RFID Perspectives

I have been thinking about RFID in my MBA course- check out this interesting video….

The Warning

I watched this interesting documentary last night about what caused the financial crisis in the first place, you can watch it online at

http://www.pbs.org/wgbh/pages/frontline/warning/view/#

“We didn’t truly know the dangers of the market, because it was a dark market,” says Brooksley Born, the head of an obscure federal regulatory agency — the Commodity Futures Trading Commission [CFTC] — who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country’s key economic powerbrokers to take actions that could have helped avert the crisis. “They were totally opposed to it,” Born says. “That puzzled me. What was it that was in this market that had to be hidden?”

I will let you draw your own conclusions from the documentary, however I do have some thoughts I like to share:

Without going into technical details about how derivatives work, is it really possible to create value by designing financial instruments that are really nothing but tools to hide or spread risk? These instruments help a few people make tons of money at the expense of others as the wizards jump from the burning train while ordinary investors get engulfed in flames. Many ignorant investors jump on the train on the promise of outsize returns only to get their clocks cleaned. Why did they jump on the train in the first place? Because they wanted the same 40% or 80% return on investment that the hedge funds were getting.  Now we use a 10% cost of capital in our finance textbooks. Why not use 40%? Because that is not a normal return. That is my point- if we are greedy enough to chase 40% returns there is always a high risk of getting our clocks cleaned, no matter how safe the investments appear. Another point to remember- profit creation comes from value creation. Does spreading money and risks create value?

Post your comments here.

Warren Buffett’s common sense beliefs (and mine)

These are some excerpts from an article by Stephanie Loiacono:

This is common sense advice and something I believe in.

“If The Business Does Well, the Stock Eventually Follows”

The Intelligent Investor by Benjamin Graham convinced Buffett that investing in a stock equates to owning a piece of the business. So when he searches for a stock to invest in, Buffett seeks out businesses that exhibit favorable long-term prospects. Does the company have a consistent operating history? Does it have a dominant business franchise? Is the business generating high and sustainable profit margins? If the company’s share price is trading below expectations for its future growth, then it’s a stock Buffett may want to own.

Buffett never buys anything unless he can write down his reasons why he’ll pay a specific price per share for a particular company. Do you do the same?

“Our Favorite Holding Period Is Forever”

How long should you hold a stock? Buffett says if you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes. Even during the period he called the “Financial Pearl Harbor,” Buffett loyally held on to the bulk of his portfolio.

Unless a company has suffered a sea change in prospects, such as impossible labor problems or product obsolescence, a long holding period will keep an investor from acting too human. That is, being too fearful or too greedy can cause investors to sell stocks at the bottom or buy at the peak — and destroy portfolio appreciation for the long run.

You may think the recent financial meltdown changed things, but don’t be fooled: those unfussy sayings from the Oracle of Omaha still RULE!

Global Accounting Speed Bump: Mark-to-Market

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How chasing Quarterly Financials leads to wrong decisions (continued……)

There are really two separate issues here:

1) Management resorting to fraudulent reporting, manipulating the stock price through insider trading, trying to conceal issues, etc. These issues are addressed by numerous laws and regulations by SEC, etc.

2) There is nothing wrong with the reporting and all laws are followed so there is no fraud or stock price manipulation. However the organization still fails to create value for shareholders and all other stake holders by focusing on quarterly results. The underlying reason may be stock based compensation but how do we solve the problem here? No amount of regulation will fix this problem. Over time bad decisions erode profitability and market share and at some point in time key individuals bail out of the organization before the organization falls into bankruptcy, gets sold or taken over or gets bailed out if it is too big to fail. Case in point- General Motors. GM followed GAAP reporting to the word but still failed to survive without government help. I think managements would act differently if these businesses were their own enterprises and they had more skin in the game. Could this be the reason why some professionally run but family owned corporations are more successful?

Just to throw a twist to the discussion, what harm could be done in the absence of quarterly reporting? Analysts would get less frequent communication and information but would it be entirely a bad thing? What good information is anyway if it becomes an end in itself and destroys shareholder value? Why not give managements some breathing room and just have a periodic update with no “financials”? Let the analysts figure out whatever they want about the stock price! This craving for constant information and analysis just fills airwaves and media and in my opinion also increases market volatility. We need to wake up and realize that this culture is very wasteful and costly. The current system supports an entire industry of accountants, auditors, analysts and stock brokers at a huge cost but where is the payback from all this compliance cost? Ultimately the additional costs get captured somewhere in the form of lost shareholder value which lead to reduced competitiveness of the economy as a whole. We have seen time and again that the present system of reporting does not reduce systemic risks, nor does it prevent bailouts and blow-ups.

Follow full discussion in the LinkedIn group- CFO Network:

http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&gid=51826&discussionID=14282748&split_page=1&goback=.mwg_*2_1

The Management Accountant’s role in Marketing Strategies

I have always been comfortable working with marketing and supporting marketing managers make good decisions. Since marketing typically comes before sales there is more planning and creativity involved in the process. However marketing managers and vice presidents don’t always understand the financial impact of their decisions- that’s where they come to us for support.

A good example is new product development process as the future profitability of any product driven company is based on this. I work closely with marketing to make sure that our new products will be profitable while retaining the desirable features for marketing. This involves value analysis, taking cost out of the product without sacrificing features, etc. Another example is when marketing managers are trying to win new business/private label/special projects etc, they don’t know how to package the deal that would make money for the company. That’s where we come in as management accountants, do the analysis and lay it out in front of them. It involves really understanding the business, cost structure and pricing decisions.

Lastly there is the routine support function in terms of budgeting/reporting, etc.

Follow full discussion in the LinkedIn group- CFO Network: http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&gid=908347&discussionID=6135617&sik=&trk=mywl_artile&goback=.mwg_*2_1

Internal Auditing- view from my chair

In my experience too many organizations expect the internal auditors to have skills similar to external auditors, this creates redundancies in work performed. To give you an example the same processes are sometimes audited by the external audit team, the outsourced internal audit team and the outsourced SOX audit team. The same public accounting firms perform all three functions but just for the sake of appearance they don’t do all three functions for the same client.

My point is too much emphasis on compliance and checking does not add value to the organization, rather it becomes an additional burden on the cost structure. It just leads to checking and re-checking the same thing with no real purpose other than adding to the revenue stream of public accounting firms.

In my opinion the internal audit function should add real value to justify its existence, not just focus on compliance with GAAP and regulations. The CFO should be able to trust the accountants keeping books to do a good job and not have the internal auditors police them. Only then the entire management team, not just the CFO will have respect for the IA function.

Follow the full discussion in the LinkedIn group- CFO Network:

http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&gid=51826&discussionID=13945806&sik=&trk=m

Financial innovation- Good or Bad?

Financial innovation has made a lot of financiers rich, but what has it done for the broader economy?

Follow the live online debate with opening statements by

ROSS LEVINE
James and Merryl Tisch Professor of Economics, Brown University

and

JOSEPH E. STIGLITZ
Professor, Columbia University

http://www.economist.com/debate/days/view/471

Toyota Recalls Dent Vaunted Image in Japan

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Getting Naked: A Business Fable About Shedding The Three Fears That Sabotage Client Loyalty

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How chasing quarterly financials leads to wrong decisions

We all know that quarterly financials are a way of life in business. Most businesses try to play the game right- manage results for maximum quarterly profit, lower expectations for the market, provide advance warning if bad news is coming and then try to beat expectations. Where is this culture leading us? Well for one thing, the whole practice is geared towards managing the stock price. The stated objective and purpose of regulation is to provide timely information to stakeholders so that they can assess the financial health of companies which in turn helps them decide whether to hold the stock or not. There are all kinds of tools available to investors including analyst reports however quarterly earnings release have become “the most important”  tool for investors.

Think about it- one quarter is just three months. What can the organization do in three months? I have seen this for too long in my professional life- “we hope the next quarter will be better”, “we must make our numbers next quarter”, etc. Often there is no realistic plan to get there, just wishful thinking. Well part of the problem you can’t just plan for three months or for that matter for one year unless it is part of a bigger, long-term plan. Long term planning is always difficult and successful execution requires that the management sticks to the plan regardless of quarterly results.

Well, the question is- are investors better off with just timely and accurate reporting of results? If businesses are not adding value to their businesses, not investing for the long-term and making bad choices to influence the quarterly results, is the end result good for investors? There are countless studies done on this subject and the answer is overwhelmingly “no”. You can’t have a good stock price if there is no underlying strategy for the long-term which the management believes in and executes against.

This opens up a bigger question- who are the stakeholders in a business and how can a business benefit them most? The owners are of course #1  in the form of stock ownership or private equity. Then you have employees, government and the society. I would argue that the focus on quarterly financial reporting (for public companies) does not help the interests of the stakeholders. I do not propose any alternatives at this time, nor do I suggest that private ownership is better than public;  just want to open up the discussion.

Please post your comments for and against.

Still following Toyota- Secretive Culture Led Toyota Astray

“Evidence had been mounting for years that Toyota cars could speed up suddenly, a factor suspected in crashes causing more than a dozen deaths. Toyota had blamed the problem on floor mats pinning the gas pedal. Now, the two Toyota men revealed they knew of a problem in its gas pedals.”

This just shows that Toyota got its priorities wrong- there is nothing wrong with their TPS system but management can always over-ride controls in any company. The right tone is required at the top to run a business ethically. I don’t think SOX type legislation is the answer to breaking down of controls like this. Businesses must be accountable to the society for what they do and one of the ways to make sure they are accountable is by promoting openness and communication. Just see what is happening now- Toyota is getting hit where it hurts the most- in their sales. More bad publicity will surely do immense damage to their brand which will hurt their brand image, pricing power, profitability and stock price.

Read full story in WSJ-

http://online.wsj.com/article/SB10001424052748704820904575055733096312238.html?mod=WSJ_business_LeadStoryCollection#

Toyota’s Troubles Started with Fixation on Growth

By Sean Silverthorne

http://blogs.bnet.com/harvard/?p=5471&tag=col1;post-5471

Surprising to have this from the company that invented lean- they must have taken shortcuts and deviated from their principles. Lesson learned- never pursue growth at the expense of quality, profitability and image. Toyota is great because of their long-term thinking as opposed to qtr by qtr planning.

A world of connections

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via http://www.economist.com/specialreports/displayStory.cfm?story_id=15351002&source=hptextfeature.

The politics of global disruption, and how they may change

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via http://www.economist.com/world/international/displayStory.cfm?story_id=15404916&source=hptextfeature.