What I Learned in Business School

Seriously. 

MBA BS Beef Chart, Cows, Dinner, Steak, Yummy

FedEx’s founding is well known in business school: Fred Smith wrote an undergraduate paper at Yale about the opportunity for a national overnight delivery service and received a C. He started the company, anyway, and it failed miserably before it became successful. In fact, even when it had its IPO, FedEx delivered a negative return to some of its earlier investors. What isn’t widely known is that the company was once in such trouble that its management team decided to take a trip to Vegas and bet its investors’ cash. Fortunately, for FedEx, they won. (A textbook used to contain this anecdote, which Fred Smith often told employees, but FedEx’s PR department seems to have erased it from the public record.) 

Part of the problem with many term sheets is that they encourage failing companies to undertake negative NPV projects with high variance, or the possibility but not the likelihood of large returns. This tendency results from the liquidation preference in most term sheets that require investors to be repaid their investments before management can realize any value from its share of the company. If the company’s value has fallen below the level of those investments, the management team really has nothing to lose (except its investors’ cash). I can’t think of a better example to illustrate this tendency than FedEx’s side business at the roulette table in Vegas.

MBA BS, Case Studies FedEx, Fred Smith, gambling

In today’s New York Times, Andrew Ross Sorkin maintains that A.I.G. should pay out its $165 million in bonuses because its contracts obligate it to do so and because it needs to retain its executives to extract the company from the mess it’s in. Both of those reasons are stupid. First of all, the government has enforced the breaking of several mortgage contracts to stem the tide of foreclosures. Contracts are broken all the time in bankruptcy, and A.I.G., without taxpayer support, would have ended up where? Yes, that’s right: in bankruptcy. Extreme times call for extreme measures, and I think the unprecedented government equity stake in A.I.G. makes rescinding the bonuses possible without setting us down some slippery slope to the point at which all contracts are meaningless. 

As for Sorkin’s point about retaining talent, haven’t these people already done enough damage? And aren’t financial professionals readily available right now? The argument seems less than sound to me. 

But here’s the real case for paying out the bonuses: They’re really not that much. We’re talking about a bonus pool that is like one fifth of one percent of all the money that the government had put into A.I.G. It’s like the value of C.C. Sabathia’s contract. In other words, as symbolic as these bonuses might be, they really don’t make much of a difference. Now, what is a bigger problem and worth fighting over is the fact that A.I.G. is paying out 100% of its obligations to the banks with whom it holds contracts. We’re talking about tens of billions of dollars flowing from taxpayers through the government, through A.I.G., and on to the banks without anyone, as the MBAs say, taking a haircut. Even shaving off one percent here would save far more than the total bonus pool that everyone’s raising a fuss over. Now, haircuts, my friends, are valuable enough to raise hell over.

MBA BS A.I.G., bonuses, economic crisis, hair cuts

One of my professors recently called Barbarians at the Gate (about KKR’s LBO of RJR Nabisco) the best business book ever written. I haven’t read enough good business books to make such a claim, but I did start reading Barbarians recently, and it’s a page-turner. So, at least it has that going. The prose is not great, but it’s good for the poor standards set by other business books. If the number of acronyms in that parenthetical didn’t scare you off, you can download a PDF copy of Barbarians at the Gate because some idiot, who doesn’t understand the concept or law of copyright, uploaded it to a file sharing site.

MBA Finance Barbarians at the Gate, LBO, RJR Nabisco

Some time ago, business schools started making business ethics a required class. It goes by different names at different schools—perhaps, yours calls it Leadership and Responsibility, or Professional Responsibility, or Professional Ethics. Several schools instituted this requirement after the Enron and Worldcom scandals at the beginning of this decade. I’m not going to analyze the effectiveness of these additions, but I would like you, dear reader, to remember the current state of the economy and the MBAs who are partly responsible for getting it there. It’s a bit late for them to start applying the concepts they learned in that ethics class, don’t you think?

Given the results, I would like to suggest that schools replace the ethics requirement with something that might actually help MBAs: a writing requirement. In no academic environment have I ever met people who are worse writers than MBA students. And I’m not talking about the Russian finance wizard who just scored high enough on his TOEFL to get admitted. I’m talking about homegrown, American, English-speaking near-illiterates. How is possible to reach 27, 28, 29 and not know what makes a complete sentence? Or the difference between affect and effect? Or to think that bullet points somehow make an essay? You think that writing in bullet points displays your great skill at bottom-lining issues? No, it displays the fact that you don’t know how to write a single sentence in this language. And your use of the phrase “bottom-line” as a verb—well, you’re going to lose some points for that too. Where the hell did this whole he/she thing come from? Have you ever seen the Wall Street Journal publish a story that contained “he/she”? No, you haven’t. (Have you ever seen this/that in any reputable source? Have you ever seen it in the New York Post? Again, the answer is No.) The Journal is all you read, so I’m really not sure where you’re getting it from. If anyone knows the answer to this, please tell me. The gender wars and political correctness are over, people, and, anyway, we’ve more or less settled on “they” as an acceptable, genderless, single, personal pronoun if you must go that route. So, to you administrators who set curriculums, I give you the following in the format your students understand: 

• Replace corporate ethics requirement with writing requirement
• Ethics classes have failed
• Writing classes produce clear and immediate results
• You like being able to show results
• If it’s good enough for the ethically high-minded medical schools, it should be good enough for you 

MBA BS, Uncategorized Curriculum, Ethics, Medical School, Writing

One of my friends asked me to recommend an external hard drive today, and it reminded me of a case I read about the hard drive manufacturer MiniScribe. It appears in Jim Collins’ book, Managing the Small to Mid-Sized Company, as case 17 about a company called R3. Collins changed the names of the company and the people involved, but his veil is thin.

MiniScribe was founded in the late 1980 and went public a few years later. It grew rapidly and then crashed before being rescued by the San Francisco investment bank Hambrecht & Quist, which installed Q.T. Wiles as the company’s CEO. The company recovered briefly, but Wiles continued setting ambitious goals for earnings growth, which the company met with the help of some accounting fraud. The most outlandish fraud involved hiring overnight workers to prepare packages filled with bricks, which conveniently weighted about the same as MiniScribe’s hard drives. The day workers would arrive and find the new shipments prepared to go out and book the orders. After booking the sales and shipping the orders, MiniScribe would later recall the “hard drives” with serial numbers matching the brick shipments. The practice came to be known as “shipping bricks.” See this Wall Street Journal article for further reading on the scam.

MBA BS, Case Studies, Uncategorized Accounting, Bricks, fraud, Hard Drives, Jim Collins, Shipping Bricks