such a disaster from occurring. vide incentives for analogous private sector Authority, the Leasing and EnvironmenThe exploration and production industry research. Furthermore, the DOI “should tal Science Office, and the Office of Natuis inherently dangerous due to the extreme require offshore operators to provide deral Resources Revenue. In order to minitemperatures, pressures, distances, and tailed plans for source control as part of mize conflicts of interest these offices will isolated locations intrinsic to the industry. their oil spill response plans and applicabe a part of the Bureau of Ocean Energy No matter how many precautions are tak- tions for permits to drill.” “Offshore opManagement, Regulation, and Enforceen, there is a systematic risk present, even erators” should have to demonstrate the ment (BOEMRE) Pre-existing organizawith the best defensive technology. integrity of their well components before tions focused on best practice guidelines The Commission’s report makes sevbeing licensed. and cleanup recommendations. The newly eral recommendations for the development Perhaps most controversially, the created organizations focus directly on of that defensive technology. The DOI Commission recommended that Congress well containment, in response to the BP needs to “develop a proactive, risk-based “significantly increase the liability cap and Deepwater Horizon incident. Most are performance approach specific to individfinancial responsibility requirements for nonprofits, some of which were created ual facilities, operations, and environments offshore facilities” and the limit on perby major oil companies like ExxonMobil, similar to the “safety case” approach in the incident payouts from the Oil Spill LiChevron, Shell, and ConocoPhillips. North Sea.” Congress and the DOI need ability Trust Fund.” This would effectively Since 1969, offshore blowouts have on average lost an estimated 200,000 barrels to work with the International Regulators’ eliminate smaller players from the marof oil per year. At $100 per barrel, an av- Forum to “identify those drilling, produc- ket and raise prices, in part due to higher erage reoccurring loss of $20,000,000 has tion, and emergency-response standards insurance premium that will inevitably been realized every year since 1969. This that best protect offshore workers and the ensue. With fewer companies capitalized loss does not account for environmental, environment, and initiate new standards well enough to legally operate, collusion legal, and subsequent reservoir re-drilling and revisions to fill gaps and to correct and artificial price increases are also more costs. Thus, $20,000,000 per year should deficiencies.” These standards should sub- likely. Increased financial liability will be considered a minimum estimated loss sequently be applied industry-wide and up- drive these smaller operators out of the dated at least every five years via the formal United States into other countries whose realized by the world’s oil corporations. review process of the International Orga- laws are less restrictive. This in turn means What still needs to be done: nization for Standardization (ISO). fewer jobs and lower tax revenue. More The Commission’s report highlights The DOI needs to also create some practically, the report also recommended the auditing and independent evaluation of individual operations to help monitor the risk and “discourage unqualified companies from remaining in the market.” The Commission emphasized the importance of raising Congressional and public awareness of offshore drilling risks by creating more Congressional oversight committees and more regular discussions of the issues. However, the official report does not focus on developing new rapid on-site pipe plugging technology. The BP Deepwater Horizon incident was the result of a technology gap. Each year as the drilling depths increased, the gap widened further between previously tried and proven well-killing technology used in shallow waters vs. deep and ultra deep waters. This gap eventually increased to the point at which America’s traditional safety and blow out response technology was left behind, thereby exposing America to disastrous environmental and economic damages. BT 40
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charles mcdonough VP, World Bank – On Fair Value, Global Poverty, and the Bank Chuck McDonough is Vice President and Controller of the International Bank for Reconstruction and Development (IBRD/”World Bank”). He is a Certified Public Accountant with over 25 years of experience in the financial services industry. Chuck is the architect of the Bank’s financial management reporting framework which focuses on providing a coherent view of Bank operations through statutory (GAAP) and voluntary disclosures. The World Bank has assets under management of more than $500 billion, conducts business in over 140 countries, offers products including loans, derivatives, and other investment vehicles, and conducts funding operations utilizing conventional and structured debt instruments. He represents the Bank on global financial reporting, accounting, and external auditing matters. He is a current member of the IASB’s Standards Advisory Council, and a former member of the financial instruments working group.
Business Today: Can you explain the United States’ fair value proposal and why you believe it is something that should be adopted? Chuck McDonough: The fair value debate is about how to measure and report the value of financial assets and liabilities. In simple terms, there is a choice between reporting on a cost basis - what you paid for the assets when you bought them, or reporting on a fair value basis what you could sell them for now in the open market. Last year the FASB [Financial Accounting Standards Board] in the US proposed the latter approach on the grounds that the current values of assets and liabilities provide a better reflection of an entity’s financial position and that changes in these values should form part of net income, since holding assets (rather than selling them) is a conscious
choice with economic consequences that should be reported. At the Bank, we are fully supportive of the fair value measurement approach, but we recognize that this is a somewhat controversial position to take.
would argue that this is merely reflecting the economic substance of what happens in a downturn. In fact, there is an argument that writing down asset values as quickly as possible helps to re-establish stability.
Let me explain why. During the financial I think a couple of additional points are crisis, a couple of trends were evident in worth making in this context. First, prithe financial markets. First, asset prices or to the crisis very few assets were in fact dropped precipitously as confidence recorded on balance sheets at fair value. dried up and second, as the volume of This tends to undermine the argument trades dwindled, very little market data that fair values somehow caused or exwas available to establish fair values for acerbated the market crash. Second, it’s accounting purposes. Reporting on a fair odd how nobody complains about the value basis in these circumstances, it is ar- use of fair values in a rising market. And gued, causes “procyclicality.” This means third, there is very little in the accountthat banks are forced to report excessive ing literature - the technical literature, losses based on questionable data, which that is, rather than the polemical - to erodes their capital base and forces fire support the argument that the use of sales of assets, thereby driving prices and fair value contributed to the crisis. Anyvaluations down still further. I think we way, the IASB UK-based International SPRING 2011 BUSINESS TODAY
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Accounting Standards Board, under intense political pressure from the European Commission, backed off a full fair value model and now has what is termed a “mixed attribute” measurement model. Without getting into too much of the technical detail, basically it allows you to
countered enormous resistance from the banking industry lobby. We would have preferred the FASB to stick to its guns, but it does not appear that it is going to be able to do that – late last month it tentatively decided to adopt a valuation approach broadly similar to the IASB’s.
We can look forward to several years of artificially smoothed earnings in the financial services sector before the next crisis comes along. measure at cost those debt instruments which, in accordance with your business model, you intend to hold until maturity in order to collect the contractual cash flows (instead of, say, selling them prior to maturity in order to realize fair value gains). We think the jury is still out in terms of the degree of management discretion the IASB standard allows in asset classifications and reclassifications, and it will make life a lot more difficult for auditors. The FASB, on the other hand, had stuck with the full fair value approach, but en-
So it is pretty clear that fair value accounting, for better or worse, is not going to progress anytime soon. My bottom line on fair value is this: if we stick with business as usual, by which I mean cost-basis measurement for those assets which you think you are likely to hold to maturity, nothing will change. This kind of accounting did nothing to anticipate the Savings & Loan crisis, and it wasn’t much help in the recent crisis either. We can look forward to several years of artificially smoothed earnings in the financial services sector before the next crisis comes along.
BT: Do you believe there is a link between income volatility and the psychological aspect of consumer behavior? CM: In times of panic or over-exuberance, there will certainly be greater volatility than in “normal” times, and this may cause herd behavior. I am not sure, however, that financial reporting should conceal this. Regulators need to be able to respond appropriately to abnormal market conditions in markets, and their ability to do so will not be helped by accounting standards that smooth reported income figures and de-link the reality of what is happening in the markets from financial reporting. BT: Do you see the fair-value accounting principle as holding true in all economic climates, or does inflationary asset evaluation in times of economic growth pose a threat of its own? CM: I don’t really think about fair value accounting in political terms. Most economic analysis, for example, is premised on the use of current market values. All that fair value accounting does is to measure what your assets and liabilities are worth in an open market with a willing buyer and a willing seller. That has always seemed axiomatic to me - what measurement basis could convey more relevant information to managers in a business as well as external users of financial information? Shouldn’t you always have in mind what your assets are worth? And let’s be careful when we talk about inflationary asset valuations. Market activity is what causes asset values to fluctuate. Excessive market exuberance, over-confidence - call it what you will - is what causes asset prices to spike, speculative bubbles and the like. All that fair value accounting does is to paint a picture of what is happening in the markets. At the peak of the bull market, in late summer 2007, I don’t think anybody really believed that the asset values we were seeing were sustainable, but that wasn’t the fault of the accounting. It was what was happening in the markets. BT: In what ways does the Controller’s The World Bank
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vice presidency assist the World Bank in the fight to end global poverty? CM: We do several things in Controllers. First, we oversee the Bank’s accounting and related financial control functions, maintain the Bank’s financial records, ensure the overall integrity of the Bank’s financial transactions, and satisfy the Bank’s internal and external reporting requirements. Financial integrity and security - safeguarding the funds that our stakeholders entrust to us - is key. Part of the franchise value of the World Bank is to be a safe pair of hands. That is to say, our stakeholders and our donor partners entrust us to manage their funds because they have confidence in the Bank’s ability to safeguard those funds.
into all Bank-financed operations. In the conditions tightened in global financial last financial year alone, the World Bank markets, developing countries’ ability as a development institution disbursed to access capital was severely impacted. just over $40 billion to our clients. Ob- Though the most acute phase of the crisis viously we are concerned with making has passed, recovery remains fragile. Persure that funds are properly deployed for sistent risks to economic health include poverty reduction purposes, and we are high unemployment and low growth conscious that a significant proportion in developed countries and continued of the funds we disburse goes into some scarce international financing for develfairly risky environments. Corruption is oping countries. The poorest countries a fact of life in many of the environments continue to need assistance to move bewe work in, so the Bank requires all bor- yond the crisis. What the Bank did in rowers to maintain sound accounting response to the crisis was to mobilize and financial control systems and to re- resources. In the 2009 fiscal year, Bank port to us on a regular basis on how the Group loans, grants, equity investments, funds have been used. In Controllers we and guarantees saw an unprecedented also work closely with our forensic ac- 54% increase over the previous year. Ascounting and investigative colleagues to sistance focused on maintaining longpursue cases of misuse of funds. As Mr. term infrastructure investments and Zoellick, the President of the Bank, says, sustaining potential for private sectorstealing is bad enough, but ripping off led growth and job creation. Throughout the poor is absolutely disgusting. the crisis, the Bank has helped keep children in school, health clinics open, and
High quality financial reporting and exceptional internal controls are also critically important. The IBRD [International Bank for Reconstruction and Development] has a AAA credit rating, and one of the things that the rating agencies look for in terms of sustaining that rating is that the Bank produces financial statements that comply with GAAP [Generally Accepted Accounting Principles], so that we can get an unqualified audit opinion on the financial statements and the internal controls around financial reporting. We also comply with And thirdly, we provide professional the applicable SEC reporting regula- technical advice to clients in financial tions. We do all these things, which is management and accounting. We also what helps us keep our rating. And what work with the various international aca AAA credit rating does is enable the counting and auditing standard-setters, IBRD to issue bonds on the most favor- as well as regulatory agencies and the able terms, so we can minimize what it global accounting profession to foster costs us to lend to our middle income improvements in accounting and auditclients, the relatively more economically ing around the world and to create a platdeveloped borrowers. The income that form for developing countries to build we earn on that part of the Bank’s port- their own capacity in these areas. Experfolio we can then use to subsidize lend- tise in these areas is key to the establishing by IDA [International Development ment of orderly capital markets. Association], which is the Bank’s soft loan window for low-income countries. BT: How has the financial crisis affected So there is a pretty direct link between developing nations and what has the financial reporting and financial control, Bank done to ameliorate these effects? and being able to deploy funds at low cost for poverty alleviation. CM: The financial crisis had an enormous impact on developing countries. The second thing we do is to manage the Declining trade flows meant that growth Bank’s disbursements function. In other prospects in the developing world were words, we oversee the payment of funds affected, and, at the same time, as credit
In the last financial year alone, the World Bank as a development institution disbursed just over $40 billion to our clients. microfinance loans flowing to women. Since the crisis began, the World Bank Group has committed $138 billion to its members and disbursed a record $81 billion, including $21 billion to the world’s 79 poorest countries. BT: If you had to give one recommendation to college students interested in working for the World Bank or in accounting as a field, what would it be? CM: I think the best advice I could give would be to get out into the world, get a qualification, and get some experience. The accounting profession is great in terms of providing opportunities to work almost anywhere in the world, language skills permitting. So join one of the firms, get a good qualification, go and work in some developing countries, and then come back and talk to us. BT Interviewed by Nick Lulli SPRING 2011 BUSINESS TODAY
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Feed the Future
Revolutionizing US aid to Africa By Daniel Bornstein, Dartmouth College
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hen Asma Lateef, the Director of the Bread for the World Institute, traveled to Malawi and Mozambique in 2002, she noticed a strong sense of frustration about agriculture. The U.S. had implemented agricultural development projects in communities, but any gains achieved by the projects could quickly fade away because African communities were not equipped with the resources necessary to sustain the improvements. “It was clear that the U.S. wasn’t responsive to the needs of the countries at the time,” Lateef told Business Today. At the same time, the World Bank was demanding that African governments stop allocating funding to agriculture, insisting that such a task was the job of the private sector, according to Roger Thurow,
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a former Wall Street Journal correspondent who was a Pulitzer Prize finalist for his reporting on hunger in Africa. Yet the private sector was underdeveloped, and the result was inadequate infrastructure and storage facilities. That is precisely what precipitated the Ethiopia famine of 2003, just two decades after the Ethiopia famine that spurred Bob Geldof and Midge Ure’s “Live Aid” concert viewed by 2 billion people across 60 countries to raise funds for the famine. The U.S. was clearly out of touch with the issues facing African food production. The 2008 global rise in food prices— which thrust millions more into poverty— brought those issues into sharp relief. U.S. officials realized the urgency of building the capacity of African countries to feed their own populations and make them less
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dependent on foreign food aid. The American response to that challenge is best displayed by the government’s “Feed the Future” initiative, launched in April 2010 to implement agricultural development based on the specific needs of African countries. Until now, U.S. foreign agriculture policy toward Africa has mainly been to ship Americangrown food to Africa. Feed the Future’s emphasis on development rather than food handouts explains why international development advocates are hailing the program as a huge opportunity to address Africa’s systemic food production issues. “Our interest lies in ensuring we have a prosperous, stable global economy,” Navtej Dhillon, a Senior Advisor at the U.S. Treasury Department, told Business Today. “Because the challenge is great, there is strong interagency coordination.” Feed the Future is led by both the U.S. Agency for International Development and the State Department. This initiative represents how “the Obama Administration is forging a new vision for development—one that fundamentally elevates development as a central pillar of our foreign policy alongside diplomacy and defense,” as Cheryl D. Mills, the Chief of Staff to Secretary of State Hillary Clinton defined it. Further, she wrote that the Treasury Department oversees U.S. funding for the Global Agriculture and Food Security Program, a multilateral fund by which nations support agricultural development in developing nations. According to Lateef, Feed the Future is so promising because it is responsive to individual African countries’ needs rather than imposing projects upon them. Once a country tells the U.S. what challenges its agricultural sector faces, the U.S. provides the expertise and the funding. This model “builds the capacity of countries the U.S. is trying to help so that when the U.S. leaves, these investments are sustainable and long-lasting,” Lateef said. Rwanda offers an example of the importance of attention to local issues. Rwanda’s geography has enabled it to terrace its hillsides in an effort to increase the amount of arable land, said Thurow, who is now a Senior Fellow for Global
Agriculture and Good Policy at the Chicago Council on Global Affairs. This approach has an environmental benefit, too—the ability of fertilizer to remain in place in terrace farming effectively prevents fertilizer runoff. “What Rwanda is excited about is the potential of the U.S. leadership to get other countries involved in the projects that have already been developed by African countries,” Thurow said. Indeed, Feed the Future is not the first time that the U.S. has projected global leadership on food security. In the 1960s, the Ford and Rockefeller Foundations took the lead in launching the Green Revolution that introduced high-yielding crop varieties to Asia and Latin America, a huge development success that averted famine. Yet Africa was overlooked by that effort, in part because the continent lacked access to the irrigation essential for sowing high-yielding varieties. Norman Borlaug, who is known as the “father” of the Green Revolution, recognized that very shortcoming and warned against complacency on the part of Western nations. Thus Feed the Future can be seen as fulfilling Borlaug’s vision for focus on agricultural development in Africa. Just as it did during the 1960s Green Revolution, the U.S. has a role to play in enhancing foreign agriculture. Research by the U.S. agriculture industry and land grant universities will have to focus on the particular challenges facing Africa: inadequate infrastructure and storage facilities, the same problems that caused the 2003 Ethiopia famine, as Thurow writes in his book Enough: Why the World’s Poorest Starve in an Age of Plenty. Ethiopian farmers in 2002 experienced huge crop yields, yet the country was missing an efficient market to absorb those yields. For example, the lack of storage facilities meant that farmers’ surplus yields flooded the market, driving down prices so low that farmers curtailed their farming operations because they would have had to sell their crops well below the cost of production. And no network was in place to transfer crops from highly productive agricultural regions to less arable areas. In addition, research has to take into account Africa’s prevalence of small farmers and malnutrition. This requires
designing food production models that not only boost crop yield but also ensure the availability of nutritious food, Lateef said. Yet agricultural innovation cannot come exclusively from the U.S., since that would run counter to Feed the Future’s vision of empowering African agriculture. One problem is that currently many African countries rely on their national institutes for research. “There is an urgent need to bring research, training and extension together under single institutions and to link them directly to farmers. Today many of Africa’s graduates of agriculture go to grow urban-based bureaucracies instead of growing crops,” Calestous Juma, a professor of international development at Harvard’s Kennedy School of Government, told Business Today. The role of U.S. land-grant universities in research is not the only way that college campuses can have an impact in Feed the Future. “No matter what one is studying, there is probably something that can be done in the realm of ending hunger,” Thurow said. If you’re in business school, you can work on microfinance, giving farmers access to credit so that they can make investments in agricultural resources. If you’re on the track to medical school, you can devote your work to nutrition issues. With food issues spanning across so many disciplines, students at any school can find the educational resources that relate to Feed the Future. Engaging academically with agriculture issues may help students understand the interconnected forces driving global hunger. “We know what acute instances of hunger look like— starvation, destitution, desperation. But what does chronic hunger look like? How do you depict generational hunger and the real causes behind that hunger?” said Dartmouth College senior Sarah Frostenson, who is working on a senior thesis entitled “Imaging Famine: The Story of Ethiopia, 1984.” President Obama certainly has the ear of young Americans. In launching Feed the Future, his biggest foreign policy lesson to them may very well be this: development is at the core of American foreign policy, and students have an obligation to help fulfill that mission. BT
FALL 2010 BUSINESS TODAY
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NET NEUTRALITY Service Providers, the Public, and the Battle for the Future of the Web By George Maliha, Princeton University
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ince its privatization in the early 1990s, the Internet has transformed itself from a simple collection of linked pages into an array of dynamic content ranging from flashing text to streaming video. This explosion, though, challenges Internet Service Providers (ISPs) to continue to provide the quality service to which society has become accustomed. ISPs have responded to these demands, but federal regulators now propose to ban some of the techniques ISPs have embraced in order to manage their networks. To this end, on December 21, the Federal Communication Commission (FCC) enacted “net-neutrality” rules that apply to landline ISPs (and, to a more limited extent, wireless counterparts). This doctrine stipulates that ISPs should not regulate the flow over their networks, subject to reasonable network management needs, but rather operate much like a phone company and simply allow applications and transactions to pass unchecked. Opponents argue that the new rules might stifle innovation by preventing ISPs from bringing new, untried products to market. Supporters of the FCC’s move, though, argue that without netneutrality rules, ISPs will abuse their privileges and direct customers to other, unrelated services that the ISP might provide, excluding competitors from the
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“free” Internet. grams were being blocked during (and Much of the current controversy occasionally after) peak hours. Comrevolves around exactly how ISPs man- cast’s network would send a particular age their networks during peak demand line of code to certain users’ computers times. Unlike other services, internet that would terminate their connection. companies must constantly ensure that After being petitioned by several connew applications work on their finite sumer groups, the FCC ordered Comnetworks—without unnecessarily slow- cast to stop blocking such activities and ing down everyone’s connection. Today, to publicly disclose their network protosome of the most popular internet ser- cols. The commission based its order on vices, such as streaming video or music, a 2005 statement of network managerequire uninterrupted connections that ment principles that the FCC stressed can be compromised during congestion. not to be explicit rules but guidelines Accordingly, ISPs have adopted several for net neutrality. methods to exert a form of “crowd conAlthough Comcast agreed to comtrol” on the Web. ply with the order, the company chalFor instance, some have piloted lenged the commission’s findings in “tiered pricing” for internet service. court, leading to the DC Circuit deciNot unlike some cell phone plans, one sion in Comcast v. FCC, which invalipays in accordance with one’s usage of dated the FCC’s current method to regthe network. Customers have reacted ulate the Internet and triggered a search negatively against such schemes, lead- by the body for a new way to exert its ing most companies to abandon pilot rulemaking power over the industry. projects and search for other techniques. The solution that the FCC adoptCurrently, the most popular protocol is ed in December, though, raises several to “prioritize” applications during peak questions. hours. This method blocks or slows Inevitably, ISPs will be sued because down high bandwidth applications of some vague provisions of the new regwhen usage peaks, preventing network ulations (“fair use” is not well-defined overload. in the preliminary rules). This threat of One company, Comcast Cable, legal action will stifle the introduction structured its network in this way. The of products and services to consumers. Associated Press and other independent New offerings are inherently risky and sources, however, discovered that cer- expensive to companies, and ISPs have tain Peer-to-Peer (P2P) file sharing pro- often favored their own products (most
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ISPs are involved in multiple businesses) neutrality regulations could cost the medium. While few contest that the on the web by encouraging subscribers American economy $64 billion and public has an interest in a free and open to use proprietary products online. If ISPs cannot be sure that they can feature their new products, they simply might not offer them. Indeed, although opponents counter that ISPs are currently exercising a form of “soft-censorship” by favoring certain content on the net, these closed systems incubate new technologies that quickly become affordable and widely available. An analogous situation exists in television programming. In the late 1990s, TiVo came out with its revolu- 500,000 jobs over the next five years—at internet, the regulatory scheme advotionary television recording technolo- a time when economists and policy mak- cated by the FCC is not the way to engies. While most loved the idea, TiVo’s ers are warning of anemic growth. sure this important goal. The trend up product was expensive and relatively In fact, in a time of bitter partisan- until this point has been deregulation out-of-reach. Once cable companies be- ship, lawmakers on both sides of the as Congress and the FCC sought to spur gan to offer their own DVR systems and aisle have expressed reservations over interest in the technology during the bundle them with service, the technolo- these regulations. Last October, 72 1990s and to help the industry recover gy took off and is developing into a stan- House Democrats sent a letter to FCC after the dot-com crash at the opening dard offering with any cable packaging. Chairman Julius Genachowski urging of the decade. Under this scheme, the Few complained that cable companies caution. Many Republicans have done internet flourished and grew from humencouraged customers to use their DVR the same as a majority of the previous ble beginnings. The internet, without a system. There are countless examples of Congress opposed the FCC’s move for doubt, represents one of the freest media these situations; companies take risks “net neutrality.” Tellingly, all 95 candi- in history. Who could imagine twenty with new products that eventually be- dates for the House of Representatives years ago that humanity would create a come convenient and profitable services. who pledged to support net neutrality network spanning the globe? As the first Moreover, if ISPs do not have the regulations lost in the 2010 elections. decade of the 21st century closes, the inflexibility to manage their networks, the Finally, the message sent by the ternet is poised to expand the reach of internet will cease to be the innovative FCC with these new regulations may the fields of education, medicine, enterplatform that society has come to value. damage the cause of Internet freedom tainment, and more. The United States Applications, such as Skype, require abroad. While proponents of net neu- has stood at the forefront of previous great amounts of constant bandwidth trality contend that the regulations are advances and must ensure that it conto provide streaming video. If networks needed to prevent ISPs from promoting tinues to lay the groundwork for new cannot adapt to these new, intensive certain political views to the detriment breakthroughs. programs and must give equal band- of others, competition is enough to enWe cannot afford to tinker with a width to all applications at all times, sure a vibrant marketplace of ideas. If an system that is working. The FCC must then popular products will simply be- ISP decides to favor one view, subscribers not attempt to impose regulations on come less available to the general public. have an array of providers from which to this dynamic field—even those supWithout wide access to the market and choose (the development of satellite In- posed to ensure “net neutrality.” The sources of revenue, programmers will ternet now guarantees that there are at FCC should adopt its traditional policy most likely develop fewer applications least two ISPs nearly everywhere in the towards the internet: to leave it alone for the web. The student inventor of the United States). On the other hand, net and allow the net to innovate and exnext Facebook will surely face difficul- neutrality provides regulators an oppor- pand. This is not to say that ISPs should ties in launching their product in this tunity to interfere with the content an be allowed to operate without any reenvironment. ISP offers consumers and can represent strictions, but they must be allowed to Because of the uncertainty caused the beginning of further control. As manage their networks to provide us, by the new FCC regulations and the po- the US criticizes China, Iran, and other the consumers, with the evolving contentially lost innovation, the rules might regimes for blocking Internet content, tent and features we have grown to exalso cripple the industry and broader what type of message do we send? pect. Consumers already have gotten a economy. According to a report from The history of the internet reveals taste of a free and open Internet; they New York Law School’s Advanced Com- that the government must tread lightly will allow neither government nor ISPs munications Law & Policy Institute, net as it attempts to contend with this new to intrude on this medium. BT
If ISPs do not have the necessary flexibility to manage their networks, the Internet will cease to be the innovative platform that society has come to value.
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Obama Tax Cuts
and the Government Multiplier Effect
After fierce debate the Obama administration was able to reach a compromise with the House and Senate, passing the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010”. Business Today takes a look at how the package will affect our recovering economy. By Kanwar Bir Anand, Virginia Commonwealth University
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f you are a deficit hawk, someone increased government spending, because who places great emphasis on keeping government spending could crowd out the federal budget under control, private investment. For the government December 2010 was disappointing to say to increase spending during economic the least. Not only did the deficit panel downturns, it must borrow, taking adjourn without voting on its ambitious away funds used for private investment. proposal to reduce government spending Therefore, businesses have to pay higher and drastically simplify the US tax code, but the Senate also passed the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” The legislation, which is popularly known as the Obama Tax Compromise, is expected to add $858 Billion in government expenditure (a little under $3,000 per American or a used sedan) over the next ten years according to the Congressional Budget Office (CBO). Some economists, who believe that increased government spending leads to a multiplier effect throughout the economy, support the recent developments in the Obama Tax Compromise. Writing in the Summer 2010 issue of National Affairs magazine, Greg Mankiw, a professor of Economics at Harvard, argued that Keynes Figure from the White House believed that extreme and sustained unemployment during a recession is interest rates to obtain credit and conduct fundamentally the result of a decline normal activity. In 2009, Matthew Shapiro in overall (or aggregate) demand in the and Joel Slemrod, Economics professors at economy. Mankiw also added that the the University of Michigan, asserted that government can help restore “normalcy” the rebates in 2008 did not have as much by increasing demand through spending. of multiplier effect as anticipated due to This increased spending drives businesses consumer’s low propensity to spend. One to hire and gives consumers incomes to possible explanation is that putting cash spend—multiplying the impact. into the hands of the consumers makes On the other hand, most neo- them more likely to save or pay off debt, classical economists argue against which boosts their individual well being
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more than simply spending money on new items. The study also found that lowincome individuals were particularly likely to use the rebate to pay off debt as compared to mid to high-income individuals. When asked about the recent tax compromise, President Obama said his policy is not to negotiate with hostage takers unless the hostage is being harmed. He explained this by suggesting that in this case the hostage was the American people, and that he was not willing to see them get harmed. Regardless of the rationale, it seems that most people generally agreed with this tax compromise. The new law should help clear the tax confusion that had been recently increasing due to the expiration of Bush Tax cuts on January 1, 2011. Most Americans & Businesses will see more money in their pockets because of lower taxes, strengthening the recovery. It is often said that in a room with ten different economists, you should not be surprised to hear ten different solutions for a particular problem. Economists and politicians will continue to debate the “real” effects of the recent tax compromise. At this point, though, it seems that the Tax Compromise may benefit the economy over the short term, but the issue will surely become a leading war cry for both political parties in the 2012 electoral season. Still looming, though, is the increasingly urgent issue of America’s long-term debt. This compromise does nothing to manage the mid to long-term fiscal challenges that will have to be confronted by the Federal Government. BT
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Who Will Take the Oath? A Look at the Future of the Medical Profession Phillip Miller and Kurt Mosley are executives with Merritt Hawkins, the nation’s leading physician search firm and a company of AMN Healthcare. By Phillip Miller and Kurt Mosley
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ith its various frailties and they would not recommend medicine as a inevitable obsolescence, the career to their children or to other young human body has long provided people. a reliable guarantee of full employment Why are so many physicians for America’s doctors. dissatisfied with the state of the medical That will not change any time soon. profession? There are a variety of reasons, Indeed, as health reform brings millions but the main one revolves around of people into the ranks of the insured, autonomy and control. In the so-called demand for doctors is only going to “golden age of medicine” physicians were increase. But will the medical profession independent practice owners who had as a whole be in a position to meet this virtual carte blanche over treatment demand? In five, ten or fi fteen years, will options for their patients. They also were medicine still hold the appeal for students paid on a fee-for-service basis and could that it has today, and, if not, what will this rely on being compensated for the services mean to healthcare delivery? they performed. Patient relationships Answers remain elusive. There is no generally were enduring and malpractice doubt, however, that many physicians suits were rare. have become disaffected with the medical Today, a growing number of doctors practice environment. They still enjoy are employees of hospitals or large medical seeing patients, but they are reaching the groups rather than small business owners point of professional burn-out over all the running their own shows. Clinical non-clinical duties and frustrations that decisions about patient care are often come with being a doctor today. dictated to them by third party payers. In a survey of some 12,000 physicians Reimbursement is more uncertain as that Merritt Hawkins conducted on payment shifts from the fee-for-service behalf of The Physicians Foundation, a model to quality and cost-based models. not-for-profit grant making organization, And malpractice is a constant threat that 78 percent of doctors said that the stalks the offices and operating rooms practice of medicine has become more where physicians practice their art. Many unsatisfying in the last five years. Ninety- doctors feel that control of the medical four percent described the morale of profession is slipping away from them and physicians they know as very low, poor or that the core of medicine – the physician/ mixed, while only six percent described patient relationship – is being eroded. physician morale as positive. Seventy-eight The medical profession is at a percent said they find medicine either crossroads, and many doctors and less rewarding or no longer rewarding. healthcare experts are concerned about Perhaps most telling of all, 60 percent said its long-term future. To remain viable,
medicine must retain the appeal that has long attracted the best and brightest students to commit to four years of college, four years of medical school, multiple years of additional training, and the duties and responsibilities contained in the Hippocratic Oath. Students considering careers in medicine must realize that the rules have changed. Rather than having unquestioned authority, physicians today are part of integrated teams and are valued for their leadership and listening skills as well as for their clinical acumen. They must work within a framework of finite resources and consider the broader implications of how care is delivered, rather than focusing exclusively on individual patient transactions. They are more subject to data-driven treatment protocols and are more likely to be paid on the basis of the patient outcomes they achieve rather than on the volume of services they deliver. They most likely will cede some of their duties to non-physician clinicians. And with the financial pie shrinking, they must accept that the monetary rewards will probably diminish. For those who can live within these rules, medicine will continue to offer an unrivalled opportunity to impact individual lives and to contribute immeasurably to society. Despite the many ways in which medicine has changed, there still are good reasons for students to aspire to “take the oath” and assume the august title of physician. BT
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George M. kappaz Chairman, Astrata – On Predicting Trends in Technology George Kappaz has built and managed highly successful global companies in several different industries. Most recently, he and his partner Timothy Harmon led the acquisition of Astrata Group, Inc, a global leader in advanced location based IT services and solutions (telematics) that combine GPS, wireless communications and geographical IT. Headquartered in Singapore, Astrata has offices and operations throughout the world. Mr. Kappaz is currently serving as chairman of Astrata. Business Today: Would you say you’re a serial CEO, having led so many companies over the course of your career? George Kappaz: It’s about actually charting the course of the companies in which we invest. We formed our partnership in the early part of the last decade after the sale of the electric power generation company I cofounded and ran. From the outset, we decided to focus on sectors, companies and opportunities where we believed that we could bring disproportionate value if we were at the helm. Our objective was not to create a classic private equity fund, but rather to be a true owner-operator, seeking opportunities where there is a strong brand, excellent potential and, of course, value. We will bide our time and have no set capital deployment nor hold period requirements. From the outset, our objective has been to be in companies which bring a tangible benefit to those people and entities touched by their products or services, and to build enterprises of lasting value. BT: Can you give us an example of your methods in practice? GK: Our first major acquisition was in 2002 after the telecom and dot com debacle. We thought that telecom would be a good place to be as there were the proverbial babies likely getting washed away with the bathwater. To use the old cliché, we like to buy when everyone else is selling, and that was certainly the case in the telecom sector in the early 2000s. The challenge was to find the gems.
We quickly focused our attention on a really the safety, security and profitability for any nice company, Comsat International. We company which is involved in the transport saw in Comsat International a great name of goods or people. Deployed in the governin international telecommunications, serv- ment sector, telematics offers huge homeing a blue chip customer base primarily com- land security, law enforcement and public prised of corporations and governments, but safety benefits. also a company which was lacking for attention and rapidly diminishing viability. Over One thing we really liked about Astrata was the ensuing five years, we took Comsat in a that the company was conceived and develmuch more ambitious direction, started fo- oped to cost effectively support enormous cusing on much larger networks, and turned fleets—a million vehicles or more. In the it from the shrinking subsidiary of a major telematics industry, a large fleet is normally corporation into rapidly growing indepen- measured in the tens of thousands of vehident leader in which the entire culture and cles. Because of some large contracts which mindset became vibrant, focused and driv- Astrata was able to win early on—contracts en. After seeing the company grow mutli- of unprecedented scope and size—the comfold over the ensuing five years, Comsat was pany needed to develop its software and a sold in an unsolicited transaction to a divi- CCB capable of simultaneously monitoring sion of British Telecom in 2007. close to one million Astrata enabled vehicles. This had never been done before, and in orAgain, we like to be countercyclical, and are der to do it, the company invested heavily in willing to wait years before investing. We R&D, resulting in the world’s most scalable didn’t acquire Astrata until late 2009, over and cost effective telematics offering. two years from when we exited the telecommunications sector. So that gives you a little In addition to Astrata’s ability to handle a background on our acquisition strategy and huge number of assets, our unique system is how we look at the market. quite flexible, and we believe it is the world’s only system able to provide such a wide BT: What made you choose Astrata as your range and breadth of services. most recent acquisition? Astrata’s customer base broadly breaks GK: A couple of years ago we began to focus down into corporate and government. on the relatively new market for GPS loca- Within each, we serve several sectors. On tion based IT services. We saw the poten- the corporate side, an example would be the tial market for intelligent, on-board, and delivery and logistics industry, in which we remotely managed telematics services for see no end to the explosive growth currently vehicles and moving assets of all types to underway. One of Astrata’s large custombe enormous. Telematics deployed in the ers is TNT, the fourth largest such delivcommercial sector can significantly enhance ery company in the world. With Astrata SPRING 2011 BUSINESS TODAY
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on board, all of their vehicles in Asia have This is not the future, it is the present and off ramp, just to name a couple. geo-locking on the trailers and geo-fencing Astrata is deploying these applications in on each truck’s route. If the truck deviates other countries. Now, think about the safety benefits such from its approved route, it hits a geo-fence a technology could bring to our roads and and an alarm is triggered in the command BT: You’ve made references to toll roads. highways here in the U.S. The insurance and control center. TNT’s ability to ensure What are the applications? industry is quickly realizing these potential route and cargo integrity as a result of utilizbenefits. We are in discussions with certain ing Astrata has made them the only logistics GK: You are probably quite familiar with insurance carriers who would love to have company operating in Asia to achieve the toll booths and systems used to speed up this on their plan. Here’s an example of how highest level TAPA security classification traffic on toll roads such as EZ Pass. While it might look: when a parent buys a car for for overland—as opposed to via air—trans- EZ Pass certainly has resulted in better man- a teenager, the parents’ insurance premium port of high value cargo. aged traffic flows, it is frankly an antiquated usually goes up quite a bit. A carrier could system. In Singapore, for instance, you may tell a buyer that if he were to put Astrata BT: Why is Astrata headquartered in Sin- not even notice the gantries, which are over- on board, his premium would only go up gapore? head on toll roads and use radio frequency by 20%, instead of say 50%. The device itto track road usage. Now, they want to self would probably not cost much and the GK: The other broad sector we serve is gov- move away from gantries altogether and insurance premium savings would quickly ernment. Early on, Astrata identified in Sin- simply have an on-vehicle unit which will compensate for the cost. However, the real gapore a willingness to deploy latest genera- track toll road and paid parking usage over benefit is the safety and peace of mind that tion technologies to enhance the safety and the air. This is squarely in the bulls-eye of the car is always being operated at a safe and security of the country. what the Astrata unit and system can do. legal speed. Of course, the theft protection We are working with certain large IT com- benefits the vehicle tracking and remote imAstrata is working with the Singapore gov- panies with deep experience in road tolling mobilization capabilities Astrata offers also ernment on different initiatives ranging processing and billing systems, such as IBM, lowers risk, thereby benefiting the carrier from homeland security to traffic manage- on next generation tolling projects in Singa- and insured alike. ment. For some time now, Astrata has had a pore and elsewhere. contract to place its telematics units on every BT: Would some consider this an infringehazardous materials truck in the country, as With regard to parking, wouldn’t it be great ment of privacy laws? well as any and all coming into the country if you could park on the street or in a lot from neighboring Malaysia. Using Astrata, without having to worry about a meter or GK: Not if done correctly and in compliSingapore’s authorities are able to ensure payment kiosk and simply get a billing state- ance with a particular jurisdiction’s laws that all such trucks carrying potentially ment at the end of the month? What about and regulations. At the end of the day, one dangerous cargo stay on their pre-approved if you also got alerts on your smart phone normally doesn’t have the right to violate his route. If a hazardous materials truck devi- 15 minutes prior to the street on which you loan agreement by defaulting and then inates from its approved route (into a school parked becoming a no-parking zone? This tentionally hiding, abandoning or absconddistrict, for example) an alarm is triggered technology exists and Astrata can imple- ing with the collateral. All we are doing is in the command center, the lights and horn ment it today. using technology to make the loan safer and of the truck are activated, and the truck is more secure. It’s a win-win: it’s cheaper for remotely and automatically immobilized. BT: How have insurance companies re- the consumer and safer for the bank. This is the most advanced and comprehen- sponded to your products’ capabilities? sive hazardous material transport security BT: Astrata sounds like it could be a game system in the world, and Astrata is provid- GK: We have developed an application changer. Is it? ing it. called dynamic speed control, which as I mentioned, assures compliance with speed GK: Yes, and the game is changing as we Now, I think you are beginning to see how limits regardless of the road being used. Ba- speak with Astrata front and center! Again, far the company’s applications can extend. sically, a combination of satellite mapping this is not some vision for the world of the Here in the U.S., take school buses, for ex- and on-board intelligence programmed into future—it is happening now and we’re ample. Most of us are so are careful with the Astrata unit and system identify the providing this technology for major corpoour kids, teaching them not to get into a car speed limit, and then the car is governed to rate and government customers around the with strangers, but often will put them in a that speed limit in a safe and reliable man- world. I believe that the day will soon come school bus driven by a stranger. Wouldn’t it ner. Indicative of our R&D capabilities, this when it will be difficult to remember what make sense to have a system similar to what technology was actually quite difficult to the world was like before the widespread use Astrata is providing for the hazardous mate- develop due to many factors, including tran- of telematics. We’re betting that on that day rials trucks in Singapore installed on school sitions among numerous roads a car might Astrata will far and away continue to be the bus systems in this country? Any incident take and the need to avoid abrupt speed re- global leader in the industry. BT and the bus can be remotely immobilized. ductions when moving from a highway to an Interviewed by Nick Lulli 54
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The Authentic Network
by James L. Orsini
James Orsini is the Director of Finance and Operations at Saatchi & Saatchi New York, where he works closely with the CEO to provide strategic and day-to-day direction of all financial and operational functions. Prior to joining Saatchi & Saatchi, he was Chief Operating Officer of Interbrand North America, the world’s leading brand consultancy.
It’s All About Authenticity ple, and our PR counsel. When you work For me, the art of networking (and closely with such a varied group of people, yes, it is an art) boils down to one word you start to get a handle on the core ways –authenticity. Networking should be in- to get the most out of your colleagues, and terchangeable with relationship building. what it is that they most value in you. It’s not simply about amassing the largest If you want a litmus test to judge the number of virtual friends; it’s about the state of your network, ask your contacts to quality of the contacts built around you. name three words describing your interIt’s about the level of trust between each of actions. The real master networkers, the ones that Malcolm Gladwell refers to as those connections. “the connectors,” are regularly described For the majority of my career I’ve by the big three - credibility, sincerity and been in roles that required working with selfl essness. all sorts of people. In my current position (I’m the Director of Finance & Operations at a large NY ad agency), that means any Credibility Being a resource for your friends and given day can equate to a meeting with a new hire, an HR manager, a team of cre- coworkers is important, but it’s completely atives, our strategy director, facilities peo- ineffective if you don’t have a reputation of
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credibility. Your focus should always be on delivering when it counts. If you offer professional advice on making a new hire or accepting a position, that advice needs to be thoughtful, effective and efficient. However, this doesn’t mean that you’re required to offer a solution for every scenario tossed your way. Answer promptly and answer honestly. Your connection will respect that, and you won’t risk burning an important bridge down the line. Sincerity The thing that all connectors have in common, the single most important skill you can have as a networker, is active listening. It should be a no-brainer, but the fact of the matter is that most profes-
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sionals (especially as you climb higher up the ladder) are more interested in talking than in listening. If you want to build an authentic network, the people you bring into your circle need to know that you’re there to listen when they need advice or a problem solved. If you don’t listen to your connections, how do you ever expect to remember why they’re the best person for an opportunity down the line? The more sincere you are, the more trust you’re given.
call and invite them out to lunch. You’ll be amazed by how much goodwill can be
Like most relationships, people will float in and out of these two networks as
What goes around comes around. Take the time to do a favor today, and it will come back ten fold a year down the line.
Selflessness This is perhaps the most important won by simply picking up the phone and a career progresses, but it’s important to of the big three. There was a Kevin Spacey reaching out regularly. know who’s who at any given time. I find fi lm a few years back called Pay it Forward that most of my inner-circle tends to be whose main ideals fit perfectly into the way What You Get Back fellow “connectors,” which is a tremennetworking should always be approached. I’ve talked a lot about what to put dously helpful thing when on the hunt If someone does you a favor, don’t feel the into your relationships, but it’s also impor- for good people. Being confident that, need to repay them . . . just pay it forward. tant to know what you can take away from between me and the twenty people in my A lot of people ask me, “why take the building an authentic network. A former little circle, the majority of talented people time to help others in business matters colleague of mine often talks about “the in New York are just two phone calls away, when the problem has nothing to do with favor bank.” You give a favor, you’re owed makes dealing with any professional probme or my company?” The short answer: a favor. lem 100% easier. what goes around comes around. Take the In the business world, I’m always imtime to do a favor today, and it will come pressed by the positive returns I’ve received An Interactive Rolodex, not a Gameback ten fold a year down the line. on a good investment. Don’t believe the Changer If you’ve done the legwork in your hype – nice guys don’t always finish last. In recent years, an increasing amount network building, it shouldn’t take treThe talented junior employee you of focus within the business community mendous time or effort to assess a situa- recommend in 2011 may turn out to be a has been placed on social networking tion, think about your contacts and sug- major player by 2020, and don’t think that sites. More specifically, I’m speaking about gest the right person to meet the need at they won’t remember who helped them LinkedIn. I use it and it can be a tremenhand. A good networker should be a walk- out at the start. From helping out friends, dously helpful tool. My worry, however, is ing Wikipedia. A good friend of mine I’ve brought in new business for my com- that the many people have embraced the once told me that I was like “LinkedIn on pany, been tipped off about under-the-ra- platform not as a networking tool, but as steroids.” dar superstars looking for a new home and a replacement for the practice of networkbecome close with trustworthy C-Suiters ing in general. Put In the Face Time in almost every business sector. If you The problem here is that there’s no I think face-to-face interaction is the practice paying it forward, I promise you face-time required for making an online single most undervalued thing in the work it will come back in the end. connection. Where’s the authenticity in place today. Since the advent of email, inthat? stant messaging and Facebook, we spend Circle Within a Circle less and less time physically talking to one There are dozens of charts and dia- In Closing another. A lot of people can’t be bothered grams online and in business books seekAt the end of the day, networking is to make a phone call, let alone travel across ing to break down “the ultimate shape and about being genuine. Be open and honest town for a lunch meeting. But if you re- size of a network.” For me, the simple “cir- with your contacts, listen when they’re ally want to build a successful network, cle within a circle” model makes the most speaking to you, and go out of your way putting in the face time is one of the most sense. to be helpful (even when it doesn’t impact important things you can do. Deals may Every great network is made up of you directly). If you work to implement be sealed in the boardroom, and finessed two circles. The big one, which consists these ideas into your day-to-day business over email, but they’re built over breakfast, of people that you’ve worked with, respect life, you won’t just build an authentic busilunch and dinner. and keep in touch with on a time-to-time ness network, but a number of life-long Being selfless pays dividends here basis. And the tight one, which typically personal relationships. It’s a classic winas well. Don’t wait until you need some- consists of 20 or fewer people that you win, and all it takes is stepping away from thing! If you haven’t heard from someone consult with weekly (or even daily) and your computer screen a few times a day. in your network in awhile, give them a can be counted on at a moment’s notice. Imagine that. BT SPRING 2011 BUSINESS TODAY
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Following up on Young the Giant’s electrifying performance at the Fall Business Today Launch Party, Business Today spoke with lead singer Sameer Gadhia about taking time away from Stanford, running a band, and getting stranded in Nebraska. They’ve recently finished a new, self-titled album that can be found on iTunes.
Business Today: Was leaving Stanford to pursue your music career a difficult decision to make? Sameer Gadhia: I guess it wasn’t really an easy decision, but I knew that I wanted to do this and that if I didn’t, I would regret it. Obviously, there were a lot of things that deterred me from doing it. Nothing was guaranteed, and we weren’t signed yet. There was a lot of risk. I can always go back to school, but there is that risk of failing and being demoralized. More than anything, I was afraid of losing my friend group. I had been at college for two years and made some really close friends, but I’ve been able to keep in touch with most of them. Looking back on it, it was the logical thing to do. I was pretty lucky that everyone supported me. BT: Did the rest of the band have to go through a similar decision process? SG: Yeah, we had a presentation to all of our parents explaining the benefits of doing this and the cost analysis, and finally everyone agreed. A couple of the guys really knew that this is what they wanted to do, and others were a little more on the fence. Some of them had just gotten into their programs of choice and were going in depth into their majors and doing some research and internships. So it was tough, but obviously we’re very happy that we took the time off. BT: What were you studying at Stanford? SG: I was studying human biology. It was kind of ambiguous, but it’s sort of like psychological analysis of biology. There is cultural evolution as well as biological
evolution, and I was studying the ways they connect. BT: Do you view the music career as a hiatus from school or do you see it as connected to your academic life?
a managerial role where we walk in and check up every two weeks and see how things are going. BT: What was the process of signing with Roadrunner records like? Any drama?
SG: I do see it connected to my academic life. Music is very mathematical, and a lot of times the composition of creating something is very much like writing an essay or creating a project or a thesis statement of a paper. There’s also a lot on the business side. Most people don’t realize all the work that goes into getting to even the small position that we’ve reached. Not just with the writing and all that stuff, but also with the business aspect of it, such as realizing what we should and should not sign off on.
SG: It was kind of strange at first. We were pretty perplexed by why they were interested in us. They have a predominantly heavy metal roster. We first met with them at SXSW [South by Southwest, a musical festival held in Austin] in 2009, and they said they were interested in having dinner with us. We were like okay, that’s fine, we don’t think we’re interested but we’ll go along and keep an open mind and get some free food. So we went to the dinner and after that conversation, we had a head change. Even our manager, who is very skeptical of everything BT: How do band decisions get made? and very protective of us, was pretty convinced by the end that these guys were reSG: We do get a lot of advice, sometimes ally passionate about us and were willing too much advice. In the end, it would be to put the attention in that we needed. a problem if they [manager and agent] We thought they would be a force to be did anything without our approval. reckoned with and stand above all the We’re kind of the end all be all. At the other labels because at that time we had end of the day, we create the music that had some minor record label battles. At we make, and we create the business that the end of the day, we met with a couple surrounds us, so we have a big say in how other labels and realized that Roadrunthings go. ner was the most passionate. It became a no-brainer and before long, we were BT: Do you like the business and market- just negotiating the contract. Our lawing side of the band? yers did a great job with that. I’m pretty happy with how it worked out. SG: To a certain extent, but I don’t go too far into the micro stuff. I like dealing BT: Was it a conscious decision to wait with the bigger picture. We have good art so long to sign with a record label? directors and good photographers on our side. I pretty much trust their judgment. SG: There are different plateaus. There I’m not going to be a dictator. We do are lot of bands that will never find a deal trust all the people that are working for that’s good enough and will wait years us, but at the same time we are kind of in and years and turn down a lot of offers SPRING 2011 BUSINESS TODAY
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that could have gotten them to some pretty high places. And, there are others that are really impulsive. I think we were somewhere in the middle. With any sort of collaboration between art and business, there is some risk involved. We were cautious to a certain extent, but we were ready to take on the risk and realized the possibilities of this union. We were excited to have a big power in the industry that was really enthralled with new ideas and taking risks and dealing with us— we were young guys just trying to make a name for ourselves and have a good time. BT: What was the inspiration for the album? What kind of mood do you try to evoke with your music? SG: We wanted to capture the bittersweet essence of freedom. When we first excitement and joy. One of the biggest started writing together and first got indicators of what our feelings were was signed, we straight-up moved out of our “Strings.” The lyrics and chorus all talk dorm rooms in college and lived together about really joyous things, being able to in a beach house in Newport Beach. We soak up all the dregs of the sun before it didn’t really have much to do. All we goes away, and sometimes it can feel like were told to do was wait for a while, play an eternity, but it always sets so the last some shows, and chill out and write. We lyric we say is “why you know it goes, it took the opportunity to just chill out. goes, it always goes.” There is a feeling of
We didn’t have a care in the world. I don’t even remember how we ate.for We didn’t do too much writing, but we like to think that the view of complete freedom, of doing absolutely nothing, was a big inspiration for the album. Some of the songs are a lot brighter, about the day aspect of beach life, but it’s really strange to live at the beach sometimes. There’s almost this sadness sometimes in the happiness and beauty because you know that you’re not always going to be existing there. You’re not always going to be able to soak up all that you can. When you’re there you live in this very carpe diem mindset. We didn’t have a care in the world. I don’t even remember how we ate. We didn’t have any money, but we had such a great time. The beginning of the album deals with this unbridled 60
renewal but then the idea of death at the end. I think a lot of people do think that the album is really happy, but a lot of it has to do with the sadness within that happiness. BT: Any good stories from the road? SG: One of the coolest things actually started as kind of a disaster. We had our first show in Boston, and we had to drive from California. We thought everything was cool, and we were making good time, but then we started having minor transmission problems. We stopped for lunch in Lincoln, Nebraska and before we could even stop, the car shuts down in the middle of the road right after we
got off the freeway. It was a Sunday and nothing was open. We were in the smaller side of Lincoln and we couldn’t even get gas. We had AAA, but we had a trailer with us and they said the trailer needed extra insurance and we would have to pay. We were essentially stuck. The show was in two days and transmission problems are always pretty fatal. We were freaking out and went to a bar to get some food and have a drink together and realized that there was nothing we could do, so we had to make the best of it. After that pact, everything starting working out. The AAA guy was really nice and went under the book to take out another towing truck for our trailer without cost. I drove around with the AAA guys and they were really cordial and funny and showed me around town. Afterwards, we got a little hotel room and went out that night to a restaurant right near downtown where the university was. We ended up meeting a couple people and went to a bar. We enjoyed ourselves there and met some students who took us back to their place to hang out. We ended up making a great time out of something that we thought was going to be completely horrendous. We met with the technician and he understood our plight, so he had workers work throughout the night to get us back on the road the next day. We marathoned it to Boston and made it literally five minutes before sound check started. It all worked out. BT
Interviewed by AJ Koger
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ACCIDENT & HEALTH | ALTERNATIVE MARKETS | CASUALTY | CONSTRUCTION | ENERGY | ENVIRONMENTAL | EXCESS WORKERS’ COMP | EXECUTIVE ASSURANCE HEALTHCARE | LENDER PRODUCTS | NATIONAL ACCOUNTS CASUALTY | PROFESSIONAL LIABILITY | PROGRAMS | PROPERTY | SURETY | TRAVEL Insurance coverage is underwritten by one or more member companies of Arch Insurance Group in North America, which consists of (1) Arch Insurance Company (a Missouri corporation, NAIC # 11150) with admitted assets of $1.9 billion, total liabilities of $1.2 billion and surplus to policyholders of $645.9 million, (2) Arch Specialty Insurance Company (a Nebraska corporation, NAIC #21199) with admitted assets of $413.9 million, total liabilities of $97.5 million and surplus to policyholders of $316.4 million and (3) Arch Excess & Surplus Insurance Company (a Nebraska corporation, NAIC # 10946) with admitted assets of $29.4 million, total liabilities of $1.5 million and surplus to policyholders of $27.9 million All figures are as shown in each entity’s respective Quarterly Statement ended September 30, 2010. Executive offices are located at One Liberty Plaza, New York, NY 10006. Not all insurance coverages or products are available in all jurisdictions. Coverage is subject to actual policy language. This information is intended for use by licensed insurance producers.
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The C-Suite
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C Suite
Brendan wallace Co-Founder and CEO of Identified.com On Entrepreneurship and Social Networking Brendan Wallace is the CEO and Co-Founder of Identified.com, a new website that uses Facebook to connect people with employers. He graduated from Princeton undergraduate and Standford Business School. He talks to BT about the process of entrepreneurship, how Identified works, and offers insight into the intersection of business networking and social networking. Business Today: In what ways can people and even H.R. professionals can answer. your employers? using Identified.com interact with employ- At some schools, even the career center is ers? Can one apply for jobs directly through on the site and they’re answering students’ BW: We’re a recruiting company. Our busithe site, or is it solely a tool for networking questions. Identified actually enriches the ness model is centered on helping candiand learning about employment opportuni- application experience by allowing you to dates get jobs. Therefore, the success of Identies? not just apply but also informing you on tified hinges on our ability to make sure the how and where you should apply. filter between Facebook and Identified is Brendan Wallace: One of the really interabsolutely 100% airtight. Identified pulls in esting things about Identified is that it lets BT: Is there a way that the connections you strictly professional data: where you went to you do more than just apply to a specific job make at Identified can help you get a job school, where you work, and who you know. like a traditional job board or even a career more so than if you were to just submit re- It doesn’t take any other information about center. We let you apply to the company as a sumes to Human Resources? yourself- no wall posts, no pictures, no stawhole in an extremely efficient way. We take tus updates, no videos, no games. People everything associated with landing a job, BW: Using Identified is a lot more power- don’t want leisure mixing with their profesfrom researching companies to networking ful than just applying through HR, because sional identities, but they still want the bento referrals, that previously happened in fif- not only can you apply, you can also see efit of the hundreds or even thousands of ty different places and took weeks of work, who you know who works at that com- connections they have on Facebook. The avand allow you to do it in one place in sec- pany. Then, you can ask them for a referral. erage number of friends on Facebook for an onds. We’re the one-stop shop for recruit- We’ve had 25,000 applications, and of those, Identified user today is 750 friends. There’s ing. It’s a very simple application process, 5,000 have included a referral. These 5,000 an incredible amount of value in a network but on top of that, what we do is connect have actually asked someone they know to of that size. Our solution has been to build a with your Facebook network, which for col- vouch for them in their application to the barrier that only pulls in the professional inlege students tends to be very large and well company. And most importantly, appli- formation embedded within that network. developed, to see who you know at that par- cants with a referral were a lot more likely ticular company. The other thing we let you to get contacted by the companies they were BT: How do you feel about people having do is receive demographic data about the interested in. In fact, a lot of people tell me two facebook accounts, one for business particular company, so how many people after they’ve used Identified that they didn’t and one for social, if they want to keep from that school have they hired, how many even know they had some of the connec- things separate? people from your major have they hired, tions to the company they do. Identified how many men, how many women actually opens up a lot more possibilities in terms of BW: I think that’s a symptom of the same work at that particular company, in order who you can ask for referrals and how many problem we’re solving: most people are conto better inform your decision. The other referrals you can get to improve the recruit- cerned about mixing their two identities. really interesting thing we do is that we ac- ing experience. The problem with having two accounts, one tually let you learn about that company by for professional, one for social, is that typiasking them questions. For example, if you BT: A concern with a program like yours is cally your professional won’t have nearly the want to get a job at McKinsey, you can ask that it makes a social networking account, amount of friends you do on your social what’s it like to work at McKinsey, how to which is usually a place to joke around and account. While you may not immediately prepare for first-round interviews, or what talk with friends, into a professional space. see the professional benefit of those ‘social’ the work-life balance is like. Your peers can What constraints are in place to make sure friends, great power lies in those connecanswer, alumni from the school can answer, that weekend pictures don’t get shown to tions. Identified renders all those friends to SPRING 2011 BUSINESS TODAY
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you in a way that’s professionally useful. In some ways I’d say we’re a solution to keeping two separate profiles. We take your social profile, and we professionalize it; we don’t force you to create a new one. With Identified, instead of starting with a career platform and then making it social, we actually started with social networking itself and said, how can we professionalize this in a way that lets students interact with companies in a context that is professional, while not jeopardizing their privacy. BT: What do you envision that next step for Identified.com to be in linking people with the labor force? BW: The next step is actually going into the experienced-hires market, people aged 21 to 30. Currently, we’ve been signing up undergrads very quickly. We launched at 8 schools, and at some schools, we’re signing 20% of the student body in 4 days. Part of that is driven by the fact that it’s a very tough labor market out there, so there’re lots of unfulfilled job-seekers, even at top schools like Princeton, Harvard, Yale, and Brown. However, I do think there’s also the same problem we can solve for experienced hires. Because, in a lot of ways, they face the same pain-points as the undergraduate jobseeker, the only difference is that they don’t have the benefit of a career center. BT: Could you tell us a little about your background and maybe some of the things you were involved with before you started Identified? BW: I graduated from Princeton in 2004 and pursued a traditional finance career track. After graduation, I went to work at Goldman Sachs where I did investment banking in New York for one year. Then I went to work at Blackstone, in private equity, for one year in New York and one year in Los Angeles. I founded a small real estate company just after leaving Blackstone and then went to Stanford Business School where I met my cofounder, Adeyemi Ajao. Ade was the founder of a site called tuenti. com, which is the second-largest social network in Europe behind Facebook. It’s the largest social network in Spain and it recently was sold for $100M to Telefonica. He and I were in our first year of business 64
school and we saw some of our classmates recruiting through the traditional career center process. We just thought, you know, recruiting is an incredibly painful and inefficient process and there has to be a better way. I think social media offers the solution, and that was kind of the seminal idea behind Identified. BT: Could you tell us a little about the process of starting a new online company? BW: Starting a company is probably one of the hardest things you can do, because you’re forced to juggle so many things simultaneously. On the one hand, you have to believe passionately in a single idea….but that idea is changing constantly as your business grows, matures, and as new information comes to light or new competitors emerge. While you’re doing that, you’re also looking to raise capital, and the capital typically wants to see demonstrated progress, so they want to see a product, and you may or may not have that yet. In addition, you have to have resources, in terms of human capital and office space and equipment to actually build your business. You have to put all that together at the same time. Having a co-founder like Adeyemi who can shoulder some of that responsibility was key, but, even so, for the first 12 months you really feel as though you’re getting pulled in a thousand different directions. And so I’d say one of the hardest things to do as a founder of a company is to juggle those things simultaneously when you’re in the initial phase of building the business. When we first launched Identified, we had very little resources. We had two engineers who were working out of a tiny office in Palo Alto while Adeyemi and I were still students at Stanford. We had very little time, so we had to stay committed to one very simple, demonstrable idea, which was to build a better version of a career center. We kept working on that and as soon as we actually built it and launched it at Stanford, that’s when kind of the real financing came in. We launched the beta product at Stanford in May of 2010. In 2 weeks, we had signed up 80% of the Stanford MBA program and over a thousand Stanford undergrads. In fact, we were placing students in jobs in the first few days of the site being ‘live.’ That’s when we were approached by a number of top investors in Silicon Val-
ley such as renowed venture capitalist Bill Draper, Google CEO Eric Schmidt, Facebook Executives, even professors at Stanford that had heard about our tremendous growth on campus. . We then raised a large financing round of nearly six million dollars thanks to the success of that launch. BT: How do you guys get paid? BW: So right now, it is a totally free business model. We’ve been giving it away to companies and giving it away to users. Long term, I never want to charge users. You’d have adverse selection problems, and I also think it’s just unethical to charge students to recruit. So, ultimately, I plan on charging companies. We could start charging right now, but actually my primary goal is to build the business even more before we start charging companies. We’re building a marketplace and it’s crucial to establish critical mass before looking to monetize from the valuable transactions (in this case, jobs) that we’re enabling. Ultimately, I’d like to charge companies an access fee to use the platform to recruit. Right now, our focus is just on growth. We’ve grown to 10,000 users in six weeks, and we’ve had 900 companies sign up for Identified. Our goal over the next 3 months is to probably quadruple those numbers. So I think right around springtime is when we’ll start to think about monetization. BT: Do you have any advice for aspiring entrepreneurs? BW: The first piece of advice is that being an entrepreneur is a full-time job and requires a total commitment of your time, your energy, and your focus. I’d say pick the time at which you want to become an entrepreneur very well, because it can often lead to compromises in your personal life. A second thing is to be very creative with your idea. A lot of people tend to be very cagey with protecting their idea. I’d say take the advice of as many people as possible, even if you’re opening up your idea to more people who might ‘steal’ it, because the insight of others is often what leads to the best innovations and insights...The best piece of advice is just go for it, go do what you want, go do what you’re excited to do, seek the advice of others. Just dive in. BT
Interviewed by Eric Rehe
BUSINESS TODAY SPRING 2011
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