FEI Competition

Apparently, our final round presentation for the Financial Executives International Case Competition is now available online. Unfortunately, I can't embed it into the blog, but I can include the link below:

http://www.feicanada.org/cfo-tv.php?vid=22&page=2

Enjoy!

[Rotman] 5 Great Speakers at Rotman

[Rotman Series: 1, 2, 3, 4, 5]

Jaime is a part-time student in the MBA program at Rotman. He has worked in the sports media industry since 2002 and is currently Manager, Digital Media for the Canadian Football League. He and I went to the Latin America study tour in May last year. He was gracious enough to do a write up for me on his favourite guest speakers which follows:

By Jaime Stein

One of the first things you notice when you obtain an e-mail account at the Rotman School of Management is the sheer volume of e-mails from a guy named Steve. At first it can be overwhelming, but if utilized wisely, it can be your ticket to an exclusive roster of speakers. Steve and his team are the masterminds behind the A-list speakers that regularly visit the Rotman School.

The hardest choice I have to make each week is which speakers I will NOT listen to. This is a good problem to have because choice is always welcome when working full time and attending school part time. I simply don’t have the time to listen to every speaker that passes through Rotman. However, in almost three years, I have been privileged to listen to close to 100 guest speakers.

Most of the speakers that I have seen have delivered outstanding talks, but for the purpose of this blog I present five of the best speakers I have listened to during my time at the Rotman School:

1. Paul Martin – Former Prime Minister of Canada

Imagine you are in your second semester of a three-year MBA degree and you are studying Macroeconomics. A large focus of the course stems around Canada’s macroeconomic policies during the 1980s and 1990s; specifically the country’s battle with debt and inflation. One day you find out that the man behind the plan to battle inflation will be speaking at your school. That would be like a young basketball player having the opportunity to shoot hoops with Michael Jordan and ask him for tips.

Fortunately for our macro class, Mr. Martin came to speak at the Rotman School one morning and for about an hour took us through his plan that brought Canada back from the brink in the mid-‘90s. Following his talk he took time to speak to each of us and share some more personal insights and war stories from his time as both Finance Minister and Prime Minister. This was one of the great days at school that left me wanting to explore a subject further.

2. Isadore Sharp – Founder, Chairman and CEO of Four Seasons Hotels and Resorts

One of the main selling points of the Rotman School is its focus on Integrative Thinking – the theory coined by the current Dean, Roger Martin. In one of his books on Integrative Thinking (The Opposable Mind), Martin focuses on the story of Isadore Sharp and his path to building the greatest luxury brand of hotels in the world. In many of our classes we study the Four Seasons Model for customer service and other best-in-class management techniques. We were fortunate to have Mr. Sharp visit the Rotman School and explain firsthand how he went from one Four Seasons hotel in 1961 in Toronto to operating a chain of approximately 100 properties worldwide.

For anyone with an ounce of entrepreneurial spirit this was a motivating discussion. You could see the passion, courage and drive that Mr. Sharp possessed to launch his vision and stay true to it along the way. Any successful company will create a competitive advantage – however, these are eventually replicated by the competition over time. When people are your competitive advantage, it becomes truly sustainable as Mr. Sharp has proven. While other hotels provide outstanding service, none of been able to match the formula created by the Four Seasons.

3. Rahaf Harfoush – Digital Strategist and Author

It was November 27, 2008 when Ms. Harfoush spoke (for the first time, I believe) at the Rotman School. There was lots of hype surrounding her talk that day because Barak Obama had recently been elected President of the United States and Ms. Harfoush was a part of his wildly successful digital media campaign. I also remember this talk vividly, because it was one day later on November 28, 2008 that I joined Twitter. A lot in my personal and professional life has changed since that defining moment – all for the better.

The topic of conversation at Rotman that day was, “Applying Barack Obama’s Social Media Strategy to Your Brand’s Communications Needs” and it was Ms. Harfoush’s talk that became the inspiration for a lot of what we have done at the Canadian Football League over the past two seasons in the social media realm. To me, this is what an MBA program is about – an exchange of ideas to help stoke peoples’ imagination and potential. I’m glad I made time to attend her talk that day.

4. Michael Lee-Chin – Founder and Chairman of Portland Holdings Inc.

In October, 2009 I attended the Rotman School MBA Leadership Conference in downtown Toronto. It was a star-studded event with speakers like George Butterfield, Co-President of Butterfield & Robinson, Beth Comstock the CMO for GE, Don Morrison, COO of Research in Motion, Robert Deluce the CEO of Porter Airlines and Michael Lee-Chin, the Founder and Chairman of Portland Holdings.

Mr. Lee-Chin is one of the most engaging speakers I have had the pleasure to listen to in person. Mr. Lee-Chin spoke for about an hour on a variety of subjects including how to create wealth. He focused on a small number of blue chip businesses with long-term growth potential. But he was adamant that you know and understand where you are investing your money. One quote from Mr. Lee-Chin that sticks with me is, “If you don’t understand what you own, are you investing or speculating?” This is important advice that too many people continue to ignore this day and age.

5. Jay Hennick – Founder and CEO of FirstService

Mr. Hennick spoke to our class recently at the Rotman School. He runs FirstService, a company that provides services in commercial real estate, residential property management and property services and generates about US $2 billion in annualized revenue. Mr. Hennick told us his amazing story of how he achieved his current standing atop a multi-national company. He got his start with a company he ran as a tenth grader that brought in an income of $200,000. Yes, you read that correctly – he was in grade 10.

His key message was focused on people management; what he believed was the differentiating factor for the success of his current company. His “Partnership Philosophy” states that impact players must have more than a salary and bonus invested in the business; they must have an equity stake. His company focuses on aligning employees’ interest with shareholders in building long-term value. This was both fascinating and eye opening for most students who believe this is hard to do in a company of 18,000+. Yet FirstService continues to succeed. Listening to Mr. Hennick and his passion for success was rewarding.

As you can see, there are some overarching themes from these speakers such as focusing on people and establishing long-term strategies. But ultimately, each of these speakers is among the leaders in their field and that is why I feel fortunate to have spent the past three years at the Rotman School. The access to these great minds alone was worth the price of admission – well almost!

Financial Executives International – 5th Best in Class Competition

On Saturday, a Rotman team composed of myself, Shree, Fei and Matt Literovich competed in the Financial Executives International 5th annual Best in Class Competition. The case company was HudBay Minerals. Unfortunately, we placed second, behind Alberta School of Business.

The competition was intense, as many of the teams worked late into the night on Friday to put together our decks and get a few rehearsals in before scrambling to get a few hours of shut eye. The next morning, our names were drawn for presentation order and we found ourselves in the seventh spot.

Matt Literovich was phenomenal understanding potential legal issues related to mining and commanded the attention of the room when he spoke of precedent case law.

Fei gave a detailed account of all the organizational issues we could expect as HudBay Minerals grew and followed our acquisition strategy.

And Shree’s knowledge of mining and dissection of potential target companies gave us an exceptionally high level of credibility.

All three were exceptionally strong in both the presentation and the question and answer period and this short description does not do justice to the quality of our presentation.

While we were very disappointed that we didn’t take the top spot, the event itself was challenging and very entertaining. Judges from the competition included top executives from HudBay Minerals, USGold, OTPP, Mercator, a justice and many other top professionals. Definitely a great experience, I would recommend any MBA student to attend this competition.

Back in the Mix

Today marked my first official day back at school with my Corporate Finance class. I've essentially sorted out what project groups I'll be working on this term and have the opportunity to work with people I haven't worked with before (all with reputations for being smart and hardworking). It also occurs to me that there is also a notable bias towards JD/MBA teammates.

The school is abuzz with info sessions and recruiting events every day it seems as my classmates are constantly appearing in business formal wear and putting their best foot forward for potential employeers. People are taking the opportunity to really investigate what career they want to build and what direction they want to take.

There are also first year students who are now in the same place we were last year and some of my classmates have admitted that it is a bit "different" to suddenly be the senior students giving advice on the MBA program to a group of bright motivated students.

Nextel Institute

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

The Nextel Institute is a NGO which provides additional training for at risk and vulnerable youth aged 16 to 24. They are funded by Nextel and work in partnerships with companies like Agencia Click.

They have had explosive growth, placing 70% of their 124 participants in 2008 and 60% of 390 in 2009, more than doubling their success rate.

This tremendous growth has caused this foundation to look at developing new locations and partnering with additional companies to absorb the additional youth looking for employment.

More than Mechanics

Many people are still job hunting (with some positive results being announced recently) and I've been collecting their experiences with the recruitment process.

One thing that is common with the successful candidates seems to be that they all have some form of edge and advantage to distinguish themselves from others. While it might be ironic to try to find a common thread which runs between a group in which individuals try to distinguish themselves, I think one of the common themes is the idea that there is more to finance than mechanics.

I can also appreciate that it is VERY easy to focus on the science, mechanics, valuation techniques etc. After all, that is the focus of this blog (generally speaking). However, as some of my colleagues in industry have mentioned: "Understanding the mechanics is table stakes. You can't play the game if you don't know the rules. But you can't succeed if you don't know how to build relationships."

So while having the technical skill is sufficient to do the job at a junior level, if you can't build relationships (leading to driving deals) you can't become a senior manager in finance (or anything really). And if you don't at least exhibit the potential to become a senior manager, you probably won't be given the opportunity to be a junior (after all, what's the point of hiring someone who doesn't have potential to excel?). Even the best Equity Research Analysts (considered one of the most quant jobs) are great at selling ideas. After all, who cares if you're analysis is perfect if you can't convince someone to look at it?

Having said that, a question asked by JD is a common question by people looking to enter the industry. How does my background fit when transitioning to a job (particularly finance)? In JD's case, with a background in sales in marketing (and any job in general) I'd focus on your ability to sell an idea. Don't worry about demonstrating your technical prowless.

While you need to strike a balance beween showing interest and going overboard, you can't expect to be able to answer EVERY technical question that comes up. As keen and diligent as you are, the person interviewing you has already passed the vigorous recruitment filtering process and is now doing this as their livelihood and is guaranteed 100% to know this more than you and drill you until you get to a place where you simply don't have the answer. It's more important to show interest, that you've taken the steps to learn as much as is reasonably possible and that you have the potential to excel.

Getting a Job in Asset Management

Previously, I was asked to write a post about getting a job in the Asset Management industry. While I myself am not that well versed on the buy side, I interviewed and got advice from other people who know more than I and were successful in getting interviews / offers. This is of course, beyond what is expected in any capital markets job, and this is what they had to say:

Application Materials

As always, you have to get your initial application materials in order with the hope of getting that first round interview. At the application stage, asset management companies have been known to ask for typical materials such as resume, cover letter and transcript as well as:

• Writing samples
• Sample stock pitches

Networking

As always networking is an important part of getting that first interview. Before you start networking, you should already be very polished, particularly on the topics of:

• Their fund strategy and your style / fit
• Know their holdings and weightings
• Diversification - know the focus of the fund

To get this information:

• Hedge funds tend to be proprietary and it will be more challenging to get info
• Mutual funds holdings are generally public

Either way, go go onto Capital IQ / Bloomberg and find out as much as possible. Read manager's letter about their performance and strategy. Know their best performing success stories as well as their dog holdings. Know where their exposures are and what strategies they are using.

If you impress them at the outset with a networking or informational interview, that improves your chances of getting that first round interview.

Interview

For the interview, they will probably ask you a few fit questions. I've been told buyside will not ask you too much technical stuff on valuation (i.e. walk me through a DCF) because these are expected. If your resume doesn't show some experience in capital markets, I'm told you have a much lower chance of being interviewed.

Have a view of the market and ensure congruency in your view. A great piece of advice was to really understand the "off balance sheet items". The reasoning for this is because these are the items that are more difficult to value and provide you a potential differentiation advantage. If you are able to better interpret this information, this is your potential competitive advantage in the market.

Also, the "stock pitch" component of this interview is generally more intense than in other finance jobs. I've heard it described as the interview was just "10 stock pitches". Having said that, while most finance interviews usually require 2 longs and a short, it's been suggested that you have a mix of 10 long and short positions, with a mix of long and short companies and industries. Also, you have to make sure that there is congruency in your view as well as your story.

For instance, one example from an interview was: "I see that you've recommended this stock because you think the industry is strong. If that is true, why not buy an ETF of that industry rather than cherry pick stocks? What if the one or two companies you buy in that industry turn out to be dogs?"

Asset management is much more than just "buying and selling stocks" as any portfolio manager will tell you. There are many aspects that portfolio managers are responsible for in funds including:

• Risk Management and protection or hedging strategies
• Investment style
• Investment objectives and goals
• Liquidity requirements

It is important to comprehensively understand and prepare as much as possible so that you can maximize your chances of getting a successful result in your interviews.

Advice for Getting the Job in Finance

Rotman students are still in the heat of trying to find a summer job and have been asking around for advice for what to do. Specifically, there were a lot of questions about how to get into finance, so I thought I would pass along advice that I've gotten from colleagues and friends.


Before you even start looking for jobs (when you first start school: undergrad or MBA etc):

1. Clubs and competitions. Join clubs relevant to your interests and gain any relevant experience you can get and to apply theory and academic skills in class in a practical environment.


2. Networking. This is especially important for career switchers, as it helps give us insight into how to design our recruitment materials and to understand if this job we are looking at is really what we want. It also doesn't hurt to show genuine interest and make an effort to learn more about different career paths.


3. CSC. It's easy and a good primer if you have no finance background. The Canadian Securities Course is also a required designation for anyone hoping to sell securities in Canada.


4. CFA. If you can afford the time (possibly before you start the MBA) doing the Chartered Financial Analyst (even just the level I) designation gives you a tremendous financial foundation for taking classes and working in the industry. Toronto is also notorious for being the "CFA Capital of the world", having the highest per capita CFA population of any city in the world. This goes doubly for people applying for buy-side jobs (Mutual funds, Hedge funds, Equity Research, PE etc).

The first is to understand the recruitment process for jobs:

1. Application Materials (Cover Letter / Resume) - Have someone look them over, preferably someone in the industry who can A. Give you relevant advice and B. Can pass it on to people they know are recruiting if they like what they see.


2. Interviews - READ THE VAULT GUIDE. It won't get you a job, but if you don't read it, it will help you lose it. It has all the fundamental background for jobs in finance so you have an idea of what you are getting into. Also, do extensive mock interviews to feel comfortable with the technical as well as behavioural questions. Be ready to talk about the markets, pitch a stock and otherwise show that you are genuinely interested in finance.

I'm looking to get more advice from people who know more than myself so I can do a specific post for people, such as MM, who are currently looking at getting into Asset Management.

Past Behaviour Predicting Future Performance

Often we've heard the phrase "Past behaviour is [not] a good predictor of future performance".

The above sentence includes the word [not] in finance, but excludes the word [not] when dealing with people (I think most psychologists would suggest). In short, history predicts people, but not companies or markets.

It kind of bothers me when I see maxims which are essentially identical in one case (individuals), but don't apply en mass (for groups). However, it reminds me of an interesting result I noticed relating to random motion.

If you have a dot in space, and you define it's movement as being "random", over time, the dot will essentially remain in the same spot (the expected value of random movement for one dot is zero change over time).

However, if you have multiple dots on a page, each who's movement is individually defined as "random", over time, you will actually experience diffusion. This is a bit counter intuitive as you would expect that since each individual's dot is random and because of the above result (where individual dots with random movement are expected not to stray to far from their original position) that individual dots won't move. If I'm not mistaken, the diffusion should actually take a normal distribution.

Role Playing in Leadership

Yesterday, we were in our leadership discussing a case about an aggressive investment banker, "Rob Parson", who was being abbrasive but accomplishing the job by increasing the firms revenue and market share. However, the issue was his attitude and fit into the culture of his firm, Morgan Stanley.

Our professor asked two of us to role play, one to be the manager and one to be the banker. She asked the class: "Who can channel Rob Parson?" and there was a humming of my name in the class. A friend sitting next to me kept poking me to raise my hand up so I finally did. The professor looked over to me and asked me if I wanted to play the role of Rob, the investment banker, as long as I didn't use "inappropriate language" (even though that is what happened in the actual case).

My classmate, Sid, played the role of the manager and was sitting a few seats to my left. The chalk board was covered with notes from our discussion and we immediately began to draw down arguements in defending our positions:

"You don't fit into our culture, we want you to be more like us to work better with us."
"If you want me to be more like you, then you want a market share of 2%!"
"You don't treat people well and they don't want to work with you! I can't promote you!"
"The industry has expectations and we need to move faster! You need to decide if you want an investment banking division!"

By the end, our discussion got really heated and we lost ourselves in the moment as we really had at each other. The teacher halted the conversation and took over to show us what actually happened in the case: Rob walked out of the room.

Our classmates were generous with their applause, but it was an intense exercise. Sid and I shook hands over a great debating challenge where tempers rose and it was a lot of fun.

Capital Markets Technical Prep

"They" have always said that preparing for recruitment is like taking another class. That was certainly the case this morning as the CCC prepared a morning session entitled: "Capital Markets Technical Overview". The session was fully booked and Heather-Anne Irwin was teaching us about how to ramp up our learning for capital markets beyond what we were taught in our classes.

She gave us the opportunity to try to discuss complex finance terms in layman's terms appropriate for a technical interview scenario as well as a quick review of key financial indicators and what the implications were for movement in either direction. It was certainly a good primer for us to go about doing our own homework to learn more and form our own opinions of what's happening in the market.

While we are not officially graded on this course, perhaps our "grade" is the most important grade of all, the stamp of approval in the form of a summer job offer.

CEO Compensation - Using Complex Derivatives

In our FIT class, our group presentation project was to look at CEO compensation (with deliberately vague instructions to give the teams flexibility to take the initiative on how to approach the topic: allowing us to think about our thinking). Our group was one of the teams that presented today (and we got generous feedback from our peers), however, it's another group's presentation I wanted to discuss in more detail.

Nick Kerhoulas' team, composed of Amanda, Nik, Mark and Nick K, mentioned in their presentation the unique idea of compensating a CEO with stock options against a benchmark. I thought this was a brilliant (yet generally overlooked) idea and I wanted to explore it further.

First, you will probably notice a trend (and skeptics and critics in the market have always highlighted this) that when a company has done well, it is touted as because of good management (alpha). However, when the company is doing poorly, it is pitched as being because the market (beta) is in recession.

In using Kerhoulas' idea which he presented in class, I think it would be interesting to see if CEO compensation could be restructured to include more complex derivatives rather than just stock options. Although stock options are a form of derivatives, deriving their value based on the underlying stock (in this case the firm's equity), I think Kerhoulas' idea can be adopted with more complex derivatives. My proposal is to use a sort of net neutral strategy similar to the market leader growth strategy I mentioned at the end of this previous post. The assumption here is that you believe your company should outperform competitors.

How would this work? Well rather than compensate your CEO with either pure equity or call options to buy the equity at a given exercise price, the CEO should be compensated with a mix of these options as well as a short position against an industry index. What does this mean?

The short position against the industry index means that if the industry as a whole succeeds because the market rises (beta), the compensation of the CEO goes down (the firm is succeeding because of the industry). However, if the CEO's decision making allows his/her firm to outperform the industry, then (s)he will be compensated based on the performance in excess of what the market is providing (alpha).

Similarly, if a market is in recession (beta), the short position gains value as the market declines, but if the CEO can manage the company to outperform (or 'do less bad' than the market as a whole), (s)he gets compensation accordingly (based on alpha).

How about poorly performing CEOs? If management ability (alpha) ever underperforms the market (beta), the CEO's compensation will always be negative. Now rather than qualitatively make statements against the causes of your firm's performance, you can use the market index as a benchmark to have a context in which to describe management (CEO) performance as suggested by Nick.

I think another interesting result is what happens if this compensation structure is adopted in a system (say, the industry at large) versus in isolation (at one company). I intuitively believe that the game theory grid that would represent this scenario describing a system would resemble the prisoner's dilemma, in that as CEO's are incented to "outperform" the market becomes more competitive and the market index rises (which reduces overall compensation within the system due to all the short positions) because each of its individual components rise. It could even potentially be framed as a zero-sum game (as shown below) if the CEOs are forced to trade stocks with each other to create the required short positions in the market index.

This actually even acts as a natural cap for CEO compensation, but still motivates CEO's to fight over the same pool of compensation. The maximum compensation available will be determined by the increase in the short position of the market (how the market moves as a whole), but CEO's can essentially earn more compensation against their competitors.

Example:
Assume 3 CEO's managing equal companies. Each company's stock is valued at $100.
Market index is composed of one of each stock and the compensation derivative is described as:

• Long three shares of the company's stock
• Short one unit of the market index

Assuming that companies 2 and 3 have stable performance (no change in stock price), but company 1's performs and stock price goes up by $10.

Total compensation would be:

• Long three shares: Increase in value $30
• Short Market: Decrease in value $10
• Total compensation change:+ $20

Now try a new (industry wide / systems based) scenario:

Firm 1's stock: +$50

Firm 2's stock: +$20

Firm 3's stock: -$10

Market index: +$60

CEO 1's compensation: 3*(+$50) - (+$60) = +$90

CEO 2's compensation: 3*(+$20) - (+$60) = $0

CEO 3's compensation: 3*(-$10) - (+$60) = -$30

Note that the sum of the CEO's compensation is $60 (CEO compensation 1 + 2 + 3 which is the Market index). This is because the market index compensates 3 CEO's with 3 shares of each company, and the CEO's each hold three shares of their own company. It's as if each CEO shorts competitors' stocks to the other CEOs respectively. In this way, there is a natural cap on the CEO compensation (which is directly reflected to the value they bring to the market) yet, CEO's are still incented to overperform because they can capture the bonuses of their competitors if they outperform them.

Would this work in practice? Well the only people who would actually adopt this form of compensation are the executives who actually believe they can outperform the market. Once this gains legitimacy as a compensation structure by those who want their performance bonuses to have high credibility, it provides companies with a quantitative answer (and a nearly indisputable answer) to the question: Is your company performing well because of you or the market you are in?

Career Leader

Me: "Oh career leader... What should I be? An investment banker or a mangement consultant?"
Career Leader Software: "Uh... I dunno"

After telling the Rotman Career Councellors that I couldn't decide between Investment Banking and Consulting, I was asked by the CCC staff to do the career leader exercise online to help give me an indication of what I wanted to do. They suggested it might help me decide what I want to be. After I finished what were my results? They were (I don't think this is sorted in any particular order - all ranked "Very high"):

• Commercial Banking
• Finance in Corporate Settings
• Investment Banking
• Investment Management (Portfolio Management and Securities Analysis)
• Management Consulting
• Managers in Science/Engineering
• Private Equity Investment (Including Leveraged Buy-Out)
• Strategic Planning and Business Development

So, uh... Thanks for nothing? Perhaps I should just be happy it didn't say "Cop" or "Luchadore"

Be Useful: The Only Way to Improve Employability (Job Security)

This weekend, a friend of mine asked me to help him compose an M&A model. As you can tell from the posts, this weekend was particularly busy. However, this friend has been incredibly helpful before. I told him I'd meet up with him tonight so that we could go over the financial statements of the two companies who he was proposing to merge. Personally, I think the fact that he asked me to help was a huge compliment as this person is exceptionally talented and has been inspirational in terms of pushing me to achieve my best.

We went over the financial statements of the two companies and discovered there was a lot of "interesting" (chaotic) things going on in their respective annual reports and financial statements. Because of the unique nature of their businesses, they had complex derivatives structures which would allow them to hedge bets against strategic changes in the market which would adversely affect them. However, this meant that they had "interesting" cash flow statements which required a great deal of scrutiny. This was added, of course, to the natural challenge of building a model to merge two separate companies and creating a new capital structure, modeling their future performance, and determining earnings dilution (accretion).

In the course of this exercise (which took just over an hour), he also taught me about private equity and how some of the management fee structures work, how they are levied, how they offset the management fees of funds (theoretically) as well as reviewing how financial engineering works to gain returns through offsetting leverage applied with cash flow (EBITDA) coming in.

Having said that, I'm looking forward to putting together my finance prep team. I anticipate that we will probably meet sometime next week after the RFA recruitment primer scheduled for Friday. I'll probably be sending out an email to interested parties sometime tonight or early tomorrow (after my Econ quiz).

Using Inertia to Offset Loss Aversion and the Status Quo

In our Foundations of Integrative Thinking (FIT) class, we were reading an interesting case about savings programs. Particularly, that countries with a high marginal propensity to consume (MPC) naturally exhibit low savings (low marginal propensity to save, MPS = 1 - MPC). Coupled with hyperbolic discounting (the idea that our myopic views cause us to over value short term events at the expense of long term events) and the stickiness of the status quo, inertia and resistance to change. In finance terms, the maturity premium on our discount rates are underweighted.

Using these tools, the question was asked: "Is it possible to build a program which encourages people to save?" An ingenious solution was the SMarT program (Save More Tomorrow Program), which tried to affect the various levers to obtain the desired result (increased savings).

A simple proposed solution was simply: "Can you make them aware of their situation and ask them to save more?" A logical model assuming 'rational' players, however, loss aversion and myopic views would prevent people from taking the 'medicine' they needed. Often many workers were making 'just enough to get by'.

The next attempt to reduce loss aversion would be to ask them to save more when they receive a promotion. However, myopic views and discounting still have an strong enough negative effect that will prevent significant savings program acceptance.

However, the SMarT program mixes a knowledge of all the concepts listed above in a fairly unique manner. Rather than take any of the traditional and 'logical' methods based on simple models in order to solve the problem, they proposed a different solution:

At a given point T=0 (Now) propose that when an employee gets their next
pay raise, that a they increase their savings at that point.

Key points to note:

• By making the decision now to save later, this discounts the future 'loss' associated with having to save more in the future (and consuming less now).
• By introducing the idea of making the decision in the future also results in inertia working in the benefit of savers by biasing them towards not changing their intended course as it relates to saving (sticking to the program).
• Since the trigger is a pay increase, the loss as described by decreased consumption usually associated with saving is offset by an increase which reduces the loss aversion further.

In reading the results of the article, it was shown that this methodology of getting people to increase their savings was significantly more successful than previous methods. The success of the program is primarily attributed to the methodology which considers not only the logical conclusions, but also how the mind works and precieves the benefits of different solutions based on how they are framed. After all, the goal in each of the programs is the same, a modification of saving behaviour. However, the approach in any 'behavioural problem' is critical to obtaining the desired outcome.

YCIF - Managing Your Career... In a Downturn

The Young Canadians In Finance team hosted a phenomenal event tonight titled: "Managing your career... In a downturn" and it was hosted by Fraser, Milner and Casgrain and was MC'd by Bill Vlaad of Vlaad & Co, one of the top recruitment firm in Toronto. The main speaker was Brent Belzberg, Senior Managing Director and Founder of Torquest capital partners.

The theme of the talk was about the lessons to be learned in a recession (the ones that can't be taught in school) and how credibility and reputation are the only true assets that anyone really has. While things may seem bleak for most of us, especially the ones who are looking to get out of the gate running, a depressed economy with few opportunities can certainly strain our ability to perform to our full potential.

Although readily admitting that his circumstances were much different, Brent was gracious to the audience by attesting to the competitive environment we were in and gave those of us with "irregular" backgrounds hope for still being able to pursue our interests if we showed the right traits. Bill had previously expounded that the two most important qualities of candidates in his mind were integrity and passion. Brent built on this point by saying that technical skills are table stakes, that without them you can't expect to perform in the most junior roles. However, he was also quick to point out that you can't expect to succeed in this business if you are lacking in the fundamental ability to build relationships. This is a common theme I've heard, specifically as it relates to the "magic line" between moving from an Associate to a VP.

The talk was very informative and enjoyable (the open bar didn't hurt) and it is always good to meet people from different walks of life with similar interests.

Foundations of Integrative Thinking: When Models Breakdown

In foundations of integrative thinking last week, we were discussing building models of human behaviour in negotiating. It was a case about two companies from two different countries (we were told they were constructed from "archtypes", but most people could guess which they were) who were going to be negotiating.

The point of the exercise was to demonstrate the interactions and perceptions (modeling) of ourselves and other people and how that is affected by available information. For instance, the Beta team was considered very passive, formal and unified whereas the Alphas were considered aggressive, disorganized and informal. Although this is a gross over simplification, I wanted to extend this idea to what happens when models of behavour are incongruent with behaviours that we are familiar with. This is very much related to the case we did in our Managing People in Organizations case with the Canadian bank acquiring the Mexican bank.

I would propose that in homogeneous groups, where people have very similar cultural backgrounds, it is very easy to develop models because they are similar to how we model ourselves. Slight differences can be accounted for with small exception rules.

However, if cultures are more polar, there seems to be large disconnects between our model of the other person and their model of themselves (and vice versa). Behaviours which might be presented as respectful in one culture might be received as extremely rude in another. For instance, Beta's tended to be very formal in their responses and gave vague answers instead of "No's". Alpha's considered that rude and unproductive, focusing on the task rather than the relationship.

I would suggest that when we don't understand the models of other people (literally in this case as not having read their behavioural instructions, but in more pragmatic terms as not having lived and breathed a different culture), we tend to project our own models on them. Therein lies the problem, that our models (polar and absolutely different) break and we are unable to understand what is happening. The incongruency is then read along the lines of: "Why are they doing that? I would never do / think that. They must be stupid or evil.*"

* Roger Martin's criticism of "conventional thinkers" is exactly this... That what they don't understand is often labeled as a lack of competency or as evil.

One of my favourite commercials of all time, from HSBC a few years ago, highlights this idea:



HSBC has always bragged about having a good understanding of international business and culture and I think this commercial is a great example (I love the Englishman's face at the end). (Also, this is my apology to my readers for having text and formula only posts in the last few days... This MBA is very involved and I don't usually have time to draw graphs like I used to).

Diversity in the Class: More than just a "nice to have"

I was recently reflecting on our Managing People in Organizations class and how we analyze cases in order to develop models we use. Last week, we had a case regarding cultural issues and how they affect the performance of organizations (for better or worse) as well as being able to differentiate between different definitions of "culture" and being able to apply those definitions in order to improve our own models.

In this particular case, it was very clear that there were some huge difficulties within the company caused by cultural issues. Now this probably comes as no surprise. As my undergrad strategy prof at McMaster, Dr. Terrance Flynn, used to say: "We learn the most with companies in distress"... I loved his class and got a good grade, but used to call it "doom and gloom" because the companies we analyzed always had problems. This case was no different. The two organizations had major organizational friction during the acquisition and restructuring.

What WAS interesting is that the bias reflected in the case was also reflected in our class. Our class, composed mostly of Canadians, were incredibly quick to side with the Canadians in the case (it was a case of a Canadian bank acquiring a Mexican bank). They say that those who don't study history are doomed to repeat it. However, there were some South Americans in the class who identified more with the Mexicans and were very quick to correct our biases with concrete examples from their past experiences.

When we used to do interviews to hire managers, you could quickly tell who was inexperienced when you asked them a behavioural question, such as "What would you do to resolve a conflict?"
An inexperienced manager would start by saying: "I would..."
Whereas an experienced manager would say: "In the past, I have..." and finish with a powerful example.

This is exactly what the two South Americans, Alejandro and Jenny, did in our class. They were the first two people in our class to add value to our conversation beyond just doing an analysis of the case as provided by injecting their own personal experience and unique perspective. I thought it was wonderful. We often hear MBA recruiters telling us how great their programs are because they can attract international students with diverse backgrounds (Rotman's official number this year is 36%), but it's an entirely different thing to have your case conversation redirected (in a good way) such that you would have missed out otherwise if you had a homogenious class of Canadians.

Meet the Dean - Roger Martin and Integrative Thinking

I figure I'll take a short CFA study break to write about an encounter I had at the Meet the Dean session at Rotman early last week. I thought it was an invitational event for those of us who were accepted, but it turns out there were some people who were still applying, waiting for acceptances or deciding.

Dean Martin spoke about how Rotman is different from other MBA programs and for once, I was actually impressed with the Rotman presentation. This may seem kind of odd, coming from someone who has already "sampled" the proverbial kool-aid so to speak by accepting my offer letter to start in September, but the truth of the matter is that I was more sold on Rotman by my colleagues and friends currently enrolled (or graduated) than I was from the Faculty administration. I'm quite embarrassed to say that the admin simply made it seem like just an MBA program whereas my friends were raving about their experiences.

The reason I bring up this point is that Dean Roger Martin brought it up and addressed it as well. Now from ANY MBA program, you would expect some pomp and circumstance regarding why their program is so fantastic. One of the major issues facing MBA programs today is their incremental value add. For instance, there are some top schools for which recruiting companies have stated they would rather hire students who were accepted, rather than students that had graduated. The reason? Top schools who accept good candidates are simply validating their position as top performers, whereas the marginal benefit of attending a top school doesn't necessarily justify the exorbitant increase in salary.

Dean Martin reframed this postulate as top schools resting on their laurels and not affecting the changes required by society in light of the financial crisis in the markets. He put up a rather simple diagram of a three dimensional box with the dimensions described as depth, breadth and flexibility. He called the current state of MBA education, shallow, narrow and static where it should be deep, broad and dynamic. I can't remember who he was quoting off hand, but he mentioned: "There aren't marketing or finance problems. Only business problems" (reflecting the interdisciplinary relationships).

He used the example of the Blacks-Scholes models for derivatives valuation and that stated limitations in the model made it inappropriate for use in many circumstances. However, this model is widely used in ALL derivatives valuations and therefore leaves models with large vulnerabilities in their assumptions.

The punch line?

Integrative thinking is a framework which systematically creates people who ask the right questions to make the right decisions.

Being Irreplaceable - The Good and The Bad

In my work with career development, I often hear stories of professionals who are quite happy with the fact that they are irreplaceable. They take it as a sure sign that they have job security. While in this economy, there are few who would look a horse in the mouth with regards to that view, in the long run, being too irreplaceable has it's downfalls to.

For those who are upwardly mobile, being irreplaceable should have an upward bias. That is to say that if you are looking for a promotion, you should be looking to add value outside of your position which apply to broader scopes.

Being irreplaceable at lower levels is not healthy for individuals or organizations. To have a foundation which rests on one point is extremely unstable and does no one any good. Also, if you are irreplaceable, there is a strong bias NOT to promote you. Not only is it detrimental but also selfish, as it prevents those below you from organic and professional growth as well.

[Case Study] An administrator for NPO was promoted for her work with a one of the organization's leading programs where she was the program head. She moved into an acting director position for all similar programs while continuing to act as program head for her previous team. She had always been proud of her work and the team celebrated the fact that there was no one people in her staff who could replace her. She had years of experience and knew all the in's and out's of past and running projects, fund raising and soliciting contributions from members.

However, after she received her promotion and new responsibilities across a broader field, her previous program began to suffer. She was repeatedly called back to deal with issues and ended up spending more time at her old position than the new to the detriment of both. After much effort, she finally trained a junior team lead to take the position of program head and was finally able to focus on her new position.

[Case Study] A software programmer was developing a module for communication infrastructure. He was absolutely indispensable as he was the only one who was able to do maintenance on the code due to legacy technology issues. As a result, he was a talented programmer whose skills could be transferred to another bigger more profitable project, however because he could not be replaced, he was passed over.

Finally, when he understood the situation, he went to his manager and put forth a proposal: "If I can find a suitable replacement, will you authorize a transfer?" Upon approval from the manager, and mentoring a junior developer, the programmer was able to successfully transition to a new position.