Corporate Governance

Carl Icahn wrote this article on WallStreetJournal last week after his unsuccessful attempt to takeover Dell.

http://online.wsj.com/article/SB10001424127887324665604579081703521362462.html

I believe the role of corporate raiders like Carl is critical in the market. The numbers he gives in his article are solid and noteworthy though its not easy to verify the claim.  But all in all he makes a good case for change in corporate governance.

Dell, HP and a lot of other giant corps have lost so much value due to poor corporate governance. On the other hand I don’t fully understand what happened with Citigroup less than an year ago. Despite leading Citi out of the woods Vikram Pandit was pushed out unceremoniously.

This makes a more compelling case for restructuring corporate governance.  I do believe that some form of stakeholder model would be far better than the current one.

http://en.wikipedia.org/wiki/Stakeholder_theory

I believe that the success of Mittelstand companies in Germany is due to the focus on long term profitability as opposed to the quarterly and annual pressure faced by public listed companies. 

“Enlightened value maximization utilizes much of the structure of stakeholder theory but accepts maximization of the long-run value if the firm as criterion for making requisite trade-offs among its stakeholders... and therefore solves problems that arrives from multiple objectives that accompany traditional stakeholder theory”

-Jensen, 2001

Some countries push to maximise shareholder value others push multiple stakeholder value.

I’ll expand further on this. 

Alternative investments – Are they really alternative?

It turns out I was really naive about alternative investments. When I did some analysis on returns of these so called alternative investments I found out a few interesting things that I want to share. 

 

Hedge funds have nearly 95% correlation to the broader stock market in US

This applies to Real estate investments as well though the correlation is near 90%.

Commodities also have a very high correlation to negative correlation depending on the specific commodity and I believe they carry higher risk than equities in general.

 

The only real alternative investments that stand out and diversify against a loss from stock markets as you could have guessed by now are T-Bills.

Gold which lost quite a bit in value in the past few weeks has been a bad investment for a very long period of time (a few centuries) until 1980’s.   Take a look at this Chart of real price of Gold from 1344 to 1998.  (Reproduced from another website).

 

 

 

Gold should really not be considered an alternative investment because of this.

Diversifying internationally may help offset some risk, but again you might be caught off guard by exposure to countries like Greek and Cyprus.

 

Technorati Tags: Finance,Alternative investments,investing,Personal finance

The Lean Startup - Review

    Completed the book "The Lean Startup" by Eric Ries. Link http://theleanstartup.com/ It was a good read. The book proposes improvisation of Toyota's Just-In-Time lean manufacturing process to startup companies (focuses on technology companies but tries to generalize this for other startups too) . Recommended for aspiring tech/other entrepreneurs.

Key points : 5 principles of Lean startup : Entrepreneurs Are Everywhere Entrepreneurship Is Management Validated Learning Innovation Accounting Build-Measure-Learn Validated Learning Any failure in a startup provides some lesson. However validated learning is not that. Make small and specific experiments (each experiment to be done alone) with the product/service and measure the impact of these changes specifically. Gross or cumulative metrics distort the picture. Cohort analysis to be used. If the metrics shows improvements after a specific experiment, it is validated learning.

• Build a minimum viable product (MVP) and launch it. Make small and incremental changes as experiments to the product continuously in small quick cycles. Measure the success of the experiments and use the learnings to build the next increment (Build - measure-learn)

Innovation accounting: standard accounting practices do not make a lot of sense for startups. especially for the employees and investors. Lessons from the early stages need to be measured . 1. Establish baseline: Establish the basline on where the company stands as of now 2. Tuning the engine: After establishing baseline, work toward the ideal. (the 2nd learning milestone, tuning the engine). Every product change should be driven by one of the growth engines. 3. Pivot or persevere:

Be wary of cumulative or vanity metrics. Try to stick to cohorts analysis and split tests (A/B Testing).

Startup runway : Remaining cash/ Burn rate But the true measure of runway should not be in absolute time but rather how many pivots are left before running out.

Schedule regular pivot or persevere meetings ahead of time. A pivot may be needed for a variety reasons:

Zoom-in pivot: Zooming in on a specific feature as the whole product zoom-out pivot: Zooming out to include more features to a product Customer segment pivot: Product solves problems for real customers but not the initial target segment. Many startups may require to do this at one point. After running out of early adopters, the mainstream customers come in and have very different expectations for the product and are more unforgiving. Customer need pivot: After initial product build, the product solves a problem that is not important. But identifies a related problem that requires re-positioning of the product. Platform pivot: Change from an application to a platform or vice versa. Startups create a platform and start selling a single application. Business architecture pivot: Change from high volume/high margin to the other way around. Value capture pivot: Changes to the way a company captures value. Engine of growth pivot Channel pivot technology pivot

Three engines of growth: 1. sticky engine of growth : Churn rate is critical. Maintain customer base 2. Viral engine of growth : Network effect , a viral coefficient closer to 1 or above makes the product highly sustainable. 3. Paid engine of growth: Growth is subsidized by existing sales. As long as the Cost per acquisition(CPA) is greater the Lifetime value (LTV) of the customer, growth is positive.

The Five whys - an important tool in finding the root cause without blaming someone. System comes first not the personnel.

Links: http://theleanstartup.com/ http://leanstartup.pbworks.com/

Further reading: Four steps to the epiphany by Steve Blank http://500hats.typepad.com blog.500startups.com

The innovator's dilemma Startup owner's manual

Livestock and vegetarianism

One of my close relatives was really concerned that we don’t feed our son any meat. I have started giving eggs to him fearing low Vitamin B12 and D levels , but he has been an ‘eggetarian’ so far.  My relative was saying that without eating meat we are not getting any nutrition at all. So not true.  In fact if we follow the diet set by our ancestors we wont be malnourished neither would we be affected by the diseases caused by western diet.

In fact human body is designed to be herbivorous. I guess there should be hundreds of articles arguing that point. But what I want to convey here is the relatively new awareness about livestock being a major contributor to greenhouse gases, land degradation and biodiversity issues. Nearly 18% of greenhouse gases are produced by livestocks which is higher than  the share generated by transportation.

There are some researches which conclude that adding a little meat and dairy to a low-fat vegetarian diet makes it more efficient in terms of land used to produce it. However I still believe the overall cost (that includes the GM corn and other feeds, water required, etc) would still be higher for a diet that uses meat.

Moral of the story: If you care about the environment you should at least become a partial vegetarian.

Food security and Agriculture

 

Food security is still a problem even after all these years of progress in science and technology. This is something that is close to my heart and an area where I want to spend time at least on a part-time basis. This infographic from http://visual.ly shows the current state. Hunger is increasing in Sub-Saharan Africa while its on the decline in Asia and Latin America.

 

 

 

Here is a link to some interesting TED Videos on Sustainable Food

 

 

 

 

 

The State of Food Insecurity in the World 2012 infographic