VisionGBSN StaffContact
  • Use
Sign in with OpenID Sign in with Facebook Sign in with Twitter Sign in with LinkedIn Sign in with Google
  • or
  • Login:
  •    

Tuck School of Business at Dartmouth

quick intro

Tuck provides a world-class business education. The faculty ensure that our students become leaders who can work in diverse environments and accomplish the most complex objectives.

contact info
rss reader

Tuck Articles & Press Releases

PepsiCo’s Derek Yach Delivers Business and Society Conference Keynote
Take, for example, Pepsi’s Performance with Purpose initiative, which aims to reduce the amounts of salt, sugar, and saturated fat in its products while increasing its portfolio of healthy, whole foods and reducing its environmental footprint. Using more fruits and vegetables means learning the intricacies of new supply chains; more dairies could mean more methane emissions; and new crops raise questions about water use and labor conditions. All of these things have the potential to send the finance and operations divisions into heated debates. Yet they also pose new opportunities for profit and cost savings. “Increasingly our teams understand how shifts in the nutrient profile of foods and beverages create new business opportunities,” Yach said during his keynote address at the 10th annual Business and Society Conference, Feb. 9-10. “We were well placed to take advantage of our food formulation work over years in Mexico when a new law requiring stricter standards on school meals came into force. And many of our advances in reducing fossil fuel use in our large truck fleet; in approaching zero waste; avoiding national electrical grid use; and attaining positive water balance in our Frito Lay California plant are actively sought after by other companies.” The lesson—that corporate sustainability is complicated but can spur profits—fit in well with the conference theme, “Trading Off: Impactful Business Strategies in Uncertain Times.” In addition to Yach’s speech, the two-day event featured sessions on social impact as strategy, investing for impact, driving change in the energy sector, and trading profit for health care. Dean Paul Danos launched the conference with some thoughts on the tension between a tepid economy and the growing concern with the effect of business on society and the environment. In recent years, companies have invested money and manpower in broadening their social responsibility profile, “but just as all that momentum comes, we’ve had a downturn,” he said, “and then companies have to compete for internal resources. That’s what this conference is all about: How do you walk that tightrope between the imperatives of cost and profits and regulatory settings and yet really make deep progress on sustainability?” Yach, a South African epidemiologist who specialized in non-communicable diseases, made remarkable progress on a different kind of sustainability—human life—when he helped the WHO design and implement the Framework Convention on Tobacco Control in 2003. The framework set strong limits on how tobacco companies could sell their products around the world. It was a big win for global health, but one he could not repeat in the fight against obesity-related diseases. In that forum, Yach tried to insert recommendations on salt and sugar intake into the WHO’s new dietary guidelines. The food industry, however, flexed its lobbying muscles and killed the proposal. A few years later, PepsiCo CEO Indra Nooyi asked Yach if he could do for Pepsi what he tried to do for the WHO. Departing from the usual career track of a public health professional, Yach agreed to join Pepsi. By helping the company, which serves 3 billion people per year, reduce the sugar and salt in its products by 25 percent by 2015, he will arguably have more impact there than he would have at any state agency or non-governmental organization. Addressing the audience in the Georgiopoulos Classroom in Raether Hall, Yach used two high-profile reports to illustrate the difficulties and opportunities inherent in the move toward sustainable development. A 2012 report by the United Nations’ Panel on Global Sustainability, which is chaired by the presidents of Finland and South Africa, stated that “efforts to reach social and economic targets are hampered by both the inability to agree on decisive and coordinated action…and by unmet commitments for financial support.” A McKinsey report was a little more optimistic, detailing $2.9 trillion in savings that companies could capture by improving resource productivity. “The contrast between the U.N. report and the McKinsey one highlights a fundamental difference in how the U.N. and the private sector frame issues,” Yach said. “The U.N. report is one of deep gloom that will only be overcome by tens of government actions. McKinsey spelled out opportunities for investment where business and society would benefit.” Based on his experience at PepsiCo, Yach tends to align closer with the McKinsey report. But he was careful to explain that businesses, acting alone, won’t move quickly enough toward sustainable operations. Through financial incentives and disincentives, governments can help make the right choices the easy choices. “For the food industry,” he said, “this approach would help if it could lead to…public investments in health research that correct the imbalance in favor of pharmaceutical solutions to nutrition and related health problems, and toward research aimed at developing sustainable food and agricultural solutions.” This line of reasoning could also extend to fiscal reporting. Yach said he agreed with the likes of Al Gore and Harvard Business School professor Michael Porter that the Securities and Exchange Commission should abandon quarterly earnings statements—they make companies too focused on short-term profits—and implement uniform sustainability metrics in annual reports. “These norms will codify what business has known for decades: their license to operate is granted in perpetuity not for the short term,” he said. “Corporate survival and growth over the long term requires that they share stewardship over the environment and the promotion of health with government and communities.”
02/17/2012 10:27 AM

New Year, New Governance Rules?
Eckbo explains that the U.S. legal and governance rules deprive shareholders of essential rights, which are available throughout much of Europe and in particular in the U.K. Without these rights, he says, U.S. shareholders are relatively powerless against the decisions of officers and directors. Such powerlessness can erode trust and confidence in business judgments rendered at the highest level of a firm’s hierarchy—judgments that often have large impacts on a firm’s value. He is arguing for changes that would put the owners of a corporation—its shareholders—in a better position to both trust corporate boards and steward their personal investments. The most powerful lever for change, Eckbo says, is a reform of the U.S. director election system. Currently, directors are elected via a plurality of votes, submitted by shareholders on proxy voting cards. Director candidates are nominated by the firm, and shareholders can vote either “yes” or “abstain” on the proxy card. There isn’t a “no” box, and “abstain” doesn’t count as “no.” Thus in principle, a single “yes” vote can get the directors elected. Naturally, this system fails to promote shareholder confidence in elected directors.  To make matters worse, the firm’s insiders often nominate directors. “If I’m the CEO and ask you to serve on the board, and you’re elected,” Eckbo says, “you’re going to look at me as the guy who hired you, not the shareholders. And you would be right.” How is this system going to promote shareholder protection as it was originally intended to do? By contrast, many European countries not only allow shareholders to form election committees and nominate directors, but shareholders can also vote “no.” Moreover, directors are often up for election on an annual basis, as the U.S. tradition of staggered board elections (where you elect only one third of the board each year) is either frowned upon or directly outlawed. Over the past 10 years, the Securities and Exchange Commission—the agency that regulates public corporations and makes rules about their governance— has twice seriously considered fixing parts of the election system. The first time, under the George W. Bush administration, the SEC commissioners ended up rejecting a proposal to let large shareholders (those holding at least 5 percent of the equity) access to the proxy voting card (by writing in a competing slate of director nominations). The commissioners, who are political appointees, felt the change represented too large an increase in shareholder power. However Mary Schapiro, the current chairwoman of the SEC, revisited this reform issue in 2010 and advocated for a similar proxy access reform. This time, Schapiro’s proxy access proposal was passed by the SEC by a 3-2 vote, with the two Republican commissioners objecting. But then the Business Roundtable and the U.S. Chamber of Commerce sued the SEC and won, claiming that SEC didn’t fully consider the costs and benefits of the rule change (a time-tested delay strategy when a federal agency is alleged to have overstepped its boundaries). The SEC may appeal the decision this year, but Eckbo isn’t optimistic. “The paradox is that although the director election system is malfunctioning,” Eckbo says, “U.S. corporate law continues to treat the board as representatives of shareholders.” The courts simply refuse to recognize the agency problem. This attitude is clearly expressed in the so-called “business judgment rule,” which holds that the court will not second guess a board’s business judgment (and therefore its business decisions) unless directors breach their fiduciary duties to the corporation. These are duties of care and of loyalty. “The standards for satisfying these duties are low,” says Eckbo. Suppose the board receives a takeover bid and decides to “just say no.” The court won’t question this decision as long as the board met and discussed the takeover proposal, preferably with input from a consultant.  Why does the court take this generous view toward directors? “Because the assumption is that boards effectively represent shareholders,” Eckbo explains. “The message seems to be: If you (the shareholders) don’t like what the board is doing, elect new directors.” So when the election process is rigged against shareholders, the system fails. Of course, shareholder exasperation with a malfunctioning election system breeds costly dissent and attempts to interfere with board decisions anyway. “We see this in the so-called ‘say on pay’ movement,” says Eckbo. “This movement is designed to have the annual shareholder meeting consider and formally approve top executive pay. It’s not that shareholders understand better than the board how to set the pay—they don’t—it’s all about mistrust of the board created by a sense that directors fail to represent the owners.” But the picture is not entirely bleak. The past decade has brought definitive governance improvement through the growing acceptance of the idea that the CEO ought not to also hold the position of chairman of the board. “This development has in part come about by pressure from large foreign investors, who are neither used to nor willing to accept the uniquely American tradition of combining the two top positions in the firm,” says Eckbo. After all, a major function of the board is to hire, fire, and set compensation for the CEO. “It’s harder to do that properly when the CEO is also the chairman of the board,” says Eckbo. “Combining the chairman and CEO roles amounts to a built-in conflict of interest in the board. Fortunately, this tradition is now on the way out. In many foreign jurisdictions, combining the two roles is actually prohibited by law.” What’s at stake in the modern governance reform movement is corporate directors’ and officers’ unfettered power to run the companies they represent. “They see little reason to voluntarily give up this power,” Eckbo says. “If you push them on it, they push back with statements like ‘why change the game—after all, we’re the most productive economy in the world.’” For Eckbo, this argument can be misleading. “Yes, the U.S. is the most productive economy in the world, but in part that’s due to the opportunities for huge scale in the economy not available to smaller western nations,” he opines. “The economy runs on the ability to create and develop new inventions—which boards have very little to do with. Moreover, when the innovations hit big, you don’t need a superstar board for the huge U.S. consumer market to kick in. In sum, it’s far from clear that the success of U.S. firms can be attributed to board structures.” He continues: “The real test of boards comes not when companies are doing well, but when the opposite happens. Suppose a firm becomes financially distressed and the best course of action is to initiate a merger with a financially healthy company.  If the merger means that the directors and top executives will lose their coveted jobs (and research shows that they typically do), then the question boils down to whether they will actually think like shareholders and sell, or like employees and fight the sale. We need a director election system which guarantees that, when the house is on fire, top executives will do what’s in shareholder interest.”
02/16/2012 10:16 AM

Pricing the News
As newspapers have discovered the stark reality that advertising revenues alone don’t cover the costs of producing the news online, they’ve slowly started stashing their stories behind pay walls. The London Times and Sunday Times did it in 2010, The New York Times created a 20-article per month threshold in 2011, and the Chicago Sun-Times followed suit earlier this year, just to name a few. But setting the price for online news is no simple task, says Praveen Kopalle, a professor of marketing at Tuck and an expert on pricing strategy. That’s because newspapers exist in a two-sided market: they get income from both readers and advertisers. Furthermore, the two sides are irrevocably intertwined, with the demand from the readers affecting the demand from advertisers, and vice versa. In other words, newspapers are a classic example of a network externality: a situation where a product’s utility depends not only on its use by the consumer, but on how many other people are also consuming the same product. “If I’m the only one with a phone,” Kopalle says as an analogy, “who am I going to call?” To get a feel for the tricky dynamics of the newspaper economy, consider these axioms: Advertising revenues will increase when the number of readers increases. The number of readers will depend on the price they must pay to access the information. The price charged to readers depends in part upon the revenues from advertisements. More advertisements can lead to lower prices for readers (and thus more readers), up to a point, but too many ads detracts from the reading experience and drives readers away. Kopalle makes sense of these interrelated truths by organizing readers and advertisers according to the benefits they get from the transaction. The most common and most interesting scenarios occur when (a) the benefit to advertisers is high (because of more readers) but the benefit to readers from ads is low; or (b) the benefits to both readers and advertisers are high. The first scenario is akin to what The New York Times and other newspapers must deal with—advertisers like having millions of eyeballs see their ads, but people don’t read newspapers for the ads. So these newspapers takes great care in finding an article threshold and price that both brings in enough revenue and doesn’t reduce readers. They also try to find just the right number and type of ads: enough to pay the bills, but not so many as to be obnoxious or annoying. The second scenario is in play with magazines like Vogue and GQ. People read these magazines, in part “so the ads can tell them what kind of lifestyle they should be living,” Kopalle says. These readers also happen to be affluent. It’s a win on both sides: the advertisers can engage with a rich, targeted clientele, and the readers actually enjoy flipping through 20 pages of advertisements before getting to the table of contents. What’s made the business model for online news even more difficult is that many papers, The New York Times included, gave their content away for free for many years, and many still do. “That sets the reference price in readers’ heads to zero,” Kopalle says, “so when you put up a pay wall, anything you charge becomes more than the reference price.” Basic economics dictates that when price goes up, demand goes down, and that’s especially the case “when you have conditioned people to a price of zero,” asserts Kopalle. The question then becomes: How do newspapers with new pay walls stem the decrease in readers? For Kopalle, the answer partly lies in educating the consumer. “You must stress to people the value of the product,” he says, “and that the reference price should not be zero.” Equally important is bringing the interests of advertisers and readers into a closer balance. That can happen, Kopalle says, when the advertisements are more targeted to the readers. Thanks to social media and data analytics, targeting readers with the content and ads they might like is much easier.  But Kopalle stresses that it must be more seamless than pop-up ads or a picture of the shoes you browsed at Zappo’s last week. “It has to be more creative and integrated,” he says. “Something like a narrative.” Perhaps it will give a new meaning to “news you can use.”
02/06/2012 01:10 PM

discussion area

Post a comment