Education Bubble Part 2

More of this is hitting the news. This video gives more details of the education bubble. To me the big question is this, is the free market being prevented from equalizing the student loan debt situation because student loans are not bankruptable? If bankruptcy is the great “do-over” allowing citizens to recover from untenable financial situations and return to society in a productive role, then are we just crippling students by not allowing them to participate in this mechanism available to the rest of society? Maybe the OWS crowd wouldn’t be so angry if they had the ability to recover from the fateful decision of picking a major with no economic prospects. In any case, I think there is a reasonable argument to be made that if we are willing to forgive debt to countries in Africa, we ought to consider giving at least the bakruptcy option (which is not without consequences) to our own young people.

 

The Education Bubble

I’ve been talking about this for about 3 years. I’m glad somebody finally picked it up. The AP reported on a financial bubble in education last week. There have been a slough of stories percolating about this, such as Generation Jobless: Is An Ivy League Diploma Worth It?, and some spinoffs of ridiculous comments made by unemployed Occupy Wall Street lemmings, like What’s Your Kid Getting From College? 

There are also some debates about what constitutes a REAL economic bubble, as if anyone caught up in it cares about the precise definition of the hyperbolic media parlance. Personally, I’m more interested in the similarities of the big bubbles, Dot.com, real estate, and now education. In all three cases, it appears that a disconnect arose between price and value. Specifically, the price inflated way beyond the intrinsic value of the underlying asset. With the Dot.coms there was a belief that traditional valuation methods based on old-fashioned metrics like assets or earnings were passe and companies could be valued for cyberspace intangibles like website visitors or stickiness. With the real estate bubble home prices were artificially inflated due to massive pull-through demand generated by collateralized mortgage obligations, fueled by investor cash that had fled the market in the Dot.com crash looking for something “safer” that financiers didn’t understand… real estate.

So, how does education—and more particularly student loan debt—look like these previous bubbles? Well for starters, the price and the underlying value are way out of whack. Tuitions have escalated around the country in the midst of the financial crisis, its ensuing recession and remaining aftermath. How is that possible? Do people have more money to spend on education? No. Has the value of education gone up? No. In fact, the opposite is true. New graduates are now competing with candidates that have both degrees and experience, but who now find themselves part of the massive ranks of unemployed Americans vying for available positions.

Any hope that this climate might change soon dwindles in the face of politicians like Harry Reid who showed such a profound misunderstanding of economics that he was recently quoted as saying millionaire job creators are like unicorns, they don’t exist. Seriously, what an out of touch tool.

Despite any political despair, the question remains, why would tuitions rise in the face of declining economic operators? Demand is down, supply is up, and yet the price climbs. This simple analysis betrays the disconnect and the evidence of a bubble.

Disconnects like this also alert us to other symptoms of a problem. If the economics are breaking down, then too is the value this education is providing to society. But in the face of this evidence, the powers that be continue to raise the cost of traditional education and use their influence to prevent new entrants into the market. I am not about to prognosticate about how this bubble will resolve itself. One thing preventing it from popping is the un-bankruptability of student loan debt. However, depending on election results this coming year, someone may get wise to the idea that if we are going to forgive debts we would be just as well to forgive them to our citizens as to developing nations in Africa or Asia. And when we do, education will rapidly return to its fair-valued price. In other words… pop.

 

 

 

The Punctuated Equilibrium of Leadership

Many of us have worked for someone and thought, I could do his job. What’s so great about that person? (These thoughts are probably more prevalent when that person is our boss and is driving us crazy.) I’m not trying to answer every question about how some people work their way into leadership positions. What I am going to do is suggest some thoughts about why a person, who still only has 24 hours in a day, who still has only one FTE of output, and who puts their pant on one leg at a time just like everybody else, might be able to create disproportionate value for a company.

I recently read Linchpin: Are You Indespensable? by Seth Godin. (I also recently gave this book a negative review on my LinkedIn reading list and now I’m quoting it, go figure.) On page 51 (of the hardcover first edition), he made a comment about Richard Branson as follows:

You could do Richard Branson’s job.

Most of the time, anyway.

… You could certainly do most of what he does, perhaps better than he does it. Except for what he does for about five minutes a day. In those five minutes, he creates billions of dollars’ worth of value every few years, and neither you nor I would have a prayer of doing what he does.

Now, if you are interested in what Godin says Branson does in those five minutes, you can read the book. What interested me is this idea that a leader was able to create that kind of leverage. That there really might be a quality time component to leadership, that made the economy of a company work, despite an ostensibly disproportionate amount of control and pay residing in one individual.

I have known CEOs who felt that the key to their leadership was to outwork, outsmart, and outperform everybody in the company in every function. This seems obviously foolish, but in their desire to lead by example, they view their company like a wolf pack where their position at the top is only secure as long as they can unseat any challenger to their superiority. If a leader’s true value is not created by putting in more hours than anybody else—hours are finite after all—but, instead leveraging a few critical moments of judgement, decision-making, insight, or charisma, then the economy of leadership within a company make sense.

I titled this post, The Punctuated Equilibrium of Leadership, because this narrow opportunity to exercise leadership that would be leveraged across other less-critical moments, reminded me of Stephen J. Gould‘s concept of punctuated equilibrium in evolutionary biology (something that opens up an extremely wide field of potential common ground with scientists who are also men of faith). This is the idea that things move along for a time with very little change, and that these times of relative equilibrium are punctuated by times of rapid change.

In support of this idea, I recently read the latest Jim Collins book, Great by Choice: Uncertainty, Chaos, and Luck—Why Some Thrive Despite Them All, which is a follow up to Good to Great and How the Mighty Fall. On page 120, he writes:

Not all time in life is equal. Life serves up some moments that count much more than other moments…. We will all face moments when the quality of our performance matters much more than other moments, moments that we can sieze or squander…. [We can] respond to unequal times with unequal intensity, when it matters most.

Having spent a few years of my career as a CEO, this is hyper-relevant to me as I strive to be equal to the critical moments that I will inevitably arise in the future of my company. But I think it has a broader application than that. It seems to me that whatever the endeavor, if we want to achieve our life’s goals, we need to dedicate ourselves to being prepared to be equal to the critical moments that present themselves. We can abdicate this quality on behalf of our company, if we aren’t the CEO—but we can’t abdicate it in our lives. There isn’t anyone else who is more invested in our success as individuals. In effect, we are all the CEOs of our own lives, and it isn’t a job we can be fired from, resign from, or otherwise give up to others. As Collins says, not all time in life is equal. We have time during the equilibrium to prepare to make the critical choices when they come.

Who are your influences?

“Who’re your influences?”

This was the question Jimmy Rabbitte posed to each prospect interviewing to join the “World’s hardest working band,” The Commitments, in the 1991 film adapted from Roddy Doyle‘s classic novel. The Commitments is a great (albeit profane) cultural snapshot of the pre-Celtic Tiger Ireland I first encountered as a missionary in January of 1992.

One of the reasons I love this line from the movie is that Jimmy is trying to do what everyone who has ever interviewed someone tries to do—ask questions that probe deep and in a few brief moments reveal a person’s character and future behavior, to peer into the soul of the interviewee and see what kind of person he or she is. The task of knowing for certain whether someone is going to be a good fit for the band, or the company, or the job by spending a few minutes (an hour tops) with them is of course impossible. But the question, Who’re your influences? opens the door for someone to reveal a lot about themselves.

So, I began thinking about my influences. Not just artistic influences, but life influences. Maybe it is right to talk about these people in terms of mentors. I made a list, and I have about a dozen major mentors in my life. These are men and women who had a profound effect on me. They taught me, set an example for me or opened my eyes in one way or another. Then, I realized that I have another cadre of minor mentors that also had an influence even though they may have only appeared once or twice in my life.

I’m not going to list the major mentors by name, but they include my parents, various teachers, supervisors, partners, and friends. Some of the “influence” they had was to teach me that work is a blessing; that knowing mythology, Shakespeare and the Bible were the keys to understanding English; how to recognize miracles and to feel the deep spiritual things of life; that you don’t have to compromise your principles in order to achieve success in business; about commitment and sacrifice; and about strength and gentleness.

Add to that the influence of minor mentors and a great deal of what I am and believe is owed to how I responded when presented these influences. I would guess that if you look at yourself, you will see that the same is true. The more I think about the men and women behind that influence, the more grateful I am.

One of my favorite lines from The Lord of the Rings, is the statement by Theoden as he lies dying on the Pellenor fields. He says, “I go now to my fathers, in whose mighty company, I will not now be ashamed.” In generations past, we built up courage in ourselves by telling stories of the honor won by our heroes, the men and women of valor from our more distant past. In modern times the tradition of venerating the good in our history, has unfortunately fallen out of favor and in its place, we seem wont to focus on the here and now. If I look to my own generation for those heroes, I have been fortunate enough to have them and they are my mentors.

Driving past the cemetery the other day, my daughter asked me what it was. I told her. She asked why we don’t go there more often. I told her that the older you get, the more people you have to see in the cemetery, so you tend to go more often. In truth, I believe we go through life and build a welcoming committee for the other side. So, when I exit this world and enter the next, I hope to stand in the company of many of my mentors. If I am able to stand in their mighty company without shame, I will be satisfied.

Freedom via Constraints

In 2008, I read Presentation Zen by Garr Reynolds. Essentially, it is about making slideshow presentations more powerful, more focused, more interesting and more effective. (I think this book should be mandatory for all students and business presenters.) It is also about the value of simplicity. Simplicity is not easy, but it is powerful and I think a worthy goal in almost any endeavor. As Leonardo DaVinci said, “Simplicity is the ultimate sophistication.”

Well this week I picked up the sequel, Presentation Zen Design. The follow-up volume is equal parts effective presentation strategies and a crash course in the basics of design—mostly what we would consider graphic design—at an elemental level that translates into many of life’s pursuits. It was inside this well-crafted package that I found a principle so elegant that I was compelled to spend more time with it. Reynolds often comments on how restraint is key to powerful design, a beautiful yet counter-intuitive idea. But deeper still was the following quote about working within constraints from Steve Hagen,

True freedom doesn’t lie in the maximization of choice, but, ironically, is most easily found in a life where there is little choice.

I find this notion far more counter-intuitive than merely the notion of restraint. In fact, I would expect most readers to read and reject this idea out of hand. However, I think there is a great truth here. In a country based on freedom, where we even have a statue of liberty, and in a world with few restrictions, what external constraints are left?  We aren’t coerced by a king, or a master. We are free to adopt the only true control there is, which is self-control.

Victor Frankl said, “A human being is a deciding being.” and, “Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom.” This idea of space relates to what Hagen is talking about. If we look at our lives from the deciding moments, we are essentially looking forward at the unwritten story of our lives. Nothing exists there yet but space. And then we make a decision… From Presentation Zen Design:

If you take an empty slide and put even a single word on it, you have created “space.” Before you put anything on a slide, it is just a frame filled with possibilities. Once you add an element, you activate the space.

When we choose to act in our lives, from those moments of critical decision, we “activate the space.” We are constrained by the consequences of our actions, but within those constraints is where we can achieve the greatest freedom. When we try to act without consequence, we are slaves of our own thinking, because we have rejected the constraints that would have made us free. In fact the energizing creativity that is required to keep harmony with each subsequent decision we make after “activating the space” is exciting and alluring.

In Presentation Zen Design, Reynolds discusses the Japanese ink and wash art called sumi-e. In sumi-e, the ink is always black. A monotone palette from pure black to very light shades of gray is created by the manner in which each brushstroke is made. There are rules in traditional sumi-e. If you do not understand the rules, you can paint all you want, but you are not making sumi-e. You are not free to make sumi-e unless you understand the constraints, the proper method for how it is made. I remember my grandmother telling me that when she was a child and she saw her first opera, she wanted to come home and write one herself. Of course when she sat down to write it, she found that she couldn’t. It was an impossibly hard task from her current level of skill and understanding. I had a similar experience after reading Tolkein, I thought it would be great to create my own language. I spent several hours attempting this, only to discover that I did not yet understand enough about grammar and syntax to produce more than a few code words that related 1:1 to their English counterparts.

If exercises like these demanded that we learn the rules and operate within the constraints, what about the big things in life? What about happiness, relationships, religion, and meaning? Well, it stands to reason that you need to learn to embrace constraints there too. If god’s plan involved giving us our agency, the freedom to choose for ourselves and to act rather than be acted upon, yet at the same time gave us a laundry list of commandments, of constraints, then it stands to reason that if we want to become what we have the potential of becoming, we really don’t have a choice at all.

The irony, as Hagen says, is that to be truly free, we have to choose to act in complete harmony with all of the constraints. If freedom is what we desire, we really don’t have any choice in the matter.

Customers, Shareholders, Stakeholders, Oh my!

bankBanks and automakers who accepted bailout stimulus money are living the truth behind the proverb, “when you pick up a stick, you get both ends.” Banks are realizing that dipping their hand in the taxpayer till may turn out to be a honey pot that they should run—not walk—away from. Stories like this, this, and this, begin to paint the picture of banks looking to escape the strings attached to bailout money. It looks like at least some of these firms are shaking their heads asking, “what have we done?”

Banks, however, seemed a little quicker on the uptake than the automakers, who may still not fully realize their plight. In Stakeholder Capitalism and Chrysler, Harvard Business Review editor, John T. Landry exposes two significant trends fueled by the Administration’s approach with Chrysler. First, there’s a new precedent of legal priority caves to political expediency. Second, there is an underlying movement to supplant shareholder value as the primary goal and purpose of a business with the similar-sounding, but very different meaning stakeholder value.

What do I mean about the legal stuff? I’m talking about U.S. bankruptcy law. (For a more apologetic and detailed angle, read Who is Screwing With Bankruptcy Law? It isn’t my purpose to delve into the nitty gritty of the Chrysler deal, just to hold it up as an example of a shifting macro-opinion.) Typically, companies raise money by issuing various types of debt and equity. Each of these exchanges represents a promise of repayment, and that promise is called a security. In a bankruptcy liquidation, there is often not enough money available to pay everyone back, so these various securities represent the priority of who gets paid back first. Bonds are debt securities, while shares of stock are equity securities. Typically the pecking order from first to last is, bondholders > preferred stockholders > common stockholders.

chryslerHowever, in Chrysler’s case, the President’s offer gave a better deal to the UAW than it did to bondholders. Bondholders made a statement that to the effect that they felt they had an obligation to their shareholders to defend the rights of their more senior position. The President’s opinion is clearly that workers (read stakeholders) are more important than shareholders. President Obama‘s words (abridged) were:

Now, while many stakeholders made sacrifices and worked constructively, I have to tell you, some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout.

They were hoping that everybody else would make sacrifices and they would have to make none. Some demanded twice the return that other lenders were getting.

I don’t stand with them. I stand with Chrysler’s employees and their families and communities. I don’t stand with those who held out when everybody else is making sacrifices.
Because of the fact that the UAW and many of the banks, the biggest stakeholders in this whole process have already aligned, have already agreed, this process will be quick, it will be efficient. It’s designed to deal with those last few holdouts, and it will be controlled.

It’s a process that has the full support of Chrysler’s key stakeholders and the full backing of the United States government.

What about the second point, that Obama’s opinion represents a more widespread and significant trend shift toward stakeholder value supplanting shareholder value as the corporate mandate. A more overt treatise is available from Harvard Business Review editor Michael Yaziji in his frightening article, Time to Rethink Capitalism.

My intention is that with the recent surge in popularity of anti-capitalist sentiment both in the U.S. and abroad, I think it’s time capitalism received a defense, however inadequate in the context of the shareholder/stakeholder question.

I contend that companies exist to create value for two groups: customers and shareholders, both of whom voluntarily fund the company with cash in exchange for the value the company creates for them. When the company is successful creating value for these two groups, it is able to use the cash they provide to pay employees and value chain partners in order to grow and increase its capacity to create even more value. Without this funding, companies have no resources to allocate to community reinvestment, corporate giving, philanthropy, and corporate citizenship.

Mr. Yaziji contends that between employees and shareholders, employees take greater risk. His logic is that the scope of individual risk represents the ethical grounds for earning a return. He concludes that since the economics of today’s capital markets produce shareholders that individually have a very small stake in the company, in fact may not even know that they own the stock if the purchase was part of a manged fund, that shareholders individually carry much less risk than do individual employees and that laborism, the notion that employees should make most of the decisions and be the primary recipients of returns, is justified.

What!?! Let’s consider a few problems with this argument. For starters, the individual scope of participation by shareholders does not change the essential nature of the function they provide, or the relationship they have with the company. In other words, just because the capital markets have evolved a mechanism that allows more investors to participate (in line with their risk tolerance), and thereby more money to be made available for companies seeking to raise it, doesn’t mean that the function of their investment is different than if it were a single “deep pockets” investor. Just because an employee’s compensation package may constitute a larger dollar amount than the size of the average shareholder’s investment, doesn’t change the fact that employees have one relationship and shareholders another.

Looking at the relationship in investment terms, we see that employees invest “sweat equity”, they deliver their labor. Although the potential for value exists within that labor, it does not automatically translate directly into value for the company.* It is possible for any amount of labor to end up wasted and worthless. (For instance the labor invested in producing Chrylser automobiles that customers are not willing to buy.) In exchange for that labor, employees receive a paycheck every pay period. As investors, we might say that the risk employees face of losing their original invested capital only lasts as long as the time between paychecks. The only thing at risk for employees is potential returns in the future—employees risk only Return on Invested Capital (ROIC), but practically never risk Return of Capital.

Investors on the other hand risk both their invested capital and their potential returns. But, some say, employee compensation represents much more than simply a paycheck. What about benefits like health insurance, retirement accounts, and options?

Well, the employer portion of insurance is typically paid each pay period, so employees receive that benefit immediately. Retirement accounts and options typically vest over time, so there is the potential for employees to lose some of that value which could be considered part of their invested capital. However, these instruments typically create an opportunity for employees to participate as investors. To the extent that these benefits function as investments, the participants should really be regarded as shareholders and not employees.

As Kirby Cochran argued in What About Those Pesky Shareholders?, when companies focus on shareholder value, all other stakeholders are taken care of. It’s a win-win. However, the opposite is not true. A scenario where stakeholder value is preferred over shareholder value, the cart is before the horse and a win-lose scenario results.

*Note that Karl Marx’s notion that the value of a product was equal to the sum total of all the labor that went into its production is undeniably false. Just look at the current housing market. The labor value could be summed up as the “replacement cost.” Houses are selling below replacement cost. That’s because value is established by the customer, not the worker.