Rice Business Wisdom - Winter 2020

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

WINTER 2020

FALL FROM GRACE

What happens when a CEO runs wild? ricebusinesswisdom.com | Winter 2020 | Rice Business Wisdom

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RICE BUSINESS students benefit from having direct access to professors — and their research-backed insights — in our small, close-knit community. It’s one of the reasons The Princeton Review ranked us No. 8 in the nation for best classroom experience.

(Read more about our rankings in the letter from Dean Peter Rodriguez on p. 5).

Here, marketing professor Jaeyeon Chung talks to students between classes.

But students aren’t the only ones who benefit: Rice Business Wisdom makes our professors’ groundbreaking research accessible beyond the classroom, sharing their ideas with the world.

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Rice Business Wisdom | Winter 2020

Contents FEATURES 12 You Belong Here What makes a student the right fit for Rice Business?

16 Gotta Have A Code How companies fare in times of crisis 20 Just Like Old Times The secret to businesses that last a century — or more 24 Fall From Grace What happens when a CEO runs wild

RESEARCH 28 32 36 40 44 46

Investing: Dial Tone Decision Making: Trial Balloon Discrimination: Deep Dive Marketing: Sea of Decisions Startups: Getting To Know You Management: Power Failure

DEPARTMENTS From the Dean Q&A: Base of Operations Social Feed Five-Minute Rice Expert Opinion: Merger Mania Commentary: What’s The Harm In Illicit Ice Cream Licking?

54 Word Watch: For Whom The Whistle Blows 5 6 8 9 10 52

DON’T MISS THE LATEST RESEARCH Subscribe to our weekly newsletter at business.rice.edu/wisdom.

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

Dean Peter Rodriguez Executive Director, Marketing and Communication Kathleen Harrington Clark Editor-In-Chief, Rice Business Wisdom Claudia Kolker Senior Editor, Rice Business Jennifer Latson Design Director Bill Carson, Bill Carson Design Marketing Kateri Benoit Ashley Daniel Tricia Delone Dawn Kinsey Weezie Mackey

Eduardo Martinez Keleen McNamara Michael Okullu Kevin Palmer

Contributing Editor Mitchell J. Shields Contributing Writers Tracy L. Barnett Deborah Lynn Blumberg Alexander Butler Utpal Dholakia Mikki Hebl Prashant Kale Jennifer Latson

Vikas Mittal Marlon Mooijman Patricia Naranjo Amit Pazgal Peter Rodriguez Andrew Sessa Shrihari Sridhar

Contributing Photographers Bill Carson Darice Chavira Annie Tao Hannah Vickers Contributing Illustrator Kelcie Johnson Printing Chas. P. Young Co.

FromTheDean

W

e’re riding high from our recent Princeton Review rankings: No. 1 in

the country for graduate entrepreneurship, No. 3 for finance and No. 8 for overall classroom experience. These are among the most important outcomes an MBA program can achieve, and they place us in great company, speaking volumes about our dedicated faculty and staff. We have great things happening in our MBA programs at Rice Business — it’s terrific to see them recognized.

While rankings are exciting to talk about,

however, they only tell part of the story about the caliber of management education Rice Business delivers and how well we prepare our students for the challenges of the future.

Along with classroom teaching, we aim

to bring real-world business challenges and solutions to light through faculty research.

Whether it’s Alex Butler’s research on how young venture capital firms can find a mutually beneficial partner with startups, as you’ll read in “Getting To Know You,” or Amit Pazgal’s inquiry into how best to market a new product, featured in “Sea Of Decisions,” entrepreneurs and those who think like one can find valuable insights in this issue of Rice Business Wisdom.

It’s a brand new year. Be kind. Work

hard. Celebrate the wins. — Peter

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RiceBusinessWisdomQ&A Base Of Operations How data analysis has transformed baseball — and especially the Astros.

J

immy Disch is an associate professor of sport management at Rice, where he teaches a popular course called “Moneyball,” a reference to the 2003 book about Billy Beane’s use of sabermetrics — statistical analysis applied to baseball — to make the Oakland A’s a competitive team on a shoestring budget.

The Astros were early adopters of sabermetrics, and they continue to invest heavily in statistical analysis — and to apply its findings on the field. Take the defensive strategy of infield shifting, for example, which they use more than any other MLB team.

While they faced off against the Nationals in the World Series, Rice Business senior editor Jennifer Latson talked to Disch about how the field of sabermetrics has evolved, and how the Astros use it to their advantage.

How has data analysis changed the way baseball is played?

Any sport is always looking for ways to modernize and become more competitive.

One thing that’s been a major factor in baseball is that analytics has shown how shifting is a supreme advantage to the defense. Some players’ careers have been drastically affected by this, like [Los Angeles Angels first baseman Albert] Pujols specifically. Now that everyone’s shifting him, it’s a lot harder to get a hit.

As far as hitting styles go,

the big thing now is launch angle — trying to develop a swing that helps you get the ball in the air more. That has increased the number of strikeouts for hitters, but it’s also increased the number of home runs.

What are some examples of game-changing findings that a statistician was able to observe while a coach could not?

Recently, teams have started applying the data they have to trying to improve pitching styles. It used to be you really didn’t want to throw high in the strike zone, but now you’ve got pitchers doing what they call “tunneling,” where they can start their fastball up high. Then they can start their curve ball in the same “tunnel” and make it harder for the hitter to decide the type of pitch. In the old days, most coaches wanted the pitchers to keep the ball low and just work it in and out. But the Astros were ahead of that trend. [Astros pitching coach] Brent Strom has been preaching that for a long time, well before there were statistics to back it up.

What are some surprising facts or anecdotes you share with the students in your “Moneyball” class?

When the Owls won the College World Series in 2003, we had a pitcher, David Aardsma, who went on to play professionally. After he left Rice to play, he took my sports

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analytics class. And for his final project, he took a scientific look at his best pitches in terms of outs. He hypothesized that his slider was his best out pitch against right-handed batters, and his changeup was the best for left-handed batters.

The data showed that the slider was best for right-handed batters — but it was also the best for left-handed batters. If he’d known that earlier, he would have changed his approach.

What do people tend to misunderstand about sabermetrics?

What I try to emphasize in my class is that you’ve got to start with a theory; you can’t just throw a bunch of numbers into an analysis and come up with something meaningful.

It’s also not the case that sabermetrics is a replacement for scouting and coaching. Today you have a blend of analytics and traditional scouting. If the scouts and the numbers agree that a player is worthwhile, you draft him, and if they agree that he’s not, you don’t. But when the scouts say one thing and the numbers say another, that’s when you have to dig more deeply — you have to take a closer look.

How has sports analytics changed in recent years, as technology has evolved?

What are some of its newer applications?

Instead of player acquisition, the focus is now getting into the area of player development. Everything’s more quantifiable now; you know exactly the spin rate on pitches and how much the ball deviates. Improved video technology has given coaches and players tools where they can immediately analyze what just happened. But at the same time, all the low-hanging fruit is gone — all the easy

answers have been found. So now you’ve got to really dig to find out what’s going on.

Why hasn’t data analysis played as big a role in other sports?

Baseball has always been a sport that measured everything, but the fact that the pitcher puts the ball in play is what makes the difference. You always know where the ball’s going to start, and in order for something to happen, the batter’s got to put it in play.

Basketball is also highly analytic, and the Rockets are trendsetters in the NBA with data analysis, just like the Astros are trendsetters in the MLB. There’s also a lot in soccer, but there the scoring is so low that it’s hard to find valid predictors. In football, the size of the field and the nature of the beast makes it hard — there are still a lot of measures that aren’t predictable. A lot more comes down to coaching in football.

Which do you think would be more helpful to the Astros: all the data in the world or Jose Altuve?

That’s a good question, because it goes back to the value of traditional scouting. All the numbers say no on Altuve. He’s too small; no one expected him to have nearly the power he has. But fortunately, one of our scouts looked at him and gave him a chance. They’d sent him home from tryouts, thinking he’d lied about his age because he was so little, but he got his birth certificate and came back and they let him play — and he was so skilled that they signed him. In the end, all the numbers can do is maximize the paradigms that you have to work from. You still have to use your judgement. u

Professor Jimmy Disch at Reckling Park. Disch teaches Rice’s popular “Moneyball” course.

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SocialFeed

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FiveMinuteRice Bite-sized grains of business wisdom

24:

Hours a day you can shop online

Seemingly infinite: Brick and mortar stores: 52 percent:

The variety of channels where consumers can buy a given product

The only place you can see and touch a product

The number of shoppers who alternate between online and in-store purchases Source: “Shop ‘Til You Drop” https://business.rice.edu/wisdom/peerreviewed-research/consumer-shopping-behavior-mutimedia-multichannel

Metacritical, taxonomic, hermeneutics and polysemy: Words you can find in academic journals

Zero:

Minimizing loss: Maximizing gain: Those who make the riskiest investments: The priority for female investors

The priority for male investors

Men

Source: “Double Dare” https://business.rice.edu/wisdom/peer-reviewed-research/ investing-behavior-differences-men-and-women

: e” n o z g in eth er som cs tdeicidoinn e f g wheth e d d er spen Thehtimee a “ custom ct ”: e n rodu T p o a z h it r gw iboutn whethe is wron t a r ot sure n e d natissfieid with a product, o c “ e Th er is s

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viewed /peer-re m o d is e.edu/w iness.ric s://bus satisfaction p tt h ” e rOf Lov ustome : “Chain t-marketing-c Source c u d ro /p h researc

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Number of times those words are used in casual conversations

Using everyday language and injecting wit and personality: Ways to make academic writing relevant beyond the ivory tower Source: “Use Your Words” https://business.rice.edu/wisdom/peer-reviewed-research/accessible-academic-writing

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ExpertOpinion

By Vikas Mittal and Shrihari Sridhar

MERGER MANIA

O

ver two-thirds of all mergers fail, with the failures blamed on post-merger issues such as execution gaps, lack of cultural alignment and integration problems. Closer scrutiny of failed mergers and acquisitions in the oil and gas industry paints a different story. It appears CEOs and board members often create the conditions for failure by ignoring the most critical stakeholder, the customer, and instead focusing on cost cutting and efficiency as the primary source of shareholder value.

General Electric’s botched acquisition of Baker Hughes is a prime example. In 2016, GE acquired Baker Hughes for $30 billion and sank millions into post-merger integration. By late 2018, GE announced a separation from Baker Hughes, valuing the latter at less than $15 billion.

More recently, McDermott CEO David Dickson billed the company’s 2018 merger with Chicago Bridge & Iron Co. as “an exciting day for McDermott,” stating, “We are confident that the execution of our ‘One McDermott Way’ strategy will allow us to drive value for our stockholders and meet

the continuously evolving needs of our customers.”

By September 18 of last year, McDermott’s stock had lost 90 percent of its value, compared to a 17.7 percent decline in the energy sector exchange-traded fund.

Post-merger integration could not save the day.

And just this spring, Occidental CEO Vicki Hollub won the battle against Chevron to acquire Anadarko, with the help of Warren Buffett’s $10 billion cash infusion. Buffett rationalized the merger as “a bet on the fact that the Permian Basin is what it is cracked up to be … oil prices will determine whether almost any oil stock is a good investment over time.” No word of post-integration issues from the Oracle of Omaha.

Our 2014 study of 429 mergers shed light on the relative benefits of adopting a cost reduction focus relative to a customer focus. By measuring the cost focus and customer focus of each merger, the study ascertained their effect on shareholder value.

The results were different than the philosophy prevalent in the oil and gas industry. Compared with mergers that focused only on efficiency, mergers that

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Here’s why oil and gas company mergers usually fail.

simultaneously focused on efficiency and satisfying customers created 530 percent more value for shareholders. Companies contemplating mergers and acquisitions make a mistake when they skip the customers’ perspective.

We recently completed an analysis comprising 6,200 customer evaluations of over 100 companies in the oil and gas sector and developed the Strategic Synergy Index (SSI). The SSI is based on customer evaluations of a company on 30-plus items that encompass their satisfaction with eight strategy pillars, loyalty behaviors, corporate reputation, executive leadership and customers’ switching costs. The SSI between two companies can range from zero to 100; a score of zero indicates no synergies between two companies while a score of 100 indicates complete synergy.

Take the case of Anadarko, which was wooed by Chevron and ultimately acquired by Occidental. The SSI for Chevron-Anadarko is 77, indicating above average synergy, while the SSI for Occidental-Anadarko stands at 57, indicating only average synergy. Thus, achieving sales growth would

have been easier for the Chevron-Anadarko combination than it will be for the Occidental-Anadarko merger.

Other potential mergers show similarly glaring omissions that CEOs fail to consider. Although C&J Energy Services recently merged with Keane Group, customers perceived C&J as being more synergistic with Halliburton or Schlumberger.

To improve the success rate of mergers and acquisitions in the oil and gas industry, CEOs need to evolve their ossified approach from focusing on cost-based synergies to customer-based synergies. The primary yardstick for merger success cannot continue to be cost savings and efficiency. Otherwise, the cycle of lackluster success, or failure, will keep repeating with CEOs and board members destroying even more shareholder value under the guise of efficiency and cost cutting. u This article originally appeared in the Houston Business Journal.

Vikas Mittal is the J. Hugh Liedtke Professor of Marketing at Rice Business. Shrihari Sridhar is a professor of marketing at Texas A&M University.

Vikas Mittal, the J. Hugh Liedtke Professor of Marketing at Rice Business ricebusinesswisdom.com | Winter 2020 | Rice Business Wisdom 11

YOU BELONG HERE

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Dean Peter Rodriguez on what makes a student the right fit for Rice Business

By Peter Rodriguez This article is reprinted with permission from Poets & Quants, where it appeared on Sept. 25, 2019.

L

ike most B-School deans, I have given more than a few talks on the value and transformative power of an MBA. In official, academic settings this message is thoughtfully delivered within the context of the value of education writ large and is rightly connected to a message of personal, life-long growth. But, in a casual setting or an elevator, brevity rules and I just say, ‘This is the best career decision you’ll ever make.’

With a few more moments, I like to expand the conversation and talk about what all of us try to do every day: make a difference. We’re all working with teams of people trying to advance towards a goal that has meaning for us. That’s why we form groups and teams in the first place. Because we can’t accomplish big goals alone. Put another way, the purpose of any organization is to solve a particular set of problems, for their stakeholders, customers, and/or society. And, to that organization, you are worth the size of the problem you can solve.

A business school’s job is to teach you to solve bigger and more complex problems — the ones all organizations face. In order to do that, we believe our students must be broadly and rigorously trained, empathetic and passionate.

We’re looking to make leaders.

My name is Peter Rodriguez. I’m dean of the Jones Graduate School of Business, an economist, a family man, and a wannabe photographer. If you don’t know Rice University and you

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“We are also one of the only MBA programs to have an integrated

global field experience (and more, if you choose) for each student in every MBA program as part of the curriculum.”

don’t know Houston, I’d love to introduce you.

Rice Business is a young business school, founded in 1974 and named after Jesse Jones, a prominent Houston business leader, and philanthropist. The school sits in the heart of the Rice University campus — 300 wooded acres next to the Texas Medical Center, the Museum District and the zoo. A short METRO ride to the innovation hub, downtown, the theater district and sports stadiums, Rice is a big part of the vibrant fabric of Houston. It was named one of the nation’s top five private universities and is consistently ranked in the top 15 in U.S. News & World Report.

Houston is the fourth-largest city in the U.S. and has one of the youngest, fastest-growing and most diverse populations in the world. At the same time, it feels accessible. You name it, we’ve got it.

Oil. Gas. Healthcare. Banking. Tech. Startups. Food.

Arts. Sports. (Did I mention the Astros?) And Texas charm. Whether you live here for two years and go off to a great new job in Seattle or New York or stay to make Texas your home, Houston is a great place to land for graduate school.

Even in such a large city and dynamic location, Rice Business offers a personal, tailored approach.

We’re an intentionally small program in the nation’s most diverse city. With students and scholars from 89 countries, Rice is the second most international university in the U.S. Every student is handpicked for their experience, perspective, background, and interests.

At Rice Business, our small classes are taught by a dedicated group of faculty with big reach.

Reach, for us, means going beyond the classroom to unleashing our professors’ scholarship into the world. Rice Business Wisdom, our online ideas magazine, translates faculty research into short, snappy articles and shares them weekly through email and in a magazine. That way, you can follow the kinds of things your professors are researching and talking about in class.

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Rice Business is known for its No. 3 entrepreneurship ranking and the prestigious Rice Business Plan Competition — the largest and richest in the world. An MBA can help you start and nurture a business, if that’s your thing, then grow and sell it.

Or it can help turn on your entrepreneurial mindset within your role in a large company. We have an ecosystem of courses, research, and programs for all of that, including the Lilie Lab, as well as co-curricular opportunities and connections to a thriving VC community.

We are also one of the only MBA programs to have an integrated global field experience (and more, if you choose) for each student in every MBA program as part of the curriculum. We know the value of understanding how business is conducted around the world. During your global field experience, you’ll work in teams on short consulting projects for organizations in the host country along with tackling a service project in the local community.

As a forward-thinking business school for the next generation of global leaders, we’re here to provide a business education focused on leadership, integrity, and service. We designed our programs to provide the education and skills you need to advance professionally. The Career Development Office will partner with you to identify and meet your professional goals. From resume writing and group workshops to an online career course and one-on-one career strategy advising, you’ll have an experienced team on your side.

That goes for our small but mighty alumni network, too. They’re accessible, active with the business school and interested in helping future alums. Once you enroll, you’re part of the Rice family.

Let us help you find a way to change the world and change your future. If you want to join the Class of 2022, get in touch with one of our recruiters and be ready to take the first step to solving the world’s biggest challenges. You belong here. u

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ETHICS

GOTTA HAVE A CODE

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How does Johnson & Johnson’s credo hold up in a crisis?

By Tracy L. Barnett

I

t’s been three-quarters of a century since Robert Wood Johnson, an early chairman of Johnson & Johnson, penned what would become the gold standard of corporate social responsibility: Put the well-being of customers first.

The credo was famously tested in 1982, when seven people in Chicago died from ingesting J&J Tylenol capsules tainted with cyanide. The firm’s swift decision to reverse the supply chain for the first time in history, launching a total product recall, cost millions in the short run. In the long run, the decision became a textbook example of best business practices.

Now, as J&J faces two ongoing crises surrounding allegations of asbestos in their iconic baby powder and their role in the national opioid epidemic, that code is being tested anew. And once again, business leaders are watching closely. During institutional crises like this, experts say, pre-existing moral and practical norms will be the most reliable salvation.

“Only if you are truly an ethical organization can you preserve that type of reputation with this multitude of stakeholders,” said Anastasiya Zavyalova, a professor of strategic management at Rice Business. “Especially in this day and age, the more you try to hide who you are, the harder it will hit you.”

If allegations are true that the company hid damaging research, “that’s the kind of thing that’s unforgivable,” agreed loyalty expert Chris Malone, co-author of “The Human Brand: How We Relate to People, Products and Companies.” “What we’ve found in our research is that customers can be very forgiving of a lapse of competence or ability ricebusinesswisdom.com | Winter 2020 | Rice Business Wisdom 17

“For any business facing serious allegations, all three researchers agreed that a strong, pre-existing ethical code, practiced daily, is the best crisis preparedness possible.”

or technical skill. But when you have a lapse of trustworthiness — that you are intentionally doing something wrong or covering something up — that will damage trust permanently and is very, very difficult to recover from.”

In the 21st century’s climate of diversification and decentralization, J&J’s credo may not have played as central a role throughout the company as it once did, Malone speculated. “There was a time, perhaps, looking in the rearview mirror, when that credo was more firmly and consistently practiced at J&J,” he said. “I think that has become less and less the case as they increasingly became a pharma and medical device holding company… it seems they’ve taken on the habits and practices of those industries more broadly, and as a result it has watered down the application of that credo.”

Harvard Business School professor Stephen Greyser, whose case study of the Tylenol episode is a business school classic, noted that the firm’s current crises look very different, and as such may prompt a different response. “When a number of people are dying very quickly, as was the case with the Tylenol, that’s very different from finding small amounts of asbestos in a product where it’s not clear what the consequences are,”Greyser said.

For any business facing serious allegations, all three researchers agreed that a strong, pre-existing ethical code, practiced daily, is the best crisis preparedness possible.

Building a culture with such a code has to start with recruitment and continues through training, Zavyalova said. “Organizations that have a strong backbone of ethical culture are actually less likely to have a crisis event,” she said. “But even when they do, they have that cushion, that strong culture that allows them to claim with a straight face, ‘This is an anomaly in our organization.’ ”

Greyser concurred, adding that this seemingly self-evident truth continues to elude corporate lead-

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ers. Citing the recent ethical failures at Volkswagen, Wells Fargo and FIFA, he said, “One wonders whether it’s either an inability to read or an inability to grasp [past] examples … that lead companies not only to behave unethically — that can happen — but to stonewall, to deny, and to stretch it out in such a way that they really are blaming the victim.”

These continuing blind spots stem from the fact that ethics are still rarely talked about in corporate settings, argues author Adele Cehrs, a former crisis-management adviser for clients including Lockheed Martin, Verizon and, at an earlier date, Johnson & Johnson. But when a company has a strong ethical position that it’s long made it clear to customers and employees, she said, “you can recover faster from a disaster by saying, ‘We’ve always had this underlying value — this crisis is not aligned with it, and here’s how we’re going to bounce back.’”

Starbucks is one company that got it right, Malone said, after a store manager called the police on two young black men waiting for a colleague.

“For one thing, they immediately took responsibility and apologized,” he said. “It would have been very easy to say, ‘That was a rogue manager who made a decision that isn’t supported by any of our training or management policies.’ But they said, ‘We take full responsibility for this as an organization; we failed to have enough training or enough policies to prevent this.’ ”

He also praised Starbucks’ next step: inviting experts as well as critics to help design a training program, closing all stores and losing an afternoon’s revenue to put every employee through the new training. In addition to signaling that the company takes fighting racism seriously, Malone said, “they sent a message to their employees that ‘We’re not going to throw you under the bus.’”

Integrity, in fact, needs to be considered at every stage of business, said Bruce Weinstein,

a speaker and consultant who calls himself “The Ethics Guy” and the author of the book “Ethical Intelligence.” When he is advising companies, Weinstein said, he checks to see if their job descriptions include words like “honesty” and “courage.”

Performance evaluations, too, need to explicitly rate character as well as competence, he tells clients. “It doesn’t matter how competent someone is in sales, marketing, HR, or IT,” Weinstein said.

“You don’t want a single dishonest person at any level of your organization.”

To Cehrs, there are important lessons to be learned from J&J’s ongoing crises. In both the talcum powder and opioid cases, data was available to point to possible problems, she noted. “If you’re inside the company and you have a lot of this data, are the signs pointing to a potential crisis?” she said.

“It is the job of the communications, marketing and legal departments to break down the silos and say: ‘I see the smoke; this could be an issue.’ ”

In addition to values training and data mining, however, only putting employees in situations that mirror real-life crises can show how they will respond. The notion that values-based protocols must be in place long before trouble strikes is already foundational in many high-risk fields. “We don’t rise to the level of our expectations,” Navy SEALS like to say: “We fall to the level of our training.” Or, in the words of Omar Little, the iconic “hood Robin Hood” character in the HBO crime series “The Wire”: “A man gotta have a code.”

Businesses need to have a similar foundation, Greyser argued. “How important is it to have such an ethical framework in place in advance?” he asked. “I would say, how important is it to have a culture where doing the right thing is normal?” u Tracy L. Barnett is an independent writer based in Guadalajara, Mexico.

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JUST LIKE OLD TIMES

CUSTOMER LOYALTY

In an era when shopping takes seconds, some businesses survive in one place for centuries.

What’s their secret?

By Deborah Lynn Blumberg

I

nside the Houston Shoe Hospital’s Palmer Street warehouse, machines hum as craftsmen in stained cotton aprons trim heel caps by hand and peer at fresh-polished boots. Some of the workers, now in their sixties and seventies, toil alongside their adult children. In a city where businesses, houses and even neighborhoods can disappear overnight, the Shoe Hospital has occupied the same building since 1906.

In business, lasting a century or more, let alone in one spot, is no small feat. Yet the Shoe Hospital’s longevity is not unique.

In New York’s Barney Greengrass eatery, “The Sturgeon King” himself still watches from a framed photo over the eponymous company he launched in 1908. His legendary family business has purveyed bagels, lox and other noshes from Amsterdam Avenue and 86th Street through two world wars, the Great Depression and Upper West Side real estate prices.

In the U.K., butcher shop RJ Balson & Son recently marked 500 years in its original spot in Bridport, having sold bangers and sausages through the Reformation and on into the English Civil War. How do they do it? According to the Small Business Administration Office of Advocacy, 80 percent of small businesses survive the first year. But it’s usually downhill after that. Only about half make it to five years, and after that, just one in three reach the 10-year mark. Few make it to 100.

In Houston, Montalbano Lumber has occupied the same spot on Houston Avenue since Italian immigrant Francesco Montalbano started selling firewood there in 1900. Across eight acres of ricebusinesswisdom.com | Winter 2020 | Rice Business Wisdom 21

“Family businesses may also endure because of the way they run their

business. For many, it’s more about leaving behind a legacy for the next generation and less about making large amounts of money.”

warehouses overlooking downtown, the business’s forklifts ferry stacks of lumber for customers. Inside, contractors and homeowners browse rows of siding materials, lights, paints and tools.

The business has thrived despite the advent of big box stores in part by staying true to its niche in lumber, said Joe Montalbano, the company’s director of administration and Francesco’s great-grandson. Now, the company is fifth generation-owned.

Similarly, New York’s Barney Greengrass zeroed in on a niche with its top-quality fish, and England’s RJ Balson & Son did the same serving specialty meats. For all three, being family-owned has also helped: Owners treat employees and customers like they’re a part of that family and their loyalty has been returned. “Our employees have been with us for decades,” Montalbano said.

“Somebody can always beat you on the price,” said Montalbano, who works alongside his father, Mike, the company’s CEO, and his uncle, who’s vice president. Joe’s brother and cousins are also involved. “Somebody may have the newest trinkets or items we don’t carry. What it boils down to is loyalty and trust.”

Rice Business professor Anastasiya Zavyalova, professor of strategic management, confirms that the family connection is often what builds that unusual level of trust. Because the names of a founder or owner become intertwined with the name of the business, she said, the business takes on a larger role in the community.

“It’s the reputation of the founder and the owner that spills over onto the reputation of the business,” Zavyalova said. “If there’s a trustworthy founder that everybody in the community knows and loves, by extension, customers trust that the business will deliver, and if something goes wrong they know they will take care of it.”

The importance of family to business longevity is so great that in Japan, which boasts some of the world’s oldest businesses, business owners have 22 Rice Business Wisdom | Winter 2020 | ricebusinesswisdom.com

gone to great lengths to keep that family connection alive.

Japan is home to the world’s oldest hotel, the Nishiyama Onsen Keiunkan, which has been nestled for more than 1,000 years amid hot springs in the South Japanese Alps. Like many of Japan’s oldest companies, it’s been in the same family for more than 50 generations in part due to a common, centuries-old Japanese practice: adopting heirs. In cases where there’s no child to inherit a business, a business owner will legally adopt an heir like a son-in-law as a “second-birth son.” The technique is known as “Mukoyoshi.” It’s why a vast number of adoptees in Japan aren’t children, but men in their twenties and thirties.

Dutch business theorist Arie De Geus analyzed 30 businesses that have lasted for centuries, and found they share four common traits. In his book, “The Living Company,” he found long-lived companies were sensitive to their environment, had a strong sense of identity, were tolerant and were frugal. De Geus summed it up in one sentence: “Companies die because their managers focus on the economic activity of producing goods and services, and they forget that their organizations’ true nature is that of a community of humans.”

Zavyalova, the Rice professor, agrees. In addition to reputation, she said, family businesses may also endure because of the way they run their business. For many, it’s more about leaving behind a legacy for the next generation and less about making large amounts of money.

Indeed, research has shown that family owners consider both economic and non-economic factors like legacy when making business decisions.

Family businesses are also less likely to lay off employees despite financial performance, and support strategies that put employees and customers first. One family-owned business survey found that facing more meager earnings, 76 percent of family business owners said they would reduce or

not take a distribution, while 58 percent said they would reduce or not take a salary.

Family-owned businesses also tend to have less debt, which can allow them to behave more nimbly during a downturn. That was certainly the case for Montalbano’s, said Joe Montalbano. The Great Depression years, the 1980s oil bust, and the 2008 downturn were all rough patches, he said. For the most recent downturn, “we didn’t have any debt,” he said. “I think that was key. We were able to weather the storm.”

Houston novelty shop Southern Importers had that key combination of family ownership, loyal customers who enjoyed seeing long-time employees and a well-defined niche. For 104 years it sold party and theatrical supplies, costumes and decorations, and drew generations of Houstonians and celebrities. Many employees worked there for 20 years or more.

Then, this year, the business shuttered. It had been a major supplier to theater groups, department stores and costume companies. But when those sales dwindled in part due to a rise in online sales, it lost its niche, owner Milton “Mickey” Frost, III, told the Houston Chronicle.

Nearby in Montrose, where a bungalow worth $40,000 20 years ago can fetch up to $300,000 today,

dry cleaner Up To Date Cleaners is still going strong after 109 years. The business is beloved by law enforcement for the deals it’s given workers who serve the city.

Brothers Rahel and Sadiq Momin recently purchased the business from a family who bought it from Nick Arapolis, grandson of the original owner.

Over the years, early, clunkier equipment has been replaced with more sophisticated machines with bells and whistles. Yet the brothers also work at preserving the past by cultivating time-honored business strategies. A top priority: reviving the partnership with the Houston Police Department, which the previous owner let lapse. “We’re trying to get back to that bond that Mr. Nick created,” Rahel Momin says.

Now living in Austin, Arapolis, who’s in his 80s, still drops by the store when he’s in Houston to press his own blue jeans and visit with long-time employees — many of whom have worked at Up To Date for two decades. Rahel relishes both the visits and the reminiscing, and he takes to heart the business advice Arapolis imparts. “We treat him like he still owns the place,” Rahel says. u Deborah Blumberg is co-president of the Texas chapter of the American Society of Journalists and Authors. ricebusinesswisdom.com | Winter 2020 | Rice Business Wisdom 23

LEADERSHIP

FALL FROM GRACE

Charismatic founder-CEOs may seem heaven-sent. But that gives them farther to fall — and some bring their companies down with them if and when they do.

By Andrew Sessa

T

o the casual observer, it may look like a rough time to be a founder-CEO. Stories of startup founders behaving badly have filled the pages of the Wall Street Journal and the airtime on CNBC. Disruptive companies that once promised to deliver good returns and change the world for good have seen their tremendous valuations drop precipitously, if not disappear entirely, as a result of their founders’ actions. WeWork’s Adam Neumann, Theranos’s Elizabeth Holmes and Uber’s Travis Kalanick became household names — first cited as visionary leaders, now as cautionary tales.

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Each of these messianic figures rose to fame, power and riches on the strength of their moonshot ideas, their compelling stories and their charismatic personalities. They attracted abundant funding and fawning attention from investors, the media and the public. But many of their seeming strengths — and the control they wielded as a result — proved both blessing and curse. Previously seen as their companies’ greatest asset, these founder-CEOs proved to be their businesses’ biggest liability.

False Promise The latest scandal played out at WeWork, where a $47 billion valuation dwindled to $8 billion before the company called off its late-2019 IPO plans. Prior to his ouster, Neumann had spent nearly a decade claiming that his co-working company would create a moneymaking communitarian utopia — a “capitalist kibbutz” as the Israeli-born entrepreneur put it — that could expand into apartments (WeLive), finance (WeBank), schools (WeGrow) and more. Energetic to the point of frenzy, with the charisma of a cult

failed to follow through on its magical promise. The same can be said of Theranos, whose value crashed from $9 billion to zero after founder-CEO Elizabeth Holmes’ grandiose claims turned out to be nothing more than smoke and mirrors — and she was charged with fraud. Uber’s Kalanick, for his part, built his business based partially on his rule-breaking brashness, driving the company’s valuation upwards of $70 billion, but his bad-boy style led to his leaving the company amid accusations that he fostered a workplace plagued by sexual harassment, gender bias and other unacceptable behaviors. Uber still IPO-ed, but it never went up much past its initial $45 share price, and by the end of 2019 it was trading in the $20s.

leader, and, at 6 feet 5 inches, physically dominating, Neumann famously charmed Japan’s SoftBank into making an initial $4.4 billion investment in his company after just a 12-minute tour of its headquarters.

At the same time, Neumann was leading tequilaand marijuana-fueled retreats, spending lavishly on such items as a $60 million corporate jet, and, perhaps most gallingly to investors, personally profiting from rents WeWork paid to lease space in buildings he partially owned. As the managing member of a private company that trademarked the word “We,” he also forced WeWork to fork over nearly $6 million for the rights to the word.

His erratic behavior and the company’s questionable financials came home to roost on the eve of the now-scrapped IPO — whose prospectus, The New York Times noted, “was quickly ridiculed for its incoherence.” Within weeks, Neumann parachuted out of the company on a $1.7 billion exit package and SoftBank took over.

For early investors who thought they were about to ride a unicorn to sky-high stock gains, WeWork

“God’s Gift to Technology” All of these cases are different, but each centers on the erratic and even narcissistic behavior, unconventional management style, personal eccentricities and corporate maleficence of CEOs who at first seemed infallible — until they failed. And those failures didn’t just affect their own fortunes. Because they’d become so synonymous with their corporate brands, their downfalls dragged their companies down as well.

Although these are extreme examples, they are hardly isolated incidents. Recent research by Yan “Anthea” Zhang, Fayez Sarofim Vanguard Chair Professor of Strategy at Rice Business, found that more than half of startups that received venture capital funding between 1995 and 2013 had replaced their founder with a new CEO by the time they launched their IPO. Other studies, meanwhile, have shown that some traits common among entrepreneurs make them prone to the sort of unpredictability that can be their downfall.

John Gartner, a Baltimore-based clinical psychologist and assistant professor at Johns Hopkins University Medical School, offers an explanatory diagnosis: “As a group — and there are exceptions, though relatively few — entrepreneurs have hypomania.” ricebusinesswisdom.com | Winter 2020 | Rice Business Wisdom 25

“Hypo is Greek for ‘lesser,’ so it’s not that they have bipolar disorder,” explains Gartner, who wrote “The Hypomanic Edge: The Link Between (A Little) Craziness and (A Lot of) Success in America.” “I like to say that, ‘If you’re manic, you think you’re Jesus; if you’re hypomanic, you think you’re God’s gift to technology.’”

Hypomania isn’t entirely a disadvantage for entrepreneurs; it carries strengths as well, Gartner explains. Those include extraordinary creativity, confidence, charisma, energy and drive, which allow them to have big ideas, to act on them and to bring others on board. They have the messianic ability, he says, to “create buzz around a movement that didn’t exist before, to make it seem inevitable.”

The downsides of hypomania, however, include impulsivity, irritability, and impatience, which can cause entrepreneurs to jump into action without thinking, demonstrate poor judgment, be arrogant about the value of their ideas and fail to consult with others, Gartner says. “Something that differentiates successful entrepreneurs from unsuccessful ones,” he says, “is the ability to listen to nonhypomanic individuals.”

Several other mental health conditions are more common among entrepreneurs as well, according to Michael A. Freeman, a psychiatrist and University of California San Francisco School of Medicine professor. Freeman coauthored a 2015 study in which 72% of entrepreneurs reported mental health concerns, compared to 48% of the non-entrepreneurs surveyed. Those in the entrepreneurial group were significantly more likely to say they were affected by depression, attention deficit hyperactivity disorder (ADHD), substance use conditions and bipolar disorder.

As with hypomania, however, these conditions also come with advantages. Depression, for example, has been linked with empathy, which could help a CEO engage more meaningfully with those around them, Freeman notes, and with realistic judgment, which can lead to more grounded decision-making. When it comes to the entrepreneurial personality profile, Freeman cites characteristics that could easily describe Neumann, Holmes and Kalanick: Though they can prove open-minded, 26 Rice Business Wisdom | Winter 2020 | ricebusinesswisdom.com

creative and flexible, they’re also driven, missionfocused, action-oriented, assertive, self-sufficient and open to more risk than the general population.

Minimal Oversight Gartner and Freeman’s work helps explain why some entrepreneurs might excel at coming up with disruptive ideas, launching innovative businesses and developing cult-like followings — even if they then prove constitutionally unfit to run those companies. But it doesn’t explain how they manage to convince investors to buy in, and to the tune of hundreds of millions, if not billions, of dollars with seemingly minimal oversight.

Alessandro Piazza, a Rice Business management professor who studies high-tech entrepreneurship and corporate scandals, chalks this up to two key factors: an overabundance of capital at all levels and a reliance on a startup’s and its founder’s story rather than the business fundamentals.

“It is both difficult and time-consuming to evaluate ventures,” he explains, “and most of the due diligence stuff is profoundly boring.”

What we prefer instead, Piazza continues, are good stories. And those narratives, rather than a business’s actual viability, are what often drive investment these days. “Increasingly, founders must be good storytellers,” Piazza says. WeWork and Theranos, especially, used strong rhetoric and compelling stories — “Israeli kibbutiznik creates communitarian utopia”; “Stanford dropout disrupts lab testing” — to cover up weaknesses.

Lately, Piazza observes, the expectation around startups seems to be that a strong, charismatic founder will build a mission-driven company around him or herself, sell the idea of the mission with a compelling story and then cast themselves as the sole person who can accomplish that mission.

“That creates a situation in which unruly behavior is accommodated,” he says. “What I find interesting about all this is that the whole system of corporate control and governance in America — the separation of the management running the company from the board of directors who they report to — is designed to make sure this doesn’t happen. These new startups have weak oversight by design. Founders don’t recognize the value of an independent

board that keeps you in check.”

Greg Putnam, an investment manager and lecturer at the University of North Carolina, believes a sense of “VC FOMO,” fear of missing out on the next big opportunity, also contributes to the lack of pre-investment due diligence, which leads to the unbridled entitlement of modern founders.

So what’s the solution? How can investors stop hitching their wagons to unhinged unicorns? Perhaps, Putnam and Piazza suggest, it’s all in how you train your unicorn.

“These examples,” says Putnam, “are calls to the folks providing that next-step capital — the SoftBanks, the J.P. Morgans of the world, the VC funds — to say, ‘Founder X, Founder Y, we need to have some corporate controls written into how this is going to work.’” In other words, the TED Talk and the promotional video and the glossy marketing collateral aren’t enough. They don’t stand in for a real business plan, or governance structures, or standard operating procedures.

Putnam calls for a return to first principles — the fundamentals of business — and to previous levels of corporate oversight and governance. “In the old days, people used to talk a whole lot more about Excel spreadsheets, the internal rate of return, what the cash flow looks like,” he says.

“We have boards for a reason: to separate management and ownership. If we allow boards to become an extension of the CEO — and we see more and more that are stuffed with the CEO’s friends — it’s not good for the shareholders, and it’s good not for the company either,” Piazza argues. “The things CEOs do now wouldn’t have flown 20 or 30 years ago, when boards did a better job of monitoring their behavior.”

Part of the issue, he notes, is that these messianic startup CEOs are increasingly identified with

the company — they don’t just lead the brand, they are the brand. So boards are afraid that the market might react negatively if the CEO resigns or is fired.

“How Do You Make Money?”

Zhang’s research shows that there is at least some measure of oversight often enough. She and her colleagues discovered that 41% of CEOs — both founders and non-founders — are replaced after a company gets its first round of VC funding.

Still, she notes that founders are less likely to be replaced than non-founders, a fact she attributes to founders’ personal connection to their businesses and their significant share of ownership.

Her research also revealed that VC funds frequently make what she calls “calculated decisions” about changing CEOs. They replace those with the lowest human capital — in particular, the least experience with management and leading publicly traded companies. When they do, the CEO switch both increases a company’s value at the time of its IPO and its performance immediately after. “The higher the human capital of the CEO, the better the valuation and the operating performance,” she says.

And the relative human capital of founder-CEOs? Theirs tends to be lower rather than higher, she found. As companies like WeWork demonstrate, the charisma of a founder, the persuasiveness of a company’s origin story and mission, and the flashiness of its marketing materials can be inversely proportionate to the actual value of the company.

At the end of the trading day, Zhang says, all we really need to know is: “What is the business? How do you make money? In business, we talk about business.” u Andrew Sessa is a Boston-based writer and editor. ricebusinesswisdom.com | Winter 2020 | Rice Business Wisdom 27

INVESTING

DIAL TONE

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Can Certain Analysts Detect Nonverbal Messages That Others Cannot?

Based on research by Patricia Naranjo, Francois Brochet, Gregory S. Miller and Gwen Yu. •

Culture affects the way managers communicate in conference calls.

•

Managers from more individualistic countries use language that is both more optimistic and more self-referential.

•

In earnings calls Q&As, when an analyst comes from a similar, collectivist culture as a manager, the analyst can better interpret the speaker’s tone of voice and adjust forecasts accordingly. These “intra-cultural analysts” play a crucial role in getting stock prices to accurately reflect executives’ tone.

I

t’s Alibaba’s latest earnings call, and CEO Daniel Zhang is fielding questions during a Q&A. An analyst from the U.S. thinks Zhang sounds cautious, and leaves his forecast as is.

But another analyst, who grew up in Shanghai as Zhang did, notes a certain cheerful nuance in his tone. After the call, she revises her earnings forecast for Alibaba upward. The market jumps.

It’s an anecdote reported from earnings calls time and again: when an analyst and manager both come from the same, collectivist culture, the analyst somehow seems able to discern unspoken meaning in the manager’s tone. This ability to detect underlying optimism or pessimism prompts these analysts to adjust their forecasts — and the market responds.

In a recent study, Rice Business professor Patricia Naranjo proved that this unspoken communication is real. When both analyst and manager in an earnings call come from collectivist cultures — that is, cultures that prize the group

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“Naranjo found that after an earnings conference call, markets responded more dramatically to revisions from analysts who had the same, collectivist ethnicity as the C-suite executives who spoke.”

over the individual — the effect on the market is measurable.

Working with colleagues Francois Brochet of Boston University and Gregory S. Miller and Gwen Yu from the University of Michigan, Naranjo found that after an earnings conference call, markets responded more dramatically to revisions from analysts who had the same, collectivist ethnicity as the C-suite executives who spoke. The results suggest these “intra-cultural analysts” play a key role in getting stock prices to reflect managers’ true outlook.

To measure this phenomenon, Naranjo and her team first amassed a sample of English-language earnings conference call transcripts from 2002 to 2012. The calls occurred within the three days around an earnings announcement. The final sample consisted of 57,740 conference calls held by 5,021 unique firms from across the globe.

The 24,901 executives from 42 countries who took part in the calls were mostly CEOs and CFOs, but there were also COOs, CMOs and IROs, among others. Of the managers, six percent were female and ten percent had a post graduate education.

The average age of the executives was 52.77.

The researchers began with the premise that ethnicity helps shape an outlook that is either more or less individualistic. The researchers then assigned managers and sell-side analysts to likely ethnic groups, based on first and last names and an ethnicity-name matching technique. Assigned groups included Anglo-Saxon, Chinese, European, Hispanic, Indian, Japanese, Korean, Russian/Slavic and Vietnamese.

Next, the researchers measured each ethnicity’s individualism outlook, using an index based on analysis of 88,000 IBM employees in 72 countries.

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Unsurprisingly, Anglo-Saxons rated the highest on the individualism scale, followed by Europeans.

Koreans and Chinese were the least individualistic, and were categorized as more group-oriented.

Now it was time to test the hypothesis. Did managers from more individualistic cultures have a more optimistic tone during conference calls? The prediction was based on psychology research showing that independent cultures – typically Western — place more emphasis on influencing individuals through shows of self-confidence and optimism.

Because Q&As tend to be more spontaneous than scripted calls, Naranjo and her colleagues zeroed in on the Q&As to conduct their analysis. Their hypothesis proved correct: the managers from individualistic cultures did indeed speak with a more positive tone during the calls. They also used more first-person pronouns as they spoke.

The finding held true even for executives from individualistic cultures who had studied or worked in group-oriented cultures. Though these executives weren’t quite as positive-sounding as counterparts who hadn’t spent time in group-oriented cultures, the researchers concluded that the cultural traits the executives inherited from their native ethnic group were long-lasting.

Overall, the researchers also found, CEOs tended to speak more positively and use more singular first-person pronouns on average. Female managers used less optimistic language, and older managers tended to adopt a more pessimistic tone, but also used more singular first-person pronouns.

Finally, those analysts who shared a group-oriented cultural background with the managers on a conference call responded more strongly to the managers’ tone — suggesting that they recognized

Patricia Naranjo is an assistant professor of accounting at Rice Business.

the effect of culture on a speaker’s tone of voice.

Collectivist managers, as a rule, used less optimistic language.

When Naranjo’s team studied individualistic analysts matched with group-oriented managers, the analysts’ response was not as strong. Nor was there any pronounced special response when an analyst from a group-oriented culture was paired with an individualistic manager. When analysts are from different backgrounds as managers, in other words, there’s no evidence that they will strongly revise a forecast in response to tone.

For investors tuning in to company conference calls, the findings speak volumes. For analysts and executives who share the same, collectivist background, important messages can go unspoken — and still be understood. Not only that, but when these “intra-cultural analysts” read between the lines and act on their intuitive cultural knowledge, the markets listen. Investors should take note as well. u To learn more, please see: Brochet, F., Miller, G. S., Naranjo, P., & Yu, G. (2019). Managers’ cultural background and disclosure attributes. The Accounting Review, 94(3), 57-86.

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DECISION MAKING

TRIAL BALLOON

Two Classic Business Theories Put To The Test.

• Managers

Based on research by Prashant Kale and Phanish Puranam.

• Managers

are more likely to seek equity in a partner firm when they think the firm’s resources offer a competitive advantage. are also more likely to seek equity in a partner firm when they think the partnership will lower their transaction hazard.

• Contrary

to existing theory, uncertainty in the market makes managers less likely to seek equity ownership in a partner firm.

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W

hen it comes to a company’s equity ownership structure, the decisions that managers make are important and long-lived.

So naturally, years of study have been devoted to describing — in theory, at least — what managers should consider as they navigate these intricate choices.

But what role do these theories play in a real life test?

For answers, Rice Business professor Prashant

Kale joined INSEAD professor Phanish Puranam in a study of 66 managers and their decision process. The study was designed to measure how the factors cited in two widely held theories of equity ownership —

the “resource-based view” and the “transaction-cost economics view” — impact managers when they’re making choices about equity ownership.

The resource-based view (RBV) maintains that managers seek equity in another firm to get access to that firm’s resources and sharpen their own firm’s competitive edge. A company that sells athletic shoes, for example, may find it worthwhile to partner with a manufacturing plant in order to add its capabilities to its own. Equity ownership in a factory could give the shoe company access to manufacturing resources, to decision-making power over the plant and to seamless coordination between manufacturing and other operations. ricebusinesswisdom.com | Winter 2020 | Rice Business Wisdom 33

“ Resources and relationships offered by inter-firm partnerships strongly swayed managers’ decisions about the kind of equity ownership agreements they wanted.”

The transaction-cost economics (TCE) view, in contrast, emphasizes how equity lowers the transaction hazards in business dealings between firms.

The sports shoe company, for example, may sell a high-profile sneaker that requires a special shoelace developed by another firm. In that case, the shoe company might pursue equity ownership in the shoelace company in order to gain some control over the firm. This, in turn, would accomplish two things: lower the risk of self-interested behavior from the shoelace company and spark greater cooperation between the firms in their business dealings.

Past studies have measured how much managers consider the factors cited in these two theories when they make decisions about ownership structures. These studies, however, depended mainly on archival data, and many didn’t control for other variables that might influence managerial decisions.

Ultimately, Kale and Puranam write, this previous research didn’t connect the dots between theory and real life business practice.

To establish a clear link between theory and actual managerial decision-making, Kale and Puranam asked respondents to imagine that they were seeking an inter-firm partnership in order to secure another firm’s technological resources. At the same time, the researchers controlled for non-RBV and non-TCE based factors that might influence managerial choices.

Using a methodology called policy capture, Kale and Puranam came up with 30 different scenarios that required respondents to consider various decision-making criteria. For each scenario, the respondents were asked whether they’d choose:

• a contractual relationship

• a minority equity stake in the firm

• a non-majority equity stake in the firm, or

• majority equity stake/acquisition.

The researchers took care to design some of the decision-making criteria using RBV or TCE factors, and other criteria based on control factors.

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This allowed them to measure exactly how much the theoretical criteria influenced managers’ choices.

What they found was that resource-based and transaction-cost factors did indeed influence the managers’ choices. Most influential were factors related to gaining a competitive edge, as proposed

by RBV theory. The greater the apparent value of the RBV factors, the higher the level of ownership the managers wanted in the new partner firm.

Transaction-cost factors also shaped managers’ equity ownership choices, but not as much as the prospect of honing competitiveness. Transaction-cost advantages influenced managers’ decisions to seek an equity stake in the firm. But when those advantages grew, it didn’t increase managers’ interest in raising their levels of ownership of the partnering firm.

What about the role of demand uncertainty in these decisions? Contrary to the tenets of transaction-cost theory, Kale and Puranam discovered, uncertain demand conditions actually made respondents less interested in an equity stake in the partner firm.

In short, and just as RBV- and TCE-based theo ries suggest, the resources and relationships offered by inter-firm partnerships strongly swayed managers’ decisions about the kind of equity ownership agreements they wanted. In practice as in theory, these key assets are deemed worth the investment — if the market is stable. When market demand is uncertain, however, real life managers don’t react as transaction-cost theory prophesies they will. Instead, uncertain demand conditions make respondents less keen for an equity stake in a new partner firm.

Human nature, in other words, is highly predictable. But there’s still no substitute for watching what happens in the open air of real business. u

To learn more, please see: Kale, P. & Puranam, P. (2013). The design of equity ownership structure in inter-firm relationships: Do managers choose according to theory? Journal of Organization Design, 2(2), 15-30.

Prashant Kale is an associate professor of strategic management at Rice Business.

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DISCRIMINATION

DEEP DIVE

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Why Shallow Efforts Against Discrimination Don’t Work.

Based on research by Michelle “Mikki” Hebl, Katharine R. O’Brien, Samuel T. McAbee and John R. Rodgers.

• Discrimination-related

stress in the workplace is linked to long-term effects on performance and health.

• Supervisor

support can buffer these effects.

• Organizations

need to do more to prevent informal, interpersonal harassment to stop minority outflow from the sciences, technology, engineering and mathematics.

M

ore than one third of Americans have been victims of discrimination at some point in their careers.

And regardless of whether the discrimination is on account of race, gender, age, sexual orientation, disability or physical appearance, for the person affected, research shows, the outcome is usually the same: an increase in stress and a decrease in performance.

Among minority groups, workplace discrimination translates all too often into an outflow of talent.

This hurts business in the long run, as workforces and the products and services they create fail to expand their potential reach and expertise level.

Nowhere is this more apparent than in science, technology, engineering and mathematics (STEM), where the chronic shortage of women and minorities — the well-documented “leaky pipeline” — stymies heterogeneity in the talent pool.

In the United States and elsewhere, statutory checks and balances regulating hiring procedures ricebusinesswisdom.com | Winter 2020 | Rice Business Wisdom 37

“ Hebl found that when minority group participants had the support of a supervisor or mentor, the effects of being discriminated against were strikingly reduced. ” and promotions have been designed to correct institutional discrimination in STEM fields. And while that’s all to the good, Rice Business professor Mikki Hebl wanted to know more about countermeasures to other types of STEM discrimination. What is happening to identify and mitigate subtle, insidious discrimination that can stigmatize minority groups planning careers in STEM? Together with colleagues from the Illinois Institute of Technology, Baylor College of Medicine and CUNA Mutual Group, Hebl processed feedback from more than 200 early-career STEM academics surveyed at universities across the United States.

Not only does off-the-radar discrimination persist in the workplace, they found, but what is often dismissed as “unimportant complaints,” “molehills” and “minor transgressions” can have a major negative impact on the mental and physical health, well-being and academic performance of those victimized.

“A small body of previous research suggests that subtle behaviors – things like minor incivilities or simple rudeness — can actually have more impact than formal or visible discrimination,” Hebl’s team writes. “Worse still, for these individuals, the negative outcomes can last for years.”

To understand how these behaviors impact long-term, job-related performance as well as health, Hebl and her colleagues designed a series of questionnaires and surveys to capture a range of information from their sample group. The questions measured how excluded or harassed minority STEM academics felt, how much stress they perceived and how frequently they experienced health issues.

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Hebl’s team also looked at the participants’ academic performance, analyzing citations and published papers over a three-year period, and reviewed self-rated feedback on how much commitment or “organizational citizenship” participants felt toward their employers.

When they cross-referenced the results, the team found a causal link between interpersonal discrimination and increased stress levels in minority group members within the sample. That wasn’t all. While the increased stress produced an upswing in reported health issues, it also led to a significant reduction in academic productivity and decreased feelings of belonging or commitment to their universities. In other words, workplace discrimination directly affected performance and motivation. And the effects were still present three years after the initial surveys.

But there was some good news.

Hebl found that when minority group participants had the support of a supervisor or mentor, the effects of being discriminated against were strikingly reduced.

“This is an important finding,” Hebl and her colleagues write. “Stress is significantly reduced where there is supervisor support for the individual, acting like a kind of buffer against falloff in performance and health. It shows that those who are being stigmatized for whatever reason benefit tremendously from having supportive colleagues.”

But, the researchers argue, organizations ought to avoid relying on supervisors or academic mentors to assuage the ill effects of discrimination.

Instead, the organizations themselves “need to understand how discrimination manifests in health and performance, and proactively pursue strategies and policies that mitigate, if not prevent, these subtle forms of behavior before they occur.”

Beyond government regulations, supportive individuals, upstanding mentors and other respon-

Mikki Hebl is the Martha and Henry Malcolm Lovett Chair of Psychology at Rice University and a professor of management at Rice Busines.

sible coworkers play a disproportionate role in countering the damage caused by discrimination.

But until organizations themselves shoulder their responsibilities with formal anti-discrimination procedures and policies, informal social support only skims the surface, Hebl writes. To access the broadest experience and talent from engineers, scientists,

doctors and mathematicians, it’s up to institutions — not individuals — to dive to the source of the discrimination pushing so many to leave. u

To learn more, please see: O’Brien K. R., McAbee, S. T, Hebl M., & Rodgers, J. R. (2016). The impact of interpersonal discrimination and stress on health and performance for early career STEM academicians. Frontiers in Psychology, 7, 1-11.

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MARKETING

SEA OF DECISIONS

How Can Your New Product Make A Splash?

Based on research by Amit Pazgal and Yuanfang Lin. • Consumers

need a range of information when they consider a product that’s just been introduced into the market.

• Timing

plays a key role in determining the right kind of information firms should provide consumers.

• Marketers

of a truly new product should tout its attributes and innovation. Marketers of similar products that come later should, if they’re high quality, educate consumers on what quality looks like — ­ then let them decide which product is best. For marketers of late-appearing, lower quality products, honesty is the best policy.

F

rom smart phones to video games to virtual reality toys, new products roll forward as relentlessly as the tides. So what, and how, should you tell consumers about your product to avoid being swept away in a sea of similar wares?

To answer this question, Rice Business professor Amit Pazgal and colleague Yuanfang Lin of Conestoga College dove into the particulars of how companies differentiate their products by informing consumers about a new product’s quality.

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“ Any time a company launches a device or service into the world, it

needs to trust consumers’ ability to learn — and not drown them with too much information. ”

The rush of new products, they note, is particularly intense in technology, where innovations are constant — which means consumers constantly need information about them. Traditionally, tech companies make the case for their products using advertising, free samples, product trials and splashy product demonstrations. (See your local Apple Store.)

But how does a consumer’s wish for information interact with their ultimate buying decision?

Timing, Pazgal and Lin found, plays a powerful role in the type of information that best influences consumers. Suppose, for example, Firm 1 offers a new product, say a smartphone with innovative features. This makes Firm 1 a pioneer. For a certain golden period, Firm 1 might hold a monopoly in the market, since there’s simply no other smartphone like theirs. This is the moment, the

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researchers say, to offer consumers information that reveals the product’s true quality and uniqueness. Because no similar product is out there, Firm 1 has the power to establish the parameters for judging its invention.

Inevitably, of course, another company (call it Firm 2) will come up with something comparable.

Thanks to the heavy lifting in innovation by Firm 1, Firm 2 has the luxury to create a phone of equal or greater quality. And this is when the tide starts to turn. One might assume Firm 2 would just inform consumers of the superior quality of its product.

But, surprisingly, Pazgal and Lin found that in most cases Firm 2 will instead focus on educating consumers about their preference for quality — in effect, leaving it up to the buyer to decide which of the two phones they really want.

However, if another firm emerges with a similar product of lesser quality, its marketing

Amit Pazgal is the Friedkin Chair in Management and a professor of marketing and operations management at Rice Business.

will likely take yet another turn. Instead of trying to claim better quality, late entry companies offering an inferior product typically admit outright that their product isn’t as well made as other versions.

That’s because such firms calculate that if customers discover this themselves, they’ll react badly. By telling the truth and pricing appropriately, a firm can find a calm stretch of water elsewhere in the market, someplace where it’s not clashing directly with the earlier, higher quality products.

Whether it’s Alexa, a smart TV or a virtual reality game, Pazgal and Lin explain, when a product enters the market for the first time, consumers need to be shown how it works. When a second product in the same line is introduced by a different company, the marketing task changes: it’s now more important to show consumers how to identify a quality product, and then let them choose for themselves.

Any time a company launches a device or service into the world, in other words, it needs to trust consumers’ ability to learn — and not drown them with too much information. Informed what good quality looks like, Pazgal and Lin conclude, consumers will swim on their own to the item they truly want. u

To learn more, please see: Lin, Y. & Pazgal, A. (2016). Hide supremacy or admit inferiority –­ market entry strategies in response to consumer informational needs. Customer Needs and Solutions, 3(2), 94-103.

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STARTUPS

GETTING TO KNOW YOU Inexperienced Venture Capitalists Find A Niche Partnering With Startups.

Based on research by Alexander Butler and Sinan Goktan.

• Startups

can profit from partnering with newer venture capital firms.

• Younger

venture capital firms have an advantage when analyzing startup companies: they gather information through relationship building and intense study.

• Inexperienced

venture capitalists build on their strengths rather than resting on their reputations.

I

n the high-risk world of venture capital investing, successful firms don’t always start big. For venture capital firms that are young and inexperienced, wealth can flow from backing a similarly young company, and patiently building client confidence with financial records and persuasive information.

According to a study coauthored by Alexander Butler, a finance professor at Rice Business, and Sinan Goktan of California State University East Bay, a number of startups have partnered successfully with inexperienced venture capitalists. These newer venture capitalists, Butler and Goktan found, were highly motivated

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“ The startups provide an important niche for younger venture capitalist firms, which gravitate toward companies that outside investors find hard to evaluate, then roll up their sleeves to build credibility for them.” to build the financial backing and advice needed to showcase their startup partner’s potential.

Investors are aware that some well-known companies are nearly guaranteed to deliver profits. But newer companies also have the potential for huge returns if they can escape their lackluster credibility.

And newer venture capitalists can be their ticket out.

These equally hungry partners are willing use their own resources to build financial profiles that reassure bigger investors. When the heavy hitters join in, it can prompt an initial public offering.

It’s obvious why a startup would welcome that kind of support. But why do young venture capitalists take the risk? It’s because the collaboration benefits them as well, Butler and Goktan explain.

The startups provide an important niche for younger venture capitalist firms, which gravitate toward companies that outside investors find hard to evaluate, then roll up their sleeves to build credibility for them.

While experienced venture capitalists judge an investment based on existing financial data, the young venture capitalists tend to be groundbreakers. Their goal is to offer bigger investors — with whom they have often already have relationships — a detailed view of what is going on inside a new company, and to show why those investors should be part of its future.

Younger venture capitalists don’t shrink from new firms that lack hard financial information. For them, a promising startup is an opportunity to be seized.

Later involvement from more established venture capitalist firms is part of the plan. When these heavy hitters invest, word spreads that a company has major support and may be the next big thing.

To generate hard information for investors, the newer venture capitalists hustle. They talk with a company’s key people, and they learn what’s going

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on day to day. When they see fit, they give advice.

Because their insights are built on relationships, the closer the venture capitalists are to a company geographically the more efficient the process tends to be.

These findings, Butler and Gotkan note, explain a puzzle. When startups pair with younger venture capitalist firms, the latter often do something that seems uncomfortably self-serving: they rush their startup partners into initial public offerings, a tactic known as “grandstanding.”

These collaborations continue, the researchers say, because the startups and the investment firms know their mutual inexperience has unique benefits for both. While young venture capitalists have incentive to grandstand, they also have a comparative advantage at gleaning crucial financial information.

Both investor and investment in these arrangements, in other words, benefit from similar traits.

They’re intensely motivated, they take the long view and they’re willing push an idea from dream to blue chip reality. u To learn more, please see: Butler, A. W. & Gotkan, M. S. (2013).

On the role of inexperienced venture capitalists in taking companies public. Journal of Corporate Finance, 22, 299-319.

Alexander Butler is a professor of finance at Rice Business.

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MANAGEMENT

POWER FAILURE

Why Do Leaders Mistrust Their Colleagues?

Based on research by Marlon Mooijman, Wilco W. van Dijk, Eric van Dijk and Naomi Ellemers.

• Trust

is vital to running a business: Managers need to be able to trust employees to comply with instructions and keep the company’s best interests in mind.

• Without

trust, workplace productivity, reciprocity and cooperation break down.

• Leaders

who perceive their power is unstable are more likely to distrust their workers.

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W

hile U.S. soldiers battled in Vietnam, inside the White House, President Lyndon Johnson grew increasingly suspicious of those closest to him. The legendary political dealmaker now believed that any opposition to the war was part of a conspiracy against him; aides who questioned his policy might be part of it. According to research using newly available interviews and telephone transcripts, Johnson’s distrust may have been triggered by the very experience of being in power.

But how, exactly? In a recent paper, Rice Business professor Marlon Mooijman and a team of colleagues delve deeply into the interaction of

power and trust, seeking answers about when and why wielding power degrades leaders’ belief in those around them.

The question has deep implications not only in politics, but also in business. “Managers must trust employees’ willingness to comply with instructions and keep the company’s best interest in mind,” Mooijman notes. Without that trust, past research shows, workplace productivity, reciprocity and cooperation break down. Leaders who successfully craft trusting bonds with their coworkers and employees, on the other hand, are more effective than those who don’t.

To learn why leaders might abandon that trust, ricebusinesswisdom.com | Winter 2020 | Rice Business Wisdom 49

“ Unstable power decreases trust,” the team found, “regardless of whether we provided participants with a justification of their unstable position.”

Mooijman’s team set up four studies. First, though, they had to establish a working definition of trust.

Trust, they proposed, is the willingness to be vulnerable to another party’s actions, based on the expectation that the other party will perform a specific action important to the truster — even without the truster’s ability to monitor or control the activity.

Essential to a trusting relationship: the expectation of the other party’s goodwill, and the willingness to expose themselves to possible exploitation if that goodwill fails.

Whether you work in an indie coffee shop or a giant software company, most workers can name a leader who lacks that kind of trust. Many also have had the good luck of a leader who isn’t lacking in that department. The difference between such managers, Mooijman’s team found, may be the stability of their power.

There are plenty of reasons for wanting to keep power, obviously. In relationships, power holders are able to disregard others’ wishes and pursue their own. Within the individual, power boosts self-esteem and encourages behaviors such as expressing amusement and happiness. Less obvious, however, is the effect of fearing a loss of power. Leaders whose power feels unstable experience this physically, with changes in heart rate and blood pressure. They have a heightened awareness of colleagues they perceive as threats, and are more prone to divide coworkers and disrupt their alliances.

When power holders or leaders perceive their power to be unstable, it’s that prospect of power loss that erodes their trust in those around them, even helpful and often unsuspecting colleagues.

So strong is this effect that it occurs even when the loss of power comes with an economic benefit, Mooijman notes. “Unstable power decreases trust,” the team found, “regardless of whether we provided participants with a justification of their unstable position.”

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Marlon Mooijman is an assistant professor in the management department (organizational behavior division) at Rice Business.

To reach their conclusions, Mooijman’s team first surveyed 206 participants assembled through Amazon’s Mechanical Turk software. Each participant was randomly assigned a power ranking (high or low) and asked to imagine being a VP of sales at a mid-sized firm. Some were told that as part of a productivity initiative they would be reassigned to other divisions. The participants were then asked to rank their perception of their power at their firm and their perception of their job stability there.

Regardless of whether their job reassignment was explained or not, the researchers found, the participants who perceived their jobs — that is, their power — to be unstable showed more mistrust of their coworkers.

A final study, a field experiment with real life managers and subordinates, reinforced these findings. Managers in positions of relatively high power who perceived their jobs were unstable were more prone to voice distrust about their subordinates.

While instability is built into political careers, Mooijman’s findings have practical implications in other industries. For example, the common practice of moving workers between departments, meant to build insight and productivity, may backfire. Instead of strengthening team spirit, the strategy will likely foment distrust. Similarly, at high levels of power, emphasizing job instability with tactics such as high-stakes, winner-take-all performance metrics might be counterproductive.

Power doesn’t always erode trust, the researchers found. Leaders who felt their power was secure didn’t show the same level of suspicion as those who felt their roles were insecure. But when power seems fragile, the research revealed, even the most seasoned leaders are prone to abandon trust in their colleagues and see work as a battlefield. u To learn more, please see: Mooijman, M., Van Dijk, W. W., Van Dijk, E. & Ellemers, N. (2019). Leader power, power stability, and interpersonal trust. Organizational Behavior and Human Decision Processes, 152, 1-10.

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Commentary

By Utpal Dholakia Reprinted with permission from Psychology Today.

PUBLIC TRUST

What’s The Harm In Illicit Ice Cream Licking?

Such acts by consumers can hurt sellers by eroding reputation and trust.

“All this product licking is simply a sign of a self-absorbed, selfie-star obsessed sick nation.” – Cheryl K. Chumley.

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I

t started with a video that went viral. A teenager opened a Blue Bell ice cream carton in a Lufkin, Texas Walmart, ran her tongue over the ice cream, then returned the container to the shelf. This was followed by a copycat incident in Louisiana a week later. As is often the case with such incidents, the phenomenon took off on social media. The hashtag #icecreamchallenge trended on Twitter. Since then, both mainstream media and social media have been inundated with expressions of outrage, calls for punishment and fixes to product packaging, a mockery of the perpetrators, and all manner of opinions and assertions.

Much of this debate has focused on the motivations behind acting this way, the severity of a punishment that should be meted out to perpetrators, and what such behavior says about our culture. What about the longer-term effects of such widely publicized transgressions? In this post, I want to explore the longer-term psychological repercussions of these incidents for ice cream buyers, and the economic consequences for retailers and ice cream manufacturers from the ice cream licking videos.

Physical harm from consuming contaminated ice cream.

The act of ice cream licking depicted in the

“Some consumers will assign the blame entirely to the illegal behavior of the perpetrators while others may argue that sellers should be more proactive in preventing such incidents.” videos is a case of product tampering defined in legal terms as, “to alter or add a foreign substance to a consumer product to make it probable that the consumer product will cause serious bodily injury.” When someone licks ice cream and puts the container back on the shelf, it increases the likelihood of actual physical harm to the person who buys that contaminated container afterward and consumes the ice cream.

In and of itself, however, this risk is minuscule for any individual ice cream buyer.

More than 1.5 billion gallons of ice cream is consumed in the US each year. The chances of placing the ice cream package licked by one of the perpetrators in your shopping cart are considerably lower than the likelihood of being struck by lightning.

Heightened risk perception associated with consuming ice cream.

Despite the low actual risk, these incidents create havoc. Most of this occurs because of how the incidents impact consumer perceptions and behaviors.

The ice cream licking videos received concentrated attention, so they remain at the top-of-the-mind of many consumers and lead to elevated risk perceptions when buying ice cream.

Psychologists have argued that people not only

overestimate the occurrence of low probability events but they also give them much greater weight in their decision-making process. This significance is compounded in today’s environment where many consumers place great emphasis on food safety, pay attention to their food choices, suffer from allergies, and have dietary restrictions.

Change in how people buy ice cream or whether they buy it at all.

Consumer psychologists have found that consumer behaviors are influenced by perceptions of risk. The upshot of heightened risk perceptions is that consumers change their behavior to reduce their risk. Influenced by the videos, when purchasing ice cream, some people have resorted to measures like cutting off the top section of their ice cream package or selecting a package from the back of the shelf. Others may postpone buying ice cream at the grocery store and replace their planned purchase with another dessert or food category that is seen as safer.

An increase in copycat behaviors.

In the two weeks or so since the ice cream licking videos came out, people have posted videos involving tampering with various other products like Listerine mouthwash, Arizona tea,

and a tongue depressor in a doctor’s office. Some of these tampering incidents are even more dangerous and disgusting from a food safety standpoint than ice cream licking. Many products in the grocery store are relatively unattended and do not have tamper-proof or sealed packaging. Just think of the bulk bins in your local grocery store, not to mention any number of unsealed consumer product packages. To gain attention on social media, many people resort to outrageous copycat behaviors. This can lead to spreading dampening effects on consumer perceptions and behavior far beyond ice cream. As tampering incidents spread to other product categories, their purchases may also be affected.

Damage to the retailer’s and manufacturer’s reputations and consumer trust.

The amount of blame to be assigned to the retailer (for not policing their shelves and freezers) and to the manufacturer (for not making tamper-proof packages) is not always clear.

Some consumers will assign the blame entirely to the illegal behavior of the perpetrators while others may argue that sellers should be more proactive in preventing such incidents. For instance, in the aftermath of the ice cream licking videos, many experts

blamed Blue Bell ice cream for not using an internal seal or a plastic wrap band on their packages. So far, retailers have escaped widespread criticism. However, if the product tampering videos spread beyond ice cream to other categories and consistently implicate one retailer, this may change.

Regardless of the merit of such criticisms, product tampering incidents result in the loss of reputation of sellers which can take months or even years to recover. As one example, when seven people in Chicago died after taking Extra-Strength Tylenol capsules from packages that were tampered and laced with cyanide in September 1982, the brand’s market share fell off a cliff, from 37% to 7%. It took more than a year, over $100 million in expenditure, and a number of tough business decisions like implementing a blanket recall and a drastic revamp of packaging to make it tamper-proof.

Only then did the manufacturer, Johnson & Johnson, recover its market share to 30%. It is this long-term loss of reputation of sellers, particularly manufacturers, and of consumers’ trust in them, that is the most significant harm caused by the ice cream licking videos. u Utpal M. Dholakia is the George R. Brown Professor of Marketing at Rice Business.

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WordWatch

By Jennifer Latson

FOR WHOM THE WHISTLE BLOWS Are whistleblowers heroes or snitches?

W

hat do we know about the whistleblower? Not that whistleblower, but whistleblowers in general.

How do we view an individual who brings someone else’s (alleged) misdeeds to light?

President Donald Trump recently described one as “almost a spy.”

“You know what we used to do in the old days when we were smart? Right? The spies and treason, we used to handle it a little differently than we do now,” he said, according to audio obtained by the L.A. Times.

Others, meanwhile, defend whistleblowers — sometimes literally. “We must protect those who demonstrate the courage to report alleged wrongdoing, whether on the battlefield or in the workplace,” Joseph Maguire,

the acting director of national intelligence, said at a September hearing.

Whether you see a whistleblower as a hero entitled to legal protection or a snitch who should be outed (and possibly convicted of treason) may depend on where you stand politically. It may also depend on whether the whistle is pointed in your direction.

“For people who wish to encourage whistleblowing, then whistleblowers can be heroic,” says Duane Windsor, a management professor at Rice Business. “People who are being reported on typically try to dismiss and vilify whistleblowers.”

Whistleblowers have met with ambivalence throughout the history of whistleblowing — and that history is a long one. Policies enabling the rank and file to expose wrongdoing by people in power have been in place since Beowulf battled Grendel. “Qui tam” provisions — short for the Latin phrase

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“qui tam pro domino rege quam pro se ipso in hac parte sequitur,” meaning “He who sues on behalf of our Lord the King and on his own behalf” — date as far back as the early Middle Ages, according to Tom Mueller, author of “Crisis of Conscience: Whistleblowing in an Age of Fraud.”

In what’s considered to be the first of the qui tam laws, King Wihtred of Kent declared in 695 A.D. that anyone caught working on the Sabbath would be fined — and whoever turned him in was entitled to half the fine. Because medieval kings didn’t have a standing police force, Mueller explains, it made sense to incentivize private citizens to do the police work. But that meant the earliest whistleblowers were essentially bounty hunters spying on their neighbors. And it didn’t make them popular in the community, particularly when they brought down its pillars. (“William Shakespeare’s

father was sued, and perhaps ruined, by qui tam informers who accused him of usury and the illicit sale of wool,” Mueller writes.)

Bounties are the most controversial element of many whistleblowing laws — including our own False Claims Act, originally passed in 1863 after war profiteers swindled the Union Army by, among other things, passing sawdust off as gunpowder and selling the same horses several times. By that time, England was phasing out its own qui tam laws, since the cash reward was seen as overly corrupting, particularly for a policy meant to rout corruption.

Some informers resorted to entrapment to get their share of the fine; others simply lied, according to Randy Beck, a law professor and associate dean at the University of Georgia.

In the U.S., however, the False Claims Act still rewards whistleblowers for exposing fraud against the

company; the CFO tried to have her fired. After Enron’s abuses became public, Congress passed the SarbanesOxley Act, which includes unprecedented protection for whistleblowers like Watkins, making it a felony to retaliate against them and holding executives personally liable when they do.

“Whistleblowing can be difficult and risky, at best,” Windsor says. “It seems to me that cash awards are in order. We want to encourage whistleblowers in as many ways as possible.”

The alternative, of course, is to witness wrongdoing and say nothing. And far greater numbers of people choose this path — what management scholar Margaret Heffernan refers to by the legal term “willful blindness.”

In fact, Heffernan says, when researchers surveyed employees at American corporations, 85 percent said they were aware of problems at work that they were too afraid to mention.

In a world without whistleblowers, we’d go on buying the same horses over and over, or worse, investing in Enron. But even with the promise of a cash reward, few people are willing to endanger their career by speaking out — and risk being called a spy or a traitor for their trouble. u Jennifer Latson is an editor at Rice Business and the author of “The Boy Who Loved Too Much.”

Go to

>

government. Sherry Hunt, who blew the whistle on mortgage fraud at Citigroup in 2011, was awarded $30 million of the $158 million settlement Citigroup ultimately paid. The IRS also pays informers who report tax dodgers, while those who report securities fraud are entitled to payment under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. And even profit-motivated whistleblowers can produce useful tips, Windsor argues.

If anything, they’re more essential today than in medieval England, since scams are getting more complicated and harder for regulators to uncover without help from the inside. A 2018 PricewaterhouseCoopers survey found that nearly 30 percent of corporate fraud detection came via tip-offs by an internal source or from anonymous whistle-blowing hotlines.

“There may be some division of opinion about motive: unrewarded reporting is heroic; rewarded reporting is somewhat less noble or even mercenary,” Windsor says. “I do not agree. We need whistleblowers, whether heroic or mercenary. Both channels are socially valuable.”

Windsor teaches his Rice MBA students the case studies of two different whistleblowers: Sherry Hunt at Citigroup and Sherron Watkins at Enron.

While Hunt went directly to the feds, Watkins blew the whistle internally, alerting Enron CEO Kenneth Lay to her discovery of widespread accounting fraud at the company. Instead of earning a reward, however, she became a pariah at the

business.rice.edu/wisdom for more research from our faculty contributors

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This essay first appeared in the Houston Chronicle’s Gray Matters.

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