Richard Kovacevich, Wells Fargo CEO

STANFORD GRADUATE SCHOOL OF BUSINESS — Wells Fargo Chairman Richard Kovacevich recalls that one of the most crucial business lessons he learned at Stanford came on the baseball field, not because he was a star pitcher, but because of the interpersonal dynamics involved with being part of a team.

“Success in the business world, especially in the world of financial services or other service companies, is less about brains at the 99 percent level and more about people development, motivation, coaching, leadership, teamwork, integrity, culture, community involvement, vision, values and a broad understanding of a variety of business disciplines, especially interpersonal relations,” Kovacevich said November 5 as part of the student-sponsored View From the Top speaker series.

“Management by culture” is one of the key reasons Wells Fargo’s revenue has grown at a double-digit compound rate for 20 years, and helped the company avoid most of the pitfalls in the current financial crisis, said Kovacevich, MBA ’67, the CEO at Wells from 1998 to 2007.

He explained that Wells Fargo has a vision and values booklet, updated every couple of years, and acquires only those companies with similar values. When other large banks were buying investment banks in the late 1990s, Wells passed — they had different cultures, such as trying to reward a few stars who might be looking out for themselves rather than the company.

“We predicted that six out of 10 of these investment bank acquisitions by commercial banks would not work. We were wrong. Nine out of 10 did not work.”

Kovacevich made it clear that teamwork, delegating authority and sticking to its values helped Wells Fargo resist the temptation to offer many subprime mortgages and lower its lending standards. “We lost 4 percent market share in our mortgage business for three years between 2005 and 2007 — $160 billion in originations in 2006 alone. In hindsight, we were glad we did.”

He said a command-and-control leadership style wouldn’t have served nearly as well. “Great leaders give power to their teams. They do not monopolize it. You cannot share a vision unless you share the power to achieve it. Leaders don’t point fingers, they point direction; they show the way by personal example.”

Leaders need to believe in the talent and listen to the opinions of people at all levels, so that those who enter the business full of energy don’t wind up feeling bored and ignored in a few years, Kovacevich said, adding that it is crucial to make the workplace fun and offer motivation, praising workers publicly when they do well.

“People at the top should, above all, be leaders. Quite often, they act like managers. Managers administer; leaders innovate. Managers rely on systems; leaders rely on people. Managers need control; leaders rely on trust. Managers work on getting things right; leaders work on the right things.

“A good leader inspires a team to have confidence in him or her; a great leader inspires a team to have confidence in themselves.”

Kovacevich said the key to growing profit is finding ways to increase revenue, not cut costs. “If customers are giving you more of their business, as evidenced by organic revenue growth, you know you must be doing a lot of things right,” he said. “You must have competitive products, you must have good service, you must have good people who understand customers’ needs. You must be priced about right. Your technology must be competitive.”

That helps explain why Wells bases most acquisitions on projected revenue growth rather than cost savings. “Cost savings are usually a one-time profit gain; revenue growth is the gift that keeps on giving.”

Kovacevich also said that when positions do need to be eliminated in an acquisition, Wells Fargo tries to offer displaced workers jobs in different areas. “We call it retain and retrain.”

Even if bank branches might have to close, for example, people might be reassigned into some other part of financial services; less than half of Wells Fargo’s revenue comes from traditional banking.

“What I try to get people to understand is that Wells Fargo is first and foremost a distributor,” Kovacevich said. “It’s a distributor of commodity financial products. Most all financial products are similar. Thus we have much more in common with other distributors of commodity products, like Wal-Mart and Lowe’s, than we did with Goldman Sachs or Countrywide. Just like Wal-Mart and Lowe’s, our uniqueness is the way we distribute those products, not the products themselves.”

He said a good leader must not overreact to projected trends. Kovacevich said that a decade or two ago, some competitors closed many branches because online banking was seen as the wave of the future. That is gradually happening, and Wells has a well-respected online service, but he said many customers still want brick-and-mortar branches.

“It is important to listen to the futurists, the pundits, the media and Wall Street because there is usually some rationale to their positions. But in my opinion, don’t do anything until you actually see signs that customers are voting with their feet. Look for the earliest possible signs of radical change. If you don’t see any, stay away from the bleeding edge.”

When it does acquire businesses, Wells often looks for “fixer-uppers,” Kovacevich said. He said a company like Wachovia, which Wells Fargo acquired in 2008 for $12.5 billion, had good businesses and talented employees, but some obvious problems that Wells believed it could fix.

The acquisition also helped his company move into investment banking, which now fits Wells’ vision and values because so many changes have been made during the economic crisis, Kovacevich said. “I believe this will turn out to be the best and most profitable acquisition in banking history, and among the best in all of corporate history.”

The View From the Top speaker series brings leaders from across the world to talk to student audiences about leadership and strategies for success. It is organized by the Center for Leadership Development and Research.

— Dave Murphy

Also on Stanford Knowledgebase:

1. Cultivating A Culture
2. People
3. Microlending Gives Dignity to People with Leprosy

Audi TTS / Stanford

As early as next year, an Audi TTS will wend its way up Pikes Peak, cruising at speeds upwards of 130 mph … without a driver. Using only gyroscopes, accelerometers and its GPS system to increase speed, brake and locate the boundaries of the road, the car will be making its own decisions.

From the NY Times Wheels Blog: Chris Gerdes, a professor of mechanical engineering at Stanford, directs the Center for Automotive Research at Stanford. The university has teamed up with Volkswagen, which last year announced a $5.75 million grant to Stanford to create the Volkswagen Automotive Innovation Lab. One of the more interesting products of VW’s interest in operator-free driving is a Web page that imagines the world of 2028, with a video of a father and son team using virtual reality projections to pick a car for the day. They muse over the traffic jams and highway carnage of bygone days as the car (a futuristic Volkswagen) delivers itself and takes them for a ride.

Also on Stanford Knowledgebase:

1. QOTD: Fear as Driver

Also on Stanford Knowledgebase:

1. Portable Health Care Benefits
2. How Much Will We Pay for a Year of Life?
3. Development Economics Must Reform

A: Anyone who bets against Silicon Valley is betting against a successful track record of 40 or 50 years.

You’ve got the universities. You’ve also got a very, very effective venture-capital industry, which is very well honed and you have the creations of at least a biotech revolution and a high-tech revolution, and the possibilities of the green revolution being created here.

When I’m asked about this, and I’ve been asked this for years, I answer this the same: It is the weather. There’s a reason why generations of young people who are willing to challenge assumptions and so forth have ended up in the Bay Area, and the weather is not a small part.

–Eric Schmidt, CEO of Google and lecturer at the Stanford GSB, in a Q&A with the Wall Street Journal

Also on Stanford Knowledgebase:

1. CEO For A Day
2. Business Plans Should Begin with User, Work up to CEO
3. Wage Imbalance between CEO and Workers Sends a Bad Message

And if you’re interested, Stanford Graduate School of Business has a YouTube channel, too. Watch the latest speakers and view our extensive library of videos featuring leadership, social innovation, entrepreneurship and more.

Also on Stanford Knowledgebase:

1. Video: Routes to Entrepreneurship

“Americans still believe in the power of leadership. If they have lost faith, it’s about the current crop of individuals in leadership roles that seem to be driving their disenchantment and dismay – not the idea that leaders can make a difference.”

— Roderick Kramer, the William R. Kimball Professor of Organizational Behavior, in the Washington Post blog “On Leadership.” Kramer is currently a visiting professor at Harvard.

Also on Stanford Knowledgebase:

1. What Health Care Reform Will Americans Pay For?
2. QOTD: Context is Key
3. QOTD: You Say You Want a Revolution? Well…

Also on Stanford Knowledgebase:

1. Fundamental Industry Changes
2. Executive Education As A Growth Industry
3. Alternatives to Venture Capitalists: Food Equity

1. Eight Rules for Brainstorming
2. Believe Me, I Have No Idea What I’m Talking About
3. Cost of Reducing CO2 Emissions Could Plunge
4. Peers Influence Decision to Be Entrepreneurs
5. Don’t Waste Volunteers’ Time

Also on Stanford Knowledgebase:

1. Readers’ Favorites for September: Story Telling to Getting Jilted
2. Readers’ Favorites
3. Readers’ Favorites

Eliminating sales quotas boosts company profits says Professor Harikesh Nair. In one case, the new sales compensation plan without quotas resulted in a 9% improvement in overall revenues, which translates to about $1 million of incremental revenues per month.

STANFORD GRADUATE SCHOOL OF BUSINESS — How do you pay your sales force in a way that motivates them to do the best job possible? The U.S. economy spends an estimated $800 billion annually compensating sales forces, almost three times the amount devoted to advertising, yet sales force compensation remains a troubling question.

Many firms offer bonuses for crossing certain sales thresholds, or meeting quotas. New research at Stanford Graduate School of Business, however, suggests that quotas may, in some situations, undercut profits. When one Fortune 500 company removed quotas, sales went up $1 million per month.

“The fundamental problem is that managers never know exactly how much time and effort their salespeople are putting into their work,” says Harikesh Nair, an associate professor of marketing and one of the authors. “In the absence of such knowledge, they can only base payment on agents’ output, not their input.” Commissions, quotas, and bonuses based on performance are thus the typical staples of sales force compensation. Quotas, in particular, are believed to generate strong incentives by serving as targets or goals that encourage sales agents to work hard.

While commissions may spur effort in unequivocal ways, the quota carrot can sometimes result in agents gaming the system. “Those who have already made the quota in a current compensation cycle may have an incentive to postpone additional sales,” says Nair. “Alternatively, those who perceive they have no chance of making the quota in the current cycle have a perverse incentive to postpone their effort to the next cycle.”

In a recent paper, Nair and Sanjog Misra, an associate professor of marketing at the University of Rochester, develop finely specified mathematical models that describe the behavioral patterns of every sales agent employed by a Fortune 500 contact lens manufacturer. The mathematical models are based on a branch of economics named “agency theory,” which specifies how output-based compensation schemes should be designed. The models enable them to simulate what sales would be if the features of the compensation contract were changed, and to quantify the cost to the firm of employees gaming the system.

They find that removing quotas enhances firm profit. In essence, eliminating quotas removes the inefficiency induced by gaming.

Nair and Misra then worked with company managers to formulate a new compensation scheme without the quota requirement. Implemented at the start of 2009, the new plan resulted in a 9% improvement in overall revenues, which translates to about $1 million of incremental revenues per month.

The new compensation plan also was extremely popular among the sales associates. “Most salespeople do not like quotas,” says Nair.

Striking the quota system may not be the answer for every company, say the researchers. “What managers need to do is evaluate more carefully how the system is functioning for their own organization,” Nair suggests. One approach is for firms to conduct mathematical analyses that formally consider the behavioral responses of sales people to aspects of the compensation scheme. Another, says Nair, is for managers simply to take a good look at their group’s sales data over time to understand how output has varied when quotas or incentives changed. “That can give a company a good base by which to evaluate what can happen if they do change the compensation system,” he notes.

The new study utilizes both approaches. The mathematical strategy used by Nair and Misra combines agency theory with a technique called “dynamic programming.” Leveraging this framework in conjunction with the firm’s historical sales data enables them to form a more complete picture of the efficacy of the compensation scheme. The study demonstrates that this type of approach can help significantly improve marketing decision making and firms’ profitability.

“Firms now operate in an increasingly complex and data-rich environment. Those that understand how to harness the power of this data to cut through this complexity will enjoy a lasting competitive advantage,” says Nair.

–– Marguerite Rigoglioso

Paper

• “A Structural Model of Sales-Force Compensation Dynamics: Estimation and Field Implementation,” Sanjog Misra and Harikesh Nair, Stanford Research Paper No. 2037, August 2009.

Also on Stanford Knowledgebase:

1. Sales Simulator Throws Curveballs to Students
2. Internet Marketing
3. Lack of Information Skews Sales

STANFORD GRADUATE SCHOOL OF BUSINESS —In the world of investing, few can boast a personal saga as colorful and dramatic as Bill Browder’s. The famed fund manager went from being “the largest portfolio investor in Russia” to “one of the biggest enemies of the state,” Browder recently told a group at Stanford.

The founder and CEO of Hermitage Capital Management recounted the story of the rise and fall of his Russian investment fund to a packed room at the Stanford Graduate School of Business on Oct. 22. Hermitage has exited Russia and now has an $850 million fund investing in other emerging economies in the Middle East, Asia, and Latin America, said Browder in a talk sponsored by the School’s Global Management Program.

Browder soared to fame and fortune investing in Russian equities amid the chaos and corruption of the post-Soviet economy. His hallmark: finding hidden values in Russian companies and driving up their share prices by exposing corporate malfeasance and mismanagement. His widely publicized campaigns for shareholder rights and corporate governance helped propel the Hermitage Fund from $25 million in 1996 to $4 billion a decade later. But eventually the U.S.-born financier ran afoul of the Russian government, which banned him from the country in 2005 as a threat to national security.

Today, Browder says it is Hermitage that has become a victim of the criminal activity and official corruption that still pervade Russia’s economy. He has gone public with accusations that Russian fraud artists and high-level government officials colluded to steal companies owned by Hermitage, intimidate or jail Hermitage lawyers, and rob the Russian treasury of at least $230 million. Hermitage’s saga is a cautionary tale of the risks of investing in Russia today, according to a video, posted on YouTube, that Browder showed the Stanford audience. “Anyone who would make a long-term investment in Russia right now, almost at any valuation, is completely out of their mind,” declared Browder. “My situation is not unusual. For every me, there are 100 others suffering in silence.”

Browder is the grandson of Earl Browder, a union organizer from Kansas who went to Moscow in 1927, married a Russian, and became the head of the Communist Party in the United States. The younger Browder grew up in Chicago, attended the University of Chicago, and later Stanford Business School. “How do you rebel against a family of Communists? I rebelled by putting on a suit and tie and becoming a businessman,” he quipped.

Graduating with an MBA in 1989, the year the Berlin Wall fell, Browder decided to pursue opportunities in Eastern Europe. While working in the region for Boston Consulting Group and later Salomon Brothers, he saw how Soviet bloc countries like Poland and Russia were privatizing companies at absurdly low valuations. He soon realized there was a lucrative opportunity for investors to buy in cheaply to the post-Soviet Russian economy.

In 1996, Browder set up Hermitage with $25 million from the late Edmond Safra, a renowned banker. Browder moved to Moscow and focused on undervalued Russian companies overlooked by mainstream securities researchers. By the end of its first year, the Hermitage Fund soared to $100 million. Eighteen months after launching, it was worth $1 billion.

By the late 1990s, a coterie of two-dozen Russian oligarchs controlled many of the oil and gas companies that Hermitage had invested in. They embarked on an unprecedented “orgy of stealing,” said Browder, citing practices such as asset stripping, share dilution, and embezzlement. He embarked on his own campaign of digging up corporate abuses and publicizing them through the press. The goal was to create pressure for reforms that would unlock shareholder value. Browder’s biggest coup was at the national gas company Gazprom, where he generated a governance scandal that led to the firing of the company chief and contributed to a stock price surge.

Things began unraveling in November 2005, when Browder was denied re-entry at the Moscow airport.

What followed was a twisted tale of corporate raiding, Russian style. In June 2007, police raided Hermitage’s office, taking away files and records. Criminals used the documents to steal ownership of three companies from Hermitage and to arrange sham court judgments against them. The judgments were used to create losses that were the basis for getting $230 million in fraudulent tax refunds from the Russian treasury, Browder alleges in legal filings and a publicity campaign. “You can’t steal $230 million from the Russian budget without having very, very senior officials involved,” said Browder, who now works out of London.

“I would hope in my heart that this is an ugly phase Russia is going through and this is not the future of Russia,” he added.
—Maria Shao

Also on Stanford Knowledgebase:

1. QOTD: Rebellion with a Suit and Tie
2. Another Oscar for Bill Guttentag
3. Bill Musick, MBA 1984

“How do you rebel against a family of Communists? I rebelled by putting on a suit and tie and becoming a businessman.“

–Bill Browder, MBA ‘89, CEO of Hermitage Capital Management. He is the grandson of Earl Browder, a union organizer from Kansas who went to Moscow in 1927, married a Russian, and became the head of the Communist Party in the United States.

Also on Stanford Knowledgebase:

1. Don’t Invest in Russia Today, Warns Bill Browder
2. QOTD: ‘Emerging Markets’ Obsolete
3. QOTD: Privatization Urged in Gulf

According to Stanford Prof. Caroline Hoxby, “U.S. growth is increasingly dependent on innovation,” she said. “You could say that it’s the only thing we’re good at.” She emphasized that the nation needs “highly educated people to create innovation.”

The archived webcast video is also available at:

• Stanford on iTunes U
• Stanford on YouTube

Also on Stanford Knowledgebase:

1. Social Innovation: Ask an Expert
2. Stanford, GSB Professors Debate Bailout Plan
3. The Stanford Business School at 75 Years

Also on Stanford Knowledgebase:

1. Founders’ Values Help Shape Gender Mix in High Tech
2. A Natural History of Markets
3. Strategy: Rescuing a Part of American History

Michaela Draganska

• “Super-Premium Ice Cream”

Also on Stanford Knowledgebase:

1. New Business Model

Spirit of America

Also on Stanford Knowledgebase:

1. Research: High PTSD Rates for Iraq War Veterans
2. Entrepreneurs