Samantha Stainburn

Writer | Editor

R.O.I: Following the Money Featured

(The New York Times, 02 August 2013)

FOR 18-year-old consumers, financial decisions escalate exponentially. Tall latte or a grande splurge? Lucky Brand or True Religion? State U. or N.Y.U.? Statistics or psych or maybe social work?

It’s not hard for a student today, facing an average single-year college bill of $21,657, to unwittingly take on a life-altering amount of debt. Pick a college or field that doesn’t set you up for a job that’s lucrative enough to pay back loans and you could spend years just scraping by.

To help students make informed decisions about whether it’s worth paying a premium for a certain college or degree, advocates and entrepreneurs have created online tools to compare graduates’ income.

“In the last few years, there’s been a fairly strong push to have colleges report to students when they pick a major what the labor market performance has been,” said Anthony P. Carnevale, director of the Georgetown University Center on Education and the Workforce. “Do graduates get a job in their field, earn enough money to pay their loans?”

Most colleges don’t have the research staff, or desire, to chase down graduates and find out what they’re making. But states have been collecting income data for years, and some — Virginia, Maryland, Nevada and Florida — have passed laws requiring their education departments to compile and release it, or post it voluntarily. Other free sites help students calculate R.O.I., or return on investment: the cost of attending set against future earnings.

Unfortunately, not one of these tools is based on complete or particularly good data. And no site allows students to do what most probably want to do: pick a handful of colleges across the country and compare earnings achieved by graduates in various majors.

The institution most obviously suited to reporting what students earn after college is the federal government. The United States Department of Education already collects graduation data from all states, and the Internal Revenue Service tracks earnings. But the law prevents matching individuals’ transcript information to employment data. A bill introduced in the Senate, the Student Right to Know Before You Go Act, is seeking to overturn that ban. It wants the government to publish earnings and employment metrics sorted by major, degree, college and state up to 15 years after graduation.

While the predictive value of currently available salary tools is limited, they can reveal patterns that might inspire students to consider different choices. Earnings data show that “two-year technical degrees from community colleges can be incredibly valuable,” said Mark Schneider, president of College Measures, which developed a tool, with funds from the Lumina Foundation, that some states are using to compare incomes. For example, Texas students with two-year technical degrees have average first-year median earnings of about $50,000 — $11,000 more than graduates with bachelor’s degrees. In Colorado, students with associate degrees in applied science earn a starting salary almost $7,000 more, on average, than that of graduates with B.A.’s.“So if you’re on the fence about getting a bachelor’s degree,” Mr. Schneider said, “these technical degrees are something you should explore.”

Another takeaway: “You want to go to the flagship public college because it has a better football team,” Mr. Schneider said. “But in every state we’ve worked in, many students graduating from the regional campuses end up just as well off. Sometimes they even beat them.” Health profession majors at the University of Tennessee’s flagship in Knoxville, for example, fall behind those at the Martin campus, $46,770 to $58,592.

Of course, there are factors to consider besides earnings when picking a career or college. But middle- and low-income students who can’t afford to make mistakes, and students considering low-paying professions like social work or art, may want to figure in R.O.I. “The qualitative benefits of college, such as how fun the dorm life is, are temporary,” said Katie Bardaro, lead economist for PayScale, a Web site that reports compensation. “Your after-graduation earnings are permanent.”


At, students can compare earnings for graduates of 1,058 colleges and universities as well as national median starting and midcareer salaries for 130 majors. Who knew: The starting salary in nursing beats business $54,100 to $41,400. More useful, the gap narrows midcareer: $70,200 to $70,000. Data can be sorted by region or type of school, including public, private or, as defined by the Princeton Review, party school. (Lowest-paid partiers come from the University of Mississippi; highest from the University of Illinois, Urbana-Champaign.) And using its own algorithm, PayScale calculates return on investment for colleges and popular majors. It may surprise that in-state engineering majors from George Mason University enjoy a higher R.O.I. over 30 years ($1,937,000) than engineers do from M.I.T. ($1,794,000). PayScale also publishes an attention-grabbing list of schools offering the worst returns.

Strengths: PayScale provides median midcareer salaries (10 years plus), which is a more realistic measure of how much liberal arts degrees pay off, since degree holders often work at coffee shops in the early years.

Weaknesses: Earnings are self-reported. Because the compensation survey is completed by visitors (1.5 million did so last year), results are biased toward workers who are researching salaries online — younger, white collar and not yet running Fortune 500 companies. The reports also exclude graduates who went on for an advanced degree and who attended college part time.

State By State

Arkansas, Tennessee, Virginia, Colorado and Texas post first-year earnings for graduates of all their two- and four-year public institutions on Virginia and Colorado also track private colleges. A math geek who wants to study and work in Virginia can home in on average earnings for computer science majors at the University of Virginia ($59,739), William & Mary ($56,809) and Virginia Polytechnic Institute ($54,917), or compare U.Va.’s computer science majors to its math majors ($45,777) and mechanical engineers ($50,917). Or zoom out to see which schools graduate the highest earners in general; in Virginia, it’s Jefferson College of Health Sciences followed by University of Richmond.

Strengths: Statistics are based on state education and employment records, so the experience of every single public-school graduate who works in the state is factored in. Earnings are available for just about every degree and certificate program in each state.

Weaknesses: Nothing from outside the state, including graduates who take jobs elsewhere, is calculated in. Neither are the self-employed.

College Reality Check

Produced by The Chronicle of Higher Education with money from the Bill and Melinda Gates Foundation, allows students to compare earnings, monthly payments on student loans, graduation rates and average net price for up to five colleges at a time.

Strengths: There’s a lot of guidance on what terms like net price actually mean and how to interpret different types of data, along with links to relevant sites and articles. A stylish interface generates graphics like what a graduate’s monthly debt payments might look like over 10 years compared with monthly pay depending on the school attended.

Weaknesses: Earnings figures come from PayScale (see above). There’s no information at all on specific programs.

How to Look at All the Data

  • Focus on figures for different majors rather than different colleges, said Anthony P. Carnevale, director of Georgetown’s Center on Education and the Workforce. “What really matters in your career is much less the college and much more the major. If you go to Harvard and become a schoolteacher, you won’t make more than other schoolteachers.”
  • Look at the sample size on which an average or median salary is based, said James Leipold, executive director of the National Association for Law Placement, which has reported on lawyers’ salaries for decades. “The bigger the number, the better the data.”
  • Don’t assume you’ll end up in the top half of the earnings median; half the population is below it. Students “always sort themselves to the high side,” Mr. Leipold said. “That’s why they borrow more than they can afford. There’s such optimism about success.”

Read this article at the New York Times.

Q&A: What Is Political Asylum? Featured

(, 03 July 2013)

"Helmet," Seth Cohen.

“Helmet,” Seth Cohen.

Former National Security Agency contractor Edward Snowden, charged with espionage by the US government, is desperately trying to obtain asylum in another country.

GlobalPost asked Ashley Huebner, managing attorney for the National Immigrant Justice Center’s Asylum Project, for a primer on what asylum is and how hard it is to get. This interview was edited and condensed by GlobalPost.

What is political asylum?

People often call it political asylum, but it’s just asylum nowadays. It started out as being much more politically-based after World War II, but today you can get asylum based on your political opinion, your race, your religion, your nationality or your membership in a particular social group.

The purpose of the benefit is to provide protection to somebody who is unable or unwilling to return to their country of nationality because they have a well-founded fear of persecution by the government or an entity the government can’t or won’t control.

In order to get asylum, what do you typically have to prove?

The first thing you have to prove is you have a well-founded fear, which in the United States means you have to have at least a 10 percent chance of being persecuted if you go back to your country. If you’ve been persecuted in the past, it’s presumed you’re going to be persecuted in the future.

You have to prove you will suffer or have suffered persecution – that’s a legal term. It tends to be any kind of harm, harassment or discrimination that’s risen to a certain level in order to constitute persecution.

Then it has to be on account of political opinion, race, religion, nationality or group membership. So it can’t be general violence in a country. In a political opinion case, it can be your actual political opinion – you’re a human rights activist in a dictatorship – or it can be a political opinion that’s imputed to you – maybe your parents were political activists, or you’re from a particular region that’s known for being rebellious.

Several countries – including Spain, Ireland, Ecuador, Austria and Finland – have said that Snowden’s asylum requests can’t be processed because he is not in their country. Is this typical of asylum systems?

Yes. It’s the general rule with asylum and the general difference between asylum and refugee status. Refugees have been determined to meet that definition somewhere outside, and they come in with that status already.

Snowden has applied for asylum in 21 countries. Is it easier to get asylum in some countries versus others?

There are countries, typically in the developing world, that simply don’t accept any kind of refugees or asylum-seekers. In Western countries, they’re all within a certain level of each other. Some have more benefits while you’re waiting for a decision in your case, others don’t. Others may have specific policies, such as maybe they have a good policy for people from certain countries but for other countries they’re more strict, or essentially racist. I wouldn’t say that there’s any country that has an absolutely fantastic asylum system.

What do you think of Snowden’s chances of obtaining asylum?

In the Snowden case, where it becomes tricky is there’s this prosecution versus persecution issue. On the one hand, a government has the right to uphold its laws and punish those who don’t follow the laws. The question can become, ‘Is the law legitimate?’ Someone could still be eligible for asylum because it’s not a law that we would consider the country has the right to have. Or maybe the law is legitimate but the punishment is so severe that it changes from prosecution to persecution.

If he was coming from another country and requesting asylum in the US, I think he’d have a hard time proving his case because of the prosecution versus persecution issue. But maybe some country that wants to thumb its nose at us will grant him some kind of protection.

Read this article at

Image by Seth Cohen. Used with permission.

A Revolution on the Stage Featured

usnews-ancient(U.S. News & World Report, Special Edition on the Ancient World, 2004)

When Lysistrata premiered in Athens over 2,000 years ago, it played to an audience of about 15,000 assembled on a hill behind the Acropolis. Last March, Aristophanes’s famous comedy was performed in decidedly humbler circumstances—in living rooms, cafes, and even a Kurdish refugee settlement in Greece.

The play, about women who withhold sex to force their men to end the Peloponnesian War, was revived by two New York actresses to protest the Iraq war. In a single 24-hour period, the play was performed by tens of thousands of people in 59 countries. Although some productions strayed far from the original, participants said there remained enormous potency in Lysistrata’s core issues—questions like: What power do the powerless have? “It was like a rock concert,” says project cofounder Kathryn Blume, “in terms of the energy and the outpouring of enthusiasm.

No modern play would have served the activists’ purposes better, Blume says. “[Lysistrata] is sexy, it’s funny, it’s dirty, [and] it really reflected our situation—a group of people who feel they don’t have a voice, undertaking a creative action to stop a war.” And because Lysistrata is such an ancient play, Blume notes, it distances the audience from the specifics, freeing them to ponder the broader themes.

It doesn’t take a protest, however, to get Greek drama an audience these days. In recent years, theatergoers have flocked to see A-list actresses like Diana Rigg and Fiona Shaw interpret the title character in Medea. They have had their senses assaulted at Lee Brauer’s The Gospel at Colonus, a version of Oedipus at Colonus set at an African-American church revival. And they have applauded Peter Sellars’s The Children of Herakles, in which a silent chorus of real refugee children underscored the play’s discussion of exile. In fact, according to researchers at the University of Oxford, more Greek tragedy has been performed in the past 30 years than at any other time since the classical age itself.

Why the enduring appeal? Greek tragedies explore how difficult it is to be a human being. Most Greek tragedy portrays the downfall of a hero, often caused by extreme arrogance, or hubris. Tragedy’s goal, said Aristotle, is to arouse in the audience feelings of pity and fear, emotions that are then purged in a process of relief the Greeks called katharsis. Tragedies have a particular appeal, says Nicholas Rudall, a classics professor at the University of Chicago, “in times when people don’t feel fully confident about their being, their safety.” Edith Hall, codirector of the Archive of Performances of Greek and Roman Drama, says that Greek plays also allow modern audiences to explore a fascination with survivors.

In the moralistic tragedies of later centuries, playwrights tended to kill off characters who committed adultery, murder, or rape, writes Hall in Dionysus Since 69: Greek Tragedy at the Dawn of the Third Millennium. Not the Greeks. “The incestuous Oedipus, the infanticidal Heracles, Medea, and Agave, the mother-murdering Orestes, the bereaved women of Troy—they all survive their terrible experiences and stagger from the stage, leaving the audience wondering how they can possibly cope with their psychological burdens.”

Greek drama has influenced writers from Shakespeare to sitcom hacks. Yet it’s remarkable that there are any ancient plays left to learn from at all, since they were written on rolls of papyrus that rotted easily. Of the more than 1,000 plays created in Athens between 500 B.C. and 400 B.C., only 31 tragedies and 11 comedies—the work of just four authors—survive.

Most scholars believe that Greek drama evolved from hymns about popular myths that were performed at the annual festivals of Dionysus, the Greek god of wine and fertility. One day in the mid-sixth century, the story goes, a man named Thespis stepped out of the chorus to converse with the rest of the group, In so doing, he became the world’s first actor, and he created a new art form—the tragedy.

In 534, Athens introduced an annual tragedy contest at the City Dionysia. Every year, an official chose three dramatists to present an entire day of new plays—three tragedies and a satyr play, a comic chaser to the serious work. The playwrights directed (and early on, acted in) their own works. The city assigned a wealthy citizen to pay for all production costs not covered by the state. Foreshadowing Oscar-night pools by centuries, a panel of ordinary citizens, chosen by lottery, judged the plays and awarded prizes.

Among the festivals’ most important innovators were the three tragedians whose work has survived. Aeschylus (523 – 456) pulled a second actor out of the chorus to more fully develop dramatic confrontations. In works such as the Oresteia trilogy, he used personal stories to explore political concepts like justice. Sophocles (circa 496 – 406) focused on his protagonists’ psychological development in masterly structured plays like Oedipus Rex, Oedipus at Colonus, and Antigone. He introduced a third actor, painted scenery, and reduced the chorus from 50 to 15.

It was Euripides, however, who pushed the envelope of civil discourse. In plays like Medea, Electra, and the The Trojan Women, he took on incest, infanticide, and more. His plots can seem half-baked—many depend on a deus ex machina, or sudden appearance of a god character, to neatly untangle events—but they have provided generations of actors with complex female characters to inhabit.

Around 488, the City Dionysia added a comedy competition to the lineup. Many scholars believe ancient Greek comedy grew out of a feature of early Dionysian festivals called the komos—a bawdy parade of jokesters who carried symbols of penises through the streets. The 11 plays from Aristophanes (circa 448 – 395) are marked by obscene lines, double-entendres, and coarse costumes, including erect phalluses worn by sexually frustrated male characters in Lysistrata. While never considered as lofty a genre as tragedy, comedy helped diffuse anxieties by satirizing important people and institutions through characters that solved social or political problems with absurd schemes.

Most contemporary producers aim to make the Greek classics as accessible as possible to audiences by using modern language, current fashions, and familiar locales. But archaeological finds, from painted vases to ruins of outdoor theaters, provide tantalizing clues to the ancient performances, and a few modern companies are presenting the old plays to conform with these ideas. Classic Greek Theater of Oregon, for example, performs in an outdoor ampitheater. The actors wear masks and tunics copied from vase paintings, and large choruses sing and dance to original music.

At New York University’s Aquila Theatre Company, producing artistic director Peter Meineck also strives to capture the atmosphere of the ancient performances, which he calls “a cross between an opera and a football game.” The actors may perform without masks, but they often use them in rehearsal. “It’s a completely different way of performance,” he says. “The actors, when they speak, all have to face the front; they can’t turn and face each other. Often an actor is standing behind another actor speaking out to the audience, and what that creates on stage is very interesting psychologically. Naturalism, which is what most actors are trained to do, is out the window.”

In spite of the challenges, Meineck says, when a Greek play hits a nerve, he knows it. In the mid-1990s, the Aquila presented The Wasps, Aristophanes’s comedy about a litigation-crazed society. It was a rowdy production that one reviewer likened to a Benny Hill skit. The performance coincided with “a time when people were really getting fed up with their legal system,” Meineck says. “It tapped into this aggressive energy that was in the audience, and it was an amazing rush. At the end, we had the entire audience up on stage—dancing.”

Who Owns Your Great Idea? Featured

(The New York Times, 04 January 2009) 

Matthew Naples (L) and Peter Zummo.

Matthew Naples (L) and Peter Zummo.

Peter Zummo, a senior double-majoring in design and mechanical engineering at Rensselaer Polytechnic Institute, is used to explaining the products he thinks up for his studio-class assignments. But last spring, he found himself answering questions of a different kind in a conference room at Rensselaer’s office of technology commercialization, which tracks and patents inventions made on campus.

Mr. Zummo and his classmate Matthew Naples, who was attending the meeting via speakerphone, had designed a water bottle that could be filled with sand and reused as a brick to build housing in developing countries. The director of the office, Charles Rancourt, sitting across the table from Mr. Zummo, wanted to know: When had they come up with their design? Had they held brainstorming sessions on campus or off? What equipment had they used to produce their prototypes?

Colleges and universities own the ideas and technologies invented by the people who work for them, including professors and graduate students who are paid to do research. Most universities also own inventions created by students using a significant amount of their resources, even if the inventors are undergraduates like Mr. Zummo and Mr. Naples, both 21.

The question of whether the two students or R.P.I. owned their invention was a tricky one. They had first designed plastic bottles that snapped together, Lego style, with two other students for a freshman design class project that challenged them to solve a social problem. Their idea was to keep the billions of water bottles that people in developing nations throw away each year out of landfills while providing the poor with free building materials. They presented a paper and a prototype in class, but “it was a crude concept, and we never really hit our goals with our first rendition,” Mr. Naples says.

As juniors, he and Mr. Zummo decided to tinker with the design again on their own (the rest of the original group didn’t want to join them), brainstorming off the Troy, N.Y., campus and interviewing bottle manufacturers about the molding process and materials. They developed a new design that was cheaper to manufacture and could withstand more types of stresses than the first.

With entrepreneurship booming, especially in courses that mix M.B.A. candidates with budding physicians or engineers, more and younger students are coming up with ideas that have commercial potential. While formal programs offer classes in managing intellectual property, plenty of students develop their ideas with little knowledge of how ownership is determined or the pros and cons of involving the university.

“Universities want to get whatever revenue streams come out of inventions so they can build more labs, have more research going on and hire more professors,” says David Schwartz, executive editor of Technology Transfer Tactics, a newsletter for people working in the field. Lisa Rooney, director of Ohio University’s tech transfer office, notes another interest: “Most universities have a broader economic mission to help out their communities and states, and licensing or starting new companies is a way to do that.”

Colleges and universities obtained fewer than 250 patents a year before 1980, when the Bayh-Dole Act gave them ownership of inventions developed through federally financed research. Now they acquire about 3,000 a year, according to the Association of University Technology Managers, whose members work in tech transfer offices. In 2006, association members made $45 billion from licensing fees and equity in spinoff companies; research powerhouses like Stanford and New York University made $61 million and $157 million, respectively.

University help can be a boon for student inventors, too. A third to half of the money generated by a product is typically assigned to the student, with the rest split between the student’s department and the university. That’s a better deal than the zero percent collected by scientists working for corporations. And universities cover the legal fees involved in obtaining patents on inventions they own, which can easily total $15,000 a patent.

“You can imagine a 20-year-old who develops something isn’t going to have access to venture capital money or the expertise to patent it,” Mr. Schwartz says. “The tech transfer office can find the resources to move it forward.”

Of course, the offices negotiate deals that are best for the university, notes Peter Corless, a partner at the law firm Edwards Angell Palmer & Dodge in Boston. He specializes in protecting biotech and medical device inventions at academic institutions. “If they can, they’re going to give some deference to the inventor, but their first allegiance is to do something for the university,” he says.

Erez Lieberman, a 28-year-old graduate student doing federally financed research at the Harvard-M.I.T. division of health sciences and technology, discovered this tendency after the Massachusetts Institute of Technology pushed through a patent on a technology he created as an intern at NASA in the summer of 2007. His algorithm detects whether a person is standing correctly or is off balance, and Mr. Lieberman, currently in the sixth year of his Ph.D. program, has started a company called iShoe to develop products using the technology, including insoles that can help prevent elderly people from falling. Because M.I.T. is co-owner of the invention with Harvard and NASA, Mr. Lieberman knew he would have to negotiate a licensing agreement that would give his company exclusive rights to the technology, but he was taken aback by M.I.T.’s tough negotiating stance.

“I wasn’t aware of the fact that more or less the day after the patent was filed, I would be facing a conversation like, ‘We take a substantial royalty and $75,000 now, and it’s all yours,’ ” he says. “That was a surprise.”

Jack Turner, associate director of M.I.T.’s tech licensing office, says: “We endeavor to get what we think is a fair deal for M.I.T. and the inventors and for the companies we’re licensing. At the same time we don’t want to license something exclusively to someone who’s going to end up not doing anything. We write into the agreement those elements of the business plan that we consider essential for the technology to find its way into use. If they can’t do that, we can get the technology back and find another home for it.”

Ultimately, Mr. Lieberman says, the fact that M.I.T. doesn’t automatically kick the license to an inventor is for the best. “It enforces discipline on you,” he says. “The process has been valuable for us in terms of thinking hard about what needs to happen, how do we raise money and what kinds of milestones make sense.”

He’s hopeful that he can raise funds for the license through angel investors or a joint venture with a hospital. But now that he knows how expensive and complicated the licensing process is (not to mention having to check in in the future to show he’s on track), Mr. Lieberman is avoiding using university resources as he develops the technology further. Last summer he paid an engineer and a computer programmer through iShoe to work off campus to improve the design of his insole and write software that lets it communicate with wireless devices. Using $25,000 worth of legal services he won in April in a business plan competition for space-derived technologies, he has filed for two additional patents, owned by iShoe, based on their work.

If a student has money to develop and protect an invention on his own, should he? It depends. Turning the job of commercializing a product over to a university is a better bet if you have no interest in business or if finishing school is a priority. “The mission of a student is to research, get their degree, and move on with their life, and if you start fooling around with this stuff too much, it’s a total distraction,” says Peter Corless, the intellectual-property lawyer. But if retaining control over an idea is important — say, you don’t want your technology licensed to a company that pollutes oceans — the expense and hassle of doing it yourself might be worth it.

Lone-wolf inventors should get a written statement from their university confirming they own their idea, Mr. Corless advises. “You want to get these things cleared up when there hasn’t been a lot of value recognized,” he says. “If you try to clear things up later, people’s memories change.”

R.P.I. determined that the bottle design belonged to Mr. Zummo and Mr. Naples. The university offered to patent the bottles and get them into the market if they transferred ownership of the design to the university. The students chose to go it alone, deciding that the standard slice of royalties R.P.I. gives to inventors, 35 percent, was too low. An intellectual property lawyer who’s a friend of Mr. Zummo’s family waived his fees to help them file a provisional patent, and the students started looking for ways to raise $18,000 to mold several hundred actual bottles they can test and show to companies interested in licensing the technology from them.

They’re not flying entirely solo, though. Last month, the university determined that while the students own the design, R.P.I. owns the idea for the bottles. The students must license it from them, at a cost of about $250 a year and 25 percent of the profits generated by the idea. That, though, comes to only 0.5 percent — an “idea” being worth less than the “design.”

“What we’re giving up is obviously nothing, and if someone infringes on our rights, now it’s R.P.I. against them,” Mr. Naples says.

The bottle negotiations helped convince R.P.I. to rethink its royalty-sharing policies for students in studio courses: it’s now 75 percent for the inventors, 25 percent for the university. For one, the university recognizes the distinction between the ideas coming out of undergraduate design classes and those coming out of a research center or lab, Mr. Rancourt of R.P.I. says.

“Given the early stage of development, a significant amount of work needs to happen to prove the idea,” he says. “At the same time, they have real potential, and our goal is to encourage them.”

Read this article at the New York Times.

When social networks go astray

(Chicago Booth Review, 09 December 2014)

Networking has become a daily obsession. According to the Pew Research Center, 74 percent of adults online use social-network sites such as Facebook and LinkedIn. And a 2013 report from Ipsos Open Thinking Exchange estimates that people spend an average of three hours daily on online social networks. That doesn’t count all the networking that takes place offline, at industry cocktail events, alumni reunions, and religious meetings, among other places.

Most of the time, developing and mining a network is a smart move. A person develops social networks hoping and expecting to gain something—whether that be a job, contact, investor, or simply a friend. He may turn to those networks when in need or feeling vulnerable, perhaps when trying to make a risky business decision.

But avid networker, beware: these social networks have a dark side. According to research by Christopher B. Yenkey, assistant professor of organizations and strategy at Chicago Booth, our networks can make us more vulnerable to fraud and even encourage us to cheat. “We shouldn’t be blind to the ways they can make us vulnerable to opportunism or even push us into doing things we shouldn’t do,” says Yenkey. His research findings could help you avoid becoming a victim.

The ‘people like us’ trap
Yenkey teaches a class that focuses on creating value by understanding social networks, of which there are many kinds, he explains to his students. To them, “social networks” refers to the ubiquitous online version, but some networks are comprised of direct relationships, and others include people who are linked by a common bond, such as an alma mater. They are, he tells his students, their “tribes.” And to study such networks, he went to an area of the world where tribal membership is explicit: in Kenya, most residents are members of one of 12 primary ethnic tribes that are important in economics and politics.

Interested in how networks play into frauds, he studied a major financial fraud at the Nairobi Securities Exchange. Starting in late 2006, agents at the country’s largest brokerage, Nyaga Stockbrokerage Ltd., began using clients’ shares to manipulate the market. With electronic access to client accounts, they were able to steal cash and shares, until the massive fraud was discovered in early 2008. At a time when the firm served approximately a fifth of the emerging market’s total investors, its brokers looted approximately one-quarter of the firm’s 100,000 clients’ accounts.

Yenkey was interested in whether tribal affiliations influenced which clients were preyed upon. In a country where 98 percent of all citizens vote with their tribe in elections, and where professional and social relationships are similarly influenced by tribal membership, was there any reason to think a corrupt manager would steal from his own group? Most research and our intuition about markets would predict that a corrupt agent would be more likely to cheat clients outside of his network, his tribe—especially those of a rival tribe. But Yenkey had another hypothesis: if we are more likely to trust people in our network, including those whom we are only tied to indirectly, that assumed trust could become a resource for committing fraud.

If we believe that members of our network are trustworthy, we give them more leeway for taking advantage of that trust.

To test this proposition, Yenkey accessed NSE databases (with regulators’ supervision) comprising detailed information about all of the market’s investors, including names, addresses, gender, portfolio composition, and more. With help from Kenyan research assistants from six different tribes, he used last names to identify which tribes the investors and agents belonged to. The research assistants reviewed and categorized 20,000 unique last names, capturing 94 percent of all investors.

The Nyaga firm was owned and operated by members of Kenya’s largest ethnic group, and approximately 60 percent of its clients belonged to that same tribe. But Nyaga’s client list also included investors belonging to almost all of Kenya’s tribes.

Yenkey compared lists of Nyaga’s clients with a list of investors who had registered claims with Kenya’s Investor Compensation Fund, which tracks victimization in the market, to see who had been cheated in the Nyaga fraud. His findings suggest that belonging to the broker’s tribe actually made people more vulnerable to the fraud. Even worse, investors who lived in areas where their tribal identity was critical to their safety—where being a member of another tribe could have made them targets of violence—were even more likely to be cheated.

Investors, Yenkey saw, initially used their social networks to select brokers, just as earlier research would indicate. That was particularly true in areas where there was more risk to the tribe. In December 2007, Kenya’s disputed presidential election led to intertribal violence that left 1,300 people dead and another 400,000 forced from their homes. In districts that experienced this violence, investors from the tribe that operated the Nyaga firm were about 40 percent more likely to choose a same-tribe broker. The investors were also more likely to choose a same-tribe stockbroker in areas where they were outnumbered by members of other tribes. In most locations the data captured, members of rival tribes avoided hiring stockbrokers from the tribe that ran Nyaga. Just like many of us do, those investors were presumably tapping into their network, their tribe, to find a trustworthy broker.

But quite often those investors got the opposite of what they were seeking. When Yenkey looked at the Nyaga firm’s 100,000 clients, he observed that a corrupt broker was almost 20 percent more likely to steal from a member of his own tribe. And the likelihood of a same-tribe client becoming a victim was almost double that when that client lived in an area affected by the political violence. A corrupt broker was more likely to steal from clients who belonged to his own tribe, “especially when they reside in the diverse and violent areas that led them to choose a same-tribe broker initially,” Yenkey writes. Moreover, wealthy clients were particularly at risk. While earlier research has suggested that criminals tend to avoid wealthy targets, in order to avoid stricter penalties if caught, Yenkey finds that wealthy same-tribe clients of a corrupt Kenyan broker were twice as likely to be cheated as lower-income clients in the tribe.

While most brokers were honest, the corrupt brokers took advantage of the ties that had brought clients to them.

“Essentially, we are vulnerable to being taken advantage of by people in our network because we assume they will take care of us,” Yenkey says. “We ask fewer questions ahead of time, and we are less likely to keep tabs on them later. Most of the time, this works very well for us. But when there is a bad apple in the network, it makes us more vulnerable.”

How networks create cheaters
Yenkey’s research suggests that not only can a social network increase a person’s vulnerability to fraud, it also can increase the chance that he or she may perpetrate one.

To arrive at this conclusion, Yenkey and the University of California-Davis’s Donald Palmer studied the world of professional cycling, which represents another kind of social network. Athletes, owners, managers, assistants, and staff form relationships as they work together, and some may depart at the end of the cycling season to join other teams.

This network has had its own battle with fraud, in the form of performance-enhancing drugs. Cyclists have long used these drugs to better compete in races including the Tour de France, a grueling 2,200-mile race that takes riders through the Pyrenees and the Alps and finishes on the Champs-Élysées in Paris. In the 1920s, riders boosted their energy with cocaine. Race organizers banned drug use in 1965, but in the late 1990s through the mid-2000s, there was rampant use of steroids; human growth hormone; a blood-boosting hormone called erythropoietin, or EPO; and amphetamines to improve performance at high altitudes, accelerate recovery, and provide energy.

In the mid-2000s, the International Cycling Union (officially called the Union Cycliste Internationale, or UCI for short) and the police in Europe began cracking down more seriously on cyclists’ drug use, instituting more and better testing and launching investigations into doping operations. The UCI began requiring cyclists to provide blood and urine samples several times throughout the year. A panel of anti-doping experts tracked each rider’s samples over time and assigned him a “suspicion score,” essentially a medical opinion of the likelihood that a cyclist was using performance-enhancing drugs. These scores, typically kept confidential and used only by racing officials, were in 2011 leaked to the press. Scores for all 198 participants in the 2010 Tour de France were leaked to French sports magazine L’Équipe.

Yenkey and Palmer used the leaked report to study links between cycling networks and fraudulent behavior. The data led them to two main observations.

The first is that the role a person has in a network can influence his or her tendency to cheat. People expected to perform complex and difficult tasks at specific points in time are under significant pressure to ensure they can live up to the challenge. This pressure leads them to consider all means available to them, be it legal or illegal. If a person was assigned a critical role on a cycling team, expected to perform a difficult task at a specific time—sprinting, for example—he was almost six times more likely to have a suspicious blood profile than a generalist rider. The cyclists assigned to assist that crucial team member were more than twice as likely than a generalist to have suspicious blood profiles. Those generalist riders, also known as free agents, were no more likely than the average cyclist to be suspected of drug use.

The second observation: people in a network teach others what behavior they can and can’t get away with. Using data from cycling fan websites, the researchers mapped the social networks of 195 of the 2010 Tour de France competitors by tracing the teams they had ridden for throughout their careers. Doing this, the researchers identified the present and past teammates of each rider, as well as what they call “twice-removed teammates,” or the teammates of former teammates (think of these as friends of friends).

The researchers also used data from fan websites that have cataloged more than 1,500 doping incidents that occurred between 1999 and 2010. The incidents included positive drug tests, and evidence of doping from hotel-room raids, phone taps, and vehicle searches. From this data, the researchers reconstructed the cyclists’ full careers, including documented doping incidents and any resulting sanctions.

They find that seeing a fellow rider punished deterred a teammate from committing the same offense. Only 45 percent of prior doping events experienced by people in the riders’ networks led to sanctions, but just over half of the time, those sanctions were major: guilty riders were suspended from competition for more than six months. And the researchers saw that when riders had doped and been sanctioned, their teammates tended to have lower suspicion scores leading up the 2010 Tour de France. The opposite was true for riders whose teammates had doped but had not been sanctioned.

The effect was particularly strong for cyclists whose current teammate had been caught doping. Contemporary teammates were 94 percent less likely to have more-suspicious blood values, while twice-removed teammates were just 8 percent less likely if the prior infraction had been strongly punished. If a cyclist had been caught doping and hadn’t been heavily sanctioned, a contemporary teammate was 27 percent more likely to have a high suspicion score, compared to 3 percent for twice-removed teammates.

The takeaway: people closer to you in your network have more influence on you. You also learn things from people who are more distant in a network, but you do so at a lesser rate.

“If your social network is telling you, ‘Watch out, there are strong consequences for doing this,’ you’re less likely to do it,” Yenkey says. “But if your network contains people who have cheated and basically gotten away with it, it teaches you this is something you can do, and so you do it.”

Drawing lessons about fraud
Frauds are clearly moving through social networks far beyond Kenya and professional cycling. Networks are key to a number of Ponzi schemes, including the Bernard Madoff scandal, where Madoff used social ties to recruit new investors and victims. Before Madoff, Charles Ponzi swindled his Catholic neighbors in Boston, even his own parish priest. The blog is updated regularly with news of the latest alleged and confirmed schemes.

The same dynamics that led brokers and cyclists to cheat are at work in networks of all kinds, around the world. According to the 2011 PricewaterhouseCoopers Global Economic Crime Survey, insiders committed 56 percent of all serious corporate frauds reported worldwide.

The research findings, therefore, have broad application. They suggest that to avoid becoming a victim of a fraud, know that while your network can be a great source of information, contacts, and leads, deviants in the network may be looking to take advantage of your trust. Use your network to your advantage, but also with caution.

If you or someone else plays a critical role in an organization—for example as the “rainmaker” responsible for bringing in new business—monitor decisions and actions when the pressure builds. The data suggest that the pressure of meeting expectations can drive people in critical roles to make bad decisions.

And if you find fraud in your network or organization, be vigilant about punishing the wrongdoers. Otherwise, you may encourage more of the same behavior.

Works Cited

Donald Palmer and Christopher B. Yenkey, “Drugs, Sweat, and Gears: An Organizational Analysis of Performance Enhancing Drug Use in the 2010 Tour de France,” Working paper, September 2013.

Christopher B. Yenkey, “Tribes and (Dis)trust: The Role of Social Capital in Fraud Victimization,” Working paper, February 2013.

Read this article at Chicago Booth Review.

Time Management: One-Year M.B.A.s

(The New York Times, 01 August 2014)

Streamline, accelerate, graduate. Educators have been scurrying to figure out how to cut short just about every field of professional study, be it law, medicine or business.

Graduate business programs were first truncated in Europe in the late 1950s, half a century after the two-year degree was introduced by Dartmouth. But one-year M.B.A.s are only starting to catch on in the United States with cost- and time-conscious students.

Donato Wilkins started a graduate program in May 2013 at Emory’s Goizueta Business School and is already headed toward a new job in mergers and acquisitions at PricewaterhouseCoopers. “I did the math, and the return on investment for the one-year program was much higher than for the two-year program,” said Mr. Wilkins, who had worked three years in corporate finance at Xerox and Newell Rubbermaid but wanted to get into a more exciting slice of finance. He considered both savings on tuition and the additional income from starting a job with an M.B.A. salary one year earlier.

He believes this: “You get the exact same benefit as the two-year program — the same professors, the community, the G.B.S. network, all the on-campus resources and Goizueta brand — in less time and for less money.”

Enrollments are up 26 percent for Goizueta’s program over last year. Cornell enrolled its largest one-year M.B.A. class on its Ithaca campus this year, and has opened a new program focused on the global digital economy at Cornell Tech in New York City. A long program was a concern when designing an M.B.A. for techies, said Douglas M. Stayman, associate dean for M.B.A. programs at Cornell’s Johnson School of Management. “The tech economy moves quickly, and if people are out of it for a long time, it’s an issue.” (The one-year M.B.A. runs about $93,000 versus $116,000 for the two-year.)

The Graduate Management Admission Council counts 189 one-year programs, compared to 173 four years ago, and 55 percent of them have reported increases in applications over last year.

Proponents say a year is sufficient for students with strong quantitative or analytical skills who are willing to clear their schedules to study. Typically, students start in May, and cram in almost a year’s worth of foundational business classes in four months. In September, they fall in with students who are in their second year of a traditional program, taking elective classes, joining industry-related and cultural clubs (essential for network-building), participating in case competitions and interviewing at companies. Students in the one- and two-year programs graduate as a class, with the same degree, the following May.

Some schools let students go even faster. The University of Florida’s Hough Graduate School of Business, for example, runs a 10-month M.B.A. for students who graduated with an undergraduate business degree within the previous seven years.

The pace of the one-year degree — essentially completing three-quarters of the academic credits of a two-year degree in half the time — can limit the appeal. “One-year is for people who are accelerating their careers, not changing their careers,” Mr. Stayman said. “You don’t have time to do career exploration.”

Employers interview during the fall, so students with five months of M.B.A. study under their belts are competing with students with 15 months, including an internship. One-year students need to have enough of a career history to make the case that they don’t need that internship.

The positive spin, said Alex Sevilla, assistant dean and director of Florida’s M.B.A. programs: “A student can say to a recruiter, ‘I voluntarily chose the one-year program, and that gives you some indication of my horsepower.’ ”

According to G.M.A.C.’s 2013 student poll, fewer job seekers from one-year programs (53 percent) had received offers by March than had students in the final year of two-year programs (61 percent). While one-year students reported an average 70 percent increase over pre-M.B.A. earnings, their earnings boost was 9 percent lower than what two-year students reported.

There are other drawbacks. Students don’t have time to spend a semester abroad. They forfeit some electives. They can join clubs but can’t lead them (presidents are picked the spring before they arrive). And elite business schools like Harvard, Wharton and Stanford don’t have one-year M.B.A.s. “We haven’t felt comfortable offering a one-year M.B.A. here,” said Madhav Rajan, who oversees Stanford’s full-time M.B.A. program. “I think there would be huge demand if we ever went that route, but given the content we want to disseminate, that’s not something we’ve pursued.

“You get to know your classmates and interact with your professors over two years,” Mr. Rajan said. “The whole notion of our M.B.A. is that it’s a transformative experience.”

Read this article at the New York Times.

An M.B.A. Your Way

If full-time study is too much of a commitment, there are plenty of other ways to fit M.B.A. training into a harried schedule.


Best for: Working executives with 12 to 15 years’ experience and on track for senior management.

Should know: Veteran professors and former C.E.O.s teach, with the focus on general management and networking with other highfliers. You’ll want to be one, because E.M.B.A.s can be pricey. Columbia’s is $175,200 (for tuition, books, meals and accommodation during weeks in residence). That’s $243 per class hour. But the range is wide. You can also spend $42,000 at the public University at Albany (for tuition, books, meals and international travel).

Time frame: A long weekend once or twice a month for 18 months to two years, with some weeks on campus or studying abroad.


Best for: Students with 5 to 10 years’ experience who aren’t willing to stop working to study but want to move into management or change industries.

Time frame: Evenings and weekends for two to five years.

Should know: A danger of part-time programs is that students choose when they take classes and how many at a time, so it’s easy to extend how long it takes to earn a degree. To help students focus, some schools require that they move through as a cohort. American University’s Kogod School of Business recently revamped its part-time M.B.A. into a sequenced, one-night-a-week, one-course-at-a-time lock-step program. The school even takes care of dinner. “The idea is they don’t have to think about it,” said Jill Klein, director of the professional M.B.A. program. “They just have to commit, and in 27 months, they’ve earned their M.B.A.”


Best for: Working students who want to load up on courses during slow periods.

Should know: Students can switch between part-time (generally two courses or fewer) and full-time status (three or four courses) from one semester to the next. It’s not a back door into the more competitive two-year cohort, however. Typically, flex students can take some electives with traditional students but not core classes.

Time frame: Weekdays, evenings and weekends for two to eight years.


Best for: Recent graduates who have taken only a handful of undergraduate business courses and are hoping for an edge in breaking into a specific field.

“You see a lot of people coming out of school with minimal work experience trying to get jobs,” explained Alex Chisholm, director of statistical analysis at the Graduate Management Admission Council. He offered a defensive strategy: “You can say, ‘I might not have that much experience, but I can help you today with accounting or finance.’ ”

The degree also appeals to applicants not ready for an M.B.A. program. It used to be that schools would take M.B.A. applicants straight out of college, said Mark Zupan, a professor and former dean of the University of Rochester’s Simon Business School. “But when schools get ranked on the basis of starting salary, they have incentive to look toward older candidates.” Convincing evidence: The mean age of G.M.A.T. examinees sending scores to specialized master’s programs in accounting is 24 and in finance 23. A more typical M.B.A. applicant is a 27-year-old with five years’ work experience who wants to move into management.

Should know: Demand is growing, in large part fueled by foreign students seeking an American credential. Last year, 20 percent of G.M.A.T.-takers were planning on applying only to specialized master’s programs in business, up from 13 percent in 2009. At the same time, the number of G.M.A.T.-takers considering only M.B.A. programs dropped slightly, from 55 percent to 53 percent. The most popular concentrations are finance and accounting, and schools keep adding others. Simon now has six, including marketing, pricing and business analytics; Fordham Graduate School of Business offers 14, including programs in applied statistics and decision-making.

Time frame: One year or, part time, two years.


Best for: Recent liberal arts graduates testing the business waters and bolstering résumés through an intensive introduction to working in teams and business fundamentals.

Should know: Tuck School of Business at Dartmouth is seeing a younger skew: students who’ve just completed sophomore year of college. “Students are seeking a jump on the competition when they apply for internships,” said Robert G. Hansen, senior associate dean and a faculty director. “The summer internship after junior year is increasing in importance in getting a full-time job on graduation.”

Stanford, University of Virginia, Wake Forest and Dartmouth are among schools offering these certificate programs, costing $5,000 to $11,000.

Time frame: 4 to 10 weeks in summer.


Best for: Midlevel managers who want to update skills or deepen understanding of business concepts.

Should know: These certificate courses, open to all, are taught by professors from the M.B.A. programs. But they don’t actually get you an M.B.A. They’re boot camps. And while the term Mini-M.B.A. has caught on, some schools worry it cheapens the brand of their full-blown M.B.A. The University of Michigan Ross School of Business, for example, uses the less alliterative name Business Acumen for High-Potential Executives. Its 10-day course costs $16,690, including materials and some meals. Columbia’s 12-day Mastering Management course is $19,850. Most programs, however, set you back only $2,000 to $4,000.

Time frame: Daily for two days to two weeks, or one night a week for several months.

Read this sidebar at the New York Times.

Global Law: New Rules In a New Age

(Crain’s Chicago Business, 22 September 2008)

In 1996, a U.S. company hired Eric Hargan to help it buy a factory in Asia. Mr. Hargan, a corporate lawyer working in Jakarta, Indonesia, called the manufacturer to set up a tour, due diligence he considered “a normal, check-the-box thing.”

But the response was far from normal. First the factory manager said the site was inaccessible because the only train that went there had derailed. Mr. Hargan said he would rent a jeep. The manager claimed the roads had been washed away by heavy rains.

The factory’s contracts appeared to be in order, but the manager’s reluctance to let Mr. Hargan see the facility made him suspicious. On closer inspection, he noticed the numbers in the work contracts did not match the financial statements. Ultimately, he and his client, whom Mr. Hargan declines to identify for confidentiality reasons, concluded the factory didn’t exist.

U.S. companies walk away from acquisitions all the time after performing due diligence, but how often does a deal fall apart because the buyer concludes the asset doesn’t exist? “That’s rare in the U.S.,” says Mr. Hargan, now a partner at McDermott Will & Emory LLP in Chicago.

Along with finding the right partnerships, deciphering cultural nuances and bridging communication gaps, navigating legal differences is a major hurdle to doing business abroad. Bumping up against those differences happens more often these days as more Chicago companies expand abroad.

“The most common misperception that U.S. companies have is that their experience doing business transactions with other U.S. companies gives them the ability to do those same type of transactions in foreign jurisdictions,” says Susan Greenspon, a partner in Chicago at Kelley Drye & Warren LLP, who has advised U.S. clients on corporate transactions in the Bahamas, Vietnam and Eastern Europe.

Foreign laws often punch loopholes into routine transactions, favoring local companies and costing American businesses time and money. In the Bahamas, for example, a foreigner can’t buy land — even private property — without permission from the government, a process that can take up to a year if the government is distracted by elections or has concerns about the buyer’s reputation.

Under Western law, joint-venture partners are largely left alone to negotiate a purchase price and share value. But in China, joint-venture agreements can be subject to government approval, even for non-state assets.

And resolving an international dispute is not as straightforward as filing a lawsuit in Cook County. Some foreign courts are at worst corrupt and at best biased toward local companies. Even if you win, there may not be a process or the will to enforce the judgment.


So how do you avoid all this trouble?

First, tap U.S. law firms to help you assemble a team of well-connected foreign attorneys. They can advise you on whether agreements with suppliers and other business partners will be protected under their laws.

In places like China, where laws are evolving, go a step further and retain lawyers with government contacts who can provide warnings on upcoming legal changes.

You’ll still need U.S. lawyers on your team to interpret the information coming from their foreign counterparts. But your U.S. lawyers must be careful not to step on anyone’s toes.

“The last thing you want to do is show disrespect for your local counsel, because they’re critical in the ability to get transactions done,” Ms. Greenspon says. “When it comes to communicating with opposing counsel abroad, that’s their job.”

Second, avoid unpleasant surprises by getting to know your foreign business partners away from the negotiating table. Go to lunch or have drinks at the bar to equip yourself to evaluate their motivations and expectations.

Finally, slow down.

“The road is littered with U.S. investors whose Chinese operations have been unprofitable, in part, because they’ve plunged into equity investments or contractual arrangements with Chinese parties without carefully considering Chinese laws on investments, the repatriation of capital contributions or other regulations,” says Philip Stamatakos, a partner at Jones Day in Chicago, who represents companies in cross-border transactions.

Lawyers agree: Cutting corners to get a deal done may be a risk worth taking in the United States, where businesses are more transparent and it’s relatively inexpensive to take a troublemaker to court. But when you’re a stranger in a strange land, it’s just asking for trouble.

©2008 by Crain Communications Inc.

China: Chasing copycats and profit margins

Four years ago, one of Jeffery Duncan’s clients was having trouble with copycats in China.

The client, a well-known U.S. audio-equipment maker, found that Chinese companies were duplicating its receivers’ and CD players’ faceplates, slapping them on garbage electronics and selling the fakes on the Internet as the American brand.

So Mr. Duncan, an intellectual property lawyer at Brinks Hofer Gilson & Lione in Chicago, had associates in China file for a patent that prevents anyone from duplicating the U.S. company’s design. Since then, they have succeeded in shutting down several of these companies by sending them cease-and-desist letters. The online solicitations have disappeared.

“They may be surfacing somewhere else, but at least the most visible harm we’re seeing, listing these things on the Web as ‘a genuine xyz receiver,’ is coming down,” Mr. Duncan says.

Chinese officials have become more vigilant in enforcing patent and trademark laws as they seek to safeguard foreign investment and protect local companies, which increasingly are manufacturing products of their own.

Still, when filing for trademark protection in China, it’s a good idea to register the name or symbol using English and Chinese characters, since English is often used in the country’s advertising campaigns. Once you have registered your intellectual property, set up systems to ensure suppliers aren’t violating those patents or trademarks. At minimum, employ an automatic Web crawler program to detect if anyone is advertising knockoffs of your product online.

Other areas where U.S. companies stumble in China:

LACK OF TRANSPARENCY: There are plenty of state-owned companies in China that U.S. firms would like to buy. But Americans often find that Chinese companies won’t disclose how much their assets are worth or whether they are profitable.

“It’s not a question of shady people vs. unshady people so much as there are enormous cultural differences between China and the U.S. and Western Europe,” says Douglas Tucker, a partner at Quarles & Brady LLP in Chicago. “The Chinese are wildly offended when you ask them to open their books. It’s a huge show of disrespect.”

That’s why you need to give yourself double the time you usually would for due diligence to build the relationships that are essential for getting anything done in China.

“The first time you meet the plant manager, you take him out for dinner,” Mr. Tucker says. “The second time, you walk around the plant and tell them how you’re really impressed. The third or fourth time, you start inching over to that topic. Now you’re friends, and he’ll say, ‘Of course you can see our books and records.’ ”

COMPETITION: Unlike in the United States, foreign companies that license the rights to manufacture their products to Chinese distributors cannot forbid these companies from tweaking the product and selling the new version as their own.

To cut down on this practice, Mr. Duncan’s clients use contracts that require the Chinese firm to secure its promises with bonds worth hundreds of thousands of dollars and spell out dire consequences like revoking the distribution license or seizing the bond if the terms are violated.

Also, non-compete agreements in China require companies to make payments to former employees during the period they are prohibited from competing. That can create other problems.

“Sometimes people run from the payments,” says Sharon Barner, a partner at Foley & Lardner LLP. “They don’t want you to pay them because they don’t want the non-compete to be enforceable.”

IF YOU DO GET INTO A DISPUTE: When going to court in China, location matters. Each province has the right to interpret the law as it sees fit. Courts in Guangdong Province, which has welcomed outside investors and businesses since it became a special trade zone in the 1970s, and courts in the economic capitals of Beijing and Shanghai have reputations for being the most fair toward foreign companies.

©2008 by Crain Communications Inc.

India: You don’t want to go to court

What American companies don’t know about Indian law can hurt them. Brad Peterson, a partner at Mayer Brown LLP in Chicago, had one client that used a standard contract to buy a license for software developed in India. Everything was fine until the U.S. company began to squabble with the developers about whether their work met specifications, and the Indian firm looked more closely at the contract.

Turns out the agreement didn’t specify that the U.S. company was buying rights to use the software in the United States, nor that it was purchasing those rights forever. Both these factors are assumed under the U.S. Copyright Act when doing a licensing deal with a U.S.-based company.

But under Indian law, which governed this case because the software was created in India, licensing agreements last five years and pertain only to use of a product in India, unless otherwise stated.

“The American company could have gotten exactly what they wanted with better drafting and an understanding of the presumptions in Indian law,” Mr. Peterson says.

But in this case, the Indian company required the Americans to pay extra for rights they thought they were buying in the first place.

Other challenges U.S. companies face in India:

INTELLECTUAL PROPERTY: While India has IP protections, the government lacks the resources to seize infringing goods or shut down computer systems of companies that violate the law.

That’s why, when doing business there, you have to make it harder for employees and contractors to steal ideas in the first place. For example, give employees computers without USB ports and limit their access to printers. And make sure your contracts with Indian partners spell out what you require them to do to maintain security, such as not hiring people who fail background checks or separating work duties so no single employee has complete knowledge of your process.

“Then, when you walk into their facility and security is not adequate, you can point to the contract and say, ‘We have a promise. I’m withholding money or taking back all of my assets unless you fix this problem,’ ” Mr. Peterson says.

WORKING WITH PARTNERS AND SUPPLIERS: Infrastructure and skills vary widely across India’s 28 states and seven union territories, and location often determines how easy and efficient an offshore or outsourcing arrangement will be.

“A tier-one site in Bangalore has the capabilities of an office complex in Naperville,” Mr. Peterson says. “At a tier-four site in India, communication is difficult, the roads may make it inaccessible and the people may have low levels of English.”

But even the most qualified Indian partners interpret business terms differently than suppliers and contractors in the United States. For example, a U.S. business may request that a partner inform it of problems promptly. But the definition of promptly in India is not the same as in the United States because of cultural differences. So be sure to specify a time frame.

IF YOU DO GET INTO A DISPUTE: Indian courts are notorious for backlogs. Waiting five to 10 years for a trial is not unusual. That’s why preserving evidence and making sure all depositions are completed is important. There is no guarantee that older executives will be alive to discuss the facts of the case a decade after it occurred. Otherwise, follow what many companies do to avoid going to court in India: use alternative dispute resolution.

©2008 by Crain Communications Inc.

U.S.S.R.: Russia raises red flags

Recent stories about Kremlin strong-arming have made plenty of U.S. companies nervous about doing business in Russia.

Since January, Russian police have searched BP PLC’s Moscow offices several times amid a spat between the London-based energy company and its Russian partners over expansion plans. The government has charged a Russian BP manager who holds an American passport with spying and has withdrawn the visas of 148 other foreign employees.

In another case, businessman William Browder was barred from the country after he and his investment firm, Hermitage Capital Management Ltd., ran afoul of the Putin government. After the Kremlin canceled his visa in 2005, police seized documents and computers from the offices of Hermitage Capital and its attorneys. Then Mr. Browder learned someone had transferred ownership of Hermitage’s Russian holding companies to a convicted murderer.

In cases like these, there’s not much you can do, says George McKann, a partner at Drinker Biddle & Reath LLP in Chicago, who has advised U.S. companies working in Russia since the 1970s.

“There’s nothing to prevent the government from deciding they want you out or they want your Russian partner to be a 60% owner vs. a 50-50,” he says. “That’s the risk of doing business in essentially a totalitarian regime.”

But these are extreme cases, says Arthur George, a partner at Baker & McKenzie LLP in Chicago who co-founded the firm’s Moscow and St. Petersburg offices. “The activities of companies in most sectors of the economy are really below the radar of the authorities,” he says.

More-common predicaments that U.S. companies face in Russia:

CORRUPTION: Russian distributors attempting to circumvent customs duties and taxes often propose shipping to ports in countries like Germany or Finland.

“Sometimes they’ll ask our clients to contract with some other company outside of Russia and then just ship to a designated point,” says Mr. George, whose clients include U.S. automakers and drug companies. “When the payments are not from Russia, there’s some kind of corruption going on there. You have to say no, because there are going to be problems under Russian law as well as U.S. law.”

Fears that organized crime has infiltrated all levels of Russian business are overblown, Mr. McKann says, but mob-run sham companies do exist, so you must be careful.

When embarking on a venture with a Russian company, “you do everything you possibly can to find out its history,” he says, from Googling to checking its reputation with the U.S. Embassy.

EMPLOYEES: As in most of Europe, there is no at-will employment in Russia. To dismiss an employee, the company must explain which article of the Russian labor code permits it. Every Russian has a passport-like document called a “workbook,” which contains a worker’s entire employment history. Anytime an employer promotes, disciplines or fires an employee, it must be noted in the workbook.

“If you don’t have on file that they’ve been warned, you can’t fire them,” Mr. George says.

IF YOU DO GET INTO A DISPUTE: Litigating in Russia takes less time and money than in the United States, but companies are not allowed to gather evidence from an opponent, which could lead to an unfavorable ruling. “If we anticipate the case is going to be long and complicated and involve a lot of money, we recommend it be heard in arbitration,” Mr. George says. “If our client is selling something to a Russian buyer for $50,000 and they don’t pay, we might be happy to let the case be resolved in a Russian court because a judge is perfectly capable of deciding whether they paid or not.” A note of caution: Many Russian companies that work with foreign firms have operations outside Russia, and sometimes U.S. companies sign contracts with their offshore subsidiaries. Make sure these companies have assets to draw on in the event of an arbitration award or insist on signing a contract with the Russian parent company.

©2008 by Crain Communications Inc.

Latin America: What to do about bribery

In some parts of the world, local companies often give government officials a little extra cash to secure a license or contract. Latin American officials, in particular, are notorious for requesting bribes to move business along.

In fact, 29% of Latin American companies reported that they had experienced corruption and bribery in the past three years, compared with 9% of companies in North America, 14% in Western Europe and 21% in the Asia-Pacific region, according to a 2007 global fraud survey by New York-based risk consultant Kroll.

Since 1977, the Foreign Corrupt Practices Act has forbidden U.S. companies, their partners and employees from paying bribes to foreign officials and has required public companies to record financial transactions accurately, which means no labeling bribes as “toner cartridges.”

Until five years ago, U.S. officials didn’t aggressively enforce the law. But priorities have changed as the feds have received more tips from U.S. companies, which are taking a closer look at their operations under Sarbanes-Oxley, and from officials in the other 29 Organisation for Economic Cooperation and Development countries, which have embraced new anti-bribery laws.

“The Americans sitting in America know not to pay bribes to foreign government officials, and they have training for their U.S. employees who operate overseas,” says Charles Smith, a partner at Skadden Arps Slate Meagher & Flom LLP in Chicago. “The problem usually comes when they buy into a local business that doesn’t have that history.”

To avoid problems, lawyers advise U.S. companies to review their Latin American partners’ financial records for unexplained commissions, suspicious donations to charities and fake or incomplete invoices. If they find a company is paying bribes, they should ask how critical those payments are, says Margaret Gibson, a partner at Kirkland & Ellis LLP in Chicago.

“It’s all well and good for a U.S. investor to say, ‘I’m going to buy this business and you’re going to stop and run clean,’ ” she says, but, “It may be that the company will not get the business it used to get without those payments.”

Other areas in which U.S. companies trip up:

INDEPENDENT CONTRACTORS AND EMPLOYEES: Many Latin American countries require foreign companies that want to fire their local distributors to cover investments the sales reps have made to develop the market, even if those dealers haven’t done a good job.

Those laws prevent foreign companies from using new distributors until the old dealers are paid. The three-year old Central American Free Trade Agreement released U.S. companies from that obligation in the six signatory countries: Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua.

But “if you are dealing with a country like Paraguay, which has a strict law that is not subject to relief by any treaty, then you need to make a call as to whether it makes sense for the growth of your product line to risk non-performance by a dealer there,” says Miguel Noyola, a partner at Baker & McKenzie LLP in Chicago.

Also, Latin American countries generally require companies to give employees benefits American workers don’t get.

In Brazil, for example, each employee must be given a yearly bonus totaling one-third of annual salary. Employers also must put 8% of every employee’s salary into an interest-earning “employment security fund.” If the employee is laid off, that money plus 40% of his or her annual salary goes toward a one-time severance payment.

POLITICAL INSTABILITY: Latin American countries started opening up to international trade and investment in the late 1980s. But in recent years, some countries have reintroduced protectionist regulations.

In Venezuela, for example, President Hugo Chavez has imposed restrictions on foreign capital ownership in certain industries like petroleum and natural gas.

“If you’re a private-equity investor who’s hoping to sell that company one day, the Latin American political environment is much less stable than in the U.S.,” Ms. Gibson of Kirkland & Ellis says.

IF YOU DO GET INTO A DISPUTE: Latin American countries have slow, process-driven civil law systems in which most arguments are submitted in writing rather than verbally. Jury trials almost never happen. Awards, even for significant breaches of contract, are small compared with what companies get in the United States. That is why Americans often seek to resolve disputes with Latin American firms through international arbitration.

©2008 by Crain Communications Inc.

Europe: Across the pond

Michael Hanna learned the hard way that European labor laws are more employee-friendly than those at home.

Eight years ago, he owned a Chicago technology consulting firm that opened an office in Milan, Italy, after acquiring a company there. When he decided to fire an Italian employee for poor performance, he discovered local law required a severance package equal to about one year’s pay. It was money he was sorry to lose.

“We get spoiled in the United States because we don’t have all these rules,” he says.

Now CEO of NewMedical Technology Inc., a medical-device manufacturer in Northbrook, Mr. Hanna, 48, outsources distribution in Australia, Europe and South America to avoid hiring employees there. His entire staff is in North America, where they are at-will hirees.

“In the U.S., you have the hire-and-fire mentality and make quick decisions to downsize and right-size,” says Dieter Schmitz, a partner at Baker & McKenzie LLP in Chicago. “The European culture and legal rules really don’t allow that.”

Not only do European countries have severance requirements, which can be hefty in places like France and Belgium, but companies may have to go to labor court — something that doesn’t exist in the United States — to win approval for hirings and firings.

Other potential minefields for U.S. companies in Europe:

INTELLECTUAL PROPERTY: In the United States, you own the trademark you use, whether you’ve registered it or not. In Europe, your trademark is only protected if you register it there. Companies that don’t plan ahead can find their trademarks in the hands of opportunistic European companies and individuals who make money selling them back.

To avoid problems, U.S. companies can apply for a “Community Trademark,” valid in all 27 countries in the European Union. Prices start at $2,345, much cheaper than registering 27 individual trademarks.

Companies working in Europe also must register their patents, keeping in mind that European courts interpret patents differently than U.S. courts. In Europe, you have to prove the patented material or process is the result of an “inventive step” not obvious to a skilled person in that field — another concept that doesn’t exist in the U.S. That’s one reason Pfizer Inc.’s patent for the active ingredient in its cholesterol drug Lipitor was revoked by the Federal Patent Court in Munich, Germany, last fall.

IF YOU DO GET INTO A DISPUTE: In the civil law systems of continental Europe, there’s no trial by jury. You appear before a judge, who asks all the questions. You can’t demand documents or other evidence from your opponents like you can in the United States, and if you lose, you pay their legal fees and court costs. For these reasons, Europeans are more likely to mediate or arbitrate business disputes than rush to court like Americans. You can pick where you want to arbitrate and describe the type of arbitrator you want — for example, an English-speaking, U.K.-trained, non-German judge. Lawyers recommend putting these preferences in contracts with your European partners to avoid haggling over the details after the goodwill between you is gone.

©2008 by Crain Communications Inc.

Women to Watch: Susan Manske

(Crain’s Chicago Business, 07 May 2007) 

WHY WE SHOULD WATCH HER: Her success in the financial markets determines whether charitable organizations, from international human rights programs to juvenile justice initiatives, continue to be funded.

CROSSROAD: Amid high turnover at Ameritech Corp., she stayed at the company from 1987 to 2000, moving to different investment divisions such as capital markets and risk management as colleagues left. That gave her the range of experience she needed to become a chief investment officer.

Susan Manske loves the intellectual challenge of investing. And she’s good at it, which is why more forests in Latin America are being saved and more human rights initiatives in Africa are getting funded.

Since Ms. Manske joined the MacArthur Foundation four years ago, her team’s investments have increased the foundation’s endowment to $6 billion from $3.8 billion in 2003, at an average 19% annual gain. That beats the Standard & Poor 500’s average annual gain of 13% over the same period.

Foundations are required to give away 5% of their assets every year, so by increasing assets by $2.2 billion, Ms. Manske’s team generated an additional $110 million for good works. This year, for example, MacArthur will give $5.5 million — $1 million more than last year — to 180 local arts organizations, including the Art Institute and Northlight Theatre.

“I strongly believe that teams with diverse skills — the fixed-income person, the equity person, the private-companies person — generate better ideas than individuals do,” says Ms. Manske, who supervises 11 people. “We’re long-term investors with a globally diversified portfolio.”

Previously chief investment officer of trust investments for Chicago-based Boeing Co., Ms. Manske, 48, has applied an investment formula that has beaten most major charities for the past four years. In 2005, MacArthur’s 15.5% rate of return was higher than 61 of the 64 non-profits surveyed by the Chronicle of Philanthropy, beating both the Rockefeller Foundation (12%) and the Bill and Melinda Gates Foundation (5.2%).

For non-profits, getting good returns isn’t easy, says Stacy Palmer, editor of the Chronicle of Philanthropy. “Non-profit organizations have to protect their assets and not invest in anything too risky,” she says. “There are rules that govern how foundations need to be prudent investors. On the other hand, if you don’t invest aggressively enough, you don’t have enough money to give away.”

Talk about pressure: If Ms. Manske doesn’t make the right choices, millions of dollars for charity disappear. When MacArthur had lower returns in the early 2000s, it avoided a dramatic dip in grant-making by spending more than the required 5% of its endowment, but couldn’t give extra support to some deserving programs.

©2007 by Crain Communications Inc.

Crain’s Fast 50

(Crain’s Chicago Business, 2 June 2008) 

Chicago’s 50 Fastest-Growing Companies

No. 39. WMS Industries Inc., Waukegan

2007 revenue: $539.8 million

Four-year growth: 202%

Profitable? Yes

Local employees: 850

Worldwide employees: 1,414

Five years ago, WMS Industries, a leading player in the $90-billion global casino gambling industry, was in trouble. Sales were slowing, and the company was losing money.

Then WMS introduced the Bluebird, an ergonomically designed slot machine featuring high-quality audio provided by Bose Corp. and video that filled the screen.

“They were the game-changer in terms of what a slot-machine box looks like,” says David Katz, a gambling analyst with Oppenheimer & Co. in New York.

Priced at $10,000 each, Bluebirds tilted the odds in WMS’ favor. By the end of 2007, the company had shipped nearly 100,000 new machines or upgrades, a key reason WMS revenue soared 202% in four years.

WMS’ growth also has come from leasing 9,000 slot machines to casinos around the country. Among its offerings are “Monopoly Big Event,” a bank of networked Monopoly-themed slot machines that allows players to enter special bonus rounds together, and a “Wizard of Oz” game with surround sound and 3-D animation. Revenue from leased machines increased 87% between 2003 and 2007, to $174 million.

WMS, which started as Williams Manufacturing Co. in 1943, has never shied away from innovation. Founded in Chicago by Harry Williams, inventor of the tilt mechanism for pinball machines, the company made pinball games and jukeboxes, then switched to arcade video games. As arcades disappeared, the company, which renamed itself WMS when it went public in 1987, invented the video lottery terminal in 1992, then a video poker game for casinos. In 1994, it designed its first slot machines.

Casinos abroad bought 29% of WMS’ machines in 2007, up 36% from a year earlier. The company boosted international sales by acquiring two European game makers in the past two years: Orion Gaming B.V. of the Netherlands and Systems in Progress GmbH of Austria. WMS also maintains design studios in Australia and England that adapt games for foreign markets and enable the company to ship new games in all currencies and languages at the same time the U.S. version is released.

“We are in a hit-driven business,” says CEO Brian Gamache, 49. “Players around the world want to play what’s hot, and if we don’t give them products simultaneously, someone else will.”

WMS designers already are working on what industry analysts say is the next big thing — server-based gambling, in which slot-machine content can be controlled by a central computer, so if a particular game is popular one night, casino managers can download it on more machines from a back room. The Bluebird 2, scheduled for release by yearend, will have this capability.

©2008 by Crain Communications Inc.