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Cornell SC Johnson College of Business

Keeping a Better World in Mind

A Dean's Blog by Andrew Karolyi

Insights and Perspectives

The multiplicity of perspectives can be dizzying, no matter how seasoned a researcher one is. But ignoring inconvenient perspectives will never be a satisfactory response. The only way to make sense of this vast intense world is to be discerning. Discernment, trained on the multiplicity of perspectives, is the best tool for making sense of it all.

So we work to measure insights and perspectives. What’s the right number of sources, and from which quarters of knowledge? We are required to cultivate patience and humility to be truly discriminating, using good judgment, being willing to evaluate, and re-evaluate, a finding. When we sharpen the tools of good judgment, when we establish and continue evaluating the criteria by which we are measuring something, we learn, and our results are more useful to the world. Addressing disagreement is tremendously valuable and interesting. When the “other side” has correct, useful information, it’s a thrill and a challenge, and a gift, which must then be included in a more valuable/useful/reliable result. It’s great to stay teachable. Sometimes we have to pivot.

Accounting for expectations defines perspective

This past month, I was captivated by the news that the Nikkei 225 stock index, the widely-watched Japanese benchmark index of stocks, surged through the 39,000-point mark, topping its all-time high of 38,915 back in December 1989. This FT piece is among a plethora of news stories focusing on the importance of this record-building overall market sentiment, trying to understand its impact. Some writers predicted that this event would inspire new institutional investor flows. Other stories went digging into the fundamentals that might be inspiring the new momentum, emphasizing the rise in investment interest in Japan over past 18 months, as concerns around China’s slowing economic growth have driven global funds to pivot elsewhere. All of these theories were interesting, but the ones that caught my attention were the investigations that addressed the past 34 years of market pain for Japanese stocks – from the Asia financial crisis in 1998 to the collapse of Long Term Credit Bank, from the Bank of Japan’s negative interest rate policies in 2015 through the 2020 COVID-19 pandemic…
…This all brings back memories of my first year as a finance professor, which occurred at the very same time that the Nikkei was hitting its original peak in late 1989. I had just graduated with my PhD at Chicago, and the events of the day were fueling my research interests toward the study of international capital markets. One of my dissertation advisors, Professor Ken French, inspired me in his work with MIT’s Jim Poterba, who now oversees the National Bureau of Economic Research (NBER), on the study of heightened Japanese market valuations. Their March 1990 NBER working paper (#3290) originally entitled “Are Japanese Stock Prices Too High?” was timely and provocative, creating quite a buzz among scholars by offering up the thesis that the reported valuation ratios between the US and Japan were not as puzzling as they appeared at first glance, in part because of the differences in accounting practices with respect to consolidation of earnings from subsidiaries and depreciation of fixed assets. Even after making proper accounting adjustments, however, they concluded that, in order to explain the market’s stratospheric valuations, the heightened investor expectations of future growth for Japanese firms needed to be invoked. The details are always important, of course, for a paper to be ultimately successfully published, but this closing message was critical, because the authors were clearly skeptical that the differences in accounting rules alone could be the story.
The Nikkei’s remarkable collapse in early 1990 – coincident with the posting of French and Poterba’s working paper – must have made it difficult to get the paper published. Or did it, perhaps, make it easier? For whatever reason, the June 1991 published version of the paper bore the altered title “Were Japanese Stock Prices Too High?” (the authors had to note this alteration in the final version) and was now asking the question as to whether market fundamentals, like accounting differences, could explain not only the recent run-up in Japanese equity valuations, but also its decline. The published version leaves the reader wondering whether swings in growth expectations of analysts and market investors could have possibly rationalized this whipsaw in the markets. Fascinating!
I never forgot this episode. What I take away now, from this 34-year-old event in the markets and this impactful French-Poterba research paper (which I got to watch closely from working paper to publication) is that insights and perspectives matter so much for management and business research. This informed and inspired me not only to follow my passion for the study of global financial markets, but to pursue research questions that were relevant and impactful for the managerial issues of the day. And this adds to my appreciation of my colleagues here at Cornell, who work every day with passion toward the relevance and impact of their own work.

Accepting opposing viewpoints

The value of debate? As an exercise in accepting truth from an opposing viewpoint.

Inspiration is in full flower these days. In early February our college hosted a pair of student debates, as part of our contribution to Cornell’s Freedom of Expression theme year (which, of course, will not end in December). Students debated the question: Is freedom of speech in the workplace a good business practice? Same topic, in English and Spanish. Students ardently debated both sides: it’s not a good business practice because disagreements that are unrelated to work might hinder productivity, it is good business practice because the multiplicity of opinions and perspectives can be included, strengthening the organization’s overall efficiency.

Ultimately, however, one team posed the most undeniable rhetorical question, putting the question of passion in action to the test: “Which world do you want to live in? Which one do you want to work for?”

Then on March 6, we hosted a marvelous event on the on-campus unveiling of the documentary film Why Is Mona Lisa Smiling? The Re-Imagination of the Corporation. The filmmakers traveled from Atlanta and South Carolina to share with us the experience and revelations of collecting interviews with significant corporate leaders who are working with practicality to embed purpose and meaning into their consumption and production processes and in the work experiences of their employees. Drawing a metaphorical parallel between the business in today’s world and the function of finance and markets during the Renaissance – Leonardo da Vinci and the Medicis and all – the filmmakers conclude that now is a time ripe for change, a reimagination of the purpose of a corporation, and offer that it is indeed happening.

After we watched the film together, my colleague Dean Vishal Gaur moderated a panel discussion with me, the movie director Joanna Durr, Angela Mwanza MBA ‘00, Rockefeller Capital Management, and Corning’s John Bayne Engineering ‘88. I was delighted to share my own views on whether we really need to refine or overhaul the concept of shareholder value maximization, view inspired by the Friedman Doctrine (Nobel Laureate Milton Friedman, Capitalism and Freedom, 1962), a book that had a huge impact on my thinking those many years ago.

The film makes an energetic exploration of the putting-to-work of inspiration, in history and the present day, and the enactment of practices intended to improve products as well as human life and experience. One of the entrepreneurs featured, Sara Menker, founded Gro-Intelligence eleven years ago, a monumental collection of data, analytics, and forecast models helping to assess the impact of climate change in order to optimize agricultural supply chains. This inspired resource “illuminates the interrelationships between our earth’s ecology and human economy to help you see the big picture and act on the small details,” and yet she is flummoxed by the measurement of measurement of social effects (the “S” in “ESG,” as she put it). I appreciate Menker’s focus on measurement. In order to honestly measure our responses, to withhold them until we have heard all of a story or argument, is wise, because if we don’t have all the information we will overlook or not even get anywhere near a thread of knowledge which could be useful to us. But isn’t it incumbent upon us to decide where our boundaries lie?

I hope blog readers will find their way to watch the movie when it drops for broad public release. And just a wink to close us out: Mona Lisa is allegedly smiling because she likes our Renaissance-esque refresh of capitalism and the purpose of the corporation.

And I could not leave without mentioning:
• On March 25, I’ll have the privilege of sitting down for a face-to face discussion with SEC Commissioner Hester Peirce, who has served since 2018 and is well-respected for a personal communication style that embodies respectful substance. We have created together a slate of topics upon which we will disagree, and are looking forward to having a talk based on content and grounded in good will. I’ll certainly be writing in more detail after that event.

• I had the privilege of attending and giving an address at the launch conference for the new Center for Responsible Investing at Arizona State University. The audience was mostly asset owners, asset managers, private client advisors, family office managers from around the country. I was invited to speak on the topic of Biodiversity Finance, a new field of inquiry I am hoping to inspire among financial economists given the huge need to mobilize private capital toward slowing the biodiversity loss crisis. My article with colleague John Tobin de la Puente, Professor of Practice in the Dyson School, is garnering useful attention. My session was together with Dr. Rebecca Shaw, chief scientist of the World Wildlife Fund, who gave great context to the vital importance of conservation of the biosphere. A great team effort to get the message out!

• This month’s book? My longtime acquaintance and current advisory councillor for our Emerging Markets Institute, Dr. Georges Ugeux, former CEO of Galileo Global Advisors and former EVP of the New York Stock Exchange, just released his book, Wall Street’s Assault on Democracy: How Financial Markets Exacerbate Inequalities. I expect to blog about the book in the near future as I reflect on its provocative implications. Consider the book’s own description: “Citizens are losing hope that equity exists in the system and it has become clear, as fundamental liberties like right voting rights are being threatened – that the problem lies much deeper. Ugeux insists that a change of perspective and a redefinition of societal goals is essential: social and solidarity capitalism is possible only if our leaders listen to the expectations of their citizens.”