by Daniel Gross

hich comes first, theory or practice?

Theory – whether it was Charles Darwin’s Galapagos-inspired writings on evolution, or Sir Isaac Newton’s apple-induced discovery of gravity – is informed by practice and observation. And yet practices frequently follow from theory. Think, for example, of how management models like Total Quality Management or Six Sigma have altered the strategy, actions, and bottom lines of massive companies.

In fact, innovation is the product of a constant cycle whereby theory and practice are continually informed by one another. As a result, bridging the gap between theoreticians and practitioners is crucial. And one of the best ways for doing so is by constructing, using, and revising models. Models represent the marriage of real-world observation to imaginative thinking. And they provide a framework for teaching, for discussion, for inquiry, for understanding, and, ultimately, for enacting change.

Each year, Sweden’s Nobel Prize Committee recognizes researchers whose theoretical work finds applications in the real world. And last year, NYU Stern finance professor Robert Engle received a share of the 2003 Nobel Prize in Economics for developing an innovative and highly useful economic model called “Autoregressive Conditional Heteroskedasticity.” In English? “It’s a way of trying to model and describe and forecast this thing we call volatility,” Engle said in a town hall meeting held in his honor last fall. (“Nobel Pursuit”)

Currencies have been among the more volatile asset classes in the past year. After years of strength, the dollar has weakened substantially against currencies such as the British pound and the euro. The advent of the euro in 2000 was the latest step in a continuing effort to build a new model for European political, social and economic relocations. But last fall, the future of Europe’s united fiscal and monetary policy seemed in doubt as countries faced a conflict between meeting Europe-wide financial mandates and internal policy goals. Amid the crisis atmosphere, a panel sponsored by NYU Stern and Blackwell Publishing, Inc. gathered to discuss present and future prospects for Europe and the Euro. (“Currency Event”) While the panel’s members, who included NYU Stern Dean Thomas Cooley, largely agreed on the diagnosis of Europe’s ills, they offered different – and provocative – cures.
“Models represent the marriage of real-world observation to imaginative thinking. And they provide a framework for teaching, for discussion, for inquiry, for understanding, and, ultimately, for enacting change.”

When something breaks down – a monetary system, a car, or a system of corporate governance – it’s time to go back to the drawing board. And in the past few years, a series of board-room scandals and failings have exposed the flaws in the ways publicly held companies are governed. In their article, (“Ties That Bind,”) Lawrence White and Eliezer Fich dissect the current model and analyze how the make-up of corporate boards, and chief executive officers’ relationships with corporate directors, influence crucial outcomes such as compensation.

As Chairman of the Securities and Exchange Commission from 1993 to 2001, Arthur Levitt, Jr. implemented a series of reforms aimed at altering such relationships. In remarks prepared for the Citigroup Leadership and Ethics Program at Stern, (“Pocket Protector”) Levitt called for a “cultural change” in the way directors and CEOs approach their jobs. “We need private sector leaders at all levels to dedicate themselves to creating a culture of accountability and foster an ethic of service,” he said. “We need to change who our role models are.”

Whistle-blowers – employees within organizations that see unethical behavior and alert associates, regulators, or law enforcement agencies – are frequently crucial to creating accountability. But in corporations today, forces discourage employees from speaking out. “In many organizations, employees know the truth about certain issues and problems facing the organization yet they do not dare to speak that truth to their superiors,” as Elizabeth Wolfe Morrison and Frances J. Milliken note. In their article, (“Sounds of Silence”) drawing on sociological and psychological insights, they propose a model for understanding the phenomenon of organizational silence and suggest means through which managers can turn up the volume.

Whether you own a house or run a company, you’re continually in a state of remodeling. Robert Nardelli, the chief executive officer of The Home Depot since 2000, is simultaneously trying to remodel the home improvement chain’s massive store base while figuring out how best to help Americans remodel their homes. “We had a very decentralized business model,” said Nardelli, who spoke as part of the Stern CEO Series. (Interview). “What I found was that the fundamental infrastructure needed for sustainability in a variety of economic cycles was missing. The decentralization that had served the company well was a disadvantage going forward.”

Part of Home Depot’s current growth strategy is to push into more heavily populated urban areas like New York. Indeed, the company plans to build a large store in East Harlem. In so doing, Home Depot is joining a long list of companies that are investing in what Gregory Fairchild and Jeffrey A. Robinson call “America’s emerging markets.” (“Going for Brokers”). Fairchild and Robinson examine the phenomenon of white entrepreneurs and business owners operating in central city locations. Their suggestion: social brokers – institutions and individuals that can bridge the gaps between minority neighborhoods and non-minority business people – can help facilitate growth, profits, and development.

y opening stores in areas that have been historically underserved, companies like Home Depot can both do good and do well. Indeed, there’s growing evidence that the reputed conflict between companies’ social responsibilities and their responsibilities to shareholders to maximize profits may not be so great after all. A panel discussion jointly sponsored by NYU Stern and Resources for the Future brought together environmental activists and executives to discuss the ways in which being green can translate into more green in the corporate coffers. (“Responsible Parties”) Pursuing a goal of zero waste and emissions has “saved us about two billion dollars in energy costs,” said Paul Tebo, vice president of health, safety, and environment at DuPont. “Working on energy and keeping it flat while you grow is a terrifically good strategy.”

Understanding business models – and creating new models for understanding business – is an important component of the work done at NYU Stern by students, by faculty, by administrators, and by the practitioners who are part of the larger Stern community. In challenging conventional wisdom, in bringing new insights to bear on longstanding issues, this issue of STERNbusiness should stand as, well, a model for other periodicals.

Daniel Gross is editor of Sternbusiness.