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In This Issue: Value-based Management, CEO Pay, and Private Equity

Managing for Value 2.0 8 Kevin Kaiser and S. David Young, INSEAD

The Growing Executive Compensation Advantage of Private Versus Public Companies

20 Marc Hodak, Hodak Value Advisors and

New York University’s Stern School of Business

Three Versions of Perfect Pay for Performance (Or The Rebirth of Partnership Concepts in Executive Pay)

29 Stephen F. O’Byrne, Shareholder Value Advisors Inc.

A Look Back at the Beginnings of EVA and Value-Based Management: An Interview with Joel M. Stern

39 Interviewed by Joseph T. Willett

What Determines TSR 47 Bennett Stewart, EVA Dimensions LLC

Integrated Reporting, Quality of Management, and Financial Performance 56 Cécile Churet, RobecoSAM, and Robert G. Eccles, Harvard Business School

The Evolution of Private Equity Fund Terms Beyond 2 and 20 65 Ingo Stoff, Technische Universität München, and Reiner Braun, Friedrich-Alexander University, Erlangen-Nuremberg

The Impact of Sovereign Wealth Funds on Corporate Value and Performance 76 Nuno Fernandes, IMD Business School

How Much Do Private Equity Funds Benefit From Debt-related Tax Shields? 85 Alexander Knauer, Alexander Lahmann, Magnus Pflücke, and Bernhard Schwetzler,

HHL Leipzig Graduate School of Management

Global Drivers of and Local Resistance to French Shareholder Activism 94 Carine Girard and Stephen Gates, Audencia Nantes School of Management

A P P L I E D CO R P O R AT E F I N A N C E Journal of

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Managing for Value 2.0*

* This material is adapted from the first five chapters of our recently published book, The Blue Line Imperative: What Managing for Value Really Means (Jossey Bass, 2013).

It is reprinted here with the permission of the Wiley Corporation. Copyright John Wiley & Sons, Ltd.

by Kevin Kaiser and S. David Young, INSEAD

Y ears ago, we had a conversation about the diffi- culty of teaching MBAs and business executives what it means to manage “for value.” In our view, there were four essential questions to be addressed:

(1) What is value? (2) Why is it important? (3) If it’s so impor- tant, why aren’t managers already doing it? And (4) how can we help managers to do it? We noticed that when a class of 30 participants was asked to write down a definition of value, we would get 30 different answers. We figured that at least 29 of these definitions were wrong, at least in part. If these current and future managers don’t understand what value is, they are unlikely to create sustainable value in their organizations. Thus, we saw the need to establish a common definition of value to have any chance of helping people manage for it.

It is relatively easy to show what value is not—manag- ing for next quarter’s profit, for example, is not the same as managing for value. However, knowing what value is not doesn’t really clarify what it is. To answer this question, we took a somewhat unconventional “crowd-sourced” approach to incorporate the different perspectives that we have encoun- tered among our many program participants. Our aim was to talk about value in a way that would be useful to our academic colleagues across different disciplines as well as to the seasoned corporate managers in our executive programs.

We also chose to define value using a method of backward induction as the answer to the following question: What does an organization have to accomplish if it is to survive as an independent entity over the very long term (say, a century or even longer)? Taking this approach enabled us to avoid the opinions and differing perspectives of individuals, and to define value in an objective way. So although each person may hold a definition of value that is personal and unique to them, we also found that there is a definition that is objective and common to all of us. We explain both definitions here and the critical connection between them.

Equally important is the analysis of why it is important to manage for value and, closely related, why it is so difficult to do so. As we demonstrate later, it is the combination of a market-based system for allocating resources and a well- functioning market for capital that is forcing organizations to align the two definitions of value if they wish to survive. This

means that organizations, to be confident of generating the cash necessary to sustain themselves, must consistently deliver satisfaction—or something even more than satisfaction, let’s call it “happiness”—to those it serves with its products. Viewed in this way, the creation of value becomes an imperative—not just a choice that depends on what the manager feels like doing on a given day; those organizations that create and deliver value will have a future, and those that do not face economic ruin. Upon closer inspection, this system turns out to be no more, nor less, than the evolutionary forces of nature at work. When viewed over thousands of years—and not just a single year, or a decade, or even a century—the need to deliver value as we define it is clearly not a question on which humanity can simply choose to agree or disagree. Organizations that create value are sustainable, and therefore survive, while those that do not sooner or later face extinction.

Nevertheless, we observe many organizations destroy- ing value—sacrificing the longer-term sustainability of the organization to achieve a short-term target. In fact, we like to pose the question in our executive programs: “How many of you have knowingly destroyed value in order to deliver on an indicator target that you’ve been assigned to hit?” Initially we were shocked by the high percentage of hands that were raised. (After years of asking this question, we are no longer surprised.) Such behavior is common in all types of organizations, from private-sector companies to charities and governments.

And it begs the question: Why do people destroy value if they have at least an instinctive understanding of it? The simple answer is that people are often paid to destroy value, a point we emphasize later in this article.

Once we had provided answers to the “what,” “why,” and “why not” of value, we then tackled the profoundly difficult question: how do we get the people inside organizations to commit themselves to value as an objective? What techniques and tools can we use to (1) know when we are creating value, (2) encourage people to take value-enhancing decisions, and (3) build a culture across the organization that will attract and reward those who create value? Our approach makes use of hypothetical frameworks, techniques, and insights from several areas of academia—with emphasis on psychology, neurosci- ence, organizational behavior, and finance—in what has

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each day of our lives a little better than the day before. To do so means, at its most basic level, taking the resources available to us and using them in ways we hope will make us happier than we would have been through alternative uses of the resources (including not using them at all). No matter what products or services we strive to create, our overall purpose is the same: delivering happiness to ourselves, and others we care about, and so creating ongoing value in our lives.

Value, in other words, is really just another word for happiness, at least from the perspective of the consumer. Happiness is the cognitive experience that dominates our waking lives—and the pursuit of happiness is the basic value imperative by which we are all instinctively governed.

To help deliver this happiness to ourselves, we at some point created businesses that generate products and services that have at least the potential to make us a little happier each day. “Happier” might mean more comfortable. Or it could mean more excited or entertained. It might mean better able to dust high window ledges. Business was the means of delivery. Many people will say they value many things that businesses do not and cannot provide, such as spending time with loved ones, or communing with nature. But, we ask, didn’t business play a crucial role in creating the technologies and products that free us from gathering food, cleaning and preparing it, washing dishes, mending and washing clothes, or transporting us safely to and from our comfortable, modern homes? And even if we recognize the many cases where freedom from such concerns has failed to provide lasting happiness—and acknowledge the human needs that go well beyond the material ones addressed by most businesses—we think that most people would agree that business has succeeded at the very least in freeing unprec- edented numbers of men and women from burdens that few of us today would gladly take up again—and that many more of the world’s citizens are eager to throw off.

become a decade-long interaction with our classroom partici- pants and corporate clients. With the help of their challenges and feedback, and based on observations of their behavior and answers to carefully designed questions and case studies, we have been able to test the validity and effectiveness of alterna- tive techniques and hypotheses. We have also benefited from several implementations of some of these techniques with corporate clients, with successes and failures alike providing invaluable lessons.

The set of insights and prescriptions that emerged from this interaction is presented in this article as “blue line management.” It is an approach that seeks to incorporate perspectives from many areas of study to enable managers to design value-adding processes, and then ensure their commit- ment and ability to adapt continuously in ways that keep the organization focused on value creation, and its people highly motivated and keen to show up each day to do it again.

What Is Value Creation? The first thing to note about value creation is that it has noth- ing to do with beliefs—yours, ours, or anybody else’s. Value creation, when properly understood, is not simply some- one’s economic or ethical perspective on how to manage a company. Value creation is a self-generating, self-governing, self-preserving planetary imperative based on nature itself; and if you don’t respond to it, the planet will shut you down.

Consider a continuum of value where on one end we have the most basic of raw materials, and on the other the consumers of these materials. Whether we’re drilling for oil, pumping gas at the local service station, or driving the latest Jaguar, we are all participants somewhere within this global value chain (see Figure 1).

This value chain rules the globe since, beyond our basic drives of food, shelter, and sex, we are driven to try to make

Figure 1 The Global Value Chain

“Customers” Raw materials

B2BB2C

Cash

Need: Energy

VALUE = HAPPINESS VALUE = The Expected Future Free Cash Flow Discounted at the Opportunity Cost of Capital

Need: Cash

Cash Cash

Objective for Firms – Value Creation & Capture

10 Journal of Applied Corporate Finance • Volume 26 Number 1 Winter 2014

1. Deidre N. McCloskey, 2010, “A Kirznerian Economic History of the World,” The Annual Proceedings of the Wealth and Well-Being of Nations (Upton Forum), pp. 58.

But now let’s look at this question of value from the perspective of a business. For any business to survive, it must not only deliver happiness that customers are willing to pay for—the “cash applause of consumers,” as one observer put it1—but the cash it receives must be sufficient to pay its own suppliers as well as its providers of capital. What’s more, to accomplish that goal, the business will have to use resources at least as efficiently as alternative methods of delivering the same products or services.

This all means that, in the case of a business, we can express value in a different way, namely as “the expected future free cash flows discounted at the opportunity cost of capital.”

And a value-based company is thus one that evaluates all major investment opportunities in terms of their net present values (or NPVs)—a practice we refer to in our book as “blue line management”—and not according to their expected effects on reported earnings, or some other widely followed performance indicators.

Although this definition of value—or something very much like it—has been part of finance theory for a long time, it has been poorly interpreted and misunderstood by many practitioners. So, we want to begin by clearing up a few misconceptions.

First, this definition of value is completely consistent with, and works to reinforce, the definition of value as happiness that we offered a moment ago. Only if the business deliv- ers happiness to its customers will they willingly part with their cash. Only if the business uses its resources efficiently will it have cash remaining after covering its cash costs and the opportunity cost of its capital. And only if the business performs systematically and sustainably at least as well as its competitors will it be able to survive for a long time.

Our years of experience as educators and consultants have made it clear to us that several words and concepts in this definition tend to cause confusion for business people. First, the word “the” in front of “expected future free cash flows” is meant to emphasize that the value of a particular business venture—which like all businesses involves the use of scarce resources with an opportunity cost—depends upon the net cash flows that are expected in a probabilistic sense, indepen- dent of any one person’s (or group of persons’) expectations about those future cash flows. Unless grounded in some objective sense of probabilities, what you or I or the manager expects is completely irrelevant to the question of value.

The second “the” in the definition is equally important and also often misunderstood. By saying “the opportunity cost of capital,” this definition underscores the reality that any resources employed in a particular business venture cannot simultaneously be employed in an alternative venture, and therefore an opportunity is being passed up to deliver the products and services to customers. The clear implication here is that, if an alternative use of those resources could have sustainably delivered more happiness to potential customers than the chosen use, there will be economic forces at work pushing these resources to that alternative.

A Matter of Power The past was undeniably a simpler time, but undeserving of much of the nostalgia bestowed on it. Many people in the old days had more “leisure time” than we have today, but when we speak of leisure in this context, it’s far from the idea of leisure we have now. Well into the 19th century, the great majority of people on earth lived lives that were little better than those of our Stone Age ancestors. Often lacking the calo-

The concept of the opportunity cost of capital (OCC) presented here is very different from the way it is often taught—namely, as “the investor’s opportu- nity cost of cash.” Thinking of “capital” as money that belongs to “the investor” leads to a very different inter- pretation than viewing it instead as simply the resources used for the project. Investors would prefer to earn an infinite return on their investment. Only if forced to accept a lower return—for example, by the process of competition with other potential investors also willing to fund the project—would the initial investors agree to accept a lower return. We refer to this concept as the “cost of funding,” and it is what the business must pay to obtain funds from investors.

Although the two concepts are clearly related, there is a potentially large conceptual, and practical, difference between the cost of funding and the opportunity cost of capital. The latter is a measure of the happiness that could have been delivered through alternative uses of the same resources in projects of comparable risk. The cost of funding reflects the return that investors are willing at any given time to accept on invested cash; and thus it is influenced by transitory factors such as fluctuations in market-risk premia and subject to frequent if not continuous change. The opportunity cost of capital associated with a given project is first and foremost a function of the project’s nondiversi- fiable or “market” risk, which is unaffected by changes in investor moods or market psychology.

Cost of Funding vs. Opportunity Cost of Capital

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2. Tony Judt, Postwar: A History of Europe Since 1945 (New York: Penguin Books, 2005) p. 337.

3. W.J. Baumol, 1990, “Entrepreneurship: Productive, Unproductive, and Destruc- tive,” Journal of Political Economy 98:5, part 1. p. 899.

4. http://classiclit.about.com/library/bl-etexts/rwemerson/bl-rwemer-conduct-3.htm

more people than the next person. With wealth concentrated in the hands of the select few, procuring the funding necessary was next to impossible for those with innovative ideas.

And the net effect of all this was that the most promising ideas for improving the material lot of mankind never got beyond the idea stage.

The Rise of the Consumer Every man is a consumer, and ought to be a producer. He fails to make his place good in the world, unless he not only pays his debt, but also adds something to the common wealth. Nor can he do justice to his genius, without making some larger demand on the world, than his subsistence.

Ralph Waldo Emerson, The Conduct of Life 4

Our roles as consumers go hand in hand with our roles as producers. We produce things to consume; and because we want to consume, we produce.

This wasn’t always the case. Renaissance Europe may have had many fine things—art, architecture, gold, jewels—but it wasn’t what we would today consider a consumerist society, at least not in the collective sense. Luxuries were the exclusive domain of the aristocracy—the landed rich—and remained to the common man as out of reach as flying to the moon. Because of this vast gulf between the haves and have-nots, the subsisting peasants (a group through which many of us can trace our lineage) felt no incentive to work harder in the fields than they already did, or to make wares in their spare time to sell, since there wasn’t much they could spend any extra money on, anyway.

Still, they no doubt felt the desire to reach beyond, to do more. They felt the powerful urge to produce and invent—to somehow enhance the comforts of their life and find ways to bring what is sometimes called “old luxury” within the grasp of more than just a privileged few. Though they may not have described the urge this way, they were striving to create “new luxury” that could be available, ideally to everyone.

We can trace the beginnings of what we think of today as “consumerism”—a system that encourages the purchasing of goods and services in ever greater amounts—back to the 17th century. The clearest evidence of these beginnings can be seen in the trading activities initiated by the Dutch and British East India Companies. When their ships started returning from their overseas voyages, they brought back with them products and materials—spices, coffee, tea, silk, porcelain— that were available to anyone who had the means. As a result, people were encouraged to find new ways to make money.

Suddenly, from having no incentive to earn more money or produce anything different—or having much spare time to

ries needed for a full and productive life, and lacking also in the consumer goods that offer pleasure and comfort, they did little more than survive. Historian Tony Judt reminds us that for “the overwhelming majority of the European popu- lation up to the middle of the twentieth century, ‘disposable income’ was a contradiction in terms.”2 It’s easy to forget just how recently the grinding routines of material scarcity held sway over every aspect of human life.

What forces had conspired to keep humankind in such servitude? For many centuries, entrepreneurs—at least the sort that tried to commercialize innovations and make them available to the wider public—were frowned upon. There are only two basic ways to make money. The first is to improve the world; that is to enlarge the size of the collective economic pie, and take a cut in the process. The second is to rip off people or institutions; to use one’s ingenuity, or political ties, to take a slice of the pie without contributing to it. Let us call the first method “productive entrepreneurship”—and for the second we will use the economist’s term “rent-seeking.”

For a long time, productive entrepreneurship was not viewed as a respectable or reliable path to riches or status. As Princeton economist William Baumol said about the Romans, “As long as it did not involve participation in industry or commerce, there was nothing degrading about the wealth acquisition process.”3 Those who did acquire their wealth through industry or commerce were typically freed- men—former slaves—and therefore socially stigmatized.

In Medieval Europe, it isn’t that enterprise was frowned on; it was merely considered a waste of time unless it helped promote warfare or aided in capturing a neighbor’s castles and lands. Ideas for better siege machines or more sophisticated weaponry had a good chance of seeing the light of day, but those aimed at improving the lot of the common man made little headway.

The ancient Chinese had a similarly unenthusiastic view of commerce. Instead of inventing things and working to make everyone’s lives better, thousands of men sought advancement by sitting for the imperial examinations and becoming bureau- crats. If they passed, they moved into a position of power with access to tax and other legal and not-so-legal revenues.

For thousands of years, the chances of productive entrepre- neurs realizing their dreams were extremely limited. Capital allocation—funding—was driven purely by relationships. Because assessing the true value of an idea was very difficult, investors made decisions based not on whether an idea had merit but whether they thought the person behind the idea was trustworthy. Or worse, decisions were based on whether the person was a relative, friend, or friend of those in power; or because he or she was politically shrewd, or good at killing

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5. Thomas K. McCraw, 2007, Prophet of Innovation: Joseph Schumpeter and Cre- ative Destruction, Boston: Harvard University Press, p. 9.

TVs, iPads and other accoutrements of modern life. If such products were not available, how many of us might choose to work less, with the result that the world would have fewer products, including those that truly meet the needs and desires of humanity?

As the great economist Joseph Schumpeter wrote, “The capitalist achievement does not typically consist in providing more silk stockings for queens, but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.”5 Three centuries of innovation spurred by the need to give customers what they want has given us not only cheaper commodities and all the gadgets that help us organize our time and maintain our social networks, but also the telephone, MRI scanners, and key-hole surgery. Of course, some of the things we come up with don’t provide happiness or create value. But these inventions don’t last. Eventually, enough of us reject them, and they disappear.

In order to have the things we want, we need people and businesses to have good ideas, be able to convert those ideas into things, and then figure out a way to get these things to us. This has always been the necessary equation for the creation of value; but until a few hundred years ago, it wasn’t possible. Whether our most pressing wants are represented by basic survival, Asian porcelain, or gold-plated faucets, each part of this chain—the original idea, the ability to turn it into something, and a method of delivery—must be satisfied. But consumerism couldn’t become a reality until a mechanism surfaced that would enable it.

The Global Capital Markets For the gears of consumerism to kick into motion, three things were necessary: first, good ideas; second, time and resources for the entrepreneurs with the ideas to develop them into usable stuff; and, finally, a way to get that stuff to market—and, ultimately, into the hands of consumers. We’ve argued further that it is our roles as consumers that have driven the massive social and political changes of the last 400 years. If a major force keeping humankind at the level of subsistence was the difficulty of borrowing money to start a business or develop an idea, some seismic shift must have occurred that led to today’s circumstances, when we get our stuff by the bucketfuls.

So what changed? What mechanism emerged to ensure that capital could be allocated efficiently and fairly? What system arose that could somehow naturally and objectively direct the right funds to the right people? As we’ve said, getting funding for good ideas had been nearly impossible; the risks were enormous and the rates excessive. Something happened to get the cost of funding down to a level at which investors could lend money without risking everything they

do it anyway—people had a reason to use any time not spent surviving to try to make more money so they could buy the fantastic things coming back from unknown, faraway places.

The result was remarkable. The output of the average person rose dramatically, and only partly because of techno- logical progress. This change had come about in large part for a much simpler reason: people wanted to earn more so they could buy things. It was a simple but powerful chain of logic. Because things were being produced in large quantities for the first time, they were becoming available to anyone who could make enough extra money to buy. This opportunity—the opportunity to consume—encouraged people to work harder.

Was their desire to buy blind, aimless, or irrational? Hardly. People wanted to buy the things the ships were bring- ing in because they were acutely aware that those things would improve their lives. In England, for instance, the arrival of lightweight calico from India and gingham from the Far East meant that people could discard the traditional, home-grown thick linens and wools in summer. In Holland and elsewhere, the arrival and quick dissemination of tea transformed it from a drink of the elite into a universal comfort and pleasure. People suddenly had access to the lifestyle of the previously untouch- able rich. They drank coffee, smoked tobacco, ate chocolate.

And once they got the taste for such things, it made them want more. The Dutch East India Company at first imported a few thousand plates, bowls, and vases from Asia. By the end of the 18th century, that number had grown into the millions—and because of this mass production and mass availability, fewer and fewer items remained the exclusive domain of the elite class. And as consumerism exploded, social distinctions began to erode. What might be sold to the aristocracy as a high-quality, high-priced product was soon being produced in volume and sold cheaply to the masses.

Commentators from Jean Jacques Rousseau in the 18th century to John Kenneth Galbraith in the 20th have lamented these developments, equating mass consumerism with an exploitative form of capitalism that loses sight of the greater good and creates an underclass that can’t distinguish between what it wants and what it needs. This, they claim, leads people to blindly imitate their social “betters” rather than support innovation that truly meets their needs and desires. Thus, the argument goes, this type of consumerism must be bad for people.

But all this begs the question: Do the workers who make the clothing, the transportation infrastructure, and the medical equipment do it to experience a greater sense of self-worth for contributing to the “greater good?” For many, no doubt, the answer is yes, at least in part. But people also work, of course, to feed their families, and to be able to buy the products others are producing, including new flat-screen

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6. As of November 18, 2013. 7. http://www.pngbd.com/finance/shares.php

8. http://www.world-exchanges.org/statistics/key-market-figures

investment plunge, they could do it in only so many ways, after which they could do nothing but hope for the best.

Even if everything went according to plan, investors’ hands were still tied as far as liquidity was concerned. Imagine investing in a ship about to sail to Asia to acquire spices. Until the ship returned to port, there was no tangible way to cash in one’s investment. And since traveling from, say, Europe to the Far East and back is no short trip, to say that investors had to wait a long time to see the fruits of their investments is a major understatement.

So, entrepreneurs needed money to develop the ideas that might make our lives better—but investors needed a way to limit their risk.

Once the wheels of the capital markets were set in motion, the mechanism for bringing money and ideas together needed only time to increase in both momentum and efficiency. As the markets grew in size and expanded geographically, inves- tors realized two benefits that had never existed before: more raw opportunities to invest, and a much bigger pool of poten- tial ideas to invest in. These two new advantages meant they could finally diversify away many of the catastrophic risks that in previous centuries were largely unavoidable. A further advantage was the ability to maintain liquidity. Even though they had put money into something that wasn’t guaranteed to succeed, at least it wasn’t stuck on a ship at sea.

But Who, or What, Decides Which Projects See the Light of Day? While the benefits of the capital market discussed above are of course important, the most important aspect of having capital markets is their influence over the allocation of capital. While the pharaoh may have been keen to have an enormous pyramid built to honor him in death, and had the power to direct the lives of thousands of people squarely to this task, this is not the allocation Egypt’s people would have chosen for themselves had they a say in the matter. The key distinc- tion between monarch-driven allocations of resources and the capital market is the matter of who is in control.

The capital markets work because no one person or group of people decides how the money in it should be divvied up. Capital allocation is driven by some other criteria—but what? How do we make sure that, without thinking about it, the capital markets direct funding to the ideas that will make a positive difference in our lives? To answer this question, let’s consider the case of bacteria.

A single bacterium has no brain, yet collectively bacteria continue to thwart the efforts of medical researchers to kill them. James Surowiecki wrote about the wisdom of crowds, by means of which groups of people make better decisions than individuals because they possess far more information, even though they don’t necessarily communicate that infor-

owned, and entrepreneurs could accept the loans without signing away their lives as collateral.

The initial action that started moving money into the hands of those who could do something useful with it was a small experiment launched by the Dutch in 1606. Shares in the Dutch East India Company were issued, suddenly creating what is usually considered the world’s first publicly traded company. While commodity exchanges had existed in various forms since early civilization (the U.K. is dotted with ancient Corn Exchange buildings that now host art and entertainment events), and brokers trading in bank debts had plied their trade since at least the 12th century, it wasn’t until the public launch of the Dutch East India Company that company ownership truly changed, and that the common man was given opportunities he had never seen before.

Thanks to the Dutch, the capital markets had taken root and quickly expanded. The value creation imperative— the natural process by which the most promising ideas are enabled and the wrong ones rejected—would take a long time to develop into its present form. There were growing pains, for sure, and growth proceeded in fits and starts. But the capital market boomed, emerging from its early growing pains to become truly global. Today, there are nearly 250 stock exchanges all over the world, from the New York Stock Exchange, with some 2,800 listings and a market capitaliza- tion of over $16 trillion,6 to the Port Moresby Stock Exchange (which lists 19 stocks) in Papua, New Guinea.7 In August of 2013, the World Federation of Exchanges reported that the total market capitalization of the 52 regulated exchanges it represents was approximately $57.4 trillion, reflecting the market value of more than 45,000 listed companies.8

How the Capital Markets Help Us Get Our Stuff In the pre-modern world, not unlike today, there were entre- preneurs—people with the ideas but not the money—and there were investors—people with the money but not the ideas. We’ve discussed the acute problem the entrepreneurs faced: getting money in their hands to develop their ideas to make the world a better place. But before you direct all your sympathy to the entrepreneurs, consider the investors’ position as well. Sure, it would have been nice for the people with the money to fund every idea that came along, thereby ensuring that the right ones would eventually rise to the top.

But there was a reason they didn’t. There was a reason they tended to invest only in the ideas of family members or others in their immediate circle they felt they could trust. In today’s world, what is the constant message we’re given? To diversify our risk to every extent possible. For early share- holders and investors, with their limited supply of relatives, friends, or high-ranking connections, investment risk was virtually the opposite of diversified. If they did take the

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9. Michael Lewis, 2011, Boomerang: Travels in the New Third World. New York: W.W. Norton & Co., p. 128.

ions hinder the creation of value by compromising objectivity and skewing the collective democratic brain. Yes, relationships still benefit us in many ways, but there are times when we need to recognize them as more hindrances than enablers.

The collapse of Ireland’s economy during the Great Recession offers a cautionary tale of what can happen when personal relationships are allowed to interfere with the alloca- tion of capital. Anglo Irish, one of the country’s largest banks, grew its business through aggressive and careless lending practices. As Michael Lewis writes, “Anglo was able to shovel money out its door so quickly because it had turned banking into a family affair: if they liked the man, they didn’t bother to evaluate the project.”9 Relationship-based lending meant no due diligence, and the bank’s willingness to write checks at just about any amount requested by the borrower only made matters worse. Perhaps most shocking, lending officers were paid based on how many Euro were lent—with almost no attention paid to the quality of the loans.

There is only one way to guarantee that capital alloca- tion decisions remain objective: keep people out of them. The capital markets achieve this goal because no one is in charge. The capital market is a cold, dispassionate broker. It couldn’t care a whit about the color of your skin, your gender, your religious beliefs, your age or shoe size, the clothes you wear, the food you eat, the schools you went to, or who your parents are. It cares about one thing only: allocating capital to the products and services that deliver value to our lives.

To promote value creation in our own organizations, we must, like the capital markets, remove personal biases and opinions when allocating resources and making investment decisions. A critically important accomplishment of capital markets is their effectiveness in removing considerations of “kith and kin”—or their modern-day equivalents of crony- ism and patronage—from corporate decision-making and

mation directly to each other. Concepts that play on this idea, such as open-source innovation and crowdsourcing, which invite input from anyone and are ultimately self-policing, lie behind the success of Linux, Mozilla Firefox, and Wikipe- dia. The Internet, in fact, may be the perfect example of the ultimate democracy that is the collective brain. No one is in charge, so that the only ideas that make it are those that succeed in bringing value.

The global capital market system achieves a similar outcome in financing ideas: those that deliver, and are expected to continue delivering, enough happiness to cover the opportunity cost of the resources engaged in the process continue to be supported, while those that cannot do so eventually fail to receive support and are shut down. Who decides the fate of ideas in the capital market? Ultimately, it is all of us in our role as customers and our willingness (or lack thereof ) to cover the full cost of the resources engaged to deliver the products or services.

The mechanism that achieves this outcome is the compet- itive nature of the capital market. This mechanism drives the cost of funding, the return accepted by investors in competi- tive markets, down to the opportunity cost of capital. The opportunity cost of capital, as we have already seen, is deter- mined by the riskiness of the project into which the funds are invested, and not the desired return of the provider of the funds.

The Relationship Problem We are social creatures, and the act of forming relationships has benefited us since our distant ancestors learned the value of watching each other’s backs, sharing food, and keeping an eye on each other’s kids when the men were out trying to kill something for dinner. In business, however, relationships have a downside. They cloud judgment and generate opinions. Opin-

Using the concepts and statistical tools of modern finance, academics have attempted to clarify what is meant by “risk.” And one of the most widely used defi- nitions of risk—the one provided by the Capital Asset Pricing Model, or CAPM—fits nicely into our discussion and definition of value.

According to the CAPM, in a well-functioning market for capital, only the market-related risks of compa- nies—the tendency of their stock prices to move with or exaggerate changes in the broad market—are “compen- sated” with higher returns over time. The effects of all

other risks on the cost of capital and market pricing are said to be “diversified away” by investors’ actions in constructing well-diversified portfolios.

From whose perspective are we to assess which risks can be diversified away? As finance academics have argued, the perspective should be that of the “fully diversi- fied portfolio” that includes all productive assets. What’s more, they have demonstrated that there is no require- ment that any individual, or group of humans, actually hold this portfolio for a well-functioning capital market to price each investment as if they did.

The CAPM (or How Risk Affects Value

15Journal of Applied Corporate Finance • Volume 26 Number 1 Winter 2014

To put it another way, blue line companies resolve to invest systematically only in projects where the expected future free cash flows, discounted at the opportunity cost of capital, exceed the initial investment. It sounds simple enough. But, as we’ve noted, these determinations of value depend entirely on the cash flows expected from the invest- ment in a probabilistic sense, and not necessarily on the managers’ cash flow forecasts, which are by their nature prone to distortion by bias and opinion.

To sum up, then, all investments have an intrinsic value—one that exists independently of whatever you, we, or anyone else might believe it to be. Confusing intrinsic value with personal estimates of value can lead to the serious error of equating price with value. Price is the outcome of a market mechanism, or negotiation, among two or more parties. For any item, from consumer goods to shares of stock, the buyer in a voluntary exchange privately assigns to it a value at least as high as the price for which she bought it, and the seller privately assigns to it a value no greater than the price for which he sold it. This price negotiated between the two parties will rarely, if ever, be equal to the present value of the expected future free cash flows discounted at the opportunity cost of capital.

Yet companies fall prey to these errors all the time. They allow perception and opinion to sway decisions, uninten- tionally ignoring value at their peril. Why do they do this? Because it’s hard to believe in something you can’t see.

Why can’t the blue line be seen? Because to know the intrinsic value of any potential investment decision, you would have to possess, and be able to process accurately, all available information about it, including all states of nature that might prevail in the future, not to mention the precise probability of all potential states of nature, and the cash flow consequences for each of these states.

Price, on the other hand, couldn’t be more observable. Why? Well, remember that price is generated by transac- tions, or by different people agreeing on forecasts of expected cash flows. But such forecasts are invariably different—and will often be quite different—from the expected cash flows that, in combination with the opportunity cost of capital, define intrinsic value. Forecasts may sometimes be reason- able estimates, but they can never be substitutes for the true probability distributions that underscore value.

But since it is our natural desire to want to measure things—to make them tangible and real— corporate managers tend to focus on what they can directly observe.

forcing managers to focus on efficiency and value as their primary goals.

Blue Line Management Having come to understand value conceptually—that is, as the expected future free cash flows discounted at the oppor- tunity cost of capital—we can take the next step, which is to ask the question: How do we manage for value creation in our day-to-day business? Recognizing the theoretical founda- tion of an idea hardly ensures that we will put it into action. A practical framework is needed.

To facilitate the application of value, we find it a necessary first step to distinguish between value as our main objec- tive and all other objectives. In other words, if you aren’t managing toward value, you are necessarily managing toward something else—and that something else, whatever it is, is, at least in our view, wrong. We call the path toward value the “blue line,” and the path toward everything else the “red line.” Companies that maintain a firm intention to create value are upholding what we call the Blue Line Imperative. Every decision they make is based on one criterion and one only: whether that decision will create value or destroy it.

By contrast, companies that allow their decisions to be influenced by anything other than value creation are manag- ing according to the red line—and that can lead to only one conclusion: Though it may take one year or 30, red line management eventually spells doom for a company, no matter what business they are in.10 Blue-line management leads to long-term profitability and survival.

Value Creation and the Blue Line The managers of a value-driven company ultimately make a rather simple decision regarding every investment possibility before them, even if the way to reach that moment of simplic- ity isn’t so simple. The simple part, of course, comes down to a straightforward question: Will this investment create value or destroy it?

The answer to this question is determined in a very specific way: namely, by calculating the decision’s NPV, or Net Present Value—that is, the expected future free cash flows discounted at the opportunity cost of capital. Manag- ers in blue line companies are encouraged—both as a matter of corporate training and “culture,” and by the reinforce- ment provided by incentives—to take on all positive-NPV (or value-creating) projects and walk away from (or shut down) the rest.

10. Some recent research provides evidence of a negative link between long-term value and the use of incentives tied to short-term targets. That is, the more we hold management accountable for measurable and, particularly, earnings-based targets, the more that what we view as the truly “value-based” elements of corporate culture— qualities such as integrity, collaboration, and customer orientation—appear to suffer. Popadak, Jillian, 2013, A Corporate Culture Channel: How Increased Shareholder Gov- ernance Reduces Firm Value, unpublished manuscript, The Wharton School. Popadak finds that increases in what she calls “shareholder governance” (in which managers are evaluated on the basis of single-period KPIs, such as earnings) do lead to short-term

improvements in the relevant KPIs, but also statistically significant decreases in custom- er-orientation, integrity, and teamwork. Decreases in these less-visible aspects of corpo- rate performance lead to worse financial results in the longer term. As Popadak says (p.3), “firms realize financial gains from the results-oriented corporate culture, but in the long-term, the gains are reversed.” To use our language, the emphasis on highly visible KPIs for control purposes (including incentives) may cause the red line to look better in the short term, but the neglect of critical and less tangible aspects of performance cause the blue line to do down.

16 Journal of Applied Corporate Finance • Volume 26 Number 1 Winter 2014

a blue line (here represented in the figure by a black line). The red line depicts the movement of a fictitious public company’s stock price over time; the blue line shows “intrinsic” value. We expect the red line to fluctuate around the blue because, as deviations between the intrinsic value and share price get larger, savvy investors will take appropriate action. If the shares appear seriously overpriced, they sell or even short; if the reverse is true, they buy.

The practical effect of this activity is the tethering of share price, an observable indicator of “value,” to the blue line. Anything one does to detract from value adversely affects not only the blue line, but the red line in concert. Value destruc- tion, in other words, causes share price to go down just as value creation causes it to increase. In Figure 2, we see an increase in the blue line, which typically leads to a higher share price. But the red line continuously fluctuates around the blue. And when the blue line is higher, as in the right half of the graph, the share price naturally goes up. If the share price is to fluctuate around the blue line, isn’t it better that it fluctuates around a higher level of value?

The problem, then, is not with stock prices as such, or with the efficiency of capital markets. The problem is with the efforts of executives to manage price at the expense of value. While the red line cannot follow the blue line, the two, as we have seen, are inextricably related. Value destruction, in other words, causes share prices to go down—at least eventu- ally—just as value creation causes it to increase.

A blue line company never tries to “manage” its share price. It simply allows price to be determined by the capital market with the confidence that if it makes positive-NPV decisions, one of the outcomes will eventually be an increase in share price. The red and blue lines will never entirely coincide; but when viewed over a sufficiently long time horizon, they will converge to a high degree because clever investors will try cease- lessly to spot and exploit mispriced securities.

This means that the only way to be reasonably confident that one’s share price will rise is to make decisions that raise the blue line. If a manager devotes time or other company resources to managing the red line, it is nearly certain that the diverted resources will cause the blue line to fall. The ironic result is that trying to manage the red line with the aim of raising share price will almost certainly cause it to fall.

Evidence that management in a given company is red-line motivated will show up in a number of ways, both at the corporate level and business-unit levels. One common signal at the corporate level is the buying back of one’s own shares with the aim of increasing Earnings per Share (EPS); another is the massaging of accounting numbers to reduce earnings volatility. A buyback can be justified on several grounds— perhaps most reliably as a tax-efficient way of returning excess capital. But buying back shares simply to increase EPS does not increase value. This act is virtually always motivated by the misguided belief that share price is based on a fixed multi-

Quantifiable goals are comforting, if potentially disastrous. At most companies, they are known as “key performance indicators,” or KPIs.

Companies everywhere rely on a broad set of such KPIs for internal performance evaluations that, they believe, keep their people focused and “incentivized.” KPIs would indeed seem the ultimate carrots for inspiring value-generating performance.

Unfortunately, this belief is more likely to have the opposite effect, and indeed has been responsible for staggering amounts of value destruction. The blue line is unobservable, yes. But it still represents the only goal for any value-driven organization.

   The Curse of the Red Line Let’s restate the Blue Line Imperative: it is an approach in which all decisions of consequence are made with the sole aim of creating value. This view stands in stark contrast to the more frequent practice of red line management, in which value creation may be the stated goal but the busi- ness is managed to deliver on specific indicator targets, independently of whether these efforts are value-creating or value-destroying.

Here’s a common example. The most visible indicator of what we will for the moment call “value” for a publicly traded company is share price. Indeed, value creation is often expressed as rising share price, as we have noted. But remember that share price is not value; it is the consensus estimate of the firm’s value that is provided by those participating in the market. As such, it will always be at least somewhat off the mark and the subject of healthy skepticism—and, under some circumstances (think of the dotcom bubble that burst in 2000, or the recent financial crisis), it is liable to very large errors.

Consider Figure 2, in which a red line is superimposed on

Figure 2

$ € £ ¥

Time

The expected future free cash flows discounted at the opportunity cost of capital

Value =

Outcome of a negotiated or market process clearing supply and demand

Price =

17Journal of Applied Corporate Finance • Volume 26 Number 1 Winter 2014

But an even bigger problem with KPIs is the incentives that they provide corporate managers and employees to “game the system.” Once you take a value driver and try to measure it—by, for example, putting a dollar sign, point value, or percentage sign in front of it—the very nature of the value driver has been transformed. You have turned it into an indicator—and people in the organization can be counted on to find ways to increase it that often involve reducing the value and efficiency of the organization.

Figure 4 illustrates the R&D process map for a large specialty chemicals company. For each box, there are behav- iors that take place behind the scenes to drive performance, and an indicator that summarizes observed performance for a given period. For example, converting technology into appli- cations (enhanced functionality of products, new product features, and process innovation) is deemed to be a critical success factor—that is, a value driver. Because of its impor- tance to the long-run success of the business, many companies attempt to measure—and some reward—the performance of responsible managers on this dimension.

But now let’s consider what is likely to happen when a manager is held accountable for converting technology into practical applications. A manager evaluated on the percentage of technologies converted may discourage or reject an idea that he believes is potentially groundbreaking because it has a high risk of failure. Meanwhile he embraces any project with a high probability of “success” even if he feels it will probably contribute marginal or even negative value. He is gunning for those indicator targets, and meet them he will through this highly focused behavior. His behavior, along with that of his fellow managers, will lead to a high observed value for this and other metrics—while value-creating opportunities with lower probabilities of success but potentially much larger payoffs will be regularly passed up.

ple of earnings. If this were the case, any action that increased EPS, even if it had no impact on the cash-generating capabil- ity of the firm, would cause the share price to increase. Of course, the signal conveyed by an increase in EPS may be misinterpreted, but when the implied increase in future cash flows fails to materialize, the share price is bound to fall.

The Problem with KPIs When used properly as a source of organizational learning, KPIs can be highly useful, even indispensable. But they can also be, and are often, used as red-line tools. Value-reducing behavior is often motivated by the desire of senior manag- ers to finesse share price, and KPIs offer a great way to do it.

As shown in Figure 3, value creation is achieved through actions and behaviors commonly known as “value drivers”— critical success factors that must be managed effectively if the business, or any business, is to succeed. Examples of such value drivers include employee motivation, customer and supplier relationships, and the configuration of equipment and machinery in factories.

But here again we are confronted with the problem of visibility versus invisibility. You might be able to gauge how well your relationship with your supplier is going, but you can’t attribute to this value driver a specific, quantifiable impact. Because it is not measurable, you attempt instead to capture it in a KPI, and this becomes a target to be met.

But there are a number of problems with how compa- nies use such KPIs. First, because the KPIs almost invariably reflect the influence of many factors other than the desired corporate behavior, there is almost never a clean, direct causal relationship between the ultimate effect on value of a given business decision and its outcome as measured by a KPI. And thus most indicators are at best noisy measures of how well value drivers are being managed.

Figure 3 The Relationship Between Value Drivers and Indicators, and How They Relate to Value Creation.

Managing product quality

Attention to customers

Motivating employees

Strengthening team orientation

Learning from failure

Optimizing inventory

Shortening prod-dev cycle

Defect rate

Customer satisfaction

Employee productivity

Return on Invested Capital

Employee turnover

Working capital / revenues

Time from patent to product

Value Drivers

Indicators

Value Indicators

18 Journal of Applied Corporate Finance • Volume 26 Number 1 Winter 2014

Often, the message we hear coming from upper manage- ment to lower is to deliver on the KPIs but not to compromise the long-run interests of the company in the process. Those receiving this message detect an immediate and obvious lack of integrity in the system, since they understand clearly that they cannot do both. What will most people do in this position? They will do whatever puts food on their family’s table. If value is destroyed as a consequence, so be it—you need to look out for number one.

Two deadly consequences arise. First, when middle- and lower-level managers recognize that they are destroying value as the only way to keep their careers on track, morale suffers. When morale goes, productivity declines as people begin to instinctively go through the motions. Worse, in such a system employees come to understand that at least some of their colleagues who get promoted tend to be the biggest value destroyers but the best at manipulating the system to their advantage. Morale sinks still further, as does productivity, and people who might have otherwise been eager to create value for the company instead become resigned to hitting targets as a means of career survival. The red line has taken over.

Indeed, in organizations where the red line reigns supreme, even when senior managers insist that they are focused on value and encourage everyone else to do the same, middle managers recognize that they are being paid to deliver on indicators. The employee described above who was trying to understand the disparity between the company’s value-peppered mission statement and its indicator-driven system of compensation now has a new quandary to tease apart. Senior management is trumpeting value as its focus, yet

The first problem leads to a second. The initial problem stems from metrics that are used as targets or incentives. The second comes from the reality that when metrics are used as incentives, they no longer indicate what managers think they are indicating because they become altered by the efforts of decision-makers to manage them, an extra source of confu- sion on top of an already confounded measure of “value.” The result is that even those employees who are trying to use KPIs properly—that is, as tools of learning, diagnosing problems, or filling knowledge gaps—will obtain the wrong insights because the noisy proxies for value have become even noisier. Since everyone in the organization manages to KPIs, it becomes impossible to trust the indicators or to interpret them in a meaningful way. Managers will be unable to understand how changes in behavior affect either outcomes or value creation; and given the inherent difficulty in distinguishing positive-NPV projects from negative-NPV ones in even the best of circum- stances, value creation becomes a practical impossibility because all of the numbers being used are, to varying degrees, lies.

In sum, we are not suggesting doing away with indicators. We strongly believe, in fact, that any complex organization ought to make intensive use of indicators as the only practi- cal way to judge how well key processes are being run or how they might be improved. The trouble occurs, however, when indicator outcomes become the focus—and even the effective goal—of the business. Red-line behavior spreads through all levels of the organization because employees are paid based on indicator outcomes, and it takes little time for them to discover that it is in their best interests to deliver on the indicator targets—and thoughts of value be damned.

Figure 4 Drivers and Indicators in a Product Development Process.

How effective is organization at grasping and developing new ideas?

How effective is organization at converting new tech. to actual application ?

How effective is organization at implementing new technology / products?

% ideas acted upon

# ideas generated

% conversion to patent/next step

# ideas introduced

x

% convert tech to application.

# ideas become actual technology

x

% launch to client / activity

# new products / applications

x

revenues/ cost savings per idea

# implemented products/activities

x

Incremental cash impact

x

How effectively do new products / technology generate revenues &/or cost savings?

Is organization actively encouraging idea generation?

Time from idea generation to product launch / technology implementation

How effective is organization at identifying and acting on new ideas?

PV of expected future FCF

Value Creation x

What is the present value of the long-term cash impact of the effort?

19Journal of Applied Corporate Finance • Volume 26 Number 1 Winter 2014

11. For an interesting discussion on these issues, see Steven J. Spear, 2009, Chasing the Rabbit, New York: McGraw-Hill, pp. 33-44.

Properly calibrated KPIs will reveal the extent to which our understanding of the system was incorrect or incomplete— a confirmation or repudiation of the hypothesis. In this way indicators can act as highly useful warning signals, the prover- bial canary in the mine shaft, since discrepancies between the targets (the hypothesis) and the outcomes (the result of the experiment) can reveal critical problems as they emerge, allow- ing us to plug knowledge gaps and resolve problems faster. Or they may validate the hypothesis and provide important evidence that the investment seems a positive one.

But this process can work only if we allow it to. The measurement of outcomes must be unbiased, and completely uncontaminated by efforts to steer or massage the indicators. And such outcomes must clearly be consistent with increasing the long-run NPV of the enterprise, with little possibility for gaming. KPIs always have something valuable to say, but the value must be allowed to emerge pristine. If the business is managed according to the KPIs, then potentially indispens- able learning will routinely be suppressed, hidden, or ignored.

It is easy to set a target, reward those who hit it, and withhold reward from those who fall short. Companies that organize themselves this way operate in a way they might say is very clear and obvious to everyone within the walls. You know what you have to deliver on, which makes it easier to do the job well. But punishing people for failing to deliver on KPI targets is like punishing a scientist for conducting a lab experiment whose hypothesis is not confirmed. In a red line culture, that scientist has failed his experiment. In a blue-line culture, he has learned something of value. When viewed rightly, business is a never-ending series of experi- ments, some of which succeed, but most of which fail. If this is the case, how can we punish people for the experiments that don’t pan out?

It’s no revelation to say that critical learning often occurs through failure. However, even knowing this, many compa- nies default to the red line because it seems simpler and more comfortable—with more visible things to measure—and so they encourage extraordinary amounts of time and energy to be spent hiding “failure.” To turn it around, they can begin to do something different: use those same resources to encourage learning, and thus create value.

Kevin Kaiser is Professor of Management Practice at INSEAD. He can be reached at [email protected].

S. David Young is Professor of Accounting and Control at INSEAD. He can be reached at [email protected].

They are co-authors of The Blue Line Imperative: What Managing For

Value Really Means (Jossey-Bass) which can be purchased on Wiley.com.

http://www.wiley.com/WileyCDA/WileyTitle/productCd-1118510887.html.

the remuneration scheme rewards value destruction; there- fore senior management is either dishonest or confused. In either case, our dispirited employee does not see a common purpose pointing the organization forward. People are clearly not working toward the same purpose. And if the people in a company aren’t working toward the same purpose, what chance does that company have?

A Blue-line Approach to KPIs If indicators should serve neither as carrots that reward employees who hit targets nor as sticks that punish those who fail to deliver, what is their proper role in the value-driven company? The primary function of KPIs is to promote orga- nizational learning.

Technological and scientific progress has given us products and services that accomplish things unthinkable a generation ago. But these advances have come at the price of ever-increasing complexity.11 While it is virtually indisput- able that products are more reliable, functional, and durable than ever, the business systems needed to deliver them have become devilishly complicated. A logical consequence of this complexity is ignorance and uncertainty. Systems are too complicated for managers to know all that they need to know to maximize value creation. Although companies may go to great lengths to design and document systems and processes, important pieces of the puzzle are frequently missed simply because the average puzzle has grown to such mammoth dimensions. Simply put, knowledge gaps are more a certainty now than they have ever been.

An important part of value creation involves how we manage this unavoidable ignorance. In an uncertain, complex world, the successful business culture is one in which every- one is continuously learning. Of paramount importance, it is also a culture in which having the right answers is less important than asking the right questions. In other words, value creation demands experimentation. Blue line organi- zations don’t just tolerate trial-and-error, they promote it. Only through continuous exploration and, yes, failure, can we gather new and relevant information to help us better understand the business and how to get more value from it. In a culture where people up and down the ladder are forced to obsess over hitting indicator targets that represent false value, the blue line cannot possibly take root.

Indicator targets are important, but not as performance motivators. When set honestly—that is, without the game- playing so common in budgeting these days—targets become hypotheses about how business systems are supposed to work. As such, they reflect expectations based on imperfect knowl- edge; and that is exactly what we want them to reflect, since that is what will lead to continuous learning and improvement.

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Yakov Amihud New York University

Mary Barth Stanford University

Amar Bhidé Tufts University

Michael Bradley Duke University

Richard Brealey London Business School

Michael Brennan University of California, Los Angeles

Robert Bruner University of Virginia

Christopher Culp University of Chicago

Howard Davies Institut d’Études Politiques de Paris

Robert Eccles Harvard Business School

Carl Ferenbach Berkshire Partners

Kenneth French Dartmouth College

Stuart L. Gillan University of Georgia

Richard Greco Filangieri Capital Partners

Trevor Harris Columbia University

Glenn Hubbard Columbia University

Michael Jensen Harvard University

Steven Kaplan University of Chicago

David Larcker Stanford University

Martin Leibowitz Morgan Stanley

Donald Lessard Massachusetts Institute of Technology

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Stewart Myers Massachusetts Institute of Technology

Richard Ruback Harvard Business School

G. William Schwert University of Rochester

Alan Shapiro University of Southern California

Clifford Smith, Jr. University of Rochester

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Joel M. Stern Stern Value Management

G. Bennett Stewart EVA Dimensions

René Stulz The Ohio State University

Alex Triantis University of Maryland

Laura D’Andrea Tyson University of California, Berkeley

Ross Watts Massachusetts Institute of Technology

Jerold Zimmerman University of Rochester

Editor-in-Chief Donald H. Chew, Jr.

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