BEYOND BRICKS AND MORTAR - Wharton...

Winter 1997

A l u m n i M A G A Z I N E

The Wharton School University of Pennsylvania

BEYOND BRICKS ANDMORTARACCOUNTING FOR

INTANGIBLE ASSETS

W H A RT O N A L U M N I W E E K E N D

P H I LA D E L P H I A

Friday, May 16; Saturday, May 17; Sunday, May 18, 1997

• 1967, 1972, 1977, 1982, 1987, 1992 Class Reunions• Welcome Reception• Executive Education Programs• Class Parties• Alumni/Faculty Exchanges• Wharton Town Meeting• Picnic Lunch and Parade• Farewell Brunch

Registration materials and event calendar will be mailed shortly. For more information, call Alumni Affairs at 215-898-8478.

O T H E R A L U M N I E V E N T S

PA R I S

TH E 2N D WH A RT O N EU R O P E A N FO R U M

Thursday, June 19 and Friday, June 20, 1997

Organized by The Wharton Club of Paris in cooperation with the Office of Alumni Affairs and the Executive Education Division

Details and registration information to follow

S H A N G H A I

THE 4TH ASIAN REGIONAL ALUMNI MEETING

Friday, May 30 and Saturday, May 31, 1997

Theme: “Shanghai Into the 21st Century”

Organized by The Wharton Club of Shanghaiin cooperation with the Office of Alumni Affairsand the Executive Education Division

Details and registration information to follow

C O V E R A R T I C L E

The importance of traditional performance measures — such as return on investment, stock price and quarterly earnings — has long been paramount. But that may be about to change.

Illustration by

Steven Noble 7

EDITORRobbie W. Shell

STAFF WRITERSTom McMahonMike Baltes

EDITORIAL ASSISTANTJulia Feldman

DESIGNWarkulwiz Design Associates

EDITORIAL OFFICE

344 Vance Hall, 3733 Spruce St. Phila, PA 19104 (215) 898-8478Fax (215) [email protected] address: http://www.wharton.upenn.

edu/alum_mag/alum_mag.html

A l u m n i M A G A Z I N E

Editorial Staff

Winter 1997

F e a t u r e s

7 M E A S U R I N G N O N - F I N A N C I A L A S S E T S

Managers These Days Are Taking a Hard Look at the Value of Intangibles Like Customer Satisfaction, Intellectual Capital and Employee Loyalty. Soft Assets, They Say, Can Help Predict Future Economic Performance

13 E U R O P E A N U N I O N , O R I S I T D I S U N I O N ?Management Professor Geoffrey Garrett Analyzes the Politics and Personalities Behind the Struggle for European Integration

17 A L I V E A N D W E L L A N D W O R K I N G I N …San Juan

D e p a r t m e n t s

2 S C H O O L U P D A T E

The MBA Club SceneAlumni HonoredExecutive Education, According to Liechtenstein

22 A L U M N I P R O F I L E S

Manuel V. Pangilinan, WG’68: The “New Asian Manager”Kathleen A. O’Neil: WG’76: Banking at the Fed Anthony Hamilton-Russell, WG’90: Making Wine in South Africa

24 F A C U L T Y O P I N I O N

Two Sports Anniversaries, But Little to Celebrate

25 W H A R T O N I M P A C T

Taking Stock of Overpriced Equities

29 M A N A G I N G Y O U R C A R E E R :How Wharton Can Help

W H A R T O N A L U M N I M A G A Z I N E

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THOMAS P. GERRITY

Dean and Reliance Professor of Management and Private Enterprise

ROBERT E. MITTELSTAEDT

Vice-dean and DirectorWharton Executive Education

MARTI HARRINGTON, WG’76Director of Alumni Affairs

Administration Advisory Board

JOAN WALSH CASSEDY, WG’82PresidentKing Communications Group

JAY A. DUBOW, W’81PartnerWolf, Block, Schorr and Solis-Cohen

DAVID GRAFF, WG’84Senior Vice PresidentHearst Magazines International

ART HOWE, WEMBA’86PresidentMontgomery Newspapers

DAVID R. REIM, WG’90PresidentSimstar Digital Media, Inc.

ELLEN YIN, W’87, WG’93Health Care Consultant

S C H O O L U P D A T E

Dancing Club, The Whartones andthe Home Beer Brewing Club.

THE CLUB SCENE

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The MBA Mar-keting Club sponsorsMarketing Mania, an annual all-day eventnear campus which matches up 35 market-ing companies with more than 500 interested MBA students.

The Wharton India Club is currently preparing for its sec-ond Wharton India Economic Forum which last yearbrought together 100 companies and close to 200 studentsfor a day-long conference titled “India, Opportunity of the21st Century.”

The Wharton Cigar Club, started in 1995 to “further theknowledge and enjoyment of cigars,” now has more than100 dues-paying members for whom club officers have nego-tiated discounts at a local cigar shop and free subscriptionsto Cigar Aficionado.

The energy and ingenuity of Wharton’s MBA studentsallows career-focused mainstays — including, for example,the Investment Management Club, Asia Capital Markets Club,Sports Management Club and Consulting Club — to flourishalongside such newer socially-driven entrants as the Ballroom

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Culturally-oriented clubs,like the Wharton Latin Ameri-

can Students Association, KoreanClub, Emerging Economies Club

and African-American MBA Club,reflect the diversity of Wharton’s

student body while those inter-ested in community service

can sign on with Say Yesto Education, Wharton

Students Helping the Home-less or the Buddy Program.

Meanwhile, for the physically active, thereare climbing, scuba diving, ice hockey,roadrunning, rowing, rugby and ultimate

frisbee clubs. And that’s only the beginning. At last count, the Whar-

ton Graduate Association (WGA) — the student-run bodythat provides clubs with financial and managerial assistance— sponsors 30 professional clubs, 20 athletic clubs, 14 socialclubs and 16 cultural affairs clubs, plus another 20 that don’tfit into those categories (the Ethics Club, a Mac Users Groupand the Orientation Club, to name a few). Notes Dan Kelsey,WG’97, “Students here often remark that in an environ-ment which encourages leadership, it is fitting that almosteveryone can be president of something at Wharton.”

All you really need, besides WGA approval, is an agenda.Marketing club co-president Jeanne Ehrenkranz, WG’97, forexample, wants to “increase the awareness of Wharton’smarketing strengths in the face of its dominant reputationas the premier finance school,” she says. The club encour-ages students to pursue marketing careers by providing

Continued on page 6

H.S.H. Prince Philipp, CEO and chair-man of the Liechtenstein Global Trust(LGT), describes his company’s newexecutive education initiative as a“truly innovative and unconvention-al program” where participantsexperience 10 weeks of “rigorous men-tal and physical training…”

Part of that training will come fromWharton’s Aresty Institute of Execu-tive Education, which has engaged inan unusual joint venture with LGT, a

$42 billion asset management and pri-vate banking company headed by thesecond son of the ruling family ofLiechtenstein. Liechtenstein is a small(62 square miles, 30,000 residents)principality located between Switzer-land and Germany.

Prince Philipp’s idea is to createRenaissance leaders in his companythrough an academy which combinestraditional professional educationwith the development of personal

EXECUTIVE EDUCATION, ACCORDING TO L
intelligence skills and teamwork. Theprogram offers training to 60 seniormanagers during a 10-week periodspread out over three years.
Wharton’s role in the academy pro-gram is to provide courses inmarketing, international finance andleadership development. Three 20-member groups of LGT managers willbe here on campus for two-week ses-sions in September, October andNovember.

IECHTENSTEIN

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Continued on page 5


At three different events on campuslast fall, five individuals were honoredby Wharton for their dedication to theSchool and/or for achievement in thefield of management.■ The Dean’s Medal of Honor, theSchool’s highest tribute, was awardedNov. 15 by Dean Thomas P. Gerrity to Liem Sioe Liong, founder of theIndonesian-based Salim Group.

The citation accompanying theaward recognized him “for a lifetime ofmanagement leadership, achievementand commitment to family, countryand the pursuit of excellence.”

The Salim Group is one of South-east Asia’s largest conglomerates, withmore than 200,000 employees in divi-sions ranging from agribusiness andfinancial services to chemicals andtrading and distribution.

“Mr. Liem has helped to lead theresurgence of the Indonesian economythrough his leadership in private sectorgrowth,” noted Gerrity, citing also the“exceptional role” Liem Sioe Liong hasplayed in Indonesia’s history and “themodel of business and managementleadership” he has offered.

The Dean’s Medal is given to promi-nent individuals around the worldwho have made extraordinary contri-butions to their field.■ On Nov. 1, Slivy Edmonds Cotton,WG’79, was presented with the firstDistinguished Alumna Award byWharton Women in Business at the17th annual Wharton Women in Busi-ness Conference. Cotton, who is thesenior managing director of TheEdmonds Group, a newly-formed private investment and merchantbanking firm, addressed a recordcrowd at this year’s conference, whosetheme was “Innovation and Impact— Turning Ideas into Action.”

The Distinguished Alumna Awardwill be given each year to an individ-ual who has achieved professional success, shows the potential for continued career development, hasdemonstrated a commitment to bal-

HONOR ROLL

LIEM SIOE LIONG

SENG TEE LEE

SLIVY EDMONDS COTTON

JIM ANCHIN AND MICHAEL FISHER

ancing career and community involve-ment, and serves as a strong role modelfor Wharton women.■ During a ceremony on October 24, three alumni were given Distin-guished Service Awards (DSA), anhonor established by the WhartonAlumni Association in 1988 to recog-nize exemplary volunteer contri-butions to the School. One of thoserecipients was Seng Tee Lee, W’50,who received the award in 1995 butwas unable to accept it in person untillast fall.

Lee, who lives in Singapore, ischairman of the Lee Pineapple Com-pany, a business that he and hisbrother, Seng Gee Lee, W’43, WG’44,grew into one of the giants of theSoutheast Asian economy.

Lee’s donations have built Lee Terrace and Lee Garden near SteinbergHall-Dietrich Hall and also the LeeLibrary in the Steinberg ConferenceCenter. He has contributed to reno-vations of the undergraduate vicedean’s suite, the Furness Building and Lippincott library, and in 1994, created a loan fund for West Philadel-phia entrepreneurs to start and runtheir own companies.

The other 1995 DSA recipient, CraigHarding, WG’75, chairman and CEO ofThe Harding Group in Greenwich, Ct.,received his award on campus in May1995.

Recipients of the 1996 DistinguishedService Awards are Jim Anchin, W’65,WG’66, and Michael Fisher, WG’74.

Anchin is the managing partner atAnchin, Block & Anchin, LLP in NewYork. His involvement with Whartonincludes serving as a member of theUndergraduate Advisory Board and aspokesperson for the UndergraduateAdmissions working group.

He is also a member of the board ofdirectors of the Wharton Club of NewYork and was a volunteer on his 30threunion gift committee. He has beena long-standing member of the Ben-jamin Franklin Society and last year

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■ Would a state-of-the-art aquaculture facility at thePhiladelphia Naval Yard generate enough jobs and revenuesto justify its existence?■ How can our country’s national parks be better managedand more cost-efficient?

Students and researchers affiliated with Wharton’s Sol C.Snider Entrepreneurial Center are part of two separate teamshelping to answer these questions.

The aquaculture — or commercial fishfarming — project is spearheaded byPenn’s Veterinary School andfunded with a $450,000 grantfrom the Delaware River Port Authority. Wharton’smandate is to conductfeasibility studies forwhat is currently en-visioned as a 5-acrefacility where fish willbe raised, processedand shipped out tolocations in the three-state region.

The aquaculture centercould serve several purposes,says Clark Callahan, director of the Wharton Small BusinessDevelopment Center and a memberof the project team. “One is to create a newuse for the huge Philadelphia Naval Yard thatwould generate jobs, revenues and general economic devel-opment in the Philadelphia area.”

Another goal, says project member Patty Khuly, WG’97and a 1995 graduate of Penn’s vet school, is to “address thedepletion of the world’s fish resources caused by decades ofcommercial fishing and an increase in the popularity of

AN ENTREPRENEURIAL APPROAC

seafood … What’s especially thrilling about this project,”Khuly adds, “is that we are working in a cutting-edge indus-try involving new technology,” including, for example,closed recirculation systems that allow water to be filtered,reused and adjusted for such variables as salinity, nutritionand temperature.

The project is cross-disciplinary in that it brings togetherbusiness, engineering, architectural and veterinary stu-

dents along with faculty, researchers andadministrators.

The project team will pre-sent its feasibility studies to

the Delaware Port Authoritythis month.

The national parks pro-ject began last fall whenthe EntrepreneurialCenter was asked bythe U.S. Departmentof Interior, NationalPark Service, EasternRegion, to prepare

strategic plans for threedifferent parks — Valley

Forge, Shenandoah Nation-al Park and the Maggie Walker

House in Richmond, Va.According to Bill Alexander, the

Center’s managing director, both MBAand undergraduate students spent the fall semester

researching operational issues. For example, the projectteam looked at ways to increase revenues from vendors,including hotels, restaurants and other auxiliary services. “Iknow there is a big fear that you will walk into a national parkfacility and find that all the trails have corporate plaques onthem,” says Alexander. “We certainly don’t want that, but

H TO FISHERIES AND FORESTS

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BROADCASTING THE NETWORK: These 10 students are members of theWharton Undergraduate Alumni Relations Council (WUARC), founded fouryears ago to promote interaction between Wharton undergraduate studentsand alumni.

In November, WUARC members helped host Career Week during whichpanels of recent alumni came back to campus to talk with students abouttheir career choices. Earlier this year, WUARC created an alumni resourceguide for seniors, designed and distributed class mugs, organized lunchesbetween students and alumni and invited alumni club representatives tomeet with interested undergraduates.

“Wharton’s network was one of the things that attracted me to theSchool, but I didn’t know how to access it,” notes Margaret Rhee (shownin white shirt), W’97, chairperson of WUARC. “This council seemed likea great way to get involved early.” ”

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LIECHTENSTEINContinued from 2In accordance with LGT’s mandate, the visiting executiveswill be exposed not only to state-of-the-art business educa-tion but also to the arts and humanities. Their curriculumwill include, for example, sculpture classes, a visit to thePhiladelphia Museum of Art and rowing on the SchuylkillRiver, according to Fran Johnston, associate director of cus-tom program development at Aresty.

Wharton’s participation in the Academy is based in parton a recommendation from LGT executive Rolf Kaelin, whoattended an Advanced Management Program at Wharton sixyears ago.

The Liechtenstein program, says Robert E. Mittelstaedt,Vice Dean, Executive Education, “goes beyond pure businessinstruction to recognize that the future of managementeducation lies in developing the whole person.” ”

■ Samuel T. Lundquist, director of admissions and financial aid for the Graduate Division from 1992until last summer, has been namedchief of staff for Dean Thomas P. Ger-rity and director of the Dean’s Office.

In this newly-created position,Lundquist becomes a member of the School’s senior management team, advising the Dean and pro-viding assistance on special projects,including the School’s strategic plan.

Robert Alig, WG’87, senior asso-ciate director of Wharton GraduateAdmissions since 1995, succeedsLundquist in the position of director. ■ Last October, 105 Students fromWharton’s Executive MBA program(WEMBA) spent five days meetingwith government and business lead-ers in South Africa.

The International Seminar, orga-nized every year during the finalyear of the two-year WEMBA program, offers students the op-portunity to study and observe aparticular area’s economic and busi-ness environment.

Members of this year’s graduating

class chose Southtination because country “will plabusiness world anopment,” notes associate director

The students mminister of finanment of the Repubthe chief executivMines of South ASouth Africa Brenumber of corpora■ Ernest Dale, a of managementworldwide forconsulting on oleadership, died79. Dale, who ein economics fromPhD in economicsWharton in 196

He was a formAmerican Academa leading proponWork?” school oauthor of a dozethe best-selling ment: Theory and

NEWSCampus

Africa as their des-they felt that this

y a key role in thed in regional devel-Catherine Molony, of WEMBA.et with the deputyce for the govern-lic of South Africa,

e of the Chamber offrica, the CEO of

weries along with ate representatives.professor emeritus who was known his wr it ing and rganizations and

in August at agearned two degrees Cambridge and a

from Yale, came to4.

er president of they of Management,

ent of the “Does Itf management andn books, includingtextbook Manage- Practice. ”

5


On April 19, 1997, Christmas in April

volunteers from Wharton and members

of the surrounding community will revi-

talize 30 homes belonging to the elder-

ly, disabled and low-income residents of

West Philadelphia.

We need your help to achieve our

goals. If you wish to contribute funds or

your time, please contact:

Christmas In April Philadelphia

PO Box 42752

Philadelphia, PA 19101-2752

or call Eileen Dibb (215) 731-9233

VOLUNTEERS NEEDED

Presents its Annual Conference

“India, Investing in a New Era”March 21, 1997Wyndham Franklin Plaza Hotel 17th and Race StreetsPhiladelphia, Pennsylvania

For further information contact:Wharton-India Economic Forum University of PennsylvaniaTel: (215) 898-7631, Fax: (215) 573-8999web site: http://dolphin.upenn.edu/~whindia/

Promoted by

Wharton Emerging Economies Program

Sponsored by

WhartonIndiaE C O N O M I C F O R U M

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employer information, assisting with on-campus corporatepresentations and helping students with resumes and mockinterviews.

Cigar club founder and co-president Jamie Wilmsen obvi-ously has a different agenda — not only “furthering theknowledge and enjoyment of cigars” but also “strengthen-ing the alumni network,” by, for example, sponsoringalumni events to “reinforce Wharton as an important aspectin peoples’ lives after they graduate.”

India Club president Irma Goyal, WG’97, is driven by adesire “to teach future business leaders about the potentialwhich India can offer from a business standpoint, but also tooffer non-Indians a chance to learn through fun, non-threat-ening cultural events.”

“Many students are involved in more than one club,”notes Kelsey, who is a member of the cigar club, consultingclub, cycling club and marketing club. What these groupsall have in common “is that they improve the on-campusexperience for everyone involved.”

The WGA offers support, adds WGA president Mike Car-rel, WG’96, “but student-run clubs are the true catalysts forpositive change at Wharton.” (Next issue: UndergraduateClubs) Dan Kelsey ”

CLUB SCENE Continued from 2

became a member of the Joseph Wharton Club.Fisher is one of the co-founders, and currently the man-

aging partner, of Multi-Manager Investments AG in Zurich,Switzerland.

In 1988 Fisher became one of the charter members of thenewly-formed European Advisory Board. Last year he coor-dinated the First Annual Wharton European Forum — titled“European Competitiveness: Dynamo or Dinosaur?” — inLondon. The Forum drew 200 alumni and business leadersfrom 19 countries in the region. ”

HONOR ROLL Continued from 3

we do want better contract procedures in place that will max-imize royalty arrangements for the parks.”

The Entrepreneurial Center team is also developing pro-posals for local “friends” groups to play a more significantrole in fundraising by organizing community programs,nature walks, concerts and other events.

Two months ago, the federal government announcedthat entrance fees at many national parks will be increased,in many cases doubling, as part of a plan to raise $30-$50million for park improvements. The fee changes will bephased in by April.

The Wharton project has enlisted the full-time help ofKate Rhoades, W’95, who spent the last two summers work-ing in Yellowstone National Park. “I am looking at ways tosupplement government funding either through privatesponsorships or licensing arrangements,” she says. Rhoad-es has also been interviewing officials at historicWilliamsburg, Va., and working with a company that surveysthe attitudes and travel habits of American tourists.

Her work will be supplemented by MBA students who, aspart of a required field application project during the secondsemester of their first year, are looking specifically at how to

FISHERIES AND FORESTSContinued from 4

increase royalty streams to the National Park Service Foun-dation through the marketing of products — ranging fromcamping equipment to tee-shirts to Christmas cards —licensed by the Park Service. ”

In Philadelphia:

Thursday through SaturdayFeb. 6, 7, 8at 6 and 8 p.m.Mandel Theater, Drexel UniversityFor ticket information, callRobert Burlinson at 215-242-9654

In New York:

Friday, Feb. 14, at 8 p.m.Tribeca Performing Arts Center199 Chambers StreetFor ticket information, callSecil Tabli at 215-985-3613

WHARTON FOL L I ES

2 1 s t A N N U A L

Wharton

Latin American Conference

“Succeeding in Times of Change” will be held Feb. 21, 1997 atthe Pennsylvania Convention Center in downtown Philadelphia

Investment Banking in Latin AmericaCrossing BordersThe Consumer Products MarketAlternatives for Economic Development

Lorenzo H. Zambrano, chairman and CEO, Cemex; FranciscoGros, former CEO of the Central Bank of Brazil, currently a man-aging director at Morgan Stanley; and Ana Botin, CEO, BancoSantander.For information on purchasing tickets at the special alumni rate,please contact the Wharton Latin American Conference office at(215) 573-5598 or fax to (215)-573-3651. The website addressis: http//dolphin.upenn.edu/~lamconf/

The

6Annual

TOPICS INCLUDE:

Among the speakers will be:

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MANAGERS TODAY ARE TAKING A HARD

LOOK AT THE VALUE OF INTANGIBLES LIKE

CUSTOMER SATISFACTION, INTELLECTUAL

CAPITAL AND EMPLOYEE LOYALTY. SOFT

ASSETS, THEY SUGGEST, CAN HELP PRE-

DICT FUTURE ECONOMIC PERFORMANCE

MEASURING

NON-FINANCIAL

ASSETS

Every three months, thousands of executives, analystsand money managers around the world wait anxiously forthe hard numbers that will move markets, slash or increasepayrolls and drive expansion. Although the importance oftraditional performance measures such as return on invest-ment, stock price and quarterly earnings has long beenparamount, things may be about to change.

In a decade characterized by exploding global com-petition, a shift from manufacturing-oriented firms toservice-oriented firms and almost perpetual reengineering,more and more companies are paying far greater attentionto the measurement of “soft” or “intangible” assets — intel-lectual capital, training, human resources, brand image and,most important, customer satisfaction. As Steven Wallman,a commissioner at the U.S. Securities and Exchange Com-mission, says, “assets like customer satisfaction and employeeloyalty are increasingly viewed as drivers of wealth produc-tion and earnings. If measured reliably, they can providecritically important information to the financial markets.”

Reliable measurements are half the battle. The real chal-lenge, says David Larcker, Ernst & Young Professor ofAccounting, is actually linking quality and customer-focusedinitiatives to accounting and stock market returns.

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Larcker and colleague Christopher Ittner, KPMG PeatMarwick Term Assistant Professor of Accounting, are at theforefront of a movement within a growing number of com-panies to predict future economic performance using softasset measurements. They, along with University of Michi-gan Professor Claes Fornell, have developed a sophisticatedapproach for measuring the economic value of soft assetswith a mathematical model based on the American Cus-tomer Satisfaction Index and the Swedish CustomerSatisfaction Barometer.

“The choice of performance measures is important foreveryone in an organization,” says Larcker. “For example,more and more of these measures — like customer satisfac-tion, employee satisfaction and quality — are being foldeddirectly into bonus contracts for executives. The idea is thattraditional financial measures don’t capture everythingabout managerial performance. There are certain steps amanager can take to improve customer satisfaction thatdon’t show up immediately in the bottom line, but willshow up in the future. These are forward-looking indicatorsof economic values of the company.”

Neel Foster, a board member at the Financial AccountingStandards Board, agrees. “As we move into more of an infor-

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mation age and service-based economy, the importance ofsoft assets is becoming more relevant to valuing some com-panies than brick and mortar. A lot of companies don’t evenhave brick and mortar.”

The distinction, Foster says, is an important one for ana-lysts whose job is to “figure out what future cash flows areand estimate the value of a business. If they don’t haveany information regarding soft assets and the kinds of cashflows that they’re going to generate, they have an incom-plete picture.”

Drastic changes in industries such as telecommunications,banking and utilities have fueled the interest in putting avalue on soft assets. “The service sector is under tremendouscompetitive pressure due to deregulation,” Larcker says. “Acustomer now has a choice of alternative service providers.If a company doesn’t satisfy them, they’ll just go to anothercompany that can.”

The same might be said aboutemployees. “We’re taking a lot oftechnology from the customer sideand applying it to the employeeside,” says Jim Brown, WG’92, vicepresident of quality and businessdevelopment at GE Capital. “We’relooking at employee retention andemployee satisfaction and relatingthis back to things we can do dif-ferently as a company. Previouslywe had much more generic ‘feelgood’ surveys for our employees,asking them how they like it here,how they like their benefits and soforth. Now our questions relate towhat makes an employee leave orstay. For example, what is the like-lihood he or she will be with us fiveyears from now. That is more of anoutcome measure. Then we drilldown to the areas that would affectthat decision.”

While many companies have,in fact, made progress in improving their measurement ofsoft assets, the U.S. corporate landscape is littered with firms,even entire industries, that followed narrow, financial mea-sures, says Marshall Meyer, professor of management andsociology.

In his forthcoming book, Finding Performance (HarvardBusiness School Press, 1997), Meyer points to several indus-tries that lost significant market share to competition in theearly 1980s because they were obsessed with productionand inattentive to quality. The auto industry is one. Anoth-er is the mainframe computer industry whose preoccupationwith profit margins in static commercial markets blinded itto growth opportunities in consumer markets and openedthe way for clone makers to seize the market for desktop

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computers. A third is the banking industry which founditself holding billions of dollars of distressed assets, mainlyreal estate, in the early 1990s because it had been bookingprofits while ignoring risk.

“The common element in these stories is that financialdisasters might have been avoided had the right measuresbeen in place,” says Meyer. “The stories have taught busi-ness people that no single measure can capture the totalityof performance and that obsession with any single measurecan be very risky. The managers I’ve spoken with, as a con-sequence, now accept the need for multifaceted performancemeasurements to capture financial and nonfinancial dimen-sions of performance simultaneously.”

The usefulness of information provided by nonfinancialmeasurements is not limited to companies for their inter-nal decision making. As Foster has pointed out, analysts and

investors would find the infor-mation useful as well. Yet currentaccounting rules do not allow forintangible assets to appear on the balance sheet as an asset likeequipment or inventory, notesIttner. “Say a company invests in intangible assets such as em-ployee training or research anddevelopment. The payoff fromthat may take some time to showup in a typical financial state-ment.”

For those analysts who doobtain such information aboutintangible assets, the results canbe powerful, says GE Capital’sBrown. “Morgan Stanley uppedits estimate of GE’s stock pricealmost 20 percent based on theinformation GE reported to themabout what they were doing withtheir quality initiative and wherethey thought it was leading,”Brown says.

Ideally, adds the SEC’s Wallman, “analysts ought to besaying that they desperately want this information, and thatit must be generated from a model that’s comparable acrossbusinesses and is fair, reasonable and verified by a thirdparty such as an auditing firm. As it becomes clearer thatthis information is both reliable and useful, and that it canmeasure numbers that provide cross-company and cross-industry comparisons, there will be a growing demand forthe information. It will start with sophisticated investorsand lenders of capital, who will obtain the informationeither directly from the company (confidentially if need be)or commission their own studies. Or, you’ll find moneymanagers commissioning studies. Finally, you’ll see infor-mation about intangible assets made public.”

) AND IT TNER

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F E A T U R E

II. Tackling the Problem

of Measurement

While companies have mastered the ability to pinpoint cycletimes and defect rates, measuring intangible assets like cus-tomer satisfaction and employee satisfaction has provenmore difficult.

According to Ittner, a major pitfall in trying to developreliable measurement systems is that measures move aroundtoo much. For example, a study by Ittner, Larcker and Mar-shall Meyer of a major financial services firm found thataccording to its measures, 80 percent of its customers weresatisfied in a given quarter. But in the subsequent quarteronly 55 percent said they were satisfied. A measurement sys-tem like that has too much error, Ittner says. And theimplications can be damaging. “If you use the wrong mea-sure, or it doesn’t map into economic performance, not onlyhave you wasted a lot of money creating a customer satis-faction index that’s not very good, but you’ve potentiallymade disastrous product and service design decisions.”

“Many times companies just come up with a list of attrib-utes and ask people to rate them without having any realknowledge of what’s important,” says William Madway,W’79, WG’85, director of research at Charlotte, N.C.-basedAmerican City Business Journals, a publisher of 35 businessnewspapers nationwide. “One could miss the boat entirelyas to defining what a satisfactory experience is for a cus-tomer.”

“A critical factor in developing accurate measurements ismaking sure that they’re part of a broader-based measure-ment system that integrates data about a customer’s behaviorand the competitor’s customer behavior,” says Denis Hamil-ton, WEMBA’87, director of quality management at Johnson& Johnson. “Many companies have mastered techniquesthat measure attributes such as price, image, service and prod-uct factors, but the secret is in designing surveys aroundbehavioral segments of the market. The learning comes fromcontrasting loyal customers against non-loyal customers.”

A large chemical company studied by Larcker is a case inpoint. After learning that its customer satisfaction levels(and revenue growth rates) were lower than its competitors,company analysts found that customers really wanted thechemical company’s salespeople to be not just order takers,but partners who would interact with the customers to sug-gest value added initiatives, such as how to more efficientlyuse technology. Once the chemical company’s salespeoplemoved from pure order takers to partners, Larcker says, thechemical company saw noticeable improvements in cus-tomer satisfaction and a resulting rise in sales revenue andcustomer profitability.

Some companies are looking to each other for answers.Hamilton, a point person in J&J’s customer satisfaction ini-tiatives, recently chaired a consortium of nine blue-chip U.S.companies that meets three times per year to discuss best


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GE CapitalQGeneral Electric, long at the forefront of quality initiatives, isalso taking a lead in linking those initiatives directly to financialperformance. One of GE’s top subsidiaries, GE Capital, is in themidst of rolling out a customer loyalty survey and customer ser-vice program to each of its 26 different businesses, which rangefrom consumer credit cards to highly specialized financing.

David Larcker, Ernst & Young Professor of Accounting, hasbeen directly involved with GE Capital’s initiatives in conjunc-tion with Pamela Cohen of CFI Group, the Ann Arbor-basedconsulting firm.

The first phase of GE Capital’s initiative involves the collectionof customer information and the establishment of extensivedatabases. Research firms, such as CFI, then work directlywith senior managers from the individual businesses to identi-fy target customers and determine what GE Capital employeesdo day-to-day to affect customer loyalty and retention. Onemajor problem that was uncovered in some of the businesseswas a slow and confusing billing process.

Little time was wasted as project teams were deployed fromacross various GE Capital businesses to redesign the billingprocess. But, says Jim Brown, WG’92, vice president of quali-ty and business development at GE Capital, “it is not sufficientto look just at the billing process. That might be where theproblem manifests itself with the customer, but a lot of times theproblem may actually start with sales people not understand-ing what they’re selling customers and customers notunderstanding what they’re buying.”

According to Brown, a team’s size depends on the business,but typically ranges from as little as six to eight employees, or,in some of the larger businesses, as many as 30 employeesacross a number of teams and various geographies. It is essen-tial, he says, to pull together teams from across a number ofinternal functions to solve the problems.

“The most difficult thing in this whole initiative is to take cross-functional teams and have them work on problems spanningacross functions. Then, you actually have to get the improve-ments implemented and make them stick. We’ve found that weneed to continually measure these processes and control themthrough reporting and constant feedback. We currently use aquarterly reporting system, but we’re probably heading to amonthly system.”

GE Capital demonstrates its commitment to improving quali-ty by pulling employees from their regular jobs and dedicatingthem to quality improvement projects on a rotation that can lastup to two or three years. In addition, Brown says, the compa-ny has instituted several financial incentives at both upper andlower levels of the organization to be more team-based and tofocus specifically on these project results.

“The cutting edge is focusing everything around the customerand linking it to actual behavior, which is probably the nextphase we’re going into,” Brown says. “Now, we’re relying a loton interview data and what customers tell us. Next, we wantto link it to actual behavior and finally, link it to financial per-formance. That doesn’t mean that we’re going to have perfectdata, but it’s something we can begin estimating over the nextseveral months, then refine over the next few years. It’s diffi-cult, but there’s no question it can be done.”

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practices in customer satisfaction. One of the main issues ishow to standardize surveys, especially when business unitsmay be spread around the world.

A big challenge for the global business entity, for exam-ple, is how to fold cultural differences into measurementsystems, particularly in businesses where service is importantto decision making. For example, J&J is very decentralizedand comprised of more than 160 operating units worldwide.One of the first things to do, says Hamilton, is determinewhat kind of measurement scales to use.

“In Germany, scales must be reversed because in the Ger-man school system one is considered high and five isconsidered low, whereas in the U.S., five is typically consid-ered a favorable score and one is lower,” Hamilton says. “Inthe Far East, questions that require negative responses aretypically not desirable because of the cultural orientationagainst using the word ‘no’.”

Another challenge for far-flung companies is institutingmeasures across various business units. “You have to get afirm-wide measure, but it’s so dependent on what’s hap-pening in local markets,” says Madway. “In my company,these business units tend to be very autonomous. It has var-ied from city to city as to whether the individual office didany type of customer satisfaction study. And, if they did, itwasn’t uniform. One of my goals is to standardize the mea-surement process.”

Equally difficult for managers like Madway is restatingquestions in a more detailed and comprehensive way to getthe most useful information.

“Sophisticated performance measures are very new tomany industries, especially newspaper publishing,” Mad-way says. “In the past, newspaper executives would testreadership behavior by asking their readers about a fewmajor attributes such as appearance, reporter quality andquality of coverage, using simple scales ranging from excel-lent to poor.”

Today, Madway notes, there are much better gauges inpredicting readership and loyalty such as the degree to whichthe paper contains information or articles that help the read-er with their business, or the degree to which interestingarticles are easy to find. “We’ve taken the same types of ques-tions and changed the way they’re asked.”

III. Linking Customer

Satisfaction Measurements

to Quality

Larcker and Ittner recently surveyed senior managers respon-sible for managing quality programs at major U.S. firms andfound that 75 percent felt considerable pressure to demon-strate the financial consequences of their quality initiatives.Yet only 29 percent thought they could link quality to

Common Pitfalls in Customer Satisfaction Measurement

QAlthough there is no Holy Grail of customer satisfaction mea-surement, David Larcker, Ernst & Young Professor of Accounting,and Christopher Ittner, KPMG Peat Marwick Term Assistant Pro-fessor of Accounting, offer their observations on limitations intypical customer satisfactions measurement programs.

Customer satisfaction measures are unstable over time. Inmany companies, customer satisfaction measures exhibit con-siderable variation from one period to the next. However,unless the company (or its competitors) has made a significantchange in its operations, this variation is likely to be due tomeasurement error, rather than to actual changes in real cus-tomer satisfaction.

Customer satisfaction is measured using a single overallquestion. Customer satisfaction is too complicated to be mea-sured with one survey item. However, many companies use asingle question and simply tabulate the percentage of respon-dents that provide the highest rating (i.e., a “top-box” measure).But research demonstrates that these methods have dubiousreliability.

Customer satisfaction measures cannot be linked to desiredeconomic outcomes. Many firms are frustrated in their effortsto demonstrate that changes in customer satisfaction lead tofuture changes in customer purchase behavior, sales growth,accounting returns and shareholder value creation. Unlesscustomer satisfaction can be linked to either current or futureeconomic performance, customer satisfaction measures areunlikely to be providing any useful information for decision mak-ing and performance evaluation.

The drivers included in the customer satisfaction measure-ment are not actionable. Even if reliable and valid measures ofcustomer satisfaction can be obtained, they are of little useunless the analysis also identifies the factors that drive cus-tomer behavior. Most customer satisfaction analyses includesome examination of factors that are assumed to drive cus-tomer behavior. However, unless these factors can be trans-lated into action plans, the customer satisfaction measuresalone are unable to guide improvement initiatives. For example,customers may indicate that “professionalism” is an importantdeterminant of their satisfaction rating. However, without someadditional detailed qualitative analysis of what “professional-ism” means to the customer, it is almost impossible to developaction plans for increasing customer satisfaction.

Customer satisfaction measures are not linked to customerprofitability analysis. Sophisticated customer satisfactionmeasures provide valuable information about future customerpurchase behavior and the revenue consequences of improve-ment initiatives. However, it is still necessary to determine thecost required to increase customer satisfaction. In some casesthe cost of increasing customer satisfaction can exceed theassociated revenue gains. In other instances, the most highlysatisfied customer may be the least profitable due to the high-er costs of serving these customers. Without supportinginternal accounting systems to capture customer-level prof-itability data, customer satisfaction measures alone providelimited guidance for improving profitability.

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accounting returns such as return on assets, and only 12 per-cent could link quality to stock price returns. Similarly, only27 percent could link customer satisfaction measures toaccounting or stock price returns.

According to Ittner, a common stumbling block is mostfirms’ inability to link internal and external quality data. Forexample, defect rates and cost of poor quality are typicallytracked by the quality or operations department, whereascustomer satisfaction is tracked by those in marketingresearch. “If you really want to find out the returns of thesequality programs, or which projects are going to give thebiggest payback, you’d better look at both internal andexternal effects simultaneously,” Ittner says.

“Putting more emphasis on nonfinancial measures allowsa much broader understanding of what quality means,” headds. “For example, does the product or service meet cus-tomer needs? Measuring defects is one component of that,but it’s a very minor component compared to things like ‘Isit aesthetically pleasing?’ ‘Can it be serviced?’ ‘Is it reliable?’Incorporating nonfinancial measures gives a more encom-passing definition of quality.”

The difficulty, however, is thatmanagers do not always know what to do with reams of data, saysPatrick Harker, UPS TransportationProfessor for the Private Sector andprofessor of operations and infor-mation management. “There was alot of frustration in the early quali-ty movement because organizationswouldn’t do anything about theinformation they were collectingabout customers. It would get lost in a bureaucratic abyss.”

Indeed, several recent studies indicate that a majority ofquality programs have failed to produce significant economicreturns. McKinsey & Company, for example, found thatnearly two-thirds of the quality programs that it examinedhad either stalled or fallen short of delivering real improve-ments. A survey by A.T. Kearney found that 80 percent ofmore than 100 British firms reported “no significant impactas a result of TQM,” and more than 300 U.S. companies sur-veyed by Arthur D. Little found “zero competitive gain.”

“Everybody assumes that customer satisfaction translatesinto better performance in the future,” says Larcker. “But sofar there has been relatively little evidence to back this up ...

“From a business perspective, there are two considera-tions: First, can you develop measures of satisfaction —relating to customers, employees, whatever — that actuallytell you something about future economic consequences?Second, what component, or drivers, can you change tocause this measure to go up? If you can answer these twoquestions, this will tell you where you want to focus yourquality initiatives.”

The methodology used by Ittner and Larcker — which isbased on several recent statistical advances and innovations

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in the analysis of qualitative and quantitative data — pro-vides customer satisfaction measures that are more predictiveof the ultimate economic goals of the quality program. Inaddition, the model explicitly includes the elements of ser-vice, quality and so on that are leading to customersatisfaction, thereby providing insight into those qualityimprovement opportunities offering the highest potentialeconomic payback.

To test their model, Larcker and Ittner have used datafrom several manufacturing and service organizations. Ittnersays the first step in estimating this model is conductingqualitative research through techniques like one-on-one cus-tomer interviews and focus groups to determine the primaryquality components, such as product price, packaging, cleanliness of facilities, courteous service and breadth ofpromotion programs.

“You have to figure out what people really mean by qual-ity,” Ittner says. “For example, in the fast food industry,initiatives like offering the latest promotions (the newest

mple) can have a big impact on ustomer satisfaction. Quality is aot more than just the product, specially in service businesses.ltimately you don’t just want

ustomers to be happy; you wanthem to come back and buy yourroduct or service again.”After collecting the initial quali-

ative data and identifying theotential drivers of customer satis-action, the researchers use aophisticated statistical technique

that “maximizes the ability of the customer satisfaction mea-sures to predict economic outcomes (retention, customerprofitability, the likelihood of the customer providing posi-tive word-of-mouth advertising) and ultimately economicoutcomes such as stock price or return on assets,” Ittnersays. “You don’t just want to maximize customer satisfac-tion, but those aspects of customer satisfaction that have thebiggest impact on economic performance.”

After making that assessment, a company has a rankingof quality components in terms of their input on customersatisfaction and the creation of economic value. This is akey input in deciding how a company allocates the budgetfor quality improvement.

To test whether the link has been made, sales figuresshould be checked against satisfaction scores over some timeperiod (generally six to twelve months). Controlling forthings such as layoffs, strikes, or unexpected downturns inthe economy, a positive relation between customer satisfac-tion and financial performance is typically observed.

“Information like this is invaluable for companies inindustries with short customer cycles like banks or the Yellow Page directories, or in industries like telecommuni-cations and health care where customers can easily switch

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allegiance,” says Ittner. “You can see fairly quickly if peoplearen’t happy, and this allows you to make adjustments whereneeded.”

However, this analysis is not limited to companies withshort customer repurchase cycles. In industries with longrepurchase cycles, nonfinancial customer satisfaction mea-sures can provide early warning of problems long beforefinancial results turn down.

For those companies that are able to more accuratelymeasure soft assets, say Larcker and Ittner, there is a payoff.A study they completed in 1996 found that companies ranking the highest in the American Customer Satisfac- tion Index (discussed annually in Fortune) — a leading track-er of customer satisfaction data for major U.S. companies — significantly outpaced lower-ranked companies in thestock market.

IV. Looking Ahead

“The cutting-edge work now being done links different partsof a company into a system that is essentially mathemati-cally based, but feeds on data collected within the firm andfrom its customers,” says Claes Fornell, the Michigan pro-fessor who is also founder of The CFI Group, an AnnArbor-based consulting firm specializing in customer satis-faction measurement.

“For example, if we change this aspect of an employee’sworking environment, we can trace the effects of that all theway through to shareholder value. We can see how employ-ee satisfaction impacts the customer’s evaluation of the firm,how that affects return on investment and how return oninvestment impacts shareholder value.”

Fornell, a research collaborator of Larcker’s, says that oneof the outcomes of the work being done by Larcker, Ittnerand others, is that companies will not be as captive of short-term financial performance. “Quarterly earnings reports willstill be significant, but not as important as they are today.Intangible assets such as customer satisfaction are muchmore long-term in nature.”

Moreover, customer satisfaction and quality are just thetip of the non-financial asset iceberg. “There are other assets— alliances, supplier relationships, intellectual capital,employee diversity, channels of distribution — that areequally, or even more, valuable,” says Larcker.

The work in this area may also mark a resurgence in thequality movement, according to some long-time experts inthe quality field.

“Quality is not passé,” says Wharton Professor Paul Klein-dorfer, Universal Furniture Professor of Operations andInformation Management. “It’s the very core of an analyt-ically oriented, customer-focused person who wants knowl-edge about the market and how his or her organization cancreate value for that market. In the hands of such a person,quality is a very valuable perspective and a real motor forchange and growth.” ” Michael Baltes

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Using Nonfinancial Measures to Determine Compensation

QAlthough companies have traditionally relied on financial mea-sures to reward executives, David Larcker, Ernst & YoungProfessor of Accounting, says that an increasing number ofnonfinancial measures like customer satisfaction and employ-ee satisfaction are being used in the bonus contracts ofexecutives. For example, the Chrysler Corporation ties a largeamount of its executive bonuses to the J.D. Power and Asso-ciates quality survey.

Larcker, Wharton’s Christopher Ittner, KPMG Peat MarwickTerm Assistant Professor of Accounting, and Madhav V. Rajan,associate professor of accounting, collected data from 317companies across many industrial sectors and found that 36percent of the companies sampled used nonfinancial mea-sures to determine executive rewards.

They also uncovered several key factors that influence whichtype of measure a company preferred. The primary insight isthat companies that pursued strategies founded on innovationand new product development (strategies that are funda-mentally long-term in scope) tended to favor nonfinancialmeasures. In addition, nonfinancial measures are used morefrequently in companies with a well-developed quality pro-gram, in utilities and telecommunications firms that faceregulatory and competitive pressures to improve nonfinancialdimensions such as safety and customer satisfaction, and infirms where financial performance measures are heavily influ-enced by factors outside the executives’ control.

Finally, they found no evidence that executives manipulatedboards of directors into adopting nonfinancial measures to padbonuses (an important finding because it contradicts a commonfear that greed may motivate the adoption of such measures).

Although many companies have embraced the tying of com-pensation to nonfinancial performance measures, someexperts say that the results have been mixed and that successoften depends on the organization. In some companies, thisapproach is applied not just to senior executives, but takendown to the sales level, says Denis Hamilton, WEMBA’87, director of quality management at Johnson & Johnson. But,says Hamilton, that may not necessarily be positive. “The gen-eral view I’ve heard is that there’s too much manipulation of theresults when you take it down to that level.”

However, Bill Madway, W’79, WG’85, director of research atAmerican City Business Journals, says that companies canalways do a better job of satisfying customers, and one way isto tie employee bonuses into nonfinancial performance mea-sures like customer satisfaction. “This applies to everyone,especially the lower-level employees because they’re on thefront lines with the customers,” Madway says. “If employeesare able to drive up customer satisfaction and it helps the com-pany’s bottom line, they should be rewarded for that.”

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OR IS IT

M A N A G E M E N T P R O F E S S O R G E O F F G A R R E T T A N A L Y Z E S T H E P O L I T I C S A N D

P E R S O N A L I T I E S B E H I N D T H E S T R U G G L E F O R E U R O P E A N I N T E G R A T I O N

alk to Professor Geoff Garrett about the subject of Euro-pean integration and you will hear a tale of drama,intrigue and passion more suited to a discussion of Ital-

ian opera than international economics. Garrett draws upon such material as the tension between

German Chancellor Helmut Kohl and Germany’s powerfulBundesbank, the climactic end of the Cold War in 1989, thestreet riots in Paris over government job cutbacks, the sud-den collapse of the Italian lira and English pound in 1992and the ongoing struggles of Eastern European countries towin acceptance into the European Union (EU).

“Developments over the past 15 years have transformedthe way Western Europe works,” says Garrett, an associateprofessor of management whose research is primarily ininternational political economy and European integration.“On many important dimensions we are seeing somethingakin to the formation of a European federation of statesamong countries that have a long history of hostility and dis-agreement. It is a fascinating process to watch.”

For the moment, all eyes are on Europe’s upcoming tran-sition to EMU — the formation of an Economic andMonetary Union with the creation of a single currency, the“Euro”, in 1999. Yet even as analysts are busy debatingwhich of the 15 countries in the European Union will joinEMU, Garrett is quick to point out that monetary union isonly the latest development in the evolution of Europeanintegration. Two other events of major significance set thestage for EMU’s arrival.

The first, and one that is extremely important for busi-ness, was the creation of a large body of pan-European law.“Although this body of law has its roots in the Treaty ofRome signed back in 1957, the case law of the EuropeanCourt of Justice (ECJ) that was developed between 1964 and1979 has been critical,” says Garrett.


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Unlike most international law, he adds, “ECJ decisions arebinding and are followed by most member countries. Thecourt has real authority to arbitrate in international dis-putes, which has been a boon for trade.”

The second major development was ratification of theSingle European Act in 1987 and the subsequent movetowards majority decision-making rule. “This is more orless without precedent,” says Garrett. “In the Security Coun-cil of the United Nations, for example, any permanentmember can veto any decision it doesn’t approve of. Butwith the passage of the Single European Act, the rights ofindividual countries to block initiatives they don’t like weresubstantially reduced.”

The Single European Act heralded a renewed commit-ment towards a truly free market system in Europe, Garrettadds. “European leaders committed to going much farther,much faster, than ever before, and decided to do it by greatly reducing national sovereignty in the regulation ofmarkets.”

But the momentum for European integration took anunexpected turn in 1989 with the end of the Cold War.“Suddenly enormous new problems and opportunities were created throughout the world,” says Garrett. “People worried that unification would lead to an aggressive, expan-sionist Germany. Germany was already the economic power;now it would be the political power as well. How do you dealwith that?”

Moving north and east, there were other considerations.Because of their proximity to Soviet bloc countries during theCold War, Austria, Finland, Norway, Sweden and Switzerlandhad chosen to remain neutral and outside the EU. That allchanged post 1989. In the early 1990s, three countries — Aus-tria, Finland and Sweden — did join the EU. Switzerland andNorway chose not to. The main reason the Swiss didn’t join,

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says Garrett, “is becausethey are notoriously protec-tive of their national sov-ereignty; the Norwegiansare as well, plus they haveenormous oil reserves whichmakes it easier for them togo it alone.”

Still further east, appli-cations for EU membershipfrom Eastern European coun-tries, led by the VisigradFour — the Czech Republic,Hungary, Poland and Slo-vakia — have met with tacitresistance from the govern-ments of Spain, Portugal,Greece and Ireland whoworry that their privilegedposition on agriculture anddevelopment assistance willbe threatened by competi-

tion from Eastern Europe. France has also expressedreservations. Germany, however, wants the Visigrad Four in.

And that’s just a preview of what’s to come. The anxi-eties over European integration are especially pressing nowbecause of EMU’s timetable: Although a single currency isnot scheduled to take effect until 1999, countries will beadmitted to, or denied membership in, EMU based on datafrom 1997.

In an article last year in the Financial Times, Garrett assess-es the economic consequences of EMU and its implicationsfor EU member states. His research takes into account EMU’sconvergence criteria — a set of requirements for entranceinto EMU that are laid out in the Maastrict Treaty of 1992.The two key criteria are: a country’s budget deficit cannotexceed three percent of GDP; and public debt cannot exceed60 percent of GDP. But these rules aren’t hard and fast, Gar-rett notes. Countries will be admitted or not, based on aruling by a “qualified” majority as to whether sufficientprogress has been made towards meeting the criteria.

In his article, Garrett talks about the potential costs of cre-ating a single European currency and a single monetarypolicy for all EU members. He also looks at three other fac-tors that will influence the domestic effects of joining: theextent to which countries’ central banks are already inde-pendent from political control, the extent to which theirlabor market institutions can coordinate the workforce tocontain wage increases, and the extent to which countriestrade with each other.

“This critically important economic initiative has verydeep political roots that go back to more than a century ofinstability in Europe and, most importantly, the series ofwars between France and Germany,” says Garrett. “Whatinterests me is how the politics and economics fit together.

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It’s very different from a corporate strategy view of Europewhich looks at EMU’s impact on this or that type of multi-national. At the same time, corporations do need to knowwhat this new Europe will look like if they are to makeinformed decisions.”

Garrett was born in Australia, earned his BA at the Aus-tralian National University and his MA and PhD at DukeUniversity. He taught at Oxford and Stanford before comingto Wharton in 1995.

His forthcoming book, titled Partisan Politics in the Glob-al Economy, argues against the idea that globalization of theeconomy has fundamentally reduced national autonomy,suggesting instead that there are many ways to successfullycompete and also retain national economic identity.

Below, he discusses key issues and important players inthe move towards European integration.

EMU: PROS and CONS“EMU makes a lot of sense for countries that are part of theEuropean ‘core’, meaning those countries that do substantialtrade with Germany and have symmetrical business cycles.

Governments from other countries might want to be inEMU for a different reason. Joining EMU, they feel, mightactually reduce the power of the German Bundesbank overtheir economic policies. The bigger the monetary union andthe more members in it, the less the monetary union is like-ly to be dominated by German-style concerns — pricestability above all else.

In my article in the Financial Times, I speculated on thepredicaments of different EU members. Participation inEMU is an easy decision for Austria, Germany, Luxembourgand the Netherlands. These countries already have delegatedmonetary authority to institutions that are insulated frompolitical control, most importantly the German Bundes-bank. As a result, the dislocations from the transition tomonetary union would be small. Labor market institutionsare also quite encompassing in these countries, and hencethe labor market is likely to respond efficiently to EMU.Moreover, these countries form a tight trading bloc and theirbusiness cycles are highly correlated.

The UK is at the other end of the spectrum. The Bank ofEngland continues to be heavily influenced by the govern-ment. British labor market institutions have become veryfragmented following the Thatcher decade. The Britisheconomy is not well integrated into Europe in terms of tradeand business cycles.

The bulk of EU members lie in between these twoextremes. The most important case is France. The Bank ofFrance is relatively independent but French labor marketinstitutions are weak. Furthermore, intra-European trade isnot so important for the French economy as for the mem-bers of the EU core.

I believe that there will be a monetary union in 1999. Thepolitical importance of maintaining the pace of European

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integration will overcome other misgivings. But this EMUwill be small, comprising only France and the tight “DM-zone” — Austria, Germany, Luxembourg and theNetherlands. Is that good? For the DM-zone, absolutely.They are the ones that should be in it. France fits into thiscategory, but for political rather than economic reasons.Belgium ought to be in it as well because its economy is inti-mately tied to Germany’s. But Belgium radically violates theconvergence criteria because it has the largest public debt ofany European country. If you let Belgium in, it becomes verydifficult to exclude anybody else.

The question for Europe is, will this small group of tight-ly-linked countries within a larger free trade area be a magnetthat will attract other countries over time, so that perhapsin five years or so Italy, Spain and Portugal will join thismonetary union? That’s the optimists’ view.

The pessimists’ view is no, there will be a big barrier cre-ated in Europe in the form of a small core of countries thatis tightly integrated in almost all ways. These countries willprobably attempt real foreign policy cooperation as well,which in the past has been impossible for Europe. WitnessBosnia, which has been a disaster for European foreign pol-icy. The negative view says there will be a big barrier aroundthis small European core and everyone else will lose.

The Italian government, for example, is scared. On theone hand, the Italian economy is not part of the EU’s eco-nomic core. But on the other hand, the Italian governmentdesperately wants to be in EMU because not being in sug-gests second-class European citizenship. Italy doesn’t wantto be excluded. Joining the EMU might also impose somemuch needed discipline on Italy’s domestic business envi-ronment. German leaders, however, view Italy as anundisciplined economy that could destabilize EMU. TheFrench government has recently expressed similar views.Given these reservations, it is doubtful that Italy will be inthe first wave of EMU, a body blow for one of the foundingmembers of the EEC (as the EU used to be known).

For many people outside the EU core, the big issue iswhether a small EMU will create a two-class system in Europethat could have damaging long-term consequences. I thinkthat is more likely than the magnet theory that says the coremoves first and everyone else will soon follow.”

EASTERN EUROPEAN COUNTRIES :OUTSIDE LOOKING IN

“Before the Eastern European countries can even think aboutEMU, they have to be admitted into the European Union.

Getting the Eastern European countries into the EU isextremely complicated because they are poor countries thatare competitive in agriculture and cheap manufacturedgoods. The existing EU members who are also poor — ledby Spain, Portugal, Greece and Ireland — currently receivesubstantial development aid from the wealthy north of

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Europe that they fear would get diverted to Eastern Europeancountries if they were admitted to the EU.

The other group of countries that has reservations aboutexpanding the EU includes France and Italy, with large anduncompetitive steel, textile and agricultural sectors. Theclearest problem here concerns the Common AgriculturalPolicy, a complex system of agricultural subsidies to large butinefficient agricultural producers. At the moment, threequarters of the European Union budget is made up of agri-cultural transfers from countries that consume agriculturalproducts to countries that produce them. The biggest pro-ducer is, and always has been, France, who of course wantsthis common agricultural policy to stay in place. It can’t stayin place if you give it to the Eastern Europeans.

Who is the big mover behind Eastern Europe’s accep-tance into the EU? Germany. The German agenda is partpolitical and part economic. First, Helmut Kohl believesthat stabilizing Eastern Europe is essential to Germany’sfuture, and I think he’s probably right. The way to stabilizeEastern European countries is to bring them into the West-ern bloc. In addition, German companies were the first intoEastern Europe. They have by far the strongest foothold andas a result can only benefit from this process.

Ultimately the Eastern European issue pits Germanyagainst most of the other Western European countries,including its perennial partner in EU affairs, France. Thequestion is whether the political will of Helmut Kohl or hissuccessor can make this work.

I think Eastern Europe will get into the EU but they willmost likely come in as second-class citizens, at least initially.All the rules of membership will apply to them but in caseswhere they could do damage to existing members’ economies,they won’t get all the benefits. For example, they won’t getas much development assistance, now moving from thewealthy European countries to Spain, Ireland, Greece andPortugal. These four countries will agree to Eastern Europe’sentrance provided their own benefits aren’t cut. And theonly way not to cut their benefits is either give very little tothe East Europeans or have Germany pay for Eastern Europe.

“The fascinating thing about Economic and Monetary Union is that it has become

extraordinarily unpopular with citizens, even though most government leaders

are completely committed to it.”

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Kohl’s inclination is to pay this price, but that is impossibleat the moment considering the enormous debts his govern-ment has accrued as a result of rapid German unification.

Given these constraints, do the Eastern European coun-tries really want to join the EU? The answer is yes, they wantto join very badly. The governments from these countriesthink there would be economic benefits, which there prob-ably would be. For example, their economies would becomemuch more attractive to foreign investors because now youwould be investing say, in the Czech Republic, but your firmcould sell its goods and services with no trade barriers to Ger-many. So you don’t have to pay German costs to have accessto the German market.

Also, the Eastern European countries hope that by joiningthe EU they will get some development aid from Germany.

Nonetheless, the whole Eastern Europe question is goingslowly. Realistically, you won’t have even the four most devel-oped Eastern European countries in the EU until well after2000. The decision to let them in has to be made very slow-ly because agriculture is paramount to France, developmentassistance is critical to Spain, and both countries can makecommon cause with Italy on these issues. These are the threemost influential countries in the EU apart from Germany.”

HELMUT KOHL AND THE BUNDESBANK:“Germany has the strongest economy in Europe and a strongcentral bank, so it is very hard for anything to happen inEurope without Germany wanting it to happen.

But that hasn’t been a problem because Helmut Kohl hascommitted himself completely to the project of Europeanintegration. Obviously German reunification was even moreimportant at the turn of the decade, but that happened rel-atively easily. Now creating a ‘European Germany’ isparamount to Kohl. He has to balance not only externalconstraints, like the opposition of some countries to EasternEurope’s inclusion plus the differing opinions about whatmonetary union should look like, but also a serious domes-tic constraint, which is the German Bundesbank.

The Bundesbank has believed for a long time that Kohlalways puts political objectives above economic prudence.And the Bundesbank is a very powerful actor in Europe. Ifthe Bundesbank raises interest rates, that causes a recessionon the whole continent, which is what happened in theearly 1990s. The Bundesbank raised German interest ratesas a way of punishing Kohl for reunifying Germany veryquickly and in an extremely expensive manner. The resultwas a devastating recession throughout Europe.

The Bundesbank is mandated to care only about the infla-tion rate — i.e. price stability. If that means you have to livewith a 10 percent unemployment rate, the Bundesbank says,‘That’s okay. The government should deal with that, not us.’It’s a remarkably powerful institution.

The historical reason that the Bundesbank was given thismandate was that Germans believe, probably rightly, that it

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was careless money, or hyperinflation, in the 1920s that ledto political instability and gave rise to Hitler. As a result thereis a shared national view in Germany that inflation is badand that prices should be kept as stable as possible.”

NO POWER TO THE PEOPLE“The fascinating thing about EMU is that it has becomeextraordinarily unpopular with citizens, even though mostgovernment leaders — led by Kohl and President JacquesChirac of France — are completely committed to it. Why isit so unpopular? Because the economics of it are very com-plex and the citizens don’t understand it. What they dounderstand is that back in the early 1990s they werepromised that the Maastrict Treaty would make everybodyin Europe better off.

Over the next five years, however, a lot of citizens sufferedbadly. While fixed exchange rates, in the form of the Euro-pean Monetary System (EMS), were associated with lowerinflation and higher growth in the 1980s, things lookedvery different in the early 1990s. Most European countrieswere going into a post-cold war recession, but the Germaneconomy was overheating as a result of government spend-ing on German unification. Since Europe was tied togetherby the EMS, the other countries had to adopt German mon-etary policy, which was far too tight for them. Slower growthand rising unemployment were the logical consequences ofthis. Citizens began to realize that their governments hadsigned away an enormous amount of sovereignty at Maas-trict. Then on black Monday, September 16, 1992, EMS allbut fell apart in very dramatic fashion. The pound and thelira were both forced out of the system — heralding a yearof currency instability and massive international capitalmovements in Europe.

Most people believe that the Bundesbank played a role inthe crisis by hinting that the Italian and British economiesshould not be in a monetary union with Germany. The Bun-desbank effectively told the currency markets that the lira andpound were overvalued and should float against the DeutscheMark. Conversely, the Bundesbank propped up the franc.

The tightness of the French-German bond over monetaryunion is amazing. The French government has been pre-pared to sacrifice massive domestic hardship in the name ofkeeping monetary union alive. Essentially what this hasmeant is that the French government has adopted Germaneconomic policies at a time when those policies are terriblefor the French people.

The fact that government leaders in both countries arewilling to do this shows you the importance of these bigpolitical issues. The legacy of the pre-1945 era for France andGermany is clearly so powerful that the goal of trying toeliminate the possibility of another continental war is onethey are prepared to pay almost any price to achieve. InFrance that has meant unemployment, massive strikes in thepublic sector and large scale rioting in the streets.

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A P P R OX I M AT E LY 3 .7 M I L L I O N P E O P L E — I N C L U D I N G 150 A L U M N I — I N I N D U S T R I E S R A N G -I N G F R O M B A N K I N G, I N S U R A N C E A N D F O O D P R O C E S S I N G T O R E A L E S TAT E , L AW A N D

T O U R I S M . T H E 1 0 0 - M I L E L O N G I S L A N D I S A L S O H O M E T O M O R E T H A N 2 0 0 B E A C H E S ,Y E A R - R O U N D T E M P E R AT U R E S I N T H E 8 0 S A N D A P O R T T H AT I S T H E C R U I S E S H I P C A P I TA L

O F T H E C A R I B B E A N. W H E T H E R YO U G O F O R B U S I N E S S O R T H E B E AC H , CO N S I D E R TA K I N G

A L O N G O U R L I S T O F R E S TA U R A N T S A N D H O T E L S . T H E Y C O M E H I G H LY R E C O M M E N D E D.

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RICHARD CARRIÓN, W’74CHAIRMAN, PRESIDENT AND CEO, BANPONCE

As if running Puerto Rico’s largest bank, aggressively expand-ing operations into the U.S., Central America and theCaribbean, and targeting new initiatives in the family busi-ness sector isn’t enough, Richard Carrión is also aiming toget Puerto Rico chosen as the site for the 2004 SummerOlympics.

Carrión is chairman, president and CEO of BanPonce,where he oversees a financial services holding companywith $16.8 billion in assets and a market cap of $1.8 billion.Banco Popular, the corporation’s full-service commercialbanking subsidiary, has 170 branches in Puerto Rico andfocuses mainly on the small and middle market.

In the U.S., Banco Popular has expanded its empire by targeting emerging Hispanic communities and setting upuser-friendly neighborhood banks. The company has 30branches in New York, six in New Jersey, eight in Chicagoand four in Los Angeles, and plans to expand this year intoFlorida and Texas. It is already the largest commercial banklender of SBA loans in the U.S.

This northern strategy complements an expansion to thesouth as well. Banco Popular currently offers its ATM ser-vice to consumers in the Dominican Republic and is in theprocess of building a system in Costa Rica. “We are lookingfor local partners in Central America and the Caribbean,”says Carrión. “We also have an investment in a Jamaicanbank and our own banking network in the Virgin Islands.”

Within Puerto Rico itself, the family business sector is aclear fit for Banco Popular. “It is very much our market, andit is an extremely important one for Puerto Rico,” says Car-rión, who has five children ages 4 to 16. “Family-controlledcompanies are more committed to the business and they aregood competitors.”

One of the biggest challenges for family businesses, headds, “is stewardship of the corporation. As succeeding gen-erations come, who is going to manage the company? Welike to say that running a business is extremely difficult andrunning a family is extremely difficult, so running a familybusiness is difficulty squared.”

Banco Popular is offering educational seminars to fami-ly businesses — in conjunction with the Wharton Fam-ily-Controlled Corporation Program — and helping them“put in place the mechanisms that will improve their oppor-tunities for survival. We are also helping our commercialloan officers better discern the difference between a stablefamily business and one that is headed for trouble.”

Banco Popular itself was runby Carrión’s father and grand-father before Richard Carrióntook over as president in 1985and as CEO in 1989. In 1990,the company merged with itsrival, Banco de Ponce.

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As for the Clinton administration’s recent repeal of Sec-tion 936 of the U.S. tax code, which in effect eliminates aset of special tax breaks for U.S. companies operating inPuerto Rico, Carrión expects a short-term negative impacton Banco Popular — which does a considerable amount of business with mainland companies that operate on theisland — as well as on the Puerto Rican economy. “We willsee a significant exodus of 936 funds from the market, whichwill have to be replaced with slightly more expensive ones.But in the long run we should be all right. Puerto Riconeeds to diversify its economic base more than it has, andthere are already mechanisms on the manufacturing side fordoing this.”

Then there are the Olympics. Carrión, an avid racquet-ball player, is lobbying hard to have Puerto Rico chosen as host for the 2004 Summer Olympics. “It would be veryhelpful for our economic and social development,” saysCarrión, who suggests that the hotel capacity issue be solvedby putting people up in cruise ships in the San Juan harbor.

“What makes the Olympic Games great is the philosophyof competition,” he adds. It’s true that the commercial sideof the Olympics has allowed the philosophy to grow and bepresent in more parts of the world, but it is the strength ofthe Games that should be brought to the forefront.”

RAFAEL A. ROCA, W’49CHAIRMAN OF THE BOARDS, PRAICO

INSURANCE GROUP

After Rafael Roca left Wharton he joined the family business,which back then consisted of coffee and sugar plantations,stone quarries and cattle. “It wasn’t for me,” says Roca.“Coffee plantations are up in the mountains. I preferred thecity. I went to work for GE’s industrial sales division for halfthe salary and without the car my father had offered me.”

He spent four months at GE, four months at Seagrams’rum distillery, and then, in 1950, moved to Puerto Rican-American Insurance Co. (PRAICO).

He has been with them ever since in a variety of posi-tions, including co-owner and chairman. “When I firststarted, PRAICO had five employees; now it has 566,” saysRoca. In 1993, the last year production was directly respon-sible to him, the group was the largest property/casualtyinsurer in Puerto Rico. Now, with about $110.6 million inrevenues, it is the third largest in a field of approximately109 property casualty companies. It also has a life insurancecompany.

In 1979, PRAICO was acquired by the Continental Insur-ance Company of New York. Five years later it entered intoa partnership through a reinsurance pooling agreement withPan American Insurance Co., thereby enabling Roca, whothat year had acquired Pan American, to stay with the Groupand aggressively grow the companies.

In 1991 Continental sold the PRAICO companies andRoca sold the Pan American companies to Mapfre Interna-

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cional, S.A., a subsidiary of thelargest public insurance compa-ny in Spain. Under the terms of the deal, Roca stayed on aschairman and CEO until last

April. He is now chairman and chief investment officer. Today, Roca and his wife are involved in a number of phil-

anthropic ventures, including homeless shelters and the localCatholic university. He is particularly interested in music, andthrough his company has provided scholarships to PuertoRican music students who wish to study in the U.S. He sitson 18 boards, seven of them outside Puerto Rico, includingthe board of trustees of the National Symphony Orchestra atthe Kennedy Center in Washington, D.C. His brother, Gaspar, W’47, is currently head of El Vocero, the largest news-paper in Puerto Rico.

Roca says his business philosophy can be summed up byWinston Churchill’s commencement speech at Oxford:“Never give up; never give up; never give up.” His biggestchallenges over the years have been very stiff competitionfrom U.S. and foreign companies, adverse loss ratio periodswhen rates could not be raised due to political and otherpressures, and the stress of hurricane seasons.

Although he has no immediate plans to move on fromPRAICO, he does not discount the possibility of another ven-ture. “One of these days there might be something else I wouldenjoy doing, maybe in the field of investments,” he says.

MANUEL H. DUBÓN, W’63, L’66PRESIDENT AND CEO, D GROUP EQUITIES

Manuel Dubón’s immersion in Puerto Rico’s economy andpolitics is impressive and it goes back a long way.

Dubón, who earned a JD degree from Penn in addition tohis undergraduate business degree in accounting and finance,practiced law for almost two decades, with several short inter-ruptions, including one year as executive officer and legalcounsel to the Senate Finance Committee in Puerto Rico,two years as a captain in the U.S. Army in Europe and twoyears as the island’s economic development administrator.

“In 1978 I was responsible for drafting the law and imple-menting the economic policy that made U.S. multinationals(936 companies) start paying corporate taxes to Puerto Rico,”he says. “We changed the industrial incentive system fromone of 100 percent tax exemption to one of partial taxation.I wasn’t a very popular fellow.”

The program also offered a deep discount of the tax if the936 companies voluntarily elected to reinvest all or part ofthe annual profits in Puerto Rico. “It worked like a charm,helping to defray, in part, the cost of the modern educa-tional, transportation and public utility infrastructure thatPuerto Rico enjoys today,” Dubón adds.

In 1986 Dubón stopped practicing law to concentrate hisattention on business enterprises. He is president and CEOof the D Group Equities holding company and spends about

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one half his time with D Group Commercial Equities Asso-ciates, a real estate partnership that does development,property management and construction. Through D GroupCapital Corp. he is involved with the group’s financial ser-vices and investments in the equity and financial markets.He is also chairman of The Bank and Trust of Puerto Rico, aprivate bank he helped create, and secretary of Mendez &Co., one of the largest food, liquor and beer wholesalers inPuerto Rico. He is involved with Mendez’s affiliated Inter-ship and Intermarine groups, the largest stevedore andmarine terminal operators of the Port of San Juan.

“We have professional management in all these entities;my job is to supervise performance and help set policy andgoals. I also love to negotiate, structure complex businesstransactions … and above all create institutions,” he says.

Dubón is married and has five children, including aWharton graduate and a current Wharton student. Hisbrother Luis also went to Wharton, W’56, and is a lawyer.

Despite his business responsibilities, Dubón has been anactive member of the New Progressive Party that advocatesstatehood for Puerto Rico. Hewas a delegate to the RepublicanNational Convention in SanDiego and counselor of the Dolecampaign in Puerto Rico.

On the subject of PresidentClinton’s repeal of Section 936of the U.S. Tax Code, Dubón sayshe would have preferred a “period of transition rather thanan immediate phase-out of the tax breaks, with some alter-native relief in the form of a new wage-based tax creditincentive.” But he doesn’t think repeal will have the disas-trous effects that some are predicting for Puerto Ricanindustry.

“Our industrial sector today is much more sophisticatedand has a stronger capital base than before,” Dubón says. “Itwould cost billions to replace that production capacity in addi-tion to the lengthy environmental permit process that anynew plant installation or relocation would have to undergo.”

CARMEN A. CULPEPER, WG’68PRESIDENT, FINAPRI, INC.

At the same time that Carmen Culpeper was developingfinancing alternatives for the public and private sectors atClark Melvin Securities Corp. in San Juan, she was also doingindependent management consulting for such clients as theP.R. Government Development Bank, the University of Puer-to Rico, Grenadier Realty, the P.R. Buildings Authority andTriple S, the biggest health insurance company in Puerto Rico.

Today, Culpeper is president of Finapri, a subsidiary ofTriple S, which finances the purchase of insurance policiesin property, public liability and other areas.

“The company was on the books in May of 1996 but Ireally started operating it and hiring people last September.

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We currently have five employees, a number that will prob-ably double this year, and a million dollars in premiumfinancing,” says Culpeper who grew up on the island andgraduated magna cum laude in finance from the Universityof Puerto Rico. The company eventually plans to expandinto equipment leasing and other types of financing.

After Culpeper graduated from Wharton, she worked forPeat Marwick Mitchell as a consultant and then joined Volks-wagen as their finance manager in Puerto Rico. From 1973to 1977 she was a control unit manager for Citibank, N.A.in Puerto Rico before taking a year’s leave of absence to bethe financial and economic affairs aide to the Mayor of SanJuan. From 1978 to 1981 she was executive aide to theMayor, coordinating the personnel, finance and adminis-trative units and directly supervising the risk managementfunction for San Juan.

In 1981 she was appointed Secretary of the Treasury forPuerto Rico, and in 1985 rejoined Citibank as vice president,Latin American Bank Group, New York.

From 1988 to 1992 Culpeper was president and CEO ofthe State of New York Mortgage Agency. In 1992 she joinedDonaldson, Lufkin & Jenrette as manager of DLJ’s PuertoRico account and oversaw a $700 million tax revenue antic-ipation note issued for the Commonwealth.

She stayed at DLJ until 1995when she moved to ClarkMelvin Securities Corp. as seniorvice president.

Culpeper is optimistic aboutthe repeal of Section 936.Although the legislation lastsummer eliminated new tax

breaks retroactive to Jan. 1, 1996, it agreed to phase themout over 10 years for companies already in Puerto Rico. This10-year grace period “provides time to create something newin the interim,” she says, “such as incentives on the local taxlevel that would attract new corporations to the island.”

VICTOR GONZALEZ, W’74ENTREPRENEUR

Even while he was at Wharton, Victor Gonzalez tookcourses at Penn in biology as preparation for a master’sdegree in forestry from Yale.

Today, all his entrepreneurial business ventures share, tovarying degrees, two goals: protecting the environment andmaking money. Or as Gonzalez puts it, “It’s a matter of com-bining what I learned at Yale about ecology with what Ilearned at Wharton about finance.”

Gonzalez’ business ventures are grouped into three com-panies. Puerto Rico Land and Fruit Co. produces and sellsorganically grown coffee, manages ecological restorationprojects and is involved in setting up a mitigation bank. Theconcept behind a mitigation bank, says Gonzalez, is to estab-lish an inventory of restored and created wetlands which are

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then sold as credits to developers whom regulatory agenciesallow to impact environmentally sensitive areas.

“No one else in Puerto Rico is doing this, although it is becoming more common in the U.S.,” he adds. “These mit-igation banks are seen as a wayof resolving the main conflictbetween the business and environmental communities byoffering companies a way toboth make money and protectour environment.”

Gonzalez has two other firms, Mateco and Celta, whichimport lumber, plywood, steel, cement and related materialsfor the building and construction industries. Altogether heemploys about 200 people.

“The theme behind everything I have done is that of thesmall- or medium-sized businessman taking the risks andgetting the rewards, rather than working out the solutionsto problems through a large corporate structure.”

Born in Havana, Cuba, Gonzalez moved with his family toPuerto Rico in 1962 at age 10. He and his wife, Tania Serralles,C’78, have three boys. Gonzalez sits on the board of a non-profit conservation organization based in Philadelphia andserves as an adviser to Yale’s School of Forestry in New Haven.

“I have been extremely happy living in Puerto Rico,” hesays. “I am very grateful for the way the Puerto Rican peoplefreely and openly welcome foreigners like myself, and offerus the same opportunities as they have themselves. No otherCaribbean or Latin American country is like this. It showshow big Puerto Rico’s heart is.”

MANUEL R. DE JUAN, WG’86DEPUTY EXECUTIVE DIRECTOR, MARKETING,

PUERTO RICO TOURISM CO.

In late 1992, Manuel De Juan was a brand manager incharge of all Procter & Gamble products sold in the Domini-can Republic and Haiti. An old friend who happened to beexecutive director of the Puerto Rico Tourism Co. called himwith an offer he couldn’t refuse — to head up the tourismagency’s worldwide marketing of Puerto Rico as a destina-tion, primarily for vacationers but also for the group andconvention market.

“I spent three weeks trying to convince myself not to takeit, but in the end I decided it was too good an opportunityto pass up,” says De Juan.

The Puerto Rico Tourism Co. is a public corporation of theGovernment of Puerto Rico, and as such has top-level back-ing to make tourism into the engine of economic growth forthe whole island. It’s a challenge that sends De Juan out onthe road 50 percent of his time inviting the world to “dis-cover the continent of Puerto Rico.”

“’Continent’ is a rather dramatic term, but we use itbecause there are so many experiences to be enjoyed here,”

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says De Juan, going on to mention the island’s 200 beach-es, year-round average temperature in the 80s, rich cultureand overnight options that range from luxury resorts tomore affordable hotels and inns.

De Juan’s responsibilities include infrastructure and pub-lic policy issues designed to promote tourism. In 1993, forexample, “we created a law to provide incentives for hotelroom development in Puerto Rico that has caused an explo-sion of rooms being constructed — and filled. This year wehave about 10,200 rooms; next year we anticipate 13,000.”

On the marketing side, “we recently did a quick invento-ry of our video production and realized that if you count thevideos we have either produced directly or been a part of, itcomes to 500 hours of programming that has been shown ina number of outlets, including national TV. ‘General Hospi-tal,’ for example, came down here and filmed about amonth’s worth of episodes. The shows were stunning.”

De Juan grew up in Puerto Rico and graduated cum laudefrom Yale University with a degree in economics. He and

his wife, a marketing researchmanager at P&G (where theymet), have a year-old son.

“The current governor of Puerto Rico is a pediatric surgeonwho brought with him into gov-ernment a cadre of youngprofessionals from the private

sector to accomplish a number of top-priority goals, includ-ing the development of tourism,” says De Juan. “I knewwhen I took this job that I was coming into a situation whereI was getting a lot of support and could truly make an impacton the future of Puerto Rico.”

SILA GONZALEZ, W’87LAWYER

Sila Gonzalez divided her time last fall between taking care ofher infant son, working occasionally for a real estate devel-oper and helping her mother, Sila Calderon, run for mayor ofSan Juan as the Commonwealth Party candidate. (She won.)

During the course of the campaign Gonzalez had anopportunity to meet many Puerto Ricans at rallies andfundraising events — an experience which she says kindledher interest in working in the government at some point inthe future. “There is so much poverty still in Puerto Rico.You feel that perhaps if you had a position in governmentyou could do something to help people out.”

At the moment, though, Gonzalez has set aside severalyears to raise a family. She attended law school at BostonUniversity after graduating from Wharton and then workedin the Boston regional office of the U.S. Environmental Pro-tection Agency. While at BU, she met her husband, adoctoral student in physics who decided to switch to law. Heearned his JD at Harvard Law School and now works for alaw firm in San Juan.

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Gonzalez and her husband— both of whom grew up inPuerto Rico — returned homein 1992. She worked for a smalllaw firm and then a large one,O’Neill & Borges, until she tookleave in October 1995 to start a family.

Gonzalez’ affiliation with the Commonwealth Party — asopposed to the Statehood Party or the Independence Party— is rooted in the feeling that Puerto Ricans have “a differ-ent culture, history and language. I feel more Puerto Ricanthan American. On the other hand, I don’t think indepen-dence would be economically feasible. We get a number ofbenefits from the U.S., although we reciprocate by payingsome taxes, contributing to the armed forces and so forth.”

As for her mother’s election as mayor of San Juan, Gon-zalez acknowledges that the family will have less privacythan before. “If I have to make a sacrifice in terms of ourfamily relations, I do it gladly because I know she is goingto do great work.”

SALUSTIANO ALVAREZ, W’54PRESIDENT, MENDEZ & CO.

A few years ago, says Salustiano (“Tito”) Alvarez, his com-pany — one of the top three food and liquor distributors inPuerto Rico — was able to import beers only in 10-ouncecans and in bottles that had to comply with a specific shapeand color.

The Puerto Rican government, supported by the laborunions, did that “to protect local industry,” says Alvarez.“But we lobbied hard to get those restrictions removed, evenarguing at one point that they were unconstitutional.” Thelobbying paid off, and the company won a permit allowinggreater flexibility with regard to beer containers.

Today Mendez & Co.’s most popular brand is Heinekens,offered in several different shapes and sizes, followed byMiller. The company also sells distilled spirits and wines andhas a food division that offers such well-known brands asGeneral Mills and Beechnut. Sales are in excess of $200 mil-lion a year.

And should continue to grow. “The economic newsseems to be very good,” Alvarez says. “The repeal of Section936 will be of minor consequence to our business. The onlyway it could affect us is in thecost of money. Right now 936funds are obtained at very rea-sonable rates. Those rates willprobably go up once the 936funds disappear from PuertoRico.”

Mendez & Co. is a familybusiness started in 1912 by two of Alvarez’ uncles. His fatherwas the third partner. Today the groceries division is head-ed by a vice president who is one of Alvarez’ nephews. The


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MANUEL V. PANGILINAN, WG’68: THE “NEW ASIAN MANAGER”
To understand, on a some-what philosophical level,why Hong Kong-based FirstPacific Co. Ltd. has been suc-cessful, it helps to think interms of paradoxes.
This $7 billion Asian conglomerate, whose corebusinesses today includetelecommunications, realestate, trading and banking,is “neither east nor west, buta blend of the two,” saysManaging Director MannyPangilinan. West, in that itconforms to the financialdiscipline and accountingdisclosure requirements fol-

lowed by most western countries, but east in that “we canbe comfortable, if needed, with ambiguity in our businessrelationships. That is very Asian, and it’s especially impor-tant when dealing with the political milieu in countries likeThailand or the Philippines.”

First Pacific has also been called an “oxymoron,” Pangili-nan adds, “because we define ourselves as an investment andmanagement company.

“Somebody once told me you can’t do that. Either youare an investment company and should forget about man-aging, or you are a management company and should forgetabout investing. We said no. We should not only make goodinvestments, but we should manage them as well. We at cor-porate don’t pretend to run the companies we own but weare intrusive. We have to know what is going on, bothstrategically and financially.”

Pangilinan’s approach to management has clearly paidoff. A recent Business Week magazine profile of First Pacificdescribed the company as “one of Asia’s most dynamic con-glomerates” and Pangilinan as a model of “the new Asianmanager.” Given First Pacific’s phenomenal success thesedays — earnings in 1996 were in excess of $200 million andthe stock has increased tenfold since 1991 — one wondersexactly what aspect of the First Pacific story is referred to: thecompany’s adroit mix of management professionalism andentrepreneurship, or perhaps Pangilinan’s own penchant forrisk-taking and the connections he has established with someof Asia’s most powerful political and corporate leaders.

In 1981, Pangilinan started First Pacific with the help offour Indonesian families, including the Salim Group, andpublic funds. The relationship with the Salim Group sprangfrom a friendship between Pangilinan, the son of a Manila

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banker, and Anthony Salim, the son of Liem Sioe Liong, theSalim Group’s founder.

The initial plan hatched between the two was to be “inter-mediaries of capital, sort of a financial supermarket whereone could buy securities or get a loan or whatever,” saysPangilinan, who is also a friend of Philippine President FidelRamos. “That was one leg. The other was to be an inter-mediary of goods.”

Then in 1988, Pangilinan, over the objections of some ofhis closest advisers, invested in a Hong Kong cellular com-pany called Chinatel. With about 2,500 subscribers andoutmoded technology, Chinatel at that point was the small-est of three cellular operators in Hong Kong. “We invested

$50 million just to buy airwaves,” says Pangilinan. “But Ifelt it was a good investment because the teledensity of Asia[the number of phones per capita] was very low and fixedwire operators didn’t really appreciate the potential of wire-less systems. Asia must rely on wireless technology to bringas many basic dial tones as it can to the population at thelowest possible cost.”

Today First Pacific’s wholly-owned sub-holding companyfor its many telecommunications businesses is called AsiaLink. It’s a thriving regional cellular communications com-pany with more than 600,000 subscribers in six countriesand a strong future as a savvy “niche player” in Asia.

In the trading area, First Pacific owns companies in morethan 40 countries worldwide, selling everything from Ballyshoes to food snacks to corrugated carton boxes. In bank-ing, First Pacific is strengthening its banking operations inHong Kong and expanding into China in partnership withone of China’s state ministries, the Ministry of Foreign Tradeand Economic Cooperation.

In the property area, First Pacific has been the leader of aconsortium that last year spent $1.6 billion on the redevel-opment of the huge Fort Bonifacio military base in centralManila with plans to transform it into a modern, world-class office/residential city.

Even as First Pacific continues to earn accolades in thebusiness community, Pangilinan is quick to note that thecompany has not been infallible. In 1990, for example, First


“WHAT COULD HAPPEN TO ASIA

MANY YEARS FROM NOW

IS WHAT IS HAPPENING TO COMPANIES

IN EUROPE AND THE U.S. TODAY.”

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A L U M N I P R O F I L E S

HAM

KATHLEEN A. O’NEIL, WG’76: BANKING AT THE FED

Kathleen A. O’Neil, executive vice president and head of thecorporate group at the Federal Reserve Bank of New York,remembers interviewing at the bank 21 years ago for the jobof information analyst.

“What I found appealing was the bank’s role in the financial system,” says O’Neil, who functions today as thebank’s chief administrator, chief financial officer and chiefcredit/risk manager. “We are, on the one hand, an active par-ticipant in financial markets like the government securitiesmarket and the foreign exchange market, but we also are astandard setter both in the U.S. and abroad, not so much offi-cially as by the weight of our influence …

“What I also found intriguing was working for an orga-nization that deals with systemic risk, where you lookbeyond an event’s impact on your own institution to thepotential ripple effects that it would have on an entire mar-ket or on institutions beyond that initial market. It’sbasically a concept of relatedness. Financial markets andinstitutions are highly interrelated not just through theirconnections to each other but through technology, throughthe speed of information, and so forth.”

O’Neil’s decision to take the information analyst posi-tion launched her on the fast track at the New York Fed.

W H A R T O N A L

Today, as one of the top two women at the bank, she is incharge of credit and risk management, human resources,planning and control, public information, accounting andservice functions, the office of corporate consultancy, theoffice of regional and communityaffairs and the secretary’s office. Shemanages 579 employees and a bud-get of $52 million.

It’s an eclectic set of responsibil-ities. Her accounting function, forexample, includes the developmentof new financial statements andfootnotes that more closely reflectGAAP (generally accepted account-ing principles). In the credit andrisk management area, O’Neil hasbeen studying how the federalreserve system organizes, on a sys-tem level, its approach to risk man-agement, “from our lending func-tions to our credit functions to themanagement of reserve require-ments and other risk related issues.”

Continued on page 28O’NEIL

ANTHONY HAMILTON-RUSSELL, WG’90: MAKING FINE WINE

Anthony Hamilton-Russell spends his evenings reading wine journals and his days worrying about everything from the stakes holding up his camphor trees to the types ofproducts he should be selling in the year 2020.

He is the owner of a vineyard 70 miles southeast of CapeTown, South Africa, a boutique win-ery that his father started in 1975and ran until Anthony returned in1991. Hamilton Russell Vineyardsemploys 37 people, sells 30,000cases per year of high-priced Pinotnoir, Sauvignon blanc and Chardon-nay in 15 different countries, andrepresents a sudden shift in careerfor its owner.

Hamilton-Russell was a financialanalyst in corporate finance at Mor-gan Stanley in London during thelate 1980s when he decided toswitch to the field of consulting.After getting his MBA from Whar-ton, he landed a job with Bain & Co.in its London office. ILTON-RUSSELL

“I was lucky enough to experience consulting at a peakand in a trough. I learned an enormous amount from work-ing at Bain, but my medium-term goal of moving intoventure capital as a principal seemed less viable in the cli-mate prevailing at the time … At the end of a year, I beganreviewing my options.”

Coincidentally, the family wine business was in need ofhands-on management. “I picked up the phone, called myfather and said I would like to get involved. He was delight-ed. I returned home on Friday, Sept. 13, 1991.”

In running the business side of the vineyard, Hamilton-Russell focuses on hiring, motivating, setting budgets andstandards and devising marketing strategy. Although hetook wine courses and produced wine on a small scale in theearly ‘90s, he leaves that part of the process to the winemaker.“Finding and developing the right people is my biggest chal-lenge as owner,” he notes. “In a small business you areespecially sensitive to employee performance. We are in anenvironment where good people are very expensive andordinary people are very damaging.”

There is also the “constant agitation for improvement, forreinvestment of profits and for change,” he notes. “Nothingis stable for very long.”


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TWO ANNIVERSARIES, BUT LITTLE TO CELEBRATEBy Kenneth L. Shropshire

F A C U L T Y O P I N I O N

1996 and 1997 mark two little noted 50th anniversaries: Thefirst is the “reintegration” of the National Football League in1946; the second is Jackie Robinson’s integration of theBrooklyn Dodgers and Major League Baseball in 1947.

Generally, anniversaries are cause for celebration. Butwhile much has changed on the field in these two sports,there has been little change in the owner’s box. African-Americans occupy a hefty percentage of the positions on thefield, but no African-American holds a controlling interest ina major league professionalsports franchise. Professionalsports franchise ownership willconstitute the true measure ofAfrican-American success in thesports industry.

Like baseball, organized pro-fessional football was originallyan integrated enterprise as earlyas 1904. Much like the rest ofsociety, there was a brief pre-JimCrow period of broad integra-tion. Unlike baseball, however,the impact of Jim Crow did not end the African-American presence. Blacks played in orga-nized professional footballleagues until 1933, the year that an unofficial ban on blackswent into effect. Although no formal announcement wasmade, black athletes were simply not invited back to trainingcamps and none were signed out of college. The last blacksto play in that season were Ray Kemp and Joe Lilliard.

Most point to the move of the Boston Redskins footballfranchise to Washington, D.C. — below the Mason-Dixonline — as the reason. The Redskins became the first NFL fran-chise to be based in a southern city. Franchise owner GeorgePreston Marshall apparently felt that southern fans wantedto cheer for an all-white team. Under Marshall’s influence,blacks disappeared from the League.

Re-integration of the NFL occurred 13 years later in 1946,largely as the result of pressure from the black press of theday. The Cleveland Rams had just moved west to Los Angeles and wished to play their home games in the publicly-owned Los Angeles Memorial Coliseum. The black press,particularly the Los Angeles Sentinel, pointed out the poten-tial illegality of the use of a public facility by a segregatedteam. The issue received widespread newspaper coverage.

Other fortuitous circumstances worked in favor of theRams. Los Angeles franchises were uniquely suited for inte-gration because of the local collegiate success of Rams playersKenny Washington and Woody Strode. Both were stars atUCLA and had proven marquee value. Washington was Jack-

SHROP

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ie Robinson’s backfield mate at UCLA, Strode an end for theschool’s team. This reintegration preceded Robinson’smuch more widely celebrated debut with the BrooklynDodgers. The national focus, however, was on baseball.Baseball was the sacred national pastime, not football.

According to one 1995 study of nearly 300 individualswith any ownership interest in professional sports, fewerthan ten were African-Americans and none owned or com-bined to own a controlling interest. The only substantial

African-American ownershipin a major professional sportsleague, outside of the NegroLeagues, was a brief period in1989-1992 when businessmenPeter Bynoe and Bertram Leeowned a 37.5 percent share inthe Denver Nuggets. Duringthis period they acted as themanaging partners (beforeeventually selling the Nuggetsto majority partner COMSAT).

Why is this absence ofAfrican-American ownershipso striking? One reason is thatthe people who play in gamesare predominantly black,

almost 90 percent in the National Basketball Associationand 65 percent in the National Football League. MajorLeague Baseball has a significantly lower percentage ofAfrican-Americans at approximately 18 percent. There arefew areas in American society where such a racial under-representation in ownership exists. Major entertainmententities, such as Black Entertainment Television, are ownedby African-Americans, as are large publishing entities suchas Johnson Publishing. Even the multinational BeatriceInternational is owned by the family of the late African-American businessman Reginald Lewis. But not majorleague sports enterprises. Yet professional sports could cer-tainly benefit from diversity at the ownership level in atleast three ways.

First, there is clearly a value to society in having peopleof color in positions of power and serving as role models.Second, diversity can have a positive impact on previouslyhomogenous groups, as evidenced by the change in the pre-dominantly white male U.S. Senate after sexual harassmenttestimony during the Clarence Thomas hearings. In thebusiness of sports, addressing the particular concerns of play-ers and fans of color are issues which a more diverseownership group could handle better than the current one.Finally, great wealth seems to accrue to owners who selltheir teams. This wealth, in some form, could benefit minor-

SHIRE


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W H A R T O N I M P A C T

TAKING STOCK OF OVERPRICED EQUITIES
Researchers have shown that many initial public offeringsstart out well, but then later stock prices slump onceinvestors realize that the companies are weaker than theyexpected. A new study reveals that if stock offerings are over-priced, a major reason may be that sell-side analysts are toooptimistic in their predictions about these companies’ earn-ings growth.
When Yahoo!, an Internet search-engine company, wentpublic this year, its stock at first seemed to live up to its name.The initial public offering (IPO), managed by Wall Street’swell-known Goldman Sachs, did phenomenally well, andYahoo!’s stock, priced at $13, soared to $43 on the first dayof trading. Soon, though, Yahoo! lost its sheen. By Augustthe stock had slumped to $18; in early December, it was trad-ing in the mid-20s. And Yahoo! is scarcely the only Internetcompany to have taken this roller-coaster ride.

Other Internet companies that went public during thepast year have also seen their stocks shoot to dizzyingheights before gravity yanked them back to earth.

If all this has a familiar ring, it is because Wall Street hasbeen there, seen that, so to speak. Researchers who followstock movements have shown that many IPOs start out well,but then later slump once investors realize that the compa-nies are not as strong as they expected.

And the phenomenon seems to occur in waves. TodayInternet companies are all the rage. Yesterday it was biotech-nology firms. Tomorrow ... whoknows? But you can bet there will besome company in some industrythat will be on analysts’ lists of hottips.

NEW-ISSUE PUZZLE

Observers have tried to explain whythis happens. In academia, they callit the so-called “new issue puzzle.” If markets are efficient, as theory suggests they are—which meansinvestors take all available informa-tion into account before they agreeto pay a certain price for a stock —why should IPOs perform badly overtime? Why do new offerings declinein value over the years and companies that once seemedpromising lose millions of dollars in market capitalization?

Some people attribute the trend to normal market risk.Others suggest that perhaps the initial expectations werebased on flawed research. At a gut level, though, many havesuspected that IPOs get hyped because the analysts who pre-sent seemingly objective research about the offerings in fact

The prediaffiliatedwere muc

off the markof unaffiliate

ctions of analysts h further than those d analysts.

W H A R T O N A L U

work for the very investment banks that are trying to mar-ket the stock to investors.

That gut feeling now has substance. In a recent paper,Wharton’s Patricia M. Dechow, Anheuser-Busch Term Assis-tant Professor of Accounting, and Richard G. Sloan, assistantprofessor of accounting, and Harvard’s Amy P. Sweeney, saythat IPOs are overpriced mainly because sell-side analysts aretoo optimistic in their predictions about companies’ earningsgrowth potential. And investors, rather than recognizingthat sell-side analysts are part of a company’s marketing effortfor its stock offering, naively accept these projections, whichpushes up the price of the stock.

Dechow, Sloan and Sweeney found that the earnings fore-casts of so-called affiliated analysts — analysts who work forthe investment bank underwriting the offering — are morebiased than those of analysts who work for other investmentbanks. The researchers say these hyped-up expectationslargely explain the long-run underperformance of IPOs.

The researchers based their study on data relating to 7,636stock offerings made between 1981 and 1990. They obtainedinformation about analysts long-term forecasts as well as thenames of the analysts’ employers. After eliminating com-panies about which they had incomplete information, theyworked with a sample of 1,179 offerings.

Next, Dechow, Sloan and Sweeney separated the analystsinto two groups: affiliated and non-affiliated. Finally,

they compared the actual earningsgrowth in these companies over fiveyears with the forecasts of the affili-ated and non-affiliated analysts.They also adjusted their calculationsto account for major market swings.For example, the impact of the 1987crash that rocked the whole marketwas factored out of the reckoning.

WAGES OF BIAS

The results were illuminating. Onaverage, the companies’ earningsgrew by 5.7 percent a year over fiveyears. Contrast that with the factthat analysts had predicted growthof 16.2 percent a year. Dechow,

Sloan and Sweeney show that analysts over-estimated earn-ings growth by roughly 10 percent a year for the five yearsfollowing the stock offerings.

The predictions of affiliated analysts were much furtheroff the mark than those of unaffiliated analysts. For exam-ple, the forecast error for the entire sample was 10.6percent—but while unaffiliated analysts erred by 10.3 per-


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FACULTY OPINION Continued from page 24ity communities.

Today, the price of sports franchises, upwards of $200 mil-lion, brings into question whether this is an appropriatetime to enter the market, particularly for individuals. Finan-cial returns are not likely to come until the franchise is sold,and the operational costs, particularly salaries, are immense.Corporate ownership of teams is certainly the emergingtrend and African-Americans generally do not control thelarge corporations capable of making such forays into thesports franchise market.

Some are concerned that franchises are now overvalued.But where these transactions do make sense the currentowners can mandate that people of color must be a part ofany ownership group. They can also seek out people of colorwith the resources to purchase a team and give them theopportunity to review the investment.

There is not much celebrating this year for football—although there should be for the efforts of the individualswho made integration on the field happen. Washington,Strode and others struggled in much the same way thatJackie Robinson did. The true celebration should occurwhen there is African-American ownership in this highlyvisible industry. ”

Kenneth L. Shropshire is an associate professor of legal studiesand real estate and author of In Black and White: Race andSports in America, New York University Press, 1996.

cent in their predictions, the affiliated ones were off by 14.4percent.

Disturbingly, these biases worked their way into the pricesthat investors paid for the stocks. The fact that initial pricespurts were followed by slumps suggests that investors, atleast at first, bought the analysts’ pitch.

Dechow, Sloan and Sweeney say bluntly: “An importantrole of the underwriter is to manipulate investors’ expecta-tions of the future earnings prospects of their clients in orderto secure a higher offer price.”

What accounts for this bias among analysts? Dechowbelieves that both affiliated and unaffiliated analysts arereluctant to make negative forecasts because neither groupbenefits from asking investors to sell the stock. “If they didthat, they might lose contact with management,” she notes.

Affiliated analysts face much greater pressure than unaf-filiated ones because the investment bank’s underwritingside wants people to buy the stock. “From my understand-ing of the way these organizations work, the analysts oftenreceive bonuses for bringing a client to the investment bankso that the corporate finance section can underwrite thestock offering,” she says. As a result, affiliated analysts havemore incentives not to reveal bad news.

Dechow says while she and her co-authors have notworked on data for the 1990s, she sees no reason why thetrend should be any different today. “It’s not as if the Secu-rities and Exchange Commission has come in and said, ‘Thishas to stop.’ And I haven’t heard any investment banks saythey are cracking down on this practice. They have alwayssaid that there isn’t a problem here. So I think the trend willcontinue, because this is where the investment banks makemoney.”

MARKET IMPLICATIONS

While the paper does not make any specific recommenda-tions about solving these problems, Dechow suggests a fewsteps. For one thing, since the forecasts of unaffiliated ana-lysts are less optimistic than those of affiliated ones, it wouldhelp if more unaffiliated analysts gave out their forecasts.

Secondly, she recommends more public scrutiny of ana-lysts, so that investors are left in little doubt about theiraffiliation. “I’d like investors to be aware of this problem,so that if an affiliated analyst is making very optimistic fore-casts, they should be wary about believing it,” she says. “I’dlike more disclosure. You’d almost want to know if the analyst is getting a bonus or not, or if the analyst’s com-pensation is somehow tied to how the issue goes off.”

Another key step, Dechow says, would be to change theincentive structure for analysts, “which would mean theirpay would be less dependent on investment banking under-writing deals.” Before the 1970s, for example, analysts gotmost of their pay through the brokerage department’s com-missions. But in the 1970s, after the market was deregulated,

commissions became a small part of investment bankers’incomes. Now the money that pays for analysts’ researchoften comes from the underwriting side of investmentbanks.

“The problem has become worse than it might have beenin the 1970s because of this institutional change and dereg-ulation,” she says.

Dechow and her co-authors plan in the future to look atrelated issues. For example, they might study what happensif the company making the offering has big institutionsamong its stockholders. “A lot of companies like to have biginstitutional holders because it stabilizes their stock,”Dechow says. “Big institutions are also good clients forinvestment banks, so the investment banks may have lessincentive to make these big buyers bear the cost.”

The Role of Affiliated Analysts’ Long-term Earnings Forecasts inthe Overpricing of Equity Offerings, Patricia M. Dechow,Richard G. Sloan, and Amy P. Sweeney. July 1996.

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GARRETT Continued from page 16If you are attached to the Bundesbank, you do not have

high inflation. But you may well have to endure high unem-ployment for long periods of time. France’s unemploymentrate has been running at over 10 percent for a decade. Butthe French government is unwilling to do much about thisbecause of its ties to Germany.”

THE UK: A CONSERVATIVE APPROACH “Once you get to Britain, the politics of European integra-tion dominate the economics almost completely. MargaretThatcher was a committed anti-European from the outsetbut she had powerful opponents within the Conservativeparty. When John Major came along, he inherited a verydivisive issue. Europe was an important reason Thatcher wastoppled by her own party. Major himself has a reasonablysensible attitude towards Europe, which is that the UK mightnot like the direction Europe is taking but it’s better to beinvolved in the discussions than to be on the outside. Yetconcerns about sovereignty are very powerful in Britain

The issue of monetary union is further complicated in theUK because London is the center of the European financialsystem. The bankers are very worried that if monetary uniongoes ahead and the UK isn’t in it, they will lose their busi-ness. The center of European finance would most likelymove to Frankfurt. So bankers want in, big time, and so domost competitive British manufacturers because of the sta-bility in export markets this would bring.

The interesting question in Britain is, assuming the Con-servative party gets defeated — which it will next year unlesssomething unexpected happens — what will the Labourgovernment will do? The Labour Party historically has beendeeply anti-European, more so than the Conservatives.Britain only joined Europe in 1973, and two years later aLabour government held a referendum (which was narrow-ly defeated) on whether to leave.

Right now, government leaders on the continent are twid-dling their thumbs and waiting until the British election thatmust take place by the middle of 1997. The Labour Partyhas made lots of pro-Europe noises while in opposition.Whether it delivers on this commitment will be a real testof whether it is in fact a “new Labour” Party, as its leaderTony Blair so vehemently maintains.”

VIEW FROM THE BOARDROOM“Anyone who manages a European multinational is likely tobe in favor of EMU. The biggest benefit is that it stabilizesthe European economy and makes investment decisionsmuch easier. Plus you don’t have to pay a commission everytime you do a transaction in two currencies. Exporters inEurope should view this positively.

But business people in Japan and the U.S. have a differ-ent view. EMU will increase the clout of the DM-zone in

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2

international markets, perhaps tipping the balance of powerin the trilateral world economy in Europe’s favor. The inter-esting point here is that when European integration startedseriously in the mid-80s, business people and governmentofficials in Tokyo and Washington were worried that thiswould create a ‘Fortress Europe’, locking out foreign pro-ducers. Fortress Europe didn’t transpire, but this fear was thestimulus for enormous inflows of investment from outsideEurope, particularly into Scotland and Ireland. Americanand Japanese multinationals wanted to get into Europebefore external barriers were raised.

But now there is the possibility that a united Europemight start manipulating the exchange rate in ways thatwould be bad for the U.S. currency — for example devalu-ing the Euro against the dollar, which clearly would hurtAmerican exporters. This relationship would resemble thatbetween the U.S. and Japan, with a united Europe an equalplayer in the system.

If you were an entrepreneur looking to start up a com-pany in Europe, the effects of EMU would very much dependon where you wanted to locate. The classic pattern in recentyears for Japanese and American investors has been to go tolow labor cost areas of Europe that nonetheless are part ofthis European market. But things might be very differentunder EMU, depending on who is in and who is out.

What would happen under EMU if, for example, Irelandand the UK weren’t in the monetary union? You as aninvestor might be a little more reticent about setting up there.You might start to think more seriously about having a plantinside an EMU country because it should, all else being equal,have a smaller budget deficit and lower inflation rates.

But maybe England looks just as attractive because if youstay outside the system, you don’t have to follow the sameeconomic policies as the insiders. You might think there isan advantage to being in a country that doesn’t follow Ger-man economic policy. After all, the monetary union worksonly as long as there is one economic policy that is good forall the countries.

Alternatively, if being outside EMU is an indication of sec-ond-class citizenship in Europe, perhaps investors will thinktwice before moving into such countries. For example,countries like Portugal, Spain, even Italy might become con-siderably less attractive to foreign investors if they are notin EMU. Investors might take this as a signal that the gov-ernments in these countries are not serious about creating‘market friendly’ economic policies.

Thus, the potential ramifications of EMU are enormous,not only for European citizens, governments and companiesbut also for actors in the other two major economic blocs inthe world economy. But when all is said and done, the eco-nomic effects of EMU will be determined by political decisionsabout the future of the European integration project. This iswhy studying the European Union is both fascinating froman intellectual standpoint and fundamental from the per-spective of the business community.” R.W.S. ”


7

liquor distribution division is headed by a vice president whois the second of his two sons. “Then I have a third nephewwho takes care of the operational aspect of the company,”says Alvarez, who has a daughter as well. “There are someoutside people who are partners also but we consider allpeople working with us as members of the family.” ”

SAN JUAN Continued from page 21

Pacific made what initially looked like an unwise invest-ment in an Australian IT company; invested in the secondlargest trading company in Holland before realizing that itsforay would be stoutly resisted, and lost money on aprocessed meat factory in Thailand.

“It was a dark time for us,” Pangilinan says. “But wepulled ourselves out and learned that you have to focus onyour core businesses and manage those well. The transitionwas difficult because the thrill of the chase in doing dealscan be very seductive.”

Pangilinan was born in Manila and earned his BA in eco-nomics from Ateneo de Manila University, a Jesuit-runschool with a strong reputation in the humanities. Hisfavorite professor was in the philosophy department andindeed, Pangilinan credits the school with influencing hisperspective of the world and of human relationships.

Today, he feels very strongly that the number one chal-lenge facing Asia is people. “While Asia gives the impressionof being vast and highly populated, we have a dearth ofexcellent managers and some countries can be xenophobicabout foreigners. Yet part of Hong Kong’s success as a finan-cial center is that it has allowed, to a large degree, foreignprofessionals — from lawyers to investment bankers to pub-lishers — to come in and do business there because it is notonly the hardware of buildings, infrastructure and moneythat creates markets but the software of people. That’s whatmakes Hong Kong so vibrant.”

First Pacific, for example, is run by professional managersfrom many different countries, including Asia, America,Australian and Europe. Before starting the company,Pangilinan himself held executive positions with AmericanExpress International Banking Corp. and Philippine Invest-ment Management Consultants, Inc.

As to Hong Kong’s future under Chinese rule, Pangilinanis “an idealist without any illusions. Already, the Chineseinfluence is increasing and the British influence is waning,”he says. “Politically and economically, everyone wants asmooth transition. We feel China’s intentions are sincereand that the Chinese are serious about continuing, if notincreasing, the prosperity of Hong Kong if only to prove, forthemselves as well as others, that they can do a better job.It’s a question of face. They want to see Hong Kong prospermore under their leadership than it did under the British.

“Beyond that, the situation will be influenced by politics.In China, as we all know, when sovereignty considerations

PANGILINAN Continued from page 22

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collide with commercial considerations, political objectivescan sometimes be paramount.”

In addition to the need for adequately trained and diversepeople, Asia faces other challenges as well, Pangilinan says.High on the list is the need for homes. Securitization ofmortgages would help. “Asia lacks the financing for hous-es and infrastructure, in part because banks and localgovernments have limited capabilities in this area,” saysPangilinan. “And whatever funds might be available usual-ly do not have the maturity profile required by the user ofsuch funds. We should strive to create a secondary marketfor mortgages, like the one that exists in the U.S.” Asia alsoneeds a stronger bond market, he adds, noting that histori-cally the stock market has been more robust because of thedominance of bank financing, the lack of bond marketexpertise and the negative effects of government policiessuch as the withholding tax on bond interest.

Pangilinan declines to speculate on the number of hourshe works, although he does note that in addition to playingsquash twice a week, he can sometimes be found at a gymlocated in his building. He arrives at 9 p.m., stays until clos-ing time at 10 p.m. and then returns to his office untilmidnight. He works Sundays as well.

Perhaps his pace is an echo of Asia’s own hell-bent pushfor growth and development. “What could happen to Asiamany years from now is what is happening to companies inEurope and the U.S. today,” he says. “As your domesticmarkets get saturated and as economies grow only two tothree percent a year, you have to seek markets offshore …

“First Pacific is serious about developing an intensiveAsian presence … We want to grow with Asia. That’s howwe see the future.” ”


In the human resources area, she has been evaluatingexperimentation with flexible work arrangements rolled outin early 1996. As overseer of the office of regional and com-munity affairs, she recently headed up a technical assistanceeffort for the neighborhood housing service designed tohelp potential homeowners better understand the financialrequirements of homeownership.

In the planning and control area, O’Neil is analyzinglong-range office needs over the next five-to-ten years as wellas trying to improve performance measurements and inter-nal reporting systems. In the public information area, sheis involved in evaluating the Fed’s Internet home page, whilein the internal communication and multimedia servicesarea she has looked at increasing the level of presentationsand use of multimedia tools.

During the last six years at the Fed, O’Neil has undertak-en a number of special projects, including: designing andsupervising a technical assistance mission for the ArgentineBank Supervisory Authority; serving as an adviser to the Gov-ernor of the Central Bank of Kuwait on a technical assistance

O’NEIL Continued from page 23

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C L A S S U P D A T E

MANAGING YOUR CAREER: HOW WHARTON CAN HELP

For alumni interested in changing jobs, finding jobs or gettinginformation on the job market in general, Wharton offers anarray of career management resources both on and off-campus.

These programs are aimed not just at graduates who are con-ducting an active job search but are tailored to meet the needsof alumni throughout all stages of their professional lives.

In addition, Wharton Clubs offer a range of customized pro-grams designed to aid alumni in their own communities.While services vary from city to city, career management assis-tance offered by Wharton clubs have included, for example:■ “how to” workshops on writing resumés, interviewing techniques, and using the Internet to aid in a job search■ day-long seminars on career management■ printed Career Management Resource Guides, tailored tothe city in which the club is located■ peer counseling networks■ networking nights/business card exchanges.

A list of contact information for alumni clubs can be foundin the back of every issue of the Wharton Alumni Magazine, aswell as on Alumni Affairs’ World Wide Web site(http://www.wharton.upenn.edu). Alumni are encouraged tocontact their local clubs to find out more about what is avail-able in their area. The Web site also contains a club calendarof events.

On campus, career services for alumni are provided by twodifferent offices. Career Planning and Placement Services(CPPS) does outreach for the undergraduate and doctoral alum-ni of the School, while Career Development and Placement(CD&P) works with MBA graduates. Both offices are locatedin the McNeil Building, 3718 Locust Walk. CPPS’s main phonenumber is 215-898-7531 and the fax number is 215-898-2687.CD&P’s main phone number is 215-898-4383 and the fax is215-898-2598.

The following is a list of programs offered by both on-cam-pus offices as well as Lippincott Library, the business library of the University.

WHARTON EXEC-YOU-FAX: THE WHARTON ALUMNI JOB POSTING FAX SERVICE

EXEC-YOU-FAX has been designed to provide registered Whar-ton alumni with a full copy of the latest job postings receivedby Career Development & Placement. EXEC-YOU-FAX allows you to:■ access the alumni job data base any time, day or night ■ view the full copy of the job posting; you will read the entiretext as received by CD&P ■ respond to the job posting immediately; the job data baseis updated each Friday ■ select job posting for functional areas of your interest; thesystem will keep track of your requests and will not send youa posting twice.

The system allows you to choose from the followingfunctional options: consulting, finance, control/accounting/treasury, management, human resource management, opera-

W H A R T O N A L U

tions/product management, marketing, real estate, and strate-gic/corporate planning.

To subscribe to the service for six months, there is a fee of$25. If you would like to subscribe, send your name, address,phone number, Social Security number, fax number, schooland year of graduation and a check, made out to the Trusteesof the University of Pennsylvania, to: Career Development &Placement, attn: James Sumner, 50 McNeil Building, 3718Locust Walk, Philadelphia, PA 19104-6209. For questions, con-tact 215-898-4383.

ONLINE SERVICESCPPS and CD&P both utilize JOBTRAK, an on-line job-listingservice. In partnership with 400+ college and university careercenters across the nation, JOBTRAK provides over 2,100 newfull- and part-time job openings each day. For undergrad alum-ni, the service is available by calling CPPS at 215-898-3208 toverify your alumni status and obtaining a password; for MBAalumni, call CD&P at 215-898-4383 for a password.

A wealth of job hunting information is available throughthe CPPS homepage on the Web (http://www.upenn.edu/CPPS), as well as CD&P’s Web site (http://www.cdp.whar-ton.upenn.edu). These homepages include links toemployment resources on the Internet and includes sites withcurrent on-line job listings. Lippincott Library’s homepage(http://library.upenn.edu/lippincott) also offers a variety ofsources of career management information.

COUNSELINGCounselors are available to discuss alumni concerns regardingcareer planning, job hunting and placement, and applicationsto graduate schools. The offices offer appointments on-site orschedules telephone appointments for alumni who are unableto visit campus. Call Beverly Hamilton-Chandler at CPPS (215-898-7533) or Ursula Maul at CD&P (215-898-4383), for moreinformation about one-on-one counseling.

Alumni can also participate in the Penn Career Network(PCN), a data base of Penn graduates who have volunteered toanswer career-related questions for Penn students and alum-ni. Although it is not appropriate to ask PCN advisors for jobs,they can provide a wealth of information on career fields andemployment outlooks. You may request up to six names at atime. To receive information about contacting the alumniadvisers, call 215-898-7529.

LIBRARY SERVICESAll Wharton alumni are eligible to use the resources of the Lip-pincott Library, located in Van Pelt Library at 34th and LocustWalk. Lippincott is open to the public on weekdays; a photoID is needed to enter the building. Alumni who wish to usethe Library on weekends and other periods of restricted accessshould apply for a Penn Alumni Card (call 215-898-2646 fordetails and for a mail application form). For an annual fee, theAlumni Card can be activated to allow for borrowing circulat-



29

the Philly area handling businessprograms for a software startup. Iwant to extend a HUGE thanksto Jeff who has helped me com-pile this news and has set up forall of us a cohort web site, whichhas contact information andnews. The address of the site is:http://alumni.upenn.edu/~good-man2. I beg you all to updateand use this site! It makes mycolumn writing much easier!!

Oh me, Jenna, I am back work-ing at Mother Merrill in NYC inequity research, supposedly be-coming an expert on textile andhome furnishings companies(what a scary thought!). But, myMerrill ties do not stop there! Justthis past weekend, I got engagedto the Merrill trader that I met lastsummer. Don’t worry, no conflictof interest; same building, but sep-arate elevator banks!! I would loveto hear from everyone. Keep intouch!! PS: Has anyone found an

employer that gives a fall break??Cohort L News comes from

Ann Leonard 979 S. Scott St.Arlington, VA 22204 (H) (703)979-0572 (W) (703) [email protected]

Ron Goldgewert spent sixweeks traveling Europe this sum-mer with three fellow Cohortmates: Alex Hooshman, Au-gust Moret, and Robert vanBrugge. These guys did their partin supporting the European econ-omy – indulging in copious quan-tities of the various local brewsacross the continent: from Hol-land to the Czech Republic and allpoints in between! Ron writesthat he is working hard – and en-joying life – at Booz Allen Hamil-ton in New York. Robert works forMcKinsey & Company in Chica-go. He and Gail (a second year atChicago) are getting married.

And speaking of traveling ....Lydia Gizdavcic did more than

her share this summer! Thiswoman was all over the map! Shetoured the States, went diving inBelize, made a quick stop in Can-cun, and spent time visitingfriends in Indonesia and Malaysia(she must have been a Lauder stu-dent!). Lydia is now working inthe telecommunications group atAmerican Management Systems,Inc. in Fairfax, Va.

Deepa Kapoor can be foundin New York. She started work atLucent Technologies on August15th. Melissa Zeiner-Dietz is afinancial analyst in the manufac-turing research and engineeringplanning group at ARCO Chemi-cal Co. in Newtown Square, Pa.She and her husband, Jeff, re-cently added an Audi A6 and aMercedes convertible to theirfleet of vehicles!

Joe Smith and his wife, Lisa,moved to Baltimore soon aftergraduation. Joe is working at

Alex, Brown & Sons, Inc. I hearthey are living in the Fell’s Pointarea .... near the Inner Harbor.I’m sure Joe is enjoying his cen-tral location after two years ofcommuting to Wharton fromMaryland.

And I am enjoying life in theWashington, D.C. area. I’m sta-tioned at Navy Headquarters inArlington, Va., in the fiscal man-agement branch. I get togetherwith several other Whartonites inthe area on a regular basis ... therearen’t too many here from Co-hort L, however! Please send youraddress/phone number/e-mailaddress to me. That will make itmuch easier when information isdue for the next addition!

Rory McGregor is a trader for CS First Boston. FrankLavin has moved to Hong Kongto accept the position of vicepresident, market developmentwith Citibank.

mission; and representing the bank on a committee to devel-op a code of conduct for the wholesale financial markets.

O’Neil went to high school in Akron, Ohio and graduatedfrom John Carroll University in Cleveland. She and her hus-band, a lawyer for Texaco, live in Riverside, Conn., and havethree children, ages 15, 13 and 9. The challenges of working full-time and raising a family have been eased by live-in nannieswhen her children were younger and by a husband who sharesthe family responsibilities and “is a terrific partner,” she says.

“I have been lucky in having had a very broad range ofassignments at the Fed,” notes O’Neil. “As a result I have aperspective on the institution and its responsibilities thathelps me appreciate it and be effective.” ”

ing library materials; call Van Pelt Circulation for informationat 215-898-7566.

OTHER SERVICESAlumni may put their resume on file with CPPS to be circulat-ed as job opportunities become available. Resumes arecirculated according to field, industry and geographic preference categories. CPPS also keeps letters of recommenda-tion written by professors and former employers in a permanentfile from which only the alum can forward materials. To opena file, call 215-898-4382.

CD&P publishes Career Resource Packets on a number ofindustry and career management topics ranging from how tomake the transition to a new job to careers in public finance. Con-tact CD&P at 215-898-4383 to receive a list of available topics.

MANAGING YOUR CAREERContinued from page 29

Including the climate, he might add. “Although we havea cool maritime climate — which means we don’t get washed-out vintages alternating with top notch ones, as some Frenchregions do — there are still vintage variations. It lends an auraof risk to the operation every year because you never getcomplete consistency of character or quantity. But that alsoadds an element of excitement.”

Hamilton-Russell was born in Cape Town, South Africa,

HAMILTON-RUSSELLContinued from page 23

C L A S S U P D A T E

O’NEIL Continued from page 28 ago. For example, I couldn’t go back and work in a struc-tured corporate environment unless I was running thecompany ...

“What interests me are the courses you are offering atWharton on managing a family business, how to balancework and personal life and so forth. I suppose the trends dri-ving the need for these courses have been driving me.” ”

earned a BS in zoology and genetics at the University of Wit-watersrand and graduated from Oxford with honors ingeography. His English-born wife is an artist and they havetwin daughters, age 4.

Hamilton-Russell harbors no regrets about the course hiscareer has taken. “I am self-employed and my options tomaneuver are completely different than they were six years


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N I M A G A Z I N E

QAlumni Affairs, in partnership with CD&P, CPPS, the WhartonClub Network, and the Alumni Association Executive Com-mittee, will continue to expand the portfolio of careermanagement services offered to alumni. Further informationabout new programs and services will be reported in upcom-ing editions of the Wharton Alumni Magazine. ”

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