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Jeremy Lin

The Jeremy Lin success story has many questioning the ability of scouts and teams to pick the best talent, especially in the NBA. Jonah Lehrer wrote a piece a couple of weeks ago that was a stinging indictment of the “meritocracy” that he says professional sports purports to be. He cites a study that shows NFL teams barely do better than chance alone would predict in selecting top talent.

I sent the article to Blake McShane, an assistant professor of marketing who has studied baseball statistics. We should cut scouts and the draft process some slack, he said. “It is hard enough to predict future athletic performance at a given level of play. It is thus even far harder to predict performance when moving from one level of play to another.”

Countless players have stumbled as they moved from, say, college to the pros. Take Tony Mandarich. The Green Bay Packers drafted Mandarich in the first round in 1989 as the second pick overall, behind Troy Aikman and ahead of Barry Sanders. Hopes were high—Mandarich was an outstanding player in college, and the Packers needed a boost.  Plus, his performance in the scouting combine—one way the NFL evaluates prospects—was singular. “It may have been the finest workout the scouts have ever seen,” George Perles, Mandarich’s former coach at Michigan State, told Sports Illustrated in 1989.

But Mandarich’s subsequent performance for the Packers was underwhelming, to put it mildly. Whereas Aikman and Sanders were star players for their teams, Mandarich mostly played special teams before being cut in 1992.

Part of the problem may be in the way the NFL and NBA cultivate talent. McShane pointed me to an article at Marginal Revolution, quoting at length J.C. Bradbury, an economist who specializes in sports. Baseball may offer a different model, according to Bradbury:

In baseball it’s different. Players play their way up the ladder, and even players who are undrafted can play their way onto teams at low levels of the minor league. At such low levels, the high variance in talent is high like it is in college sports; however, promotions from short-season leagues through Triple-A, allow incremental testing of talent along the way without much risk…

Also, a baseball scout acquaintance, who is very well versed in statistics, tells me that standard baseball performance metrics in college games are virtually useless predictors of performance (this is contrary to an argument made in Moneyball).  Even successful college baseball players almost always have to play their way onto the team.

This system is very much unlike football and basketball, where players often play their entire college career at one school. With little fluidity in the market, someone like Jeremy Lin may not have as many chances to break out in basketball as he would if he played baseball.

Photo by DvYang.

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Angry Birds at Nokia headquarters

Nokia has fallen on hard times lately. After years of dominating the market for mobile phones, the Finnish company has come up short in the race to develop desirable smart phones. Multiple shifts in strategy later, the firm continues to lose market share. Thousands have been laid off already, and the Finnish government is preparing for Nokia to cut a total of 20,000 jobs. Finland’s tech star appears to be losing a bit of its shine.

But things are not always as they seem. The Wall Street Journal reports Finland has been experiencing a wave of entrepreneurship in the wake of Nokia’s layoffs. Venture capital has been flowing into the country at more than six times the per capita rate of the rest of Europe. Rovio, the developers of the popular iPhone game Angry Birds, has been perhaps the most visible addition to Finland’s tech startup scene, but there are many others.

New companies rising from the ashes of old ones is “common,” says James B. Shein, a clinical professor of management and strategy. “We saw it even in cutbacks such as Motorola. It happens more often from high-tech companies.”

The job market in the tech industry has been red hot in recent years, making prospects for the newly unemployed less daunting. But layoffs at large corporations still sting. Entrepreneurship can replace some of the lost output from a firm’s slide, but it takes a while to make a real impact. “There is a big ripple effect,” Shein said. “The people let go, their families, the company’s suppliers all cut back. Since it is small companies that create most of our new hires, there is some offset, but it takes real time to offset the large failure.”

In time, though, new companies like Rovio could grow to become the next powerhouse firms. Startups during recessions can gain a foothold by finding new talent easier to hire and deals on office space and equipment. “The tough part is getting credit during a recession,” Shein said. But for those firms that do, the outlook is bright. Shein points out that a slight majority of companies in the Dow Jones Industrial Average—including General Electric, Hewlett-Packard, and Microsoft—were formed during an economic downturn.

Photo by Jusbe.

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IRS form 1120 corporate income tax return

Multinational corporations based in the United States have an estimated $1 trillion in foreign earnings stashed abroad, and many are keen on bringing that money back into the U.S. But doing so would require companies to pay up to 35 percent in taxes. So rather than pay the taxes owed, a group of firms are preparing to lobby for a one year tax holiday that would lower rates on repatriated foreign income to 5 percent, claiming that the extra money would allow them to hire more workers. But is a corporate tax holiday an effective way to fight unemployment?

Probably not, according to research by Mitchell Petersen.  Petersen, a professor of finance, along with Mitchell Faulkender of the University of Maryland analyzed the effects of the tax holiday embedded in the 2004 American Jobs Creation Act on job creation and retention.  They discovered that investment at most firms did not increase appreciably, meaning relatively few jobs were created or saved for the money spent.

Whether the current proposal being lobbied by Apple, Cisco, Oracle, Duke Energy, and Pfizer among others spurs job creation depends on the amount of capital the companies can access, Petersen said. “If the firms are not constrained for capital (they have internal domestic capital or they can borrow or sell equity), we should expect to see no change in investment or employment,” Petersen said.

“Firms that are well financed, and many of the firms with profitable foreign operations are well financed, do not invest more because they are short of great ideas and projects not because they are short of capital.”

Given that firms in the U.S. are sitting on a collective $2 trillion in reserves, it seems unlikely that many companies are short of capital. For the tax holiday to work, Petersen said, financing for new endeavors must be either difficult to obtain or prohibitively expensive, leaving foreign income as the only viable option. “The firms that are lobbying for this tax change need to argue that they have great project, but can’t raise the funds to finance them,” he added.

Should the companies successfully argue their case, the repatriated income would likely move investment and consumption forward.  Much like the cash for clunkers program, such programs can “make the economy look better today, but worse in the future,” Petersen said. “If you discount or ignore the future enough, this looks like a good idea.”

“This policy is essentially government borrowing,” he continued. “The government gets more tax revenue today, and less in the future. Given the firms want to do it, this suggests the net effect is a fall in the present value of taxes the government will receive.”

Since the companies favor the tax holiday, shareholders would too, by extension.  Firms that are able to fund their existing plans for investment could hand out the repatriated money as a dividend. Those without sufficient funds would likely invest the money, but Petersen’s previous work suggests the actual amount of investment will be low. The firms lobbying for the holiday are acting in their best interest, Petersen said, but “if we as a society or a tax payer, disagree with these rules, then we should speak up. We can’t quietly expect others to look out for us.”

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glass ceiling

Women have struggled for decades to advance in the workplace. Despite high-profile programs at many companies aimed at improving opportunities for high-talent women, a new study says women are still overlooked for promotions and earn less after receiving their MBA.

Mentoring programs are intended to address the disparity in promotion rate between men and women, but these efforts appear to be doing little, according to new research published this month in the Harvard Business Review. Compared to their male peers, women receive 15 percent fewer promotions and are paid nearly $5,000 less in their first post-MBA job. What’s more, women in an earlier survey occupied lower-level positions and reported lower job satisfaction than men with the same educational background.

These numbers are especially disheartening given that there probably has been little improvement in recent years. “The percentage of women in the executive ranks in Fortune 500 companies has not changed much in the past ten years,” said Alice Eagly, a professor of psychology and management and organizations and author of a book on women and leadership. As a result, the 15 percent disparity in promotion rates between men and women has probably not changed either, she said.

The structure of the mentoring programs may be at fault, according to the study. Part of the problem is that a good mentor can be anyone in the company. They may not occupy high-level positions and may be unable to advocate for their mentee. Sponsorship in addition to mentorship may be the solution. People with a powerful ally in their corner are more likely to advance.

Unfortunately, the study notes that women are often sponsored less. There are a few reasons for this difference, Eagly said. “Viewed through the lens of cultural stereotypes, women are nicer and more caring than men, but not as tough, assertive, or competitive—in a word, not as masculine as men. At higher levels in organizations, executive roles tend to be viewed as requiring more of these masculine qualities than the lower-level positions.” Mentors may be unsure that women “have what it takes” and are often “more comfortable working with ‘their own kind,’ ” she added.

To tackle these problems, the study’s authors suggest pairing high-potential women with well-positioned sponsors in conjunction with more traditional mentorship programs. Sponsors must be tutored in the nuances of gender and leadership and should be held accountable, they add. If a candidate fails to receive a promotion, it should be viewed as a failure of the sponsor, the authors state.

Photo by Roger Smith.

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Map of U.S. unemployment June 2010

The U.S. unemployment rate continues to languish between nine and ten percent, but that nationwide statistic obscures the wide variation in joblessness across the country. California’s Central Valley has been one of the hardest hit, with 15 to 20 percent unemployment. Parts of the South have fared even worse—many counties have more than 20 percent joblessness. But the recession appears to have lost its teeth in the nation’s breadbasket. In most counties in Kansas, Nebraska, and North and South Dakota, less than five percent of the workforce is out of a job. And while much of the country has added jobs over the last year, many areas have not been so lucky. Take a look at the New York Times interactive map on unemployment for more.

 

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Executive Compensation

The debate over executive compensation, once muted, has reemerged with a distinctly populist ring. While executives of major companies have been paid outsize salaries for years, the recent spate of bonuses for employees of bailed out firms has drawn the ire of the public and politicians alike. The AIG debacle merely presaged a wider sense of indignation. Now even companies freed from their debts to the federal government have become subject to public scrutiny over executive pay.

Simple math can partially explain the public’s frustration. The average CEO of a Standard & Poors 500 company is paid approximately 3.75 times their weight in gold per year (total compensation averaged $10.9 million in 2009). Half of all executives made 104 times more than the average American worker in 2005, up from a low in 1970 of 25 times more. With numbers like these, many argue that heads of the world’s largest firms are simply paid too much. But others claim the benefits of a good chief executive more than outweigh the costs. So are CEOs paid too much? (more…)

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Demolition Derby

Few events were as unpopular in the last year as the bailouts of General Motors and Chrysler. Poorly managed for the past decade (at least), the two companies problems have been hammered by uninspiring product lines, high gas prices, and the financial crisis that has flattened the rest of the economy. The Obama administration—caught between a rock (public resentment over bailouts) and a hard place (hundreds of thousands of workers would be out on the street if the firms failed)—decided early on to appoint a task force to steer GM and Chrysler toward calmer waters. The result was rapid bankruptcies for two enormous companies and a story that is sure to be rife with intrigue. And who better to hear it from than the former head of the task force?

Steven Rattner, head of the automotive task force until he stepped down last July, chronicles the whirlwind series of events in a story published at Fortune. An outsider to the car industry, Rattner lets more than a few cats out of the bag with his account of the process. “We were shocked, even beyond our low expectations, by the poor state of both GM and Chrysler,” he wrote.

Even though this is a tale of woe for both companies, GM takes the brunt of the beating in Rattner’s retelling.

Everyone knew Detroit’s reputation for insular, slow-moving cultures. Even by that low standard, I was shocked by the stunningly poor management that we found, particularly at GM, where we encountered, among other things, perhaps the weakest finance operation any of us had ever seen in a major company.

For example, under the previous administration’s loan agreements, Treasury was to approve every GM transaction of more than $100 million that was outside of the normal course. From my first day at Treasury, PowerPoint decks would arrive from GM (we quickly concluded that no decision seemed to be made at GM without one) requesting approvals. We were appalled by the absence of sound analysis provided to justify these expenditures.

The cultural deficiencies were equally stunning. At GM’s Renaissance Center headquarters, the top brass were sequestered on the uppermost floor, behind locked and guarded glass doors. Executives housed on that floor had elevator cards that allowed them to descend to their private garage without stopping at any of the intervening floors (no mixing with the drones).

The situation he describes at Chrysler was equally appalling. “Larded up with debt, hollowed out by years of mismanagement, Chrysler under Cerberus never had a chance,” he wrote. “We marveled, for example, that Chrysler did not have a single car that was recommended by Consumer Reports.”

Bankruptcy, Rattner said, was never the outright goal of the task force. But thanks to the demands of a handful of Chrysler’s lenders, it became their only option. Ironically, Chrysler’s bankruptcy paved the way for GM’s, setting the stage for rapid changes at both automakers.

The future of both companies is uncertain at best, but this insider account is a fascinating story of corporate restructuring at the extremes.

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