HBR November issue

The November issue of Harvard Business Review is devoted to "What great companies do differently." My favorite article by far was "How to win investors over", by Baruch Lev. He argues that companies should not stop providing earnings guidance to Wall Street analysts, but instead be smarter about how they communicate information. He points out that: "Would you buy a house if you were denied inspection, termite and ground-pollution reports? Corporate managers who don't share relevant information face a substantial share price discount." A theme that underlies his article is the issue of repeated interactions: people who don't interact truthfully with analysts are eventually found out. 

Lev focuses on three ways in which managers can provide useful information to investors: earnings guidance, pro forma earnings releases and soft information (what he calls "narrative and tone" in conference calls).

Another outstanding article was "The For-Benefit Enterprise" by Heerad Sabeti, who describes how to navigate the world of for-profit vs non-profit by exploring the concept of for-benefit companies, which "operat[e] like a traditional business in many ways, but is founded primarily to provide social benefits rather than to maximize financial returns." Although I wish there had been a more thorough discussion on legislation that will make "for-benefits" legal, overall the article was truly fascinating.

But if you only read one article in this issue, I recommend it be "Social strategies that work" by Mikotaj Jan Piskorski, who is on the faculty at Harvard Business School. In Piskorski's words, "successful social strategies (1) reduce costs or increase customers' willingness to pay (2) by helping people establish or strengthen relationships (3) if they do free work on a company's behalf." Do yourself a favor and re-read the previous sentence, slowly. Piskorski builds a very strong case in his article that this is the "secret sauce" that distinguishes winning social media strategies from failed ones, by describing several real-life initiatives in well-known companies, from Yelp to AmericanExpress. Once potential social media initiatives have been identified, Piskorski provides three tests to help companies determine whether to give the go-ahead - but you'll have to pick up a copy of the HBR issue in newsstands to learn what they are.

I'll end with what puzzled me most in this issue (although the article on cloud-computing warrants a mention too). If you flip to the end of the magazine you will find an interview with world-famous architect Frank Gehry, who - among many other things - designed the MIT Stata Center, in which I spent 2 months immediately after it opened in 2004. (Then I graduated.) Being a visual person, I loved the odd shapes and the bright colors, but I was told back then that the building suffered from a number of engineering flaws, which resulted in water leaks and other problems.

In 2007, MIT sued Frank Gehry because of the leaks in the $300m building, as reported for instance in the Boston Globe. The article starts as follows: "The Massachusetts Institute of Technology has filed a negligence suit against world-renowned architect Frank Gehry, charging that flaws in his design of the $300 million Stata Center in Cambridge, one of the most celebrated works of architecture unveiled in years, caused leaks to spring, masonry to crack, mold to grow, and drainage to back up." In March 2010, it was announced that the lawsuit had been settled. Several websites also mention significant cost overruns; see for instance this article.

So imagine my surprise when I read statements in HBR such as: (about Gehry starting his own firm as a young man) "[Experienced people] didn't want to work with a struggling architect... Buildings leak when you don't have enough construction experience." (It seems they also leak when you do, don't they?)  Also: "Cost control is a big deal for me... And once you've set a real budget, it behooves you to stay there." I wonder what MIT would want to reply to that. My favorite quote: "When I reached my sixties, I separated my fee from the office fee so the office would grow up with a culture of working within a normal fee range." His associates must be glad.

I love the Stata Center, but I was puzzled by how much the facts pertaining to the Stata Center appear to contradict Gehry's statements to the HBR journalist. Maybe he has changed since 2004 when the building opened - and a whole lot at that. On the other hand, the Stata Center, flawed and all, truly is magnificent.

Comments

[Flinchbaugh]

I disagree with him, amd his analogy. You wouldn't buy a home without those things because they are all current, factual assessments of the situation, not predictions of who your future neighbors will be or what future value will be. When companies predict earnings, they get punished for not having a perfect crystal ball, and go through tremendous amounts of waste as a result. Even if you exceed, you are often going to get punished and companies have spent a lot of money they didn't need to as a result.

Investors punish you for lack of guidance once. Then they adjust because they know this is a company that just won't do it. The net punishment is much greater for those companies providing guidance.

But yes, if they are going to do it at all, improve the quality of that guidance.

[Aurelie Thiele]

I liked his point about repeated interactions between analysts and companies. I think repeated interactions between agents is an important feature, which is often overlooked in operations research models.