Stanford Business
Graduate School of Business
Stanford University
Stanford, CA 94305-5015
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- Phone: 650.723.3157
- Fax: 650.725.6750
Readers may send letters to the editor to: otoole_kathy@gsb.stanford.edu
Letters to the Editor
Stanford Finance Forum Debates Bank Capital and Equity Levels
To the Editor:
In the article Bank Equity Levels Debated at GSB Forum written by Bill Snyder in the autumn 2011 issue of Stanford Business, the banking experts were concentrating on what equity levels banks should operate at in order to be prepared to mitigate against severe economic downturns by setting an equity buffer to ride out the crisis. Professor Anat Admati of the Stanford Graduate School of Business maintains that a safe range of equity holdings should be from 10% to 15% for non-high risk investments. Adam Gilbert, managing director of JP Morgan Chase in opposition stated that Admati’s proposal would cost JP Morgan Chase billions of dollars (in lost revenue).
These Banking experts are concentrating upon the wrong issue. Under certain circumstances 15% equity could be too low, and under other circumstances 7% could be too high. It all depends upon the state of affairs at particular points in time. The real focus should be on the quality of loans the banks have outstanding (or in the process of granting). In measuring this quality it should much more comprehensive than just the traditional measures banks are used to; but the review should consider influences that could have a profound effect on the ability of the borrower to repay the loan such as an industry closing down, or customers losing governmental benefits they previously enjoyed. This review should include an assessment of receivables that have been sold in the secondary market but in which the banks still have a residual liability in them. The banks should look far enough ahead so that they can take action to increase or decrease their equity position (or any other action that is necessary) in anticipation of changing events. In other words Banks should be prepared to meet any change in the economy or society smoothly because they have done their homework beforehand.
Robert Mogis, MBA '52
(Mr. Mogis is an auditor specialist for the State of Michigan.)
Organization Theory Builders
To the Editor:
It was with great nostalgia and affection that I read your article “Organization Theory Builders” by Jocelyn Wiener in your spring edition. While it’s not possible to capture in any brief article the complete history and culture of the OB (Organizational Behavior) department of that era, there were several notable achievements that should have been recognized. For example, Tom Peters, who received his PHD in OB in the mid-1970s [MBA ’72, PHD ’77], went on to become the best-selling author and consultant for his book In Search of Excellence and subsequent illuminations of the best companies in corporate America. Similarly, [Professor] Jerry Porras coauthored Built to Last, which reinforced the reputation of the OB faculty as not only being academically prominent but also nationally influential in executive suites throughout industry.
A more serious omission is not mentioning [Senior Lecturer] David Bradford, whose course in Interpersonal Behavior had life-changing benefits for thousands of MBA and PHD students who learned more about leadership and themselves than in any other course at the GSB. For many of us graduates, his course and exemplary teaching remain one of the most memorable learning experiences at Stanford.
Finally, much of the cultural “magic” of the OB family was due not only to the distinguished faculty but also to their spouses, especially Gloria Leavitt, Mimi Webb, Jayne March, and Charlene Porras, who opened up their homes and their hearts to us struggling graduate students and made us feel welcome and safe. Another unsung heroine that made our time there so meaningful, valuable, and fulfilling was Katherine Bostick, the departmental secretary, who coached, guided, and comforted all of us throughout all the stress and insecurity of competing before some of the brightest minds in the country. Oh, what a time it was! We will treasure those memories and be forever grateful to those faculty and staff who made it all possible.
Carson K. Eoyang, PHD ’76
Professor Emeritus, Naval Postgraduate School, Monterey, Calif.
Retired Chancellor, National Intelligence University, Washington, D.C.
Design Useful Jobs for Existing Worker Skills
To the editor:
In the article written by Robert D. Hof, "Scaling Up Manufacturing Jobs," pages 22-25, in the Spring 2011 issue of Stanford Business, the author cites Andy Grove, former chief executive officer of Intel Corporation, as being concerned about nagging unemployment, primarily due to automation in the workplace, of displaced workers who do not possess the technical skills required in today's work environment. Mr. Grove does not see any easy fix to this problem. I believe an innovative approach might work. It is my observation that technical schools, colleges and universities design their programs and prepare their students for the jobs and careers that are in demand by industry and commerce. This is a right course of action. But, unfortunately, a lot of people who had jobs or no job skills are left out. My suggestion is just the reverse; namely, find out what the skills, aptitudes and interests those left out possess and create a new business venture using the hidden talents of these people. The new enterprise should be innovative yet profitable as well. I am sure there are nonprofit organizations that would be willing to invest in a pilot program to do the legwork necessary to launch such an audacious approach.
Robert Mogis, MBA '52
(Mr. Mogis is an auditor specialist for the State of Michigan.)
To the editor:
While reading the article "Scaling UP Manufacturing Jobs" in the Spring 2011 Stanford Business magazine, I came across the following statement on page 24:
'But his [i.e. Andy Grove's] focus on jobs for Americans "sounded xenophobic" to Vivek Wadhwa, visiting scholar at the University of California, Berkeley's School of Information, who wrote a dissenting commentary in Businessweek, "Why Andy Grove Is Wrong About Job Growth."
Wadhwa and others also say Grove's contention that most jobs are produced by established companies scaling up manufacturing is mistaken. Most jobs are created by startups, not larger companies such as Intel, he says. He cites the Kauffman Foundation's findings that from 1977 to 2005, existing companies lost a total of 1 million jobs per year, while new companies in their first year added about 3 million jobs annually in aggregate.'
However, in a recent Wall Street Journal article Professor Scott Shane clarifies the widespread misconception that startups create the most jobs in the US economy. Andy Grove is not in error after all.
Regards,
Karl Ruggebeg
Greenwich, CT 06831
Editors' Note: Economics Professor Scott Shane at the Weatherhead School of Management, Case Western Reserve University, wrote an article that said “The Obama administration is trying to spur job growth by helping tech startups get off the ground” in the Startup America program. “But job-growth statistics suggest the plan may rest on some faulty assumptions…. According to an analysis by the National Science Foundation, only 13% of the private-sector labor force worked in technology-intensive industries as of 2006, and fewer still — 4% — worked in small high-tech businesses. When it comes to startups—the primary target of the administration's program — the numbers are just as stark. From 1993 to 2008, 79% of new jobs were created from the expansion of existing businesses rather than from the formation of new companies, according to an analysis by the Small Business Administration's Office of Advocacy. Another SBA analysis shows that the average age of high-growth companies is 25 years, and they are found in all industries, not just tech.”
Professor Shane provided the following citations to Stanford Business: The NSF data are from the National Science Foundation's Science and Engineering indicators at http://www.nsf.gov/statistics/seind10/appendix.htm and the SBA data come from a paper by Brian Headd an economist there. http://archive.sba.gov/advo/research/rs359tot.pdf
Price Setting as Art, Not Science
To the editor:
The article titled "John Roberts: Expert on Industrial Organization" in Stanford Business, Winter 2010-11, page 29, implies there is still virtue in centralized management engaging in limit pricing. I disagree.
In limit pricing, management of a monopoly sets prices on output lower than it could get in order to avoid disclosing its actual costs to potential competitors. This might work in a static environment where standardized products are fabricated in traditional ways, market conditions are well defined, and growth is orderly and predictable, but in the emerging world, disclosing one's costs to a competitor is only one factor – a minor one – among many considerations shaping pricing policy. In coping with new conditions, businesses are decentralizing decision making. They encourage lower-ranking decision makers to liaison with other departments in the company but also to network with the various groups, organizations, and individuals that have a significant stake in company policies. The chief responsibility of the CEO should be to select and groom key managers that are vested with broad decision making powers, including price setting.
The factors forcing change are many. Electronics including computer technology and robots are displacing manual labor and paper-trail office procedures. New products are introduced at a rapid pace. Globalization presents unprecedented opportunities for expansion but also causes problems for businesses in fitting into unique cultural environments. Interest groups such as labor unions, suppliers, customers, and community activists are more knowledgeable and articulate about business. Decision makers may even find it necessary to engage competitors in joint ventures because of their expertise. Governmental oversight is more prevalent, be it at the local, state, or federal level, and managers also must consider risks from weather, terrorists, popular uprisings, natural disasters, environmental issues, and unsettled economic conditions.
Price setting, like other key policies, should be based on the impact these forces exert. The job of the executive is to find the focal point of these forces, take into account their magnitude, and set the price of the product or service accordingly, changing price structures as necessary when new developments occur. Decisions must be made quickly and yet wisely, and top management often is too far removed to act before the window of opportunity closes.
Price setting is an art, not a science, and therefore the skill of the executive (as well as unforeseen events) is critical.
Robert Mogis, MBA '52
(Mr. Mogis is an auditor specialist for the State of Michigan.)
James Porterfield: 1920-2010
To the editor:
Re: Summer 2010 Issue
I am proud and saddened to be mentioned in the same issue with Jim Porterfield's obit. He was one of my favorite professors in the Sloan Program—1959-60. He had just come over from Harvard along with many others whom Ernie Arbuckle had recruited—for the Harvard of the West.
When I first met Jim we compared notes on two subjects: Football and Investment Clubs. On football we agreed to disagree—I was living in Milwaukee at the time so the Packers were my team—still are. He was a Niner fan. So be it! The second issue he put to bed in his very humorous and succinct way. I had started an investment club with a group of friends and neighbors in Milwaukee. He called it "a pooling of ignorance" Never forget that line, albeit that we did pretty well in those days!
I am enclosing a check to be given to the B-school in Jim's memory. By the way, I also served in the Navy in WWII, so we had that in common as well. Sweet Dreams, Jim.
It's what makes the Sloan Program great.
Most Sincerely,
Robert W. Engle Sloan ‘60
Naples, FL
Caveats on New Orleans' Comeback
To the editor:
I certainly don't want to rain on the recovery parade, but there is a lot to be skeptical of in Michael Hecht's August 2008 article, "The Big Easy's Business Comeback." While there is much to applaud, statements such as "the immediate metropolitan region was back to close to 90 percent" fly in the face of recent news reports in which the Brookings Institution has been criticized in the media for finding a 70 percent return rate while other estimates hover in the 55 to 65 percent range.
On my visit in June I spoke with many friends, some of whom remain committed to the city and its recovery while others despair of being able to stay in the longer term because their companies have moved from the area to safer places. Indeed, the concern that the levee protection system needs more time and funding to be made right underlies the anxieties of many who have altered the city's nickname to "The Big Uneasy."
While Hecht's positive message is a good one to get in front of the public, it should be tempered by the understanding that there is more left to be achieved than has been accomplished thus far.
Ed Strong, MBA '69, PhD '72
Professor Emeritus, Tulane University
Visiting Associate Professor of Marketing, Roger Williams University
Bristol, R.I.
To the editor:
Congratulations to yourselves and Michael Hecht for the article "Recovery: The Big Easy's Business Comeback." How refreshing and encouraging at last to come across information that is so positive and upbeat concerning real progress in Louisiana and New Orleans in particular.
Sadly, the impression in Canada, and I believe in much of the world, is that the initial response to the tragedy as a result of [Hurricane Katrina] was incredibly inadequate, considering that the USA is one of the richest and most powerful countries in the world.
How about more reports in the future of Stanford's involvement in such basic human issues?
—J. Darg Bell-Irving, MBA '57
Vancouver, British Columbia
San Francisco Criticized
To the editor:
In an issue whose lead article was about preventing corruption ["Frisco Kid Sticks to His Guns"], it was ironic that there was also a report describing [San Francisco Mayor] Gavin Newsom addressing a GSB audience on the lack of leadership in politics. This from a man who leads a city that has regularly broken the law and engaged in activities that are clearly anti-American, if not downright criminal.
Gerald Clough, MBA '64
Fountain Hills, Ariz.
May 2008
Salvaging U.S. Health Care
To the editor:
"'People have been saying for a long time that [the U.S. health care system] can't go on much longer this way,' Enthoven said. But, it's not clear that public anger at the situation has reached a point that will force fundamental change."
I would argue that this is the most salient point in the various healthcare pieces covered in the May 2008 issue. Alain Enthoven [the Marriner S. Eccles Professor of Public and Private Management, Emeritus ] started at Stanford about the same time I did and at a time when it had become fashionable for all the business schools to redirect some of their focus away from profit-optimization modeling to public policy issues. It was clear even then that the delivery system was living on borrowed time and was a disgraceful portrait of inefficiency, disincentives, misincentives, and perhaps even just plain sloth/stupidity.
My two years prior to entering the business school in 1972 were spent as assistant director of clinical administration in Framingham Union Hospital in a suburb of Boston and most famous for the heart study. I suspect the Admissions office assumed I would be part of an emerging generation of trained MBAs who would then take Enthoven's wisdom and put it to work. Little did they know I was escaping--running for my life! It had been like playing basketball without hoops. Scorekeeping was limited the inane practice of creating a budget based on the previous year's actuals and not exceeding it. Brilliant !
We're now into 35+ years of intellectual examination of a very sick patient. During that time, despite some very fine work by our best and brightest, the patient is not only not better, it is decidedly worse.
Transformative change requires enormous financial gain potential, widespread fear and anger, or just dumb luck. I wouldn't count on the latter but some convergence of the first two is inevitable. It will be a lot less pretty and a lot more painful than had we rebuilt it right in the first place,but, that's just the way us folks seem to do things.
Jim Noyes, MBA ‘74
To the editor:
As an MD and Stanford MBA I felt that the discourse on health care costs is not complete without an analysis of the hungry gorilla in the room. The HMO was forced on the medical system with a major cost structure and a questionable rationale. An analysis is overdue of whether over 30 percent of the health-care dollar has been well spent. From a business point of view a cost/benefit analysis would be money well spent. All the other items will fall into place if the question of whether the HMO is part of the problem or the solution can be clearly answered.
Robert S. Rosenberg, M.D., MBA '52
To the editor:
The article "Salvaging US Health Care" had little to offer in the way of saving anything but the same old thinking. It reiterated the hand wringing usually associated with this very complex set of economic players. Let's shift the conversation to a more constructive and creative level by asking the following questions, and asking them frequently.
1. What is the cost of health care for all citizens, compared to the cost of war? And, why be more timid in funding the cost of health care than funding the cost of war? What is the job creation prospect in providing health care for all?
2. Why is the USA using a moribund health care insurance model created during WWII? It is not the model used by other industrialized countries. This business model is inefficient, cumbersome, and expensive for everyone, citizens, health-care providers, and employers. It diverts precious resources of time and money.
Eliminating health insurance as an employer expense would make our businesses more competitive. Shouldn't the question be "What forces of innovation will eliminate this model while providing excellent health care for all?"
To wit: Do insurance companies add any value to health care? and,
Is it ethical to profit from health care expenditures?
Or, should health care, like clean drinking water, which is the most basic public health service, be provided via taxation?
3. How can we get more value from the health-care dollar? As with most social enterprises, outcome studies are lacking. Don't we need a secure national health electronic infrastructure--that includes all patient records-- to evaluate outcome data or identify best practices? Presently, medical care is administered based on "community standard of care" which is to say, "the best we know how based on the literature and our own experience/training." When national data is available regarding outcomes and best practices, and when statisticians/practitioners are trained to evaluate this data, citizens and health care providers can better understand which treatments-- and which doctors-- have the best outcomes, and providers can create treatment protocols and practitioner training systems that provide more cost-effective health care.
—Cheryl Lilienstein, Palo Alto
May 2008
The Golden Legacy of Ernie Arbuckle
To the editor:
I greatly enjoyed the Ernie Arbuckle article in the May 2008 issue, as I'm sure did all of my MBA ‘68 classmates. He was an extraordinary leader.
But the story behind the football game events are a bit more complex than stated. Getting to lead the Stanford contingent in a cheer was a hotly desired prize, one that all students could vote on--at a penny a vote, if I recall. There was a table near the bookstore where anyone could vote, maybe other locations also. The tally was publicly shown, so everyone knew who was winning at any point, and students could vote for their favorite professors if the professor started falling behind.
This was at the height of the Vietnam war, and I can assure you that no undergrads were voting for Ernie--They didn't know him, indeed probably never heard of him, and the GSB represented everything that the undergraduate body didn't like in those days. This was the era when David Harris was elected student body president and the main administration offices were taken over by protesters.
Some GSB student--I don't remember who it was--organized a campaign to get Ernie elected. It was known that he planned to retire after 10 years at the helm, following his philosophy of repotting himself every decade, and this seemed like a nice reward. But the campaign was within the GSB only, completely a stealth effort to the rest of the campus, with GSB money until five minutes before the polls closed.
Obviously I can't prove that no undergrads voted for him at all, but he had very few votes until the moment when the GSB money got plopped down, and no one could overcome the big lead for Ernie.
And, of course, he did a great job leading the cheers.
—Jon Holman, MBA '68
To the editor:
I have read and re-read your May 2008 article, "The Golden Legacy of Ernie Arbuckle"and was so touched by how youcaught his essence 22 years after his death, and 40 years after he received the first Arbuckle Award.
Part of the essence you caught was contained in the photos: The wonderful bust shot reflecting his vigor, enthusiasm, interest, and good looks; the family shot reflecting his compassion, love of family, (and animals), and showing my mother who was responsible for a large part of his success by always being the "hostess with the mostess" and housing an endearing and enduring love and respect for him and people in general; and, the shots of the infamous "Give ‘Em The Axe" yell that he poured his heart and soul into because of his very deep love and commitment to students, faculty, parents, friends, the GSB, and Stanford in general.
The legacy my father left at the GSB never ceases to amaze me, touch my heart, provide many life lessons for me, and make me grateful for the eternal gift he gave to so many of us of his heart, soul, beliefs, visions, and commitment always mixed with love, honesty, integrity, and humor. His entire life, from early childhood in Santa Monica until his death, has been an example for many of us to learn from.
Thank you for such an excellent article with so much feeling.
—Joan Arbuckle
February 2008
Kudos for the February Cover
To the editor:
John Hersey's illustration on the cover of the February magazine is so captivating, I could not let it pass without admiring comment. I am currently conducting culture shaping 
seminars with our great employees here in Phoenix and in the home office in San Antonio, part of which cover the value in appreciating how people approach decision making from different perspectives. Nowhere could one find a better visual of the distinctions between "left brain" and "right brain" perspectives than that provided by the decidedly "right brain" brilliance of Mr. Hersey. Or is there some "left brain" at work in there as well? We are left to further inquiry.
Marina Krakovsky's wonderful article on Professor Shiv's work [on decision making] is so timely and relevant, it reinforces the enduring value of lifelong learning in general and my cherished association with my alma mater in particular. For that I thank you and your staff for your consistently superb work.
—Bill Putnam, Sloan '79
Rear Admiral, USN (Ret.)
To the editor:
I want to comment on the cover of the February issue. I am not an artist, but it is the most attractive and visually appealing cover that I have seen in a long time. By long, I mean I am MBA '72.
—Hoshi Printer, MBA '72
February 2008
An Added Risk to Business in China
To the editor:
When we saw the August issue cover article, "Probing the Realities of Business in China," we were surprised that there was no mention of an alumnus who has faced the harshest "reality" for the past nine years as a result of running a thriving U.S. medical equipment import business co-located in Shanghai and San Francisco. Our friend and classmate, Jude Shao, MBA '93, might have added his advice to that of the other alums if he were not serving a 16-year prison sentence in Shanghai.
As Professor Glenn Carroll noted during the faculty study trip, China's political economy is intimately entangled with China's brand of capitalism. But China's lack of legal infrastructure extends far beyond the shaky intellectual property rights protection mentioned by Sequoia Capital China founder and fellow alum Fan Zhang, and can actually result in criminal charges for business behavior that in the United States is considered ethical. Jude ran afoul of local government officials who solicited him for a bribe to stop a "special tax audit." When Jude refused to pay the illegal bribe, he was arrested "to teach him a lesson" and held incommunicado in a local jail for 24 months. Later, without the chance to review the evidence against him, he was convicted of tax evasion in the Chinese courts.
Lest you think this is an isolated case, the Dui Hua Foundation counts over 40 American citizens in Chinese prisons or detentions for so-called "economic crimes." Most are ethnic Chinese who speak the language and understand the culture, but these advantages, the benefit of American citizenship, and lack of wrongdoing are often not sufficient protection in a country without legal transparency and with ingrained local government corruption. Doing business in China offers many opportunities, but there are also serious risks that were not mentioned in your coverage, particularly to entrepreneurs without deep pockets.
Americans behind Chinese bars also languish despite the best advocacy available. For example, while members of Congress, the State Department, and even President Bush have pressed the Chinese government for Jude's release during the past nine years, he remains in prison.
For more information on Jude's case including the latest media coverage, and to learn how to help, please go to www.freejudeshao.com.
The Free Jude Shao Campaign
Chuck Hoover, Cyn Dai, Caroline Pappajohn, Lang Ang Pham, and Mark Williams, all MBA '93