17 November 2011 ~ 3 Comments

Financial institutionalization

Clearly, business school is getting the better part of my time and my blog is being neglected. I have though had many posts written in my head….. my fingers just haven’t gotten to typing them!

The last real post I wrote was about “social” enterprise and if the “social” is really needed and there were a number of great comments/tweets/emails about that (so thank you!). I wanted to comment on a link Adam Kronk had added to a piece by Aspen Institute’s Judith Samuelson.

A quote in it said, when commenting on the new “B-corp” status between NGOs and for-profits:
“In business schools we need to spend more time on case examples of businesses that have succeeded in accessing capital in public markets, but are managed with common sense values, decision rules and protocols up and down the supply chain and in relation to consumers. It will not always be a pretty picture, but it is a failure if MBAs learn that they need to set up a specially chartered organization to bring their values to work. “
It’s true. Getting an MBA in a year is like trying to eat the full contents of your refrigerator in one sitting. (OK, not a good example coming from a student as my fridge is pretty empty, but imagine it weren’t ;-)) There is so much I want to dig deeper into and I know it will take me years to be able to reflect on and digest it all (burp!).

We spent a bit of time today in our Finance class speaking about how, in the US in the 1930’s, a post-depression measure to spark business and deter bankruptcy fears was to instate a tax break on debt interest payments. Prior to this, both debt and equity payments were not treated as tax credits so companies would have had a higher proclivity towards equity than they would today. In other words, this policy incentivizes higher debt levels.

Our professor alleged that this was intended to be short term, but instead it has spread around the world (though apparently not to Estonia?!) and now, though many politicians and economists alike think this market distortion needs to go, no one is willing to change it. It would be political suicide to take this on and as a global society, we’re too often concerned with short term benefit to take big risks which might threaten our own personal brand longevity though potentially improve society. As our professor also commented in different words, imagine if all of those genius people who are now financial engineers trying to make new financial products to avoid taxes (like “coco bonds“…. not a cereal it turns out) were MAKING products/services to earn their money….. they’d be improving society, not just financial returns. I know, I know, I can hear my finance friends grumble about how finance drives society… but where is it driving us?

And then, though I could tell our professor enjoyed the theoretical discussion as much as we did, we went back to formulas and beta’s and graphs…. and now, even though my marketing paper is calling, I really just want to find people who have ideas about how we can get all of us to smarten up and take risks which might put ourselves in short term financial constraints for the betterment of the future of our society.  How do we incentivize that? I guess not by grading us on how well we can analyze the buying centers for curled metal manufacturing parts (in 2000 words or less), but by giving us grades far into the future once we put our new knowledge into action and prove how well we can improve society. I’d rather work towards being graded on that.
  • Andy Gray

    Via Seth Godin a few days ago:

    “Well-rounded and popular people rarely change the world. The one voted most likely to succeed probably won’t…When faced with this difficulty, those with other, seemingly better options see the barrier and walk away…On the other hand, people who believe they have fewer options take a look at the barrier and realize that even though it will be difficult to cross, it’s the single best option they’ve got.”

    There will always be people with an incentive to change things, and they may not be the people who look like the most likely to succeed.

    I can only think: Level the playing field and give them a chance.

  • Annabaranova

    While I most certainly agree that too much brain talent is lured away from better causes by financial industry (think investment banking and tax law, ugh), some of their products are revolutionary for a greater scope of purposes than maybe originally intended. Just think weather/catastrophe bonds that’s been created by financial securities engineers. If every Cambodian farmer had invested in those before the floods this year, how much of the personal economic disaster would’ve been avoided/minimized! It would reduce risk, stabilize income and unlike insurance policy, you wouldn’t have to prove to anyone that you did not cause the floods.

  • Anonymous

    An article related to this in some ways – worth reading!
    The Dumbest Idea In The World: Maximizing Shareholder Value