Week 14: Confucius, Shrek, Devil’s Advocates and the Board

Stanford GSB Sloan Study Notes, Week 4, Autumn quarter

Covered in this issue:

  • How Confucius helps the Chinese to consume free MP3s
  • How a CEO is stuck between the Board and his team in a complex matrix of conflicting loyalties
  • How a side-effect of managing a few trillion dollars in your funds is the need to do a lot of board voting for your shares
  • How high-profile VCs can keep your loans in the bank and close your hires
  • How startups should tell their story the way seen in Shrek
  • How to make the devil’s advocate a resident part of participatory decision making culture
  • How citizens should break the government monopoly of environmental and pollution mapping

And here on to the full notes:

STRAMGT279 – Global Strategic Management (Roberts)

  • Biologists have found far more genetic variation exists within any population than across populations
  • Cultural difference/misunderstanding examples with China
  • Hugo Chavez on populism: “the voice of the people that is being heard”
  • In high power-distance countries MBO does not work: negotiations are not valid
  • When implementing change, find people who are already moving in the right direction and “create heroes” out of them
    • simplest form: employee of the month
    • works only in individualistic cultures
    • for collectivist cultures, pay works better than non-pay motivators
  • People in individualistic cultures feel guilt, collectivists: shame
  • Falling unionisation (~10-15% of all workers today) as a reflection of growing individualism in US
  • Hofstede’s data problem: IBM centric, even if framework holds, GLOBE is more rigorous
  • Corporate cultures raise over national ones (Ohmae) or remain rooted in home culture (Peter Diamond)
  • When measuring cultural distance, borders are 1000-s miles thick
  • Hard to distinguish culture vs competence
    • “we do things differently here” is a great cover for just bad performance
  • Porter’s Five Forces: “who can squeeze you?”
    • substitutes, suppliers, customers (usually: next step in value chain), potential entrants, rivals
    • slicing the PIE (Potential Industry Earnings) – who has the power in given negotiation?
  • New industries are usually born as vertically integrated companies (electricity, broadcasting, computers, …) and break up later
  • Power decisions are often made when someone let’s a component brand to be visible in their product
    • Shimano on bikes
    • Google logo on maps (everywhere besides iPhone)
    • “Intel inside”
    • grows consumer knowledge of and desire for specific components

Note: see also a separate post for a toolkit for quick’n’dirty country/culture comparison frameworks, books and sites.

GSBGEN566 – Real-Life Ethics (Mark Leslie, Peter Levine)

Guest lecturer: Andy Rachleff of Benchmark Capital

  • Book: The Entrepreneur’s Guide to Business Law (the chapter on Forming & Working with the Board)
    • Outsiders independents should outnumber insiders on the board
    • Have at least one director of the same generation as the likely successor to the CEO – when the transition takes place, he or she will have a peer on the board.
    • Having the founders counsel on the board could result in inadvertent waiver of attorney-client privilege
    • Although a diverse board is ideal, it is important to avoid creating a board that acts like a legislature, with each director focused on champi- oning his or her own constituency.
    • Executive search firms, including Spencer StuartKorn Ferry, and Heidrick & Struggles, routinely publish data about trends in director compensation
    • Assuming a schedule of quarterly meetings, board work would comprise about eight days of a director’s year.
      • As a reflection of time commitment alone, board honoraria could be calculated at 2 to 3 percent of a CEO’s annual salary.
  • “You can create a Vice-Chairman role [for a fired CEO]… but the only issue is that everyone in the world knows this is not a real job for a real man”
  • CEO can be friendly, but not friends with his staff
  • “In senior roles, getting fired without a cure period just comes with the territory”
  • Palace revolts: a juncture when the leader has lost legitimacy
    • you can’t lead without consent
    • could be a reason for CEO departure in itself
  • CEO/board legally protected from mistakes if the are informed and apply business judgement
  • When a loan can’t be reasonably repaid, the board’s legal loyalty goes to the creditors
  • How long do you give a CEO to find a working business model?
    • in calendar months?
    • in cash runway left?
    • in product cycles? 2-3?
    • is there follow-through on previous ideas or does he keep flipping to new ones all the time?
  • “When you think of how thin the labor market is for senior hiring… then you start making really bad decisions”
  • “If the CEO has to be told [by the board] what to do, he is not the CEO”
  • CEO-COO structure very complex to maintain, rather avoid
    • In some circles it is an intelligence test: “would you want to be the COO?”
      • great people want to be CEOs
      • most high-end recruiters don’t take COO hiring jobs
    • Outstanding VPs want to report to CEO, not COO
    • Common for the structure to blow up in 2 years (VP-s try to skip level to CEO, when the CEO overrides the COO for the first time: the COO is effectively dead)
  • For a VC to return 0X or 1X of the money is virtually indifferent in the big picture (failure anyway)
    • wouldn’t use much partner time to really make the effort
  • Venture partnerships have no board, all partners have fiduciary duty
    • Who does a partner sitting on the invested company’s board have fiduciary duty to then?
      • From the moment you take that board seat, it is to the company
      • VC partners can vote against you (for a fund decision), but you have to vote for the company
  • Venture loans: venture in good times and just a loan in tough times
    • “possession is 9/10 of the law” – on the dynamics of calling back loans
    • when venture debt is in your bank account and bank sweeps it, you can argue all you want, but you don’t have the cash to burn
    • “life is a game of chicken” – if a bank sees high-profile VCs investing and on board, they are less likely to call the startup’s loans
  • Past friendship / recommendation is a “sunk cost”: your loyalty to company shouldn’t be influenced by if you brought in the violator or not
  • When is “purposeful deception” OK and not OK in business?
    • bluffing in negotiations?
    • using company time for finding new job?
    • presenting 3-year revenue projections on an untested idea to get funding?
    • asking your friends to “like” and “share” your newly launched web-based product, even if they are not users?
      • paying them to do so?

Investment Club

Guest speaker: Michael Latham, Chairman of iShares (part of Blackrock)

  • Fund management activity for ETFs is mostly the same as mutual funds: rebalancing, reinvesting dividends, liquidity management
    • a lot of investor management overhead (account management, reporting) is offloaded to brokers
    • downside: 10M iShares “clients”, but don’t know who they are
  • High-yield fixed income products are so profitable for broker/dealers that they are resisting ETF transparency more… but it will come
  • Vanguard (fastest growing competitor) is a non-profit established in a spirit of mutual insurance firms
  • ETFs have massive tax advantage in the US (much less taxable capital gains while holding)
  • Blackrock
    • invented index funds in 1971
    • $3.5 trillion under management
    • as a side-effect has a lot of board voting to do
      • dedicated proxy team
      • usually votes with the management – more returns!
    • $500/$700M of success fees from macro bets, not stock picking
      • latter hard to scale & keep consistent alpha
  • Endowments use ETFs to express specific economic views (countries, sectors they believe are outperforming)
    • due to quick implementation works for tactical moves too
  • In Europe, banks tangle advice and their own products
    • Like US was 15 years ago
    • Regulatory pressure to separate (US, NED, SUI next?)
  • Continued role of human market makers is to manage cash flow in high volatility situations
    • Most algorithms just step aside
    • As a result, market orders fall through the floor (e.g never place a market order)
  • Private wealth markets follow institutions with 5-10 year lag
    • Institutions 50% passive, retail still 20% – growth oppty
    • 10y ago, 85% of wealth had advice
    • Now: get advice for your first $10M… but if you have $20-30M more, manage it yourself

MS&E 472 – Entrepreneurial Thought Leaders

Guest: Geoff Yang of Redpoint Ventures: Timing Matters

  • “Now or never” is a myth – learn on someone else’s nickel if you can
  • Entrepreneur makes an investment in his most valuable things: time, energy & reputation
    • The VC – it is for the most part only money
  • You rarely get the driving passion of the entrepreneur in a single meeting: dinners, sporting, meeting family – whatever you can do more
  • Winners recognize patters where others see chaos
  • You have to be able to articulateyour conviction clearly
    • you don’t have much more in the beginning
    • “to will a company into existence”
  • http://bluefinlabs.com/ – (almost) real-time big data analysis on how people are reacting to TV
  • http://electricimp.com/ – internet of things (by iPhone HW & Google SW engineers)
  • Your solution should be 10X the performance and -3X the price of anything out there to really redefine/create a market (30X improvement)
  • Raise what you need to get to the next milestone: proof pays by increasing valuation for next round
    • Raising too much works against being lean (culturally, getting just a bit lazier, etc)
  • Hiring
    • Use your VC’s credibility (their past successes, confidence to put their money & reputation behind you) to close candidates
    • Hire after growth, always have just a little bit of “not enough people”
    • A-list talent over B-experience

Mastery of Communications Initiative seminar

Guest Speaker: James Buckhouse – Twitter corporate marketing, former Dreamworks storyteller (Shrek, Madagascar)

  • storytelling is all about getting the character from original state to transformational state
    • in every funny scene, a Shrek character starts happy and ends angry/sad or vice versa
    • how matters much less
  • optimize for repeatability
    • there is a difference between “did you like this” and “would you recommend this” question on test surveys
    • first test screenings of Madagascar were loved by targets, but they would not recommend it to other parents (borderline jokes)
  • ghostwriting for Snoop Dogg: you create the story, not _how_ the professional delivers it, that is their art
  • say what you do in 4 words. Not 5 or 6.
    • Twitter “instantly connects people everywhere”
  • story is the shortest line between a human need and how your product solves it
  • pro-tip to fix audio: sleeping bag over your head
  • pro-tips to fix video:
    • get the subject off the wall: in the doorway, in the middle of the room with blurred background
    • move the “lower 3rd” (subtitles, name tags) up: TV-era inertia, in mobile/internet there are video scroller controls, etc hiding content there
    • thumb-face rule: is the face of any important character at least the size of your thumb when viewed on mobile screen
    • check for tangents (“accidental antlers”)
  • research shows color association is there (red=conflict, love) but so dependent on cultural context, that it doesn’t matter that much in the end
    • consistency is more important: you can use brown to mark female in your design, as long as you always do that
  • “$3 contributions” a dream outcome for political speechwriter: a proven vote gained
  • Romney’s “binders full of women” meme immediately surfaced in amazon prod reviews for binders
  • Pitch is an invitation to a co-ride

OB278 – Organizational Behaviour (Flynn)

  • Pre-meeting preferences proven to be excellent predictor of team decision outcome – why have meetings?
  • Empirical research on when leaders (should) use decision making mechanisms of different levels of participation and what is their impact: Leadership and Decision Making (Victor H. Vroom)
  • Common information problem: groups discuss things that >1 person knows about
    • we’re hardwired against “collective wisdom” – new, singular views never make it to the table
    • Solve: ask every participant contribute their info, consolidate and share back before the meeting
  • Whiteboarding triggerssharing, besides just helping to visualise
    • “let’s just fill this thing up,” replaces subconcious guarding the information
    • reduces filters applied
  • Movie: Thirteen Days on collective decision making in Cuban Missile Crisis
    • Kennedy left the forum to avoid seniority filters
  • Some senior leaders join meetings only for last 10 minutes
    • Doesn’t pollute the open arguments inside team before their arrival
    • Still present / accountable for decisionmaking
    • Saves their time
  • Invite outsiders to your meetings periodically
    • Second viewpoints
    • “dinner guest” creates best behaviours in the team
  • Concious use of “devils advocate” role in decision making
    • Rotate the role – people will start hating the person
    • Tenure committee culture: your credibility raises if you’re good playing the devil’s advocate
      • Legitimate due to routine (every single time) and obligatory (has to, not wants to argue against) nature
      • “always first 15 minutes, by 2nd most senior person present”
  • For tough decisions, schedule a “second chance” meeting, before the first one happens, leaving a marinating break in between

CS547: Human-Computer Interaction Seminar

Note: full archive of videos for this course available here.

Guest speaker: Bill Griswold, UC San Diego: CitiSense – Always-on Participatory Sensing for Air Quality

  • Book: The Transparent Society: Will Technology Force Us To Choose Between Privacy And Freedom? (David Brin, 1998): everyone should be wearing sensors to a) level the playing field and b) watch the watchers
    • Even so, the government measurements will never get hyperlocal, esp inside your home or office
    • Incentives for public measurements with unknown incentives: if high pollution areas get no new highway funding, they tend to be provide very averaged, spike-less, low numbers
  • CitySense
    • on body components: temperature, humidity, barometric, 3 electrochemical gas sensors connecting to an app on a phone
    • stores & processes readings, maps your environmental exposure during the day
    • redundancy of readings is a waste of energy – environment changes slowly
      • several people travelling together – can detect and under sample (for ex: prefer loading the user with more battery)
      • use cell communications only when there is something interesting to report back
    • Real-time aspect made people seek pollution sources (“arriving here CO2 peaked – and I realised that several city buses pause here with engines on”)
  • New class of mobile apps that connect people to their environments, rather than remove them from it
    • CitiSense: people first look up to see what causes readings, but even more so: start sharing their readings naturally with people nearby: my exposure is your exposure

CS207 – Software Economics (Wiederhold)

  • In combined licence sales / maintenance model, detecting a moment when to drop maintenance for an old version can be misleading
    • Right time when the (maintenance) cost exceeds sales income, yet it is tempting to continue while maintenance income covers it
  • Paradox of maintenance spending: SW maintenance grows more expensive along with size of codebase & complexity, yet it makes logical sense to spend less (as a share of income) the closer the retirement of this SW is
  • Complex liability setups from (lack of) maintenance – who should pay if a person dies for maltreatment?
    • A medical information system built on an ancient OS. The medical SW provider is against an OS upgrade, because they could be liable for damages if their software doesn’t perform. Yet the OS provider has deceased maintenance and the OS is actually more risky for viruses, hardware upgrades, etc
  • Vilfredo Pareto was a railroad entrepreneur

For more posts on the Stanford GSB Sloan life – click here to search by tag “sloan”.