The View from Harvard Business

A pair of experts on consumer psychology from Harvard Business School believe shoppers will spend more this holiday season than a year ago, giving retailers a chance to reassess the consumer mindset.

Professors Nancy Koehn and Rajiv Lal offer somewhat different predictions, although they agree that consumer spending is not going to return to pre-recession levels anytime soon, if ever.

Koehn forsees sales that will be “flat or marginally better” than last year’s 3.7% drop in spending. She writes:

“After the shock and awe of last year’s financial crisis, households are taking stock, abandoning the ‘next new thing’ in favor of more enduring priorities, and establishing distinct notions of value from those that have prevailed during the last decade. All of this adds up to the New Normal.”

Lal believes consumers will spend more than expected.

“I am still betting on the power of Santa Claus. While consumer spending may never reach pre-recession levels, I think it will be much better than expected for a number of reasons.”

One reason: consumers have exited that free-fall psychology of last year. We’ve also been saving more over the last year, providing a little war chest for spending.

Both agree that shoppers will be hunting for the basics, not extravagances (unless you are a Wall Street Bonus Baby), and that we will snap up promotions offered by Wal-Mart, Target, Best Buy and other discounters.

Read their more detailed comments.

Time for your forecast. Give us your prediction in our holiday shopping poll.

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(Believe image by chris runoff, CC 2.0)

Proposals for a federal government run health care program for the uninsured, the so-called public option, is the third rail of Washington politics. All who come near in support are likely to get singed, although public support seems to be growing.

But what if a way could be found to provide the goal of the public option — more competition to private insurers that would reduce medical costs — without need for a massive new federal bureaucracy?

Harvard Business School professor Bob Pozen thinks he has an idea that could work. Current reform proposals envision state health care agencies acting as group purchasing agents for those who are currently uninsured. What if we took that a step further and said states will also offer, as one choice, a state run health care plan. “This could be, for example, a health care plan for local teachers or state government employees,” Pozen writes on his  blog post, A Public Option That Would Work.

The beauty of this plan, concludes Pozen, is that public health care apparatus already already exists in every state or region of the land — no great new bureaucracy needed, more local control preserved.

Several of Pozen’s blog readers take issue with the idea, such as Greg’s view that “This plan only shifts problems around from one level of government to the next, it does not address the problems of control and cost.”

What do you think? Are states the answer to providing a public option? The floor is yours.

Related Reading

Public Option: Everything You Need to Know (CBS moneywatch.com)

(No stethoscope image by Mykl Roventine, CC 2.0)

One of the core tenets of the Financial Stability Improvement Act of 2009, which continues to advance its way through Congress, is to identify systemically dangerous financial firms (i.e., too big to fail) that would be subject to special government monitoring and regulation.

There is just one problem with this proposed legislation, but it’s a doozy — and you should be outraged. The list of systemically dangerous firms will be kept secret from American taxpayers, the very people who ponied up in the current financial crisis.

Harvard Business School professor David Moss says this single provision undermines much of the potential good work of the larger legislation. Why?

For one, all reports to Congress concerning these institutions would also be private, weakening any thought that Democratic oversight might be a good idea. The legislation could also lead to weaker and inconsistent regulation on these institutions (not that we would know!), and unfair “stabilization” payments required of less systemically important firms.

Moss continues:

“To be successful, the final legislation must require the creation of a public list of all systemically dangerous financial institutions; and it must ensure that these firms are subjected to dramatically heightened regulation to control excessive risk taking.  In fact, the regulation of these firms must be so tough that they feel a strong incentive to slim down or break up in order to get off the list.  Such a vital public mission will never be achieved in the shadows.”

Couldn’t agree more. How do you feel about this idea of a secret list?

One of the under-appreciated side effects of the financial crisis has been the promotion of employees into management roles for the first time. It’s hard enough for a rookie to assume command when times are good. These days it must seem like being thrown head first into a spinning clothes dryer.

I recently ran across two great pieces of advice for new managers. The crux of it: Slow down.

1. Check Your Progress. Harvard Business School’s Linda Hill, who literally wrote the book for first-time managers, says rookies try to do too much, which causes them to lose sight of their goals. Every two weeks they should step off the treadmill and assess what they have been doing and where they are headed within the context of the goals of the organization.
2. Three Tasks a Day. New managers face a million things to do, so pick out the most important three things each day and get them done. That’s the advice of Susan Ashford, a professor of management at the University of Michigan’s Ross School of Business.

Both these insights are explored in an excellent article written by the business staff at the Associated Press, Surprise! You’ve become a manager. Now what?

These are important lessons not only for new managers but for also for the seasoned vets who manage them. Make sure your newbies aren’t overstretching themselves. If they are, help them focus on what is important and on achieving results, even if it’s just a few accomplishments a day.

Are you a new manager? How are you prioritizing your work? Any advice from our veteran managers?

BTW, Jessica Stillman over at Entry-Level Rebel has a nice conversation going about shortcomings in training for new managers. Take a look at Readers Diagnose “New Management Syndrome,” Offer Cures.

(Dryer image by rocknroll guitar, CC 2.0)

When Goldman Sachs announced last week that its swelling bonus pool for top performers had reached a record $23 billion — about $700,00 for each of its 32,000 employees — the chorus started anew over excessive compensation on Wall Street.

Goldman’s sop that it would pay $200 million to charity didn’t do much to silence the critics on the weekend news shows.

“The bonuses are offensive,” Obama adviser David Axelrod complained on ABC’s This Week. After all, it’s only been a year since American taxpayers wrote Goldman a whopping $10 billion bailout check, which it has since paid back.

What, you are surprised by this pay day? Goldman hasn’t lied to you about its intentions. You just haven’t been listening.

That’s the opinion of Roger Martin, Dean of the Rotman School of Management at the University of Toronto in Canada. Noting that the firm is once again riding high on a resurgent market, Martin writes on his Harvard Business Publishing post, The Goldman Bonuses: I’m Shocked, Shocked:

“Life is good again and it is time for the bonuses to flow, as they always have… So this is not new at all. The order of priority is: Goldman bankers first, the external shareholders second, and everybody else last. This is not a secret and has never been.”

His point: Goldman is a 140-year-old professional services firm that has always run its business by attracting and then rewarding star performers. No one has said they should stop doing that. Goldman’s business model has been rewarded by shareholders for years and years. And when it got in trouble last year, the government, using taxpayer funds, bailed out the firm without asking for many structural or other changes. It was back to the status quo.

Were you outraged over this latest round of banker bonuses? Do you agree with Martin that the fault lies with shareholders, legislators and taxpayers?

Tomorrow, heat on proposals for government to regulate compensation packages in the financial industry gets turned to HIGH.  World leaders at the G-20 summit will address the issue of placing caps on bankers’ bonuses, and you can bet some action by individual countries including the United States will follow.

Already in the U.S. Tim Geithner’s Treasury recently let fly a trial balloon that it is considering a plan to require banks to “claw back” executive bonuses when they lose money, and to link pay to long-term rather than short-term performance.

Good idea, or bad? No one but another banker could like a system where heads of failing financial institutions receive performance bonuses — large payouts that further push their teetering banks toward insolvency.

But Harvard Business School professor Robert Pozen doesn’t believe the question is so black and white. In general, fixed limits on bonuses for individual bankers are likely to boomerang by leading to higher guaranteed salaries, he writes on this Harvard Business Publishing blog post, Should the G-20 Adopt Bonus Limits? In fact, this jump in base salary has already happened at banks receiving TARP bailout funds.

Failure Not Rewarded

But putting a lock around the wallets of execs at failing banks is something else again.

“Limits on overall compensation at unprofitable banks make sense if combined with share awards based on performance,” Pozen writes

But even here these is no easy answer, according to Pozen. In a failing bank, low bonus payments may drive away the talented executives needed to bring the bank back to profitability.

The best solution?

“Balancing both objectives, I would recommend that the unprofitable bank distribute modest cash bonuses now to top executives, together with large awards of restricted shares that will vest over the next few years if the bank returns to profitability. In addition, to avoid massive increases in base salaries for many employees, there should be limits on overall compensation for unprofitable banks — based on their revenue since their income is negative.”

And this seems to be the solution government leaders are already circling around. Last week 27 European nations backed an accord calling for the major part of bonuses to be deferred over time, which would allow them to be canceled in the case of bad performance. The group stepped back from a more aggressive approach of capping executive salaries.

The scary part for me is that once you say it is OK for government to step in and regulate compensation in an industry, no matter how well intentioned and even necessary, you have set a dangerous precedent that unofficially becomes a potential solution when other clashes between the private sector and government.

I know one thing, if you are a financial industry executive, Thursday will be a quite an interesting day.

Asked by Forbes.com to name his top five historical partnerships, Harvard Business School Dean Jay Light produced this unlikely list:

1. Marie and Pierre Curie
2. Meriwether Lewis and William Clark
3. Larry Bird, Robert Parish and Kevin McHale
4. Bill Hewlett and Dave Packard
5. James D. Watson and Francis Crick

Lewis and Clark are highlighted, for example, because they are a fine example of complementary opposites. Writes Light:

“Lewis and Clark bonded over a shared love for the outdoors, but they had markedly different personalities. Lewis was a moody, introverted intellectual with a deep knowledge of cartography and natural science. Clark was the gregarious extrovert with a natural flair for leadership. Lewis needed Clark to keep up the esprit de corps through three arduous years while he focused on scientific discovery. Clark simply needed a job.”

Dear readers, let’s create our own lists, but confine your nominations to business leaders. No politicos, sports stars or musicians, please.

Here’s my nomination: Steve Wozniak and Steve Jobs. At the dawn of the personal computer generation, Wozniak had the technical genius and Jobs had the marketing instincts to transform early attempts at a personal computer such as the Altair, which appealed to hobbyists, into an eventually mainstream consumer electronics device.

Who would you nominate to the Business Partnership Hall of Fame?

Former President Bill Clinton contributes to the September Harvard Business Review with an essay on how the private sector can contribute to the good of society.

“Short-term thinking got us into the financial mess, and long-term investments that also benefit the world around us can lead us out of it. Any large-scale efforts to solve the great global challenges that do not include the private sector will fall short.”

What company does this well? Clinton points to Coca Cola, and its work in Africa. Coke allows independent entrepreneurs, including women, to establish distribution centers for the company. “This model helps Coca-Cola secure hard-to-reach markets while creating job growth in those communities. So far, Coca-Cola has established 2,500 independent distribution businesses across Africa, providing direct employment for more than 11,000 people and generating more than $500 million in annual revenue.”

Read Clinton’s full essay.

I recently posted about the dangers that overseas assignments can do to the family left behind. This is a dangerous and under-reported side effect you need to consider before accepting an assignment that is going to split up you from your family.

But several readers suggested this same family-killing effect may apply to any exec who travels frequently. I wrote a deliberately enticing headline above with no facts to back it up. No facts, but plenty of anecdotal evidence tells me that frequent business travel in general can unthread the cords of  family. Even if nothing is happening, suspicion can grow in the darkest places.

My advice: if you travel a lot, also spend a lot of time at home.

Any tips from you frequent flyers out there on managing this lifestyle?

Harvard economist and law professor Lucian Bebchuk weighs in with an op-ed supporting executive compensation controls now under consideration by Congress.

This question is too important to be left up to companies themselves, he writes in the Financial Times.

“Regulation of pay in financial institutions is justified by the very same moral hazard concerns that provide the basis for existing regulation of the sector. Because the failure of such companies imposes costs on taxpayers that shareholders do not internalize, shareholders’ interests are served by more risk-taking than is socially desirable. For this reason, financial institutions have long been constrained by a substantial body of rules that restrict private choices with respect to loans, investments and capital reserves.”

Read Bebchuk’s arguments at Regulate Financial Pay to Reduce Risk-taking.

The U.S. isn’t alone among world governments addressing this issue. Turns out many countries are considering similar measures in the belief that excessive compensation packages, which favored short-term performance, led to the excessive risk taking seen as a contributing factor to the econ crisis.

My BNET colleague Steve Tobak just wrote an opposing view. Read Government Say on Executive Pay? No Way

What do you think? Do boards and shareholders have enough incentives and tools in place to control the pay of their chief executives without the heavy hand of government? Take our poll.

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