The topic of family businesses has long been of interest around here. Stephen Dubnerwrote about it a few months ago, and our “Church of Scionology” podcast looked at the research on family firms. A new working paper (abstract; PDF) from Oriana Bandiera, Andrea Prat, and Raffaella Sadun explores how the behavior of family firm CEOs differs from that of professional CEOs, and why the former seem to perform worse. If you had to sum it up in one word: sloth. From the abstract:
Not an obvious common thread, perhaps. But I have long been interested in how family-run businesses succeed or fail — and in fact this week have just re-released an hour-long Freakonomics Radio podcast on the topic, “The Church of ‘Scionology’” (subscribe here). It features stories on a pair of family beer businesses — Anheuser-Busch and Yuengling — as well as the strange tale of adult adoptions in Japan in the service of corporate stability (i.e., if your son or daughter isn’t up for the job of running your company, then you can simply adopt your successor).
The Post and Journal were long-held family businesses, the Post by the Graham family and the Journal by the Bancrofts. The Times, in an ownership structure similar to the Post, is a public company whose voting shares are controlled by the Ochs-Sulzberger family, and Arthur Sulzberger, like his ancestors before him, is the publisher of the newspaper. I haven’t worked at the Times for some time but the feeling then — and I am told that the feeling persists — is that the Sulzberger family has done an extraordinary job of protecting the editorial integrity of the newspaper, as might be expected of a family steward, but has been less competent than one might wish in shepherding its business interests. (This is all speculation, of course, as there is no counterfactual.)
As Jonathan Berman and I have written in the past, for-profit companies that take a long time horizon in their decision-making are likely to make more social and environmental investments. Things like training workers, bolstering communities, and protecting ecosystems can take a long time to pay off for private companies. When they do, the return — including a stronger labor pool, a wealthier consumer base, fewer working days lost to strikes and protests, and greater employee loyalty — can be comparable to other for-profit investments.
In fact, strictly for-profit companies can be among the best social investors because they apply the same discipline to these investments that they would to other parts of their core business. Energy and mining companies, for example, have some of the longest time horizons in the private sector, and they tend to be big social investors as well. Some European companies have actually stopped issuing quarterly reports to shift the attention of analysts to the long-term. And because they are still targeting a single bottom line, profit, there’s no loss of clarity about their mission or erosion of transparency for shareholders.
I’ve long been puzzled by the almost complete disconnect between real-world businesses and academic economics. After I graduated from college, I went to work as a management consultant. Almost nothing I learned as an economics major proved helpful to me in that job. Then, when I went back to get a Ph.D., I thought what I had learned in consulting would help me in economics. I was wrong about that as well!
Ever since, I’ve felt that both business and economics would benefit from a greater connection. Why don’t businesses set prices the way economics textbooks say they should? Why are randomized experiments so rare in business? Why do economists write down models of how businesses behave without spending time watching how decisions are actually made at businesses? The list goes on and on.
Interesting if perhaps not so surprising: in a new working paper called “The Cost of Friendship,” Paul Gompers, Vladimir Mukharlyamov, and Yuhai Xuan argue that even in as performance-based an industry as venture capital, people tend to collaborate with people who have similar backgrounds, often to their detriment:
This paper explores two broad questions on collaboration between individuals. First, we investigate what personal characteristics affect people’s desire to work together. Second, given the influence of these personal characteristics, we analyze whether this attraction enhances or detracts from performance. Addressing these problems in the venture capital syndication setting, we show that venture capitalists exhibit strong detrimental homophily in their co-investment decisions. We find that individual venture capitalists choose to collaborate with other venture capitalists for both ability-based characteristics (e.g., whether both individuals in a dyad obtained a degree from a top university) and affinity-based characteristics (e.g., whether individuals in a pair share the same ethnic background, attended the same school, or worked for the same employer previously).
A few months ago I ran a contest here at Freakonomics (results here) to predict the outcome of a randomized trial on charitable giving.
Although we are long way from realization (and it may be a pipe dream), the idea is simple: imagine a market on results from research studies. This could help not just hold people accountable for their ex-ante stated views, but also serve as a guiding tool for investors, practitioners, policymakers and donors, to help make decisions and allocate resources using the collective wisdom of markets. Of course this requires liquidity, and a certain faith in markets. Anyhow, until that dream comes true, we are doing this the simple way: running contests!
I’m so pleased to see that stand-up meetings are gaining ground (or at least exposure, in the Wall Street Journal). I am on the record as someone who dislikes meetings in general; I also work much of the day standing up (at a great adjustable desk that Ikea unfortunately no longer makes).
As Rachel Silverman writes:
Stand-up meetings are part of a fast-moving tech culture in which sitting has become synonymous with sloth. The object is to eliminate long-winded confabs where participants pontificate, play Angry Birds on their cellphones or tune out. …
Here now are Cuban’s answers. A lot of answers. Granted, most of them are short but Cuban can pack a lot into a terse words (unlike a few million politicians and businessfolk we know). He has some strong words on financial engineering and, if you read carefully, lots of good career advice. My hands-down favorite: “Never follow your dreams. Follow your effort.”
A reader we’ll call H., who’s in the rental-property business, writes in with a bizarre story about his bank. Assuming it is at least 60% true from both sides (his side and the bank’s), what are we to make of this?
My partner and I were looking to obtain a small business loan. Our banker told us that loans are very hard to obtain because banks are being very stringent. Not like we were going to shut down without a loan, but we figured it could help us grow the business. So, in an effort to build credit (and a good relationship) for our business with a major U.S. bank, my partner and I proposed to our banker that we would give him $50,000 cash to hold onto and in return, have the bank loan us $50k for 5 years. Basically we were securing the loan with cash as collateral. This way, we could prove to the bank that we are a responsible business and were hoping that after this first loan, the bank will be willing to lend to us in the future with more favorable terms.
+ Economists have found that family firms that pass the company down to the next generation perform worse than if they had brought in professional management.
+ Family firms are particularly dominant in less-developed countries, which tend to have weaker markets and rule of law. Here’s Vikas Mehrotra on that point:
In the developed world, you have good contracting environments, a good system of law enforcement, and so on. So, in the developed world, you can hire professional managers and expect a certain, you know, sticking to the contract law, and so on. It’s rather more difficult to have the same kind of adherence to the rule of law in emerging economies. So, in emerging economies, family firms sort of provide a second-best solution to this poorly developed institutional problem.
If someone with a clipboard came up to you in the street and asked you if you secretly harbor racist views, have stolen things in the past, had unprotected sex, or some other illicit behavior, how likely would you be to tell the truth?
Probably not very. This causes havoc for any researcher who wants to study behavior that may deviate from social norms in some way. A survey technique called “list randomization” allows researchers to calculate the average response to a question in a population, without being able to identify the response of any one individual. In theory this gives people the freedom to answer truthfully, knowing that even the interviewer won’t be able to tell what they answered.
This method has indeed been used to measure hidden racism and sexism among American voters, as well as all sorts of bad behavior by American teens.
In a paper, forthcoming in the Journal of Development Economics, Jonathan Zinman and I apply this approach to the question of how the poor spend their microfinance loans.
In our books, Dubner and I have argued that economic analysis (at least the way we try to do it) is neither moral nor immoral. We try to start with a question, obtain a set of facts, and then understand where those facts lead, trying not to be prejudiced one way or the other by moral considerations when coming to a conclusion.
Similarly, I’ve never really thought of markets as being moral or immoral. Mark Zupan, the dean of the University of Rochester’s William E. Simon School of Business, thinks differently. In a recent piece, Zupan makes an argument that most people will find counterintuitive: he claims that free markets foster integrity and cooperation. I’m not sure I fully agree with him, but the basic idea is sensible and straightforward. Markets lead to firms that survive for long periods of time. Reputations are important to firms, which leads them to behave in virtuous ways, not because they’re inherently moral, but because virtue is good for business in the long run.
The 13-year-old grandson and his 11-year-old sister are discussing the Texas tax holiday—for one weekend in August there will be no sales tax on school-related items. The grandson says stores will cut prices to compete for customers. The granddaughter, already an inveterate shopper, says no: With the tax holiday there will be so many customers that the stores will be able raise prices.
While prices won’t rise compared to the previous weekend, the granddaughter seems to understand that an inelastic demand means the incidence of (gain from) the tax cut will be on the sellers—the customers are unlikely to get much of a bargain. A subtle, Texas-style subsidy to business; but one that even an 11-year-old can see through!
My friend and I have developed a cutting-edge technology for social media. There are other similar technologies out there for social media but we could never compete with their resources. Should we just point blank say we are the cheap alternative as a selling strategy? Sounds cheesy and flimsy but may be our only avenue.
What do you have to say to him? I don’t expect a lot of you to have experience specific to his product, but I know there are a lot of starter-uppers among our readership (yes, both kinds of starter-uppers), as well as what you might call “psychology of pricing” pros. So let’s see what kind of advice you have for Patrick.
I’ve known Tim Harford for a while; to me, he’s one of the best writers who also happens to be an economist (although in recent years he’s spent more time as a writer than a practicing economist, which may explain everything). Disclosure: Harford profiled Steve Levitt back when Freakonomics came out, and he’s had the two of us on his BBC radio show More or Less.
He writes a Financial Times column (on Saturdays) called “Undercover Economist,” and that was the title of his first book, published in 2005 (and just updated). His latest book, out this week, is called Adapt: Why Success Always Starts with Failure. It examines the incremental, adaptive ways by which success is achieved across a number of fields. Here’s a taste, in the form of a guest post. It’s very good, and to my mind, here’s the best passage:
[W]here’s the churn in education policy or healthcare policy or policing? These are difficult problems. Why would we expect them to be solved the first time? They are surely no simpler than the business problems which seem so prone to experiment and error.
This is a cross-post from James Altucher‘s blog Altucher Confidential. His previous appearances on the Freakonomics blog can be found here. If you Google “entrepreneur” you get a lot of mindless cliches like “Think Big!” For me, being an “entrepreneur” doesn’t mean starting the next Facebook, or even starting any business at all. It means finding the challenges you have . . .
Readers of this blog may be surprised to learn that in 2005 I coauthored an article with Jonathan Macey which made explicit predictions about the future of democratization in Egypt. In 2005, Jonathan and I wrote: “We also posit that economic reform will bring increased pressure for democratization in countries such as Egypt and Syria. For this reason, economic reform of the kind we discuss in this Article (simplifying and reducing the costs of business formation) will be a good “leading indicator” of political leaders’ real interest in implementing meaningful democratic reforms that go beyond mere public relations gimmicks.”
Marginal decisions to increase the net of revenue minus costs arise in non-profit organizations as much as in companies. The designers of a recent book, Peter Leeson’s The Invisible Hook (Princeton University Press, 2009), recognized this in picking a cover.
Google’s recent reported $6 billion bid for Groupon — rebuffed, for now — took observers by surprise and worried the company’s investors. James Surowiecki analyzes the deal and Groupon’s business model.
A recent interview with the Rolling Stones reveals some of their business and wealth-protection strategies. “The whole business thing is predicated a lot on the tax laws,” said Keith Richards. “It’s why we rehearse in Canada and not in the U.S. A lot of our astute moves have been basically keeping up with tax laws, where to go, where not to put it. Whether to sit on it or not. We left England because we’d be paying 98 cents on the dollar. [This may sound like an exaggeration, but likely isn’t.] We left, and they lost out. No taxes at all. I don’t want to screw anybody out of anything, least of all the governments that I work with. We put 30% in holding until we sort it out.”
In the face of economic pressures and customer complaints about coffee quality, Starbucks has revised its drink-making guidelines for baristas: “Starbucks baristas are being told to stop making multiple drinks at the same time and focus instead on no more than two drinks at a time-starting a second one while finishing the first,” reports The Wall Street Journal.
Continuing with my requests for famous quotations and sayings that might make it into the next edition of The Yale Book of Quotations, I’d like now to ask for memorable recent (or not-so-recent) words of wit or wisdom from business leaders.
The determinants of one’s demand for a product are covered in every introductory economics course. Independent of prices, my income and my general preferences, I also consider the cuteness of the product’s name.
There are innumerable great examples of goods in related markets. And of complements and substitutes. (One of my favorites is the local store that sold rock music and condoms, clearly complements.) It’s harder to cook up neat examples of goods markets that are impinged upon by labor-market changes.