Digital Musings

The Elusive Quest for the Catch-all Corporate Metric

Management, these days, is full of corporate metrics (otherwise called buzzwords) that managers are urged to follow, to maximize or to minimize: EVA, CFROI, shareholder value, costs of some sort etc... to name a few. Sometimes, the metric is a bit more involved but follows the same vein or puts some constraints on them: balanced scorecard, sustainable development etc...

In any case, the theory around these catch-all metrics boils down to the idea that following them is good for the corporation as a whole, that the corporate decisions should always be benchmarked against them. For instance, what is good for shareholders is also good for the firm as a whole.

Surprisingly enough, the discussion around the true relevance of these benchmarks is rather tenuous. Yes, market imperfections are discussed and principal-agent models, game-theoretic-models have been crafted to accommodate them.

However, it seems rather puzzling that a principle known under the name of "Goodhart's law" is hardly mentioned in business books. The law is named after Professor Charles A. E. Goodhart, Norman Sosnow Professor of Banking and Finance at the London School of Economics, who crafted with central banking in mind (see Download Goodharts_Law.pdf ). Here is what the University of Cambridge has to say about it:

"The original form of Goodhart's law arose in economics.  According to the 99th edition of Pears Cyclopaedia (1990--1, pp. G 27, G31), the law states that

• `As soon as the government attempts to regulate any particular set of financial assets, these become unreliable as indicators of economic trends.'

This, of course, is because `financial institutions can... easily devise new types of financial assets.'

Professor Charles Goodhart FBA was Chief Adviser to the Bank of England. The Bank used to have a web page about him at www.bankofengland.co.uk/cvs/goodhart.htm, giving his own statement of the law, as published in his book Monetary Theory and Practice, page 96:

• `Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.'

Professor Marilyn Strathern FBA, following Hoskin (1996), has re-stated Goodhart's Law more succinctly and more generally (see also Download STATISTICS_AND_TARGET_SETTING.pdf ):

• `When a measure becomes a target, it ceases to be a good measure.'

Goodhart's law is a sociological analogue of Heisenberg's uncertainty principle in quantum mechanics.  Measuring a system usually disturbs it.  The more precise the measurement, and the shorter its timescale, the greater the energy of the disturbance and the greater the unpredictability of the outcome."

The last re-phrasing of the law is clear: Too much emphasis on a measure as a target kills the measure that may have been a good one in the first place.

Moreover, in economies like our today economies which are highly non-linear (knowledge-based economies, complex systems, winner-take-all etc...), it is not even clear that any such measure does exist. More often than not, obliquity is at work and single metrics are very poor at capturing the richness and complexity of the economies and societies in which we live. They may simply defeat their own purpose!

The recent business history is full of cases that illustrate the perils of putting too much emphasis on narrowly defined corporate metrics: Stock-options, Enron, Adelphia etc...
The more distant history is also quite rich in such stories, chief among them that of former USSR and its obsession for production targets (yielding the results that we all know about).

So, why is that most business books authors and professors forget about Goodhart's law as if they were petrified telling students that, indeed, the world outside is awfully complex?

 

 

Academic Blogging: Some BloggerCon III Afterthoughts

I have not been blogging in a while. Well, reason is that we went with my business partner on a Cyberlibris round-the-globe tour visiting leading/rising business schools. Fascinating and inspiring believe me. Check forthcoming posts as we'll share our enthusiasm and information for what's happening there. On our way we made a stop at the Stanford Law School and attended the BloggerCon III conference. This was the third of its kind and it gathered many very active members of the blogging community.

In our view, the best session was the one devoted to Academic Blogging. The discussion leader was a "veteran blogger": Jay Rosen. Jay is a Professor of Journalism at New York University. He also runs a famous blog named PressThink.

Jay did a great job and lots of key issues were debated. The first thing that struck us was the small number of people in the room. The other sessions attracted a lot more people. This came to us as a surprise. Indeed, blogs seem to be part of the "compulsory panoply" of any academic especially most of the students already have their own blogs. The second thing that was cool is precisely the high percentage of students in the room. refreshing indeed!

The main points covered in the discussions were the following:

1. Why should academics blog ? : Seems to be the obvious number one question. Was funny to see that most of the academics in the room did not have a straightforward answer to this. Our view is simple: They should in order to extend the richness and reachness of their pedagogy. The best answer came from the students themselves (they were from the Law School, the School of Medicine etc...): We think our professors should blog because this is a great way to know them better (that's right: a blogging professor sticks his/her neck out).
2. What changes for academics when they blog ? : This is the point: Academics are afraid more often than not of what could change the pace of their academic life. One professor in the room said that blogs were "disruptive for the Ivory Tower". Great, that's what we want! Another professor added that "the University has never been great at distributing knowledge". That's why they nicknamed it the Ivory Tower. Well, it doesn't have to be so, especially in the so-called knowledge economy. Blogs are wonderful tools to expand the reach of knowledge. This would be an oxymoron not to take advantage of it.
3. What’s the potential effect of blogging in the academic world ?: Well, we don't know yet but we can try to anticipate some effects. First, it will make academics more visible and more accessible to society as a whole. There is no reason why the academic community should remain a remote tribe almost as difficult to access as some African tribes in the XIXth century. Second, it will provide academics with a straight access to ideas, suggestions, comments and challenges (stemming not only from their colleagues but also from people outside their "specialized world" which will eventually improve the quality and relevance of their teaching and writing. In a sense, a blog is a place where the academic accepts to be a "primus inter pares." Not always easy to accept when you're supposed to be the one who knows. A blog is a good way for an academic to put him/herself at risk. in the course of doing so, some nice and unexpected rewards (famous law of unintended consequences) may be reaped.
4. Why do academics make good bloggers ? : Well, the question should be "why would they make good bloggers?" Bad news first: They may not be good bloggers after all if they are not willing to stick their neck out of the Ivory Tower. Good news then: Most academics do write and do communicate. A blog is a great addition to the panoply.
5. Blogs vs. Blackboard : One faculty member in the room was asking whether e-learning platforms such as Blackboard or WebCt had any future now that we have blogs and wikis. Well-taken question indeed! Unless these e-learning firms do embrace the blog trend, it will become more and more difficult to see what their added value to the end user is all about (especially when you factor the sheer price of their platform in the equation). This boils down to the forever debate: Home-made vs. ready-made.
6. Publish or perish ? : One professor noted that "Academic journals should have their blogs. Professors could post comments, reviews on articles. Everybody could look at these discussions and expand on them." This would indeed be a major breakthrough for most academic journals. After all, a published (refereed) paper has been evaluated by a handful of people. Would not it be nice if people could post their views, criticisms etc..., publicly on a blog, even after the paper has supposedly earned its credentials? The peer community would expand as a result. Blogs are also a great way to disseminate one's research. Think for instance of the success of the SSRN (which is not a blog) and it should be obvious what blogs could achieve in the field of academic research too. That's where we disagree with the notion of academia creating value through scarcity. SSRN is precisely the opposite!
7. How do blogs affect the value of attending university ? : Blogs are a unique way of leveraging the value of attending university. You should not think of blogs as competing with the university system but as a unique opportunity to revisit it and make it even more attractive.
8. How can we make blogs more attractive to academics ? : Make them simple to use and lead by example. There are already a few good blogs around (e.g. Walter Baets, Nouriel Roubini, James Mahar etc...)
9. Who should be the audience ? : This a matter of individual choice. Some professors want to reserve their blog in-house (to their students only) while some other want to make it public, open to a broader audience. But again there is no rule except the famous one: Just do it!
10. Blogs as a student learning tools : Many students do have blogs. Hence, it should not prove too difficult to convert them to blogs as learning tools. Professors could even learn one or two things from their students.
11. University policy towards blogs? :Here is how Claude Muncey, one of the participants, summarized the issue "In the end, summing up, what becomes clear is the disruptive effect that blogging has on the academic world, which is founded on the idea of control, more than dissemination of information is an  "attack on the DNA of the university"  and we will see attacks on blogging in academia and attempts to simply graft blogs onto current publishing and control structures" (See also jzip's account)

We are not sure that we are willing to share the pessimism of this last point. Yes, faculty members are reluctant to change. Yes, scarcity has often been the major currency traded by the academic world. But, things change: Most kids, these days, blog. The challenge for faculty members will be to adapt, to be on the same page as today's kids when these kids will show up in the amphitheater. Moreover, the dividends from academic blogging are numerous, as the session run by Jay at BloggerConIII has shown: What matters is the willingness to capture them, not to say to invent them.

As usual, (academic) attitude can and must defeat (academic) latitude!

Marc Goldberg on "Old Wine in New Bottle?"

Marc was kind enough to comment on the post related to the Business 2.0 article. Here is his opinion on Business 2.0 current views on VCs:

"Forget the VCs: They're still stingy these days...

.... Hum
where should i start
1) not every business should be VC funded
2) should should put as litle money as need in a business, not more, stingy is good
3) we (VC) invest in business to build, not in business to be flipped (even if we all dream of quick exit at night)"

Sounds reasonable to me. The only point, Marc, that may deserve a bit more explanation for those who are not familiar with the Venture Capitalists world is your first point: Do you suggest there is a "business profile" that does qualify for VC funding? What is that profile then? Would be nice to see, if any, a typology of business profiles/financing vehicles and to get a sense of the risks (on both sides) of an improper match.