|
By Daniel Gross
But those shoveling dirt on the grave of the New Economy may be acting in haste, as a careful perusal of this issue of STERNbusiness suggests. After all, many of the sweeping trends that gathered force in the 1990s are very much with us, and are hard at work. Yes, there is still a New Economy, as Dean Thomas Cooley and Mehmet Yorukoglu convincingly conclude in their article (p. 20). “The effects of the information revolution will continue to be felt and influence economic well being for decades to come.” Sure, the late 1990s saw a rapid inflation and then deflation in asset values of telecommunication networks. But while stockholders and bondholders may have suffered losses, society surely gained something. As former General Electric CEO Jack Welch noted in his appearance at Stern (p. 8). “We had a bubble, but we were left with a great technology to build great businesses around.” Welch, it will come as no surprise, is still optimistic. “We are at the beginning of the greatest period in the world. It just feels lousy if you hadn't been in the other periods.” Events of the past few years have also properly inspired some reconsideration of long-held premises about the underpinnings of our economic system. Accordingly, Professor Sally Blount-Lyon shrewdly brings the tools of psychology to bear on one of the most fundamental tenets of economics: the presumed fairness of markets. In her provocative article, she deftly outlines and then debunks the “fair-market illusion.” (p. 28). Amid this new climate, executives are finding that some business practices that were widely accepted in the 1990s now may appear potentially problematic. Professor Jeanne Calderon illustrates this dilemma in her article on off-balance-sheet financing techniques in the real estate industry (p. 32). “Trends such as mezzanine financing and land banking enable developers to shift land-acquisition and development debt off their balance sheets,” she writes. “In the wake of the Enron debacle, as investors and regulators begin to clamp down on off-balance-sheet financing, these controversial methods are receiving more scrutiny.” The Enron debacle – and the failures of management and boards at other companies – have sparked calls for reform in the way companies govern themselves and provide information to the public and investors. For more than a century and a half, the New York Stock Exchange (NYSE), as a self-regulating organization, has responded to crises in investor confidence by proposing new standards for corporate governance. In his appearance at Stern (p.2), NYSE Chairman and CEO Dick Grasso outlined some of the steps the Exchange is taking to help restore investor’s faith. “The real beauty of our system is that when people devise short cuts and in some way affect the system, the system has the ability to correct itself.” In a talk at Stern last March, Federal Reserve Chairman Alan Greenspan – one of the icons of the New Economy – noted that this corrective process is well underway. “The sharp decline in stock and bond prices following Enron’s collapse has chastened many of the uncritical practitioners of questionable accounting. Markets are evidently beginning to put a price-earnings premium on reported earnings that appear free of spin. Corporate governance has doubtless already measurably improved as a result of this greater market discipline in the wake of recent events.” Even with the new regulations and reforms brewing, there’s still room for improvement. And in an interview (p. 26), Professor Joshua Ronen lays out one intriguing method for avoiding future accounting scandals. Instead of having companies pay accountants’ auditing fees, he suggests that insurance companies insure financial statements. “The insurance companies would hire the auditors,” he proposes. “The coverage amount, which covers directly investors for losses as a result of omissions or misrepresentations, and the premiums paid by the clients, would be disclosed in the financial statements. Obviously, higher coverage and a small premium would be a signal of better quality financial statements.” The recent accounting scandals were a product, in part, of the failure of board audit committees to exercise proper oversight. In her article, Professor Patricia Barron reviews the proposals to reform the functions of audit committees and of boards of directors more generally, and finds them somewhat lacking (p. 38). “What is missing from much of the current dialogue is the flesh on the bones of that skeleton that truly makes boards strong advocates for the shareholder.” She further suggests some detailed best practices for board members in this new era. It will surely emerge as an irony that some classic Old Economy companies may yet prove to be among the biggest beneficiaries of the information technology revolution. John W. Rowe, M.D., the Chairman, President, and CEO of Aetna, Inc., believes data management will provide competitive advantage for the large health insurance company “We have the largest healthcare database in the industry. We know more about patients than doctors,” he said in a Stern CEO interview (p. 6). That should lend itself to creating customized approaches to its millions of patients. With its highly sophisticated inventory controls, and its old-fashioned salesmanship, Wal-Mart has proven remarkably adept at melding the old and new. Now, reports Stern alumnus Tim Condon, the nation’s largest retailer is creating private-label brands, and, in the process, challenging some of its largest suppliers. “The question now is how the various players will react to this new trend.” This question, and the many others posed (and answered) in these pages, should lead us all to believe that the New, New Economy will be as fascinating and exciting as the original version. Daniel Gross is editor of STERNbusiness |
iven
recent events, it’s tempting to declare the New Economy –
that convergence of technology, finance, information, media, and markets
that transformed American business in the remarkably prosperous 1990s
– a thing of the past.
ne
of the more controversial reforms of the past few years has been the
Securities and Exchange Commission’s Regulation FD (Fair Disclosure).
Enacted in 2000, it forced companies to stop providing information
to selected analysts, and instead disclose it to all investors at
the same time. In one of the first academic studies of the impact
of Regulation FD, Professor Partha Mohanram and Stern Ph.D. graduate
Shyam Sunder, sifted the data and concluded that Regulation FD has
worked as intended (p.14). Among their many intriguing conclusions:
“While the performance of analysts may have declined in the
post-FD period, one cannot attribute the decline to the passage of
the regulation after one controls for the changing macroeconomic environment.”
ertelsmann,
Inc. CEO Joel Klein, who is at the forefront of the melding of old
media (book publishing, records) and new media (file-sharing), also
believes mass-customization will be the key to profits and growth.
As he put it in a talk at Stern (p. 4), we have moved beyond the “first
phase where you had mass audience and everybody listened to the same
thing, to the second phase where you could have smaller communities.”
What’s next? “Each individual consumer is going to become
her or his own audience.”