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Suppose a major financial innovation fails and causes enormous ‘creative’ destruction.
What do you do?
Such a creative innovation was the so-called CDS, credit default swaps. Huge losses were caused to bank’s balance sheets when the bonds and other investments insured by CDS’s went into default.
The losses appeared at once on the balance sheets of banks, because banks are required by accounting laws to “mark to market”. That is – to record a loss when the market value of an asset declines in its market price.
These laws are widely applied in the United States, in Europe, and in so-called International Accounting Standards.
Bankers have complained about these rules, saying they make their balance sheets look worse than they really are, because when markets are not working, some assets are valued at zero, when (if given time) they are worth far more on a long-term basis.
The international accounting regulatory body IASB (International Accounting Standards Board) that sets accounting rules for almost 100 countries made (almost unnoticed) a few changes last week, according to the Wall St. Journal (Monday Oct. 20, p. 19, European edition). These changes may allow banks to reclassify assets like loans and receivables. They could broaden the change to include derivatives, which includes CDS’s.
So – let us try to get this picture straight.
Investor trust is destroyed by the foggy murky ‘financial engineering’ that created risky assets few understood, hid them behind complexity, and distorted them with bond ratings of AAA.
And now, investor trust is going to be restored. How? By allowing banks to better hide their toxic assets rather than disclose them fully and transparently.
Good thinking, IASB! Why not allow retrospective changes in financial reporting, that simply ignore the trillions of dollars in losses and in toxic assets and show that, well, the whole thing never happened! That will surely make everyone feel a lot better, right?
Hopefully screams of protests from scalped investors will set the IASB straight. Stop this before it goes any further. We need more transparency, not less. If a bank has lost money, we want to know about it. The job of financial reporting is to reveal the truth, not to hide it!
What is the best job in the world for an innovator?
Arguably, head of DARPA, the US Defense Advanced Research Projects Agency, headed for the past several years by a man named Tony Tether, whom few have heard of. Tether says that DARPA has triggered about a third of all developments in information technology and about 75-90 per cent of microelectronics developments began at DARPA. For instance, the Internet was born as a DARPA project. DARPA has a $3 b. annual budget. Tether has run the agency since 2001. DARPA is a branch of the Department of Defense, but it purposely headquarters in Arlington, VA, several miles from the Pentagon.
DARPA will celebrate its 50th anniversary this year. It will celebrate its contributions, including the GPS (global positioning system) and integrated circuit manufacturing.
Tether is innovative about innovation. For example: He funded a major competition for university students, to design a driverless robotic vehicle capable of piloting itself around a series of complex courses. This is known as a Grand Challenge. The prizes, $2m, $1m and $500k, respectively, were won by Carnegie Mellon, Stanford and Virginia Tech Universities. Tether says DARPA invested $20 m. in organizing these competitions, and got some $100-$200 m. worth of development work from the participants!
The key to DARPA creativity is rotation. “Program managers are not at DARPA for a career”, Tether says, “so they are willing to pursue high-risk technical ideas even if there is a reasonable risk that the idea will fail.”
Half of DARPA’s work is open and non-secret. Most of this is done by universities. The secret stuff is done by industrial contractors. DARPA has a liberal patent policy. “The company or university doing DARPA research owns the patent,” he explains. “We demand a fully-paid-up license to the patent, but the commercial rights are totally owned by the developer”.
Tether, despite his success, is a Republican appointee and will likely be replaced by the Democratic President. “I used to say no one has been at DARPA long enough to screw it up,” he laughs. “Now I have people saying, Tony, you’re getting there!”
Source: Financial Times, Monday Oct. 20, 2008, p. 14, “Business Life”.
How many countries can you name that have a Cabinet Minister whose title is Minister of Innovation?
UK Prime Minister Gordon Brown has appointed one. Last June 28, Brown appointed John Denham Secretary of State, head of the Department for Innovation, Universities and Skills. His post was created after the old ministry, Education and Skills, and Trade and Industry, was abolished.
Denham’s mandate? “Make Britain one of the best places in the world for science, research and innovation”, along with “development, funding and performance” of higher and further education.
It will be fun to watch Denham’s progress, as he is already a year into his job, to see how innovative he is, at making Britain more….innovative.
It will also be interesting to see which countries emulate Britain and appoint their own Ministers of Innovation. China? America? Israel?
*source: Wikipedia, “Secretary of State for Innovation, Universities and Skills”
Prof. Patrick George operates on brains 100 times a year. He also lectures at the Solvay Business School to MBA students.
What does he lecture about?
About his unique innovation, called “passion investing”. George has a company called Passion Investments. Here is how it works.
Each year the Michelin Guide is published listing Europe’s restaurants and grading them according to ‘one star’, ‘two star’, etc. George emails all the one-star restaurants, asking if they are interesting in investing the estimated 500,000 euros it will take to get a second star. Surprisingly about a third say yes! George then seeks a wealthy individual with a passion for food. They put up the cash, in return for a share in the business, plus added perks, like guaranteed bookings, special meals and cooking lessons.
The key to the model is simple. Put your money where your passion is. Combine your investments and your passion. Make money and have fun at the same time.
This is an example of what Gary Hamel calls a business innovation. George has for a decade applied his model, as a ‘virtual company’, with 20 other full-time academics from European universities and business schools, who seek unusual investments for wealthy clientele. George says his network has raised some 100 m. euros for restaurants, artists, films, museums, universities and business schools.
“Passion Investing” is described in the Dow-Jones “Wealth Bulletin”, www.wealth-bulletin.com, which accompanies the European Wall Street Journal.
The latest issue of Business Week has two wonderful stories about how innovators overcome challenges. One is about overcoming difficulties in raising money (external). The second is about overcoming the huge obstacle of a health problem – Asperger’s Disease, a form of autism.
The first story by Spencer Ante tells about Fluidigm just missed a successful IPO (incidentally, there has been only one (1, uno) VC-backed company that did an IPO in the past two quarters in the US !)
Gajus Worthington has seen the effect of the financial meltdown on U.S. startups, and it’s not a pretty picture. The chief executive of Silicon Valley’s Fluidigm set out to take his chipmaker public about a month ago. On Sept. 5, the first day of the company’s road show, Worthington gave a standing-room-only presentation to blue-chip investors interested in buying Fluidigm stock. Three weeks later, after Lehman Brothers filed for bankruptcy and panic seized investors, he pulled the plug on the initial public offering. Worthington realized he couldn’t proceed after money managers he met with in San Francisco told him they didn’t even know how long they’d have jobs. “You could smell the fear,” he says.
Talk about bad timing! Worthington’s road show landed smack in the middle of the 1929-like panic.
Worthington had hoped to raise $80 million in the IPO, to give him a cushion of cash. Fluidigm originally priced the deal at 14 to 16 a share, but the offers from investors quickly dropped to single digits. At one point during the road show, Worthington checked into a hotel room and saw a newspaper lying at his feet. The headline, as he recalls it, read: “Worst Financial Crisis Since the Depression with No End in Sight.”
Worthington is not giving. According to the story, “the CEO laughs about the horrible timing now. Yet despite the risks of running low on cash, he’s determined to outrace the competition. He’s hiring sales and marketing executives to help find new customers in life sciences and other fields. Now, sales are concentrated with a small number of customers, including the Singapore Economic Development Board.”
A huge victim of the current global financial crisis and downturn will be the thousands of companies that brilliant innovators and entrepreneurs dreamed of starting, then abandoned.
Think different. Perhaps this is just the time to start a company (with a bootstrapping financial model), when everyone is rushing for the exits in panic. External constraints can be overcome with the same guts and ingenuity that launched your idea.
The second story, by Susan Berfield, is about an entrepreneur who launched a company even though he has Asperger’s, a form of autism. (Many will recall the amazing novel, The Curious Incident of the Dog in the Night-time, about a young boy who had Asperger’s).
Bram Cohen’s brain works differently from most people’s. He has Asperger’s syndrome, a condition that keeps him rooted in the world of objects and patterns, puzzles and computers, but leaves him floating, disoriented, in the everyday swirl of human interactions. When Cohen was in his late twenties he sat on a wooden chair with a Dell (DELL) keyboard on his lap for the better part of nine months writing a software program. In 2001 he introduced BitTorrent, an ingenious, disruptive, and controversial piece of technology that is available for free and lets people easily exchange huge amounts of digital information, from software upgrades to videos. Pirated movies have always been the most popular files shared. They, along with more legitimate files, now generate about half of all traffic on the Internet.
BitTorrent causes us to ask, wait! If Cohen can launch a successful startup, why not me? Here are some of the challenges he overcame:
For Cohen, this has been a fraught journey into the sometimes bewildering world of the office. The social conventions that ease everyday interactions can still elude him. He doesn’t like to shake hands or wear shoes or make small talk. He often plays with a Rubik’s Cube. Sometimes when he is outraged, or more often when he is fatigued, he bursts forth with unwelcome candor. He can be oblivious, lecturing on solar cells or economic theory or euphemisms until someone stops him.
Cohen’s childhood in Manhattan was one of isolation. He lived comfortably enough with his mother and father and younger brother, Ross, and they shared a vigorous intellectual life. But he had no friends. At 16, he could program in three languages. Yet he could not comprehend the social hierarchies of adolescence. “I was picked on a lot,” he says. “There was something obviously wrong with me. But it wasn’t acknowledged until I was much older that something had always been off-kilter. Were I to have to redo high school, I would just drop out immediately. “He attended the State University of New York at Buffalo for one miserable year and then left.
Charles de Gaulle once said (in a rather bitter put-down of America’s vision to put a man on the moon), “We may well go to the moon, but that is not very far – the greatest distance we have to travel lies within us”.
For entrepreneurs and innovators, this is true. The external environment for launching a company, raising venture capital and launching an IPO are more challenging than they have been since 1929. Yet the biggest challenge, I find, lies within us. Can we overcome the barriers of fear and uncertainty that keep us from even trying? Bram Cohen shows that as always, the burning desire to become an entrepreneur can defeat our innermost fears.
From yesterday’s press:
Professor Amina Wadud is to give the sermon at a centre in Oxford today in what is being called a “leap forward” for equality in Islam. But there are expected to be objections to the sermon at the Oxford Centre in Banbury Road, with opponents understood to be planning protests. The move is controversial as the tradition is that Imams – always men – hold mixed services, with some believing it to be against Islam for a woman to do so. Mokhtar Badri, vice-president of the Muslim Association of Britain is opposed to the sermon. “With all respect to sister Amina, prayer is something we perform in accordance to the teachings of our Lord,” he said.
Much can be learned from the courageous Professor Amina. “Nothing in the Qu-ran bans women leading mosque prayers”, she says. But the weight of tradition is against her. It is a 1,400 – year – old tradition that only men lead prayers in mosques. The power of tradition in Islam is known as ij’ma – do what has always been done. In Jewish halachic law there is an equivalent concept: “Minhag”, custom, can be more powerful than law and becomes law.
Innovation requires many characteristics: creativity, boldness, new thinking. But a sometimes-underestimated element is simply courage. Amina is endangering herself with her bold innovation.
How many great new innovations are never born, because the innovator realizes that he or she will pay a heavy price for even presenting them?
Do you have the courage to innovate? And can we all learn from the courageous Amina Wadud, taking on the entire male establishment of the 1.4 billion Muslims?
I am currently in Washington, DC, attending the annual convention of the Association of the U.S. Army (A-USA) and presenting our newly launched book.*
I was privileged to meet Maj. Gen. (ret.) David T. Zabecki, a military historian who had a distinguished career in Artillery and was part of an American contingent visiting Israel in 2001-3, working on the Road Map. His convoy was targeted by Hamas, but they got the wrong convoy, blowing up a convoy with diplomats instead.
Zabecki now lives in Freiburg, Germany, close to the archives of the German military. He has edited a book, Chiefs of Staff: The Principal Officers Behind History’s Great Commanders (Praeger Security, vol. 1 and 2, 2008).
Zabecki’s book includes brief accounts of the chiefs of staff who ran operations for the great military commanders, like Napoleon and Patton. These brilliant managers have names few have heard of (Gneisenau, Moltke, Berthier, Kuhl). They implemented the bold, innovative plans devised by such leaders as Patton. And they are the reasons these leaders were successful. Their excellence was in planning and in executing – often, areas where the Commanding General was not strong.
I asked Zabecki what the secret of these successful teams – leader, manager – was. He told me that the key to the best teams of Commanding General and his Chief of Staff was complementarity – each had skills that complemented, rather than duplicated, the other.
I believe that this applies equally to the roles of CEO and COO. Strong CEO leaders need excellent COO’s (Chief Operation Officers), who complement them, who are great at planning and at execution, and who implement the ideas, innovations and initiatives of the CEO, in the same way that General Patton needed Maj. Gen. Hugh Gaffey, his chief of staff.
As CEO, avoid the temptation to pick a COO who is like you. This never works; it failed in the military, and fails in business. Pick a COO who is different from you, who fills in your blank spaces. And be cautious in promoting your COO as your successor. According to Zabecki, many great Chiefs of Staff who served under daring Generals never became great military leaders themselves. Apparently, skill in operational excellence is not matched by equal boldness and daring in creativity and innovation.
*Brig. Gen. (ret.) Robert L. Dilworth and Shlomo Maital. Fogs of War and Peace: A Midstream Analysis of World War Three. Praeger Security: 2008.
Fire all the males! They suffer from testosterone poisoning. Hire the women! They don’t.
This is Financial Times writer Tim Harris’ advice for preventing a future financial crisis, like the one we are now suffering. He is the author of a new book The Logic of Life, in which his theory is presented. He was interviewed on America’s National Public Radio on Oct. 6.
Here is the basic idea.
The financial services industry is driven by fund managers, traders, brokers, analysts, investment advisors, who are largely male. They are incentivized by bonus schemes based on outperforming competitors. So the system itself is biased toward taking risk (you do not lose a $10 m. bonus if you take excessive risk; so the incentive payment scheme is really like a huge option, take the upside, forget the downside, especially after the huge ‘bailout’ was put into place).
When the males succeed, in good times, and make millions in bonuses, there is a ‘high’, a surge of the male hormone testosterone. This happens among male animals (gorillas), who succeed in defending their ‘harem’ and their family group, and it happens among human males, who take risks, survive and succeed. The testosterone tends to push these same males toward taking even more risk in future, until those risks become excessive – and ultimately, the risk-takers push themselves and their organizations to the edge…and then over the edge. So crisis is built into the system, as long as the system is run largely by males and as long as the male body generates testosterone.
Women do not suffer from testosterone poisoning.
Why not, then, urges Harris, turn the financial services and banking industry over to the women?
Harris is not speaking tongue-in-cheek. I believe he is at least partly serious. For years I have urged high-tech companies to expand the role of women in senior management, because they bring powerful skills of collaboration and communication. Now, this advice is extended to investment banks.
Bring in the women. What we need is a bit less ‘balls’.
When I bake bread, the key ingredient is the yeast. Without yeast, or when the yeast is old and does not work, there are no bubbles inside the dough and the bread comes out as a hard, inedible lump.
What is the key ingredient when we bake an innovation cake? Creativity? Ideas?
No. TIME! Time to think. Time to reflect. Time to meditate.
Time that most of us simply do not have, and do not allocate.
Here are two examples.
* Isaac Newton was a brilliant student and thinker at Cambridge Univ. During the Plague, all students were sent home to prevent its spread. At his home in the English countryside, Newton had time to reflect. He invented his great laws (including the law of gravity), the law linking mass, gravity and distance, and what Leibniz later called the Calculus, during this time. Would he have achieved such innovation without the time to reflect?
* Deng Xiao Peng was sent home to house arrest during the Cultural Revolution in China. There, he had much time to reflect on why China’s economy was failing. His insights led to China’s turning toward free markets, when he returned to power. Would China be the economic powerhouse it is today, had Deng not had the time to reflect at home?
Innovators – make yourself time and space for reflection. It should be unstructured time, without a specific purpose. You will be amazed at how many ideas flood into your mind – ideas based on questions and problems generated during periods when we are under fierce time pressure, questions that percolate in our subconscious, in our ‘blink’ brains, and for which solutions emerge only if there is time to reflect on them.
A recent segment on BBC’s Business Today reports that Japanese cell companies, e.g. DoCoMo, have failed to make headway in emerging markets, simply because they design and innovate state-of-the-art complex and expensive cell phones for the demanding and lucrative high-end Japanese markets, which insist on the absolute latest in features and technology, and hence fail to compete in emerging markets, where customers seek cheaper, simpler cell phones.
According to Michael Porter’s model of global competitiveness, companies first learn to compete in their domestic markets, then seek markets abroad. But for Japan, at least for cell phones, this has failed. The focus on high-end at home has cost Japanese firms the low-end markets abroad.
This is somewhat surprising. Nissan (which began as Datsun), Toyota, Honda and other automobile and motorcycle companies began with low-end products sold in America, to younger people, who loved them, then moved up the value chain and sold increasingly higher-end products as their markets matured and grew wealthy.
Sometimes, “There’s no place like home” can be a fierce enemy of innovation, when local markets demand products unsuitable for foreign markets.
The solution: Separate company divisions, with independence and agility, whose bottom line comes solely from emerging-markets sales. Ensure that knowledge travels between home and foreign divisions, by doing many horizontal shifts of engineers and managers, but make the emerging-markets division highly customer-centric and focused on foreign markets’ needs.