Innholdsfortegnelse for Spring 2007 i Rotman Management

If it seems the world is a riskier place than ever, you’re not imagining it. While the age-old balance between risk and reward is the very essence of business, risk today appears in a bewildering variety of guises. The bulk of today’s business decisions are made with incomplete information and in the face of an uncertain future. In 2006, for the first time ever, risk was named the major concern for C-level leaders in Accenture’s annual executive issues survey. Today’s overall perception of heightened risk is fostered by more than terrorism: the increased interconnectedness resulting from globalization has heightened the sense of peril. A joint study by A.T. Kearney and Belgium’s Centre for Research on the Epidemiology of Disasters confirms that rapid globalization has coincided with an escalating frequency of…

Optimism is mostly thought of as a positive concept, but you have found that it can be very damaging when it comes time to make risky decisions. Please explain. Optimism is one of the major biases in decision making. In general, it’s a wonderful thing to be optimistic: it keeps you healthy and resilient. But personally, I would not want my financial advisor to be optimistic; I’d like he or she to be as realistic as possible. Having said that, over-optimism is the engine of capitalism. When you look broadly at an economy, you want people to be taking risks. A few of them will succeed, and many will fail, because most of the people taking risks are not fully aware of their extent. But in the end, an economy…

The world has faced a string of catastrophes in the early 21st century: 9/11, the Indian Ocean tsunami, and Hurricane Katrina, to name a few. Are these events somehow related? Yes, they are. We have not had a six-month period in the past few years without a major crisis that simultaneously affects several countries or industry sectors. If you look at the extreme events you mention from a distance, they seem quite different in terms of their nature, where they took place, and their impact on the world. But if you look closely, they actually share two common features: each was a major surprise and each led to large-scale destabilization or destruction. We know from experience that these two characteristics deeply affect decision making: the unexpected paralyzes us, and the…

It’s easy and seductive to say that entrepreneurial business people always forge ahead, risk be damned. However, the glamour of bold action is often stymied by the specter of risk. New offerings may succeed in the market, but more often, they fail. Competitors may outwit you. Careers may hang in the balance.Taking bold risks does not feel safe. But to seek out ‘zero risk’ is to commit to doing nothing. How does one move ahead and create growth in such an environment? There is a better way. We applied the design process to this challenge, and set out to understand how designers approach risk. What we found is very encouraging. In the world of ‘design thinking,’ acknowledging risk is the first step toward taking action, and with action comes insight,…

What is the ‘J curve’, and what can it tell us about global political and economic risk? The J curve is an effort to explain how a country’s stability relates to its openness. It answers the question, ‘why it is that countries do or do not fall apart?’ Why is the J curve relevant to global markets? Many reasons: because of the flow of global energy, the economic importance of China, the impact of rogue states, organizations and individuals on world markets, and because of the nature of the global balance of power shifting away from the United States and the U.S.-led hegemonic system. All of these things make the stability of countries matter – not just to policy-makers in Ottawa, Washington and London, but to institutional investors and decision-makers…

You have said that the immediate challenge to civilization’s global energy future lies in meeting the needs of the 12 billion earthlings that will be on our planet by 2050. Please explain. Current per capital use of energy is equivalent to about 12 barrels of oil per year, for a global total of 72 billion barrels of oil per year. If you look to the not-too-distant future, to the middle of the 21st century, at least an eight-fold increase in annual production will be required – and that’s a conservative estimate. It includes a two-fold increase to account for the increase in the world’s population from 6.3 to 12 billion, along with a four-fold increase to meet the aspirations of the fourfifths of the world’s peoples whose standards of living…

Key to a sound financial plan is knowing whether current decisions allow an individual to meet his or her specific objectives. For example, given an objective such as, ‘retire at 65 with 70 per cent of pre- retirement income,’ it is the job of the financial planner to devise a suitable strategy. One important part of the financial planner’s tool kit is to tinker with an individual’s investment strategy. It is well known, for example, that riskier investments such as common shares tend to earn higher rates of return than lower-risk investments like treasury bills and guaranteed investment certificates. If a key objective such as ‘70 at 65’ cannot be met with a conservative investment strategy, then one alternative is to be more aggressive and move more of an individual’s…

SPRING 2007 A landmark funding announcement for the Rotman School of Management was announced on March 23rd by the Province of Ontario in the province’s 2007 budget. The funding, which will total $50 million, will enable the School to construct a new building to host its newly-established Centre for Jurisdictional Advantage and Prosperity, and provide space for a 50 per cent expansion of the School’s graduate programs, including its renowned MBAand PhD programs. An additional $10 million in government funding has also been allocated to the project, while a further $60 million will be raised from private donations to match the total government funding. The campaign to the raise the private funding is currently more than half way to its goal, and is being led by W. Geoff Beattie, president,…

Having toiled for Canada’s most successful retailer from the age of 16 – working his way up to president of Canadian Tire Retail – Rotman alumnus Mark Foote (MBA ’91) recently took on the role of president and chief merchandising officer at another Canadian retail icon, Loblaw Companies Ltd. Foote took the stage on January 9th in the ongoing Rotman Merchandising Experts Speaker Series. “My presentation today will be about an industry that I am passionate about,” he began, and his passion showed as he proceeded to give a masters class in retail. To create a formula that is both distinct and successful, a retailer must possess three things, says Foote: an intimate knowledge of the customer; a clear idea of what they are ‘about’ as a company; and a…

The Rotman School’s leadership in Human Resources Management has been strengthened by a recent gift that will help it attract leading HR executives to its MBA program. The KWAPartners Award in Leadership will provide a continuing student in Rotman’s Two-Year MBA program with $5,000 to help fund their education in the area of Human Resource Management. The award, the result of $25,000 gift from KWA Partners, was announced by Ron Dahms (MBA ’99), managing partner at KWA Partners, at an event hosted by KWAin October. In creating this generous scholarship, Dahms notes, “The Rotman School and Dean Roger Martin have played a key role in my business career. I am delighted that the Board of KWA Partners has committed to establish this annual scholarship recognizing a future Human Resources business…

Dimitris Vidakis (MBA ’06) Risk Manager – Equity Derivatives Commerzbank AG Lives and works in: London, England Best thing about my job: Exposure to exotic equity derivatives trades, and the opportunity to closely follow current trends in the market. My biggest challenge: There is enough complexity and constant innovation to keep me on my toes. It is very exciting. Most important skill(s) for my job: Strong finance background, willingness to learn, and of course people skills. Proudest moment: Being selected for the job I really wanted from a large pool of candidates. The words that best describe me: Persistence and patience, never giving up at the first difficulty, and believing in myself. How I relax: I love to travel. Three weeks ago I was in Paris for the weekend: on…

The discipline of risk management has made considerable progress in recent years, with corporate treasurers and chief financial officers becoming adept at quantifying and managing a wide range of risks, from currency fluctuations, to chemical spills, to computer system failures. Firms defend themselves against these risks through now tried-and-true tools such as hedging, insurance and backup systems. More recently, some firms have been adopting the practice of ‘enterprise risk management,’ which seeks to integrate available risk management techniques into a comprehensive, organizationwide approach. Many of these early adopters are at a rudimentary stage, in which they treat enterprise risk management as an extension of their audit or regulatory compliance processes. Others are at a more advanced stage, in which they quantify risks and link them to capital allocation and risk-transfer…

Over the last quarter century, some spectacular losses have resulted from the use of derivatives: Barings, Orange County and Long-Term Capital Management, to name a few. However, these losses should not be viewed as an indictment of the whole derivatives industry, as trades involving unacceptable risks represent only a tiny proportion of total trades, both in number and in value. Derivatives represent a vast multi-trillion-dollar market that, by most measures, has been extremely successful in enabling users to manage risk. To quote Alan Greenspan, “The use of a growing array of derivatives and the related application of more sophisticated methods for measuring and managing risk are key factors underpinning the enhanced resilience of our largest financial intermediaries.” Nevertheless, it is worth considering the lessons we can learn from derivatives failures.…

Organizational decision makers tend to follow a logic of reducing uncertainty and risk in their exchange relationships by engaging past partners in repeated ties and forming new ties with partners’ partners based on referrals, rather than seeking riskier and more uncertain non-local ties beyond these bounds. As a result of this preference, organizational ties tend to congeal into dense, relatively stable, local clusters infused with information useful for reducing risk and uncertainty in future exchanges. We believe that the benefits of non-local ties can, however, outweigh the greater risk and uncertainty they entail by connecting organizations to non-redundant contacts with unique information that their partners do not possess, and by creating opportunities to broker resource and information flows across unconnected partners. In contrast, over-reliance on embedded ties, which create redundant…

Critical public policy issues increasingly involve complex physical and natural systems. While we all hope that societal responses to such challenges are based on the best available scientific knowledge, increasingly, effective responses to important public policy issues require changes in the beliefs and behaviours of the citizenry at large. Science tells us that seatbelts save lives and that smoking causes cancer, but if members of the public don’t understand why, they may ignore the best scientific advice. If widely-held mental models of complex systems are faulty, people may inadvertently favour policies that yield outcomes they neither intend nor desire. Climate change is such an issue. Opinion polls show an apparent contradiction in public attitudes toward climate change: a majority of citizens support the Kyoto Accord and Climate Stewardship Act, believe…

How should we think about risk vs. uncertainty? A logical starting place is Frank Knight’s distinction: risk has an unknown outcome, but we know what the underlying outcome distribution looks like. Uncertainty also implies an unknown outcome, but we don’t know what the underlying distribution looks like. So games of chance like roulette or blackjack are risky, while the outcome of a war is uncertain. Knight said that objective probability is the basis for risk, while subjective probability underlies uncertainty. To see another distinction between risk and uncertainty, we consult the dictionary: risk is “the possibility of suffering harm or loss.” Uncertainty is “the condition of being uncertain,” and uncertain is “not known or established.” So risk always includes the notion of loss, while something can be uncertain but might…

The idea that people and the organizations in which they work should learn from failure has great popular support and seems obvious. However, organizations that systematically and effectively learn from failure are very rare. Large and well-publicized organizational failures such as NASA’s Columbia and Challenger shuttle tragedies, and the Parmelat and Enron accounting scandals, argue for the necessity of learning from failure. Why do organizations fail to learn from failure? Our research suggests that an important part of most organizations’ inability to learn from failure is a lack of attention to small, everyday organizational failures. Small failures are often the ‘early warning signs’ which, if detected and addressed, may be the key to avoiding catastrophic failure in the future. When small failures are not identified widely, discussed and analyzed, it…

The traditional approach to reducing risk focuses on the behaviour itself and encourages risk avoidance. For example, abstinence-type programs for drugs and sex are commonly targeted at teenagers. ‘Just say no’ campaigns and similar public service messages typically emphasize the health risks of drug use or unprotected sex, and encourage people to avoid the risky behaviour. These risk messages serve as ‘no entry’ signs, warning people to stay out of the problem domain. Another approach to reducing risk focuses on the promotion of remedies: products and services that offer solutions to, or ways of mitigating, risk by decreasing either its likelihood or its severity. There are two kinds of remedies: curative and preventive. Curative remedies counter the risk after it has been incurred by reducing the severity of the consequences.…

The New York Stock Exchange appears to be losing market share to foreign exchanges, a worrying trend for those who believe the Sarbanes-Oxley Act of 2002 has placed a too-heavy regulatory burden on corporations trading in the United States. However, calls to save the NYSE by scrapping ‘SARBOX’ are premature, says Luigi Zingales, McCormack Professor of Entrepreneurship and Finance at the University of Chicago’s Graduate School of Business. Zingales is a member of the Committee on Capital Markets Regulation, a bipartisan group which released a report on November 30, 2006 on ways to maintain and improve the performance of U.S. equity capital markets. On January 26, he visited the Rotman School to discuss the committee’s findings in a talk entitled “Are U.S. Capital Markets Losing Their Competitiveness? Recommendations of the…

For the second consecutive year, a team of MBA students from the Rotman School won an international case competition held at the George Washington University School of Business. The Rotman team, consisting of first year MBAstudent Sarah Stern and second year MBAstudents Abhijit Rawal, Hala Kosyura, and Ellie Avishai, defeated teams from 20 other business schools to take the first-place prize. The annual competition, held in March in Washington D.C., focuses on finding solutions for a particular not-for profit agency. This year’s case focused on the American Association of Retired Persons (AARP), which is trying to determine whether it should expand its services to include the 25 to 34 age group. The Rotman team proposed a solution based on a savings initiative that targets families. Further details about the competition…

How did you get from being a student in the MBA program to the founder of Northwater Capital Management – a $10-billion investment management firm? As soon as I finished my first course in the part-time MBA program, I immediately started portraying myself as ‘completing’ my MBA and landed a job as a trainee at what was then called Canada Permanent Trust Company. In a little over three years I completed my degree and became head office branch manager. At Canada Permanent, we had had a huge mismatch on our balance sheet – a $1-billion mismatch on a $5-billion balance sheet where we were borrowing from savings accounts and investing in five-year mortgages (during a period when interest rates were rising dramatically). Partly from my experience in the MBA program,…

Spring has finally arrived, and around the University, that means it’s reunion time! Rotman’s annual reunion for honoured years (ending in ‘2’ or ‘7’) takes place on May 31. Contact our office for the full details. And watch this space in the Fall issue for the stories and pictures. June 1 is our annual Life-Long Learning Day, at Toronto’s Four Seasons Hotel. All alumni are invited, and guests are welcome as well. Full details of the agenda, fees, and registration are online at www.rotman.utoronto.ca/events/. I hope to see you there. Now’s the time to start writing YOUR Class Note for the next issue, titled “The Quest,” which will hit your mailbox by September 1st. Keep them coming! – Jack MBA/MCom/DBA Full & Part-Time 1956 Neil Bryson has retired from senior…

Much has been written of late about the ‘hollowing out’ of corporate Canada. The rhetoric on the issue bypasses the question of whether corporate Canada actually is being hollowed out to get on to the more enjoyable topics of how bad the hollowing out is for Canada, and what we could do about it. At the Institute for Competitiveness and Prosperity, we decided to check on whether Canada was actually being hollowed out before we joined the discussion of what to do about this supposed problem. While there is no doubt that Canadianowned companies are being acquired by foreign firms, that is not tantamount to hollowing out. It is arguable that our most important companies are our Canadian-owned globally competitive companies. We define these as Canadian firms that rank in…

Economists and psychologists rely on widely-divergent assumptions about human behaviour in constructing their theories. Economists tend to assume that people are fully rational, while psychologists – particularly behavioural decision researchers – identify the systematic ways in which people depart from rationality. While the two disciplines have offered different predictions of how individuals react to external stimuli, they share the implicit assumption that individuals will accurately perceive the stimuli available to them. Nobel Laureate in Economics Herbert Simon introduced ‘bounded rationality’ as “a behavioural model in which human rationality is very much bounded by the situation and by human computational powers.” In this article, we propose that awareness can also be bounded, and that this occurs when people fail to see, seek, use or share highly relevant, easily-accessible and readilyperceivable information…

You believe that risk management will soon become the main plank of institutions’ business and operating models, as well as a key source of value creation. Please explain. I see risk and reward emerging as the common yardstick by which all financial products and activities can be compared. In the past, financial institutions placed different risk categories and products in different silos: banks had bond desks, equity desks, and option desks; and people thought about ‘market risk’ and ‘credit risk,’ but they kept them very separate. As is always the case, when you bring things together, you begin to see the commonalities – for example that some of these risks offset each other, and that they have some interplay. This in turn leads to the realization that you can create…

Successful negotiation involves carefully navigating conflicting tendencies to compete and maximize self-interest, on one hand, and cooperating and maximizing joint interests, on the other. The mixed-motive setting of most bargaining situations can make negotiators feel torn between a drive to bargain hard and risk walking away from mutually-beneficial agreements, or bargain soft and risk failing to claim as much of the resource as they could. To be most effective, negotiators must both create as ‘large a pie’ as possible, to produce the most economically-efficient agreements, and claim as much of that pie as possible, to satisfy their self-interest. An important question, then, is how can individuals navigate this conflict to simultaneously compete and cooperate to achieve optimal agreements? Regulatory Focus: Promotion vs. Prevention The tension between competition and cooperation connects…

After spending the early part of your career working in financial risk management [with Lehman Brothers, McKinsey, and the U.S. Treasury Department], you came to challenge the notion that risk management is strictly for finance, going so far as to call it a “core strategic discipline.” Please explain. The truth is, most of the risks that business people face today are non-financial. In my work, I began to realize that the best financial risk management theory and practice in the world really didn’t address the needs of people running non-financial businesses. Financial risk management doesn’t have to deal with the vast differences in what and how fast people can learn about real risks: operating risks, technology risks, security risks and strategic risks. I saw too many instances of people trying…

When it comes to explaining fluctuations in the stock market, analysts usually look at purely economic factors like interest rates and earnings per share ratios, and steer clear of the complexities of human psychology. What is behavioural finance, and how does it help complete the picture? The field of behavioural finance doesn’t attempt to trump fundamental analysis. Rather, it’s an adjunct to help explain what fundamental analysis can’t fully explain. The field of Behavioural Finance is essentially the melding of Psychology and traditional Finance. Researchers in the field attempt to explain what happens in financial markets by looking at the actions of individual market participants. For example, it’s been shown that most humans demonstrate the behavioural trait of overconfidence. If you ask people to self rate their driving ability, about…

You’ve dedicated your career to studying the ‘shadow network’ that underlies organizations as disparate as Enron and al-Qaeda. What is network analysis, and what makes it such an exciting field? Network analysis is the science of relations. It’s the study of nodes, such as people or organizations, groups or ideas, and the ties or relations among them. Once you’ve established a set of nodes and the ties among them, you can measure and monitor changes in the network. This is exciting as networks underlie all aspects of life, from family to work, to civil infrastructure and alliance formation among countries. Networks constrain and enable all your behaviour. With computers, we can unlock their secrets and so understand more about ourselves, and how to create changes in the world. With my…

Lord Kelvin famously said: “Anything that exists, exists in some quantity and can therefore be measured.” This dictum sits challengingly alongside that of another famous scientist, Peter Medewar who observed: “If politics is the art of the possible, research is the art of the soluble. Both are immensely practical-minded affairs. Good scientists study the most important problems they think they can solve [my emphasis]. It is, after all, their professional business to solve problems, not merely to grapple with them.” A few years ago I participated in the World Federation of Scientists’ International Seminar on Terrorism. Most of the other participants were eminent scientists, and I found myself in a workshop entitled “Cross-disciplinary challenges to the quantification of risk.” Terrorism undoubtedly exists, and some of its consequences can be quantified.…

Former U.S. vice president Al Gore visited the University of Toronto on the evening of February 21 to give a sold-out presentation at Convocation Hall about the threats posed by global climate change. [Less than one week later, his film An Inconvenient Truth, produced by UofT graduate Jeffrey Skoll (BASc ‘87), would win the Oscar for Best Documentary.] The morning after his presentation, Gore participated in an off-the-record discussion at the Rotman School with 50 institutional investors about the linkages between sustainability and investment management. Pictured, from left, are Keith Ambachtsheer, director of the Rotman International Centre for Pension Management; Al Gore, co-founder and chairman, Generation Investment Management; and Jane Ambachtsheer, global practice leader, responsible investment, Mercer Investment Consulting and faculty member, U ofT Centre for Environment.…

“The creative impulse can be crucial to a company’s bottom line,” argues strategist Alex Manu, “but too often, organizations hinder creativity in the interest of efficient and predictable productivity.” Manu, founder and director of the Beal Institute for Strategic Creativity at the Ontario College of Art and Design, presented tactics for organizations wishing to unleash their full creative potential in a January presentation at the Rotman School. In his talk, titled after his book The Imagination Challenge: Strategic Foresight and Innovation in the Global Economy (New Riders, 2007), Manu argued that the secret to nurturing creativity is to recapture the sense of play that each of us had as children. “Work systematically deprives us of opportunities for imagination,” he says. “We subcontract play, but without play, the imagination – and…

Having kicked off the Rotman Integrative Thinking Seminar Series in 2001, observed more than 50 sessions, and spent the past six years studying the thinking patterns of those featured [compiling his findings into a forthcoming book, to be published in 2008 by Harvard Business School Publishing], Dean Roger Martin reclaimed the stage in the School’s popular Series for three sessions in February. Between 2001 and 2007, the Series has hosted a variety of renowned CEOs and thought leaders, including Jack Welch, Michael Dell and A.G. Lafley. “My goal when we started was to try to figure out how these highly-successful people think,” said the Dean. “I was looking for patterns. I wanted to know, ‘what was the thinking that led them to the doing’?” We all use models in our…

What is Virox Technologies and how did it come to be? During my time as Corporate VP for Bausch & Lomb Canada (B&L), I enjoyed working on entrepreneurial ventures as a side interest, and twice met a Bay Street lawyer who specialized in start ups. The life sciences group at the Royal Bank spoke to the lawyer and called me to work on a business plan for a scientist who had invented a new disinfectant. The scientist had a lot of data – 10 years worth of R&D – but no business plan, and no idea how to start! The plan that I wrote was a hit with everyone but the scientist, who felt it was impractical, too risky and potentially too long a play. My plan contemplated a multitude…

Executive Director Mexican Association of Industrial Parks (AMPIP) EMBA96 I wonder how familiar EMBA alumni are with Mexico. Who can forget that study tour to Monterrey! Well, after working for 16 years in the Government sector, I’ve now changed my direction by joining the private sector, even though my responsibilities are still related to what I was doing before: international business promotion. The Mexican Association of Industrial Parks (AMPIP) is a business organization created in 1986 to represent the interests of the most prominent industrial developers of Mexico, and at present, the association comprises more than 50 member companies, who own approximately 170 industrial parks, with a total amount of 17,000 hectares of land, half of which are already developed, with more than 2,000 multinational companies established there. Let me…

Ann Hatch was named the Rotman School’s executive director of development in November 2006. Previously, she spent four years as a member of the fundraising team for the Canadian Opera Company’s capital campaign to build Toronto’s renowned new Four Seasons Centre for the Performing Arts. Greetings everyone! I first crossed paths with Rotman students when I managed a summer volunteer MBA internship program for the United Way from 1998 to 2002, when I recruited 15 energetic students each summer to work as fundraisers and consultants to United Way agencies. This experience taught me first-hand the value of a world-class MBA: although these students volunteered only two hours a week, their impact was immeasurable in the increased fundraising revenues and policy recommendations’ they engendered. As you may know, the Rotman School…

Complete details are available at www.rotman.utoronto.ca/events May 2007 May 1, 7:30-8:30am Rotman Alumni Career Management Speaker Series Speaker: Jamie Broughton, Founder, www.FootprintLeadership.com Topic: “Use Your Natural Leadership to Build a Career You Love ” May 2, 6:00-7:20pm Rotman Master of Finance Speaker Series Speaker: Alan White, Mitchelson/SIT Investment Associates Foundation Chair in Investment Strategy, Rotman School Topic: “Credit Derivatives: The New Frontiers” May 3 and 4 Psychologically Healthy Workplace Conference @ Rotman Keynote Speaker: Julian Barling, Professor and Associate Dean, School of Business, Queen’s University May 31, 6:00-10:00pm Annual Rotman Reunion This is a milestone year for the Classes of 1952, 1957, 1962, 1967, 1972, 1977, 1982, 1987, 1992, 1997 and 2002. June 2007 June 1, 8:00am-4:00pm “Integrative Thinking™: Learning How to Think to Win” 9th annual Rotman Life-Long Learning…