Running Your Own Business in 2011

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So Why Are We In A Recession, Business Owners?

A behavioral psychologist won the Nobel Prize in Economics. This is a first person not trained as an economist to scoop the award. Daniel Kahneman invented a new field in economics examining how rational the markets truly can be with human creatures and our emotions messing around. Kahneman explores the consumers' irrational decision making and, even more fascinating, studies Governments and discusses how their political agendas will interfere with rational, thought through decisions. 
When I did my MBA, the case studies and the theory are seductive because they make you believe you have power and control. Time and outside forces then put everything you learned on the MBA on hyper speed. It is never simple in the real world.
Kahneman does tackle why business owners are sitting on the sidelines:

Why are we in a recession? Taxes are too high, say conservatives and free-marketers; thus, entrepreneurs have no incentive to invest or create new jobs. Demand is too low, say liberals: if wages were higher—whether paid by private employers or subsidized by government—consumers would buy more, and entrepreneurs would then produce more and recruit new employees.

Well, as a business owner myself, I hire people and I do not want to fire them, ever. Over the past three years, my business bank balance has been swinging between having to close down and then being at over-capacity. Yes, it is that psycho right now and my bank manager is no longer caught up in the spirit of the 1990s. Every two weeks, I am responsible for my employees' pay checks, their families and homes. I had better have a full pipeline of great private equity projects for the next year. 
Why would I take on the awesome responsibility to ensure long term exciting employment for new people with the chaos going on with the governments in Europe and the US? (Thank goodness for our baking system and for our bland government.) When we talk about strategy planning, at first we think big which has driven our success in the past, but there are too many "what if's" to make growth a top objective. We are going down the rapids right now - not the time for anything fancy, just keep paddling through the rollers.
The uncertainty of government policy in the US is also having a huge impact on many company's business plans, not just my business strategy. The EPA changes has just removed $20M from one of my client's 1914 projections. The EPA change might happen, or not. Meanwhile, we plan for the worst. 
This is an interesting article because we are witnessing governments playing huge stakes with economic theory. If you need a brush up on the big themes, here you go:

 Kahneman does not contradict Smith’s self-love or Keynes’s animal spirits, but he elevates them from intuitions into something like hard scientific evidence. As his important new book Thinking, Fast and Slowdemonstrates, economic behavior can be better understood through scientific and psychological experiments. Most of the book describes the psychological experiments that Kahneman and his colleagues conducted to understand how people judge and decide. Kahneman concludes that our minds are divided into two very different operational systems: System One is fast, intuitive, and emotional, while System Two is slower, more deliberative, and more logical. The former can result in erratic decision-making and even in compulsive behavior, like buying what we don’t need; the latter leads to slow, deliberate choices. In daily life, we constantly and intuitively shift from one system to the other, depending on circumstances; but external incentives—well understood by marketing experts—can activate one system against the other.

Kahneman’s theory is in tension with another influential economic and psychological doctrine: rational-action theory, or RAT, whose leading proponent is University of Chicago economist Gary Becker. According to RAT proponents, people behave “as if” they were rational, whether in their personal lives or as economic actors. On this view, markets are generally rational and efficient, while government interference means less rationality, less well-being, and less happiness in society. Yet if RAT is true, behaviorists ask, how can we explain manias, bubble speculation, and self-defeating choices—none of which, moreover, depends on government? Becker and other RAT theorists accept that the market may not be fully rational, but they don’t believe that the government is any more so. 

Read More here

Read about Jacoline Loewen's opinion on quotas for females on Boards.

Name the top country to do business?

Can you believe it - Canada is #1 on the Forbes list for Best Countries to do Business. The way we talk about ourselves, you would not know it though. 
Kudos to the Conservatives for working so hard to make Canada far more competitive. They have been meeting with entrepreneurs and listening to their issues.

Canada moves up from No. 4 in last year’s ranking thanks to its improved tax standing. It ranks ninth overall for tax burden compared to No. 23 in 2010. Credit a reformed tax structure with a Harmonized Sales Tax introduced in Ontario and British Columbia in 2010. The goal is to make Canadian businesses more competitive. Canada’s tax status also improved thanks to reduced corporate and employee tax rates.

Contrary to the US government's speeches on raising taxes on their corporations, it does impact on their competitive standing.

The U.S. ranked No. 10, down from No. 9 in 2010. The world’s largest economy at $14.7 trillion continues to be one of the most innovative, ranking sixth in patents per capita among all countries (No.7 overall Sweden ranks tops for innovation).

What hurts the U.S. is its heavy tax burden. This year it surpassed Japan to have the highest corporate tax rate among developed countries. The U.S. also gets dinged for a poor showing on monetary freedom as measured by the Heritage Foundation. Heritage gauges price stability and price controls and the U.S. ranks No. 50 out of 134 countries.

Now would someone call Huffington Post and inform their blogging community as most of them do not have a clue about their taxes and economy.
Read more

Gloria Steinem is too political in Toronto

Vanessa Grant, McCarthy Tetrault, kindly invited me to hear Gloria Steinem speak in Toronto. Gloria is an admirable person who has made a huge change in attitudes in society and I was excited to hear her speak and wondered what her message would be.
It was disappointing to hear her start with the right wing's attitude to women's reproduction. According to Gloria, the right wing only want hearth and home and sex is for the reproduction of the species, nothing more. This Footloose style attitude has certainly not stuck around in Canada and as I sat with a table of dynamic female lawyers, all partners at McCarthy, I wondered if Gloria's activist message no longer had the same urgency for North American women.
I also wondered if the American right wing did believe that sex was all around procreation. Quite the image painted by Gloria.

Business must be about values

Ultimately, the finance industry is about trust. The regulators and government can bind up the gigantic finance industry with the tiny ropes of many rules, but like Gulliver, the finance industry will find new ways to free itself.  Business in finance must come down to good human decisions made every day. These simply are too many to be restricted and guided by well meaning government and regulators hovering nearby.

I was at a recent finance event held by CIBC for their partners in the lending industry and was struck by how many of these industry leaders lowered their voices and expressed their concern about the values, or lack of, spreading across the banking industry. This decline in values is a contagion that threatens the investment industry and our economic health.
In the Nineties, companies did spend a great deal of time - and money on expert fees - discussing "Values" and building Values statements. The process of having employees ponder what makes the bank successful over the long run is what counts, along with the interest and sincerity of those executives managing the banks. At the same time, top bankers had to understand numbers and financial instruments like swaps, but to climb your way to the top, you also had to have a strong sense of people.
Sadly, Values consultants got a hold of the concept and many turned a valid part of working together into phony processes not run by the leaders and the output were oily values statements - just adding to cynicism.
I have mentioned before that my uncle ran the insurance division of the Royal Bank of Scotland, and was appalled at the upcoming leadership as the men were purely financially driven. Their lips would curl at the suggestion of having a process for employees to talk about what is the best code of conduct for bank traders to hold in their hearts.
Knights of the Round Table stills fascinates a large audience of young people. What is it about this ancient tale of a Kingdom long ago?
Perhaps it is due to the loyalty of all the knights to help each other and that invisible moral code that bound them all but also made them the best in the land.
As we think about our financial leaders, do they have a moral code that guides their employees? How involved are they at demonstrating daily how to behave? How does each bank leader demonstrate how to make profits? What is the message given on treatment of all clients of the bank - including those faceless traders on the other side of the world who were sold those viral derivatives with mold infested mortgages.
Here in Canada, we are fortunate in our bank leaders like Gord Nixon and Ed Clark. They have risen through the bank hierarchy and are what my uncle would call "true bankers", not the fast thinking corporate finance types who financial engineer profits.
Can the banking and investment system lead the way back from the edge of this madness and build back the trust? How will they demonstrate that business - everyone's business - needs to be built on strong values.
The UBS trader is the most recent rogue trader bringing down the value of a bank. His friends say he was a nice fellow so what happened in his mind? What was it? Greed or pride? I would prefer the latter. On his final Facebook page he asked for a miracle. Could he have done with more emphasis on values?

Roger Martin reinvents the finance system

What makes a the Dean of an MBA school effective? Personally, I appreciate Roger Martin, Rotman, because he puts his opinions down on paper and we benefit from his books but he also participates in public debates.
Here he is with Ed Clark of TD Bank and Arianna Huffington on a panel with The Economist and their video series on the financial markets. Arianna does not agree with Roger Martin's thesis that the system needs regular tweaking just like the NFA. As I am a Director on the board of the Exempt Market Dealers Association, I do agree with Roger Martin. Making changes in the finance industry takes a great deal of time to get through the system and encouraging incremental changes in the rules is good. The danger is that this tweaking will morph into an ever thickening rule book. I am in the private equity industry and as an example of the foolishness of government and regulatory rules, my small office must submit Anti-Terrorist reports every few months as part of our compliance. It is the over-zealous rule book making we all fear.
The comments by Ed Clark also make the video well worth watching, particularly where he answers the question, "Banks are hated by the public - do you think that view is valid?"
http://bcove.me/9g98h0j9

Why do entrepreneurs drop out of school?

A list of top entrepreneurs will reveal that many do not stay in university for very long. What is it that makes them less likely to follow the usual path?
A study of 5,000 business innovators, described in the recent book The Innovator's DNA by Hal Gregersen, Jeff Dyer, and Clayton Christensen, identifies five mental habits that characterize how successful entrepreneurs operate:

1. questioning, 
2. experimenting, 
3. observing, 
4. associating (that is, making connections among disparate ideas), and 
5. networking. 

It is clear that curiosity is at the heart of these mental habits—the desire to find out more about something that one finds interesting, to tinker with it, and to forge something new from ways that have grown stale. Curiosity is fueled by a passion to explore the world.

What did Jobs himself have to say about the genesis of his amazing career? He shed light on this question during his 2005 Stanford commencement address.

Jobs recounted the story of his brief college experience: at seventeen years old, he enrolled in college and then dropped out six months later. He recalled that "I couldn't see the value in it. I had no idea what I wanted to do with my life and no idea how college was going to help me figure that out." Yet he did not disappear entirely from the college scene. He stayed in town, sleeping on friends’ floors and dropping into some college classes that he found interesting. First and foremost among these was a calligraphy class.

This is the part I like in particular as Jobs dos the terrible act of dropping out but then gets to experiment with learning because he is just curious. I often wondered what Bill Gates thought of Steve Jobs' speech when he talks about Microsoft's copying ways.

"Because I had dropped out and didn't have to take normal classes," Jobs recalled, "I decided to take a calligraphy class...I learned about serif and san serif typefaces, about varying the amount of space between different letter combinations, about what makes typography great. It was beautiful, historical, artistically subtle…and I found it fascinating." At the time, he thought that his interest was just in fun, without "even a hope of any practical application in my life." But it turned out differently, with world-transforming consequences. "When we were designing the first Macintosh computer, [what I learned in that class] all came back to me. And we designed it all into the Mac." He added that, since Windows copied the Mac, it's likely that no personal computer would have the elegant typography that they all now share if Jobs had not dropped in on that college calligraphy class during his free time of intellectual soul-searching. "Much of what I stumbled into by following my curiosity and intuition turned out to be priceless later on."

 Three points from Jobs' commencement address are noteworthy for an understanding of youth entrepreneurship and how it is fostered. First, consistent with evidence presented in studies such as The Innovator's DNA, a principal factor in entrepreneurial achievement is persistent curiosity. Second, many young entrepreneurs are unable to satisfy their curiosity in the context of today's schools and colleges, so they drop out. This has been the response of not just Steve Jobs, but of founders of Microsoft, Facebook, and a host of other contemporary business icons. Third, there is a vast store of useful knowledge available in our academic heritage that can prove invaluable for entrepreneurs who learn it. Jobs found useful ideas in calligraphy; others have found useful ideas in science, engineering, economics, history, art, music, psychology, ancient Egyptian studies, and the list goes on.

Putting these three points together leads to an inescapable conclusion about educational priorities today: They are poorly suited for cultivating the entrepreneurial genius that lies nascent in many young people today. At the K-12 level, amid the frantic pressures to raise student test scores on basic (and usually remedial) skills, stimulating curiosity is barely on the classroom radar screen these days. Many of the subjects that could evoke interest among all of the students who find memorizing basic skills dreary—subjects such as art, music, theater, or emerging media technology—have been squeezed out of the curriculum by budget reallocations intended to make room for yet more instruction in remedial skills. The intention has been to equip students with abilities that can make them "employable."

The Need For Stable Financial Partners

Businesses beneath the $100M revenue mark and who have narrow EBITDAs, below $5M, will be struggling to find banks willing to lend to them over the next year.
After all, if you had one million dollars and you could lend it out, but at such a low rate of return, would you? That is the question banks are asking themselves. Why would they lend to SMEs who do not have the fat in their systems to take more bumps from Europe and American business news? That risk is just not worth the razor thin profits to made from SMEs below $100M.
Yet, unwittingly, banks are allowing direct competitors to flourish in this Scrooge environment because into this risk category steps Private Equity.
Banks are leaving an enormous gap for those who can take the higher risk and who will be more expensive money if the business owner just looks at the interest rate. The Private Equity firms still alive are tough and are flourishing in this hard economy because they are stepping up to invest in business owners and their companies, even if there is risk. They also get in and help grow the EBITDA.
Private equity partners will be there for business owners who realize that they can grow more with more capital and with smart partners at the Board room table. Here is a WSJ story on Private Equity taking over the bank's usual territory - small business. We will be seeing much more of this.

Private equity-backed bank holding company SKBHC Holdings continues to take advantage of the shaky environment for small community banks, picking up Seattle’s Viking Bank. Viking had assets of roughly $400 million and assets of $379 million as of June 30. read more.

Women Want Leadership Courses

Women in business seem to be finally dropping their requirement for women based courses at the MBA level of business education. Over the past two decades, there has been a rush of women clubs, women networking groups and even made for women university courses. Here is an intersting article on the European MBA school IMD leading the way by changing their course titles, dropping the gender differential. Who asked for the change in title - the women on the MBA courses who have already jumped the required hurdles to get to the top. They have achieved it on their own and know it is a tough world where men and women need to compete aggressively. IMD changed the name of its course to Strategies for Leadership from Strategic Leadership for Women. Participants did not like the [original] name of the program, says Prof Toegel.





Read the full article here http://www.ft.com/cms/s/2/e2ba5f0a-d947-11e0-884e-00144feabdc0.html#ixzz1XkIzJnwC