By Vijay Govindarajan and Anant Sundaram
Published: April 21 2009 03:00 Last updated: April 21 2009 03:00
Managers are frustrated. While many are intent on creating long-run value for investors, the recent performance of equity markets makes them question how the fundamentals of their business are reflected in the stock price.
Basic finance theory tells us that a company's value reflects long-run cash flows discounted to the present at the rate of return that investors expect ("cost of capital"). Cash flows are a function of revenues, costs and investments - and the life of a manager revolves around getting the most out of these. But cost of capital is primarily determined by the stock market.
As a result, individual stock prices are tied to movements of the market. If the market swoons, the chances are high an individual stock will plunge too. As we have seen recently, this can happen irrespective of what managers do to influence future cash flow prospects.
What to do? We believe it is time to re-examine the relationship between companies and capital markets. Chief executives should decouple their long-run strategies from the short-run vagaries of financial markets by taking any or all of the following six actions:
* Jettison quarterly guidance. Chief executives have had a simple bargain with the market: provide regular updates and the market will process the information and reveal "fair" prices. But, in many companies, earnings guidance has become a treadmill of managing for the next 90 days. Recent market falls made little distinction between companies that provided quarterly information and ones that did not.
* Reduce dependence on external capital. Having to justify to the markets why a company needs capital is viewed as a source of discipline. But that assumes the market will believe the company's business case, that the liquidity and the investment bank will be there when needed. We have seen that these could be somewhat naive assumptions.
Companies might do better by focusing on internal cash to fund growth. They should concentrate on cash flows - that is, the cash that comes in versus the cash that goes out - rather than accounting earnings. They should also rethink their dividend policies. If they can create more value by reinvesting the cash, they should do so, even if the action risks a fall in the share pricein the short term.
* Focus on individual and not institutional investors. Most shares in the US are owned by institutions. But it is perhaps time to develop, manage and communicate the company's strategy as though its primary investor is an individual. Why? Individuals have longer horizons. Second, if a company is managed for institutional investors, which institution should it care about and for what horizon? After all, they include everything from pension funds (longer horizons) to hedge funds (short horizons) to arbitrageurs (horizons measured in minutes).
This focus, however, must be accompanied by three changes in shareholder relations. Companies should appoint to the board a retail shareholder representative. They should treat the annual general meeting as an opportunity to have a meaningful conversation with investors. Companies should make financial statements more retail investor-friendly.
* Rethink compensation.
Earnings-per-share-related metrics bias managers' attention towards the short term. Companies should instead focus on long-run, cash-flow-based metrics in a manner that rewards managers for the value-creating investments they make.
If using stocks or options, payoffs should be benchmarked against market or peer performance. On the upside, executives are rewarded only for value they (and not the market or industry) create; on the downside, they are not penalised for market-driven declines.
* Innovate via adjacencies rather than breakthroughs. Tough economic conditions call for a brutal focus on costs. But companies must also grow and growth requires innovation: we recommend innovation into spaces adjacent to the core rather than via breakthroughs. The latter, such as Detroit's quest for an electric car, involves bet-the-company moves that can exacerbate share price volatility because the up-front cash outlays required and the chances of failure are both higher.
Adjacency innovations extend existing competencies and offer new products and services to already-familiar customers. To the extent that they involve a smaller up-front cash outlay, they are consistent with reliance on internal cash flows, and obviate the need for large external financing.
* Invest and acquire countercyclically. Companies tend to go shopping for big-ticket items when they feel rich. But the risk is that they can "buy high" in a boom and go into a defensive mode in a downturn. By being counter-cyclical in investing and acquiring, not only are assets likely to be cheaper but screening mechanisms are also more disciplined and the requirements for a business case more uncompromising.
Vijay Govindarajan and Anant Sundaram are professors at the Tuck school of business at Dartmouth
Source: FT.com
Friday, April 24, 2009
Wednesday, April 8, 2009
Basic Truths About Jack Bauer
Killing Jack Bauer doesn't make him dead. It just makes him angry.
If Jack Bauer was in a room with Hitler, Stalin, and Nina Meyers, and he had a gun with 2 bullets, he'd shoot Nina twice.
If you wake up in the morning, it's because Jack Bauer spared your life.
Superman wears Jack Bauer pajamas.
If it tastes like chicken, looks like chicken, and feels like chicken, but Jack Bauer says its beef. Then you better believe it's beef.
Jack Bauer once forgot where he put his keys. He then spent the next half-hour torturing himself until he gave up the location of the keys.
1.6 billion Chinese are angry with Jack Bauer. Sounds like a fair fight.
Let's get one thing straight: the only reason you are conscious right now is because Jack Bauer does not feel like carrying you.
Jack Bauer was never addicted to heroin. Heroin was addicted to Jack Bauer.
Jack Bauer played Russian Roulette with a fully loaded gun and won.
When life gave Jack Bauer lemons, he used them to kill terrorists. Jack Bauer hates lemonade.
Jack Bauer once won a game of Connect 4 in 3 moves.
Osama bin Laden's recent proposal for truce is a direct result of him finding out that Jack Bauer is, in fact, still alive.
Jack Bauer is the leading cause of death in Middle Eastern men.
Jack Bauer doesn't miss. If he didn't hit you it's because he was shooting at another terrorist twelve miles away.
When Jack Bauer was a child, he made his mother finish his vegetables.
Jack Bauer killed 93 people in just 4 days time. Wait, that is a real fact.
Simon Says should be renamed to Jack Bauer Says because if Jack Bauer says something then you better do it.
Jack Bauer won the Tour de France on a unicycle to prove to Lance Armstrong it wasn't a big deal. He thinks yellow wristbands are gay.
When Jack Bauer pissses into the wind, the wind changes direction.
Jack Bauer's favorite color is severe terror alert red. His second favorite color is violet, but just because it sounds like violent.
When you open a can of whoop-ass, Jack Bauer jumps out.
When Google can't find something, it asks Jack Bauer for help.
You can lead a horse to water. Jack Bauer can make him drink.
Jack Bauer can get McDonald's breakfast after 10:30.
When the boogie man goes to sleep, he checks his closet for Jack Bauer.
Every mathematical inequality officially ends with "< Jack Bauer".
In 96 hours, Jack Bauer has killed 93 people and saved the world 4 times. What the hell have you done with your life?
Jesus died and rose from the dead in 3 days. It took Jack Bauer less than an hour. And he's done it twice.
Jack Bauer killed so many terrorists that at one point, the #5 CIA Most Wanted fugitive was an 18-year-old teenager in Malaysia who downloaded the movie Dodgeball.
In kindergarten, Jack Bauer killed a terrorist for Show and Tell.
What color is Jack Bauer's blood? Trick question. Jack Bauer does not bleed.
Guns dont kill people, Jack Bauer kills people.
If Jack and MacGyver were locked in a room together, Jack would make a bomb out of MacGyver and get out.
People with amnesia still remember Jack Bauer.
Sun Tzu once wrote, "If your enemy is weaker, conquer him. If he is stronger, join him. If he is Jack Bauer, you're f***ing dead."
Jack Bauer literally died for his country, and lived to tell about it.
Jack Bauer has been to Mars. That's why there's no life on Mars.
Superman's only weakness is Kryptonite. Jack Bauer laughs at Superman for having a weakness.
When Batman is in trouble, he turns on the Jack Bauer signal.
It took Jack Bauer two minutes to beat a confession out of OJ.
If Jack Bauer was gay, his name would be Chuck Norris.
The bumper sticker on Jesus's car reads, "WWJBD?"
Jack Bauer was conceived by torturing the other sperm until they gave up the location of the egg.
After 7 minutes of interrogation at the hands of Jack Bauer, Tom Cruise admitted that he was gay.
Jack Bauer's family threw him a surprise birthday party when he was a child. Once.
If Jack Bauer was in a room with Hitler, Stalin, and Nina Meyers, and he had a gun with 2 bullets, he'd shoot Nina twice.
If you wake up in the morning, it's because Jack Bauer spared your life.
Superman wears Jack Bauer pajamas.
If it tastes like chicken, looks like chicken, and feels like chicken, but Jack Bauer says its beef. Then you better believe it's beef.
Jack Bauer once forgot where he put his keys. He then spent the next half-hour torturing himself until he gave up the location of the keys.
1.6 billion Chinese are angry with Jack Bauer. Sounds like a fair fight.
Let's get one thing straight: the only reason you are conscious right now is because Jack Bauer does not feel like carrying you.
Jack Bauer was never addicted to heroin. Heroin was addicted to Jack Bauer.
Jack Bauer played Russian Roulette with a fully loaded gun and won.
When life gave Jack Bauer lemons, he used them to kill terrorists. Jack Bauer hates lemonade.
Jack Bauer once won a game of Connect 4 in 3 moves.
Osama bin Laden's recent proposal for truce is a direct result of him finding out that Jack Bauer is, in fact, still alive.
Jack Bauer is the leading cause of death in Middle Eastern men.
Jack Bauer doesn't miss. If he didn't hit you it's because he was shooting at another terrorist twelve miles away.
When Jack Bauer was a child, he made his mother finish his vegetables.
Jack Bauer killed 93 people in just 4 days time. Wait, that is a real fact.
Simon Says should be renamed to Jack Bauer Says because if Jack Bauer says something then you better do it.
Jack Bauer won the Tour de France on a unicycle to prove to Lance Armstrong it wasn't a big deal. He thinks yellow wristbands are gay.
When Jack Bauer pissses into the wind, the wind changes direction.
Jack Bauer's favorite color is severe terror alert red. His second favorite color is violet, but just because it sounds like violent.
When you open a can of whoop-ass, Jack Bauer jumps out.
When Google can't find something, it asks Jack Bauer for help.
You can lead a horse to water. Jack Bauer can make him drink.
Jack Bauer can get McDonald's breakfast after 10:30.
When the boogie man goes to sleep, he checks his closet for Jack Bauer.
Every mathematical inequality officially ends with "< Jack Bauer".
In 96 hours, Jack Bauer has killed 93 people and saved the world 4 times. What the hell have you done with your life?
Jesus died and rose from the dead in 3 days. It took Jack Bauer less than an hour. And he's done it twice.
Jack Bauer killed so many terrorists that at one point, the #5 CIA Most Wanted fugitive was an 18-year-old teenager in Malaysia who downloaded the movie Dodgeball.
In kindergarten, Jack Bauer killed a terrorist for Show and Tell.
What color is Jack Bauer's blood? Trick question. Jack Bauer does not bleed.
Guns dont kill people, Jack Bauer kills people.
If Jack and MacGyver were locked in a room together, Jack would make a bomb out of MacGyver and get out.
People with amnesia still remember Jack Bauer.
Sun Tzu once wrote, "If your enemy is weaker, conquer him. If he is stronger, join him. If he is Jack Bauer, you're f***ing dead."
Jack Bauer literally died for his country, and lived to tell about it.
Jack Bauer has been to Mars. That's why there's no life on Mars.
Superman's only weakness is Kryptonite. Jack Bauer laughs at Superman for having a weakness.
When Batman is in trouble, he turns on the Jack Bauer signal.
It took Jack Bauer two minutes to beat a confession out of OJ.
If Jack Bauer was gay, his name would be Chuck Norris.
The bumper sticker on Jesus's car reads, "WWJBD?"
Jack Bauer was conceived by torturing the other sperm until they gave up the location of the egg.
After 7 minutes of interrogation at the hands of Jack Bauer, Tom Cruise admitted that he was gay.
Jack Bauer's family threw him a surprise birthday party when he was a child. Once.
Tuesday, April 7, 2009
The kind of smart that IQ tests miss
ST 8 Apr 2009
By Keith Stanovich
IN 2002, cognitive scientist Daniel Kahneman of Princeton University won the Nobel Prize in Economics for work done with his longtime collaborator Amos Tversky (who died in 1996). Their research had to do with judgment and decision-making - what makes our thoughts and actions rational or irrational. They explored how people make choices and assess probabilities, and uncovered basic errors that are typical in decision-making.
The thinking errors they uncovered are not trivial mistakes in a parlour game. To be rational means to adopt appropriate goals, take the appropriate action given one's goals and beliefs, and hold beliefs that are commensurate with available evidence. It means achieving one's life goals using the best means possible. To violate the thinking rules examined by Kahneman and Tversky thus has the practical consequence that we are less satisfied with our lives than we might be. Research conducted in my own laboratory has indicated that there are systematic individual differences in the judgment and decision-making skills that Kahneman and Tversky studied.
Intelligence tests measure important things, but they do not assess the extent of rational thought. This might not be such a grave omission if intelligence were a strong predictor of rational thinking. But my research group found just the opposite:It is a mild predictor at best, and some rational thinking skills are totally dissociated from intelligence.
Ironically, the Nobel Prize was awarded for studies of cognitive characteristics that are entirely missing from the most well-known mental assessment device in the behavioural sciences: intelligence tests. Scientists and laypeople alike tend to agree that 'good thinking' encompasses sound judgment and decision-making - the type of thinking that helps us achieve our goals. Yet assessments of such good (rational) thinking are nowhere to be found on IQ tests.
Intelligence tests measure important things, but they do not assess the extent of rational thought. This might not be such a grave omission if intelligence were a strong predictor of rational thinking. But my research group found just the opposite: It is a mild predictor at best, and some rational thinking skills are totally dissociated from intelligence.
To an important degree, intelligence tests determine the careers of millions of people. Children are given intelligence tests to determine eligibility for admission to school programmes for the gifted. Corporations and the military depend on assessments that are little more than disguised intelligence tests.
Perhaps some of this attention to intelligence is necessary, but what is not warranted is the tendency to ignore cognitive capacities that are at least equally important: the capacities that sustain rational thought and action.
Critics of intelligence tests have long pointed out that the tests ignore important parts of mental life, mainly non-cognitive domains such as socio-emotional abilities and interpersonal skills. But intelligence tests are also radically incomplete as measures of cognitive functioning, which is evident from the simple fact that many people display a systematic inability to think or behave rationally despite having a more than adequate IQ. For a variety of reasons, we have come to overvalue the kinds of thinking skills that intelligence tests measure and undervalue other important cognitive skills, such as the ability to think rationally.
Psychologists have studied the major classes of thinking errors that make people less than rational. They have studied people's tendencies to show incoherent probability assessments; to be overconfident in knowledge judgments; to ignore the alternative hypothesis; to evaluate evidence with a 'my side' bias; to show inconsistent preferences because of framing effects; to over-weigh short-term rewards at the expense of long-term well-being; to allow decisions to be affected by irrelevant context; and so on.
All of these categories of failure of rational judgment are very imperfectly correlated with intelligence - meaning IQ tests tend not to capture individual differences in rational thought. IQ tests measure mental skills that have been studied for a long time, whereas psychologists have only recently had the tools to measure the tendencies towards rational and irrational thinking. Nevertheless, recent progress in the cognitive science of rational thought suggests that nothing could stop us from constructing an 'RQ' test.
Such a test might prove highly useful. Sub-optimal investment decisions have, for example, been linked to overconfidence in knowledge judgments, the tendency to over-explain chance events, and the tendency to substitute affective valence for thought. Errors in medical and legal decision-making have also been linked to specific irrational thinking tendencies that psychologists have studied.
There are strategies and environmental fixes for the thinking errors that occur in all of these domains. But it is important to realise that these thinking errors are more related to rationality than intelligence. They would be reduced if schools, businesses and government focused on the parts of cognition that intelligence tests miss.
Instead, these institutions still devote far more attention and resources to intelligence than to teaching people how to think in order to reach their goals. It is as if intelligence has become totemic in our culture. But what we should really be pursuing is development of the reasoning strategies that could substantially increase human well-being.
The writer is professor of human development and applied psychology at the University of Toronto.
PROJECT SYNDICATE
By Keith Stanovich
IN 2002, cognitive scientist Daniel Kahneman of Princeton University won the Nobel Prize in Economics for work done with his longtime collaborator Amos Tversky (who died in 1996). Their research had to do with judgment and decision-making - what makes our thoughts and actions rational or irrational. They explored how people make choices and assess probabilities, and uncovered basic errors that are typical in decision-making.
The thinking errors they uncovered are not trivial mistakes in a parlour game. To be rational means to adopt appropriate goals, take the appropriate action given one's goals and beliefs, and hold beliefs that are commensurate with available evidence. It means achieving one's life goals using the best means possible. To violate the thinking rules examined by Kahneman and Tversky thus has the practical consequence that we are less satisfied with our lives than we might be. Research conducted in my own laboratory has indicated that there are systematic individual differences in the judgment and decision-making skills that Kahneman and Tversky studied.
Intelligence tests measure important things, but they do not assess the extent of rational thought. This might not be such a grave omission if intelligence were a strong predictor of rational thinking. But my research group found just the opposite:It is a mild predictor at best, and some rational thinking skills are totally dissociated from intelligence.
Ironically, the Nobel Prize was awarded for studies of cognitive characteristics that are entirely missing from the most well-known mental assessment device in the behavioural sciences: intelligence tests. Scientists and laypeople alike tend to agree that 'good thinking' encompasses sound judgment and decision-making - the type of thinking that helps us achieve our goals. Yet assessments of such good (rational) thinking are nowhere to be found on IQ tests.
Intelligence tests measure important things, but they do not assess the extent of rational thought. This might not be such a grave omission if intelligence were a strong predictor of rational thinking. But my research group found just the opposite: It is a mild predictor at best, and some rational thinking skills are totally dissociated from intelligence.
To an important degree, intelligence tests determine the careers of millions of people. Children are given intelligence tests to determine eligibility for admission to school programmes for the gifted. Corporations and the military depend on assessments that are little more than disguised intelligence tests.
Perhaps some of this attention to intelligence is necessary, but what is not warranted is the tendency to ignore cognitive capacities that are at least equally important: the capacities that sustain rational thought and action.
Critics of intelligence tests have long pointed out that the tests ignore important parts of mental life, mainly non-cognitive domains such as socio-emotional abilities and interpersonal skills. But intelligence tests are also radically incomplete as measures of cognitive functioning, which is evident from the simple fact that many people display a systematic inability to think or behave rationally despite having a more than adequate IQ. For a variety of reasons, we have come to overvalue the kinds of thinking skills that intelligence tests measure and undervalue other important cognitive skills, such as the ability to think rationally.
Psychologists have studied the major classes of thinking errors that make people less than rational. They have studied people's tendencies to show incoherent probability assessments; to be overconfident in knowledge judgments; to ignore the alternative hypothesis; to evaluate evidence with a 'my side' bias; to show inconsistent preferences because of framing effects; to over-weigh short-term rewards at the expense of long-term well-being; to allow decisions to be affected by irrelevant context; and so on.
All of these categories of failure of rational judgment are very imperfectly correlated with intelligence - meaning IQ tests tend not to capture individual differences in rational thought. IQ tests measure mental skills that have been studied for a long time, whereas psychologists have only recently had the tools to measure the tendencies towards rational and irrational thinking. Nevertheless, recent progress in the cognitive science of rational thought suggests that nothing could stop us from constructing an 'RQ' test.
Such a test might prove highly useful. Sub-optimal investment decisions have, for example, been linked to overconfidence in knowledge judgments, the tendency to over-explain chance events, and the tendency to substitute affective valence for thought. Errors in medical and legal decision-making have also been linked to specific irrational thinking tendencies that psychologists have studied.
There are strategies and environmental fixes for the thinking errors that occur in all of these domains. But it is important to realise that these thinking errors are more related to rationality than intelligence. They would be reduced if schools, businesses and government focused on the parts of cognition that intelligence tests miss.
Instead, these institutions still devote far more attention and resources to intelligence than to teaching people how to think in order to reach their goals. It is as if intelligence has become totemic in our culture. But what we should really be pursuing is development of the reasoning strategies that could substantially increase human well-being.
The writer is professor of human development and applied psychology at the University of Toronto.
PROJECT SYNDICATE
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