February 2004

Alumni Association Honors Rod Kramer

Roderick Kramer, the William R. Kimball Professor of Organizational Behavior, was honored at the School's autumn Alumni Weekend with the Silver Apple award, which is given annually by the Stanford Business School Alumni Association to a faculty member who is particularly supportive of alumni programs.

"Teaching and learning with you is especially rewarding because you've been around long enough and taken enough laps to understand the way things really are," Kramer told the alumni audience. "I tell my students some of the things I've learned about leadership and power and paranoia and they say, 'That's weird.' I tell alumni and they say, 'Yes, been there, saw that.'"

A team of Stanford political scientists that included Professor David Brady of the Business School was ahead of other pollsters in predicting the victory of Arnold Schwarzenegger in the California governors' race. They beat out other pollsters by not allowing undecided voters to say they were undecided.

"What this shows is that undecided voters gravitate to the most visible candidate, the candidate with name recognition," communication Professor Shanto Iyengar observed in a press release about the poll nearly a month ahead of the Oct. 7 election. At the time, other pollsters were showing Lt. Gov. Cruz Bustamante in the lead. Conventional pollsters give potential voters the option of saying they are undecided, while the Stanford team simply gave the actual ballot to a representative sample of adults. The ballot contains no haven for equivocators.

Darrell Duffie has been named the 2003 Financial Engineer of the Year for contributions to the advancement of financial engineering technology. The International Association of Financial Engineers (IAFE) and SunGard Trading and Risk Systems award the honor.

"Darrell's important contributions in risk management, credit risk modeling, and the burgeoning market for credit derivatives are used daily by financial practitioners around the world," said Tanya Styblo Beder, chair of the IAFE. Duffie, the Business School's James Irvin Miller Professor of Finance, will receive the award this month at a dinner at the United Nations in New York City.

He joins a prestigious list of individuals who have contributed to the advancement of financial engineering technology, including Nobel laureate Myron Scholes, the Frank E. Buck Professor of Finance, Emeritus, at the Business School.

Duffie's most recent research focuses on the empirical behavior of default probabilities and of default-swap prices, and on the theory of over-the-counter market valuation. His latest book is Credit Risk, coauthored with Kenneth Singleton, the C.O.G. Miller Distinguished Professor of Finance.

Duffie is a member of the board of the American Finance Association, a fellow of the Econometric Society, a research associate of the National Bureau of Economic Research, a member of several boards of academic journals, and a member of Moody's Academic Research Committee. He is a past recipient of the Smith-Breeden Prize of the Journal of Finance, the NYSE Prize for best paper on equity research of the Western Finance Association, the Graham and Dodd Award of Excellence of the Financial Analysts Journal, and the Batterymarch Fellowship.

In a recent policy paper and in court documents, Business School Professor Jeremy Bulow spells out reasons for the current shortfalls in workers' pension funds. "Pension trustees, whose job it is to act in the best interests of the plan beneficiaries, should have taken the assets of plans that were fully funded until a few years ago and invested in assets that matched the risk structure of pension liabilities. Because they did not, the workers in many plans, in the airline and steel industries in particular, will receive much lower benefits than they anticipated, with government insurance (and eventually other companies and taxpayers) picking up some but not all of the losses. It is precisely because asset returns and liabilities are unpredictable that these policies should have been adopted long ago, and indeed should be mandated by government," Bulow wrote for the Stanford Institute for Economic Policy Research. (See siepr.stanford.edu/papers/briefs/policybrief_oct03.pdf.)

Bulow also filed court papers on behalf of the government Pension Benefit Guaranty Corp. in its legal battle with U.S. Airways over how to calculate the shortfall in its pilots' pension fund when it filed for bankruptcy.

The Richard A. Stepp Professor of Economics, Bulow has written previous academic papers on tax policy (with former Treasury Secretary Lawrence Summers), on sovereign debt (with former IMF Economic Counsellor Kenneth Rogoff), and on auction theory (with Paul Klemperer, principal designer of the United Kingdom's 3G spectrum auction). He has consulted for U.S. government and international agencies on pensions, sovereign debt, and auction design, as well as for a number of private companies, and he was chief economist of the Federal Trade Commission from late 1998 until mid-2001.

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Charles Horngren, long considered the man who pioneered modern day management accounting, has been honored with the Lifetime Contribution to Management Accounting Award. The Management Accounting section of the American Accounting Association recognized Horngren at its January conference. A member of the Business School faculty since 1965, Horngren is the Edmund W. Littlefield Professor of Accounting, Emeritus.

Horngren pioneered the use of managerial decision making in the early 1960s, transforming and expanding the way the subject was taught. He is the author of the textbook Introduction to Management Accounting, now in its 12th edition, as well as a half dozen other widely used accounting textbooks. He has been inducted into the Accounting Hall of Fame and honored with a special issue of the Review of Accounting Standards recognizing his work in the field, among other honors.

Corporate governance failures of the 1990s reflect significant changes in the incentives of managers, Professor Maureen McNichols told an Alumni Weekend audience. For starters, the Marriner S. Eccles Professor of Public and Private Management said, there were dramatic changes in CEO compensation. Between 1990 and 2001, worker pay increased 42 percent; corporate profits increased 88 percent; the Standard & Poor's 500 index increased 248 percent; and CEO pay rose a whopping 463 percent.

Auditing firms also became more "client-focused," she said, which is a euphemism for increased attempts to sell clients a significant bundle of non-auditing services, leading to conflicts of interest.

McNichols outlined critical lessons for directors, whose oversight role has increased dramatically, though the advisory role is no less important, she said. The legal standard for a director is to demonstrate good faith judgment, which requires a decision to be arrived at through a sound process. A critical aspect of good process is ensuring that directors receive all relevant information.

She recommended using the "TV test" for good decision-making attributed to Dean Emeritus Arjay Miller and reiterated often by Bill Miller, the Herbert Hoover Professor of Public and Private Management, Emeritus. If you are not comfortable explaining a board decision on the evening news, McNichols said, "you probably need to go back and examine your process for arriving at judgments."