June, 2010 | Mays Impacts

The Center for Retailing Studies in Mays Business School at Texas A&M University will host its annual Retailing Summit in Dallas, Texas, October 7-8. Early bird registration for this event is going on now through July 15 and offers a $50 savings.

The event will be held at the Westin Galleria Hotel and is expected to draw retailing executives from across the nation. Presenters will touch on pertinent topics including sales techniques, youth marketing, understanding the changed luxury customer, and effective merchandising and branding. The theme for the event is “The Evolving Customer: emerging issues and future outlooks.”

Summit speakers include top-level executives such as Ken Hicks, chairman and CEO of Foot Locker, Inc.; Larry Magee, chairman, CEO and president of Bridgestone Retail Operations LLC; Garrett Boone, chairman emeritus of The Container Store; Sona Chawla, executive vice president of e-commerce at Walgreens; Tony Rogers, senior vice president of brand marketing at Walmart and more. (Click here for a full list of presenters.)

Hicks’ keynote presentation, “Creating Power Merchandising,” will focus on how to identify, develop, and present big merchandise ideas to maximize sales and expand the customer reach. (See more about this presenter below.)

“The Retailing Summit offers executives from all retailing sectors the chance to discover best practices from an impressive line-up of industry speakers. Innovative ideas, applicable for small businesses to the world’s largest big box retailers, are featured,” said Cheryl Holland Bridges, director of the center. “Attendees enjoy the direct interaction with top level executives and the learning environment that we, an academic host, uniquely provide.”

Last year was the first time that the event was held at the Westin Galleria. Attendees responded enthusiastically to this change in venue, due to its anchor in a retail mall and many opportunities for dining and shopping. The summit returns there this year.

Sponsor partners for the 2010 Retailing Summit include BDO Seidman LLP, SAP, and the Center for Retailing Studies. Proceeds from the event fund scholarships and programs for students pursuing retailing studies at A&M.

Register today at retailingsummit.org. In addition to the early bird savings, discounts are available for groups, sponsor companies, and former students of A&M.

About the Center for Retailing Studies

Founded in 1983, the Center for Retailing Studies bridges the academic and business communities by educating the next generation of retail leadership, and serving the industry through research and executive education.

About Ken C. Hicks

Ken C. Hicks has had a long career in retail, leading many well-known brands in a variety of capacities. He has served as president and CEO of Foot Locker, Inc. since August 2009 and became chairman of the board a few months later in January 2010. Prior to joining Foot Locker, Inc., he served as president and chief merchandising officer of J.C. Penney Company, Inc. and was a member of its board of directors. From 2002 to 2005 he was president and COO of Penney’s stores and merchandise operations.

Before joining JCPenney, Hicks was president of Payless ShoeSource from 1999 to 2002, where he had responsibility for all elements of merchandising, marketing, product distribution, and direct product development and sourcing for 4,900 stores in seven countries. Prior to joining Payless ShoeSource, Hicks was executive vice president and general merchandise manager of all merchandising and programming for the Home Shopping Network.

From 1987 to 1998, he held senior management and merchandising positions for May Department Stores, including senior vice president of strategic planning and general merchandise manager for several divisions. From 1982 to 1987, he was a senior engagement manager for McKinsey and Company Consultants.

Hicks graduated from the United States Military Academy at West Point, New York, and served in the U. S. Army, attaining the rank of captain. After leaving the Army, he earned an MBA with highest honors from Harvard University.

He serves on the board of Avery Dennison Corporation.

Categories: Centers

It has been a painful week for me personally. Part of it was my own fault. I was trimming my lawn, when I managed to do something I had never done before—thoroughly weed whack my ankle. I am pretty sure that the scar left on my ankle is a gang symbol, though I’m not sure which one. I think it might be the Smurfs.

But the more painful event in my week was inflicted on me by the Texas State Board of Public Accountancy. June is my month to report continuing education and renew my license, and I generally benefit from the conferences and sessions that help me maintain my certification. But every other year CPAs in Texas are required to report a four-hour session from a small group of select courses approved by the Board. You might be surprised to know that what caused me so much pain was an ethics course.

There are a number of reasons why that ought not to be true. One relatively obvious one is that I happen to love the topic and teach it for a living. I care deeply about the ethical reasoning and behavior of CPAs, particularly of my students. I am also invigorated by my students when I am with them in the accounting ethics classroom. I cannot tell you how much I learned from my 138 students this past spring as they related to one another in ethics accountability groups, and put together some stunning and meaningful presentations. These students also each developed a set of principles to guide their professional lives. I was challenged and moved by the growth in students’ perspectives during the course.

Another major reason the Board-approved ethics course should not have been a problem for me is that I have a high tolerance for boredom. I am, after all, a CPA, and have been for almost 27 years. I am also a professor who has sat through innumerable commencement speeches and faculty meetings. I may have to pull the hair on my legs to stay awake, but I can usually manage to get through most sessions that normal people would find intolerable.

I had a couple of factors working against me. I had waited till the last minute and had no choice but to sit through the whole course at one time. In addition, I had decided to go the low cost route in selecting my course, insuring an online delivery method that was as interesting as reading the phone book.

You might think I was bored because I already know all this stuff. But the stuff I know was actually the interesting part of the course. The course also covered, but essentially never tested over, innumerable philosophers’ perspectives, a few of which were actually relevant to decisions we make in the accounting profession. And there were endless pages of minutiae to protect the public from such dangers as two CPAs using the same staff and incorrectly representing that they were a partnership. Wow! There oughta be a law! That will bring down the republic!

But it ought not to be this way. This course is a perfect example of why people look at me with a puzzled expression when I talk about how much I enjoy teaching ethics. The nice ones ask, “Can you teach ethics?” Of course, they mean, “Can you teach it up? Can you help people make better decisions?” Everybody knows that you can teach it down; my profession has plenty of examples.

In fact, perhaps the most painful experience of my week was an e-mail from a former student who related having to make an ethical decision at her CPA firm in a ten-minute window. She chose to tell the truth, and did what was right, and it got her fired. It made my blood boil.

She told me that she remembered what I had said in class about having to make hard decisions. And she was writing to say thanks, to say that she was content and her conscience was clear, when she could easily have been writing to tell me I was wrong, and how could she have ever listened to me?

I’m sure there are better ethics continuing education courses that I can take, and maybe two years from now I will open my pockets wider and hope for the best. But I know the best hope for changing the profession is not in this futile biennial requirement.

It is in that classroom I will return to, where hearts and lives are shaped and changed. I have the chance to fan the flame of moral courage in a remarkable group of students from a variety of backgrounds. The accounting profession may not like what they get sometimes. But as long as I have breath, and as long as I prepare Aggies, people like my student are what I am going to send them.

Categories: Bottom Line Ethics

When you’re evaluating the risks associated with investing in a company, one item you may not have thought to consider is its location relative to the Bible Belt. However, that may be a salient detail, if you’re worried about fraud.

Sean McGuire
McGuire

New research from Mays accounting faculty members Sean McGuire, Thomas Omer, and Nathan Sharp suggests that firms headquartered in counties where residents report that religion is important in their daily lives exhibit less aggressive financial reporting.

This is especially true in small-to-medium sized firms that have less external monitoring from financial analysts. For such companies, religion can act as a substitute for other monitoring.

There is a significant association between the measure of a county’s religiosity and measures of aggressive reporting, including shareholder litigation related to accounting malfeasance. In fact, after controlling for other firm and county characteristics, they find that an approximate 10 percent increase in the population that indicate religion is important to their daily lives results in a 48.8 percent decrease in the odds that a firm headquartered in that county is sued for accounting malfeasance.

Thomas Omer
Omer

Which states overall reported the highest numbers of residents claiming religion was important in their daily lives? The top ten are all Bible Belt states, with Mississippi (86 percent), Alabama (84 percent), and Tennessee (79 percent) in the first three spots. At the bottom of the list by this measure are Alaska (48 percent), Vermont (46 percent), and New York (44 percent). Texas is number 13 on the list, with 71.9 percent of residents reporting religion is important in their daily life. The religion data were collected by Gallup, Inc.

Another finding of note is that firms located in more religious counties scored lower on measures of corporate social responsibility, including support for the community and diversity initiatives. On the surface, this seems surprising: shouldn’t firms where religion has an impact show higher levels of corporate social responsibility? The researchers hypothesize that this finding may be easily explained: in more religious counties, there is likely less need for corporate involvement in providing for needs within the community, as those activities are already being addressed by religious groups. Also, if a company’s CEO or other managers are already involved in community efforts personally through a religious group, they may not see the need to involve the corporation.

Nathan Sharp
Sharp

While the religiosity of the county where a firm is headquartered is significantly related to fraud risk in a large sample of firms, Sharp notes that it is only one of many factors potential investors must examine. It is significant, he says, but one should not invest solely on this criteria.

For more information

For more information, contact Sean McGuire, Thomas Omer, or Nathan Sharp.

“The Influence of Religion on Aggressive Financial Reporting and Corporate Social Responsibility” is a working paper. In the first few months it was hosted on the Social Science Resource Network website, it was downloaded more than 100 times.

Categories: Research Notes

Students from across the state will receive $10,000 scholarships from the Texas Business Hall of Fame Foundation during a ceremony in November. Ryan Goodnight ’11, an MBA student at Mays, was one of the 19 students (one from each of the major universities in Texas) to be chosen for this honor.

Ryan Goodnight '11
Goodnight ’11

The selection process has applicants explain their ideas to impact Texas business in the future. Goodnight’s idea is starting an aerospace company capitalizing on the evolving private space flight industry and helping Texas maintain its status as the world’s center for space activity. The process includes other questions as well as an interview with a foundation representative. “A few weeks later, I was surprised to hear that I was selected,” he says.

Goodnight’s background is in engineering. He holds both bachelor’s and master’s degrees in aerospace from Texas A&M University.

Now in its 28th year, the Texas Business Hall of Fame Foundation honors members of the state’s business community whose visions and careers have helped to place Texas at the forefront of the 21st century economy and seeks out the future entrepreneurs and leaders that will maintain Texas’ position.

“These 2010 scholarship recipients represent the best of the young men and women of Texas. They have an entrepreneurial spirit, high integrity and a strong personal drive,” stated Foundation Chairman Amy Chronis. “We congratulate them on their success and expect them to compete, contribute and thrive in this highly connected world, making their communities better places to live.”

To date, the Texas Business Hall of Fame has awarded more than $3 million in scholarships to students pursuing an education at Texas’ leading institutions of higher learning.

In addition to the scholarship winners, the Texas Business Hall of Fame will honor prominent Texas business leaders. Inductees are San Antonio’s Carlos Alvarez and Harvey Najim, Robert Duncan from Houston and Fort Worth’s W.A. “Tex” Moncrief, Jr. and W.A. “Monty” Moncrief (posthumously).

Since its inception, the Texas Business Hall of Fame Foundation has inducted 154 honorees, including Mays’ eponymous benefactor L. Lowry Mays; former President George H.W. Bush; and others.

About TBHF

The Texas Business Hall of Fame Foundation is a non-profit organization of 70 directors who are business leaders from cities throughout the state. The organization’s mission is to recognize the accomplishments and contributions of Texas business leaders, to perpetuate and inspire the values of entrepreneurial spirit, personal integrity and community leadership in all generations of Texans. For additional information, contact the TBHF office at 713.993.9433 or visit www.texasbusiness.org.

Categories: Students

At least 1.5 million Americans are injured every year through medication errors, adding billions of dollars to the cost of health care. Determining which medications a patient is taking prior to admission, which are given during a hospital stay, and which are prescribed when they are discharged—and making sure that none of these interact with unintended consequences—is a vital process called medication reconciliation. In understaffed hospitals, it’s a process that is full of potentially lethal challenges.

Streamlining this process was the goal of an interdisciplinary competition hosted by the Texas A&M Health Science Center and Texas A&M University in the spring 2010 semester. Mays finance students Rawles Bell ’11, Frederick Lou ’11, Sarah Mullis “10, and Ryan O’Dwyer ’11 teamed with students from industrial engineering, nursing, and pharmacy programs at A&M evaluating medical reconciliation practices at local hospitals and providing practical solutions for improvement.

It was more than a learning exercise: solutions have been implemented in hospitals—where they are potentially saving lives.

Each team was paired with a small hospital to collect data and solicit input from its personnel on effective medication reconciliation. Faculty advisors coached and mentored the teams throughout the process. The initial meetings and hospital visits occurred in late January, with a mid-semester progress review in March.

Mays finance student Frederick Lou '11 (second from left) was part of the competition's first-place group. His team worked with the Grimes St. Joseph Health Center in Navasota.
Mays finance student Frederick Lou ’11 (second from left) was part of the competition’s first-place group. His team worked with the Grimes St. Joseph Health Center in Navasota.

At the end of the semester, each team delivered their solutions before a panel of judges from various medical professions, including doctors, pharmacists and hospital administrators. The team also prepared a final report for its respective hospital and a poster.

Competition winner Frederick Lou says that his team’s biggest challenge in working with the Grimes St. Joseph Health Center in Navasota was a lack of education and enforcement surrounding existing medical reconciliation practices among the hospital staff. Also, the hospital had limited funds, so whatever solution they devised must be inexpensive.

Lou and teammates created a new policy stipulating no new medicines could be prescribed until a current medicine list had been completed on new patients. They also created an education plan to increase awareness of the policy for staff, and implemented an electronic data collection system as a way to track progress.

Second-place finishers Sarah Mullis and teammates worked with Richards Memorial Hospital, a 25-bed facility in Rockdale, Texas. Over the course of several visits to the hospital, the team examined the medical reconciliation process, which involved a photocopied form that was filled in by several members of the medical staff for each patient from admission to discharge. Mullis’ team created a new, easier-to-use form that incorporates information from the computer program used by the hospital pharmacist. They created a new policy for use of the form, as well, including digital copies and doctor’s signatures.

Prior to the competition, “I didn’t know anything about medical technology,” said Mullis. Her biggest takeaway was learning how to approach a complex problem while working with a team comprised of people with varying expertise.

Competition participants received prize money and class credit, as well as valuable experience. “It was great to see that something we were working on was making a difference,” she said.

Based out of the Texas A&M Health Science Center Rural and Community Health Institute, competition coordinators were Kathy Mechler and Robert Morrow of the institute; and Sara McComb and Andy Banerjee of the Texas A&M Dwight Look College of Engineering.

Funding for the student competition was provided through an HSC grant with the Annenberg Foundation. Faculty team leaders were Kathryn Cochran and Regina Bentley of the HSC-College of Nursing; Robert Stanberry of the HSC-College of Pharmacy; Justin T. Yates of the Texas A&M Dwight Look College of Engineering; and Christopher J. Duzich of Mays Business School.

Categories: Students, Texas A&M

I was going to write a shallow column this week about what a low life Seattle Seahawks head coach Pete Carroll is for jumping from USC and leaving them on probation and banned from postseason play. And then reality interrupted—I lost a dear friend to a brain aneurysm. And suddenly college football, and its unlimited number of self-centered numskulls, just did not matter all that much any more.

Ann was a person who lit up a room with her energy and raised, along with her husband Rick, three of the kindest children you could ever hope to meet. By an act of God’s grace, one of those children married my precious daughter, and they have given me the gift of my beautiful granddaughter, Avery.

Ann invested her life in people. She loved kids with all that was in her. Besides her own kids, she shaped the lives of countless children in her elementary school classrooms. She would speak of those children with exasperated affection, of her deep desire to help those who most needed it, of how hard the task had sometimes become. And then she would go and have a wonderful year, one in which she made a difference. Many, many young people bear her mark.

She had recently retired from teaching and, along with Rick, she was serving kids at a Lutheran camp in Colorado this summer when she was stricken. It was no surprise that she was serving because, in fact, that is who Ann was. The vacations of retirement could wait for another day. There was work to be done, and people to be changed, in a Colorado setting that had known decades of life-changing summers.

And her pattern of life has fallen to her children. Her oldest is my son-in-law, and he models for me how a man ought to treat his wife, even though I’m the one who is supposed to be setting the pace. He learned a lot from watching his Dad, and he has built on those lessons to become a husband and father of integrity and faith.

Her youngest daughter is an Aggie, bleeds maroon and Fish Camp and all the traditions. The middle son is a Tech grad, creative and artistic, but with an obvious undercurrent of entrepreneurism like his father. I mostly admire these three from afar, evidence of the fruit of two well-invested lives joined in a lifetime commitment.

But that lifetime was too brief, and for no reason that I can explain. I cling to an eternal hope, but it does not always bring clarity, at least now. Nor should it, perhaps. Clarity will be for another time.

Today we are standing with Rick and his children in the midst of their pain. I have lost a Mom and a brother of my own, but I do not have the right words to comfort them. But I can see the circle of those they love closing around them, surrounding them, keeping them from despair. They will be—we will be—with them for as long as it takes, even if it takes forever.

Few of the people I write about in these columns will have as sweet, and as simple, and as momentous an impact as Ann had in her too few years. She energized, she ennobled, she blessed, she loved the people she touched, including me.

And I thought I ought to tell you.

Categories: Bottom Line Ethics

When supervisors want better performance from employees, there is an easy thing they can do: spend more time away from their own desks.

Dwayne Whitten
Whitten

There is a direct link between supervisor work-family enrichment and subordinate performance, says new research from Dwayne Whitten, clinical assistant professor of information and operations management at Mays, and colleagues.

It works like this: when a supervisor has a healthy balance between work and life, it creates and promotes a more family-friendly work environment. This in turn leads to improved employee performance.

For some corporations, telling managers to spend less time in the office and more time at home seems counterintuitive. As one climbs the ranks of a company, increasing responsibility can mean less time for personal endeavors. But, says Whitten, in this case, time away from the office can actually lead to measurable gain for the whole team.

Whitten and colleagues surveyed 161 employees and 48 immediate supervisors from a broad range of organizations including manufacturing, professional services, education, and health services. Key in the research is that it did not look at CEOs, but rather middle managers. Immediate supervisors are frequently gatekeepers in setting the standards for acceptable behavior in a work group. If employees see their immediate boss flex her schedule to attend a child’s soccer game or a long lunch with a spouse, employees will feel more comfortable in modifying their schedules to be more harmonious with outside-of-work life.

When supervisors have a well-balanced work and family life, they pay it forward to their employees.
When supervisors have a well-balanced work and family life, they pay it forward to their employees.

In the study, nearly 90 percent of the supervisors were married and 77 percent had at least one child living at home; for subordinates, 71 percent were married and 59 percent had at least one child at home. The survey asked participants to rate statements such as, “My involvement in my work helps me acquire skills and this helps me be a better family member,” and “My involvement in my family puts me in a good mood and this helps me to be a better worker.” Other elements of the survey asked supervisors to rate employee performance, and employees to rate how family-supportive the organization is, what degree of schedule control they have, and a performance self-evaluation.

Researchers found that when subordinates feel they have greater schedule control, it has an impact on their job performance as evaluated by their supervisor and themselves. Researchers theorize that supervisors with high levels of work-family enrichment may become more tuned in to the work-family needs of their subordinates and may therefore respond by improving workplace family friendliness. The environment may occur through formal or informal policies that allow workers to take control over their work schedule (including location) or simply a management style that connotes a sense of family friendliness or concern about worker’ lives outside the office—such as showing concern for subordinate home-life situations, providing help during a personal emergency, or showing sympathy about family issues.

When supervisors have a well-balanced work and family life, they pay it forward to their employees. Then, supervisors more readily empathize with subordinates and provide support that leads to enrichment; this enrichment leads to greater engagement in the workplace on the part of the employees, as well as improved performance.

For more information

For more information contact Dwayne Whitten. His paper, “Pay it forward: The positive crossover effects of supervisor work-family enrichment,” created with colleagues D.S. Carlson, M. Ferguson, K.M. Kacmar, and J. Grzywacz, is forthcoming in Journal of Management.

Categories: Research Notes

For most large firms, more than half of revenues are generated outside their home country. In this flattening world, formulating the right strategies about when and how to release a new product in multiple countries can have a significant impact on success. Firms follow one of two strategies: waterfall (a cascade of releases) and sprinkler (simultaneous release) across multiple markets.

Venkatesh Shankar
Shankar

To study international market entry strategies, Reo Song, marketing doctoral candidate and Venkatesh Shankar, Coleman Chair Professor in Marketing examined the Hollywood motion picture industry, identifying which factors influence success on a global playing field. Their findings are valid for many types of products beyond movies.

The researchers used data from the motion picture industry to test their hypotheses for important reasons: unlike other industries, each movie is a unique product, and movie marketing and performance data are closely tracked.

In deciding the time window between launch in the home country and in a foreign market, time is money, says Shankar. If you wait too long to enter a market, you may miss a vital window of opportunity created by strong advertising. However, if you enter too soon, you may not benefit from the spread of positive word-of-mouth (WOM). This is especially true in the film industry, as movies have short life cycles and carry huge investments. Appropriately timed releases can transform a so-so movie into a hit and a good movie into a super hit in theaters.

Analyzing more than 200 films released in the U.S. and abroad, Shankar and Song have created a model that accounts for several variables and offers strategic insights that could improve a new movie’s revenues in each country.

Reo Song
Song

As the film cascades to other countries, Shankar says marketers should plan on a strategy that involves releasing first to countries where there is a high demand for entertainment and a close cultural fit with the themes of the movie. In those environments, it will be easier for the film to succeed, boosting the WOM.

Traditionally, waterfall U.S. film releases go like this: domestic, U.K., other European countries, Asia, the rest of the world. Shankar says this is not always the best strategy. If a movie has a closer culture fit to another country, it should launch there sooner. For example, the film Dirty Dancing: Havana Nights, which was about Latin dance. After its U.S. release, it became a big hit in large Latin American markets such as Argentina and Brazil, where it generated enough positive WOM to be successful in other markets around the world.

Piracy may also be a factor in the country sequence decision. It’s a double-edged sword, says Shankar. On the one hand, releasing early in countries such as China and Russia means bootlegged copies of the film will be available for consumers immediately—which may diminish box office sales. On the other hand, pirated copies can provide fast WOM and improve box office revenues.

Movies that are not likely to generate much additional positive WOM should consider the sprinkler method, which involves greater pre-launch advertising. Much anticipated sequels, such as Iron Man 2, do better with a sprinkler release, as the demand for them is already high and is less likely to be helped by new WOM. However, if another strong film is opening at the same time in a foreign country, then it may hurt the Hollywood movie’s ticket sales in that market.

While the model is complex, one thing is clear, says Shankar: many in Hollywood are ignoring these factors—and missing out on millions of dollars.

For more information, contact Reo Song or Venkatesh Shankar. Song is a fourth-year PhD candidate. The research on this topic is part of Song’s dissertation and has resulted in two working papers, with plans for several more.

Categories: Research Notes

A team of students from the master’s in management of information systems recently earned the second place title in the International Case Competition on the Strategic Value of IT Management. Ankit Jagwani ’11, Bethany Lipton ’10, and Bedanta Talukdar ’10 represented Mays at the CA Technologies world conference, held in May in Las Vegas, Nevada. Along with the prestige of their ranking, the group also won a cash prize of $5,000.

Left to right: Bedanta Talukdar '10, Bethany Lipton '10, Citigroup Senior VP Bromin Menezes, CA Technologies CEO William E. McCracken, Ankit Jagwani '11.
Left to right: Bedanta Talukdar ’10, Bethany Lipton ’10, Citigroup Senior VP Bromin Menezes, CA Technologies CEO William E. McCracken, Ankit Jagwani ’11.

CA Technologies, the School of Business Administration at Oakland University, Eller College of Management at the University of Arizona, and Kelley School of Business at Indiana University hosted the event.

The competition brought together students from business and information technology disciplines to demonstrate and evaluate the strategic value of IT management for an organization. Each participating team included three graduate students with at least one student pursuing a degree in information technology or information systems. In the case of the Mays team, Jagwani and Lipton are MS-MIS students, and Talukdar is a graduate industrial engineering student.

Prior to arriving at the event, the students were presented with this business challenge: the CIO of a global financial services organization is concerned about the value proposition of moving an in-house application to a Software-as-a-Service (SaaS) model in a cloud environment. The students were to analyze the proposal, the security and data issues inherent with such a move, and provide a recommendation for action.

The case was insightful as well as challenging, says Lipton. “I learned a ton about cloud computing and its future in the industry. I always heard of it as a buzz word but it became so much more after [the competition].”

Lipton will begin working for GE Oil and Energy starting in June. She appreciated the networking aspect of the event. “I met a lot of high level CA employees during the competition. In fact, our prize was awarded to us by the CEO of CA Technologies,” she said. Lipton has grand plans for her share of the prize money: start paying off student debt.

Lipton was philosophical about placing so highly in the international event. “Every time my team and I compete, we like to follow the wise words of one of our original teammates, Lakshmi [Lakshminarayan Subramanian]. He would always tell us that “all we could do was all we could do’ and that we should not get too cocky about winning because we couldn’t know what the other teams were doing. Those words kept us focused on the task at hand, even though Lakshmi couldn’t complete with us. When we made it all the way to second place we were totally surprised and very happy.”

Categories: Students

When the Enron debacle and similar cases filled headlines in the early 2000s and the Bush administration announced an “aggressive agenda” against corporate fraud, many analysts decried the longstanding practice of providing managers with stock options, blaming it for increasing the likelihood of fraud.

J. Shane Johnson
Johnson

This was a judgment error, says Shane Johnson, Wells Fargo/Peters/Nelson/Heep Foundation Professor of Finance. When he recently compared a set of fraud firms to control firms during the 1991-2002 period, he found the opposite of analysts’ opinion was true: firms under the leadership of managers with greater stock holdings rather than options were more likely to experience fraud.

Johnson and colleagues looked at 87 sets of firms over the 12-year period, matching by industry and size. They found that, contrary to stereotype, the firms that experienced accounting fraud generally weren’t causing their stock prices to soar; rather, they held prices steady when similar stocks were falling. This is significant as stock option values fall at a slower rate than stock holdings.

Managers in that instance have a greater incentive to cheat when they have stock holdings, not options; they lose money faster on stock holdings if they accurately report earnings.

Johnson's research found that while providing stock holdings and options as part of a compensation package to align managers' interests with that of the shareholders, it also creates incentive for fraud.
Johnson’s research found that while providing stock holdings and options as part of a compensation package to align managers’ interests with that of the shareholders, it also creates incentive for fraud.

Another finding is that, as one might expect, the greater the level of corporate governance, the lower the likelihood of fraud. Johnson says these findings are consistent with the economics of crime: criminals act when the benefits outweigh the risks. When looking at the pairs of fraud and control firms in the study, Johnson says it was obvious that in fraud firms there was a greater incentive to cheat, as there was less governance and managers faced losses of personal wealth in the form of stock holdings.

Simply put, Johnson says that firms that commit fraud have a greater incentive to do so. While popular media has encouraged companies to limit stock options in compensation packages in favor of holdings, the research shows this is counterproductive to limiting fraud.

The takeaway for shareholders is realizing that while providing stock holdings and options as part of a compensation package to align managers’ interests with that of the shareholders, it also creates incentive for fraud. Based on other research he is conducting, Johnson recommends that one way to limit fraud risk would be to increase the vesting period for managers’ stock holdings. This forces them to commit fraud over a longer period before seeing rewards, which is harder to accomplish without detection. When managers face short vesting horizons, they are more likely to manage earnings in that period. He also noted that insiders in a firm where fraud has been committed tended to sell much more stock during the fraud period than did their counterparts at a non-fraud firm.

For more information

For further information, contact Shane Johnson. His paper, “Managerial Incentives and Corporate Fraud: The Sources of the Incentives Matter,” created with colleagues Harley Ryan and Yisong Tian was published in Review of Finance in 2009.

Categories: Research Notes