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Fall 2013

College of Business at the University of Illinois at Urbana-Champaign


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very day hundreds of students, faculty members, and visitors enter the east entrance of

and alumni comprise an

[ CONTENTS ]

our Business Instructional Facility. When they look to the south as they come through the

doors, they pass a simple message. Innovate. Educate. Engage. They’re three simple words that tell a much bigger story.

incomparable network

It’s a story of the focus of the College of Business and of the opportunities that exist within it. Our faculty, students, and alumni comprise an incomparable network of high-integrity people

of high-integrity people

engaging together to be innovators in the global economy. Our College is a dominant player in the fields of research and education across a variety of disciplines.

engaging together to be innovators in the global economy.”

In this issue of Perspectives, you’ll meet some of the people in this network who innovate, educate, and engage. They include faculty members like Joe Mahoney, who is teaching a strategic management course to inmates at the Danville Correctional Center as part of the University’s Education Justice Project; alumni like Sheldon Good, whose concept of the real estate auction provided innovation in the industry; and Norma Lauder, a faculty member and an alumna, who directs our MS Tax Program, which boasts a rigorous tax curriculum, workshops that focus on professional skill development, and lyceums that engage tax leaders. The articles on these pages highlight the collaborative, interdisciplinary, and creative scholarship and service initiatives that set the College of Business apart in its efforts to

[ MY ] PERSPECTIVE

innovate, educate, and engage. And next time you enter BIF from the east, look even closer

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at the wall to the south. Behind our three-word message are the names of more than 4,000 current students, faculty, and staff. They're part of that incomparable network and the reason for the message in the first place. Sincerely,

Larry DeBrock Josef and Margot Lakonishok Endowed Dean

DEAN Larry DeBrock

IN-DEPTH 2

Unplugged

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Looming Crisis?

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Thumbs Up

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Juggling Act

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An Ounce of Prevention

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Grounded?

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Paying the Price

A new generation is reinventing how we watch and think about television.

Pension systems’ troubles threaten to undermine the economy.

What do Facebook Likes say about you?

How do nutritional ratings systems impact the food industry and the consumer?

Employers consider the best approach to wellness initiatives.

Will the government say “no” to another airline merger?

Corporations with aggressive low-tax policies often pay higher auditing fees.

MANAGING EDITOR Mary Kay Dailey EDITOR Cathy Lockman

SHORT TAKES

CONTRIBUTING WRITERS Tom Hanlon Cathy Lockman Doug McInnis

ON THE COVER Online television delivery is changing the face of television. That’s good news for a series like Breaking Bad, whose audience is looking to watch the show on their own terms—when and where they want to. Hayden Noel, assistant professor of business administration, says this shift to online viewing is a game-changer not only for the TV industry but for advertisers as well.

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Intersections

PHOTOGRAPHERS Rebecca Ginsburg Tricia Koning Thompson • McClellan Photography Ben Woloszyn

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60-Second Profile

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Corporate Partners

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The Main Event

DESIGNER Pat Mayer

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The Reason Why

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Parting Shot

Perspectives was named an Award of Excellence winner for 2013 by the University & College Designers Association.

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“Our faculty, students,

The University of Illinois at Urbana-Champaign is an equal opportunity, affirmative action institution. Printed on recycled paper with soybean ink.


[ COVER STORy ]

Unplugged

A NEW GENERATION REINVENTS TELEVISION

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“When advertising dollars move online, companies that don’t move with it will go the route of the local newspaper. Cable and network TV must adapt or they will die.” Hayden Noel PASSIVE VERSUS ACTIVE VIEWING One of many differences between online and network viewing is that the latter provides a passive experience. Online TV viewing, on the other hand, is more active; you are clicking on what you want and are more likely to be engaged with your choice of programming. “As opposed to network TV,” Noel says, “online viewers tend to demonstrate more control over the quality of the content they view.”

Still, not everyone is flocking to the online experience. “As you move up the ladder to an older viewing audience,” Noel says, “it’s harder for them to accept online viewing as an option. Older people haven’t adapted well to these changes. I know my mother would never watch a television show online.” One negative of online streaming, he adds, is that in spite of higher quality shows, you aren’t always able to view all the programs you might want to. “The programming is not as

comprehensive,” he says. “Many shows are still not being streamed online.” But there’s much more on the positive side, Noel says, including potential improvements in quality of shows. “Online content is going to survive based on its quality because it’s not owned by providers. Let’s say, for example, that Time Warner creates shows that were not of top quality. Since they are also cable providers, they could still push their shows on us through one of their cable channels. The growth of online television makes that less likely to happen. We are going to see, I think, an upward shift in the quality. Eventually, we’ll see greater variety being offered online. Then you, the user, could select the shows that you believe are of higher quality. In terms of variety, you’ll be able to get shows online that you cannot find anywhere on broadcast media.”

CUTTING THE CORD So people are moving to online shows for greater variety, greater flexibility in when and where they watch shows, and perhaps improved content. But the number one reason people are forgoing cable television for online, Noel says, is simple. “People are cutting the cord because of costs,” he says. “Cable subscriptions range from $60 a month to $200. I pay $190 because I have a

Perspectives FALL 2013

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id you miss an episode of That 70s Show? No problem. Just grab your laptop, hop on the Internet, and watch the episode—whenever and wherever you want. Online TV is changing how we watch shows, and it is threatening traditional network and cable television companies, says Hayden Noel, assistant professor of business administration. The industry changes, he says, are largely due to what he calls “Generation M” (for Mobile). “As the Mobile Generation gets older, they bring with them their media consumption habits,” Noel says. “Right now, 61 percent of Americans get some or all of their news online. And that number will only increase.” In addition, he says, Generation M gets a great majority of their entertainment online. “You have a major shift coming, and companies have to prepare for that.” One reason consumers love online TV is it gives them greater control over content, Noel says. “You can view shows when you want and how you want. It allows for greater personalization. Also, online TV enables you to avoid ads with certain programs for some of the paid services, like Hulu Plus.”

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[ PENSION ECONOMICS ]

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A VIEWING EVOLUTION AND REVOLUTION 2005

youTube is launched. iTunes offers downloadable programs.

2006

Amazon comes out with “Unbox,” offering digital rentals and purchases of television shows and movies. Google purchases youTube for $1.65 billion in Google stock.

2007

Viacom sues youTube for $1 billion for “brazen” and “massive” copyright infringement. (The case was eventually dismissed in 2010.) Netflix launches online streaming.

2008

Fox and NBC launch hulu.com. CBS launches TV.com.

2009

ABC joins hulu.com.

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Comcast and a few other multichannel video programming distributors launch TV Everywhere, a verification system that authenticates as actual paying customers those who wish to use video-on-demand Internet television services.

2011

The Amazon Prime program provides Amazon Instant Video, which streams TV shows and movies as part of a bundle with free shipping.

LOOMING CRISIS? HOW PENSION SYSTEMS’ TROUBLES THREATEN THE ECONOMY

Source: The Economics of Online Television: Revenue Models, Aggregation, and “TV Everywhere,” a working paper authored by David Waterman and Ryland Sherman, Indiana University, and Sung Wook Ji, Michigan State University.

“James Dolan, chief executive of Cablevision, said there could come a day when his company stops offering television service entirely, making broadband its primary offering,” Noel says. “What that says to me is the current model of the cable TV industry is not viable in the mediumterm or the long-term. Currently, there is this great emphasis on packaging of channels that people are required to pay for, even though you don’t want them. The market has to prepare itself for this shift in viewing patterns over the next five to ten years as young people opt to watch more online video rather than paying for traditional TV services and, in the process, purchasing channels that they don’t really watch.” If cable companies don’t adjust to those shifting patterns, they will contract, just as the newspaper industry is contracting, Noel says.

ADVERTISERS CHANGE THE CHANNEL Although cable companies aren’t welcoming the advent of online TV with open arms, it’s a far different story for advertisers, who see online TV as a great boon. “Interactive television allows for more customized and direct contact with viewers,” Noel explains. “So if you already know what programs your viewers are watching and can link that to websites they have viewed on their computers, it’s easier to target them with advertising interspersed in their online TV shows.” Noel adds that streaming advertising outperforms TV advertising by nearly a two-to-one ratio in terms of message recall and brand recall. “Advertisers see online TV as a great opportunity to build their brand with Generation M,” Noel says. Still, he notes, an important chunk of the

population remains receptive to traditional means of watching video, and therefore, by extension, traditional advertising. “So you can’t abandon the traditional advertising model entirely,” he explains. “The two media platforms can be complementary. You can have ads on both platforms. Advertisers just need to be sure that their brand image remains consistent among platforms.” However, Noel asserts that online revenues are the wave of the future. “To survive, all media— newspaper, television, radio—must move to an online model that could generate profits,” he says. “When advertising dollars move online, companies that don’t move with it will go the route of the local newspaper. They won’t survive. It sounds harsh, but they won’t. Cable and network TV must adapt . . . or they will die.” Tom Hanlon

The undoing of Illinois’s modern state pension system began on the day it was created. “The people who made decisions didn’t think about the long term,” says Avijit Ghosh, former dean of the College of Business and now senior advisor to the University of Illinois President Robert A. Easter. “Those decisions are hitting us now.”

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package with DirecTV for NFL games. That’s the only way I can see the Steelers, which is my favorite team. But I could save myself almost $160 by paying for one of those online TV providers.” The next logical step for viewers up to age 40 or so, who readily snap up information and entertainment online, is whether to get rid of cable completely. Many have taken that step. Major cable providers lost about 344,000 subscribers in the second quarter of 2013, while the top broadband providers added about 294,000 subscribers in that same period. “You have a move away from this model where cable providers have a stake in, and own completely, the content creation,” Noel says. “You see less of a connection between the owner of the distribution and infrastructure and the content provider as that link is broken. We’ll see some contraction in the cable industry. We will see some cable companies being bought out, as they move away from owning the content.” He notes that some cable companies are working to create their own online presence, which they include in their cable subscriptions. For example, DirecTV has its own iPad application that viewers can use to watch their shows. “But the downside is, it’s very limited,” Noel says. “In order to view most of the programs, you have to be attached to a home network. But cable companies have to overcome these limitations in order to remain viable. They have to allow you access to your cable TV anywhere you are—that ‘TV Everywhere’ model.” Most cable companies, he says, are behind the curve when compared to networks such as ABC and NBC, which offer content online.

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“They’ve cut [pension benefits] so much that it makes it very difficult for the state and the University of Illinois to attract top talent.” Avijit Ghosh

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tate pension systems start with three basic assumptions—that they will cost a certain amount, that the state will make regular contributions into the system, and that those contributions will earn a certain percentage rate of return. In the case of Illinois, the plan cost more than predicted, the state consistently failed to make the actuarially recommended contributions on an annual basis, and the investment returns were less than predicted. Now, the pension system’s troubles threaten to undermine the entire Illinois economy, report Ghosh and other University of Illinois researchers. In response, a team of the university’s top financial specialists has crafted a six-point pension reform plan to fix that part of the pension system that covers employees at 65 state colleges and universities. The state university system accounts for $19 billion of the officially reported $97 billion shortfall. Most economists, however, consider the shortfall to be much larger. Although the plan

could be extended to cover the entire Illinois pension system, no one knows if the legislature will bite. If nothing is done, all the state pension funds could eventually run out of money, precipitating a fullblown financial crisis. That crisis may be decades away. But in the short term, pension-fund woes have created less visible but no less serious problems that threaten to erode the state’s creditworthiness, its business climate, and the quality of its state university system, the researchers say. In addition, current pensionfund expenses have begun to suck money from other government programs. These expenses include mandatory payments to help pay some of the unfunded $97 billion. “Suddenly, pension payments account for a very large proportion of the state budget. There’s less money to pay for other things or make investment in infrastructure,” says Ghosh. (A state task force concluded that Illinois needs to spend more than $340 billion on infrastructure by 2036.)

Ghosh, along with Jeffrey Brown and Scott Weisbenner, both professors of finance, and two other colleagues designed the proposed university pension-reform plan. The plan makes the case that the pensionfunding gap is so large that university employees must ultimately get less than the generous package of benefits they were promised. At the same time, taxpayers would be expected to help shore up the fund. “You’re basically left with three options,” says Ghosh. “One option is to make the pension payments. But you would have to crimp everything else in the state budget. Or you could reduce the unfunded liability by reducing the promised amount. Or you could do some of each. That’s what elected officials are struggling with.” The state faces one obstacle that could undo any plan to fix the system. The Illinois Constitution stipulates the promised pensions must be paid, so any plan to change benefits is likely to be litigated. “Any single employee or retiree can take the matter to court,” Ghosh says. “Ultimately, we will have to wait for a court decision on any new system.” In the meantime, the funding shortfall has led to a lower credit rating for the state, raising the cost of past and future borrowing. “The worst-case scenario is that we continue to allow the pension-fund problem to grow and as a result the financial markets deem the state of Illinois no longer creditworthy, thus precipitating an all-out financial crisis in the state,” says Brown. “Absent reform, eventually we would have a true cash-flow crisis

when we reach the point where we don’t have the money to write the pension checks,” he says. “That won’t happen in the next few years. But it could happen in the next few decades. What’s more likely in the near term is a continued decline in our creditworthiness, which would further harm the state’s finances as our borrowing costs climb.” Beyond that, Brown says, the pension-fund problems may be eroding the desirability of Illinois as a place to do business, spurring existing businesses to forego expansion in Illinois and outside firms and startups to avoid the state. “I would be surprised if we’re not already seeing that happen.” The University of Illinois and its sister institutions are at risk as well from pension-fund fallout. As the pension problem grew, the state set sharply reduced pension benefits for new hires. “They’ve cut it so much that it makes it very difficult for the state and the University of Illinois to attract top talent,” says Ghosh. The university also risks losing the talent it already has. “Faculty and staff may think they should go elsewhere because their pension isn’t certain. It’s taken generations to build a strong higher-education system in the state. But it would be easy to erode the university’s quality. That’s one reason the university has been so focused on resolving this issue.”

A STEADY DRIP OF BAD NEWS Of course, Illinois is far from the only state with pension problems. The list ranges from California, the most populous state, to tiny Rhode Island. Some cities face the same bur-

den. Unfunded pensions helped drive Detroit into bankruptcy. The federal government has massive unfunded liabilities with Social Security and Medicare. In many instances across the country, the root causes of pension problems are the same as those plaguing Illinois. Illinois might have swept its problems under the rug a while longer, but the crash of 2008 and the recession that followed brought matters to a head. The State Budget Crisis Task Force put it this way: “Like other states, when the financial market collapsed, Illinois saw its revenues plummet and demands for government services skyrocket. But unlike other states, Illinois was effectively insolvent. Illinois had no reserves and had used fiscal gimmicks and borrowing to balance its budget for the

previous six or seven years. And Illinois had shortchanged its pension system for decades.” Efforts to get a bailout from Washington are likely to fail. “Washington is not in a position to help states out right now,” says Brown. Still, Illinois’s problem hasn’t become so severe that the legislature will be forced to act immediately. “A steady drip of bad news doesn’t necessarily get their attention,” Brown says. “You don’t really want a crisis. But sometimes that’s what you need to get people to make the hard decisions.” So the problem continues to build. Brown likens it to a snowball rolling downhill. “It’s gathering snow and it’s gathering speed and it’s getting harder and harder to stop.” Doug McInnis

“What’s more likely in the near term is a continued decline in our creditworthiness, which would further harm the state’s finances as our borrowing costs climb.” Jeffrey Brown

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THROWING OUT A LIFE PRESERVER This six-point plan lays out steps for proposed pension reform for state colleges and universities. 1. Cost-of-living adjustments, although lower on average, will be linked to actual increases in the rate of inflation. 2. The effective interest rate on certain transactions, including money purchase calculations and refunds of excess contributions by employees, will be set at three-quarters of a percent above the interest rate on 30-year U.S. Treasury Bonds. 3. The 65 colleges and universities in the state system will contribute 6.2 percent of their pension-eligible payrolls, shifting part of the financial burden from the state to these employers. These payments will be phased in over 12 years. 4. Employees in the Tier I defined-benefit pension program, which pays a set amount each month, will contribute an additional 2 percent of their pay. The shift will be phased in over four years. Most current employees participate in the Tier I program that was created decades ago. Tier II is a lower-cost program created for those hired after December 31, 2010. 5. The state will be required to pay off unfunded liabilities for the State University Retirement System over a period of years. Universities and participants will have the legal right to enforce the payment schedule. 6. The inadequate Tier II system for new employees will be replaced with a hybrid-pension plan that includes a smaller defined benefit plan and a new defined contribution plan to which employees contribute.

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THE MURKY WATERS OF REFORM

Source: Six Simple Steps: Reforming the Illinois State Universities Retirement System, a working paper authored by Jeffrey Brown, Avijit Ghosh, and Scott Weisbenner, University of Illinois at Urbana-Champaign; Steven Cunningham, Northern Illinois University; and David Merriman, University of Illinois at Chicago.

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[ SOCIAL MEDIA ]

Thumbs up!

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hat you “Like” on Facebook tells a bigger story than you might think. So says a recent University of Cambridge study, which analyzed data from the Facebook “Likes” of more than 58,000 volunteer users and found that the “thumbs up” is an accurate predictor of a variety of personal attributes. For instance, people who Like “Thunderstorms,” “The Colbert Report,” and “Curly Fries” are probably smarter than those who Like “Sephora,” “Harley Davidson,” and “Lady Antebellum,” according to the research. Men who Like “MAC Cosmetics” and “Wicked, The Musical” are more likely to be homosexual, says the study, and anyone who Likes the “Hello Kitty” brand is more likely to have Democratic political views. Add this information to website browsing histories, online music choices, Twitter profiles, and credit

“ With every mouse click, firms are gathering data. Every piece of information can be useful in understanding a particular consumer, and capturing the data is at the core of how businesses can be successful online.” Eric Larson

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card purchases and you have a treasure trove of data marketers can use to reach their target audience. “The sky’s the limit on how much data can be collected through online interactions,” says Eric Larson, assistant professor of business administration. “With every mouse click, firms are gathering data. Every piece of information can be useful in understanding a particular consumer, and capturing the data is at the core of how businesses can be successful online. Facebook’s IPO tells you that investors believe that the data that Facebook captures is hugely valuable to businesses.” But how will marketers use the information, what are the pitfalls of such predictions, and what does all this mean for consumers? Larson believes that consumers are aware that significant data is being collected about them. They can see it by the targeted sidebar ads that come up in

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This Sign of the Times Gives Marketers a Leg Up

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not necessarily because they believe in it,” says Wolters. “Instead, users should think, ‘What does it say about me if I Like this page?’ because those are the kinds of conclusions that will be drawn by those interpreting the data.”

PRIVATE VERSUS PUBLIC More than 1 billion people use Facebook. That’s a lot of data and a lot of different opinions on privacy. “Some people put more value on privacy than others,” says Larson. “Our cultural background, gender, age, and technology savvy are all factors that play into the individual calculus that we do when we decide whether the privacy intrusion is worth the risk. Some people consider the intrinsic benefits of the interaction to be huge. Some like the tangible benefits of getting marketing

“Users should think, ‘What does it say about me if I Like this page?’ because those are the kinds of conclusions that will be drawn by those interpreting the data.”

deals, while others don’t believe trading their personal information is worth it.” That’s the challenge for marketers—determining who is willing to respond and for what level of benefits. But finding that sweet spot can also be a slippery slope. “Access to the kind of information that Facebook provides can allow for better targeted advertisement and a better chance of the offer resonating with the consumer,” says Wolters, “but it also has some inherent problems.” As the Cambridge study and many others indicate, online behavior leads to predictions. And with predictions can come errors and backlash. “Predictions regarding gender, race, and other characteristics, even if they’re accurate, don’t provide a complete picture. In fact, they can lead to stereotyping, or even profiling,” Wolters says, which not only can backfire for marketers, but could ultimately decimate their company. He adds that there are also a lot of potential headaches if the data gets loose. And then there’s the question of how Facebook information can merge with other technologies and what that means for marketers. For instance, Red Pepper, a Nashville advertising agency, has launched Facedeals, which uses facial recognition software and Facebook Likes to offer discounts to consumers. Here’s how it works: Facebook users authorize the Facedeals app, which uses photo tags to map your face. Special cameras installed at businesses recognize your face and check you into that location. At the same time, the app sends your smart phone customized deals that match

products and services from your Facebook Like history. “To be able to identify a consumer’s location, Likes, and demographic information and to personalize an experience for them is the Holy Grail of content for marketers,” says Larson. “But there is also the potential for errors, for people to be misidentified, and for consumers to be caught in places they don’t want others to know about, all of which can create backlash for marketers.” Larson, who views these advances through an information technology lens, says facial recognition is one part of photographic data mining. “If this technology allows for recognition of not just a face but also of locations and other contexts, it begs for a strong consideration of the privacy implications.” The challenge, he says, is that technology and the commercial efforts around it are always ahead of legislation. “When there is a lag like that, commercial interests can take advantage of it. As consumers have less control of the message that is out there about them, they have to determine whether they want to participate in the platform anymore.”

BEYOND FACEBOOK Sung Kim, a new faculty member in business administration, says that while much attention is being focused on Facebook, data mining across all forms of social media has great potential for marketers. The basic text of Twitter and its 140-character tweets is one such “gold mine of data and information,” he says. Larson sees it the same way. “There is a lot of intelligence being applied to analyze the unstructured

“The game now is to compile the data, determine which sets are most fruitful, and do it in real time. This shrinking of reaction time by companies is what will change the landscape.” Sung Kim data of basic text,” he says, “and Twitter is the poster child for that type of analysis.” Both Kim and Larson agree that mining the text people are creating, trying to determine the sentiment of the text, and then analyzing its relevance for marketers is an important focus. There are other initiatives as well. “When you look at social media sites in isolation, you can glean lots of information,” Kim says. “The move now is to try to get other data sets and mix them together to draw even more powerful conclusions.” And then there’s the next step, he says, sifting through big, unstructured data in real time. This means looking at Facebook feeds, Tweets, stock market data, weather reports, and other streaming data; sorting through it all as it happens; and using

it to formulate a view of the environment and consumer sentiment. “The game now is to compile the data, determine which sets are most fruitful, and do it in real time,” Kim says. “This shrinking of reaction time by companies is what will change the landscape.” An Apple product announcement provides an example. “If you follow Twitter at the time of the product announcement, you could see what people are saying right at the time they are saying it,” Kim says. “If this data can be algorithmized, the resulting information could help marketers not just react to the Tweets and create messaging but also address any negatives, accentuate any positives, and even alter the design of a product.” Cathy Lockman

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their Facebook newsfeeds and elsewhere online, he says. “But I’m not convinced that they know all the potential implications.” Mark Wolters, visiting assistant professor of business administration, agrees. “With all of the uproar every time Facebook changes a privacy setting, people should know all their data is tracked. I think they just don’t want to think about what that means. If they really considered the information they are willingly providing through Facebook, I think they would be more careful and less apt to put all of their thoughts and photos out there.” He says that Facebook users may “Like” something almost on autopilot with very little thought before they click the mouse. “They may Like a group or a photo or even a new business in order to lend support,

Mark Wolters 10

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[ INTERSECTIONS ]

Opening Doors

“I view the Danville students as heroic in that they are trying to better themselves in a very difficult situation.” Joseph Mahoney

Until this semester, Joe Mahoney had just a short walk from his Wohlers Hall office to the BIF classrooms where he teaches courses in business administration. But in September, his commute to class got 40 miles longer every Friday. That’s the day Mahoney travels to the Danville Correctional Center to teach strategic management to a

Perspectives FALL 2013

class of 15 incarcerated students.

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“Prisons are not public goods, like clean water; they are ‘public bads,’ and a future in which we could move from 2 million to 3 million incarcerated individuals will not be a success story for our country.” Joseph Mahoney

THE RISE OF THE PRIVATE PRISON MODEL

His class is part of the Education Justice Project (EJP) at the University of Illinois, an initiative that focuses on building a model college-inprison program as a way to positively impact incarcerated individuals, their families, and their communities. It’s a program that Mahoney became aware of as an unanticipated result of his academic research into firms, markets, and government. “For 25 years, I’ve been thinking about how to allocate resources and when it’s better for firms to conduct activities themselves and when those activities are better done by a price system and markets,” says Mahoney, the Caterpillar Chair of Business. “More recently, I’ve also started thinking about when it’s better for certain activities to be carried out by government vis-à-vis markets and firms.” And that work led Mahoney to explore the effectiveness of public versus private prison models, which led him to EJP. There he connected with Rebecca Ginsburg, the program’s director, and Jim Keating, a venture capitalist and a 2006 ILLINOIS MBA graduate, who is

co-teaching the strategic management class. “In conversations with Jim, it became apparent to me that in combination we could do something special by joining academic theory and real-world practice. Jim and I had a vision that together we could teach the Danville students the skills that would allow them to be successful as entrepreneurs when they’re released.” He explains, for example, that by learning how to develop and maintain a customer base a Danville student who decides to start a lawn service would have important skills that could translate into success. “We want to give the students the tools they need to earn a living once they leave prison, most likely by doing something entrepreneurial,” says Keating. So for three hours every Friday, Mahoney and Keating do just that. Their 15 students have already completed 60 hours of community college credit before they can take the strategic management class. They’re serious students, says Mahoney. “In my 25 years of teaching, I’ve never ex-

Nearly 1,800 men are incarcerated at the Danville Correctional Center, a state of Illinois high-medium security facility. It is one of more than 4,500 prisons across the country that together house more than 2 million men and women, a tenfold increase from the 200,000 behind bars in 1971 and the highest rate of incarceration of any country in the world. Those numbers, which many attribute to a

failed war on drugs and increased mandatory sentences, have resulted in overcrowding. That problem, in turn, has opened the door for the private prison market, a focus of Mahoney’s research. “The number of for-profit detention centers has grown over 35 percent every year for the last 15 years,” he says. “The private prison model is a multibillion-dollar business.” Keating adds: “Prisons have become profit centers, and that in my opinion is a crime. When prisons become businesses—that is, for-profit institutions—they are incentivized to grow their customer base and to expand. That’s a problem because then the penal system is organized to fill the prisons.”

FOR-PROFIT PROBLEMS

“Prisons have become profit centers, and that in my opinion is a crime. When prisons become businesses—that is, for-profit institutions—they are incentivized to grow their customer base and to expand.” Jim Keating

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An article written by Mahoney and colleagues Peter Klein, Anita McGahan, and Christos Pitelis and published this year in the Strategic Entrepreneurship Journal explores these problems. They write: “Analogous to Eisenhower’s warning of the ‘military industrial complex,’ in which defense contractors push for increased military spending, we now appear to be witnessing a ‘prison corporate complex,’ in which a set of bureaucratic, political, and vested economic interests encourage increased expenditures on imprisonment.” The article also states that private prisons such as the GEO Group and Corrections Corporation of America use “lobbying, direct campaign contributions, and networking to encourage tough-on-crime legislation to ensure an increased supply of prisoners (particularly for nonviolent drug offenders).” Mahoney notes that “just as a hotel has lots of beds and develops strategies to fill them, private prisons have incentives for similar strategies.”

Mahoney explains that while it is tempting for the government to have private companies stepping in to handle some of the overcrowding problem, it isn’t a solution for several reasons. One is transparency. Private prisons are not subject to the same oversight as the state and federal prisons, explains Mahoney. Plus, he says, there’s also the potential for greater exploitation, as the users of the products and services supplied have little voice and no exit when there is severe quality shading and/or exorbitant prices.

“In business, we learn that it’s often better to let the market work,” says Mahoney. “The logic is that being efficient to enable the production of more goods is a positive thing. But I believe that this is one context where the market doesn’t have a place. Efficient private prisons lead to more private prisons, which lead to the need for more incarcerated individuals to fill them. Prisons are not public goods like clean water; they are ‘public bads,’ and a future in which we could move from 2 million to 3 million incarcerated individuals will not be a success story for our country. Indeed, ‘efficiency’ is the wrong emphasis because we know that imprisonment impedes an individual’s social, economic, psychological, and educational development.” Mahoney is trying to assist with that educational development component by teaching his class, the first by a faculty member in the College of Business offered through EJP. What he’s seen in his time “working with inspiring Danville students and some noticeably dedicated correctional officers has been life changing,” he says. “I view the Danville students as heroic in that they are trying to better themselves in a very difficult situation. They do 100 percent of the work that is done in my senior undergraduate business course, and they are every bit as insightful and hard-working as the bright, committed undergraduate students on our campus who are of world-class talent and who have inspired me every day for 25 years at ILLINOIS and continue to do so.” • Cathy Lockman

“Higher education at its best helps people think critically about themselves and the world and their role in the world. It encourages self-reflection and questioning.” Rebecca Ginsburg

GIVING THEM CREDIT The strategic management class taught by Joseph Mahoney and Jim Keating is just one of the courses offered through the Education Justice Project. In the last six years, EJP students at the Danville Correctional Center have been able to study subjects as diverse as robotics, Shakespeare, linguistics, and the Russian Revolution. The director of EJP is Rebecca Ginsburg, an associate professor of education policy, organization, and leadership, who was involved in a similar program at San Quentin while she was a graduate student at the University of California at Berkeley. She recruits ILLINOIS faculty members to share their expertise with the incarcerated men through these for-credit courses. She also oversees EJP’s extracurricular offerings, which include reading groups, a speaker series, a computer lab, workshops, a theater initiative, and English as a Second Language instruction, among other programs. More than 75 volunteers, including faculty, graduate students, and community members, support EJP as program coordinators, instructors, and program evaluators. “Higher education at its best helps people to think critically about themselves and the world and their role in the world,” says Ginsburg. “It encourages self-reflection and questioning, and EJP promotes those skills.” But there’s a broader goal beyond serving each individual student. “We don’t see the program as just educating a few men who then feel better and get smarter,” she says. “We’re a research-oriented university. This gives us the opportunity and the responsibility to produce scholarship that makes the case for providing higher education to incarcerated people and to developing best practices.” For more information on EJP, visit www.educationjustice.net. • Cathy Lockman

P e r s p e c t i v e s FA L L 2 0 1 3

perienced a class where there is greater concentration for all three hours. These men have a deeply held sense of purpose and an appreciation that education ‘leads out’ to something beyond themselves.”

15


[ CONSUMER BEHAVIOR ]

JUGGLING ACT Okay, let’s do the math. There are 50,000 items in the average supermarket. The average supermarket shopper buys 60 items in 26 minutes. That’s 2.3 items bought per minute (and 1,921 items rejected per minute). All of which leaves precious little time to, oh, compare brands or to spend time reading all the nutritional information on the side of the box of Cap’n Crunch your child just dropped in your cart.

T

hat’s where NuVal comes in. And the Aggregate Nutrient Density Index. And other nutritional rating systems that make it simpler for consumers to make wiser nutritional choices in those 26 minutes you’re cruising through those grocery aisles. NuVal, for one, is in some 17,000 stores across the country. The company uses an algorithm to measure the nutritional quality of foods and beverages, rating them on a 1-to-100 scale—the better the nutrition, the higher the score. The scores are displayed on products’ shelf price tags —helping consumers compare not just overall price, but overall nutrition, quickly and easily.

16

NuVal’s algorithm is based on the dietary goals established by the Department of Health and Human Services and the U.S. Department of Agriculture. It quantifies the presence of more than 30 nutrients, both good and bad, as well as the quality of protein, fat, and carbohydrates, and takes into consideration calories and omega-3 fats, too. Other nutritional rating systems communicate their evaluations to the public in a variety of ways. For example, Guiding Stars uses zero through three stars to rate food products; NutriPoints assigns points based on the positives and negatives in foods; Nutrition iQ uses colorcoded tags to denote nutritional values; and the Aggregate Nutrient

Density Index scores foods on a scale of 0 to 1,000, based on nutritional value per calorie.

ALL SYSTEMS GO Madhu Viswanathan, the Diane and Steven N. Miller Endowed Professor of Business Administration, has conducted studies on how consumers use nutrition information. “Having these systems out there and people using them are, of course, two different things,” he says. “NuVal is a good source of information, but you need to be educated to understand what that number means. For many people, numbers will be good shorthand, but for people with lower levels of literacy, a graphic system would be

better. Low-literate people might select only very high numbers, or see the information as something abstract they cannot relate to and, therefore, stay away from it. Not only do such systems need to be well thought out and based on scientific fact, they also must be easily understood and communicated, if they are to be beneficial to the consumer.” The NuVal system, developed by independent nutrition and medical experts from leading universities and health organizations, has come under fire from some food manufacturers. Some companies may be critical because they take exception to the scores their products receive. Others, like General Mills, question the for-profit

“We need to make use of different pieces of information as consumers, but there is a tendency sometimes to look for a magic bullet. So some people might fixate on [NuVal] scores, and that’s the only indicator they will use. They need to use the scores as a complement to other nutritional information, not as the end-all.” Madhu Viswanathan

Perspectives FALL 2013

THE FOOD INDUSTRY, CONSUMERS, AND NUTRITION

17


“What we found is that calories alone don’t influence decision making to a great degree. However, when we added the traffic light symbol, the choices that were made reflected a decreased calorie intake of 70 calories.” Brenna Ellison increase in obesity in the United States from 1990 through 2010 and notes that: • 35.7% of American adults are obese • The obesity rate (17 percent) has nearly tripled since 1980 for children and adolescents • The estimated annual medical cost of obesity is $147 billion • No state met the nation’s Healthy People 2010 goal to lower obesity prevalence to 15 percent • In 2000, no state had an obesity prevalence of 30 percent or more; in 2010, 12 states had such a prevalence

AN APPLE A DAY

GETTING THE GREEN LIGHT Grocery store aisles aren’t the only places consumers make nutritional choices. In fact, Americans eat at restaurants about five times a week. The U.S. Department of Agriculture estimates that every meal away from home increases an adult’s average daily calorie count by about 135 calories. That can really add up, translating into 10 extra pounds each year. It’s one reason why experts like Brenna Ellison, assistant professor of agricultural and consumer economics, are looking at the best ways to help consumers make healthy choices while dining out. The first step is adding calorie information to menus. Ellison says many restaurants are already including these facts, which will soon be required for chains with more than 20 locations as part of the Affordable Care Act. In addition to listing the calories for each item, restaurants will need to include the FDA’s 2000-calorie daily intake recommendation. “The more informed the consumer, the better,” says Ellison, whose research has focused on what information influences consumers’ choices at a restaurant. Along with colleagues at Oklahoma State University, she conducted a study of diners using three different menus—one with no values

18

next to menu items, a second with calories listed, and a third that featured calories plus additional information in the form of traffic symbols. A green light represented a food that was 400 calories or less; a yellow light signaled a choice between 401 and 800 calories; and a red light was used for an item over 800 calories. “What we found is that calories alone don’t influence decision making to a great degree. However, when we added the traffic light symbol, the choices that were made reflected a decreased calorie intake of 70 calories. The effect was most obvious with larger parties of four or more people,” she says, perhaps reflecting peer pressure to make better choices. While there are no requirements for traffic symbols or any information other than calories to be included on menus for the time being, Ellison is interested in broadening her research to see how a total nutrient rating system might influence diners’ choices. “Calories aren’t always the best indicator of overall healthfulness. Ratings that include a broad range of nutritional factors provide a lot of value for the consumer, whether they’re in the grocery store or in a restaurant. Generally, people don’t want to be told what they should eat, but they are happy to have the information and decide how they want to use it.” Cathy Lockman

To combat obesity and its related diseases (heart disease, stroke, some cancers, diabetes, and many other ailments), the government has come up with food pyramids, recommended daily allowances, and assorted guidelines. And companies such as NuVal have developed nutritional assessment systems designed to help consumers make healthier choices. “The obesity trend is stunning,” says Viswanathan, who studies and works with low-income, low-literate populations. “It’s a huge threat to our society. But the focus for many people in the store is not what is the daily nutritional value, but what is the best product I can find in a certain category, such as the best potato chips or cereal. I’m pleased to see in the last decade there is not a singular focus on the daily values. There has to be a more holistic approach to our diet.” For example, he says, if you focus only on products that score in the 90s in the NuVal system, you will not have a well-rounded diet. “You need to compare foods within a category,” he says. For example, if you find that most breads score in the 30s, and you’re a bread eater, you’re not likely to cut out bread. But you can use the scores to make wiser choices.

“Everything in moderation, right?” Viswanathan says. “We need to make sense out of different pieces of information as consumers, but there is a tendency sometimes to look for a magic bullet. So some people might fixate on these scores, and that’s the only indicator they will use. They need to use the scores as a complement to other nutritional information, not as the end-all.”

GOOD FOR COMPETITION Nutritional rating systems not only help consumers make wiser food and beverage choices, they provide a basis for competition among manufacturers. Lower scores will prompt manufacturers to try to improve their products to top their competitors’ products, Viswanathan says. “I’m going to say, okay, how do I change my product to move it up?” he explains. “It makes companies work harder to improve their products.” And that, he adds, is good for consumers. “Accurate information is always a good thing,” he says. “Certainly people need to change their eating habits and become more aware of nutritional values. But systems need to change, too. And nutritional rating systems like NuVal will help.” Tom Hanlon

Fruits and veggies Broccoli – 100 Blueberries – 100 Del Monte Fresh French Green Beans, No Salt Added (canned) – 100 Pineapple – 99 Avocados, fresh – 89 Del Monte Fresh Cut Whole Green Beans (canned, with salt) – 47 Snack foods Kellogg’s All-Bran Crackers Bite Size Baked Snacks – 35 Pepperidge Farm Goldfish Flavor Blasted Cheddar Snack Crackers – 20 Pringles Reduced Fat Sour Cream & Onion Crisps – 9 Crunchy Cheetos – 4 Keebler Townhouse Bistro Multi Grain Crackers – 3 Lays Stax Original Potato Crisps – 3 Breads and cereals Hodgson Mill Unprocessed Wheat Bran – 100 General Mills Whole Grain Cheerios – 37 Pepperidge Farm Whole Grain Bread 100% Whole Wheat – 36 Healthy Choice Hearty 7-Grain Bread – 34 Wonder Classic White Sandwich Bread – 28 Sara Lee Honey Wheat Soft and Smooth Bread – 27 Cap’n Crunch Sweetened Corn and Oat Cereal – 10 Seafood and meats Atlantic Salmon Fillet – 87 Shrimp – 75 Turkey Breast (skinless) – 48 Chicken Breast (skinless) – 39 Ground Sirloin (90% lean) – 30 Oils and shortening Canola Oil – 24 Shortening – 1

Perspectives FALL 2013

model of the system, which charges grocery stores for its use, and its proprietary algorithm, which is not shared with the public. Other rating systems have their critics as well. “Any system can be criticized since it is an effort to summarize complex information,” Viswanathan says. “You don’t want to throw out the indicator because it has some criticisms. There’s no magic indicator out there. I think NuVal provides valuable information to consumers.” The NuVal system—and other nutritional rating systems and tools —was devised with people’s health in mind. The Centers for Disease Control (CDC) reports a dramatic

KNOW THE SCORE With the NuVal system, foods receive a score on a scale of 1 to 100. The higher the score, the better the nutritional value. NuVal scores appear on the product shelf, not on the product itself. This system is currently found in more than three dozen grocery chains across the country, including Meijer, Kroger, and Festival Foods.

19


Norma Lauder AND

D IRECTOR

OF THE

MS TAX P ROGRAM

101 3

The number of University of Illinois accounting professors who wrote the textbook she and all other students used— Advanced Accounting: An Organizational Approach, written by Norton Bedford, Kenneth Perry, and Arthur Wyatt, first published in 1961

170 The annual cost of tuition charged during her sophomore year at the University; annual room and board that year (1968–1969) was $935

10

The number of days during senior year that she served as an intern in the tax department at Arthur Andersen & Co., after which she was offered a full-time position

18 & 3 The number of years she headed the Tax Department at First Chicago Corporation after leaving Arthur Andersen & Co. and the number of mergers First Chicago Corporation went through during that time, first with NBD, then Bank One, and then JPMorgan Chase

1

The total percentage of female partners at Arthur Andersen & Co. in 1982 when she was one of eight women promoted to partner; that brought the total number of female partners to 16 of the 1,600 total partners worldwide

20

The Business class that all freshmen in the College take and for which she serves as a section coach, sharing real-world experience with student leaders

1971

Norma stands in front of the Arthur Andersen Gallery, housed in BIF and dedicated by the College this fall. The artifacts in this exhibit, including the firm’s original doors, shown here, detail the history of accountancy through the story of one of the country’s earliest and largest firms. The gallery salutes the vision of those who helped shape the profession and provides valuable historical context for ILLINOIS students as they look to make their mark on the future of accountancy.

The year she served as treasurer of Beta Alpha Psi, the accounting honorary founded at the University of Illinois in 1919

11 & 133 The number of women who graduated from the University of Illinois in accounting in 1971 and the total number of accounting graduates that year

8 & 206 The number of years she has served as director of the MS Tax Program and the number of program graduates

P e r s p e c t i v e s FA L L 2 0 1 3

ACCY ’71

[ 60-SECOND PROFILE ]

21


[EMPLOyEE BENEFITS ]

An Ounce of Prevention

“Firms have typically offered cash bonuses to participate in wellness initiatives, but have regularly struggled with low compliance.” David Molitor

22

“There are three major issues: reducing healthcare costs, increasing productivity, and making workers value a firm because they feel the firm cares about them.” David Molitor

crease ($3.1 trillion, or 18 percent of our economy) in healthcare spending next year. About half of companies with 50 or more employees, and about 80 percent of large firms, have a wellness plan in place. About twothirds of those plans are incentivized with money, all with a focus on having healthier employees—and cutting down on healthcare costs. And with good reason: The American Psychiatric Association reports that depression alone costs companies $43 billion per year, and stress-related problems cost $80 billion. “What CVS is doing isn’t anything new,” Molitor says. “They’re trying to reduce health costs. These wellness programs have become quite popular, especially among large firms. It’s a preventive measure. Through the screening, people might find out that they have a health issue they can manage or resolve before it escalates.”

A CARROT OR A STICK? Molitor points out that there are two flavors of wellness programs: screening and interventions. The CVS approach employs screenings. Interventions offer wellness plans and classes, and sometimes include reduced fitness center rates that employees can take advantage of. And there are two approaches to framing a wellness initiative: negatively (a loss of money if you don’t comply with the program, which is the CVS approach) and positively (a bonus earned if you participate). As Molitor puts it, the incentive can be framed as a carrot or a stick. “Firms have typically offered cash bonuses to participate in wellness initiatives, but have regularly struggled with low compliance,” Molitor says. “As a result, some firms like CVS have opted for the negative approach. When threatened with losing money, employees might be more apt to comply.”

It’s all in how it’s presented, Molitor says. For example, CVS could have said they were going to penalize employees $600 if they don’t comply—which was their approach—or they could have said they’re going to give employees a $600 bonus if they do comply. But in the latter situation, behind the scenes, many companies might first raise their premiums by $600. “It looks like a bonus, but it’s really not,” Molitor says. “It turns out the same either way.”

BENEFITS, COMPLIANCE, AND PRIVACY Employers want to know their return on investment for their wellness programs, and Molitor says while it can be easy to figure out the program costs, it’s more challenging to calculate the benefits. “The benefits include reducing insurance costs and sick days,” he says. “There are three major issues: reducing health-

care costs, increasing productivity, and making workers value a firm because they feel the firm cares about them.” A central challenge revolves around compliance. “All firms are trying to figure out how to raise compliance,” Molitor says. The move among companies to do what CVS is doing—penalizing people for not complying—is growing. That, Molitor says, is motivated by loss aversion—the idea that people prefer avoiding losses to acquiring gains. Another issue companies must be aware of is the privacy concerns of its employees. In an age where hackers can make their way into a system, privacy is always a concern, Molitor says. Employees are also worried about confidentiality, fearing that employers will see their medical records and fire them if they’re costing too much money. But CVS, as with many other employers,

uses a third-party firm to handle all the records. The employers don’t see, or have access to, individual records; they only receive aggregate reports from the third-party firm. “Companies that have been implementing wellness programs haven’t always done a very good job of communicating with employees,” Molitor says. “They need to think about the hurdles regarding compliance. Is it privacy concerns? Is it the location of the screening place? Is it forgetting to schedule appointments? The research here is quite sparse. And because companies are struggling with compliance, we’re seeing some experimentation in framing wellness incentives as a carrot or a stick.” Tom Hanlon

Perspectives FALL 2013

I

n March, CVS Caremark announced that its employees must submit to WebMD wellness reviews, including checking weight, blood pressure, blood sugar levels, body fat, and cholesterol—or pay a $50 monthly penalty on their premiums. The move is partly in response to the skyrocketing costs of healthcare. But it wasn’t received with open arms by all employees, or by privacy groups, who called the new plan “coercive and invasive.” But David Molitor, assistant professor of finance, doesn’t see it that way. “This isn’t as coercive as it may sound,” he says. “CVS could have raised their healthcare premiums by $600 annually per employee. That would have been coercive. You could say this is a great save.” Companies have long been concerned with healthcare costs. The Centers for Medicare and Medicaid Services project a 6.1 percent in-

23


[CORPORATE STRATEGy]

 

Grounded? WILL THE GOVERNMENT SAy “NO” TO ANOTHER MERGER? For Viswanathan, it’s a way to begin to develop global citizens? and to fulfill what he considers his “larger purpose with teaching at ILLINOIS by creating early and later integrative experiences at both graduate and under-

24

One concern of the Justice Department is that the remaining carriers could collude over fees charged for services. But if there are five competitors, it’s tougher to get all the airlines to play along. FIGHTING TO SURVIVE The government’s case comes as consumers have become increasingly dissatisfied with airline service and pricing. To save money and boost revenues, airlines have squeezed more seats on planes, dropped routes, and created an á la carte system of pricing that charges passengers for things they used to get free. “The government is concerned that this merger would allow the airlines to further reduce capacity and raise prices,” says Clougherty. On the other side of the debate sit the airlines. “To be fair, the airline industry needs profits to survive,” Clougherty says. “Even with less service and higher fees, their profit margins are slim.” Major U.S. carriers lost money in six of the last twelve years, according to federal data. During that time, American and US Airways collectively lost $13.7 billion, Bloomberg reports. In that same time period, US Airways went bankrupt twice. American is currently in bankruptcy. The merger would leave just four major carriers in control of roughly 80 percent of the U.S. do-

mestic market, Clougherty says. “One concern of the Justice Department is that the remaining carriers could collude over fees charged for services. But if there are five competitors, it’s tougher to get all the airlines to play along.” American and US Airways dispute contentions that consumers will suffer if the deal goes through. They maintain that the merged airlines, which would fly under American’s name, will generate $500 million in benefits for consumers, in part because the merged carriers would create strong competition for industry giants United and Delta.

THE URGE TO MERGE Airline consolidation has already consigned a number of well-known names to the history books. In recent years, Northwest, Continental, America West, AirTran, and TWA combined with other airlines, leaving just five major carriers. They are American, US Airways, United, Delta, and Southwest. US Airways would have disappeared years ago if Justice Department objections hadn’t ended their proposed mar-

riage with United in 2000 and with Delta in 2006. If the current proposed merger takes place, American would have a larger domestic network to feed passengers into its international flights. “The international flights are the plums of the airline business,” Clougherty says. “There’s less competition on international flights. They make more money there.” Of course, new carriers spring up from time to time, adding a measure of competition. Southwest, for instance, rose from obscurity in the 1980s with its no-frills, low-fare formula. But the airline industry is dominated by old-line carriers that operate efficient hub-and-spoke systems in which smaller cities like Champaign feed passengers into central hubs such as Chicago and Dallas. “The high cost of setting a huband-spoke system up is a barrier that keeps competitors out,” says Clougherty. “So the newcomers, like JetBlue and Virgin America, tend to connect high-density cities. They don’t fly to very many destinations.”

WILL THE DEAL FLY? Clougherty says many people didn’t think the Justice Department would object to this merger because the two airlines seldom competed head-to-head on direct flights. But on indirect flights, which have at least one stop, there are more than 1,000 instances where US Airways’ indirect routes compete with Amer-

Perspectives FALL 2013

I

f Joseph Clougherty needs to fly anywhere in the world from Willard Airport, just south of Champaign, he has one air carrier to choose from—American Airlines. In the past, as many as four carriers flew from the airport, which serves the University of Illinois and surrounding area. But the airline industry has contracted, says Clougherty, associate professor of business administration and specialist in mergers and antitrust merger policy. There are now fewer flights, fewer employees, and most significantly, fewer carriers—and not just at Willard. Since the turn of the century, some of the biggest names in aviation have disappeared in a flurry of airline mergers and acquisitions. Now the U.S. Department of Justice wants to nix the proposed merger of American Airlines and US Airways. Not only would the deal form the world’s largest airline, says Clougherty, it would also lower the number of major domestic carriers to four. As recently as 2001, there were ten large domestic airlines. The government asserts that consumers would get the worst of the deal amid diminishing competition. Often, airlines drop merger plans when the Justice Department objects. In this case, however, American and US Airways are taking their case to federal court, hoping for a decision that will allow the merger to proceed.

25


Mergers and acquisitions by individual carriers since 1985 have changed the face of the airline industry. 1985 Southwest Airlines  Muse Airlines 1986 Delta Airlines  Western Airlines 1986 Northwest Airlines  Republic Airlines 1987 American Airlines  Air Cal 1987 TWA  Ozark Air Lines 1989 US Air  Piedmont Airlines

ican’s routes. “US Airways has been very aggressive in pricing indirect flights that compete with American,” he says. In fact, The Washington Post reports that the government uncovered emails and other evidence suggesting that those low fares will be ditched once the merger is complete. Service to Reagan National Airport in Washington, D.C., is another point of contention. If the merger goes through, American would control 70 percent of the flights at Reagan, an airport that is used by those

took place,” Clougherty says. “And the Great Recession has heightened concerns over employment.” Early projections say up to 7,000 jobs could vanish in Phoenix and 700 more would be lost in Pittsburgh, for example. But Chicago, where American has more than 9,000 employees, may escape major job losses, a Chicago Tribune analysis concluded. American is now the number 2 carrier flying from O’Hare, with roughly 27 percent of the market. For the most part, airline consolidation has taken place over the

1991 American Airlines  Eastern Airlines (Latin American Routes) 1991 American Airlines  TWA (Heathrow Routes) 1991 Delta Air Lines  Pan Am (Shuttle and Atlantic Routes)

2001 American Airlines  TWA 2005 US Airways  America West Airlines 2009 Delta Air Lines  Northwest 2010 United Airlines  Continental Airlines 2011 Southwest  AirTran Airways 2013 American Airlines  US Airways Proposed Source: A4A - an airline industry association

26

SENIOR ($10,000 – $24,999)

• • • • • • •

• • • • • • • •

Archer Daniels Midland Company BP America Inc. Deloitte LLP Ernst & young LLP KPMG LLP PricewaterhouseCoopers LLP State Farm Companies

LEAD ($25,000 – $49,999)

1997 AirTran  Value Jet

1999 Delta Airlines  Comair

CENTURY ($100,000 +)

• Busey Bank

1993 Southwest Airlines  Morris Airlines

1999 Delta Airlines  Atlantic Southeast Airlines

An investment in the education of future business leaders

PRINCIPAL ($50,000 – $99,999)

1992 United Airlines  Pan Am (Latin and Caribbean Routes)

1999 American Airlines  Reno Air

CORPORATE PARTNERS 2013–14

in the House and Senate, the Washington bureaucracy, and tourists. “It’s a politically sensitive airport,” says Clougherty. “There’s no doubt that if the government reaches a settlement to allow the merger, Reagan National would be part of it. American would be forced to sell off a lot of its slots at Reagan to preserve competition.” The third sticking point is jobs. Clougherty says the District of Columbia as well as seven states including Texas, Arizona, Michigan, and Pennsylvania have joined forces with the Obama administration to oppose the merger. “The states are concerned about employment, which could shrink. A lot of jobs were lost in Minneapolis when the Delta-Northwest merger

last decade with federal consent, allowing big carriers to grow. “The Department of Justice has allowed a number of mergers in the last five or six years, including the United-Continental merger,” says Clougherty. “I think maybe they would like to have that one back.” Now the government is saying “no” to the American-US Airways deal, which could signal an end to the recent string of airline consolidations, Clougherty says. “This merger, if successful, will surely be the last airline merger for some time.” • Doug McInnis Sources include The Dallas Morning News, CNNMoney, The New York Times, the Pittsburgh Post-Gazette, and the Charlotte Observer.

• John Deere & Company

Abbott Laboratories Allscripts Healthcare Solutions Baker Tilly Virchow Krause, LLP The Boeing Company Grant Thornton LLP Mill Creek Life Sciences, LLC Motorola Solutions Inc. Wahl Clipper Corporation

PARTNER ($5,000 – $9,999) • • • • • • • • •

AGCO Corporation Crowe Horwath LLP Metropolitan Capital Navigant Consulting, Inc. Shell Oil Company Telephone and Data Systems Underwriters Laboratories Inc. Union Pacific Railroad Whirlpool Corporation

P e r s p e c t i v e s FA L L 2 0 1 3

Mergers Take Flight

27


[ THE MAIN EVENT ]

MARKING A MILESTONE estate program at ILLINOIS, the re-

real estate and supports their pro-

Rho Epsilon, the Student Real

members of the organization, in-

union provided an opportunity for

fessional development through Rho

members; Andrew Wiedner ’04, president of the Illini Real Estate Forum, shared

I

honored distinguished charter cluding Don Schaumberger, Gene

students and alumni to participate

Epsilon opportunities and other ini-

information about the group's professional development and scholarship

photo, along with their advisor,

Stunard, and Sheldon Good for

in industry roundtables. These dis-

tiatives. Alumni of the College are

activities; attendees networked prior to the luncheon; the event concluded with

Roger Cannaday. This fall five mem-

their achievements and careers in

cussions were led by graduates of

also encouraged to join the Illini

roundtable discussions; distinguished guests included Don Schaumberger ’56,

bers of the group joined Cannady,

the real estate industry. Robert

the College who are also experts

Real Estate Forum (IREF) to con-

Gene Stunard ’55, Sheldon Good ’55, and David Harvey, son of Robert Otto

who is still the advisor, and more

Otto Harvey, an assistant professor

in a variety of fields, including real

nect with more than 400 other

Harvey, an assistant professor at ILLINOIS and the founder of the Rho Epsilon chapter and the College's real estate program.

Estate Club, posed for this

than 100 other guests for a 50-year

at ILLINOIS who founded the real

estate appraisal, brokerage, devel-

ILLINOIS graduates in the real es-

celebration of Rho Epsilon.

estate program and Rho Epsilon,

opment, law, mortgage lending,

tate industry. For more information

was also honored posthumously.

property management, and REITs.

on IREF, visit www.uire.org.

The reunion luncheon was held on September 13 at Petterino’s Restaurant in Chicago. The event

In addition to celebrating the

The College offers students a

longevity of the club and the real

rigorous curriculum in finance and

At left, Rho Epsilon, 1979. At right, 1979 Rho Epsilon alumni in attendance at the 50-year celebration. From left, Joanne Guercio Campanile (see 1979 photo, first row, third from the left); Michael Jebb (first row, second from the left); Roger Cannaday (first row, first on the left); Ross Berman (last row, last on the right); Susan Zimmerman Ulman

P e r s p e c t i v e s FA L L 2 0 1 3

From top to bottom: Rho Epsilon alumni welcomed the distinguished charter

n the fall of 1979, 36 members of

(second row, seventh from the left); and Jaime Javors (third row, sixth from the left).

28

29


[ TAxES & AUDITING ]

Paying the Price

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“The largest firms are audited by the IRS every year. These firms tend to represent the largest portion of the corporate tax base, and the government wants to make sure it gets the taxes that it should.” Michael Donohoe

“The more you avoid taxes, the more you’re going to pay for audit services,” he says. But the aggressive approach to lowering the tax bill can still pay for itself. “It’s likely a small price to pay. It’s certainly possible to save millions of dollars, or more, over what peer firms are paying in taxes.” The study, entitled “Does Corporate Tax Aggressiveness Influence Audit Pricing?” was conducted with co-author W. Robert Knechel, professor of accounting at the University of Florida. It is scheduled for publication in the journal, Contemporary Accounting Research. LOWER TAXES, HIGHER AUDIT COSTS Audit firms charge a premium in part because it takes more time and expertise to audit the books of a firm that follows an aggressive

low-tax policy. “When I worked for a Big Four accounting firm, I saw that a tax-aggressive policy meant more work for the auditor,” Donohoe says. For instance, the firm’s audit team might meet with Donohoe about details related to one of his corporate tax accounts. “This clearly involved more work because it involved both the audit team’s time and my time as the tax accountant,” he says. In addition, auditors build in fees to cover potential costs to the audit firm if something goes wrong—if, for instance, the IRS successfully challenges a tax strategy. In such cases, the auditor might get sued by shareholders or face a regulatory fine for not doing something correctly, Donohoe says. And if auditors uncover a tax strategy that does not appear legal, they might spend time trying to dissuade the client from using it.

Corporations have an ample incentive to lower their tax bills. If they succeed, it can boost the bottom line, sometimes substantially. Apple Computer, for instance, saved billions of dollars by shifting income to foreign subsidiaries in low-tax countries like Ireland. The New York Times reported some of these subsidiaries had no employees and were run by high-level corporate managers at the company’s U.S. headquarters. Last year, Reuters reported on a study by the U.S. Government Accountability Office (GAO) that found that 72 percent of all foreign firms and 57 percent of U.S. companies that do business here paid no federal taxes for at least one year between 1998 and 2005. The GAO cited three factors that allowed firms to escape taxation: operating losses, tax credits, and shifting corporate income to lowtax countries.

HEAD TO HEAD WITH THE IRS Sometimes the federal government balks at low-tax measures. With a national debt approaching $17 trillion, the government wants to collect every nickel it can. So, questionable tax shelters and other low-tax mechanisms may be challenged by the Internal Revenue Service. Large firms are particular targets. “The largest firms are audited by the IRS every year,” Donohoe says. “These firms tend to represent the largest portion of the corporate tax base, and the government wants to make sure it gets the taxes that it should. For these firms, it doesn’t matter if they are aggressive about their taxes or not. They’re going to be audited.” When the IRS finds problems, it’s usually a civil matter. Criminal prosecution is unlikely unless

there appears to be a deliberate effort to break the tax laws, Donohoe says. But even civil settlements can be costly when a corporation loses a dispute with the IRS. That’s what happened a few years ago when the IRS ruled that a tax shelter used by corporations to avoid $6 billion in taxes was illegal. “These companies were busted,” says Donohoe, “and ended up paying the taxes, along with legal fees, interest, and penalties.”

Doug McInnis

P e r s p e c t i v e s FA L L 2 0 1 3

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o business executives want their companies to pay more taxes than they have to. But some managers are particularly aggressive about slashing the corporate tax bill, sometimes cutting it to zero. New research from the College of Business finds there is a price to pay for lower taxes, and that price comes in the form of a higher bill from the firm that audits the books. Michael Donohoe, assistant professor of accountancy and a co-author of the study, says taxaggressive firms pay about six percent more on average for an audit than firms that are less aggressive in keeping their tax bills down. Depending on the scope of the audit, that extra fee can range from $6,000 to $197,000.

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[ THE REASON WHy ]

WHO Sheldon F. Good, founder of Sheldon Good & Company and Good Realty Group LLC

REAL ESTATE STATE OF MIND

WHAT Responsible for popularizing the idea of the real estate auction and other innovative marketing techniques WHERE In Chicago as well as across the country and the world, Good has been a leader in the real estate industry

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But Good wasn’t deterred. “I went to auction school, to auto, cattle, and Dutch flower auctions. I studied how they worked and how those principles could be applied to conducting a successful real estate auction from listing to closing. The purpose of the auction is to design it in such a way that you attract strong, serious buyers and make a sale at a good price.” And that’s just what Good has done to market billions of dollars of commercial, residential, and industrial properties over the years, including golf courses, schools, condominium units, department stores, and high rise office and residential buildings, like the Trump Plaza of the Palm Beaches. But the first auctions he called weren’t quite so high profile. When Good introduced the concept in the United States, one early project was auctioning a chain of new Minnie Pearl fried chicken restaurants in downstate Illinois. He also conducted a successful sale of a 300,000square-foot industrial building in Minnesota to Tonka Toy. “I went to Minnesota and ordered the billboardsize signs myself,” Good says. “By the time I got back to my office in Chicago, the buyer was calling. Tonka didn’t want to wait because they needed it to warehouse their holiday products.” It proved to Good that what he believed about the viability of auctions was true.

“I can’t sell someone something they don’t want, but I can help match people who have specific needs to sell and buy properties. And this first sale was a perfect example.” Good also believes that auctions benefit realtors. “Auctions are a great vehicle for sales even when times are good, but they can really help realtors survive in tough times,” he says. “When the government restricts the flow of cash and interest rates rise, real estate sales drop. Auctions provide a great opportunity to make deals in a down market.”

A REAL ESTATE PROBLEM SOLVER Sales may be his career, but teaching is in his blood. After founding and leading Sheldon Good & Company for more than 35 years, he sold it to an employee group and founded Good Realty Group LLC (www.thegoodrealtygroup.com), his consulting company that assists real estate auctioneers and brokerage firms as well as property owners and buyers. “Auctions are a high-pressure business, where you learn on the job,” says Good. “Large numbers of properties that go up for auction don’t sell. I offer my experience in marketing and conducting auctions to help both buyers and sellers.” Mentoring others has always been a priority for Good, who never passes up a chance to talk with stu-

dents at ILLINOIS and other leading universities. “I hope I offer a view and a vision as well as networking opportunities that will assist young professionals on the path to a successful career in real estate.” Good’s leadership roles and accolades in the industry certainly speak to his own success. He was named the world president of the International Real Estate Federation in 1996, the first American to serve in that role in several decades. He also served as president of the National Association of Realtors’ Commercial Investment Real Estate Institute and the Chicago Association of Realtors and has been recognized by industry organizations across the world for his service to the profession. The University of Illinois presented him with the Lifetime Alumni Achievement Award in 2000. “My classes at the University played a very big part in my career and taught me how to become a real estate problem solver,” says Good. “They weren’t teaching me how to make money, they prepared me for how to think, how to question, how to come up with solutions, and how to choose the right solution for a given problem. I always tell students to take advantage of that time to be prepared so that when an opportunity presents itself, like the auction idea did for me, they’ll be ready to think creatively, to offer solutions, and to achieve success.” Cathy Lockman

WHEN Graduated from ILLINOIS in 1955 and sold his first property a year earlier WHy Good saw the real estate auction as a way to help match people who have specific needs to buy and sell properties

Perspectives FALL 2013

S

heldon F. Good ’55 has covered a lot of real estate—and he’s sold a lot of it, too—in the last 59 years. Good was among the earliest graduates to earn a degree in marketing and urban land economics, and he has been in on the ground floor of many other opportunities ever since. With real estate sales in excess of $8 billion, Good has earned a reputation as an international leader in the field not only because of his success and service to the industry but because of his innovative marketing techniques, including the nowfamiliar real estate auction. “I devised the idea of the real estate auction in the 1970s as a strategy for solving problems for sellers,” says Good, who at the time had already distinguished himself in the real estate business. “I saw it as a way to help match people who have specific needs for buying and selling properties.” But what today is an accepted and successful practice in commercial real estate was considered ill-advised 40 years ago when Good launched the idea. “At the time, others in the business thought I would risk my reputation with such a strategy. They thought that the auction technique itself couldn’t be used to market nondistressed properties. They asked me if I was going to wear a cowboy hat and boots.”

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[

PARTING SHOT

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The solitude of the Business Instructional Facility courtyard on a sunny fall afternoon can be a stark contrast to the bustling activity inside. The native prairie plants and sedge meadow, along with other unique architectural and sustainable elements, create a serene environment that attracts students, faculty, and other interesting visitors, like the one shown here. This landscaping further distinguishes our state-of-the-art building and contributes to its LEED platinum rating.


Perspectives - Fall 2013