Archive for October, 2011

What Do Boards Really Do?

| Peter Klein |

Coase is fond of telling this story about the economist and the horse:

Economics, over the years, has become more and more abstract and divorced from events in the real world. Economists, by and large, do not study the workings of the actual economic system. They theorize about it. As Ely Devons, an English economist, once said at a meeting, “If economists wished to study the horse, they wouldn’t go and look at horses. They’d sit in their studies and say to themselves, ‘What would I do if I were a horse?’” And they would soon discover that they would maximize their utilities.

Coase, as O&M readers know, prefers direct, hands-on observation to abstract theorizing. As a Misesian [serious, hubba hubba], of course, I can’t endorse this view as a general prescription, though I recognize its value for empirical work. Sometimes it’s best to look at real examples, or to ask real practitioners. Kaplan and Strömberg read through real-world venture-capital contracts to see how control rights were allocated. Genesove and Mullin used the minutes of trade-association meetings, not modeling, to figure out how members of the US sugar cartel maintained compliance.

Here’s another interesting example: “What Do Boards Really Do?” by Miriam Schwartz-Ziv and Michael Weisbach.

We analyze a unique database from a sample of real-world boardrooms – minutes of board meetings and board-committee meetings of eleven business companies for which the Israeli government holds a substantial equity interest. We use these data to evaluate the underlying assumptions and predictions of models of boards of directors. These models generally fall into two categories: “managerial models” assume boards play a direct role in managing the firm, and “supervisory models” assume that boards’ monitor top management but do not make business decisions themselves. Consistent with the supervisory models, our minutes-based data suggest that boards spend most of their time monitoring management: 67% of the issues they discussed were of a supervisory nature, they were presented with only a single option in 99% of the issues discussed, and they disagreed with the CEO only 3.3% of the time. In addition, managerial models describe boards at times as well: Boards requested to receive further information or an update for 8% of the issues discussed, and they took an initiative with respect to 8.1% of them. In 63% of the meetings, boards took at least one of these actions or did not vote in line with the CEO.

I think Ronald would approve.

19 October 2011 at 9:09 am 7 comments

Business and American Literature

| Peter Klein |

Thanks to Shawn Ritenour for the pointer to Algis Valiunas’s National Affairs piece, “Business and the Literati.”

The business of America may be business, but the business of American literature in the past century has been largely to insist that the nation is, in pursuing business, wasting itself on unworthy objects. In the eyes of most novelists and playwrights who deal with the subject, business is not an honorable vocation, but rather an obsessive scramble for lucre and status. Tycoons are plunderers. Salesmen are poor slobs truckling to their bosses, though most of them aspire to be cormorants and highwaymen, too. The mass desire to strike it rich has launched a forced march to nowhere. In short, American literature hates American business for what it has done to the souls of the rich, the poor, and the middling alike.

Right-thinking people now take it for granted that, in criticizing business, American literature has saved (or at least elevated) the nation’s soul. But after a century of slander, that assumption needs revisiting.

17 October 2011 at 10:21 am 3 comments

strategyprofs.net

| Peter Klein |

At O&M we’ve long prided ourselves on being one of the top academic group strategy blogs. We believed this with great confidence, mainly because we were the only academic group strategy blog. Other blogs deal with strategic issues — Dick Rumelt’s blog, Knowledge Problem, Managerial Econ, Digitopoly, and of course the Good Twin, among others — but the Herfindahl index for academic group strategy blogs has been pretty close to 1.0.

We’re happy now to introduce a new entrant, strategyprofs.net, brainchild of Freek Vermeulen, Karim Lakhani, Mike Ryall, Russ Coff, Steve Postrel, and Teppo Felin. The first posts are already up, and the discussion is extremely interesting. Welcome to the blogosphere, Strategy Profs!

14 October 2011 at 8:12 am Leave a comment

Strategic Entrepreneurship Conference Starts Today!

| Peter Klein |

The SMG-McQuinn conference, “Multi- and Micro-Level Issues in Strategic Entrepreneurship,” starts today. Not sure if live-blogging will be feasible (“Nicolai Foss has stepped to the podium. Blue tie, white shirt. Scans the crowd….”) but we’ll post information when we can. The program is here. Some reflections on last year’s conference are here. Naturally Nicolai and I will be in book-promotion mode, hopefully not obnoxiously so.

Update: Per Bylund is doing some live blogging at the McQuinn blog.

13 October 2011 at 3:57 am 2 comments

New Book on the Austrian School from Austria, Featuring Schumpeter and Others

| Peter Lewin |

I am reading an interesting new book from the Mises Institute — The Austrian School of Economics: A History of its Ideas, Ambassadors, and Institutions by two living Austrian authors, Eugen Maria Schulak and Hebert Unterköfler. I will leave the task of a full-blown critical review to experts in the history of thought, but a few passing observations might be of interest to this audience.

One might wonder about yet another history of the Austrian School, but there may be a genuine claim for value-added here, certainly in my case. For one thing, this is a translation from the German edition, so the majority of the references are in German. We parochial English speakers often proceed in isolation from important contributions in other languages. I was struck for example by the volume of work Carl Menger has done in German that has never been translated. And this is the case with all of the usual suspects.

As it turns out, this is particularly important in one case: the case of Schumpeter’s Theory of Economic Development — to which one of the short chapters is devoted. The one English edition that exists is a translation of an earlier German edition. So it fails to capture many aspects of Schumpeter’s later vision.

Many things derive from this early work, namely, Schumpeter’s entrepreneur, in its earliest incarnation (and its evolution in subsequent editions), the idea of the entrepreneur as the combiner of capital goods, and, of course, the notion of entrepreneurship bringing gales of “creative destruction.” The authors describe the development of the work through its various editions as Schumpeter matured as a scholar and became more confident, less nuanced, in his assertions. An example is his story of the business cycle — how the innovating entrepreneur was necessarily involved in “credit creation,” which thus precipitated a cycle (Richard Ebeling has recently done some interpretative work on this). At the time he first proposed this idea, he was vigorously criticized by Böhm-Bawerk and others — and our authors see this as the emergence of the first significant breech with the Austrian School. Dare I be so bold as to suggest that the contemporaries might have gotten it wrong, and, along the lines of Ebeling’s interpretation (reference below, also see my blog here and here), that Schumpeter may be understood more plausibly within a modern central bank institutional setting as hatching a variation of the Austrian Business Cycle story? (more…)

11 October 2011 at 10:35 pm 5 comments

Now Ready for Pre-Order!

| Peter Klein |

This is a placeholder page without much detail, but you can pre-order today! The best news is the price: just £55.00 for the hardback and a mere £19.99 for the paperback — less than a family outing to the cinema, and far more rewarding!

10 October 2011 at 8:33 am 11 comments

Anita McGahan at Missouri

| Peter Klein |

Friend of O&M and leading management scholar Anita McGahan will present the University of Missouri’s Monroe-Paine Distinguished Lecture in Public Affairs, “The Health of Humanity 2050,” Thursday, 27 October 2011. She’ll also do a faculty-student seminar, “Changing the World,” that morning. Besides her important contributions to industry and competitor analysis Anita has become a leading expert in public health, poverty, and economic growth. Local O&Mers, make plans to attend!

Monroe-Paine Distinguished Lecture in Public Affairs

You’re invited to attend
Dr. Anita McGahan
Associate Dean-Research, Director of the PhD Programs, Professor of Strategic Management and
Rotman Chair in Management, Rotman School of Management,
Munk School of Global Affairs, University of Toronto

will present

“The Health of Humanity 2050”
October 27, 2011 — 1:30 pm
2501 Missouri Student Center, Chambers Auditorium
RSVP to McGahan Lecture
For more information on Dr. McGahan, please visit the Truman School website.

9 October 2011 at 6:10 am 1 comment

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).