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

Spring 2013




knowledge, but how we teach is changing. From market labs to Maker Labs to flipped

is learning new tricks.

accountancy classrooms where students watch video lectures outside class and do

homework problems in class with the professor, we’re responding to changes in business,

I’m flipping an Executive

changes in secondary education, and new ideas on how to address tomorrow’s issues. Even this old dog is learning new tricks. I’m flipping an Executive MBA course that I’ve

MBA course that I’ve taught for 20 years, and the College’s faculty is rapidly going

taught for 20 years, and the College’s faculty is rapidly going beyond even that. The pace of technology and new teaching method adoption is amazing to see. We’re offering our first course on Coursera, Madhu Viswanathan’s “Understanding Subsistence Marketplaces," and we’ve made it a strategic priority to take our online education to the next level. Much of this change is driven by today’s students. As digital natives, they are learners who are comfortable and proficient with technology. An environment with a strong digital component engages them, encourages their responses, and helps them process and absorb

beyond even that.”

information. The commitment of our faculty to provide such an environment through innovative, technology-enhanced teaching methods drives the adoption, and the success, of these endeavors. As the History Lesson on page 20 of this issue of Perspectives suggests, this commitment is methods, we realize new opportunities. And, even more importantly, we teach our students the value of doing the same. Sincerely,

Josef and Margot Lakonishok Endowed Dean


Meet Your Maker


Weathering the Storm

What does 3D printing mean for business?

Why is disaster aid so expensive and what can we do about it?


Turning Negatives to Positives Negative media coverage acts as a trigger for strategic change.


Spotting Trouble Earnings guidance is an early warning system for detecting when a stock may be in trouble.


God Save the Queen's Brand The British royal Family builds a brand and builds commerce, too.


How Fast is Too Fast? High-frequency trading changes the rules.

What Would You Do? What strategies are most effective for teaching ethics?

DEAN Larry DeBrock MANAGING EDITOr Tracy McCabe EDITOr Cathy Lockman


CONTrIBUTING WrITErS Tom Hanlon Cathy Lockman Doug McInnis


PHOTOGrAPHErS Tricia koning Thompson • McClellan Photography L. Brian Stauffer College of Business at the University of Illinois at Urbana-Champaign


DESIGNEr Pat Mayer



ON THE COVER The makers hold the future in their hands. The potential of 3D printing to initiate change for business is being called a "new industrial revolution." And the College of Business is part of it with the opening of its MakerLab. It's a place where students become makers, getting hands-on experience with the technology.




Larry DeBrock

Spring 2013


nothing new to our faculty or our College. By embracing these changes and adopting new


t ILLINOIS, what we teach remains strongly rooted in the fundamentals of business


“Even this old dog

60-Second Profile




History Lesson


The Main Event


reality Check


100 Words or Less


The reason Why


Parting Shot

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



Print an earbud adapter for a comfortable fit when listening to music

Make a belt buckle that includes your initials


Print your own uniquely designed watch band

Duplicate your keys

Buy shoes printed to fit your foot exactly 2

Buy a customized mouth guard before heading to the hockey rink

printer at home with his son has now developed into the first 3D printing lab in any Business school. “Students saw the printer in my office and were very interested in it,” he says. “I thought they would benefit from being able to interface with the technology and to consider how the opportunities presented by 3D printing have implications for business. The idea for the MakerLab grew from there.”

receive a customized bone implant after your skiing injury

Although 3D printing techniques vary, it basically is a process in which a material, plastic in the case of the MakerLab printers, is successively layered in a way that creates a threedimensional object. The technology itself is not new, but its more recent accessibility has created a new movement. “Industrial 3D printing is more than two decades old,” says Vishal Sachdev, clinical professor of business administration. “But recent advances in hardware, materials, and software have made it more accessible to a larger market. The diffusion of this technology is democratizing innovation by allowing all of us to become ‘makers.’”

Pe r s p e c t i ve s S P R I N G 2 0 1 3



hen students attended the Open House for the newly established MakerLab in the College of Business, they had an opportunity to meet the makers. Next, they’ll have a chance to become one. That’s because the MakerLab, which opened this January, is a place where students gain hands-on experience with the 3D printing technology that is creating a new wave of “makers.” It’s a movement that Wired magazine and others are calling “a new Industrial Revolution.” That’s a strong statement for a movement that a lot of people don’t know much about. But as Aric Rindfleisch, John M. Jones Professor of Marketing, explains, the technology can significantly impact the design and manufacture of products by “blurring the lines between the physical and the digital. And that holds the potential to dramatically alter the relationship between consumers, manufacturers, and retailers.” How does the technology do that? Who are the makers employing the technology? And what does all this mean for business? Two years ago, Rindfleisch began exploring those questions. What started with him assembling an early-model 3D


Able to create new markets for customization will you be.

Encounter intellectual property issues and questions, you will.

Able to bring new products to market quickly will you be. See on-demand stock replacement possibilities, you will.

To eliminate or lower shipping costs you might be able.

Have the opportunity to envision unique products and business models, you will. Hmmmmmm.

Create entrepreneurial opportunities, you will.

Much of that has to do with the smaller size of the printers and the smaller price. While commercial 3D printers as large as a refrigerator can cost more than $50,000, desktop-size options, like those in the ILLINOIS MakerLab, cost about $2,000, with cheaper options available for between $400 and $600 as well. These smaller versions allow makers to download a design for an object from the Internet, or to de-

sign it themselves using 3D modeling software, customize it, and print it. Or if you have the right equipment, you can scan an object and print it. The results can be anything from a simple plastic whistle to a smartphone case to a replacement part for a knob on your stove. Makers are constrained only by available designs, the size of the build plate on their machine, and their imagination.

All signs indicate that the emerging maker movement is a new model that is potentially quite threatening to the current practices of most retailers. Aric Rindfleisch 4

COURSE CREATION According to Rindfleisch, that focus on product design, manufacture, and innovation makes a 3D lab a perfect place for students and faculty to explore important business issues within a new framework. “The vision for the Lab has three parts,” he says. “The first is the top-down, professor-led courses and projects that focus on innovation. The second is the student-led initiatives, with student groups organizing events and competitions that involve the technology and the creation of things we can’t even imagine yet. And third is faculty and Ph.D. research that examines the broad maker movement.” A course scheduled to begin in the Spring of 2014 is one of those professor-led initiatives. Rindfleisch describes it as an integrative course that will include teams of three students—one from business, one from design, and one from engineering— who will work together to create an idea for a new product, design it, create a prototype, and develop a business plan to sell it. Sachdev, the director of the ILLINOIS MakerLab, says that such a course will provide a variety of opportunities for students. “It will introduce them to a new way of prototyping, designing, and manufacturing. This exposure to the full product life cycle will develop their

entrepreneurial skills as well. Students will develop the capability to create new products and new business models in an interdisciplinary team.” Matt Sherburne, a lecturer in materials science and engineering who plans to be involved in that course, sees a variety of benefits as well. “The course will allow interaction and communication across disciplines,” he says. “This is often where the biggest breakthroughs are made, when people with different backgrounds work together rather than in isolation. We have good reason to believe this technology will take off, so it’s important that we expose students to it.”

uct development, to alter the design of current products to better meet their needs.” But just because individual makers create items on a small scale doesn’t mean they can’t have a big impact. “When you provide people with the chance to experiment with this technology, you have no idea what they will come up with,” says Sherburne. “Sure, some of the products might have little practical value, but there’s also the possibility that someone will come up with a brand new product or a breakthrough idea that can be built on. Big ideas often start with very small steps, and that’s what this type of disruptive technology allows for.”

MAKING ADJUSTMENTS As interesting as this technology is to consumers and as important as it is to student learning, 3D printing has equally significant implications for retailers, manufacturers, and entrepreneurs.

“All signs indicate that the emerging maker movement is a new model that is potentially quite threatening to the current practices of most retailers,” says Rindfleisch. However, he continues, “the potentially disruptive set of threats, if carefully approached, could present retailers with sizeable opportunities.” He points to Staples, a retailer that has added 3D printing to its list of customer services. Consumers who don’t have a 3D printer can email their designs to Staples, come in to the store and pick them up, and, Staples hopes, buy something else while they’re in the store. Rindfleisch also points to the recent emergence of online retailers, such as,, and, all of which sell unique 3D products created by customers. “These online 3D manufacturer-retailers defy traditional business models by engaging in little in-house product development, having almost no advertising, and carry-

SMALL STEPS, BIG IDEAS Just how is this technology taking off? For the user of the desktop 3D printer, much of the “making” is for the personal pleasure of creating something, like jewelry or small toys or artwork. “As consumers, we often settle for the products that are offered to us,” says Rindfleisch. “But 3D printing allows us to envision our own products, our own creations, our own solutions, and that’s the promise of the technology.” Sachdev agrees, adding that: “3D printing provides the bridge to make it easier for consumers to experiment with prod-

Big ideas often start with very small steps, and that's what this type of disruptive technology allows for. Matt Sherburne

3D printing provides the bridge to make it easier for consumers to experiment with product development, to alter the design of current products to better meet their needs. Vishal Sachdev

ing no inventory, yet they are gaining increased attention and expanding rapidly. And retailers who alter their business model to capitalize on consumers being able to print objects at home could also find a new niche. “For instance, instead of, or in addition to, storing and selling common physical objects, such as pencil cases and desk organizers, office retailers could sell the digital designs to these objects and have consumers print them at home,” says Rindfleisch. Adjusting to the changing role of the consumer as a buyer to the consumer as a maker requires that businesses be nimble. “When people have the opportunity to experiment with technology, it creates new demand even if it reduces demand somewhere else,” says Sachdev. “That might mean the retailer or manufacturer must respond to the demand for higher-quality materials or for new services built around a new product. And then if that product gains scale, it means being ready to respond to the new opportunities that product represents.” Manufacturers, too, will need to adjust to the maker trend. “Some

might be able to stop stocking lowvalue replacement parts that can be made with commonly available materials,” says Sachdev. “Instead, they could make designs for those parts available online, and the consumer can purchase the design and print out the part themselves. That’s more convenient for the consumer and makes the manufacturer more efficient because they can then focus their efforts on selling high-value items.” Sherburne agrees. “3D printing presents an opportunity for a whole new way to approach manufacturing,” he says. “It will no longer be the Henry Ford assembly-line approach. It will be more customized and personalized and allows firms to manufacture what people want when the customer wants it. Will manufacturers need a giant warehouse full of stock in the future? I think we’ll likely be looking at manufacturers printing many products as they need them instead of producing, stocking, and inventorying them. This approach minimizes waste, and that’s another part of the promise of this technology.” Cathy Lockman

Pe r s p e c t i ve s S P R I N G 2 0 1 3




Weathering the

“We actually do fairly well with rescuing people afterwards. But we do a bad job of preparing for the disasters before they strike.”


n the aftermath of a natural disaster, the focus is to help those in the heart of the storm rebuild their lives. As we’ve seen with Hurricane Katrina and most recently with Superstorm Sandy, providing that relief is often a slow and laborious process. It’s also a very expensive one. Damage estimates for Sandy are nearing $40 billion, and Katrina was more than double that. With the costs so high and the incidence seemingly more frequent, what are the obligations that individuals, insurance companies, and the government have for paying the bills? Research conducted by Tatyana Deryugina, assistant professor of finance, examines new solutions for financing disaster relief and for adequately preparing for disasters in the first place. Part of the problem is that so many people are underinsured for a natural disaster.


“People can be very risk-averse,” Deryugina says, “but when it comes to taking out insurance against big risks such as natural disasters, they are reluctant to do so.” Many have an “it-won’t-happen-to-me” mentality even when they live in high-

risk areas such as California or the southeastern coast of the United States. Another issue, Deryugina says, is that people expect the government, through the Federal Emergency Management Agency (FEMA) and other safety net pro-

If you’re not willing to pay an extra amount each year to live on the coast, then maybe you shouldn’t be living there. Tatyana Deryugina

grams, to bail them out when disaster strikes. SPIRALING COSTS Over the last three decades, annual FEMA expenditures on disaster aid have risen substantially, from $732 million in the 1980s to $3.5 billion in the 1990s to $9.2 billion in the 2000s. These comparisons are all in 2009 dollars. “And this does not include spending in disaster areas through other social programs, such as unemployment insurance and Medicaid,” says Deryugina. Spending in those “safety net” areas rises substantially after a disaster and can even surpass FEMA expenditures. Part of the reason disaster aid has grown so dramatically is a population shift, she explains. “We’ve seen coastal populations grow disproportionately relative to populations further inland. There are more people living in danger-

ous areas, and these areas are also disproportionately wealthy. Of course, part of it can be coincidence, too. Certainly what we saw with Katrina was unprecedented.” Whatever the reason, the escalating costs of natural disasters are making plenty of people—particularly those in the government and in the insurance and reinsurance business—uneasy. “One reinsurance company estimated that relative to 2000, by 2050 we’re going to see a 750% increase in damages from natural disasters” (in real dollars, after adjusting for inflation), Deryugina says. “Insurance companies are worried about how to stay solvent through this.” In addition, she says, “The disaster process is pretty political. If you’re on the right committee, it’s easier for your state to get disaster funding, and you’ll get more of it. It’s been estimated that up to onehalf of all disaster aid is politically

motivated rather than driven by fundamentals of the disaster.” THROWING OUT A LIFELINE What can be done to reign in the costs that the government incurs? Deryugina suggests that one option is for residents in high-risk areas to pay FEMA premiums. “People living in those high-risk areas are being subsidized by people living in less risky areas, because we all pay the taxes that support FEMA,” she says. “You do want to have some sort of help for poor homeowners, but you could target that more directly than just making FEMA free to everybody. If you’re not willing to pay an extra amount each year to live on the coast, then maybe you shouldn’t be living there.” Deryugina hopes to do some modeling to see what the premiums would be, but believes they would be “fairly low” because dis-

asters rarely hit in the same place within a short time. Other solutions to deal with the rising costs of disasters include mandating that everyone pay for disaster insurance (this hasn’t gotten off the ground) and creating stricter building codes (this has some traction). Deryugina has researched the building code issue and is soon to publish a paper on her research. The American Society of Civil Engineers rates areas for wind speeds that buildings must be able to withstand. Some buildings might be within a 150-mph area, others within a 140-mph area, and so on. Obviously, the ability of a structure to withstand higher winds means less potential damage and, therefore, lower costs for repair and relief. “Not only do building codes help prevent damages, they help prevent government spending af-

terwards,” says Deryugina. “So this touches on the importance of mitigation. It’s not just about protecting the homeowners; it’s also about protecting the taxpayer. Our focus should be less on disaster aid, and more on disaster prevention. There’s research that shows for every $1 in mitigation spending, we could get as much as $15 in damage reductions. So that’s a huge benefit-to-cost ratio.” Prevention measures such as passing stricter building codes, building levees, reducing insurance premiums for homeowners who install hurricane shutters or take other measures to protect their houses, and encouraging insurance purchases could help in combating the rising costs of disasters, Deryugina says. “We actually do fairly well with rescuing people afterwards,” she observes. “But we do a bad job of preparing for the disasters before they strike.”

Tom Hanlon

Perspectives SPRING 2013








The year the Bauer brothers earned their Ph.D.s in accountancy from the University of Waterloo


The number of Academic All-Canadian rugby player titles the professors have between them

3 The number of years each worked full-time for Ernst & young before pursuing their doctorates

67& 9 The rugby injury numbers: 67 shoulder dislocations for Tim and 9 broken noses for Andy


The number of seconds Andy is older than Tim

312 & 405 Less than


The likelihood, percentage-wise, that the brothers believed they’d end up teaching at the same university




Pe r s p e c t i ve s S P R I N G 2 0 1 3

Tim, whose research focuses on auditing, teaches ACCy 405; Andy, who specializes in tax, teaches ACCy 312































When a firm is performing really well, it tends to tune out negative media coverage. When overall performance is not good, corporations tend to respond.”


hen big media speak, corporations listen. And they often act, too. That’s the conclusion of research conducted at the College of Business. “We found evidence that negative media coverage acts as a trigger for strategic change,” says Michael K. Bednar, assistant professor of business administration and lead researcher of a new study of media influence on business. The study found that negative coverage in major print publications could spur corporations to reallocate resources and engage in greater levels of strategic change. “For example, a company that gets negative press of any kind may devote more resources to advertising,” he says. “Or if a product or series of products are not well received and are criticized in the media, you may see subsequent increases in R&D spending. And a company that


is criticized for not being lean might try and reduce selling and administrative costs.” Bednar was joined by Steven Boivie, assistant professor of management at the University of Arizona, and Nicholas R. Prince, an ILLINOIS doctoral student, in assessing the influence of negative media coverage. Their research, which is an outgrowth of Bednar’s Ph.D. thesis, is scheduled for publication in an upcoming issue of Organization Science. The trio selected half of the S&P 500 companies and then ran computer-aided searches to find stories on these firms in six leading publications: The Wall Street Journal, The New York Times, Businessweek, Fortune, Forbes, and the Washington Post. They turned up some 40,000 articles between 2001 and 2005 for those companies, which then were scanned for negative news coverage. The researchers then examined strategic changes made in those

companies in the wake of the bad publicity. Sometimes corporations ignored the press. “When a firm is performing really well, it tends to tune out negative media coverage,” says Bednar. “When overall performance is not good, corporations tend to respond.” That’s because taking action can have one very positive result—it can get the media off a company's back. “Action is what tends to get glorified in the press,” says Bednar. “It's difficult to turn around negative press coverage by doing nothing.” In fact, inaction can bring an onslaught of troubles, from depressed stock prices to lost sales to unwanted attention from government regulators, for example. So corporations often act and act quickly. Recently, PepsiCo pulled an additive from its popular Gatorade drink after widespread publicity over alleged health risks. The New York Times reported studies had linked

the additive to possible side effects that included “neurological disorders and altered thyroid hormones.”

RESPONDING TO BAD NEWS The power of the media has been demonstrated again and again, especially when it mounts sustained coverage of questionable corporate activities. Congress passed antitrust regulations in the early 20th century following muckraking exposés on giant trusts in industries ranging from meatpacking to oil. Negative press takes many forms and includes everything from simply reporting a recall or product liability lawsuit to coverage of a major disaster. The 1979 nuclear accident at Three Mile Island brought worldwide attention to the plant's corporate owner and to the nuclear power industry as a whole, for instance. Sometimes the bad news comes in investigative reports. In the 1970s, The Wall Street Journal spent years reporting on inroads organized

crime had made into legitimate business. More recently, Fortune’s 2001 article on Enron's finances raised questions about the firm's reported profits. Enron subsequently collapsed amid a major corporate accounting scandal. While corporations generally respond to bad news, the response is

uneven. For instance, the new study found the makeup of corporate boards tends to influence the degree to which corporations shake things up after a bout of bad press. When a corporation has a lot of independent outside directors on the board, the corporate response tends to be greater than if the board is top heavy

with the corporation's own officials and other directors with close ties to the company, Bednar says. The researchers identified three ways that media coverage moves corporations to act. One is through investigative reporting. The media also provides an outlet for shareholder activists and other corporate critics to make their case publicly. The third is through everyday news reporting of corporate issues. “By doing that, the media makes issues more salient,” says Bednar. For instance, the media focused on First Executive Corporation, an insurer that had invested heavily in junk bonds. “They weren't the only company that was heavily invested in junk bonds,” says Bednar. “But they got all the media attention, and their stock price dropped.” The trio's research leaves some questions unanswered, providing potential grist for future research. “Our assumption was that it had to be a big publication in order to reg-

ister,” says Bednar. “It would be interesting to see if other types of media—social media for example— are becoming more important. You could also look at the difference in impact between print and broadcast outlets.” While the research showed that business often changes course in response to news coverage, it was beyond the scope of the study to determine if this was the best course of action. “We didn't take a position on whether it's a good thing or a bad thing that firms respond to negative coverage,” says Bednar. “In some cases, negative publicity highlighted problems that required action. In other cases, perhaps management ought to have ignored the publicity and focused on the corporation's long-term goals.” Doug McInnis

Pe r s p e c t i ve s S P R I N G 2 0 1 3

Michael Bednar


[ INTErSECTIONS ] THE PEOPLE Susan Curtis, lecturer in accountancy, and her students in ACCy 201 THE IDEA Use formative assessment as an active learning strategy for accountancy education THE RESULTS Accountancy students who are prepared to be active learners in the work world



usan Curtis has been teaching ACCy 201 for over a decade, but she still asks herself the same question as the 300 students in her Wohlers classroom take their seats: “What will we do together in class today that will make it a better learning environment for the students?” That question keeps Curtis focused on two important academic fronts. In her classroom, she explores teaching techniques that engage students; in her research, she studies the merits of formative assessment in the teaching of accounting. The two go hand in hand, and Curtis’s students benefit from both. “One way I try to engage students is to share real-world stories that are current and relevant. I often start class with a story and follow with a short lecture that integrates the story with the context of the textbook reading,” says Curtis. Then the students tackle problems in class, where they can get help from Curtis and their peers. For the students, it’s about getting comfortable doing the work of learning and about getting feedback while they are learning, which is the


heart of formative assessment. “Students can learn something by reading about it, but real discovery is made when they try to do it for themselves,” says Curtis. “To facilitate students’ discoveries, we do a lot of work together in class, so students can ask questions, hear questions and comments from other students, and get feedback.”

THE STRATEGY Formative assessment supports learning, explains Curtis. “It’s a process of frequently evaluating learning, for example, by quizzing as often as once or twice a week to provide feedback to students. Frequent evaluation ensures that gaps in understanding are small enough that students don’t feel they’re so far behind that they can’t catch up.” This strategy differs from summative evaluation, which is the more traditional method of using assessments to assign grades. The summative approach is often described as an assessment of learning, while the formative process is called an assessment for learning. While Curtis uses exams, projects, and papers to evaluate progress, it’s the formative ap-

proach that she says “holds the greatest promise of providing opportunities to improve outcomes for students.” And she’s not the only faculty member in accountancy who thinks so. “It’s relatively uncommon for an entire department to embrace an active learning pedagogy as we have at ILLINOIS,” she says. Curtis explains that while students will always have work to do outside of class, “In our pedagogy, we make time in class for the students to have a conversation with the instructor. These conversations also serve as formative assessment. They are a powerful tool for improving learning outcomes when the instructor uses student comments and questions to adapt lessons in real time.” It’s a message that Curtis is sharing through her research. She says that although formative assessment is one of the most effective interventions for improving student learning outcomes, the accounting education literature hardly mentions it. “There isn’t enough information available to help others implement it successfully. I hope to provide some of that through my research.”

THE STUDENTS The nearly 1,000 students Curtis teaches each year might not know what formative assessment is, but they know ACCy 201 helps them learn. There are few empty seats in Curtis’s class, and her high-energy style has students engaged and motivated. “In this learning environment, students learn to recognize the cues that tell them when they need to put more effort into their learning,” says Curtis. “It’s a way for them to develop their self-regulation and learning skills, which are incredibly important for achieving success in the work world. That’s the place where they will truly need to be lifelong learners.” After all, says Curtis, “The students are the ones who ultimately have to do the work of learning. My obligation is to keep asking myself: ‘What can I do to create an environment that helps students learn how to learn?’” • Cathy Lockman



Spotting Trouble “If you examine a firm's characteristics and its forecasting history carefully, you will be able to say that this quarter the earnings guidance is likely to be wrong, and whether it's likely


re you an investor looking for a way to tell when a stock may be heading for trouble? Research by Laura Li, assistant professor of accountancy in the College of Business, indicates there is a way and it’s actually provided voluntarily by corporate management. In fact, says Li, the early warning system is imbedded in the earnings guidance that most large, publicly traded companies offer. Guidance numbers convey managers' private information on upcoming quarterly or annual earnings. These numbers significantly shape investor earnings expectations. However, the accuracy of managers' forecasts is also a reliable indicator of a company's internal investment efficiency, and thus its long-term profitability, says Li. A recent study by Li shows that when managers' earning forecasts prove too high, the company tends to have too much inventory, and when forecasts are too low, the com-


pany tends to have too little. Excess inventory must be unloaded at a discount or written off altogether, while understocked inventory results in lost sales. Either one impacts profitability. Li's study finds that firms that issue accurate and frequent earnings guidance manage their inventories much more efficiently than firms whose guidance is less accurate and less frequent. Moreover, Li discovered that companies that err on earnings estimates tend to repeat the same mistake, coming in too high or too low time after time. Thus, investors who analyze the numbers can infer that the same problem could likely happen again. “I believe earnings guidance is a golden opportunity to look into management's mind,” says Li. “We can learn about managers' information-processing abilities and see whether they are processing their own information well. If they aren't,

then they probably are not managing assets, such as inventories, as well as other firms do.” In general, she says, errors are predictable. “If you examine a firm's characteristics and its forecasting history carefully, you will be able to say that this quarter the earnings guidance is likely to be wrong, and whether it's likely to be too high or too low. When a manager was too optimistic last year, or the firm had unusually high accruals or a large unexpected earnings drop, it's likely that management will remain optimistic this year.” Despite the potential for predictability, financial markets very often are taken by surprise when it comes to earnings guidance, says Li, who has conducted research on this subject with colleagues from the College of Business and other institutions. “I found that markets do not expect these predictable errors,” she says. “So my hope is that my ongo-

ing research on the quality of management earnings guidance can help investors form more accurate earnings expectations.” Li cautions that the methodology comes with a warning label. Managers may deliberately mislead investors in their earnings guidance. Or they may manipulate actual reported earnings for their own ends. But Li's research finds that most earnings-guidance errors result from “inefficient information processing rather than intentional disclosure strategies.”

LET EARNINGS ERRORS BE YOUR GUIDE The value of Li’s research is magnified by the fact that earnings guidance has become the norm among big corporations. Today, more than 70 percent of large, publicly traded companies offer earnings predictions, Li says. That's up from 10 to 15 percent in the mid-1990s and roughly 50 percent in 2004, according to a 2007 study.

One reason for the prevalence of earnings guidance is that it often benefits the company that issues it. Earnings guidance can reduce the information asymmetry between managers and investors and increase a corporation's visibility. A second reason is that companies have become much more willing to issue predictions since Congress passed Safe Harbor legislation in the 1990s. The law absolves companies of liability in connection with their forecasts as long as they were made in good faith. In general, management can now say what they want when they want—and if they want to stop issuing forecasts, they can do that as well. “There is absolutely no regulation for voluntary earnings estimate disclosures,” says Li. The format for guidance will vary from firm to firm, she explains. Some offer exact earnings-per-share predictions, while others offer a range for earnings per share. Some provide quarterly fore-

casts; others offer predictions for one or more years. In any case, there is a sizeable audience for the information. It includes individual and institutional investors as well as analysts and financial journalists. But as closely as these groups watch earnings guidance and the subsequent release of actual earnings, they have been missing invaluable clues that can warn of impending trouble. Using Li’s strategy, they can pick up on those signs much earlier. “It's not a crystal ball,” says Li. But it does offer observable signals about a firm's operations. For example, if you had to wait until a firm took a write-off for overstocked inventories to find out there is a problem, you would have to wait a long time. But if you pay attention to earnings-forecast errors, you could find out much sooner.” Doug McInnis

“I believe earnings guidance is a golden opportunity to look into management's mind. We can learn about managers' information-processing abilities and see whether they are processing their own information well.” Laura Li

Perspectives SPRING 2013

to be too high or too low.”






Perspectives SPRING 2013


hen Prince William married Kate Middleton in 2011, an estimated 1 million tourists lined the wedding procession route and approximately 2.4 billion people watched the ceremony. “People in America were Facebooking on the wedding day that they had gotten up at 4 a.m. to put on their tiaras, eat their scones and strawberries, drink their tea, and have this dawn party while they’re watching the wedding,” says Cele Otnes, Investors in Business Education Professor of Marketing. “Nothing boosts the Royal brand like a Royal wedding of a popular couple.”


“Americans are the biggest consumers of royalty. Why? Because we can never have it. Americans embrace it more than Brits. And clearly, there is a spillover with our love of celebrity.” Cele Otnes

THE GRAND BRAND Strategists argue that monarchies-as-brands need to convey the “five R’s”: they must be regal, relevant, respected, responsive, and royal. Otnes and her coauthor came up with “six F’s” based on consumers’ perspective to explain the appeal of the Royals. “All of the things it taps into are mainstays of consumer culture: fortune, fashion, fiasco, family, fairytale, and fanfare,” Otnes says. “The fairytale element is propagated and supported by Disney. Now we’re in a world where you can watch the Disney movies over and over while you’re in your princess dress, while you have your pop-up book in your lap, and it reaffirms the whole valorization of the goal of becoming a prince or princess.”


Now, she says, the Royals have their own website, as do William and Kate, though interviews with the press are still rare. “The royals normally don’t do interviews,” Otnes says. “They are not celebrities in their eyes. In the eyes of the people who support the brand, they are above celebrity.”


Princess Diana, she adds, played perfectly into three of the F’s: fashion, family, and fairytale. “Diana was a very crafty woman who understood how the press could help craft her persona,” Otnes says. “She evolved into this sort of supermom, super saint, super model figure. I don’t think anyone would deny she was a devoted mother. And that was a big part of her appeal—many people loved her because she was a good mother. “There was also a lot of attention focused on her fashion, how she glammed up this kind of staid family. Over their lives, brands get certain shots in the arm: Princess Diana clearly reinvigorated the popularity of the brand.” Then there’s the “fiasco” element, which keeps the brand in the public eye, even if the outpouring is tumultuous as it was when Diana died or when King Edward VIII abdicated the throne to marry twicedivorced American socialite Wallis Simpson in 1936. “Fiasco and fanfare lets in the people who are interested in the Royals from an historic standpoint,” says Otnes.

THE CURTAIN LIFTED In the 1960s, Prince Philip encouraged the queen to allow a documentary to be made about the Royals. It was the first time the curtain had been lifted to reveal their everyday lives— even to the point of showing them barbecuing. “It was kind of a mixed bag,” Otnes says. “The public loved it, but the Royals understood that it diminished their aura, so the queen never allowed the documentary to be aired again in its entirety.” Concerning the mystery of the monarchy, English historian Walter Bagehot wrote, “We must not let in daylight upon the magic.” In allowing the documentary to be filmed and aired, the queen herself violated this advice, and the paparazzi, modern technology, and social media have acted as floodlights on the royal aura, exposing the good, the bad, and the ugly. “The queen has adopted the ‘if you can’t beat them, join them’ mentality,” Otnes says. “They still can’t control a lot of the paparazzi, but they have a strong public relations arm.”

The royals may be above celebrity, but they are firmly entrenched as an integral part of the British tourist industry. To celebrate the Queen’s Diamond Jubilee in June 2012, Britons spent an estimated £823 million. “The thing about the Royal brand,” Otnes says, “is it’s so democratic. You can buy a 15-pence pencil or you can buy a £15,000 bottle of Diamond Jubilee whiskey. You can get a Prince Charles coffee mug with his ear as the handle or you can buy fine china, gilded, with the Royal Collection stamp on it so you know it’s sanctioned by St. James’s Palace. And you can take a threeweek tour of the Royal Castles, or you can watch a video on PBS. So the access is an ironic thing. The highest level of the stratum in British society is accessible to any level and at any kind of tone you want—reverential or critical or kitschy.” For the Queen’s Jubilee, you couldn’t turn around in London without seeing something for sale connected to the Royal Family. “There was Royal Beer, Royal Paper Towels, Royal everything,” Otnes says. Hanging on her office wall is a Royal Wedding Sick Bag, signed by the person who designed it. “It was given to me by someone who is very anti-Royal,” she laughs.

“So many businesses clearly benefit from Royal Family events,” she adds. Among those are pottery businesses, tourist packages, souvenir shops, and much more. And in the past 20 years, the Royal Family has opened up their properties for tours, adding greatly to the tourism industry. In 1993, the queen opened Buckingham Palace, in part to pay for the fire damage that Windsor Castle suffered the previous year. In 1997, the Royal Yacht Britannia was decommissioned and opened as a tourist attraction. Last year, when Kensington Palace hosted the edgy “Enchanted Palace” exhibit, 200,000 visitors were expected— and 400,000 showed up, even though much of the palace was closed for renovations. “It’s hard to pin down,” Otnes says of the money generated by the monarchy. “But it has to be in the hundreds of millions of dollars.”

CONTROLLING THE MESSAGE Among three biggest contributors to the brand, she says, are London, Americans, and the tabloids. “The tabloids are one of the huge industries that keep the fuel burning. They push the envelope to sell papers. They once had a whole section in a tabloid about a fake Camilla [Prince Charles’ second wife]. She appeared in that magazine in some undignified and risqué pictures.” It wasn’t Camilla, of course. No matter. It sold plenty of papers. And it underscored the need to manage the brand—the understanding of which, Otnes says, started after Diana’s death in 1997 and accelerated after Charles and Camilla married in 2005.

“The palace has gotten much more professional and strategic about it,” Otnes says. “Since Diana’s death, they have realized that they need to control the messages. And they get help from serendipitous sources such as Hollywood.” Indeed, playing off of Americans’ fascination with the monarchy, Hollywood has produced a steady stream of movies involving monarchs and the monarchy, from Wallis and Edward to The Other Boleyn Girl to Mary Queen of Scots to The King’s Speech to dozens more.

THE BRAND’S STIFF UPPER LIP Otnes sees the brand as stable now, having survived some tumultuous years in the 1990s and early 2000s. “The future bodes well,” she says, “because the Royals are in a stage of the life cycle where exciting things happen” like royal babies and more weddings. And there is admiration for the longevity of the monarchy, and specifically for the current monarch. If Queen Elizabeth II’s reign continues past September 2015, she will become the longest-reigning monarch in British history. It’s this tradition, this history, and the quintessential British sense of occasion that can appeal to those critics who find no fascination with the fashion or the fiasco or the fortune of the Royal Family. And that builds the brand, too. Tom Hanlon

A PALACE FOR EVERYONE History and curiosity. The royal palaces are sources of both, and the doors to several of them have been opened to the public. Michael Day, chief executive of Historic royal Palaces (HrP), will discuss the reinvigoration of kensington Palace, Princess Diana’s former home, when he speaks at the Spurlock Museum on campus on Thursday, April 25 at 4 p.m. The event is hosted by the Department of Business Administration.

Pe r s p e c t i ve s S P R I N G 2 0 1 3

The romantic appeal of a love story, and the upcoming birth of a prince or princess, builds the brand. It also builds commerce, says Otnes, who has co-authored the soon-to-be-published, Royal Fever: Consuming and Producing the British Monarchy along with Professor Pauline Maclaran of Royal Holloway University of London. “Events like the Royal Wedding or the Queen’s Jubilee create a lot of what we call consumer co-creation,” explains Otnes. On that April wedding day in London alone, it was estimated that almost $1 billion was spent on souvenirs, food, and drink. And who are the people most interested in the Royals? “Americans are the biggest consumers of royalty,” she notes. “Why? Because we can never have it. Americans embrace it more than Brits. And clearly, there is a spillover with our love of celebrity.”




y today’s tablet and smart phone standards, the IBM 1620 computer used by


faculty and students in the 1960s seems far from “small and convenient.” But that’s how the machine was described in 1964 when the doors opened to

Commerce West. The new 98,000-square-foot building (renamed Wohlers Hall in 2000) was the home of one of only 2,000 of these machines made throughout the 1960s. For many students across the College, it provided their first hands-on computer experience. For faculty members like Norton Bedford, professor of accountancy, the availability of the technology allowed him to conduct early research into the effects of computer technology on accountancy education. In the decades that followed, the College continued to take the lead in integrating technology into the curriculum and into the classroom. In 1975, the first four courses in information technology were introduced. This joint effort between the Department of Accountancy and the Department of Business Administration focused on training students in what was then a new discipline. During the 1980s, the College established itself as a campus leader in information systems by creating the Office for Information Management “to allow faculty to pose the research questions that could not be asked before the information revolution and to prepare students to manage the information that will be available in the 1990s and beyond.” Making good on that prediction, the College added computers to the classroom in 1995 and by 1998 was requiring that all MBA students have laptops. With the opening of the Business Instructional Facility in 2008, students have a comfortable, high-tech, state-of-the-art environment that allows access to the digital world in a way that is a lot smaller, faster, and more convenient than Bedford and Wayne Johnson, in the photo here, could have likely imagined.

Perspectives SPRING 2013

On screen: In this photo from 1965, Norton Bedford, professor of accountancy, discusses a computer problem with student Wayne A. Johnson of Minnesota.




How fast is TOO fast? HIGH-FREQUENCY TRADING: GOOD OR BAD? The debate over high-frequency trading (HFT) is a spirited one. Proponents of HFT argue that it benefits society by providing liquidity for the market, lowering transaction costs, and causing prices to become more efficient. Those who rail against the perils of HFT point to the volatility it produces in the market. “And the accumulative impact of this can be huge,” Ye says. The Flash Crash on May 6, 2010 provides an example. On that day, the Dow Jones Industrial Average dropped nearly 1,000 points—9% of its value —in about 20 minutes, and then just as quickly regained most of what it lost. In the rubble and ruins of the crash, HFT was eventually uncovered as one of the primary causes of that extreme volatility. “As you subdivide the time in nanoseconds,” Ye says, “you can have a million moves within one second. With so many moves, there is always a chance something bad can happen.” Speed is indeed the name of the game in HFT, and that speed is continuously increasing. At the turn of this century, HFT trades were executed over a span of several seconds. By 2010, trading time was trimmed to microseconds. Now trading is accomplished in nanoseconds (one microsecond = 1,000 nanoseconds). And the end is not in sight, Ye says. There is talk of pushing that speed to picoseconds, which equates

to one trillionth of a second. Stated another way, a picosecond is to one second as one second is to 31,700 years. That’s some very serious speed.

IS FASTER NECESSARILY BETTER? Ye and his ILLINOIS colleagues pose these questions for HFT advocates: Can this ever-intensifying race for greater speed result in greater benefits for society? And will more problems crop up as the speed increases? “We’ve reached the limit at which speed can still be beneficial,” he says. “The financial markets are not for some guys to play games. They're for the allocation of resources.” As for the potential for an increase in problems with greater speed, he believes that “even if there are perfect controls in place for the best of society, when you increase the number of moves without increasing the transactions, something [bad] will happen.” For example, from September to November 2008, 4,649 mini flash crashes occurred— none to the effect of the Flash Crash of May 6, 2010, but all with negative impact. In their study, Ye and his colleagues found that data cancellations increase with speed. When the speed of HFT was at microseconds, for every 26 orders, 1 was executed. Now, with nanoseconds, that ratio is 32:1.

“There is no social benefit to this speed,” he says. “There is private benefit, but no social benefit.” In addition, Ye says, in their study they found evidence of activity—such as quote stuffing—that tried to destroy other traders’ speed. “We encouraged the government to look at these findings,” he says. In 2010, the Financial Industry Regulatory Authority, the largest independent regulator for U.S. security firms, did that and ended up levying a $1 million fine against a brokerage for quote stuffing—that is, making non-bona fide orders to generate selling or buying interest in specific stocks. There are now some regulations in place for quote stuffing, and Ye hopes that regulatory changes will take place for HFT as well. “Right now trading is a zero-sum game,” he says. “We need to move toward a type of game where everybody can benefit.” He says that his paper is “neutral or slightly negative” toward HFT. “High-frequency trading needs to continue to exist,” Ye says. “But it needs to be regulated for the best of society. If we don’t regulate it, there will be problems. This kind of arms race for speed will get to a point where it will not only negatively impact traders, but all of society. And we don’t want that.”

Tom Hanlon

High-frequency trading accounts for 70% of trading volume in U.S. equities and is particularly popular with hedge funds and banks. Just how does it work? High-frequency trading firms get a peek at trade orders 0.03 seconds before they are executed. Traders can buy stock milliseconds before it goes up in value. They do so by “pinging” (listening to) the prices, learning how much people are willing to pay by making a flash bid, and then executing or canceling an order. For example, assume that eBay has a rule where you had one second to cancel your bid. You put something up on eBay, and someone bids on it. To drive up the overall bids, you place a higher bid on your item. If you see within that second that your bid becomes the highest one, you cancel it so you don’t end up buying your own product. That’s the strategy behind HFT. Traders are able to ping prices to see how much other buyers are willing to pay, in an effort to squeeze out maximum profit. In HFT, speed equals money.


“We've reached the limit at which speed can still be beneficial. The financial markets are not for some guys to play games. They're for the allocation of resources.” Mao Ye


In 2010, companies spent $2.2 billion on trading infrastructure, acquiring high-speed servers that allow them to trade at speeds approaching the speed of light. And work is underway on the first transatlantic communications cable that, once laid between New York and London, will shave 5.2 milliseconds of transmission time from the current time. Hibernia Atlantic is the company that is building the cable, at a cost of $300 million. When 5.2 milliseconds can be the difference between profit and loss, then $300 million is seen as a wise investment.

Perspectives SPRING 2013


efore 1998, if you wanted to make money on Wall Street, you just needed to be smart, says Mao Ye, an assistant professor of finance at ILLINOIS. But 15 years ago, the U.S. Securities and Exchange Commission authorized electronic trading, ushering in a new era in the markets—an era based on mindnumbing trading speed, thanks to high-performance computing. The intent was simple: Open markets to anyone with a desktop computer. The ramifications are more complicated: It has not only opened markets; it has changed how the game is played. “Now,” Ye says, “you not only need to be smart; you need to have speed.” Ye knows plenty about that speed, having conducted what finance and engineering experts have termed “groundbreaking” research on high-frequency trading. His findings were shared last fall at a hearing of the U.S. Senate Subcommittee on Securities, Insurance and Investment. With his doctoral students Chen Yao and Jiading Gai, Ye used supercomputing systems through the National Science Foundation’s XSEDE program to study NASDAQ data. In a similar study conducted with Chen Yao and Maureen O’Hara of Cornell University, Ye and his colleagues pored over nearly 100 terabytes of data—that’s 100,000 gigabytes. Ye’s NSF grant allowed him 1.5 million computing hours.





The Business 101 module ensures that all students have an early? introduction to this very important business topic. In fact, that first exposure can be where they begin to develop their concepts for the future

hat do you get when you bring together more than 100 young alumni, a panel of seasoned business professionals, and an ILLINOIS-Northwestern basketball game on TV? A fun evening of engaging conversation, practical advice, and even some spirited rivalry. The January roundtable event, hosted by PwC and the Department of Accountancy, featured a panel discussion focused on how Twentysomethings can be their own career advocates. The panelists shared personal experiences and advice on mentoring, networking, and personal branding as strategies for making the most of opportunities to learn about and grow your career. They also discussed how best to advocate for yourself without appearing self-serving and how to balance the demands of your current work while making time to plan for the next steps in your career. Attending the roundtable and hearing such advice is one of those steps. Plus, an event like this, say the panelists, offers young professionals a chance to tend to that work/life balance of business and fun that is so important as they envision their futures. Panelists at the roundtable included: randi Baskin Blume, a vice president at BMO Harris Bank; Gene Batenga, a human capital manager in the assurance practice at PwC; Lisa Jackson, a director in the transaction services practice at PwC; Chris Mulh, a vice president at AlixPartners, LLC; and Nicole Szczepanek, a director in the private company services tax practice at PwC.


Perspectives SPRING 2013

Future Roundtables and other upcoming College events include: March 20: MSF Alumni Dinner in New york April 10: roundtable: Business risk reporting, Has It Gone Far Enough? April 26: 53rd Annual Alumni Spring Luncheon in Chicago May 1: roundtable: Women in Business



The Reality

The Reality Check

ou may think that you will never need long-term care, but the reality is there is a strong likelihood that you will. research conducted by Jeffrey Brown, the William G. karnes Professor of Finance, estimates that between 35 and 50 percent of 65 year olds will use a nursing home at some point in their lives—and that 10 to 20 percent of them will live there for more than five years. Many Americans believe that Medicare will pay the costs of long-term care, but that’s not the case, explains Brown. While there are limited benefits for rehabilitation in a nursing facility following a hospital stay, Medicare usually provides no coverage in situations where there is a slow decline because of a chronic illness or disability and a need for help with the tasks of daily living. Medicaid will pay for some of these services, but only after a person has “spent down” most of their assets. The reality is that planning for the financial burden of longterm care needs is increasingly important as the American population ages.

espite the fact that long-term care is the largest out-of-pocket risk for the elderly, only 10 to 15 percent of the elderly population is covered by private longterm care insurance, says Brown. A survey he conducted indicates several reasons why, including, among others: (1) people underestimate the likelihood that they will become disabled; (2) they believe that they will be cared for by family, if needed; (3) they are concerned about the long-term financial stability of insurers; and (4) they can’t afford the cost of long-term care insurance. Although the insurance cost can be high, so, obviously, can the cost of care. On average, it costs about $75,000 per year for nursing home care. So lengthy stays for chronic illnesses or conditions such as Alzheimer’s “could easily wipe out all the assets of most households,” says Brown. “That’s exactly the kind of expenditure that one ought to insure against.” But it doesn’t appear that the private insurance market is going to solve this problem for the majority of Americans, he says. Many carriers are actually getting out of the long-term care business because they can’t make money on the product, and those that are still in the market may be pricing at levels that create “sticker shock” for consumers. It’s not an easy vehicle to price accurately, says Brown, which explains why many insurers have had to substantially raise prices in recent years. It is also unlikely that the government will be the solution. The Community Living Assistance Services and Supports (CLASS) Act, a provision of the healthcare reform bill signed into law by President Obama in 2010, was intended to have the federal government directly sell long-term care insurance policies to the public. However, in October 2011 implementation of the program was abandoned because independent experts projected that it would be fiscally unsustainable, a decision that Brown thinks was the right one due to the poor design of the program.


Jeffrey Brown is the William G. Karnes Professor of Finance and director of the College's Center on Business and Public Policy. He is also the associate director of the NBER Retirement Research Center. A former senior economist with the White House Council of Economic Advisers, Brown has conducted extensive research on public and private insurance markets. The reality is he recently applied for long-term care insurance.



Complicating matters further, the existing Medicaid program rules may themselves limit demand for private insurance. “Medicaid’s features of means testing and secondary payer status combine to impose an implicit tax on private insurance and to crowd out the purchase of private insurance for most people,” says Brown. To reduce that implicit tax and stimulate private insurance markets, lawmakers would have to be willing to eliminate those two features or to deny care to those who fail to insure themselves adequately, he explains. And even those steps wouldn’t guarantee that the private market would expand enough to cover everyone. “In other words,” says Brown, “the evidence suggests that Medicaid reform is a necessary condition for substantial growth in the private long-term care insurance market, but it does not at all imply that such reform would be sufficient.” So with fewer private companies offering insurance, and the public sector in retreat, what should consumers do? Brown suggests that the single most important step is to talk about it with your family and financial planner. “The biggest mistake that someone can make is to simply act as if ‘it won’t happen to me.’ Odds are high that it will.” So it is important to go through a planning process to consider exactly how you will pay for care if you need it for many years. Second, if you are still working, be sure to include the cost of long-term care into your calculations about how much to save. For most people, this means you will have to save more. Third, unless you have saved enough to be able to easily spend a $1 million on care, or unless you have saved so little that you will quickly qualify for Medicaid, you probably should buy a private long-term care policy. It may not come cheap, but it can provide you the resources to pay for care when you need them most. And in spite of the problems in the market, says Brown, “there are still several reputable and financially secure companies from which you can buy.”

Cathy Lockman

Perspectives SPRING 2013






he scenario presented above is what’s known in Business 101 at ILLINOIS as a two-minute challenge. It’s a strategy that C. K. Gunsalus, professor emerita of business administration, has developed to “help students form responses and habits that build professional responsibility muscle.” Two-minute challenges are an integral part of the curriculum for this introductory class, which is required of every first-year business student. The impact of addressing these ethical challenges early and often, however, reaches far beyond the classroom and has merit in corporate settings as well. Teaching ethics to students, Gunsalus says, is about “seizing their hearts and their minds at the same time.” It’s about asking them to consider who they are and what they stand for, and about providing them with decision-making tools and realworld challenges to practice their skills—challenges like the I-Clicker and dozens more that focus on personal and work-related dilemmas. How and why does this approach work? At the recent Partners in Business Ethics Conference hosted by the College and its Center for Professional Responsibility in Business and Society, Gunsalus told the audience of corporate leaders and business deans that “bringing a real-world perspective to the teaching of professional responsibility is fundamental

Imagine you’re a student again. You and a friend are taking a large class together. The professor uses I-Clickers for attendance, and the points for attendance are worth 15% of your grade. Your friend asks you to click him “in” for a class he has to miss to visit his friend in the hospital. What should you do? to influencing how people make ethical choices. Research tells us that the biggest difference makers are those opportunities that engage people in active, iterative scenarios that have an emotional impact, as realworld examples do. For this purpose, short scenarios are more effective because longer cases require more cognitive processing to decode.”

HAVING YOUR SCRIPT READY By tackling these two-minute challenges repeatedly over the semester, students learn practical strategies for decision-making and emotional self-regulation. They also learn that while solutions to ethical dilemmas may not come in two minutes or less, responses often must. To be ready, says Gunsalus, students are encouraged to devise their own “personal scripts,” or ways to articulate their values in a non-abrasive way, such as: “I’m such a straight arrow, I’d never manage to pull off turning in a bogus receipt.” “There are many predictable dilemmas, like someone asking you to do something you’re not comfortable doing,” she says. “Having a personal script ready helps you buy time to respond more thoroughly when you don’t want to agree but you also don’t want to give offense either.” Billy Tabrizi, a graduate student in accounting and the Business 101 course manager, says the personal script is an extremely valuable tool in the ethical decision-making process.

“Thinking that you’ll be able to say ‘no’ to a request that goes against your personal values and actually having the words to do it are very different,” says Tabrizi. “That’s why it’s a skill that we constantly emphasize in the course and that students are constantly challenged to practice.” Students are also encouraged to develop a strong habit of asking questions, says Gunsalus. “When you’re at the bottom of the power pyramid, as young professionals are, you often don’t have all the information you need. Mindreading is an imperfect form of communication. Having

scripts and asking questions make a huge difference in problem solving and in buying you time to think about what steps you should take in a situation. I tell students that when they’re feeling pressure to do something they’re not sure of they shouldn’t be afraid to ask: ‘Did I get this right?’ ‘Did I understand you correctly?’ When people hear their words repeated back to them, things can become much clearer for both parties.” Tabrizi says these practical suggestions and the emphasis on personal responsibility make a big difference in shaping a student’s—

“There are many predictable dilemmas. Having a personal script ready helps you buy time to respond more thoroughly when you don't want to agree but you also don't want to give offense either." C.K. Gunsalus


and an employee’s—success. “In the course, we stress the importance of owning your values and recognizing that you’re responsible for how others view you. One of the most valuable outcomes of the course is that it helps you develop a sense of responsibility to yourself, to your organization, and to your world.”

WHAT IT MEANS FOR BUSINESS As companies continue to look for the most effective ways to build an ethical culture, the strategies taught in Business 101 have merit beyond the classroom, especially in training new employees. “Young professionals especially need practical guidance on how to deal with the challenges that recur across professional life,” says Gunsalus, the author of The Young Professional’s Survival Guide: From Cab Fares to Moral Snares. “Getting to the end of a career with your sense of self as a good person intact isn’t easy, and the choices are not always clear-cut. We’re all ego-centric, and we all face ethical dilemmas, large and small, on a regular basis. We know that we are influenced by the people around us, from co-workers to bosses, and by incentives and reward structures. And we are affected by the accumulation of our own choices because small acts can lead to bigger ones. That makes starting out right so important. Yet it’s not always obvious to those at the beginning of their careers.” Cathy Lockman

Perspectives SPRING 2013





The past 20 years have seen a significant “decline in union membership, and recent developments suggest that this trend will continue into the future. From 1983 to 2012, union membership fell by almost one half, declining from 20.1 percent of the workforce to 11.3 percent, with this decline being concentrated almost entirely in the private sector. Recent passage of ‘right-to-work’ laws in states like Indiana and Michigan will continue to erode unions’ power over the next decade. At the same time, states facing increasing financial pressure are seeking ways to limit public sector unions’ power, including the creation of laws such as the one passed by Wisconsin last year.

Monica Bielski Boris, assistant professor in the School of Labor and Employment Relations

A lesson of American history is that unions “formed, grew, and survived in a hostile legal

labor union representation is costly. Is it worth the cost? Depends on how enlightened management is. Enlightened managers understand it’s in their best interests to treat labor well—and if they do so, labor unions aren’t needed because happy employees don’t form labor unions. Most likely it comes down to trust. Even if management planned to treat labor well, labor has to trust management to do so. Otherwise, employees form labor unions to substitute for that trust—to insure that management treats labor well.

order. Predictions of organized labor’s doom notwithstanding, workers will continue to join together to improve life on the job. Traditional forms of union representation and collective bargaining will increasingly be supplemented with independent mechanisms for providing legal, educational, social, and other services to workers. Unions will also develop more extensive international alliances and networks to advocate for workers in a complex global labor market. A decade from now, the labor movement will remain critical to our democracy and to a fair market economy.

Gregory Northcraft, professor of business administration and Harry J. Gray Professor of Executive Leadership




like to think that a decade from “nowI would there will be NO labor unions. After all,

Wilma Liebman, former member and chair of the National Labor Relations Board and former visiting professor of law at the University of Illinois

Labor unions are in decline, perhaps due to shifts in American politics or economic globalization that make U.S. workers compete with workers in China, India, and other emerging nations. Just recently, The NY Times reported that ‘Unions represent just 7 percent of workers in corporate America, one-quarter the level in the 1960s.’ But ‘down’ is not ‘out,’ given natural variations over time in a continually shifting economy. Manufacturing has certainly declined, and new high-tech industries have emerged, but unions may have growing importance in those new industries and in the public sector.

Don Fullerton, Gutgsell Professor of Finance and Institute of Government and Public Affairs

Collective bargaining took root because firms gained from the relationship in skill retention or had little choice, given labor’s strategic situation. Today, management sees less to gain and unions have lost strategic situation. Unions must either find new sources of leverage or new ways of adding value. On the former, international union and community alliances are taking shape, especially for the low waged. But on the latter, until stockholders see demonstrable value added—in productivity and quality—management will continue to resist the loss of its unilateral power. A significant increase in union density is not in prospect, yet.

Matthew Finkin, professor of law

Perspectives SPRING 2013

Nolan Miller, professor of finance and Julian Simon Faculty Fellow

Labor unions will continue to build coalitions with other organizations and groups interested in the advancement of working people in order to build a larger social movement. Unions will no longer solely rely on traditional forms of representing workers based on employer-specific collective bargaining agreements and instead will advocate for workers more broadly by continuing the work of building partnerships with worker centers and organizing associational members. Labor’s political efforts to elect workerfriendly candidates and to pass legislation promoting the interests of the workers will intensify, particularly at the state and local levels.













Indoor farming is not a new concept. Greenhouses, hoophouses, and tomato hothouses have long been an option for growing plants. But meeting the food needs of a growing population requires indoor farming on a much, much larger scale. That’s where vertical farming comes in. Assessing the economic viability, scalability, and profitability of the vertical farming concept is where Hoadley comes in. Large, complicated, long-lead real estate projects are Hoadley’s specialty, and that’s just what this new subsector of agribusiness will require. “The concept of vertical farming occupies the intersection of the foodenergy-water nexus,” says Hoadley, “and that’s the Holy Grail of hypercomplexity. The challenge is finding simple solutions and business models.” Meeting the demands of such a complex project creates a significant opportunity because it represents “a new asset class that will hit the sweet spot for global institutional investors interested in investment exposure to water,” he explains. It will require facilities that are built specifically to meet the needs of the industry, with solid-state lighting, temperature, pest management, and air flow controls and design. And that means opportunity.

Hoadley, and his company FEWZION, for Food, Energy, Water Zone of Innovation, has joined with Urban Ponics, a Chicago-based vertical farm run by ILLINOIS engineering alumnus Bral Spight, to identify opportunities to develop facilities and scale in this emerging industry. Their joint venture, UrbanFEWZ, is indicative of the role Chicago entrepreneurs are playing in this new sector of agribusiness. For Hoadley, that has meant serving on Mayor Daley’s 2010 Vertical Farm Task Force, co-organizing a National Science Foundation conference on the topic of vertical farming challenges in 2012, and moderating a panel discussion on urban agriculture at last fall’s Chicago Idea Week. “Every NFL city in America has an urban agriculture effort that is dancing somewhere along the language of vertical farming,” he says. “My desire is that Chicago is seen as the global thought leader for this new sector.”

WHAT DOES IT MEAN? The promising business opportunity for investors is created by the reality that there will be an estimated 9 billion people in the world by 2050 and that 1 billion hectares of new

land will be needed to provide the food for them all. With 80 percent of the useable farmland already in production, vertical farming can provide the real estate needed. And because the techniques used in this sector produce 120 times the yield using 90 percent less water than traditional farming practices and are not subject to drought, flood, and other such natural calamities, the payoff for the public is great as well. “Growing crops under cover is a promising, growing business that meets these important objectives and many more,” says Hoadley, like creating jobs, conserving water, addressing nutrition and healthcare concerns, and significantly decreasing the reliance on fuel to transport produce long distances. “My inspiration to be part of this industry rests in my personal interest in water,” says Hoadley. “From a professional standpoint, my desire is to help develop facilities by connecting venture capitalists with producers and producers with consumers. The moment that institutional investors recognize returns for this new asset class that are equivalent to other asset classes, business models will rapidly become more sophisticated and there will be an explosion in the growth of this sector. I think that’s as close as 6 to 12 months away.” Cathy Lockman

WHO Michael Hoadley, founder of FEWZION WHAT Exploring the opportunities of vertical farming WHERE Initiatives in Chicago and across the country WHEN Founded in 2011 WHY To provide solutions and business models for meeting the food needs of a growing population

This exhibit at Chicago's Museum of Science and Industry features a multi-media presentation on vertical farming as an example of how our future lives are being shaped today.

Perspectives SPRING 2013


sk most Americans where their fruits and vegetables come from and you’re likely to hear “a grocery store,” or “a garden,” or “a farm.” Few would tell you their produce comes from a skyscraper, and if they did you’d probably think they had an overactive imagination. But new initiatives in agriculture, specifically vertical farming, make that answer an accurate one. And enterprising ILLINOIS alumni like Michael Hoadley, a 1994 finance graduate, are helping to make it a possibility. Vertical farming, or controlled environments agriculture as it is more accurately termed, means growing crops inside urban buildings as a way to provide fresh, high-quality, pesticide-free produce year-round. For consumers, it means easy access to nutritious food grown locally. For horticulturalists, engineers, and other scientists, it means opportunities to safely and significantly enhance the world’s food supply. For environmentalists, it means growing food in a way that conserves water and energy. For business, says Hoadley, it means a new subsector of agribusiness and a new asset class of real estate, one that holds great potential for investors.



How do you see 3D? If you think of it as a movie and a pair of goofy glasses, think again. The technology, now in the form of 3D printing, is creating a new movement and burgeoning business opportunities. ILLINOIS students, like Ana Said, Danny Lohan, and Winnie Yang, can learn about it in our MakerLab, the first of its kind for a College of Business. And you can learn about it in this issue of Perspectives.

Perspectives - Spring 2013  

Perspectives magazine is published by the College of Business at the University of Illinois Urbana-Champaign. ON THE COVER: The makers hold...