Rice Business Wisdom Winter 2018

CULTURE CLASH How will Amazon and Whole Foods work together?

HOLDING OUT FOR A HERO Businesses need leaders who do the right thing.

GUILTY PLEASURES Are overeaters more likely to overspend?

RICEBUSINESS WISDOM RICE BUSINESS WISDOM: THE IDEAS MAGAZINE OF THE JONES GRADUATE SCHOOL OF BUSINESS AT RICE UNIVERSITY

WINTER 2018

STORMNESIA:

Houston’s fog is lifting

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RICE BUSINESS WISDOM. Intelligence you can use.

Rice Business Wisdom, our online ideas magazine, brings you peer-reviewed business research in a compelling, quick-to-read package.

It’s for the curious reader intrigued by the business of daily life.

It’s for the MBA who needs to stay current. And it’s for the student hungry to use classroom learning in real-life business.

“In today’s knowledge economy, research can’t exist in a vacuum,” says Rice Business Dean Peter Rodriguez.

“Business Wisdom delivers our research in a lively, witty format brief enough to read on your phone, tablet or laptop.”

In our new print periodical, we’re highlighting some of the most popular features, commentary and research articles from the online magazine. To read more, visit RiceBusinessWisdom.com.

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Rice Business Wisdom | Winter 2018

Contents F E AT U R E S 12 Culture Clash

How Whole Foods and Amazon can work together

16 Stormnesia

Months after Hurricane Harvey, why are Houstonians

still feeling foggy?

RESEARCH 20 Accounting: Mind the GAAP 22 Workplace: Seat of Power 26 Human Behavior: Guilty Pleasures 30 Ethics: Holding Out for a Hero 34 Financial Markets: Alumni Club 38 Creativity: Roman Holiday 40 Marketing: No Place Like Home

DEPARTMENTS 5 From the Dean 8 News Feed 9 Five-Minute Rice 10 Expert Opinion:

Should I Stay or Should I Go?

44 Commentary: Running Game 46 Word Watch: Battle Cry

FromTheDean

RICE BUSINESS WISDOM The Ideas Magazine of the Jones Graduate School of Business at Rice University

Dean Peter Rodriguez Executive Director Marketing and Communications Kathleen Harrington Clark Editor-In-Chief Rice Business Wisdom Claudia Kolker Senior Editor Rice Business Wisdom Jennifer Latson Design Director Bill Carson, Bill Carson Design Marketing Alexandra Constantinou Ashley Daniel Dawn Kinsey Weezie Mackey Eduardo Martinez Michael Okullu Kevin Palmer

W

ithin the walls of academia, research is cherished and revered, the genuine ‘coin of the realm’ for any serious scholar. Outside the walls, research often appears more like a dalliance, the luxurious hobby of the academic’s lifestyle or the abstruse and unproductive exercise of impractical but well-funded scientific minds.

The failure of academic leaders to communicate the fundamental honesty, rigor and power in great research is our most humbling marketing failure. It keeps us up at night. And it keeps the good stuff, the scientific wisdom, the very hard-won stuff, out of reach for so many who really need it. Now, more than ever, the value of science and of proven research and scholarship needs to be smartly and widely shared.

Some like to water down the complexity of scientific studies to make it palatable and less intimidating.

But adding sugar to the medicine steals the integrity of scientific processes and turns professors cold to the process. As a result, academics too often seek only their own kind when sharing successful research.

We can do better, by working hard to craft wellwritten, honest and authentic pieces on the best research done by scholars at Rice. I am immensely proud of the engaging, brief and refreshingly smart pieces that follow in this inaugural print edition of the best of Rice Business Wisdom. There’s nothing more gratifying to a professor than knowing they helped make someone smarter — and through these works on our research, we can.

On behalf of all my colleagues at Rice, and scholars everywhere, I hope you will read, enjoy and share them widely. ­— Peter

Contributing Editor Mitchell J. Shields Contributing Writers Bill Arnold Erik Dane Ashley Daniel Claudia Feldman Claudia Kolker Jennifer Latson James Weston Contributing Photographer Bill Carson

DON’T MISS THE LATEST RESEARCH

Contributing Illustrator Kelcie Johnson

Subscribe to our weekly newsletter at RiceBusinessWisdom.com.

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RBW: What’s the story behind the decision to publish concise, online translations of faculty research?

RiceBusinessWisdom Welcome to the first print edition of Rice Business Wisdom, the ideas magazine of the Jones Graduate School of Business at Rice University. Launched two years ago to showcase professor research, Rice Business Wisdom reflects the distinct character of the business school itself.

First off, Rice Business Wisdom is rigorous: Each piece you find here represents up to a decade of research, writing and peer review. It’s also practical, offering real-world lessons from research ranging from a performance comparison of index funds and managed funds to an analysis of the factors that can trigger a bad corporate acquisition (for example: when the CEO’s feelings are hurt). Above all, we’ve aimed to make this magazine, like Rice Business, responsive to the changing ways we all gather information, to the intensifying need for reliable, evidence-based facts, and to the reality that “business” no longer means one activity, conducted for eight hours a day over a lifetime.

Today’s newest workers will hold more than a dozen jobs in one career. Younger employees want work that contributes to the world as well as their own prosperity. Men and women both demand skills that will take them up the career ladder, fuel them as entrepreneurs, remain relevant during phases when they focus on caregiving, and, as they ascend professionally, show them how to use power in a way that’s both productive and ethical.

Rice Business Wisdom, like the school it represents, is designed to answer these demands. I hope you’ll find the ideas here transformative as you pursue the business of your daily life. — Claudia Claudia Kolker Editor-In-Chief Rice Business Wisdom

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We sat down with Herbert S. Autrey Professor of Accounting K. Ramesh, leader of the original initiative to translate professors’ work into concise form and share it with the public, to talk about Rice Business Wisdom’s mission.

KR: Former Rice Business Dean William Glick, like our current dean, Peter Rodriguez, believed that academic thought leadership must provide the foundation for the education provided at the business school. Personally, I felt that while my faculty colleagues were regularly making major discoveries or adding to the common body of knowledge in business in impressive ways, it was largely a well-kept secret. Obviously, our students experience the benefits of learning from such thought leaders firsthand when they take their courses. But outside of that, our stakeholders — students, alumni, corporate partners, friends, etc. — were largely in the dark about faculty research.

RBW: What do you think is most often misunderstood about business school research?

KR: The idea of what academic research in business entails is itself often misunderstood. Sometimes I joke with people who look surprised when I say I’m doing accounting research, ‘Are you wondering what we can research when debits always equal credits?’ In reality, the type of research academics do is like creating a landscape to be viewed from a satellite. You won’t necessarily see the minute details of the plants — that is, the details a business professional may need to address in the real world. Instead, you’ll get a map or framework that can help you navigate new opportunities and practical problems. I’d view Business Wisdom as a success if it means that anyone can immediately understand the research focus of one of my colleagues — and why it’s relevant for shaping their business practices.

RBW: What’s the difference between a Business Wisdom piece and a reference to a journal article in a mainstream media story?

KR: The news media tends to focus on news that can elicit an immediate emotion, response or action. If I tried to follow the advice from every piece of health research I see discussed in media, I would be restocking my kitchen every other day and starting a new exercise regimen.

Most times, the type of research we do doesn’t fit the bill for immediate gratification, although there are exceptions.

The recent Houston Chronicle article by my colleagues Erik Dane and James Weston, “Should I Stay Or Should I Go?” (p. 10), is a case in point. Business Wisdom was created as a vehicle to transmit the timeless discoveries that my colleagues make, but it is well complemented by articles like that one, in which the relevance of the school’s thought leadership becomes readily apparent.

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NewsFeed

FiveMinuteRice

Bite-sized grains of business wisdom Cost of a case of bottled water at one Houston-area Best Buy store during Hurricane Harvey 1 Cost of temporary housing for flood victims from more than 1,000 Airbnb hosts 1

1.3 million Number of RSVPs to a Mexican teen’s quinceañera after her Facebook invitation went viral 2

Funding raised over the past decade by Rice Business alums, who created 240 businesses and hired 7,787 employees 4

$5 BILLION

Cost of a new open office facility for Apple employees 5 Number of refugees who have settled in Houston since the 1970s 3

Lower productivity of open office workers compared to their counterparts in cubicles 5

Improved fuel efficiency of the Ford F-150 truck from 2007 to 2017 6 Number of gas pumps at the Katy Buc-ee’s that opened in August 7

1 2 3 4 5 6 7 8

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Percentage of oil refining activity that was halted during Harvey 8

“Do The Right Thing” http://ricebusinesswisdom.com/outside-voices/crisis-management/ “Life of the Party” http://ricebusinesswisdom.com/outside-voices/quinceanera-video-viral/ “Survival Essentials” http://ricebusinesswisdom.com/outside-voices/resilience-through-crisis/ “Fast Company” http://ricebusinesswisdom.com/outside-voices/rice-mba-graduate-entrepreneurship/ “Cure for the Common Cubicle” http://ricebusinesswisdom.com/outside-voices/ideal-office-space/ “Keep On Trucking” http://ricebusinesswisdom.com/deeper-dive/truck-fuel-efficiency/ “Pumped Up” http://ricebusinesswisdom.com/outside-voices/gas-pumps-katy-buc-ee-s/ “Running On Empty” http://ricebusinesswisdom.com/outside-voices/harvey-oil-supply-chain/

Improved fuel efficiency of the Prius over the same decade 6

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ExpertOpinion

By James Weston and Erik Dane

Should I Stay or Should I Go? How to decide whether to stay and rebuild or sell and move away if flooding has damaged your home.

F

looding in your home can be as psychologically traumatic as the death of a loved one or grave illness. Unfortunately, it’s also a demanding time when important financial decisions need to be made. Should you buy flood insurance? Should you stay and rebuild, renovate, or sell and move away?

These are especially tough decisions because we are all prone to biased thought patterns, even without the added stress of a disaster.

Fortunately, there are ways we can become aware of and overcome these patterns.

Rebuilding in a flood zone is risky, so it’s natural to consider whether and when Houston will flood again.

Although we can’t predict when another catastrophe will happen, it’s important not to assume that because we flooded recently, flooding will happen again soon. Research shows that when people are planning for the future, they give too much weight to recent events. Sales of insurance policies soar after floods, but homeowners tend to cancel the policies after a year or two if their houses don’t flood again.

Considering these common reactions, try not to over-insure — but don’t be lulled into a false sense

of safety, either. Houston has seen three “one-in500-year” floods over the past three years. There’s a one-in-125-million chance of that happening, so the term “one-in-500-year” is clearly inaccurate. But if you’re not on the flood plain, and your house flooded for the first time in, say, 50 years, it might not be that far off.

We also tend to overestimate risks to our personal safety, but this danger is far more imagined than real.

During a storm, if you don’t live where ocean surge is a risk, and you stay off the roads, it’s very unlikely that you’ll suffer critical injuries.

Research shows that the more clearly we envision a life-threatening event, the more we believe it can occur.

Hurricanes evoke threatening images, which may lead us to overestimate the personal risks that storms pose.

So how should we make

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level-headed decisions about what to do with a flooded house? Every house and homeowner is unique, but some general principles apply. It may help to consider all your options as a monthly expenditure, like a car payment.

How much would you pay per month to avoid the risk of a flood? Are you anxious about flooding, or do you take it in stride? These factors can guide your decision.

One approach is to simply live in a house that floods frequently, but pay a large insurance premium and the costs of repair. The upside to this is lower mortgage payments and property taxes. The downside is the emotional toll of repeated flooding. For some, this might be too much to bear, but others seem to shrug it off. Many coastal residents repair staunchly after every hurricane, and are drywall magicians.

Raising the foundation can also be an option. Let’s say it would cost $100,000 to raise your foundation. If you borrowed $100,000 at 5 percent interest for 30 years, it would cost about $500 per month. This might be worth your while. Now, if you could move a mile away to a neighborhood that doesn’t flood for an extra $300 monthly mortgage payment, is it really worth it to keep your present house, with a raised foundation? You might think you would spend anything not to leave you neighborhood, or school, but comparing the monthly costs puts things in perspective. For example, could you tear down and rebuild on the same property with those same funds?

It might seem like these questions could be solved easily enough with a formula that could spit out a tidy answer. It’s not that simple — many of the factors in play are psychological and emotional. But to help you arrive at these decisions, the costs can be at least roughly monetized. You might not want to leave your neighborhood, but is it worth an extra $400 a month to stay?

Thinking about decisions in this way can help us surmount biased patterns of thinking. One main takeaway from behavioral economics is that if we become aware of our cognitive biases, we can often mitigate their effects and make better decisions in times of uncertainty.

This column originally appeared in the Houston Chronicle.

James Weston is the Harmon Whittington Professor of Finance at Rice Business. Erik Dane is associate professor of management at Rice Business.

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MERGERS AND ACQUISITIONS

CULTURE CLASH

Whole Foods and Amazon: Can Their Corporate Cultures Coexist?

By Claudia Feldman

A Q&A with Rice Business Professor Scott Sonenshein In August, a tweet about Amazon went viral: Bezos: “Alexa, buy me something from Whole Foods.”

Alexa: “Buying Whole Foods.”

Bezos: [expletive deleted] Bezos, of course, is Jeff Bezos, CEO of Amazon, and Alexa is Amazon’s virtual personal assistant.

The joke was about the news that Amazon, one of the world’s largest online shopping websites, had just acquired its seeming opposite in Whole Foods Market, a pricey brick-and-mortar grocery-store chain known for its organic products and fancy-pants customers.

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Will this new relationship go the way of United and Continental?

Or prove to be a blissful match? Rice Business Professor Scott Sonenshein offered his spin on the $13.7 billion deal that threatens to upend the highly competitive grocery industry.

Q: Why the big headlines today? Is this just another acquisitions story?

A: No. A predominantly online retailer is making further inroads into brick-and-mortar retail and continuing to change the way we shop and how we consume.

Q: Explain the differences between these two corporate giants.

A: Amazon is known as very cost-focused, very innovative, very high-tech, very frugal. Whole Foods, of course, offers premium products at premium prices and is sometimes called “Whole Paycheck.”

Q: Can these two cultures coexist?

A: Time will tell. At the start, at least, Whole Foods will be run as a separate subsidiary and the CEO, John Mackey, is staying on. The grocery chain has a strong brand, the customer base tends to be affluent, and Amazon wants to learn.

Q: What makes for a successful acquisition?

A: You need an overarching vision. Amazon has been very clear that this is not about cutting jobs but helping to find new markets and new ways of connecting with customers. That should help to assuage the concerns of Whole Foods employees. I also think it’s important to have transparent leadership and clarity about metrics and goals.

Q: Let’s talk about some corporate match-ups that haven’t fared so well.

A: What looks like a successful merger on paper can be a disaster in reality. Take United and Continental. There were two very different customer service orientations — one with a customer-centered culture that was almost sacred. At United, not so much.

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Scott Sonenshein is a professor of management at Rice Business and the author of Stretch: Unlock The Power Of Less And Achieve More Than You Ever Imagined.

I think we tend to underestimate the complexity involved in acquisitions. Maybe the Whole Foods employees don’t have such a good impression of Amazon. Maybe they think Amazon employees don’t share the same values. But look how Amazon acquired Zappos.com, the online shoe and clothing shop. Bezos let them run independently.

Q: What else can go wrong in these multibillion dollar deals?

A: Focusing on the financials of the acquisition and not accounting for the cultures, the people and how their work will be transformed. And some problems are just hard to anticipate. At the end of the day, you’re not just buying real estate but skilled workers. It’s important to build trust.

It’s important to be transparent.

Q: How does this move reflect bigger industry changes? What is the elephant in the room?

A: We’ve seen a dramatic transformation in shopping and retail in the past couple of years — a whole host of bankruptcies, the closing of hundreds of stores and a large increase in the number of online transactions. One day we will reach the tipping point where the majority of shopping is done online.

I think the insight, the takeaway, is that traditional brick-and-mortar retailers are stuck with an outdated store footprint and have designed stores that increasingly don’t make sense for the type of shopping that happens today.

And Amazon has a head start. They relentlessly study how people shop.

This country has more retail space per capita than any other country by far. But retail is increasingly dependent on technological innovation too, not just product. u This article originally appeared online in the Houston Chronicle’s Gray Matters. ricebusinesswisdom.com | Winter 2018 | Rice Business Wisdom 15

AFTER HARVEY

STORMNESIA The Rain Has Stopped.

So Why Are So Many Harvey Survivors Feeling Foggy?

By Claudia Kolker

M

ary Ann Constantinou is a cool customer. Born in New Orleans, she prepped her never-flooded Houston house long before Hurricane Harvey swamped her neighborhood. When water seeped through the floorboards, she located a rescue boat and got her husband, teenaged son, elderly neighbor and basset hound to safety.

Harvey may have deluged her with challenges, but she weathered them all.

So why, weeks later, can’t she recognize acquaintances or recall the day of the week?

All over Houston, people are complaining of an odd forgetfulness. Highways may be clear, deadlines met, and the city mostly back to business. But storm survivors and even residents all but untouched by the downpour now find themselves muddling dates, weeping at small frustrations or vexed by insomnia.

“It’s called Acute Stress Disorder, and it occurs two to four weeks after exposure to a trauma,” explains Rosalie Hyde, a social worker who works closely with trauma victims including Harvey survivors. Most people are familiar with Post Traumatic Stress Disorder, or PTSD, in which serious symptoms linger after eight weeks and often don’t go away. But in the immediate aftermath of stressful events such as Harvey and other global disasters last year, many others will feel some form of time distortion or emotional and physical unease.

This article originally appeared in Houston Public Media.

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“I call it flood brain damage,” Constantinou says. Like many post-Harvey Texans, she now wakes up laser-focused on mucking out and rebuilding her destroyed home.

“In the case of Harvey we were so connected with each other through the flooding and social media that the traumatic event was shared,” Hyde says.

Befuddlement over time is one of the most

common complaints. “I call it flood brain damage,” Constantinou says. Like many post-Harvey Texans, she now wakes up laser-focused on mucking out and rebuilding her destroyed home. Yet at a recent PTA function, she kept reintroducing herself to people she already knew. At home, she insisted that a doctor’s appointment she scheduled for April was actually slated for November.

Even Houstonians who didn’t personally suffer losses notice the distortions. “During Harvey, I went fully polychronic,” says Rice University engineering professor Matthew Wettergreen, who spent the storm immersed in relief work.

In plain English, Wettergreen started seeing time as fluid, only meaningful as far as what needed to be done.

As an engineer, he is ordinarily fixated on dates, appointments, and measurements. But in the wake of the hurricane, when he ran software linking food providers to rescue groups, Wettergreen routinely called colleagues at midnight without apologizing.

“I wasn’t sure what day it was. It didn’t matter,” he adds. “Things had to happen immediately.”

Losing track of time, experiencing the present as if it’s a dream: both are ways the brain fends off overload under stress. “Dissociation happens because you can’t take it all in at once,” Hyde says.

“In the first few weeks after a traumatic event, everyone feels a little removed, a little out of sorts.

My own house didn’t flood, but I still felt confused at times.”

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Punctuating that eerie remove, for many people, are jagged, intrusive memories. Some remember looking out the window and seeing a familiar street become a disaster site with boats, megaphones and sobbing neighbors. Others have sensory flashbacks, like the feel of oily, foul-smelling water as they swam or trudged to safety. And many feel a surge of panic during the regular rainfalls common in a wet city like Houston.

The flashbacks can be especially fierce for

Houston’s sizeable population of refugees, combat veterans and survivors of earlier catastrophes. “Ninety-yearold Holocaust survivors are having flashbacks,” Hyde says.

“Think about it. In Houston, you have so many people who were disaster survivors already. So many people already have had the experience of leaving their homes, and this brings that back.”

On occasion that can lead to full-fledged PTSD. But what more Houstonians will experience is the normal next phase of acute stress: irritability, melancholy, a general malaise. That’s what Matthew Turner, a soft-spoken English professor at Lone Star College, now is finding. He and his wife, Laura, thought the worst of Harvey was over when they escaped from their flooded house by canoe. Used to arduous adventures such as weeks hiking through Spain, they were startled to find themselves bickering over small things like paint chips.

“Laura wants to pick wall colors and I say, we don’t have walls,” Turner says. “Paint is the one thing in the future she has the power to make a decision about. And I keep worrying about controlling our money. I’m not happy with the way I’ve acted

“ When people lose control in one area, they will have the tendency to gain control over something or someone, to feel sane,” Nguyen says.

sometimes.” Thanks to a Chili’s gift card from a friend, the couple was able to sit down in a tranquil place and voice the emotions underlying their short tempers.

Resources like grief support, jobs – even monetary help such as gift cards – make a huge difference after an upheaval, says pyschotherapist Judy Nguyen. In her work as a domestic violence advocate, she often sees the damaging effect of losing power over one’s life. “When people lose control in one area, they will have the tendency to gain control over something or someone, to feel sane,” she says.

Houston’s mental health

first responders have jumped into this breach with a kind of emotional triage. In the Fifth Ward, home to many low-income residents, life already could be overwhelming before the flooding, peer counselor Julia Walker says. So as soon as she saw that recovery groups were delivering water and food, she began one-onone counseling amid the piles of debris crowding the streets.

Many storm survivors need professional, stageby-stage mental health care, something already in short supply before Harvey. In its absence, ordinary Houstonians can help. If you know someone who was flooded, counselors say, listen to them. Friends and acquaintances can make a difference by inviting recent survivors to say as much as they want to about their experience.

“One of the most important things to know is that we are still hurting,” says Mary Ann Constantinou about Harvey’s survivors. “I know terrible things have happened in Florida and Puerto Rico. But it feels like we have been forgotten.

Even a text helps: ‘Hey, I just want you to know I’m thinking of you.’ ” At work, meanwhile, managers need to be

aware that seemingly unscathed employees may be living in a new reality, and to calculate that into their expectations. According to Rice Business professor Otilia Obodaru, even without a disaster most workers coexist with “alternative” identities — the selves they might be if they’d made different choices

After a disaster, survivors live alongside those lost selves without having made any choice.

The transformation isn’t always for the worse. Before Harvey, Constantinou’s neighborhood was the placid place where she lived and attended church. Now it’s the place where she charged through neck-high water in a dark house to save a friend’s parrot. When the creature attacked her, piercing a vein, Constantinou swathed her arm in a towel, grabbed the angry bird and got them both to a rescue boat.

But a parrot bite will heal more quickly than other injuries from the disaster — some of which are still surfacing. At a recent visit to pick up contact lenses, Constantinou learned that her long-distance vision had worsened so much in just the few weeks since the flooding that she needed a new prescription. Hurricane Harvey, the eye doctor said, had played havoc with her ability to see far ahead. u Claudia Kolker is the author of The Immigrant Advantage and executive editor of Rice Business Wisdom, the online ideas magazine at Rice Business.

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ACCOUNTING

“In recent years, Zeff argues, complaints over diminished meaning in financial reporting have spiked. At the same time, so have expectations for financial reporting.”

MIND THE GAAP

I

Splitting Audits Into Two Opinions Could Improve Accounting And Professionalize Auditors.

Based on Research By Stephen A. Zeff

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• The debate about whether accounting should be

based on principles or rules should focus on audi tors rather than on standard-setting institutions.

• Interpreting the phrase “present fairly” just to mean

fulfilling Generally Accepted Accounting Princi ples, or GAAP, can result in misleading accounting.

• Letting auditors themselves evaluate fair presen-

tation, independent of GAAP, would allow them to judge accounting practice by principles rather than by checking off boxes stating rules.

s good accounting based on principles or on rules? It’s an ongoing debate within the industry, with most skirmishes taking place over the standards set by the Financial Accounting Standards Board. But Stephen Zeff, an accounting professor at Rice Business, argues it makes more sense to focus on external auditors. In a recent historical/opinion paper, Zeff proposes altering the current language describing their duties.

Currently, auditors assessing a company’s financial position must opine whether the firm’s financial statements “present fairly…in conformity with generally accepted accounting principles,” or GAAP. The problem, Zeff argues, is that there are often several options to choose from among those included in GAAP. Under certain circumstances, those choices or the prescribed GAAP procedure itself can create misleading financial statements.

Instead, Zeff calls for a requirement that audi tors provide separate opinions, first on whether the information in the financial statements is presented fairly, and second, whether all accounting choices are in accordance with GAAP. He contends this would foster professional judgment in the accounting profession and lead to a greater reliance on principles rather than rules. Zeff’s proposal is by no means without precedent in the United States.

In his article, he carefully outlines the history of the phrase “present fairly”: from its introduction by an American Institute of Accountants’ special committee in 1934, to its widespread adoption by 95 percent of auditors by 1937, to its 1939 linking with GAAP. Zeff also points out that from 1946 to 1962, auditing firm Arthur Andersen & Co. actually provided dual opinions in their audits of financial statements, decoupling their opinion “present fairly” from their opinion on whether the company’s financial statements complied with GAAP.

Zeff outlines three variations on how the dual opinion could work today. First, a “fairness” opinion would evaluate the company’s choice

to use a non-GAAP accounting choice, in cases where a company and auditor believe a GAAP method is unacceptable. There has been a history of such practice already, and, as Zeff points out, “Somehow, corporate financial reporting was not thrown into chaos because of these announced departures from GAAP measures.”

Second, the auditor would offer an opinion on a company’s choice from the many GAAP methods, assessing whether the company’s pick was appropriate.

And third, the audit report would include a “fairness” opinion on whether a company’s nonGAAP accounting method over a GAAP method was in fact superior. Zeff concedes this last option would cause the most difficulty, because it represents the auditor recommending that the company depart from GAAP in order to present financial information fairly. But, he suggests, this is also an example of how an auditor would build a reputation for professionalism.

In recent years, Zeff argues, complaints over diminished meaning in financial reporting have spiked. At the same time, so have expectations for financial reporting. Separating the auditor’s opinion into two portions, Zeff proposes, would provide shareholders and the market with truly useful information.

Stephen A. Zeff is a professor of accounting at Rice Business.

To learn more, please see: Zeff, S. A. (2007). The primacy of “present fairly” in the auditor’s report. Accounting Perspectives, 6(1), 1-20.

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WORKPLACE

SEAT OF POWER

What Happens When The Person Providing Your Service Gets Inspired?

Based on Research By Jing Zhou

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• Certain

customer behaviors can boost the creativity and performance of service workers.

• When

managers give employees more freedom, they find novel ways to serve customers.

• Businesses

benefit when they encourage clients to give more power to service providers, because performance improves.

W

hen the hairdresser suggests a little purple highlight on the bangs, and you listen attentively and take her advice, you may actually get a better haircut. Though few people view a salon chair as the seat of power, researchers are learning that client decisions can make a big difference in employee performance. When customers give workers more power, the workers perform better. So do their organizations.

The growing might of the service economy — about 79 percent of the U.S. economy now is related to service — has prompted increasing research into how workers can best please customers.

The findings aren’t always intuitive. A recent paper coauthored by Jing Zhou, a management professor at the business school, suggests that when customers listen to employees, respect

them and allow them the freedom to do their jobs, the creativity of those providing the service leaps — and so does the quality of that service.

Some corporations already are experimenting with management styles that foster employee cleverness, wit and ingenuity. Southwest Airlines, for example, claims that employee satisfaction is more important than customer satisfaction. And yet it continues to take home customer service awards.

The airline asks employees to show “proactive customer service,” bestowing awards and posting videos to reward those who do it best.

Zappos, the online shoe retailer, has experimented with a workplace that has no managers.

Called holocracy, the system turns workers into mini-entrepreneurs who set their own goals and mark their progress with an app called Glass Frog. ricebusinesswisdom.com | Winter 2018 | Rice Business Wisdom 23

“‘Customer empowering’ behavior creates conditions that inspire employees and make them confident about making critical work decisions.”

Importantly, this culture was self-selecting: Zappos offered a buyout to employees who did not want to work under the new system, and about 18 percent decided to take it and quit. (Zappos maintained this was because many wanted to try entrepreneurship, and the buyout gave them the opportunity to do so.)

To better understand the role of customer feedback on performance, Zhou studied how hairstylists in Taiwan engage with their customers. Teaming up with scholars from the University of Connecticut, the University of Maryland, the University of Minnesota and National Taiwan University, Zhou analyzed data from 380 hairstylists matched with 3,550 customers in 118 hair salons.

After surveying both stylists and customers, the researchers found that when customers offered feedback and encouraged employees, worker creativity increased.

Zhou’s team studied salons because they require stylists to talk to customers and craft new approaches to please them. The interaction between a customer and a stylist also typically lasts more than 30 minutes, giving clients ample time to observe a hairdresser’s creativity and for the hairdresser to respond to the client. But, Zhou writes, the findings can apply far outside the beauty parlor.

Businesses typically benefit, the researchers discovered, when they encourage customers to give workers more agency. This “customer empowering” behavior creates conditions that inspire employees and make them confident about making critical work decisions.

The results can be striking. When customers voiced confidence about workers’ opinions, the workers became more creative. This dynamic involved more than just flattery. Because front-line employees talk to their customers daily, they may have a better sense of the issues that customers care about than do supervisors. Whether hairdressers, waiters or childcare workers, service provid24 Rice Business Wisdom | Winter 2018 | ricebusinesswisdom.com

ers often find new, practical solutions to client problems. Supervisors may be surprised to find that empowering employees — rather than closely controlling them — is a better way to prompt good service.

Oftentimes, customers lose out on employee creativity because the workers fear displeasing them. Managers, meanwhile, focus on training employees to avoid mistakes rather than pushing them to work independently and take risks that could lead to better interactions with clients.

When managers emphasize trouble-avoidance rather than creativity, workers may find it too chancy to try a new approach. What if the customer hates a proposed purple streak? It’s safer for the hairdresser to maintain the blonde highlights that have pleased the customer on the last three visits.

Yet when employees act creatively, they often delight customers. The customer becomes the company’s source of innovation, while the workers gain enthusiasm about their jobs and feel more invested in the business. They may devise new processes or adapt and refine existing procedures — all out of a wish to please the customer.

Zhou’s research shows that customers and service personnel can be cocreators. It’s a departure from the hoary idea that formal leaders in an organizational hierarchy are the standard-bearers of the quality of customer service. In fact, Zhou maintains, customer service ought to begin not with management, but with the customer herself.

The findings of Zhou and her team also has implications for managers. In the past, researchers have advocated less frequent customer contact, arguing that customers bring uncertainty into operations, which results in lower efficiency. Zhou’s research shows the opposite.

So talk to that stylist, and listen to her ideas.

Whether suggesting a purple streak or allowing a client to vent about life, service providers who are taken seriously may perform at a higher level than any training manual could ever instruct. u

Jing Zhou is Houston Endowment Professor of Management and Director for Asian Management Research and Education at Rice Business.

To learn more, see: Dong, Y., Liao, H., Chuang, A., Zhou, J., & Campbell, E. M. (2015).

Fostering employee service creativity: Joint effects of customer empowering behaviors and supervisory empowering leadership. Journal of Applied Psychology, 100(5), 1364-1380.

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HUMAN BEHAVIOR

GUILTY PLEASURES Not All Self-Control Is Created Equal.

Based on Research By Utpal Dholakia

• A

lack of self-control in one area, such as overeating, doesn’t necessarily correspond to a lack of self control in other areas, such as overspending.

• To

understand why people make bad choices, researchers need to look at specific activities rather than broad concepts such as “self-control.”

• Public

policy researchers armed with precise data have a better shot at creating behavioral interven tions that work.

I

s indulging in a lavish dessert you shouldn’t eat the same problem as buying an expensive bag you shouldn’t buy? Past research has tended to treat all forms of potentially harmful self-indulgent behavior, from smoking to procrastinating, as shades of the same overarching issue: a lack of self-control. Lumping these behaviors together leads to the conclusion that self-control is a universal trait — something you either have or you don’t. But recent Rice research suggests that not all overindulgences are alike. Some people are stoic in the face of a Kate Spade sale but unable to resist a tempting tiramisu, and vice versa.

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“They concluded that ‘domain-specific’ measures were better at predicting behavior than general measures. People who demonstrated low levels of self-control in eating, for example, could be expected to binge eat in the future.”

Rice Business professor Utpal M. Dholakia and former postdoctoral fellow Scott W. Davis collaborated with Vanderbilt University associate professor of marketing Kelly L. Haws on a study that found no evidence that people fail — or succeed — equally in all aspects of self-control.

An accurate measure of self-control in eating, the team found, might not apply equally to other domains such as spending and saving. Correctly understanding the nature of self-control is crucially important for researchers, since curbing social problems such as obesity and consumer debt are of vital concern for the people they affect and the societies they undermine.

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A great deal of time and money has gone into studying self-control — and its absence. But in the past, researchers have taken a one-size-fits-all approach to measuring self-control. They’ve used something called the general self-control scale, which assumes that all forms of self-control tap into the same reservoir and that, therefore, low self-control in one domain will predict similarly low self-control in others. So, for example, a compulsive buyer should also be a binge eater.

Research using this broad concept of self-control has shaped public policy. But Davis, Dholakia and Haws argue that to get more accurate, and more useful, findings, researchers need to refine

Utpal M. Dholakia is the George R. Brown Chair of Marketing and a professor of management at Rice Business.

their measurement tools to apply specifically to the object of their study. To gauge the potential effectiveness of a tax on sugary drinks in lowering soda consumption, for example, researchers should measure self-control in the face of fizzy, bad-for-you beverages, and not extrapolate from unhealthy habits in other areas.

Dholakia and his colleagues based their conclusions on five studies that measured selfcontrol in shopping and eating, comparing them to levels of general self-control. They concluded that “domain-specific” measures were better at predicting behavior than general measures.

People who demonstrated low levels of selfcontrol in eating, for example, could be expected to binge eat in the future, regardless of their general self-control level.

In one study, participants were told they were testing a new eating and exercise smartphone app. They were asked to add a Snickers bar to the list of foods they planned to eat that day. For some participants, the app produced a picture of a Snickers bar and its nutritional information; for others, the app produced a picture of feet walking and the comment, “You must walk 65 minutes to burn off that Snickers bar.” Then they were asked to rate the likelihood that they would actually eat the Snickers bar.

For people with high “eating self-control,” the likelihood of indulging in the candy bar stayed roughly the same across both scenarios.

But for people with low eating self-control, the likelihood of eating the Snickers was significantly higher when they were given the nutritional information instead of the exercise equivalent.

“Our findings … raise the possibility that providing nutritional information may actually enhance the appeal of the Snickers bar, leading to greater desire that those lower in self-control are less equipped to handle,” the authors wrote.

These findings could help design interventions to prevent people from overeating. Current policies designed to curb sugar consumption rarely have the intended effect — and that failure, the authors suggest, could stem from a lack of understanding about what causes people to choose short-term pleasure over long-term health.

The research stopped short of investigating how to actually stop people from eating too much sugar (or spending too much, gambling too much, smoking too much, etc.), but Dholakia’s team concluded that asking more targeted questions was a fundamental step in the right direction. The takeaway? Call a Kate Spade bag a Kate Spade bag, not a cupcake. Overindulging in one doesn’t mean you’ll overindulge in the other. u To learn more, please see: Haws, K. L., Davis, S. W., & Dholakia, U. M. (2016). Control over what? Individual differences in general versus eating and spending self-control. Journal of Public Policy and Marketing, 35(1), 37-57.

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ETHICS

HOLDING OUT FOR A HERO

Businesses Need To Nurture Leaders Who Know The Right Thing To Do – And Do It. Based on Research By Duane Windsor, Michael Schwartz and Howard Harris

• Companies

need to cultivate “moral champions” – employees who defend key values within the organization.

• Companies

also need to weed out “moral sinners and neutrals” – employees who know right from wrong but don’t act on it.

• Businesses

should seek out employees who demonstrate company values and model these values for other employees.

I

t’s not unrealistic to look for moral paragons in business. In fact, moral champions can play a critical role in successful firms, argues Duane Windsor, a management professor at Rice Business. Ethics researchers, however, just need to grasp that the business world entails different constraints and opportunities than do some other spheres.

In a recent book chapter, Windsor took a close look at moral leadership models in business.

Among his main questions: are heroes and saints, as defined in other spheres, even desirable there?

To find answers, Windsor crafted a typology categorizing different sorts of moral exemplars.

His methodology included original conceptual models combined with brief case summaries from

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“Of the three types of moral leader, Windsor concluded, it is really the moral champions that companies need the most.” available literature. (Windsor noted that his analysis did not provide a systematic survey of literature on the topic, but rather a citation of key selected publications, and that the development of a typology was based on both conceptual development and case study analysis.)

In the resulting pantheon of moral business exemplars, Windsor identified what he termed heroes, saints and moral champions. The moral hero, he writes, typically faces a dangerous, even life-threatening crisis and responds with moral courage. Rwandan hotel manager Paul Rusesabagina provides an example. During his country’s genocide in the 1990s, Rusesabagina reportedly managed to save 1,200 people from being murdered by Hutu militants.

Unsurprisingly, however, there are few candidates for this level of heroism in business. After all, it is not common to encounter the kind of danger that can summon courage like Rusesabagina’s.

“Saints,” meanwhile, show a different kind of initiative: going beyond legal requirements or common ethical standards to defend a particular, humanistic value.

Mohammed Yunus, who in 1976 began experimenting with making credit available to the landless poor, would fall into this category. In 1983, Yunus established the Grameen Bank to make loans available to those unable to get credit from other sources. He received the 2006 Nobel Peace Prize for his innovative concepts of microcredit and microfinance. Windsor categorized Yunus, a Vanderbilt Ph.D., as a “saint,” because Yunus built an enterprise promoting a single ethical value, in this case, helping the poor.

Windsor’s third type of moral leader, a champion, may sacrifice less personally, but defends

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important ethical standards. William O’Rourke falls into this category. As chief executive of Alcoa Russia in 2005, O’Rourke demanded zero company tolerance for corruption. Under pressure from threatening officials, and again when police robbed him at a local ATM, O’Rourke refused to pay bribes of any sort. In the same era when Siemens engaged in a global strategy of bribery, and Wal-Mart had to launch an inquiry into corruption payments by employees around the world, O’Rourke fended off threats of possible harm from government officials wanting the same type of payoffs. Even when local

Duane Windsor is the Lynette S. Autrey Professor of Management at Rice Business.

police stopped transport of a valuable furnace for his firm, O’Rourke refused to submit. With that type of backbone, Windsor wrote, if O’Rourke had faced much more physical danger, he might be classified as a hero.

Then there are the “moral neutrals” and sinners. Windsor created the first label for employees who know right from wrong but don’t act on it.

Moral sinners, in this lexicon, are employees who know right from wrong but do not care. Both, Windsor argued, need actively to be weeded from business. Yet moral saints are not always an asset

in for-profit firms, or for those who depend on them. A saint, he points out, prioritizes a single, non-financial value to the exclusion of all others — so, not ideal for shareholders or employees who need their paychecks.

Windsor also distinguished among the moral qualities of businesses themselves. This typology included a framework that distinguished between private and public businesses, and between harm avoidance and positive social benefit. To identify these types, Windsor used a classic series of definitions by Adam Smith. The difference between harm and contribution, for instance, echoes Smith’s distinction between citizenship as compliance and good citizenship as concern for social welfare. As Smith put it, a citizen obeys laws and rules. A good citizen strives for others’ well-being.

Businesses that merely refrain from harm, in other words, are mere citizens. But businesses that actively promote social good are good citizens.

There is a paradox here, however. In a 15-year panel dataset of nearly 3,000 public companies in the U.S. by other scholars, businesses that did the most harm were also among those most actively doing some good.

Of the three types of moral leader, Windsor concluded, it is really the moral champions that companies need the most. Saints, uplifting as they sound, seldom are financially good for business.

Heroes, meanwhile, are rarely called for. Moral champions, however, can be positive and powerful — and nearly as hard to find. u To learn more, please see: Windsor, D. (2014). A typology of moral exemplars in business: Moral saints and moral exemplars (M. Schwartz & H. Harris, Eds.). Research in Ethical Issues in Organizations, 10, 63-95.

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FINANCIAL MARKETS

ALUMNI CLUB

What Happens If The Fund Manager Played Lacrosse With The CEO? Based on Research By Alexander Butler

• Mutual

fund managers with social or educational links to a particular CEO tend to invest in that CEO’s company.

• The

portfolios of managers with social or educational links to a CEO perform better than the portfolios of managers without such social connections.

• CEOs

with social or school links to mutual fund managers get paid more than those without such connections.

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F

riends help each other out, right? Imagine young men or women racing down a New England playing field, effortlessly passing a lacrosse ball on their way to the goal. Now imagine some of those old friends as CEOs of large firms, and others as managers of mutual funds. Do they still have each other’s backs?

That was the question Rice Business Professor Alexander W. Butler explored in a recent paper. What he found makes perfect sense given human nature, and raises serious questions about the dynamics of the financial market.

Yes, Butler and his coauthor, Umit G. Gurun

of the University of Texas at Dallas, found,

CEOs of publicly traded corporations and mutual fund managers from the same schools do appear to help each other out. It may be conscious or unconscious: they do what friends do the world over. But the effect on the market can be profound.

To trace the role of social connections in the world of corporate and finance, Butler and Gurun studied how mutual fund managers vote when shareholders proposed limiting executive pay. They cross-referenced these data with information about the educational background of the firms’ executives and of the mutual fund managers who took part in the votes. ricebusinesswisdom.com | Winter 2018 | Rice Business Wisdom 35

“For investors as well as CEOs, in other words, school ties with decision makers at mutual funds raised the chances of a winning outcome.”

When voting fund managers and an executive went to the same schools, Butler found, those halcyon days at A&M or Wharton clearly corresponded to fewer votes to limit executive pay.

Now, this may reflect all kinds of things.

Shared school ties could mean fund managers have more relevant information about a firm’s CEO and his or her value. The shared culture and vocabulary of a school environment might ease information flow between a CEO and managers.

But there is also another possibility: Perhaps the value a mutual fund manager places on a CEO’s firm has nothing to do with the company’s actual value. The manager may simply support him because he’s a school friend.

CEOs weren’t the only ones to benefit from old-school ties. Well-connected investors prospered too. When a fund manager shared a school background with a given CEO, Butler found, the fund outperformed funds whose managers weren’t part of the network. For investors as well as CEOs, in other words, school ties with decision makers at mutual funds raised the chances of a winning outcome.

So a shared school or social background leads to well-paid CEOs, successful fund managers and happy investors. What’s not to celebrate?

Plenty, it turns out.

The better trading outcomes of well-connected mutual fund managers have implications far beyond one happy set of shareholders. The Securities and Exchange Commission protects a level playing field because it’s in the public interest for the U.S. financial markets to be liquid.

Consumers buy and sell stocks more easily

when they are confident that a product’s price is reasonably close to its actual value. When one party seems to know more about a stock — perhaps through friendship with the CEO — other

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Alexander W. Butler is a professor of finance at Rice Business.

investors may lose confidence that they can assess the value of stocks as accurately. When too many consumers distrust the market, liquidity drops.

Fewer people buy and sell.

Think how much it easier it is to buy a used car with public resources such as Carfax, or pre-owned car certifications. In the past, a buyer had to wonder what a car seller knew but wasn’t saying — or else try to buy a car from someone she already knew and trusted.

Almost everyone has a friend. Almost everyone has experienced the memories, common lingo and wordless sense of goodwill that come from sharing a common history. Butler and Gurun’s study of corporate and financial markets, however, shows how these natural instincts can disadvantage players outside the alumni circle. Shareholders may have less power to limit CEO pay.

And consumers may end up less confident about the value of stocks, shaking trust in the financial markets overall. Surely, that’s not what friends are for. u

To learn more, please see: Butler, A. W. & Gurun, U. G. (2012). Educational networks, mutual fund voting patterns and CEO compensation. The Review of Financial Studies, 25(8), 2533-2562.

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ROMAN HOLIDAY

“ It isn’t enough to fly to Rome, hop on a Vespa and nibble some gnocchi. The real cognitive leaps happen when you stick around long enough to learn what, when and how Romans do all the other things they do in daily life — and what it means to them.”

CREATIVITY

Why Living In A Foreign Country Is Like A Spa For The Mind.

Based on Research By Hajo Adam

• Living

in and adapting to foreign cultures seems to facilitate creativity.

• People

who have lived abroad are better able to discover links between ideas and come up with creative solutions to problems.

• Recreating

multicultural experiences helps lead to creative breakthroughs.

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C

an eating good pizza and drinking copious amounts of red wine make you smarter?

Likely not. You’ll probably just gain weight and end up hungover. But stick around Rome long enough to not only do as the Romans do, but understand why they do it, and you might end up with a real intellectual advantage.

Those are the findings of Rice Business Professor Hajo Adam and his co-authors, William W. Maddux and Adam Galinsky. In a series of experiments, the researchers showed that moving abroad and learning a new culture is creatively broadening.

Moving to another country can be a shock.

For some people, navigating different belief systems in a strange environment can be downright overwhelming, driving them to cling even more tightly to their own norms. But for those who adapt, the reward may not just be having more fun. It may also include the development of more multifaceted, complex thinking.

Indeed, the researchers note, adapting to a foreign culture demands the same psychological processes as creative thinking. Each time we learn our way around a new culture, we are likely see our treasured assumptions challenged, integrate new ideas, make novel connections and glean new insights.

In China, for example, good manners require leaving a bit of food on your plate at the end of the meal; this indicates that the host has been generous. In the U.S., however, the same behavior may be considered rude, signaling that you didn’t like the meal enough to finish it. This nuanced frame of reference — understanding the various meanings possible in one scenario — creates an understanding that there’s more than one way to solve a given problem.

But it isn’t enough to book a hotel near the

Trevi fountain and expect creative insights to ensue. Past neurological research shows that, for new knowledge to permanently imprint on the brain, we need to pay close attention and undergo repeated exposure to the new stimuli. Adam and his colleagues went a step further: Once multicultural learning experiences occur, they suggest, recreating these experiences should reactivate the cognitive map that led to creative breakthroughs.

To test those ideas, the researchers set up experiments designed to show that mentally recreating multicultural learning experiences enhanced difference types of creativity. Among these were the ability to solve the same problem in multiple ways, noticing underlying associa-

tions, and solving problems in a way that ignores typical frames — i.e. thinking outside the box.

In one experiment, all the participants had lived abroad, but only one set was asked to recall and write about something they learned from their contact with a foreign culture. Another set was asked to recall and write about something learned in their own culture. Afterwards, all participants completed a supposedly separate task, completing word fragment pairs. The conceptual challenge was to see whether the subjects could discover more than one match for the same word fragment.

As the researchers had predicted, the subjects who were primed by recalling multicultural experiences came up with more correct matches for the word fragments.

Adam and his colleagues then led experiments looking at the role of what is called “functional learning” in the equation of creativity and foreign experience. Functional learning is the process of learning about the underlying meaning of an observed or learned behavior.

In both studies, the researchers found that only when functional learning was combined with a multicultural context did it lead to more creativity in problem-solving.

In other words, it isn’t enough to fly to Rome, hop on a Vespa and nibble some gnocchi. The real cognitive leaps happen when you stick around long enough to learn what, when and how Romans do all the other things they do in daily life — and what it means to them.

Hajo Adam is an assistant professor of management at Rice Business.

To learn more, please see: William W. Maddux, Hajo Adam, and Adam D. Galinsky (2010). When in Rome… Learn Why the Romans Do What They Do: How Multicultural Learning Experiences Facilitate Creativity. Personality and Social Psychology Bulletin 36(6) 731-741.

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MARKETING

NO PLACE LIKE HOME

Getting That Homegrown Feeling.

Based on Research By Vikas Mittal

• Marketers

have long known that consumers who feel a strong sense of local identity will pay more to buy products that are locally made.

• “Local

identity,” in academic terms, means valuing local traditions and causes.

• Striking

new research shows that when a consumer’s sense of local identity is triggered, he or she will pay more for products that reinforce that identity – even if the products are manufactured elsewhere.

M

ore powerful than fact, more persuasive than numbers, more compelling even than protecting one’s wallet: the instinct to identify with a group. This desire is one of the most potent drivers of human behavior, and in a recent study, Rice Business professor Vikas Mittal revealed just how powerful that drive can be. For everyday grocery shoppers, he found, the sense of local identity overpowers even the desire to save money.

“Buy American” has been a political mantra

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“The implications are broad. If a company can inspire local identity in consumers, they’ll be less sensitive to price increases on all products, not just the local ones.” strawberries and car parts if they’re made in the USA. Times, though, are tough for many Americans. Have their priorities changed?

Not at all, Mittal and his colleagues found.

The reality around what we think of as a fair price is actually quite nuanced, and it’s heavily influenced by who we feel we are.

In a series of 14 studies that could redefine how major corporations market to local buyers, Mittal joined Huachao Gao of the University of Victoria and Yinlong Zhang of the University of Texas to analyze the impact of local identity on consumer choice.

While two of the studies took place in China, with the other 12 taking place in the United States, the outcomes were the same. Consumers were willing to pay more for products that reinforced their sense of belonging to a local community.

To reach these findings, the team deployed a battery of surveys, experiments and randomized field data, each designed to tease out if consumers would pay more for foreign products from stores that labeled themselves “Buy Local” advocates.

In theoretical terms, the team was testing the consumer sacrifice mindset, a state in which shoppers are willing to make a sacrifice such as paying more. This mindset, the researchers found, can eclipse the ordinary wish to get the best price — if, that is, marketers can trigger the sense of local identity.

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When local identity launches a sacrifice mindset, Mittal and his colleagues found, consumers worry less about the prices of all products, not just the local ones.

In one of the most significant studies, the research team asked 186 shoppers at a large grocery store in China to fill out a survey indicating how many eggs they would buy at the current price, and how many they’d be willing to buy if the price jumped by 5, 10 or 15 per cent.

The researchers then measured each shopper’s self-perception as a local citizen — someone who prioritizes local values and customs — or a global citizen — someone who prioritizes global values and customs more.

In a second study, the researchers handed shoppers two brochures announcing an impending price hike on eggs, rice and milk. One set of consumers received a brochure that urged them to value local customs, and was sprinkled with local news items. The second group’s brochure encouraged them to see themselves as part of a global community, and was filled with snippets from international news.

The brochures made a big difference. Shoppers whose local identity had been stoked bought more eggs than shoppers prompted to think of themselves as part of a bigger world.

The conclusion? Consumers with a strong local identity are less sensitive to price than those who feel a more global outlook. The implications are broad. If a company can inspire local identity in consumers, they’ll be less sensitive to price increases on all products, not just the local ones.

Walmart has already demonstrated this principle in action.

Vikas Mittal is the J. Hugh Liedtke Professor of Marketing at Rice Business.

In a recent campaign, the company told consumers it would be spending more locally and hiring more local workers. Amazingly, this was enough to boost revenue 14.5 percent, even though prices went up an average of 12 percent, and no additional products were produced locally.

For companies worried about consumer price sensitivity, in other words, there’s little need to be concerned about local positioning or local production to get buy-in. In fact, it may not be necessary to manufacture locally at all. Sparking a stronger sense of local identity might be all that’s required.

Meanwhile, for “Buy Local” activists who work on causes such as helping local farms, Mittal’s research shows that it’s not enough just to sing the praises of local products. Instead, they too need to invest in sparking consumers’ local identities.

As for consumers, Mittal’s findings may or may not inspire soul-searching. Even the savviest shoppers are not fully conscious of why they are willing to pay certain prices. And it’s worth knowing that feelings of local fervor don’t always translate into support for local producers. When it comes to psychic survival, it turns out, the most powerful weapon isn’t economic. It’s the belief that we’re the people we want to be. u To learn more, please see: Gao, H., Zhang, Y., & Mittal, V. (2017). How does local-global identity affect price sensitivity?

Journal of Marketing, 81(3), 62-79.

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Commentary

“But don’t expect too many Hail Mary passes in the next couple of years. Instead, we’ll probably see a ground game with increasingly solid returns.”

By Bill Arnold

Running Game

Why Big Oil Doesn’t Throw Hail Mary Passes Anymore.

W

ith Michael Wirth named as the next CEO of Chevron, four of the biggest integrated energy companies are headed by seasoned executives who spent the bulk of their careers in the so-called downstream part of the business. The companies include Exxon Mobil, Royal Dutch Shell and Total of France. Downstream usually includes refining and petrochemicals, but some of the executives also worked in pipeline divisions (midstream) or trading. This leadership trend has implications the industry and investors need to keep a close eye on, and understanding what got us here is key.

Over a long period, the focus of these com-

panies was on replacing the reserves produced during the previous year.

Wall Street focused on the reserve replacement ratio as a measure of the long-term viability of companies in the industry. It was a traditional but narrow measure of future performance, especially as international contracts shifted from legal ownership of resources to something more like service contracts in which companies were compensated by a formula based mostly on achieving production goals.

For decades, this reserve replacement ratio approach suited the companies because their greatest profit margins were usually earned by producing and

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selling crude oil. There were substantial technical risks in finding significant resources.

Before the recent advances in seismic technology and the shale play, exploration was, in football terms, a passing game. Not every well or pass was successful, but when they were, the team advanced far down the field.

Returns on investment for oil exploration could exceed 30 percent, so a few dry wells could be accepted when the fifth or sixth was often even more successful than expected. This motivated entrepreneurs in the industry since the 1860s. But even as the industry matured and consolidated, the “explorers” pretty consistently were risk takers. Their personal styles

were usually optimistic – they had to be to get past the dry holes on the path to success. A dry hole meant you were that much closer to a success.

The engineers in refining and petrochemicals were expected to be conservative and risk averse. Things had to work consistently and for a long time, because the alternative was potential human and environmental disaster.

They were like a football team grinding out a running game, gaining a few yards on each play.

Adding to the challenge, the downstream business could be cyclical, depending on the price of oil and natural gas, their feedstocks.

Depending on the market,

downstream returns could be feast or famine even with consistent operations.

The strategy at Royal Dutch Shell from 2004 to 2010 was simply “more upstream, more profitable downstream.” More detailed metrics followed, but the drivers were to find “elephant” fields – often defined as more than 500 million barrels of oil – whether in Alaska, the Gulf of Mexico, Central Asia, Russia or Brazil.

The downstream businesses had the unglamorous job of focusing on cost, improving technology and minimizing downtime.

This strategy literally blew up for BP when its Texas City Refinery exploded in 2005, killing 15 and injuring 180. An independent commission lead by former Secretary of State James A. Baker III placed the blame squarely on BP management’s decision to cut costs excessively and create unsound risks.

For years, most investors favored integrated oil companies that explored, produced, traded, refined, transported and sold products at retail gas stations.

There was portfolio diversification inherent in each company to mitigate volatility.

But by 2010, activist investors wanted to build portfolios according to their own risk tolerances, not rely on a company to do it for them.

Under this pressure, large companies like ConocoPhillips and Marathon broke up into separate upstream and downstream companies. Many expected this to favor the exploration side of the business, but often the downstream companies turned in better returns.

When oil prices collapsed in late 2014, the industry was largely blindsided. The boom in previous years created a dynamic of finding oil at almost any cost, whether overseas, the Arctic or the relatively new “shale play” in North Dakota and in West and South Texas. Hail Mary passes became the norm. These were exciting times. The noise level at the Petroleum Club in downtown Houston was deafening. If it meant taking on unprecedented levels of debt, so be it. The big collapse of 1986 and the shorter-lived one in 200809, associated with the nation’s financial collapse, were seen as the result of dynamics that no longer applied.

In any case, OPEC was expected to solve the problem. The member countries had skin in this game and they had used production cuts to sustain prices.

They could deal internally with members who cheated. There was a nagging concern that OPEC might let prices collapse in order

to weed out the bothersome but productive small players in the shale play. But that wasn’t the prevailing view.

Some companies even saw the initial collapse as an opportunity to pick up assets at bargain prices and staff up with professionals laid off by other companies.

But the knives kept dropping for more than two years. Over-indebted companies shed staff, leases and equipment and many took bankruptcy.

For the companies that survived, investors and boards demanded a more conservative approach to protect the balance sheet.

This involved technical innovation at the field level, dramatic cost cutting (including what they paid service providers) and unyielding attention to cash flow.

As boards sought new leaders, they considered their track records, skill sets, operational experience and alignment with the new industry realities.

Several majors have shifted leadership to engineers who ran downstream operations. Shell had already made this shift following a grave challenge from the Securities and Exchange Commission in 2004 about its reported global reserves.

An “explorer” was replaced

by Jeroen van der Veer, who had run the company’s petrochemical business. He

was succeeded in 2014 by Ben van Beurden, also a downstream executive.

Something similar happened at Total, Exxon and now Chevron. To be sure, these career executives should not be pigeon-holed as technocrats. They have been groomed for years with a variety of assignments so they can build a strategy for their time of leadership.

But don’t expect too many Hail Mary passes in the next couple of years. Instead, we’ll probably see a ground game with increasingly solid returns. Oil prices seem to have become reasonably balanced, in part because of word coming from OPEC about maintaining cuts, and there is a reasonable expectation that prices may rise to a new level in two or three years in response to the massive cuts in investment that took place during the worst of recent times.

As Al Pacino’s Tony D’Amato in Any Given Sunday tells us, football, like life, is a game of inches.

These new leaders are out to win by small inches.

Bill Arnold is a professor in the practice of energy management at Rice Business.

This article first appeared in the Houston Chronicle.

ricebusinesswisdom.com | Winter 2018 | Rice Business Wisdom 45

WordWatch

Today Clark sees fewer “firestorms” but more “embattled” people — and the fact that both words derive from war matters, he said. The word itself is medieval, derived from Middle English and first recorded in the 14th century, when hordes of Europeans were, quite literally, embattled.

By Jennifer Latson

Battle Cry

How casual use of militaristic hyperbole gets everyone up in arms.

Just after Thanksgiving, White House budget director Mick Mulvaney entered the “embattled” Consumer Financial Protection Bureau, as it was described in a Wall Street Journal headline, armed only with a supply of donuts.

Somehow, Mulvaney made it out of the metaphorical war zone alive. But he’s far from the only one to find himself the subject of the bellicose buzzword in recent news stories. These days, the word “embattled” punctuates headlines like so many bugle blasts. It has lanced elected officials, business leaders and companies, not to mention entire industries and even regions.

Few people have been more embattled over the past year than Uber founder Travis Kalanick. A Google search for “embattled CEO” produces a wall of posts —

almost all about the former head of the scandal-mired ride-hailing company. In June, Slate commented on Kalanick’s near-constant state of embattlement: People love to describe him as “embattled.” There have been plenty of folks throughout history who were far more embattled than he (the Biblical Abraham, Napoleon, victims of sexual harassment, to name a few).

But still, if you look at the past week, you will see that it was quite an embattled one for him.

Why does “embattled” suddenly seem to be hurling itself into every other headline? For one thing, drawing on militaristic hyperbole is a way to inject drama into otherwise mundane stories. A “troubled” or “struggling” leader doesn’t carry quite the same weight, says the editor Roy Peter Clark, who writes about language for the Poynter Institute, an organization that teaches journalistic ethics and practices.

Last year, Clark

46 Rice Business Wisdom | Winter 2018 | ricebusinesswisdom.com

observed that news writers were overusing another militaristic cliché: “firestorm.” He called it an example of “unmitigated hyperbole as a way of heating up coverage.” Today he sees fewer “firestorms” but more “embattled” people — and the fact that both words derive from war matters, he said. The word itself is medieval, derived from Middle English and first recorded in the 14th century, when hordes of Europeans were, quite literally, embattled.

“If you think of yourself as being embattled, you have to imagine that there’s an army of people out to get you, and that you are a combatant on one side or another,” Clark explained.

“The problem is that when

we think of the world that democracy creates, we talk about a civil society, and that’s a completely different set of metaphors. What does it mean to be civil to another person? It means to treat them NOT as if they’re your enemy, but as if you had the ability to work out your differences.”

Using the language of hyperbolic violence fuels division and intolerance, said Rice English Professor Terrence Doody.

“What I’ve been noticing is that people now do not grant any tolerance to opposing views. You don’t say, ‘I can understand how you see things, but I don’t view it that way,’” he said.

“It’s ‘You’re evil and I hate you.’ If you use that level of hyperbole, there’s no chance of reconciliation.”

To create a more civil society, we need people who use language publicly — people like journalists, business leaders and politicians — to start a backlash against violent metaphors, Doody said.

“We’d have to call it something other than a backlash, though,” he added. “That’s a violent term, too.”

But what about the targets of terms like “embattled” — can they ever become un-embattled again?

After all, the word tends to describe politicians and

Go to

executives just before they move on to descriptors like “ousted,” “fired,” and “former.”

That doesn’t stop embattled leaders from aiming for other adjectives, of course. Take United Airlines CEO Oscar Munoz, whose reputation came under siege after a United passenger was dragged from his seat in April. Munoz’ best hope for recovery was to increase customer satisfaction by improving service quality — in part by making employees happier, Vikas Mittal, a marketing professor at Rice Business, said at the time.

“To truly turn United around, Munoz, the board, and all United management and workers need to re-school themselves on the basics of customer satisfaction,” Mittal wrote.

It seems Munoz has taken that advice to heart — and, at least to some degree, succeeded.

After Hurricane Harvey hit Houston, Munoz made headlines with a more civility-minded purpose: his promise of a generous donation in matching storm relief funds. Nowhere was he described as “embattled.” A Fox News story used no adjectives at all, in fact, creating a blank canvas that must have looked, to the once-embattled eye, like a white flag.

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