Tuesday, October 30, 2012

Q3-2012 SoCal MoneyTree Snapshot

An early release of the Q3- 2012 SoCal MoneyTree Snapshot from PricewaterhouseCoopersEmerging Company Services reported a Q3 2012 total of $6.5 B in US VC investments in 890 deals for an average of $7.3 M per deal, nationwide.  

SoCal is third overall behind Silicon Valley and New England. For the 3rd Q 2012, $694.5 M was invested in Southern California in 79 deals or an average of $8.8 per deal.  Southern California represents 10.7% of the total US dollars and 8.9% of the total number of US deals.

Firms in the Los Angeles area received $324.2 M in dollars or 46.7% of the SoCal total.  Biotechnology firms received $146.1 or 21.% of the SoCal total. Software firms received 18 of the SoCal number of deals or 22.8%.

For the first three quarters of the year, SoCal investments are up 17.5% at $2,523.8 M (compared to 2011 first three quarters of $2,147.9).  Nationwide, dollars in the first three quarters 2012 are down 9.5% at $20.0B (vs. $22.1 B for the same period 2011) and deals are down 9.9% at 2,661 (vs. 2,954 for the same period 2011).

Thirty four SoCal venture capital firms invested in 74 deals, while 101 VC firms across the US invested in 146 deals in Southern California. (Note, multiple firms invest in individual deals.)

Almost half of all SoCal investments went to late stage deals (46%), followed by expansion stage (34%), early stage (18%), and seed/startup (2%).

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTreeTM Report based on data from Thomson Reuters


Wednesday, October 24, 2012

NACD Blue Ribbon Commission on Diversity

The National Association of Corporate Directors released its Blue Ribbon Commission Report on Diversity (October 2012), titled: The Diverse Board: Moving From Interest to Action:
As with earlier NACD reports, this document is important because it brings a controversial and sensitive subject into the open, commanding dialog on the topic by all concerned.

Four commission co-chairs demonstrate diversity itself:  Curtis J. Crawford, Ph.D. (XCEO Inc.; DuPont; ON Semiconductor; Xylem Inc.), Hon. Cari M. Dominguez (Former Chair, U.S. Equal Employment Opportunity Commission; ManpowerGroup Inc.; Triple-S Management Corp.; Calvert SAGE Fund), William McCracken (CEO CA Technologies, Inc.) and Kathi Seifert (Eli Lilly and Co.; Lexmark International; Revlon Inc.; Supervalu; Appleton Papers Inc.)  Committee members are representative of most (but not all) significant diversity categories.

In summary, the report offers three core recommendations and eight appendices of supporting materials.  It is not uncommon for NACD’s addenda to be as insightful, if not more so, than the report itself.

The three recommendations are:

      1.    Talk about it!
      2.    Evaluate your options.
      3.    Disclose to shareholders a thorough explanation of the company's director search process and potential value diversity brings to the company.

The NACD report does not dictate how diversity shall be achieved by individual companies.  Boards are encouraged to face up to the challenge, talk about it on the agenda and in internal board evaluations; consider alternative strategies; and disclose to shareholders their processes and conclusions.  This is slightly more emphatic than the SEC’s 2009 rulemaking.  But, because it comes from the NACD corporate peers, it could hold greater sway than the soft-spoken SEC proxy requirements.

Diversity in the boardroom is a subject equally important as independence; yet, we seem to struggle more with the former than the latter.  It may be because we can discuss independence with greater objectivity, less emotion and rancor than is the case with diversity. This may be one reason the report gives some suggestions on what to talk about in the boardroom in the body of the report and in an appendix (Appendix B: Diversity Discussion Guide for Boards and Directors):

- Look at and evaluate the current board and its makeup.
- Look beyond obvious friendships and networks to find talented candidates
- Toughen the evaluations of sitting directors
- Limit tenure entrenchment of directors

The strength of the report comes from the fact that corporate board members themselves are asking their own to talk about the issue.  As other appendices demonstrate, there are dramatically different approaches that companies could be taking to achieve diversity. 

The Intel example documents 20 separate diversity groups inside the company under the purview of a diversity officer.  For some companies, this is not a positive example of collaboration, but rather an example of divisiveness into small silos of special interest.  But, it works for Intel.

The Frontier Communications example is a different case showing how role models at the executive levels inspire those within the organization. This is a “moral case argument” more than an economic one. Again, it works for Frontier.

The GM example shows how diversity is just one more plank on the foundation of quality governance. This is a case of a company making a logical extension to a number of earlier board innovative initiatives.  It works for GM.

These are just a few of the options we could expect to see debated inside boardrooms once they start to hold a dialog on the merits of diversity for each company. Other appendices provide summaries of the familiar research, UK and international recommendations, and the director evaluation and selection criteria of Johnson & Johnson.

The NACD report also is refreshing in that it does not simply echo the same arguments from zealous advocates: it opens the door for reasoned debate on a complete range of issues surrounding diversity in the boardroom.

The introductory letter from the commission members sets a generous agenda:

“…corporations will not be able to build or maintain a successful enterprise that yields sustainable long-term shareholder value, without bringing a greater variety of perspectives into the boardroom.”

“The board has a unique role and responsibility in diversifying its own membership, and, ultimately, the leadership and workforce of the organization.”

The report then proceeds to a discussion about diversity as “a business imperative” not merely a social mandate.  Next, it moves on to the difficulty of defining “diversity” and the SEC’s decision to leave that to companies.  Since the 2009 rule-making, boards have been stuck trying to resolve “identity diversity” vs. “skill-based diversity.” The report suggests we need to get out of this quagmire by finding a more “comprehensive” definition of diversity.

No one definition of diversity exists because boards must first consider their own needs in relation to the company’s specific characteristics – a bank is different from a family business is different from a global business or a technology or oil and energy company or a financial holding company or a mutual fund. Implementing any enterprise effort to improvement the performance of diversity is a challenge requiring strategy and leadership.

Chapter 2 is the section that advocates the trilogy (1) Talk; (2) Evaluate Options; (3) Experiment and implement and tell shareholders about what you’re doing.

Chapter 3 provides the inevitable discussion of “barriers” to diversity.

1.                   Structural factors (“there outta be a law!”).

Noteworthy issues mentioned include:

            - Lack of tenure-limiting mechanisms in boardrooms: maybe term limits are better than no term limits
            - Small boards are hard to diversity: maybe increase board size
            - Boards don’t self-evaluate and get rid of deadwood fast enough: maybe do a better job of board member evaluations
            - Poor leadership development from within companies: maybe we need better training programs to grow executive talent; maybe we need to allow executives to serve on outside boards

2.                   Social factors (“it’s all his fault”).

The social impediment is the toughest nut to crack because “like tends toward like.” We are asking people to change human nature in an external world that is advocating that we “like” each other every day in social media. This is a legitimate topic of board discussion, but some perspective is required. (Permit me to elaborate.)

Homophily (i.e., love of the same) is the tendency of individuals to associate with others who are similar. In their seminal work, Lazarsfeld and Merton[1] described status homophily vs. value homophily. Status homophily refers to individuals with similar social status characteristics, where the association tends to be more by chance than intent. Value homophily, on the other hand, refers to associations among those who think alike, regardless of differences in status.

The presence of homophily was documented in over a hundred network studies reviewed by McPherson, Smith-Lovin and Cook.[2] They observed a wide variety of “status homophily,” including: age, gender, class, organizational role, etc.

Can we solve the “groupthink” part of homophily by attacking the more explicit aspects? Like other efforts to overcome bias and prejudice, better information and understanding might contribute to behavioral change:

- Lack of knowledge about candidates outside one’s own network:
            - Over-boarding of certain “star” board members
- Sitting directors are reluctant to leave a board – loss of prestige, money, networks
- Stereotyping that results from consolidating diversity into one category

3.         Habitual factors (“it’s easier not to do anything”).

Topics worthy of discussion in this category include:

            - Directors seldom talk about diversity as an agenda item.
            - Tendency to seek only CEOs and experienced public company directors for board seats.
            - Lack of diversity on the nominating/governance committee itself.

Chapter 4 challenges all of the boardroom outsiders to participate in finding solutions appropriate to each company: new director candidates, recruiters, and investors all have roles to play. It is rare that we see a challenge directed at new director candidates.  This was at least a beginning, albeit light-weight:

- Network and get educated about governance
- Learn about boardroom dynamics
- Learn to influence without being a leader – before you become a leader

The challenges to recruiters (“Work with the board and expand their horizons”) and investors (“Educate and advocate”) were somewhat weaker.

The concluding message is that enough is enough -- it’s time for boards to act.  It’s not enough to give lip service to the economic benefits of tapping more talent from within our executive ranks; it’s time to develop leadership talent and move it on into the director pipeline. Thankfully, there is no promise of “magic returns” to shareholder if diversity is implemented.  The report recognizes that diversity must reach beyond the simple silos of gender, race, age, religion or country of origin and include the entire spectrum of experience and talent.  It challenges boards to deliberate and disclose; it challenges all players in the field to step up their game. It provides a reasonable collection of research and is more balanced than most. While echoing the historic case that institutional or societal structural limits persist, it gives less emphasis to these points compared to mainstream media commentary; and it argues that boards can and should provide the required leadership.

In the interest of full disclosure, I am a member of the NACD and support their initiatives -- both this report and their diversity panels held in major US cities.  I hope the following additional points might be considered as a re-affirmation of that enthusiasm and my wish that NACD continue to be a part of the solution to this challenge.

With that in mind, and to help keep the report from gathering dust on our corporate shelves, I would like to add the following questions for consideration as possible board agenda discussion items:

1.                   Let us ask ourselves if director databases are having any impact.  NACD’s own director registry, the University of North Carolina Law School Diversity Initiative, and the 3D GMI/CalPERS registry are all examples. The European Women’s business school alumnae candidate lists are a recent addition.  Are companies aware of these (and other) resources or will these segregated lists simply go the way of the California Registry?

2.                   Let us challenge educational institutions to give greater priority to governance preparation for non-sitting director candidates.  Not only are business schools weak in addressing topics such as the global importance of IFRS, but courses in corporate governance issues and resources are sadly missing in action.  How can executives prepare for corporate leadership if they have to learn it on their own? Diversity should be a major component of business education.

3.                   Let us give credit to those few entities which are shining a bright light on the success stories of diversity:

There are governance magazines that not only track the increasing share of women directors named to boards, but also regularly feature articles by and about the professional credentials and contributions to thought of diverse directors. More publications, including NACD’s own newsletter and magazine, could do likewise.

Alice Krause’s weblog, Newsonwomen.com, similarly reports on the credentials and achievements of new women-directors as well as women executives and entrepreneurs.  For seven years, Newsonwomen.com has been a source of, and resource for, names and experience of top quality women in business (among other fields of achievement). Perhaps it is time for an international equivalent (at least the Commonwealth and European Union nations) and perhaps it is time to expand the scope to include other examples of diversity.

Women in the Boardroom has brought top tier experienced women directors to talk to women executives about public company board roles and responsibilities in an effort to debunk the host of myths that have been propagated about women on boards by light-weigh media.  Women in the Boardroom has held panels of experienced women directors in 15 cities nationwide.

To this list I might add my own writing about outstanding women on boards and in leadership, looking at where, when, how, and why women have achieved their ambitions. Perhaps it is time to see more books like those presenting African American, Asian American, Spanish-Speaking American, and other diverse directors who are role models and inspirations to the next generation of leaders.

4.                   Let us also expand the options worthy of debate and consideration in the journey to enhanced diversity of boards:

·         How to change from a narrow silo approach (e.g., the 20 separate groupings cited by Intel) to a broader cross-category approach?
·         What market-based solutions might be available (e.g., the stable allocation algorithm of Shapley/Roth)?
·         How to widen the candidate pipeline through the executive search bottleneck into the boardroom?
·         Other viable opportunities: blind auditions, alternatives that expand shareholder nomination of director candidates, or inter-organizational collaborations (e.g., between the global Institute of Directors and the NACD, for example).

In other words, now that NACD has brought the conversation about diversity fully into the boardroom, perhaps we could best honor this work by taking up the challenge and genuinely talking about its every aspect and potential. And then, let us take the actions appropriate for each company: public, private, large and small.

[1] Lazarsfeld, P., and R. K. Merton. (1954). Friendship as a Social Process: A Substantive and Methodological Analysis. In Freedom and Control in Modern Society , Morroe Berger, Theodore Abel, and Charles H. Page, eds. New York: Van Nostrand, 18-66.
[2] McPherson, M., L. Smith-Lovin, and J. Cook. (2001). Birds of a Feather: Homophily in Social Networks. Annual Review of Sociology . 27:415-44.

Sunday, October 21, 2012

A Stable Allocation System for Board Matching?

The 2012 Novel Prize in Economics went to Alvin E. Roth, the George Gund Professor of Economics and Business Administration at Harvard University (Cambridge, MA) and Harvard Business School (Boston, MA) and to Lloyd S. Shapley, Professor Emeritus of Mathematics and Economics at University of California (Los Angeles, CA).

Shapley is considered perhaps the most important researcher and thinker in the field of cooperative game theory. Roth, through his empirical, experimental and theoretical methods, has enhanced our understanding of how markets work -- and has successfully redesigned a number of important real-world but atypical markets.

The following is a summary drawn from the information provided by the Nobel Prize committee on their award-winning research. (See: http://www.nobelprize.org/nobel_prizes/economics/laureates/2012/press.html)

Traditional economic analyses study markets where prices adjust so that supply equals demand, but not all markets can use prices to allocate resources.

Shapley and Roth’s work on “stable allocations” represents an innovative application of cooperative game theory to find practical solutions to real-world prob­lems such as the assignment of residents to hospitals, students to schools, and human organs for transplant to recipients.

The market questions they address are these: How do you match different agents as efficiently as possible in a stable market relationship without a pricing mechanism? What methods are beneficial to what groups? How do you ensure that a match is “stable” – such that the end result is that the two participating agents prefer their current choices over alternatives.

Using “pairwise matching,” individuals can be paired up even though all participants have different views as to who would be the best match. The solution is described as the Gale-Shapley “deferred acceptance” algorithm -- a set of simple rules that always produce a stable matching.

The Gale-Shapley algorithm assumes rational people know their best interests and act on those best interests by engaging in unrestricted mutual trades until a stable match is achieved.  The algorithm ensures a stable match, limits agents' motives for manipulation (such as through side-payments), and demonstrates how the specific design of a method systematically may benefit one or the other side of the market.

Two-Way Match-Making:

How should ten women and ten men be matched, while respecting their indi­vidual preferences? Design a simple mechanism to produce a stable matching, such that no couple would break up to form new matches which would make them better off.

There are two possible starting points: either men could propose to women or women could propose to men. The stable market is achieved through the following steps:

  • First, each woman proposes to the man she likes best.
  • Each man then looks at the different proposals he has received (if any).
  • Each man retains what he regards as the most attractive proposal (but defers from accepting it) and rejects all others.
  • The women who were rejected in the first round then propose to their second-best choice
  • The men again keep their best offer and reject the rest.
  • This continues until no woman wants to make any further proposal.
  • As each of the men accepts the proposal he holds, the process comes to an end. 
Gale and Shapley proved mathematically that this algorithm always leads to a stable matching.

The starting point matters: whether women propose first or men propose first. If the women propose, the outcome is better for them than if the men propose. Some women end up with men they like better. But no woman is worse off than if the men had been given the right to propose first. The resulting match is better for the women than any other stable matching.

Conversely, the reverse algorithm – where the men propose – leads to the worst outcome from the women’s perspective.

Roth showed how misrepresentation of one’s true preferences might be in the interest of the receiving side.

Resident-Hospital Matching

The second example included a clearinghouse, the National Resident Matching Program – in a stable market system to allocate resident interns across hospitals in the US.  Over 20,000 residents are matched successfully each year.

Student-School Matching

A similar market system in Boston and New York schools handle about 30,000 student applicants a year.

Potential Application to Board Candidate Matching:

It might be interesting to ask Roth/Shapley to consider if their stable allocation algorithm might be applied effectively to the director candidate-board matching marketplace. The numbers handled annually by both the resident-hospital and student-school systems are significantly larger than would be required annually to match new director candidates to boards seeking diverse, fresh director talent.

A clearinghouse system such as the resident-hospital market might be appropriate to establish minimum qualifications and competencies for candidates. This type of system would encourage greater use of internal, annual board evaluations since every board annually would have the opportunity to tap the best available director talent in the open marketplace if they assessed their internal needs effectively and found some directors wanting.  This would also strengthen the role of the Nominating/Governance Committee by giving it a significantly larger marketplace from which to select director talent. The system also would increase candidates’ demand for director/governance training prior to actually sitting on a board to ensure their competencies were attractive to corporate board bidders.

We would expect that diversity candidates would have a greater chance of being selected on the merits of their competencies because the bidding structure presents a more even playing field for all candidates.

This market allocation model certainly has greater potentials than the current practice of “diversity databases” which require new director candidates to self-declare themselves without any promise of the corporate director marketplace ever tapping into that resource.  It has to be better than the current practices of friends-of-the-CEO nominations, the slow turnover of directors deemed no longer effective, the over-boarding of a few star diversity directors, and the other frustrations of under-developed potential executive leadership within our corporations. Any by every economic measure known, it has to be considered better than quotas.

Even if this is not the perfect solution, at least it might be the beginning of a true dialog about real-world market approaches to the director-board matching challenge.  Other alternatives, such as blind auditions, term limits, or publicly disclosed director evaluations, might actually become part of the dialog we so desperately need to enhance overall director selection and performance.

Thursday, October 4, 2012

Credit Suisse on Rationalizing Performance and Diversity

Credit Suisse Research Institute, in August 2012, produced a new study entitled, Gender Diversity and Corporate Performance. The study can be read in its entirety, here: http://tinyurl.com/cfjh9fq, while the Credit Suisse commentary can be read here: http://tinyurl.com/d2lxlow.

The study concluded that boards with greater diversity are correlated with improved company performance as measured by selected stock market and financial indicators.  The research covered 2,360 companies globally from 2005 onward. Forty-one percent (41%) of MSCI ACWI stocks had any women on their boards at the end of 2005. This had increased to 59% by the end of 2011.

One interesting finding was the following:

“In the middle of the decade, when economic growth was relatively robust, there was little difference in share price performance between companies with or without women on the board. Almost all of the outperformance in our backtest was delivered post-2008, since the macro environment deteriorated and volatility increased.”

“We can therefore conclude that relative share price outperformance of companies with women on the board looks unlikely to be entirely consistent, but the evidence suggests that more balance on the board brings less volatility and more balance through the cycle.” [Emphasis added.]

Inconsistencies across studies are just as likely to reflect the surrounding economic circumstances as they are to reflect the increased presence of women on boards.

The report does a credible job of summarizing the literature offered by different parties in this field.  Credit Suisse’s report is worth reading to get an overview of the variety of conclusions available.  Champion Boards also summarized some of the studies back in January 2012. See: Women and Profits Predictive Power - http://tinyurl.com/8cmx77d

The predictive power of adding one or more women to a corporate board seat wasn’t clear to me, then; nor is it clear to Credit Suisse, today.  As we said in our Champion Boards summary:

“Correlation does not equal causation. A link does not mean predictability. Data can measure things that just happen to go bump in the night.”  

Credit Suisse presents its own version of “things that just happen to go bump in the night” in the section titled, “Rationalizing the link between performance and gender diversity” (pp. 17-19).  They present a total of seven key reasons that could possibly explain the correlation and/or the direction of causes or contributing factors.  These seven possible key reasons are:

1. A signal of a better company
2. Greater effort across the board
3. A better mix of leadership skills
4. Access to a wider pool of talent
5. A better reflection of the consumer decision-maker
6. Improved corporate governance
7. Risk aversion

Each of these might be the underlying “cause” of improved performance and/or may have “caused” better performing companies to tap women director talent. The increase in women directors could just as easily have been a result of other performance or governance improvements.

Medical professionals encounter correlation between factors and outcomes all the time.  The challenge they face is the same one governance professionals and women director advocates encounter. Can we prove direct, reproducible, and confidence-measurable cause-to-effect relationships that demonstrate sustained predictability over time and under a variety of circumstances? It is important to know what causes what because you want to know, with confidence, what will happen if you take action one way or another. 

An interesting example of this is the Norway quotas.  Advocates “assume” only good news resulted from the imposition of quotas, but we do know there were side effects that were not predicted. Credit Suisse cites just a few of these adverse consequences:

"The Scandinavian markets have delivered significantly higher female board representation but other research suggests that forcing the issue via quotas has been to the detriment of morale, the working environment and potentially profitability."

Even more interesting were all of the “breathless” articles in magazines and newspapers about “this compelling research” by Credit Suisse  In articles and interviews with the lead researcher, Mary Curtis, it appeared as if the writers asked and answered their own questions rather than read the mixed messages Ms. Curtis provided (many of which are repeated here). Those who did not like the conclusions ignored the research. Those who did not read the research wrote what they chose to write.

The reader is encouraged to go to the source and reach her or his own conclusion.  But, at least read the research, please!

Southern California Women Directors in 2012

When I first started studying women-on-board trends in 2004, there was not a lot of good news, especially for Southern California firms.  In 2004, Southern California Fortune 500 firms averaged 13.4% of their board seats held by women directors, while Fortune 501-1000 firms averaged 9.1%.  Overall, only 11.7% of the directors at 104 Southern California F1000 firms were women.

In 2012, there were 7 fewer Fortune 1000 firms in Southern California: a whopping 24 firms left the region either because they relocated to another state, they were merged or acquired, or they fell off the list due to reduced revenues.  Another 17 were added to the region’s F1000 firm count. As of 2012, 20.9% of the directors at F500 firms in the Southern California area are women – a resounding increase. And 12.2% of the directors at F501-1000 firms in the region are women.  Overall, 15.7% of the directors at 97 Southern California F1000 firms are women today.

If we look at the year in which the current women directors were added to their boards in Southern California, it’s clear what progress looks like. The share of women directors added since the year 2000 is a significant 77.4% vs. 22.6% from the earliest nomination (1977) to 2000.  Almost 8 out of every 10 women added to corporate board seats in Southern California were added in the past decade alone.

In case we have forgotten, the worst recession since The Great Depression hit from 2007 through 2009.  Had we not experienced that financial melt-down, destroying companies, banks, and executive level positions, we might have expected an even greater improvement in the shares of women and other diversity candidates nationwide, but specifically in Southern California.

The record years for women added to Southern California board seats were 2006 with 10 and 2008 with 8 new women director appointments.

In 2006, Newsonwomen.com reported a total of 270 new women director appointments at public and private firms in the US, of which 45 were at companies based in California.  In 2008, there were 255 total new women director announcements at public and private firms in the US, of which 46 were at companies based in California.

As of the end of September 2012, Southern California public and private companies added 21 new women directors out of the total of 60 for the state as a whole and 286 at the national level.

If we hope to continue this positive trend, we need to help existing companies grow in the post-recession economy.  We also need to generate a host of new successful entrepreneurial firms capable of reaching multi-million dollars in revenues. And, we need to ensure that women executives interested in corporate board roles, like their predecessors who cut the first paths into the boardroom, are prepared to deal with the challenges they have faced during this most difficult recent decade.

Wednesday, October 3, 2012

This Time Is Different

I had gathered data on the 19th through 21st century financial panics when I came upon a book entitled, This Time Is Different: Eight Centuries of Financial Folly, by Carmen M. Reinhart and Kenneth S. Rogoff (Princeton University Press: 2009).  She (Reinhart) is Economics Professor at the Univesity of Maryland, while he (Rogoff) is Economics Professor at Harvard University). 

The bottom line message is this:

“… excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom…. Most of these booms end badly.”

The authors/researchers build an impressive body of data because – as they accurately point out – “a researcher stands only a one-in-four chance of observing a ‘hundred year flood’ [by examining only] twenty-five years’ of data.”

We had more than enough data on hand to predict the sub-prime meltdown or, as they describe it, The Second Great Contraction.  As was the case so many times before, warning signals – “asset price inflation, rising leverage, large and sustained current account deficits, and a slowing trajectory of economic growth” – were all there, front and center, before our very eyes as once again we told ourselves: “this-time-is-different.”  And, once again, we ran off the cliff.

During the feverish era of the Dot-Com Bubble, we kept hearing the “the old rules don’t apply to today’s digital economy.”  Then, suddenly, they did.  During the hyperbole of the energy crisis, “the old rules of supply and demand” were supposed to be thrown out the window.  Then, suddenly, they reappeared at the front door.  We all heard our friends and neighbors tell us that housing prices were supposed to increase indefinitely.  Until they didn’t anymore.

One of the main premises behind the “this-time-is-different” syndrome is the “… belief in the invincibility of modern monetary institutions.”  This includes the belief that large-scale financial holding companies could weather cyclical trends through sophisticated arbitrage and hedging techniques.  It also included the ill-placed belief that behemoth central bank strategies could somehow “manage” the upside or downside of price, interest rate, money supply, or inflationary risks. 

With a publication date of 2009, just as the NBER reported a theoretic end of the 2007-2009 recession, we are left with charts showing dramatic upswings in economic indicators approaching Great Depression levels.  Reinhart takes up where this book left off with her follow-on edited work (with Andrew Felton), The First Global Financial Crisis of the 21st Century.

What have we learned?  Simply put, anytime anyone tells us that an era of debt-fueled exuberance will magically be self-sustaining without the inevitable balancing act of a crash and burn, we hope we will have the courage – when we hear the predictable “this-time-is-different” – to slap the speaker back to reality.  Because, it never, ever (in eight centuries of financial folly) IS different.

Monday, October 1, 2012

Jane Pak on Gender and Ethnicity

“Selecting individuals on their merit and capabilities is infinitely more effective in the long term than selection by a singular attribute such as gender or ethnicity.”

That is a quote from an interview with Jane Pak (Fall 2012, CSQ.com with Dr. Mark Goulston). Ms. Pak is head of the National Association of Women Business Owners’ Los Angeles Chapter – one of the largest in the nation. Her words apply to women-owned businesses equally well as to corporate boards of directors.

“In order to innovate, you need to have a diversity of thought, experience, and perspective without which you will not be able to draw out all the possible ideas impacting and influencing multiple merits.”

A review of the Los Angeles market for women-owned businesses demonstrates how much women could benefit from innovation in developing enterprises that are growth-oriented and have a greater propensity to employ workers.

We looked at data from the American Express OPEN study of small and medium-sized firms owned by women owners in 1997, 2002, and 2007.  The table below summarizes the key economic indicators for the Greater Los Angeles Metropolitan Area. 

Los Angeles, CA
Change 1997-2007

Number of firms
Sales ($000)

Even though California has more women owned businesses than any other state (1.063 million), Los Angeles ranks 2nd behind New York.  On average, employment per woman-owned firm in Los Angeles dropped from 1.07 worker per firm in 1997 to 0.93 by 2007.  Average revenue per woman-owned firm in LA went from $172,803 in 1997 to a peak of $210,024 per firm in 2002, and then declined to $196,960 in 2007. 

If we use the percentage change reported for 1997 to 2007 to extrapolate to 2012, we get the following estimates for the current year for Los Angeles:

Los Angeles, CA
Annual change 1997-2007
2012 Est.

Number of firms
Sales ($000)

These forecasts indicate that employment levels would represent only 0.83 workers per women-owned firm, or less than an average of one employee for each company overall.  Revenues per women-owned firm would be roughly what they were in 2007 or $210,277.  These estimates would assume that the recent meltdown did not have a more severe impact on women-owned businesses than economic challenges of the earlier decade – an optimistic assumption at best.

The American Express OPEN study reports that 88% of women-owned firms generated LESS than $100,000 in annual revenues as of 2012 (compared to 75% of all firms).  Only 4% of women-owned firms generated OVER $500,000 in annual revenues (compared to 9% of all firms). The 4% of women-owned firms with $500,000+ in revenues were responsible for earning 78% of all of the revenue generated by all women-owned firms.  This re-affirms the point that there are just a few women who are demonstrating the talent required to build sizable, and therefore investable, firms.

And, continuing a trend of several decades, ONLY 1.8% of all women-owned firms earned a million dollars or more in revenues (vs. 5.3% for all firms). That comes down to ONLY 151,900 women-owned firms, nation-wide, in 2012. 

Jane Pak certainly knows what it takes for women to be successful entrepreneurs. The data about women entrepreneurs continues to show us what women need to do to succeed in business.  It is also true that we cannot simply assume that “any woman” has the competence to either lead a business or qualify for a board role “just because” she’s a woman.  It takes talent, skills, experience, competence, and the same ability to tap the marketplace of ideas and resources as entrepreneurs must do to succeed in the modern economy.


Jane Pak: Using Your Head While Leading With the Heart; Jane Pak talks about the art of fiscal and social balance by Dr. Mark Goulston in CSQ.com 3rd Quarter 2012

American Express OPEN Study: State of Women-Owned Business Report (Final)