Final Thoughts: Students Raise Questions the Experts Miss

If students can figure out warning signs in the business community, why can't the experts?

As most experienced professors recognize, most of what we know is learned from the students. I am very proud of our students here at St. Thomas because they provide a great wealth of thorough and insightful analysis and they raise questions that we might have missed. I have thought many times that I am much indebted to one student or another for providing me with knowledge learned through the reading of their term papers and reports due at the end of the Capstone Class in the master’s level programs in business, international management and engineering.

It is a great privilege to read term papers – sometimes more than 100 in a single semester. Many of the papers examine the strategies, tactics and competitiveness of individual companies and then compare them to other foreign and domestic companies operating in the same field. They examine operating ratios, balance sheet integrity as well as organizational cultures and managerial practices employed.

Over the years, our students correctly have predicted the demise of Midwest Federal, K-Mart, Montgomery Ward, Control Data, Worldcom, LTV, Daewoo, Sun Country and Qwest. They also correctly have analyzed weaknesses at AT&T, Cisco, and at an early stage, General Electric. I do not think I have ever had an uncritical term paper on any of these companies.

The shattering events of the past several months in the business community are indeed troubling, but some questions are raised. First, why were so many glaring infractions missed by the fund managers, security analysts and the SEC staff during the go-go years of 1993 to 2000? If the students could figure it out, why couldn’t the experts? There were certainly plenty of warning signs readily apparent in any thorough analysis of each company’s competitive strengths, which the students picked up.

We might ask ourselves, why would we ever have expected any investments in these companies to work out with so many violations of managerial conventions? Frenetic acquisition of companies beyond the scope of management to make the acquisitions successful. Money stripped from research, product development and operations. Demoralized employees. New and peculiar accounting terms employed to display progress in companies where no serious business model existed. Offensive executive compensation was going on at the same time.

Questions were raised about many companies but nothing was done. AOL had been challenged on revenue recognition. The financial statements of Honeywell’s future acquirer Allied Signal also looked peculiar because the company was burdened with huge debt, low margins, a weak balance sheet, slow-moving inventory and declining business in two of its five segments well before its merger with Honeywell.

Over the years, I have modified my approach to the reading assignments for class. Like most other folks, I was using textbooks, but they were not always seen as thorough, up-to-date and insightful by the students. Some of the textbooks read more like a brochure supporting particular methodologies or particular companies. I still use some material from the better textbooks but now I supplement these readings by offering copies (with permission) of some student papers from previous terms. The student papers are often better than the texts and including them in the class assignments provides another useful fringe benefit – a clear example of what a good term paper should look like.

Both SEC and Department of Justice enforcement of the nation’s security laws was extremely weak during the 1990s, when most of the business integrity problems developed. Enforcement of security laws have ebbed and flowed over the years. Perhaps our best SEC chairman was John Shad, who served for about 10 years during the 1980s and early 1990s. Prior to his arrival, there had been 42 indictments for insider trading during the entire history of the SEC. Yet, 78 were brought during Shad’s term. It was this same John Shad, a practitioner out of industry, who gave $25 million of his own money to support ethics training in education and institutions.

During the 1990s, though, the SEC and Department of Justice were clearly asleep at the switch. But our students were not. So, many thanks to Lisa Woods, Brian Weeks, Derik Mantel, Chad McKenzie and so many others. These and other students are due the appreciation of our faculty.

Dr. Fred Zimmerman, a manufacturing systems engineering and international management professor, has taught at St. Thomas since 1981.