Business for Non-Corporate Types

In other news... I'm excited to welcome a new member to our team. Jennifer Lee will be offering career coaching to college students and graduates who are considering business careers (finance, consulting, etc.) and/or MBA degrees. Below is her bio, which gives a sense of the interesting twists and turns one's career can take. Jennifer spent eleven years as a cello student at Juilliard before attending Harvard College, where she played varsity lacrosse, founded a conductorless orchestra and double majored in Music and Anthropology. She earned her M.Phil. in Musicology and Performance at Oxford (Lincoln College) and currently attends Harvard Business School for her MBA. She spent a year at a music conservatory in Freiburg, Germany, and her solo and ensemble performances have taken her to France, Germany, Italy, Switzerland, Japan, and South Korea. Prior to HBS, she worked as both a for-profit and nonprofit management consultant. Most recently, she has worked at JP Morgan in London as an investment banking summer associate in the Technology, Media, and Telecom Group. Jennifer is conversant in German and Korean.

It's rare that I hit on a topic that allows me to write about issues of importance to both MBA folks as well as law school/aspiring policy wonk types. You'd think that not many people would care about the special tax treatment received by partners in private equity firms and hedge funds (in particular, the capital gains treatment for their "carried interests"), but two opinion pieces in today's NYT demonstrate why the issue should matter to many more people, including many who read this blog.

First up: "The Under-Taxed Kings of Private Equity" by Alan S. Blinder, professor of economics and public affairs at Princeton, former vice chairman of the Federal Reserve, and adviser to Democratic politicians. His piece lays out in very understandable terms what that "carried interest" is, why it matters, and what kinds of dollar amounts are at stake for the public treasury.

Next up: "The Hedge Fund Class and the French Revolution," by lawyer, law professor, writer, actor ("Bueller? Bueller? Bueller?"), economist, and Nixon speech writer Ben Stein. Stein takes Blinder's argument one step further and asks about the policy implications behind a tax law that has hedge fund and private equity gazillionaires paying a much lower tax rate on their income than normal people:

We are in a war. We are apparently not winning the war. The military is desperately shy of funds, to the point where our fighting men and women are being shortchanged in training and equipment.

We also need more money for our soldiers’ pay, so their families do not have to live like church mice while their spouses are deployed in Iraq or Afghanistan. In these circumstances, is it fitting and morally right for the richest of the rich to be paying either very low taxes or no tax at all?

Is it right or even admissible in the human conscience that while teachers, emergency room technicians, police and firefighters are taxed at full earned-income rates — and often underpaid — that the highest-earning people in this country should pay at either very low tax rates or none at all?

Stein is no class warrior, so coming from him, this argument lept off the page (screen) at me.

Why does or should all this matter to a big chunk of my readership? For the following reasons:

1. For my MBAs and aspiring MBAs, so many of whom are itching to get into private equity: I've written before about how the economics of PE are very possibly about to change, and how that doesn't bode well for their career prospects, or at least their earnings prospects, in PE.

As Blinder puts it, "If we tax Activity A at 15 percent and Activity B at 38 percent, a free-market economy will give us more of A and less of B." If we start taxing private equity incomes at 38% rather than 15%, expect to see less capital and less top talent gravitating towards private equity.

(And the issue of capital gains treatment of their income doesn't even touch the problem of what happens to the buy-out market once interest rates rise, as they inevitably will. Could be a perfect storm brewing.)

2. For my law school types: I would guesstimate that a solid majority of law school applicants seek a law degree because they want to effect change on a policy level and make society better. (And they usually misspell "effect" as "affect," a spelling faux pas from which spellcheck won't rescue them.) In the same breath, when I ask them more specifically what kind of law they want to practice, they start rattling off the kinds of law they're certain they don't want to study. High on that list: tax law. That they don't realize how intertwined tax law is with the fundamental policy choices we make as a society and the give-and-take that happens through the legislative process suggests to me that most applicants have no idea what they're talking about.

Stein's article is a reminder that if you don't know anything about tax policy like carried interests and amortization of goodwill during an IPO, you're going to have a hard time making a rational or convincing argument about whatever activities you would rather have the government encourage, or what programs we should be funding over other ones, in a world of finite treasury resources.

Care about AIDS or cancer research? Global warming initiatives? More subsidized health care? Better life-saving equipment for our soldiers? Fancy technology for national security efforts? Those all take federal dollars, and if you want some of them for whatever your preferred cause might be, better that you start understanding things like the policy argument behind capital-gains treatment for carried interests.

Which leads me to my final point for law school types: Don't graduate from law school without having taken financial accounting and being able to read a financial statement. It could be the most useful class you take in law school, even if -- and I would argue especially if -- you're a policy wonk at heart. And if you retort that you're "just not a numbers person," you're not going to be as effective an advocate for your cause.

I'm a bit of a design nut, and recently I've been salivating over the most beautiful vacuum cleaner I've ever seen (the Electrolux Pronto, pictured over on the left). It's gorgeous, as in iPod gorgeous, although the photo doesn't do it justice.

I've had mine for about a week (lots of dog hair at my place), and I thought I was going to blog about what a great product this is for people still in college, or people who live in small quarters, or people who are too lazy to push around a big, hulking machine, or people whose aesthetic sensibilities weep when they have to look at ugly design every day (twenty-somethings think beautiful design is their birthright, thanks to Michael Graves for Target and Jonathan Ive at Apple).  And then I stumbled on the Electrolux Design Lab, which is even more exciting. It's a design competition for undergraduate and graduate design students around the world, and this year's Design Lab challenges aspiring industrial designers "to create eco-friendly, sustainable household appliances for 2020." How cool is that? The contest closes in 5 days. More design competitions here.

The Knowledge@Wharton blog (one of my favorites) has a fascinating interview with Dana Gioia about the connection between business and poetry. Who better to ponder that connection than someone who graduated from Stanford business school, served as vice president of General Foods, became a published poet, and was named chairman of the National Endowment of the Arts? A few excerpts from the interview:Well, first of all let me make something clear, because people often get my career a little bit confused. I'm the only person, in history, who went to business school to be a poet. This is because I wanted to be a poet and I wanted to have a job, a career and I didn't want to be in academia. I found business interesting and I found the problems and opportunities that you work with in business very interesting.

So, I went to Stanford Business School and then spent fifteen years in corporate life. I sort of came into business as a poet. And I have to say that having attended Stanford and Harvard, that I got my education in business. It has taught me a lot of things that have helped me as a poet.

I think the most fundamental thing is that in business, I was working with very smart people who were more average [I think] in terms of their interests. They had a rather high work ethic and they were very intelligent people. And, I was able, for fifteen years to live and work with people - who were not literary people. It gave me a better sense of the language and of the kinds of issues/ideas and subjects that the average person is more interested in. And, it took me out of the "hot house" of the English Department. . . .

I think that if you come into the business, with an arts background, you have a tremendously difficult time initially. This is because it's a very different world, it looks at problems differently and by and large, they don't necessarily respect your background.

For that reason, I did not let anyone I worked with know that I was a poet. This is because, let me ask you a question, if you had a poet working for you, wouldn't you check his or her addition? So privately I went through a very difficult time. That being said, as you rise in business, as you get out of the lower level staff jobs and the quantitative analysis, and you get into the higher level of problems, I felt that I had an enormous advantage over my colleagues because I had a background in the imagination, in language and in literature.

This is because once you get into middle and upper management, the decisions that you make are largely qualitative and creative. And, most people who do really well in the early quantitative stages are grossly unprepared for the real challenges of upper management, at least in marketing which was the industry that I was working in, marketing and product management. . . .

Well, if you take the word poet in the old Greek sense of "a maker", what entrepreneurs and artists have in common is that they imagine something that they then bring into reality. And, as any poet or any composer or any entrepreneur knows, you imagine something, but to bring it to reality you revise and recalibrate it a million times to get it just right. So, I think the ability of envisioning something and then bringing it into being goes back to the ancient meaning of the word poetry -- Poesis which means the made thing.There are lots of interesting nuggets in that interview, but I also encourage you to read it because I hear from so many college seniors that they're not sure what they want to do with themselves after graduation, but they are sure it can't be in business.

When I scratch that surface even a little bit, I soon discover that they know absolutely nothing about the business world. Add to that mix the indoctrination they receive from academics with their quaint, tenured, old-school Marxist contempt for the private sector and free enterprise, and it's no wonder people graduate from college thinking they are fit only for academia or non-profit work or -- dare I say
it -- law school. (Which just goes to show you how little they know
about what most lawyers do all day long.) They also have no idea that the skills they learned through their liberal arts training are useful in the corporate world.

So I'm going to be keeping an eye out for profiles and stories, like this one, about people who have done great and interesting things in the business world and connected their business lives with some other deeply held passion. I'll put them in a new category called "Business for Non-Corporate Types." Stay tuned!