Sunday, December 4, 2016

Probing the Protests: Firms can learn to Avoid Activists

Often we see popular protests against firm initiatives. Recently the Standing Rock Sioux tribe and environmentalists organized protests against the planned Dakota Access Pipeline, which was scheduled to run through sacred grounds and across a river. The project has been suspended not because of protests, but because the Army Corps of Engineers blocked the measure needed for it to be legal. Could the construction backers have understood that the pipeline routing would lead to protests? In retrospect it seems obvious that an oil pipe through sacred land would be seen as a rough equivalent to an oil pipe through a church, and would lead to some anger. But the more general question is, can firms learn to avoid provoking activists?

It turns out there is research showing that such learning happens, at least for firms that are experienced with protests. An article in Administrative Science Quarterly by Lori Yue, Huggy Rao, and Paul Ingram studied the combination of two events: protests against Wal-Mart Inc. store development proposals and subsequent Target Corporation filing of store development proposals. This sounds complicated, but it is a really simple sequence. Walmart needs to file a proposal and have it approved in order to open a store (stores are big projects). After a proposal is filed, there can be protests against it (many dislike the idea of a nearby Walmart store), and Walmart can then decide whether to stop planning for the store. Walmart is known to file many proposals, and has a pattern of probing for places that are “protest-safe” by the seeing whether there is a protest or not.

But in our sequence, the next step is to see what Target does if there is a protest after Walmart’s filing. Here it gets interesting. For Target, it could be a simple rule to just avoid places with protests. In fact, they found that Target does avoid places with protests, but it was also learning in smarter ways. First, because Target knows that labor unions are uniformly unhappy with large low-price (and low-wage) department stores, it pays less attention to union-organized protests than to protests from other local groups. Second, it distinguished between protests that specifically paint Walmart as evil, versus those that are against any large store. Target is likely to enter when protests are specifically against Walmart, but to avoid places with protests against big stores. So, Target learns as much as possible from each protest.

And Target is even more sophisticated than what I just wrote. These learning patterns are what Target uses for locations that they are not familiar with, so they need to use protests to learn instead of relying on own local knowledge. If Target already has knowledge about a location, it ignores the protest and goes ahead with its own plans based on the commercial promise and its own assessment of risk.

Clearly, a corporation needs to be pretty unpopular (and to have unpopular peers) to become this good at learning from protests. And equally clearly, protests are not just temporary solutions, they are also signals that firms pay attention to and learn from. Protests have a deterrence effect, just as proposals have a probing goal.

Sunday, November 27, 2016

Kickstarting the Disadvantaged: Activism in Venture Funding

Research and news tell the same story: there is discrimination both in employment and in business. Women are few and far between among executives and founders of technology firms, and claims of bias are often made, especially in Silicon Valley. On the financing side, venture capital firms appear to disadvantage women in executive roles. #AirbnbWhileBlack is a hashtag collecting discussions of discrimination, and has led to Airbnb examining its processes for retaining hosts.

This looks like a problem for women seeking to start businesses, especially if those businesses are in industries with few women to begin with, like high technology. Even worse, the tendency to favor similar people to oneself – homophily – could make this even worse. Interestingly, a recent article in Administrative Science Quarterly by Jason Greenberg and Ethan Mollick has found a counter effect. The idea is that if a minority thinks that it is discriminated against, it will be especially supportive of its own members. It will not only favor its own, as all groups do, but it will do so in an activist way. If this happens, being recognized as a disadvantaged minority – like women in technology – will lead to better treatment, at least from members of the same minority.

Does it happen? It is not clear whether this is always true, but one good place to look is in crowdfunding, where ventures and their founders are presented to a “crowd” of any interested funder, and they in turn decide what ventures to back. And indeed, women Greenberg and Mollick found that women targeted women’s ventures for funding, and did so especially for industries were women are known to be scarce. So, women especially supported other women not in fashion or publishing, where women are frequent business founders, but in technology, where they are scarce.

This is clearly not a reason to think that discrimination will balance out. Crowdfunding is the form of funding where this type of activist support is most effective, but most venture funding is not done through crowds – and we already know that venture capital firms, for example, have mostly male executives. Also, activist funding does not have large effects when there are few women funders to begin with. So, we can conclude that this provides some relief, but it is a less fair solution than simply evaluating ventures on their merit.

Sunday, November 20, 2016

Getting the Orange out of My Head: How Respect can set Inmates Free

Organizations can have very different work environments, including differences in the respect they give to employees. Organizational cultures differ, and managers differ, in whether they see employees and valuable and how well they acknowledge this. Many organizations think that it makes a difference – notice how I used the word “employee” just now, but actually words like “colleague” and “team member” are frequent in actual work. Does this matter?

For an example of how much this can matter – in a very special context – a recent paper in Administrative Science Quarterly by Kristie Rogers, Kevin Corley, and Blake Ashforth looked at an organization that operates professional call centers as part-time work for selected inmates in prisons. Every day inmates go to work in their orange jump suits (yes, just like in the TV series). Every day they go back to the prison wing after working. But this work is not like the demeaning chain gangs that we see in some old movies; the organization (Televerde) values its inmate workers and gives them both encouragement and respect.

So what happens? The respect they get from their Televerde managers, and from customers, changes lives. They get a specialized respect based on the value of the work they do, and their performance, and this gives excitement and self-respect. They get general respect from being seen as real people with lives and accomplishments, not inmates with orange jumpsuits and numbers, and this gives ideas of a changed and improved life. Together, these two kinds of respect, and especially the general one, puts the inmate-workers on a path toward removing themselves from their identities as current and future inmates, and attaching themselves to a new identity as a professional doing legal and respected work out of prison.

It happens impressively fast. These changes were easy to see over a period of less than a year (for most it was much faster), even though the Televerde workers were still in the prison wing, with their old friends and controlling prison wardens, every day after work. As part of the identity journey, they needed to transition from their old thinking habits – the orange in their heads – to a new way of seeing themselves as part of a regular civil society that they could not yet reach because it was outside the prison walls. Remarkably, they were able to not just see their inmate identity and their worker identity as separate beings coexisting in their minds, they also could shift to a new and holistic identity that would guide their lives after they were released from prison.

Giving workers respect is seen as important also in regular organizations, with no inmate workers, but there is a certain degree of cynicism about its effect, and there are also managers who don’t think it matters. After seeing how transformative it can be under these conditions, when it is done honestly, maybe it is time to reconsider.

Monday, November 14, 2016

What If Everyone Learns From Others? Finding Fool’s Gold

So the US election ended with a Trump win and wild swings in the stock markets. The Dow Jones fell from 18,200 to 17,900. Then, less than a week after, stock prices rushed back up and passed 18,800. What happened? Let’s start with the simple observation that we were observing stock sales and buys by investors, who sell and buy for profit, and who have a lot of experience selling and buying. These wild movements were not a result of ignorance, and not a result of playfulness either. Investors chasing value drove prices down and back up, and lost and gained money. And, this was not a unique event, we are familiar with dramatic price changes as the market responds to uncertainty.

What drove these events was in fact a fundamental process that has been studied long, and we can go back to a paper by Hayagreeva Rao, Gerald Davis, and myself in Administrative Science Quarterly in 2001 to learn about it. People making decisions under uncertainty try to learn ways to reduce uncertainty. When they are looking for value, one way is to learn from others. After all, if we see someone moving toward one option, or away from it, their decisiveness could indicate that they know something that we don’t know. But people can be decisive for many reasons. They may have correct knowledge. They may have incorrect knowledge. They may be impatient. But learning from others can be very tricky when those others act on incorrect knowledge or impatience. This was known before our study.

What we found went one step further. Learning from others is especially tricky when those others learn from others. In that case, it is enough for some people to make decisions without correct knowledge. Others do the same learning from them, and then others do the same learning from those who learnt from them. And so on. See how this can make stock markets plunge, with very little basis in fact? Or increase? In fact, our research was based on stock market actors – not investors, but stock analysts. They want to cover firms that are good but overlooked, because analysts are most useful for investors if they give scarce information on valuable opportunities. But we found that when analysts were chasing valuable firms, they were in fact only chasing other analysts. And the later they were in learning from others, the less valuable were the firms they found.

This is a problem that extends much further than stock markets, though it is easier to  prove there than elsewhere. Learning from others is a good strategy as long as it is not over-used. But, those who learn from others typically don’t stop using that strategy soon enough, so at some point it becomes costly. Again and again we see people, and firms, chasing fool’s gold: opportunities that looked good to the first who entered, but only because of incorrect information.

Monday, November 7, 2016

Being Led by a Narcissist: What Will Happen?

A narcissist is someone who has an inflated perception of oneself, and will give exaggerated accounts of own capabilities, past accomplishments, and ability to predict and change future events. Narcissists have, to put it colloquially, huge self-esteem. Clearly this suggests leadership as an appealing career path for narcissists. After all, leaders are looked up to, which confirms what the world should be like for narcissists, and leaders can accomplish great deeds, which narcissists are confident they can. That does not mean that CEOs of firms are narcissists in general. CEOs typically are not given the firm by dad; they are career managers who get their position based on a track record of success. Some degree of randomness is involved in who wins, but it also helps to have a realistic view of oneself and the world, and narcissists fall short on that dimension.

Still, there are enough CEO narcissists around that it is possible to do research on them, and thanks to an article by Arijit Chatterjee and Donald Hambrick in Administrative Science Quarterly, we know how they lead. The key question to pose is how CEOs learn from experience – do they become more cautious by low performance, and bolder by high performance, as one might expect and want a firm to do? After all, adjusting actions to feedback is an astute way to behave both for individuals and firms.

Intuition suggests that narcissists don’t respond much to feedback because they are already convinced of their own greatness, so they will ignore evidence to the contrary. The research showed that this intuition is only half right, and this is where things get interesting. It is true that narcissists are unresponsive to indicators of their own performance – objective indicators, the kind that one should learn from.  A narcissist CEO will completely ignore recent stock returns when calibrating the level of risky investments; a non-narcissist CEO will pay close attention and make more risky investments when they indicate success.

But that does not mean that narcissists ignore feedback. The reason is that narcissists are not as confident as they seem. In fact, they can be very insecure, and as a result they crave applause and lash out at criticism. This means that social feedback – praise – has a big effect on the behavior of narcissists. In fact, the opposite relation holds there. A non-narcissist CEO will nearly ignore media praise when adjusting risky investment, while a narcissist will make strong increases in risky strategic investment when praised a lot.  

So is it OK to be led by a narcissist? This research suggests that it might be OK, provided that social praise exactly mirrors objective indicators, or that the leader is not responsible for any decisions involving risk. Those are strict conditions, so it seems that it will nearly always be better not to be led by a narcissist.

Monday, October 31, 2016

Small Firms are Admired. But are They Good Employers?

There has been a strong movement toward smaller firms in many economies. This is partly a result of larger firms doing less well than before, and shrinking as a result of failure, and partly because large firms find it convenient to subcontract work, making their payrolls smaller than the actual work done for them. Along with this, we are seeing increased admiration for small firms, entrepreneurs founding and running them (especially), and even the “gig economy” where many people are not really employees of anyone, just individual contractors. If you took an uber ride today, you had a gig (economy) with someone.

We may wonder what all this does to employment. That’s a big question, but a practical place to start is wage levels and inequality. We already know that large firms pay more than small firms do, for the same worker. There is also some indication that they have greater wage equality, because employees inside large firms can compare their pay more easily, and can protest when inequality is high. But how does the presence of large firms affect the overall employment, including those who work for smaller firms? That’s the ambitious question answered by a paper in Administrative Science Quarterly by Adam Cobb and Flannery Stevens. They look at how US states differed in the proportion of people employed by large firms over time, and measured the effect on the income inequality -- the spread of income across the population.

What they find is disturbing for those who celebrate the rise of small firms. Large firms in a state reduce income inequality, which is only possible if they reduce inequality both inside themselves and among firms around them. So, rise of small firms means rise of income inequality. Some other findings are interesting too, and suggest problems. Large firms can have higher wage inequality if their employees compare themselves less, which is easier if they have racial diversity (races are often separated by job title, just as genders are). Racial diversity in large firms increases income inequality in the state, and this effect is especially large if the large firms are dominant employers in the state. Dispersion of large-firm employment across locations, which also prevents comparison, also makes large firms a weaker force in reducing income inequality.

Many lament the lower freedom in large firms, and hierarchies can even feel oppressive for employees. But the freedom of small-firm employment has its costs too. Jobs are lost more often, pay is lower, and even as neighbors they are less valuable – being in a state with many people employed by large firms equalizes income. Something to think about.

Friday, October 21, 2016

Can the State Help Firms Innovate? “Get some!”

The role of the state in business is hotly debate in some parts of the world, but less controversial in other parts. A key reason for the debate is that some think that the state can do some things better – for example, having a long-term perspective and committing resources – while others think the state should stay out because its decisions and execution are worse than the private sector. Different parts of the world has reached different answers, with the US standing apart as particularly skeptical of the state, with most of Europe and important parts of Asia having a much more optimistic view of the state.

One of the places with some controversy is actually China, which has gone through a market transition but still has state intervention both through state ownership and state grants to firms. This makes it a great place for looking at what the state can do, and an article by Kevin Zhou,Gerald Gao, and Hongxin Zhao in Administrative Science Quarterly takes advantage of this opportunity.  Their idea is simple. State ownership gives Chinese firms advantages both in general financing and in funding research and development, which in turn should help innovation. But, the effect on innovation will only happen if the firms are actually good at using these extra resources. So, they need to pick good research (decision making) and do the research and development well (execution) in order to do better than firms without state ownership.

Their research has a rich set of results on state effects, but the key conclusions are easy to summarize. Yes, state ownership means getting more money for research and development. Yes, those funds are used less effectively than in firms with no state ownership. And here is the interesting tradeoff: the two effects don’t balance out; instead they make firms with some state ownership superior to those with a lot, and with nothing. The advice is clear: get some! And interestingly, this advice is particularly important not for established firms, which one might think are the ones best able to milk the state for funds, but for start-ups. The reason is that start-ups are better users of the added funds they can get from the state. So, a state that understands this relation should (as the Chinese state clearly does) not just give money to the large and established firms, but also to startups.

And what happens if there is too much of the state? This is a problem seen some places in Europe, where there isn’t a deliberate market transition as in China, and where the state has a fair amount of money. For example, Norway has mostly been directing its oil-funded pension money abroad, for a number of reasons including the peculiarity of owning firms and choosing what firms should receive research funds. In spite of this caution, there is still significant state funded research in Norwegian firms, and Financial Times has reported some indications that it is used less effectively where there is a lot of it. Just like in China.