Peter Swan

Common sense suggests company boards are best composed of directors who hold shares in the business because any poor performance is effectively ‘skin in the game’ as a cost to the director as well as to shareholders. Director’s interests align with shareholders. Directors who mismanage pay a severe price. Evidence also implies this is the case.

During the global financial crisis when the ASX200 index tumbled nearly 40%, incentivised boards suffered fewer relative stock price falls. Yet this advantage can be lost if a company’s board has too many outside directors or if the board members are too compliant to the chief executive. They fail to ask the tough questions. The size of boards is also an issue. Having executive board members who share ownership directly benefits firm performance and lowers CEO pay – but less so when ownership is combined with large boards. It seems when a firm performs poorly, too many independent directors can impede critical action – such as firing an underperforming CEO. A ‘smallish’ board of five or six highly incentivised directors, with a low proportion of outside directors who are prepared to monitor and not just advise management, is optimal, according to my research done in conjunction with Serkan Honaine.

Poor governance can squander a firm’s wealth and our study into how well the interests of independent board members and shareholders are aligned in larger Australian companies suggests large boards of eight-plus members can be very destructive for shareholder value. The average market-to-book ratio of companies with smaller boards of seven or less directors is 50% higher than those with eight or more, and nearly 40% higher when debt-financed assets are included.Our research based on an analysis 284 major Australian listed companies over the decade to 2010 shows that if businesses with large boards behaved like firms with fewer directors, they would improve their performance substantially. Reducing the size of the average large board (nine directors) of Australia’s top 200 firms in 2010, to the size of the average small board (six directors), could boost an individual company’s performance by as much as 50%.

In all likelihood, a large board indicates that management is in control with little effective supervision by shareholder representatives. Naturally, management is reluctant to give up its privileges and drastically reduce board size despite huge cost savings. Poor board monitoring and weak decision-making is collectively costing shareholders hundreds of millions of dollars. Part of the solution is to replace large boards with smaller boards that do not try to usurp the role of management by micromanaging and to focus on the important task of hiring and firing the CEO.

Risk Aversion and Big Boards

Larger boards appear to substantially drag on overall firm performance through a variety of mechanisms, such as reducing non-executive director (NED) incentive pay and raising base pay for outside directors. Such actions encourage a board, dominated by outside directors who have no incentives, to entrench poorly performing CEOs. Large boards are also more cautious because they can have more difficulty reaching a collective decision. This constrained risk-taking results in slow responses to new circumstances and slower release of new information. The resulting reduced stock price volatility appears harmful to shareholder value.

Bigger boards, dominated by outsiders unlikely to be informed of company affairs, have a tendency to keep growing. Large, externally dominated boards appoint more and more directors like themselves with little or no regard for the wishes of shareholders, who are then hit twice. Shareholders not only pay for the salaries of surplus directors but also suffer performance decline into the bargain.

Our research measured performance by comparing companies’ market values to book values. (The market-to-book ratio attempts to identify undervalued or overvalued securities by taking the market value and dividing it by book value. As a rule, the more the ratio exceeds 1, the better the performance while those below 1 are considered undervalued or poorly performing.)

We find that, based on 2010 values, property group Westfield and National Australia Bank (NAB) had below-average market-to-book ratios of 1.34 and 1.39, respectively, and 13 board members each. Publisher Fairfax Media, with 11 board members, carried a very depressed ratio of 0.58, which is well below 1 (and far lower still in 2012). National airline Qantas had 10 members on its board and its value ratio was less than 1 (at 0.83) with its ratio continuing to deteriorate.

Investment and financial services provider Macquarie Group had 10 members with a ratio of 1.03. In contrast, with only five directors on their boards, investment fund Platinum Asset Management and high technology company, Silex Systems, had ratios of 11.7 and 9, respectively.

Meanwhile travel brand group, Wotif, and electronics retailer JB Hi-Fi, each with six directors, had ratios of 13.2 and 7, respectively.

Challenging Independent Director Dominance

In theory, Australian boards appear to be wide open to influence by outside directors. Unlike the US corporate landscape, no chief executive was chairman of a big Australian publicly listed company board. As a result, non-executive directors have a greater ability to intervene in a firm’s activities.

Shareholders have greater power too. Only 40% of Australian shareholders vote at company meetings on proposals from the directors – half the rate of the US. So large shareholders of Australian companies may not need as much stock to maintain control and can make critical decisions, which puts the onus on independent directors to apply greater scrutiny.

We suggest the findings on the harmful effects of outside directors’ dominance and large boards are directly contrary to the views held by regulators, which have been shaped by big corporate collapses. Virtually every country in the world has mandated a majority of independent directors based on little more than what may be simply a coincidence: the failed US energy company, Enron, happened to have a majority of executives on their board.

We challenge the trend for corporate governance councils around the world to introduce policies for a majority of independent directors on boards. Full-time executives, especially those with shares providing skin in the game, know a great deal more about the company and where it is heading than do outside directors. Moreover, typically they stand to lose a great deal more than do part-time directors if the company fails. This may include their jobs and livelihood.

Part-time, outside directors typically have little background in the industry. If the company fails, they may lose their director’s pay that in some cases is little more than a sinecure for turning up to board meetings. If prominent in the community, they may also suffer reputational loss.

We also question the regulators’ decision – in Australia and other countries – to make share ownership a barrier to independence. The Australian Securities Exchange’s (ASX) listing rules require the majority of directors to be ‘independent’, which is defined as not being a substantial shareholder (by holding less than 5% of stock in the company) or not having worked in an executive capacity for the company or another group member for at least three years. This seems counter intuitive because large shareholders have the most to lose from bad managers. They therefore have an economic incentive to gather information and actively monitor the chief executive.

If protecting shareholder interests is the task non-executive directors are facing, then surely alignment with, and not independence from, shareholders is ideal. The New York Stock Exchange (NYSE) and NASDAQ listing rules adopt a neutral stance: stock ownership per se is not a barrier to independence, and they set the barrier at 10% of stock for directors taking on an audit committee role because of the Sarbanes Oxley Act.

It would seem that regulators, in their quest to free management of burdensome shareholder concerns, have taken Australia way out of the mainstream at a huge cost to investors and forno apparent reason other than to appease the privileged managerial class at the big end of town.

Regulators’ Response

The ASX does not see this as a burning issue. When the ASX Corporate Governance Council recently reviewed its Corporate Governance Principles, roundtable discussions were held throughout the country with representatives of directors, management, institutional and retail shareholders, proxy advisers and others with an interest in how corporate governance practices are developing, no change was recommended.

The council chair, Malcolm Starr, said the consensus view was to leave well alone because the present system was working well. He acknowledged the viewpoint that it was counter intuitive to limit non-executive directors’ shareholdings because ownership should encourage better monitoring of company management. Yet there was another opinion that complete independence (through no shareholdings in a company) was the better way to go, Starr insisted.

The Australian Institute of Company Directors agrees. “Non-executive (or independent) directors are seen as ‘custodians of the governance process. While they govern an organisation on behalf of the shareholders or members by whom they are elected, their role is to act in the long-term interests of the company, not shareholders per se, and certainly not particular shareholders,” says spokesman Steve Burrell.

We say independence is undermined by other factors – such as by the old boys’ network that traditionally has appointed directors in the first place. In theory, outside directors should confront management and champion shareholder concerns, but in practice, their motivation is suggested to be more about behaving in ways that will bring more lucrative directorships.

Non-executive directors who are often appointed through friends on the board would be more partial to showing allegiance to their friends and overlook activities by management to expropriate the wealth of shareholders. Directors who do ask questions of management are likely to be either ignored or ostracised. They face the prospect of being denied the right to stand for reelection.

Paper independence aside, high levels of fixed compensation for attending scheduled meetings, along with the barriers to equity ownership provide for little incentive for non-executive directors to exert the extra effort that would add value to the firm. Likewise, the low level of variable forms of compensation to non-executive directors provides little incentive for them to seek and endorse strategies that add value to a company, as the non-executive directors would receive little in the way of the fruits for their labour.

Yet there could still be an incentive for non-executive directors, who may be motivated to perform their role more effectively by both the lure of new directorships from other boards and the financial incentive of being a corporate insider.

Why board size counts

We show that company performance diminishes with reduced monitoring of management by directors, while future firm performance increases when executive and non-executive directors own shares in the company – but not when the board is big. Weak monitoring by large boards, in combination with a high proportion of non-executive members who do not effectively own or take responsibility for decisions – the ‘free rider’ problem – was also found, particularly when boards consisted largely of non-executive directors without shares in the company.

A standard justification for large boards may be the need for these knowledgeable or well-connected outside directors to act as advisers – particularly in big complex companies. Yet it has been long believed that companies with larger boards suffer in performance because of their difficulty reaching consensus on decisions.

Greg Medcraft, the new chairman of the Australian Securities & Investments Commission (ASIC), has warned boards they will be held to account. “For instance, in the Centro case, Mr Medcraft has said publicly that ASIC acted where it believed directors’ behaviour did not meet the expectations of the law,” emphasises an ASIC spokesman. The Federal Court recently found directors of the Centro property group breached their duties when they failed to notice multi-billion dollar errors in the property group’s accounts.

Medcraft, who was appointed in May 2011 for a five-year term, says directors play an important role and they must not uncritically adopt the work of management on major issues for which they are responsible. “The key elements of the financial position of the company are things that directors should understand,” he says.

Conclusions

Our findings are a challenge to the ASX and ASIC, which discourage outside directors from owning shares in companies they hold board roles on for fear it undermines their independence. Ownership can be a tool to help align shareholder and manager interests and is linked to a firm’s positive performance. It is only likely to be fully effective if the board size is restricted to no more than about five or six. If management needs advice then it should simply hire consultants, not create large unwieldy structures made up of so-called ‘advisors’ kowtowing to management.

Before accepting a board role, a prospective director needs to signal his believe in the board’s monitoring role either by substantial personal shareholdings or taking his pay in the form of escrowed shares during his tenure. He may also need to negotiate funds set aside to assist board members in their monitoring role as boards need access to resources independent of day- to-day managerial control, especially when dissatisfied with the CEO’s performance.

Professor Peter Swan AM FASSA is a Professor of Finance, Australian School of Business, The University of New South Wales. This opinion piece was previously published on the ASA Magazine.

The  Reserve Bank of Australia (RBA) has cut its cash rate by 25 basis points to 3.25 per cent in response to a weakening outlook for global economic growth. I feel the decision by the RBA to cut interest rates may boost underperforming sectors of the economy.

From the Knowledge@Wharton today blog.

If you experienced the blues after the long weekend today, you may be among the millions who don’t get enough sleep and cause workplace productivity losses of up to 30%, according to recent research.

Sleep deficits seem to be a serious problem. Almost a third of all working adults get six or fewer hours of sleep each night, according to research from the Centers for Disease Control and Prevention. According to most sources, adults usually require between seven and nine hours of sleep a night to function optimally. Chronic sleep loss and sleep disorders are estimated to cost the nation as much as $16 billion in health care expenses and $50 billion in lost productivity, medical journal NIH Medline Plus says, citing studies from the National Centre on Sleep Disorders Research.

Wharton practice professor of management Stewart Friedman says the expectation in most workplaces is that employees should be fully alert during the entire span of their working day. Employers, of course, have formal “breaks” built into work schedules. “But often the span of expected work without rest is longer than employees can [manage to do while maintaining] 100% effort and focus,” he says.

More creative ways must be found to tackle sleep deficits hurting workplace productivity, because individuals vary in their need for rest, Friedman argues. “We would go a long way to increasing productivity if we made it legitimate and easy for people to take short periods of rest when they need to do so.”

In today’s highly connected world, sleep is a casualty also of text messages and emails that arrive at times when employees should be either relaxing or settling into bed for the night. “People feel this constant need to be connected,” noted Wharton management professor Nancy Rothbard in a recent Knowledge@Wharton article. “There’s no priority structure. Everything is urgent. Everything is red flagged.”

Studies show that inadequate sleep leads to deficits in cognitive performance, including the ability to think clearly and quickly, perform efficiently, remember things and drive safely, according to David Dinges, associate director of the Center for Sleep and Circadian Neurobiology at University of Pennsylvania School of Medicine, which has conducted studies on the subject for several federal agencies. Sleep deficits are also linked to higher rates of obesity, less effective emotional regulation, diabetes, heart disease and other issues, he adds.

Why do people lose sleep? The U.S. Department of Labor’s American Time Use Survey, which measures the amount of time people spend doing various activities, including paid work, childcare, volunteering and socialising, shows that people tend to give up sleep time for paid work, but not for unpaid work like household duties. Because they are compensated for their hours spent on the job, “people will get up earlier, go to work earlier and work longer for greater compensation — and in doing that they will lose sleep,” says Dinges.

Long commuting times only add to the problem by extending the work day further. Jet lag is also difficult to overcome for business travelers. “The disruption of the circadian system and the effect [jet lag] has on inadequate sleep often leaves them at a significant disadvantage relative to their local host,” says Dinges. Caffeine and other stimulants have limits on their effectiveness, he adds.

Recovering from a sleep deficit accumulated over five nights requires more than one weekend night of sleeping longer, notes Dinges, who is currently researching such “catch-up sleep.” Moreover, he finds that many people report that they cannot sleep two consecutive nights consisting of nine-hour stretches because their biological clock wakes them up — not to mention noise, light and other disturbances. (And those with small children will agree that there’s usually no hope of sleeping past 7 a.m. on the weekend.)

Epidemiological studies show that “very, very few people” can manage with four or five hours of sleep, although many claim that they can, says Dinges. People who consider themselves “committed” to their work like to brag that they don’t need eight hours of sleep, because sleep is associated with laziness in some people’s minds, he adds. Those who seem to thrive at their jobs despite sleep deficits often have more flexibility with regard to getting their work done, he points out. “People get by even with deteriorated performance from inadequate sleep by simply not being under [as much] pressure [as others].”

And while it may seem that well-compensated CEOs and other high-level executives get away with less sleep, Dinges points out that they often catch-up in limousines and in airplanes, and by consuming a lot of caffeine and other stimulants. Also, he finds that these individuals engage in “wake-promoting” activities, like standing at their desk or holding conversations. “At meetings, they are not the ones who have to sit and listen; they get to stand and talk,” he says. “If they had to sit and listen, they would find out they haven’t had adequate sleep.”

This post was previously posted in Knowledge@Wharton today blog: The Eye-opening Impact of Sleep Deficits

Rafal Chomik

The phenomenon of population ageing is often summarised in a simple ratio. Known as the dependency ratio, it measures the proportion of those of traditional working-age (15-64 years) to those above it (65 years and over). In Australia, as in most other countries, this dependency ratio is on the increase, having risen from 15% in 1980 to 20% in 2012. By 2050 it is expected to reach 36%.

Yet who we consider to be of traditional working-age can change over time. Arguably more important than the dependency ratio is the proportion of people actually in the labour force supporting those who aren’t.

For example, despite the rising proportion of older people, Australia’s total labour force participation rates have increased over the last few decades, from 61% in 1980 to 65% in 2012, driven by greater numbers of women working. Women still have some way to go to catch up with men. But even as that happens, if we wish to offset the declines in total participation that result from population ageing, we need some of the older people to remain in the labour force.

Many older people already want to work longer but encounter barriers to doing so. The barriers and incentives that lead to their inactivity come at a high cost of foregone potential. In a briefing paper on the trends and prospects for mature-age labour force participation, co-written with Professor John Piggott at theCentre of Excellence in Population Ageing Research, we estimate this cost to be around $30 billion, or 2.4% of GDP in 2012.

Besides dismantling mature-age employment barriers related to health, discrimination, and skills, there are some key institutional issues that government can tackle. These result from the carrots and sticks that make up the tax, benefit and retirement income system.

The most important of these are the three ages at which pension income can be accessed: 55 (increasing to 60) for superannuation access; 65 (increasing to 67) for age pension access; and 60 for tax-free superannuation benefits. These can be thought of as two sticks and a carrot.

Australia is increasing the access ages for the two sticks. But the access age for tax-free superannuation has been left untouched at 60. As Professor Piggott has noted before, “once the standard superannuation age reaches 60, in 2024, the carrot will have lost its crunch”.

These levers are not only more amenable to policy intervention, but also appear to have a greater impact. When New Zealand increased access to its pension from 60 to 65, mature-age participation rates shot up much faster than in Australia, and now stand considerably higher; 76% for those aged 55-64 compared to Australia’s 53%. A key explanation is that New Zealand doesn’t rely on a widespread superannuation scheme, which in Australia can be accessed much earlier.

But to what extent can we push for longer working lives? Some, such as my fellow contributor to The Conversation, raise concerns about leaving older people to the ravages of the labour market. There is indeed evidence that for mental health outcomes, a bad job can be as bad as or worse than inactivity.

Still, the quality of jobs in Australia is not necessarily worse than in other advanced economies. For example, the incidence of temporary contracts among 55-64 year olds, a key indicator of job insecurity, stands at 4.6% – about half the rate of the OECD average.

Indeed, there doesn’t seem to be a relationship between a country’s mature age participation rate and incidence of mature-age mental health issues. While Belgium has one of the lowestparticipation rates of 55-64 year olds in the OECD of 36%, Sweden has one of the highest, at 76%; yet both have the same incidence of mental health problems among 55-64 year olds.

It is important to remember that population ageing takes time. And society, as well as the labour market, can change and adapt over time. We know from health and education data that today’s older people are much better off than in the past. And looking at labour market data shows that while the proportion of unemployed 55-59 year olds who have been looking for a job for more than 12 months is at 34%, twice that for 25-34 year olds, this rate has declined more than for any other age group over the last decade.

Should labour markets become more turbulent and we find that older people increasingly struggle to engage with employment, then addressing labour supply and demand barriers seems more fitting than to simply retire them. The latter response is a mistake made in the past in the now familiar story across the OECD in the 1980s, of retrenchment and labour market exit of older workers to apparently make way for the young. This was in line with the debunked logic that there is only a certain number of jobs to go around.

Ever since the baby boomer generation, we have been redefining the timing of key life events. It is likely that later labour market entry, later marriage, child-bearing, and longer, healthier lives, will mean longer productive lives too. With the right mix of policy intervention, baby boomers who are now entering the age brackets of “traditional retirement age” may well redefine what that means too. And if they do work longer, then the “tsunami” of population ageing represented by an increasing dependency ratio will be no tsunami at all.

This opinion piece was previously published on The Conversation as part of their ‘Shades of Grey’ discussion portal  under: It’s time to redefine the traditional working age.

From the Knowledge@Wharton today blog.

When Burberry recently reported that sales at stores open a year or more were flat, and suggested that profits are likely to be on the disappointing side, some people began to wonder if Burberry might be the canary in the coal mine – a harbinger of lower sales in the luxury sector over the coming months.

A Wall Street Journal article today supports that theory, noting that diamond sales in China are expected to grow more slowly this year than last, while Daimler AG has announced that its Mercedes-Benz division would miss its profit target in China and expects lower sales for its Porsche division.

Is London-based Burberry indeed an example of what we will see in the luxury goods market? What are the implications for the global economy and, equally important, for the upcoming holiday season?  

Burberry suggests that its slowdown is “a sign of an upcoming trend in the luxury segment,” says Wharton marketing professor Barbara Kahn. “Although it is hard to know for sure, there is some indication that this might be a correct analysis.”

Much of the ability of the luxury segment to maintain steady growth has been due to strong performance in China, she adds, and “recently, this growth has slowed down for several reasons. First, as the Chinese luxury consumer gets more sophisticated, [his or her] need for purchasing high-end visible status symbols slows down. Many of Burberry’s products are high status — and visibly so, due to the famous ‘check’ [design].” Now that consumers are gaining more confidence “in their own positions of wealth, these types of purchases may decrease.”

In addition, Kahn says, China’s economy is slowing down, “and there are indications that the government will not provide substantial stimulus mechanisms, as they have in the past, to keep up the growth levels.”

Burberry, a luxury fashion house that sells accessories and clothing for men, women and children, has approximately 235 stores and outlets, and can be found in more than 200 upper-end department stores worldwide.

An article in The New York Times noted that Burberry’s main customers, “known in the industry as traveling luxury consumers, [include] just over a third in Asia, a quarter in the Americas and a little less than a third in Europe.”  The article, published shortly after the disappointing figures were announced by the company, quotes Burberry CEO Angela Ahrendts acknowledging that “the external environment is becoming more challenging,” and suggesting that Chinese consumers may be slowing down their luxury purchases only temporarily, waiting to see how the upcoming leadership changeover in China affects their purchasing power. 

Wharton marketing professor Z. John Zhang has a slightly different take. “I don’t believe that the overall consumption of luxury goods in China is going down, and even if it is, it will not last for long,” he says, adding that economic downturns typically do not affect many luxury goods consumers, “especially in a country where the income disparity is huge. If anything, in a downturn, you need to look even better to impress your peers.”

Burberry’s lower sales could be due to a number of reasons, according to Zhang. “First, more and more people in China are going abroad for shopping. The people who could afford to travel abroad are those who could afford to buy luxury goods, and there will be a substitution effect. Second, there may be more fake luxury goods in the Chinese market. After all, during a downturn, you do what you must to survive. The supply of fake goods may have increased considerably now that the economy is getting tougher.”

The worst outcome for Burberry in China, he adds, is that “it is no longer on the top of the Chinese customer’s list of luxury goods [to purchase]. These consumers are constantly looking for new ways to distinguish themselves and to stand out in a crowd. It is an arms race [among] luxury brands to find new ways to provide exclusivity to their customers.” The disappointing news from Burberry could reflect the fact that the company “is losing favor with exacting Chinese consumers.”

So what’s ahead for Burberry and other luxury goods retailers?

“The luxury retail sector was the first to recover after the recession, partly due to strong demand from China,” says marketing professor Stephen Hoch. “Maybe they are now at a pausing point.” Any weakness that is evident, he adds, “would be due to Europe and China rather than the U.S., where the rich seem to be doing just fine relative to everyone else.” In China, if the new stores — where you would expect the biggest increase in same store sales since they are new — showed any weakness, “then this could be a big contributor,” he points out. “It is hard to predict whether Burberry is a harbinger of anything else. I tend to doubt it, but we will see.”

Kahn notes that the continuing uncertainty in Europe is definitely a factor in lower luxury goods purchasing. In addition, she has read reports suggesting that the new Chinese leadership team – expected to begin transitioning as early as next month – “is not likely to provide as much stimulus to the economy as they have in the past.”  Finally, if Burberry’s slowdown is indeed a general trend, and not unique to Burberry, “I would expect to see similar slowdowns in other highly visible status luxury purchases, such as LVMH and Chanel.”

And the outlook for the luxury goods sector during the all important holidays? “As usual, it is hard to predict the upcoming holiday season,” Kahn says. “The back-to-school season was reasonably strong — relative to our new, more moderated expectations — so people are cautiously optimistic. I think the current thought is that we should see a holiday season fairly similar to last year – which is reflecting the slow but steady growth patterns.”

This post was previously posted in Knowledge@Wharton today blog: Is Burberry the Canary in the Luxury Coal Mine?

From the Knowledge@Wharton today blog.

It’s a conundrum that most men face at some point: thinning hair. And while it may not seem to be an especially grave problem, male-pattern baldness “has been linked with poor self-esteem and body image and with greater stress and depression,” according to Wharton operations and information management lecturer Albert Mannes.

But new research by Mannes points to a somewhat radical solution to the problem — one that directly contradicts a growing number of hair replacement services, growth serums and other products that promise to produce a robust mane. His suggestion? Just shave it off.

In his recent paper titled, “Shorn Scalps and Perceptions of Male Dominance,” published in the journal Social Psychological and Personality Science, Mannes describes three experiments he conducted that had some surprising results. Specifically, men with shaved heads were viewed as more masculine and dominant than other men. But it doesn’t end there: Two of the experiments showed that such men were perceived as taller (by an inch, on average) and stronger (that is, seen as being able to bench press 13% more) than those men who were well-coiffed. They were also viewed as having greater potential as leaders.

“The broad take-away is that perceptions about leadership and related traits like dominance can emerge from peculiar characteristics that aren’t really related to leadership at all,” says Mannes.

Mannes — who sports a shaved head — says the impetus for his research came from his own experience in his early thirties, when he began losing his hair. “After fighting it for a while, one day I just decided to shave it off.” Mannes liked the look and received some positive feedback, but his new appearance had one unexpected consequence: When he interacted with people who didn’t know him, they seemed “stand-offish and even deferential.” That led him to wonder if his experience was unique.

To test his notion, Mannes structured three experiments. In the first one, subjects were asked to look at a series of photographs of men of similar age and dress, including some with shaved heads. Then, they were asked to rate the men in terms of how powerful, influential and authoritative they looked. When the numbers were tallied, the shaved heads won.

In a second experiment, Mannes tried to control for other physical features that could convey dominance by showing his subjects the images of four men, but in two different versions: one with their hair, and one with their hair digitally removed. Again, the images of men without hair were perceived as more dominant — and, much to Mannes’ surprise, also taller and stronger.

For his third experiment, Mannes avoided all visual cues and offered subjects physical descriptions of men, including whether they had hair, thinning hair or a shaved head. Again, the shaved men came out on top.

Mannes says he does not advise that, in general, men looking for a boost in perceptions about their leadership capabilities should automatically shave off their hair. In fact, there is a cost to opting for a shiny pate. In his studies, those with shaved heads rated lower on scales of attractiveness and were also seen as older. However, his findings hold particular relevance for men with thinning hair, who may be tempted to invest money in hair replacement or other means of salvaging what’s left. By shaving their heads, not only will these men save money, they will receive a bump in terms of how dominant they are viewed by others.

Part of the effect may have to do with the bold nature of the move. Mannes notes that in his experiments, men with thinning hair were consistently rated lower in terms of dominance. Clearly, there is a difference between simply succumbing to male-pattern baldness and making the confident, but somewhat unconventional, choice to remove one’s hair altogether.

And according to Mannes, that’s where his study could have some relevance to women, who obviously have an equal investment in being perceived as leaders in a business environment. Just as head-shaving could be perceived by some as an unconventional move for men, women who show a similar disregard for convention may come across to others as self-confident, he notes. That doesn’t mean they should shave their heads, of course. “There is evidence, for instance, that unconventional dress in women is viewed as status-enhancing. So women may have more of an impact just by engaging in unconventional behavior.”

This post was previously posted in Knowledge@Wharton today blog: Hair Today, Gone Tomorrow: Why Shaved Heads Lead the Pack

Vic Edwards

Is China in a worst state than official figures suggest? Maybe – but the overall picture is mixed.

China’s manufacturing has experienced a slump in orders – but inflation slackened more rapidly than expected. China’s manufacturing activity has fallen to its lowest level in more than three years as the global economic slowdown continues to weigh on the world’s largest exporter.

The Chinese government has tried to boost the economy with interest rate cuts and by lowering the amount of reserves that banks must keep on hand in a bid to spur the kind of lending that could stimulate a rebound, however contagion from Europe is impacting China, and that is causing pressure on Australian exporters, particularly the miners who are dependent on China importing vast amounts of coal and iron ore.

China is the world’s biggest energy consumer and steelmaker. However new Chinese export orders contracted last month at the sharpest pace since March 2009 while employers cut jobs at the fastest rate in 41 months.

I recently visited China, and saw that China’s exporters are facing increasing difficulties amid stronger global headwinds. At the same time the dynamics of Australia’s relations with China are undergoing a rapid process of change, and this will reshape international and foreign policy between our two countries. This comes as China prepares its 12th Five Year Plan – an unstable time for its economy.

A series of weaker than expected economic data has resulted in China cutting interest rates for two months in a row, and its central bank has been injecting cash into money markets to ease credit conditions to support the economy after it notched a sixth straight quarter of slower growth.

A blow-out in China’s trade deficit raises concerns about the country’s future economic growth, raising questions about whether the country’s economy is tailing off more rapidly than anticipated. The only bright economic star was that inflation slackened more rapidly than expected.

China has eased monetary policy to bolster growth – but the central bank is being cautious to emphasise a “prudent” policy stance for fear of re-igniting property and inflation risks.

I feel – despite recent speculation in the newspapers – it is unlikely China will release a package on the scale of the stimulus spending and lending that occurred in 2009 and 2010 in response to the global financial crisis.

Vic Edwards is a Visiting Fellow in Banking and Finance at the Australian School of Business.

From the Knowledge@Wharton today blog.

What will a “Kodak moment” be without Kodak? In late August, Eastman Kodak Company announced that it plans to sell its flagship film business as part of a fundraising plan to emerge from Chapter 11 bankruptcy next year. The firm is looking to spin off its personal- and document-imaging businesses, which include film, photo developing kiosks, scanners and other divisions — a move that would render it a company focused mostly on inkjet printing and commercial services.

This “new” Kodak would be vastly different from the company that helped coin the phrase “Kodak moment” to indicate a one-of-a-kind opportunity that begs to be captured on film. “Whoever buys the film business from Kodak stands to gain access to a very valuable asset,” says Wharton management professor Emilie Feldman. “Much of Kodak’s value derives from its film business, so the future acquirer will need to manage that brand equity carefully.”

For Kodak, the key challenge will be that its name is so closely associated with film, not with any of its remaining businesses, according to Feldman. “Once Kodak exits film, the operations left behind will not have a concrete and well-established image on which the company can rely,” she says. “This will be problematic for Kodak vis-à-vis its external stakeholders — particularly investors and securities analysts, who will have to make sense of the new company.”

Until the mid-1970s, Kodak commanded 90% of the market for photographic film in the U.S. But it lost that dominance rapidly in the digital age. “Digital technology has all but done in the iconic filmmaker,” notes a Knowledge@Wharton article that traces Kodak’s slide over the years. Should the firm have chosen an earlier time to sell its consumer film business? “A company should divest its ‘legacy’ business when the value of its remaining businesses plus the value of the payment it receives for the legacy business exceed the value of continuing to run the legacy business within the existing company,” says Feldman. Kodak would have benefited more had it sold the film business when it was on top of the market, she points out. But now, given the company’s financial distress, the need to repay its creditors is dominating its strategy, she adds.

In the latest quarter ending in June, Kodak reported losses of $299 million on revenues of a little more than $1 billion. Since 2003, the company has closed 13 manufacturing plants and 130 processing labs, and reduced its workforce from 63,900 less than a decade ago to about 17,000 worldwide. After eliminating 2,700 jobs since the beginning of this year, the firm announced it would cut another 1,000 before 2013. Kodak also has seen some turnover at its top level: On Monday, the firm announced that its president and chief financial officer are stepping down.

Letting go of the consumer film business may not be painless for Kodak because of the branding halo it lends its other, lesser-known business operations. “Because legacy businesses constitute companies’ historical cores, the synergies between the legacy business and other parts of the company are likely to be particularly strong,” Feldman noted in another Knowledge@Wharton article, based on her research of legacy divestitures by diversified U.S. companies between 1980 and 2000.

In addition, companies are prone to miscalculating how their consumers will react to drastic changes in the way they do business. For example, Los Gatos, Calif.-based Netflix last September announced its intention to split its DVD rental and streaming media businesses, only to drop that plan a month later. Netflix’s consumers reacted badly to the idea of having to sign up for two different services. The plan to split the businesses “may be a harmful strategy,” Feldman had toldKnowledge@Wharton Today at the time.

In a statement, Kodak acknowledged that consumer photography “has been the core of our business” for most of its history. “It is also important to note, however, that our brand is strong in commercial markets.” The company’s commercial services business now represents more than two-thirds of its sales, the firm added. Its reorganization plans include the sale of 105,000 retail kiosks and efforts to monetize its litigation-ridden portfolio of digital imaging patents. In early August, Kodak won a partial victory over Apple in a battle over digital imaging patents. It may either sell that portfolio or leave it as an alternative source of recovery for creditors, Kodak has said.

Professor Fariborz Moshirian

Plans for the Eurozone’s rescue fund are to go ahead, following a ruling by the German Constitutional Court at Karlsruhe. This was a much anticipated landmark ruling watched around the world, delivering a momentous decision with far-reaching implications for the euro’s future. It means Europe can finally sign the European Stability Mechanism (ESM) and fiscal pact.

The German Bundesverfassungsgericht Constitutional Court overturned a number of legal challenges aimed at preventing two crucial economy boosting tools into law.

The ESM was set to replace the temporary European Financial Stability Facility (EFSF) and should have been in place by the beginning of July. However it needed Germany’s share of the rescue money to function and that was really held up pending the court ruling.

The European Stability Mechanism is a fund backed by the 17 countries that use the euro, with those members paying 80 billion euro up front, and pledging 620 billion euro as a backup. Its purpose is to support countries that have got into financial trouble and just can’t borrow money on the normal money markets. The 700 billion would enable the fund to sell highly rated bonds.”

It is designed to come to the aid of debt-stricken countries such as Spain and Italy. The court’s rejection of thousands of injunctions from Germans objecting to participation in the European Stability Mechanism will help smooth the way for the Eurozone to attempt to contain the debt crisis.

The present turmoil in Europe may continue for some time to come, however I think major economies should avoid sinking into recession as long as European policymakers intensify their efforts to address the Eurozone crisis.

Professor Fariborz Moshirian is the Director of the Institute of Global Finance at the Australian School of Business.

Christina Boedker

Lifting Australia’s productivity is an ongoing challenge. Business leaders have blamed the industrial relations framework and almost every day there are calls to make labour more flexible – to some, this means cheaper and more disposable.

But manipulating staff as inputs within a market equation is not a sustainable way to lift productivity. Cutting wages and conditions is hardly an incentive for individual employees to work harder and produce more.

A critical part of lifting workplace productivity is having a great boss. Great bosses are those that enable workers at all levels of organisational hierarchies to lead change and be the best they possibly can.

Ongoing research that I have led since 2009 has canvassed more than 5600 employees at 77 Australian companies. It clearly identifies leadership as having the greatest correlation with firm productivity and profitability. It is the interpersonal and motivational skills of bosses that prompt staff to exercise discretionary effort.

Front-line managers especially have the strongest impact on profitability. This level of leaders manages important relationships with customers and has the biggest span of control.

Great leadership is about valuing employees and being compassionate. Compassion does not necessarily mean being soft: sometimes as leaders we have to ‘be cruel to be kind’. This will involve having hard conversations.

Compassion is also a two-way thing. It flows from the ‘top down’ but also, importantly, from the ‘bottom up’. In other words, hard conversations must be initiated by all staff, including subordinates. A great leader then, is a person who values feedback and criticism as learning opportunities.

The key question for Australia in future decades is how to sustain our position as a leading economy. Enterprise bargaining during the 1990s got the productivity levers moving at a workplace level, but what is the next big thing for moving Australia’s productivity agenda forward?

Focus could be provided by a new entity, such as the leadership institute recommended by the Prime Minister’s manufacturing task force. It could help firms lift leadership skills through education and research programs. And it should work with all sectors, operating collaborative industry projects that collect and benchmark productivity data to generate new policy insights.

Here, too, a compassionate approach will be required. A government-sponsored initiative can provide support and offer leadership, but unless it fosters the co-operation and engagement of industry and workers across all sectors, nothing will happen. Government, enterprise and its associations, unions and others all have to come together to jointly drive this agenda.

Dr Christina Boedker is a senior lecturer at the Australian School of Business. She will discuss her research at the Australian Graduate School of Management’s 35^th anniversary conference in Sydney on 11 September. This opinion piece was previously published in The Australian Financial Review: Bosses are key to productivity.