As the global financial and economic crisis deepens, four of our faculty members offer their insights on what lies ahead in the video below, along with highlights of our faculty’s work in 2010 at London Business School.
At the heart of accounting is using financial accounting information to communicate effectively with investors. As part of this process, the ninth London Business School Accounting Symposium took place in June and involved academics from throughout the world. From London Business School, Sir Andrew Likierman provided an introduction to the event and keynote speaker Ian MacIntosh, chairman of the UK’s Accounting Standards Board; Maria Correia looked at political connections, SEC enforcement and accounting quality; while Francesca Franco, Oktay Urcan and Florin Vasvari chaired sessions.
With financial accounting, managerial accounting and corporate finance still under the popular spotlight, London Business School’s accounting faculty has continued to set the agenda. Florin Vasvari looked at the informational role of bond analysts. Florin’s expertise lies in the accounting information within debt markets with an emphasis on fair value reporting for financial instruments and associated risk disclosures. During the year, Florin was awarded a coveted grant to support his research into debt contracts from the AXA Research Fund.
Irem Tuna was also successful in securing a ERC Starting Grant award providing research funding for the next five years. Irem’s research interests lie in two broad areas: the use of financial accounting information in capital markets, and corporate governance – specifically, the measurement of corporate governance and the interaction between financial reporting and governance.
Research by Lakshmanan Shivakumar examined whether audited financial reporting and voluntary disclosure complement each other and provide the best possible information for managers, investors and regulators. The results of his research imply that firms commit to greater auditor financial statement authentication when their managers make more frequent and more informative voluntary forecasts and that investors then perceive the forecasts to be more credible. As a result, financial statement verification enhances the information value of management forecasts.
Eli Talmor has continued his involvement in the school’s Coller Institute of which he is founder and chairman. Eli is the creator and principal lecturer on the School’s private equity elective and has been responsible for the development of the Coller Institute’s portfolio of prestigious case studies on venture capital and private equity.
With a constant eye on the reality of accounting practice, the accounting faculty also includes Dwight Poler who is managing director of Bain Capital, as well as being an executive follow at the School.
With policymakers battling against the worst global recession for more than 70 years economists have been very much in the spotlight. The debate is vigorous and ongoing. Fuelling the debate, London Business School’s economics faculty hold weekly seminars covering subjects as diverse as booms and busts in asset prices to weather and infant mortality in Africa. They are also involved with a variety of influential groups formulating the future of the discipline in the wake of the financial crisis.
Lucrezia Reichlin has been combining her academic skills with her ECB experience to work on how monetary policy works in exceptional times and the degree to which market freedom helped mitigate or contribute to the global recession.
Richard Portes has called into question our ability or willingness to learn from the crisis. “There will always be financial crises. That is in the nature of a dynamic, innovative capitalist economy with a relatively unconstrained financial system. The best we can hope for is that the next crisis will be different, that measures taken in response to the current crisis will block the mechanisms that gave rise to it and mitigate the consequences of the next major disturbance. That was, in fact, the result of the Great Depression — a new framework of financial regulation that underpinned considerable stability for 75 years,” he says. Richard contends that the seemingly ambitious programme of reforms outlined at the 2008 G-20 summit have not been delivered upon.
In September, Hélène Rey was selected by the French Prime Minister, Francois Fillon, as one of the six new members of his Conseil d’Analyse Economique, a non-partisan body whose role is to advise the government on economic matters. Hélène continues to write provocative columns for the French newspaper Les Echos and also joined the advisory board of the Institute for New Economic Thinking (set up in 2009 with a financial pledge from George Soros).
Elsewhere, faculty contributions have been characteristically wide-ranging. Assumptions about our voting system should be re-examined, found Jean-Pierre Benoît in his research. Jean-Pierre, working with Lewis A. Kornhauser, discovered that virtually no voting system is efficient. The research helps to explain why so many voters are so often disgruntled with the assemblies they elect and why public commentators seem to be unable to explain why.
Globalisation is never far from the economics agenda. In September, the School presented events in New Delhi and Mumbai on sustainable globalisation. And, Andrew Scott led a distinguished panel in Shanghai in July to discuss the merits and challenges of the Chinese city as a financial capital. Andrew has also been involved in his role as Non Executive Director at the UK Financial Services Authority with the financial crisis more directly where both the UK financial regulatory regime is being restructured and new global regulations rolled out.
Also shaping the agenda is Linda Yueh. Her new book, The Economy of China, is the story of China and its economic development since 1979, a period in which China became a hallmark in the global economy. Linda visited China in January, participating in the first international seminar the Chinese government’s top policy body had ever held on its Five Year Plans, and was one of three international experts invited to give advice on the 12th Five Year Plan.
The intellectual reach and influence of London Business School’s finance faculty continues to grow. Take the work of Julian Franks. He is Academic Director of the Centre for Corporate Governance and lead investigator for a £1.4 million grant for research into corporate governance. With a variety of academic colleagues, he is also examining family businesses in France, Germany, Italy and the UK. This research is looking for an explanation why the UK has a low proportion of family businesses compared with France, Italy and Germany. In addition, he is examining European shareholder activism, as well as writing a paper on ownership in Japan which asks why it is so different from ownership in the UK and elsewhere.
Such wide-ranging interests are increasingly common as faculty share knowledge with other disciplines. Ian Cooper’s research is focused on valuation, the cost of capital, company financing and capital structure, utility regulation, derivative instruments and international finance. Most recently, he has been working on executive compensation and the role of the chief executive. This research argues that powerful incentive packages can severely distort decisions towards riskier strategies because incentives are not set once and for all in advance, but adjusted year by year. His next focus will be on the role of leadership in this issue.
James Dow, who will chair the European Winter Finance Conference in 2011, looked at how and why established firms often fail to maintain leadership following disruptive market shifts. He argues that such firms are more prone to internal resistance. Change inevitably creates winners and losers in the organisation. Losers resist large changes when strong customer goodwill cushions the consequences. Partial adaptation may lead winners to depart to form new firms with no goodwill, but no internal resistance.
An observer of the mutual fund industry once commented, “The real business of money management is not managing money, it is getting money to manage.” This seems truer than ever in today’s difficult markets because investors are extremely cautious. Such wariness is an incentive to investment fund managers, who want to outperform their peers because doing so is likely to attract investors, increase the assets under their management and, hence, their compensation. Research by Suleyman Basak looked at how the desire to outperform other funds translates into the portfolio strategies of money managers.
Meanwhile, Henri Servaes’s has been looking at what drives corporate liquidity through an international survey of cash holdings and lines of credit. His latest research looked at how credit ratings agencies, as a result of the financial and economic crisis, have become tougher in their ratings.
Stephen Schaefer was part of an international research team advising the Norwegian government on the active management of its pension fund.
Among the recognition received by the finance faculty, Christopher Hennessy was named a rising star in finance by Rensselaer and New York University’s Stern School of Business.
Finance faculty members run the Hedge Fund Centre, the Centre for Corporate Governance, the Coller Institute for Private Equity and the London Share Price Database.
Led by Narayan Naik, the BNP Paribas Hedge Fund Centre was the first research centre dedicated entirely to research into hedge funds and educating people about hedge funds. In November the Centre held a conference which brought together some of the best thinkers and practitioners in the area.
Francesca Cornelli is academic director of the Coller Institute. Francesca’s current research focuses on corporate finance, industrial and transition economics. She has also been working on private equity in emerging markets and collaborating with the European Bank for Reconstruction and Development (EBRD). The School held the Private Equity Findings Symposium in May 2010, on ‘The PE Contract: Evolution or Revolution’.
Some good news came from the Hoare Govett Small Companies Index Report in which Elroy Dimson and Paul Marsh revealed that mid and small-cap companies had enjoyed their best share price performance since 1977 during the previous year.
Harnessing data and analytics to make things happen better is the focus of the faculty in management science and operations. Their work covers subjects including decision modelling and analysis; and operations, logistics and supply chain management; and the design and evaluation of information systems.
And it makes a real difference. Take the work of Kamalini Ramdas who is an Academic Director of the Institute of Innovation and Entrepreneurship at the school. Her recent research examines new ways to create value through innovation, including service and operational innovation in business sectors, such as health care and information services.
“I find that many people who manage hospitals think that improving health care starts with government — changing regulations, drafting new legislation and so on,” says Kamalini. “Or they think that hospital boards must change policies before improvements can be made. Neither is true.I have found that hospital managers can often improve their own internal processes and thereby make enormous improvements in providing health care. They don’t have to wait for other players in the health care system to make improvements first.”
In July over 100 people — including 27 chief executives of Hospital Trusts and Strategic Health Authorities, and 10 chief executives of private-sector businesses providing health care services — attended a conference at the school on service innovation in healthcare. With a similar focus, the Institute of Innovation and Entrepreneurship hosted a conference on service innovation in September.
Also making a difference is the work of Derek Bunn. He heads the Energy Markets Group whose energy research programme was set up in 1986 to provide advice on forecasting and capacity planning in the field of energy. Moving with the times, its new Carbon Finance and Analytics Programme, provides a practical understanding of the evolution and opportunities in carbon trading.
Research by Nitin Bakshi looks at responses to disasters.It’s not a pleasant thought, but another major disaster is going to happen, sooner or later. Nitin believes that we can both learn from how disasters were managed in the past and also find better ways to manage and recover from the next major global setback. Moreover, he believes that relying on governments alone is not wise.
At a more personal and organisation level, Zeger Degraeve argues that we should reward people for the decisions they make, not just for the results they create. “Managing for results — pay for performance schemes and the like — are fundamentally flawed if that is the only criterion for evaluating managers,” he says. “I have observed more than the average share of businesses, managers and employees, and I have serious doubts about this almost universal approach to managing firms. Far better, I believe, to reward people for their decisions and decision-making processes.”
The need for marketing has, arguably, never been greater. Yet, the role of Chief Marketing Officer is often questioned. Research by Rajesh Chandy sought to establish once and for all whether CMOs really do add value to organisations. “As with the success of any corporate executive, many factors come into play,” Rajesh explains. “CMOs can affect firm value in a unique way; but, first, the firm must be sure the right kind of person is named to the office. When the fit is right, the CMO can be an executive of great consequence.”
One challenge for companies is explored by Nader Tavassoli in his on-going research on brands. “In any organisation, the efforts of the people, from the boardroom to the shop floor, should support the delivery of the brand to the customer,” he says. “At the same time, the brand is central to attracting the right people to work for the organisation -- and engaging them to their fullest. What CEOs need from HR and marketing, then, is deep collaboration. Unfortunately, the reality in many organisations is a disconnect between the HR and marketing functions.”
Elsewhere, Nirmalya Kumar has continued to lead the debate about the implications of India's spectacular economic emergence. Also looking at the bigger picture, research by Patrick Barwise looked at the apparent revolution in how people watch television. Despite the predictions by many that we will soon be able to watch what we want anytime we want, Patrick thinks the dawn of stand-alone video on demand certainly won’t happen any time soon. Patrick's new book will be published in Spring 2011.
Marco Bertini’s work on pricing led to an article in the May issue of the Harvard Business Review –“How to stop customers from fixating on price” (with Luc Wathieu). Marco continues to examine value-based pricing. “At its essence, value-based pricing aims to align price with real, unique value—the ‘stuff’ that customers care about and competitors currently do not provide,” he explains. “This pricing approach aligns company and customer interests better than any other pricing method. In circumstances where customer perceptions of value are high, prices can be set accordingly without alienating customers (assuming that the real, unique value is in fact communicated efficiently to the customer). In circumstances where perceptions of value are low, lower prices have to follow suit.”
In other research emerging from the prolific marketing faculty, Anja Lambrecht studied the efforts of banks to convert customers to regular use of online transactions. With the huge potential for cost savings, other businesses facing similar hurdles have much to learn from her research.
Simona Botti’s work looked at the wisdom of amassing as much information as possible before making a decision. Participants in her study who had more freedom to gather information actually performed worse than participants who had less freedom and information. Although choice is often associated with beneficial outcomes, this cannot be assumed to be the case.
Also in marketing, John Mullins has continued to evangelise on behalf of entrepreneurs. The third edition of his book The New Business Road Test was published and the twelfth Entrepreneurship Conference at the School was held in May.
In tough times, it is easy for companies – and governments – to focus on economic and financial issues. But, every crisis has an organisational and human impact.
Lynda Gratton and Rob Goffee were both recognised as being among the top ten most influential thinkers in human resources by HR Magazine. Over the last year, Lynda led a research consortium of 21 companies and over 200 executives from around the world in an exploration of the look and feel of tomorrow’s workplace. The conclusion? You will need to manage in new ways — and sooner than you think. The second phase of the research was launched in October.
During the year, Nigel Nicholson looked at the relationship between meritocracy and hierarchy. “We can't abolish hierarchy completely. But we don't have to let it infect our minds with muddled concepts about human qualities and how best to use them,” he says. “A true theory of meritocracy would acknowledge that we all have multiple talents and motivations; and that we all can learn and improve in most of the roles in which we are placed — though how much and how fast will vary from person to person.”
Niro Sivanathan’s latest research draws on psychological theory and research to show that when people feel that their egos are threatened, they are more inclined to buy high-status goods. If, however, they are presented with other means of alleviating their psychological pain, they are less likely to seek these kinds of products.
Companies have long been interested in identifying high-potential employees, but few firms know how to convert top talent into game changers — people who can shape the future of the business. Doug Ready and Jay Conger, working with Linda Hill and Emily Stecker, have found the ‘X factors’ that can allow companies to turn their high-potential lists into strong competitive advantages.
The seventh annual Global Leadership Summit in June highlighted the contribution of the School’s faculty to the continuing debate on these topics. As well as a host of global business leaders, it featured Gillian Ku and Lynda Gratton as well as colleagues from other departments.
What does your strategy look like? Those who study and plan strategies risk falling into the traps that maps, graphs, charts and matrices present. Michael Jacobides feels that strategy might best be cast as a dramatic playscript that can reveal the unfolding plots of business far better than traditional strategic tools, as the landscape shifts around us.
“The playscript isn’t just a metaphor; it’s a tool to help companies manage the complexity of the competitive landscape and facilitate analysis and action,’ says Michael. This fresh take on strategy was published as a Harvard Business Review article “Strategy Tools for a Shifting Landscape”.
In a busy publishing year, Julian Birkinshaw’s new book, Reinventing Management, was published in March by Jossey Bass. It builds on the developing work of the Management Innovation Lab, where Julian, together with Gary Hamel, captures some of the world’s most innovative management practices.
Freek Vermeulen’s latest book, Business Exposed, was published at the end of the year by Financial Times Prentice Hall. The book delves into previously untouched areas of business study and challenges commonly held perceptions. Along the way, Freek investigates CEO pay, the role of boards and the role of the City.
Also casting an expert gaze on this subject was Rupert Mersonin his new book Rules Are Not Enough: The Art of Governance in the Real World.
Kevin Boudreau is set to play a key role in the running of a software development initiative established by NASA and Harvard University. The NASA Tournament Lab is a forum where the space agency can present computational or complex data processing problems and software developers can compete with each other to create the computer code that will provide the best solution.
Elsewhere, Don Sull looked at what he labels “strategic orchestration”. Inspired by the likes of Apple, Ryanair and Nestlé, strategic orchestration allows firms to get to market faster, adapt to changing circumstances and lower their invested capital, thereby allowing them to pursue less profitable opportunities such as serving emerging market consumers.
Costas Markides has spent over two decades studying business strategy and innovation. Recently, he has been focusing on the bigger picture of how people can address major social problems. Can the techniques used by managers to create innovation inside organisations work with global change?
On the theme of global change, London Business School’s Aditya Birla India Centre leads the way in exchanging ideas between the vibrant Indian economy and the rest of the world. Its directors are Phanish Puranam and Nirmalya Kumar. In 2010 Phanish received a grant from the European Research Council to fund a three-year research programme into the foundations of organisation design, but his contribution to thinking around Indian business is also substantial.
“India is not just an emerging market; it could be the next big innovation and talent engine. If you look at the availability of raw talent in India that’s what many Western companies really get excited about, and that’s why they come to India. Nirmalya and I are working on a book project, which is called India Inside. The idea is that, just like Intel inside, there’s a lot of innovation happening in India which consumers don’t see because it’s embedded in a B2B context or it’s part of a long value chain,” Phanish explains. “A global company of the future will have to have the best global practices and processes; but they cannot execute those processes without human capital which is available in India on a scale not easily available anywhere else.”