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The ABC of Insider Trading

Source: Wikipedia
Raj Rajaratnam, notorious insider trader - Enlarge
Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information. However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company.[1]
In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders (in the U.S., defined as beneficial owners of ten percent or more of the firm's equity securities) must be reported to the regulator or publicly disclosed, usually within a few business days of the trade. Many investors follow the summaries of these insider trades in the hope that mimicking these trades will be profitable. While "legal" insider trading cannot be based on material non-public information, some investors believe corporate insiders nonetheless may have better insights into the health of a corporation (broadly speaking) and that their trades otherwise convey important information (e.g., about the pending retirement of an important officer selling shares, greater commitment to the corporation by officers purchasing shares, etc.)
Illegal insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.[2]
Legal Insider Trading
Legal trades by insiders are common, as employees of publicly-traded corporations often have stock or stock options. These trades are made public in the US through SEC filings, mainly Form 4. Prior to 2001, US law restricted trading such that insiders mainly traded during windows when their inside information was public, such as soon after earnings releases.[3] SEC Rule 10b5-1 clarified that the U.S. prohibition against insider trading does not require proof that an insider actually used material nonpublic information when conducting a trade; possession of such information alone is sufficient to violate the provision, and the SEC would impute an insider in possession of material nonpublic information uses this information when conducting a trade. However, Rule 10b5-1 also created for insiders an affirmative defense if the insider can demonstrate that the trades conducted on behalf of the insider were conducted as part of a preexisting contract or written, binding plan for trading in the future.[3] For example, if a corporate insider plans on retiring after a period of time and, as part of his or her retirement planning, adopts a written, binding plan to sell a specific amount of the company's stock every month for the next two years, and during this period the insider comes into possession of material nonpublic information about the company, any subsequent trades based on the original plan might not constitute prohibited insider trading.

Illegal insider trading

Rules against insider trading on material non-public information exist in most jurisdictions around the world, though the details and the efforts to enforce them vary considerably. The United States is generally viewed as having the strictest laws against illegal insider trading, and makes the most serious efforts to enforce them.[4]

Definition of "insider"

In the United States and Germany, for mandatory reporting purposes, corporate insiders are defined as a company's officers, directors and any beneficial owners of more than ten percent of a class of the company's equity securities. Trades made by these types of insiders in the company's own stock, based on material non-public information, are considered to be fraudulent since the insiders are violating the fiduciary duty that they owe to the shareholders. The corporate insider, simply by accepting employment, has undertaken a legal obligation to the shareholders to put the shareholders' interests before their own, in matters related to the corporation. When the insider buys or sells based upon company owned information, he is violating his obligation to the shareholders.
For example, illegal insider trading would occur if the chief executive officer of Company A learned (prior to a public announcement) that Company A will be taken over, and bought shares in Company A knowing that the share price would likely rise.
In the United States and many other jurisdictions, however, "insiders" are not just limited to corporate officials and major shareholders where illegal insider trading is concerned, but can include any individual who trades shares based on material non-public information in violation of some duty of trust. This duty may be imputed; for example, in many jurisdictions, in cases of where a corporate insider "tips" a friend about non-public information likely to have an effect on the company's share price, the duty the corporate insider owes the company is now imputed to the friend and the friend violates a duty to the company if he or she trades on the basis of this information.

Liability for insider trading

Liability for insider trading violations cannot be avoided by passing on the information in an "I scratch your back, you scratch mine" or quid pro quo arrangement, as long as the person receiving the information knew or should have known that the information was company property.
For example, if Company A's CEO did not trade on the undisclosed takeover news, but instead passed the information on to his brother-in-law who traded on it, illegal insider trading would still have occurred.[5]

Misappropriation theory

A newer view of insider trading, the "misappropriation theory" is now part of US law. It states that anyone who misappropriates (steals) information from their employer and trades on that information in any stock (not just the employer's stock) is guilty of insider trading.
For example, if a journalist who worked for Company B learned about the takeover of Company A while performing his work duties, and bought stock in Company A, illegal insider trading might still have occurred. Even though the journalist did not violate a fiduciary duty to Company A's shareholders, he might have violated a fiduciary duty to Company B's shareholders (assuming the newspaper had a policy of not allowing reporters to trade on stories they were covering).[6]

Proof of responsibility

Proving that someone has been responsible for a trade can be difficult, because traders may try to hide behind nominees, offshore companies, and other proxies. Nevertheless, the U.S. Securities and Exchange Commission prosecutes over 50 cases each year, with many being settled administratively out of court. The SEC and several stock exchanges actively monitor trading, looking for suspicious activity.

Trading on information in general

Not all trading on information is illegal inside trading, however. For example, while dining at a restaurant, you hear the CEO of Company A at the next table telling the CFO that the company's profits will be higher than expected, and then you buy the stock, you are not guilty of insider trading unless there was some closer connection between you, the company, or the company officers. However, information about a tender offer (usually regarding a merger or acquisition) is held to a higher standard. If this type of information is obtained (directly or indirectly) and there is reason to believe it is non-public, there is a duty to disclose it or abstain from trading.[7]

Tracking insider trades

Since insiders are required to report their trades, others often track these traders, and there is a school of investing which follows the lead of insiders. This is of course subject to the risk that an insider is making a buy specifically to increase investor confidence, or making a sell for reasons unrelated to the health of the company (e.g. a desire to diversify or pay a personal expense).
As of December 2005 companies are required to announce times to their employees as to when they can safely trade without being accused of trading on inside information.

American insider trading law

The United States has been the leading country in prohibiting insider trading made on the basis of material non-public information. Thomas Newkirk and Melissa Robertson of the U.S. Securities and Exchange Commission (SEC) summarize the development of U.S. insider trading laws.[8] Insider trading has a base offense level of 8, which puts it in Zone A under the U.S. Sentencing Guidelines. This means that first-time offenders are eligible to receive probation rather than incarceration.[9]

Common law

U.S. insider trading prohibitions are based on English and American common law prohibitions against fraud. In 1909, well before the Securities Exchange Act was passed, the United States Supreme Court ruled that a corporate director who bought that company’s stock when he knew it was about to jump up in price committed fraud by buying while not disclosing his inside information.
Section 17 of the Securities Act of 1933[10] contained prohibitions of fraud in the sale of securities which were greatly strengthened by the Securities Exchange Act of 1934.[11]
Section 16(b) of the Securities Exchange Act of 1934 prohibits short-swing profits (from any purchases and sales within any six month period) made by corporate directors, officers, or stockholders owning more than 10% of a firm’s shares. Under Section 10(b) of the 1934 Act, SEC Rule 10b-5, prohibits fraud related to securities trading.
The Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 provide for penalties for illegal insider trading to be as high as three times the profit gained or the loss avoided from the illegal trading.[12]

SEC regulations

SEC regulation FD ("Fair Disclosure") requires that if a company intentionally discloses material non-public information to one person, it must simultaneously disclose that information to the public at large. In the case of an unintentional disclosure of material non-public information to one person, the company must make a public disclosure "promptly."[13]
Insider trading, or similar practices, are also regulated by the SEC under its rules on takeovers and tender offers under the Williams Act.

Court decisions

Much of the development of insider trading law has resulted from court decisions.
In SEC v. Texas Gulf Sulphur Co. (1966), a federal circuit court stated that anyone in possession of inside information must either disclose the information or refrain from trading.[14]
In 1909, the Supreme Court of the United States ruled in Strong v. Repide that a director upon whose action the value of the shares depends cannot avail of his knowledge of what his own action will be to acquire shares from those whom he intentionally keeps in ignorance of his expected action and the resulting value of the shares. Even though in general, ordinary relations between directors and shareholders in a business corporation are not of such a fiduciary nature as to make it the duty of a director to disclose to a shareholder the general knowledge which he may possess regarding the value of the shares of the company before he purchases any from a shareholder, yet there are cases where, by reason of the special facts, such duty exists.
In 1984, the Supreme Court of the United States ruled in the case of Dirks v. SEC that tippees (receivers of second-hand information) are liable if they had reason to believe that the tipper had breached a fiduciary duty in disclosing confidential information and the tipper received any personal benefit from the disclosure. (Since Dirks disclosed the information in order to expose a fraud, rather than for personal gain, nobody was liable for insider trading violations in his case.)
The Dirks case also defined the concept of "constructive insiders," who are lawyers, investment bankers and others who receive confidential information from a corporation while providing services to the corporation. Constructive insiders are also liable for insider trading violations if the corporation expects the information to remain confidential, since they acquire the fiduciary duties of the true insider.
In United States v. Carpenter (1986) the U.S. Supreme Court cited an earlier ruling while unanimously upholding mail and wire fraud convictions for a defendant who received his information from a journalist rather than from the company itself. The journalist R. Foster Winans was also convicted, on the grounds that he had misappropriated information belonging to his employer, the Wall Street Journal. In that widely publicized case, Winans traded in advance of "Heard on the Street" columns appearing in the Journal.[15]
The court ruled in Carpenter: "It is well established, as a general proposition, that a person who acquires special knowledge or information by virtue of a confidential or fiduciary relationship with another is not free to exploit that knowledge or information for his own personal benefit but must account to his principal for any profits derived therefrom."

However, in upholding the securities fraud (insider trading) convictions, the justices were evenly split.
In 1997 the U.S. Supreme Court adopted the misappropriation theory of insider trading in United States v. O'Hagan, 521 U.S. 642, 655 (1997). O'Hagan was a partner in a law firm representing Grand Metropolitan, while it was considering a tender offer for Pillsbury Co. O'Hagan used this inside information by buying call options on Pillsbury stock, resulting in profits of over $4 million. O'Hagan claimed that neither he nor his firm owed a fiduciary duty to Pillsbury, so that he did not commit fraud by purchasing Pillsbury options.[16]
The Court rejected O'Hagan's arguments and upheld his conviction.
The "misappropriation theory" holds that a person commits fraud "in connection with" a securities transaction, and thereby violates 10(b) and Rule 10b-5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. Under this theory, a fiduciary's undisclosed, self-serving use of a principal's information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of the information. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company's stock, the misappropriation theory premises liability on a fiduciary-turned-trader's deception of those who entrusted him with access to confidential information.
The Court specifically recognized that a corporation’s information is its property: "A company's confidential information...qualifies as property to which the company has a right of exclusive use. The undisclosed misappropriation of such information in violation of a fiduciary duty...constitutes fraud akin to embezzlement – the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another."
In 2000, the SEC enacted Rule 10b5-1, which defined trading "on the basis of" inside information as any time a person trades while aware of material nonpublic information – so that it is no defense for one to say that she would have made the trade anyway. This rule also created an affirmative defense for pre-planned trades.

Security analysis and insider trading

Security analysts gather and compile information, talk to corporate officers and other insiders, and issue recommendations to traders. Thus their activities may easily cross legal lines if they are not especially careful. The CFA Institute in its code of ethics states that analysts should make every effort to make all reports available to all the broker's clients on a timely basis. Analysts should never report material nonpublic information, except in an effort to make that information available to the general public. Nevertheless, analysts' reports may contain a variety of information that is "pieced together" without violating insider trading laws, under the mosaic theory.[17] This information may include non-material nonpublic information as well as material public information, which may increase in value when properly compiled and documented.
In May 2007, a bill entitled the "Stop Trading on Congressional Knowledge Act, or STOCK Act" was introduced that would hold congressional and federal employees liable for stock trades they made using information they gained through their jobs and also regulate analysts or "Political Intelligence" firms that research government activities.[18] The bill has not passed.[19]

Arguments for legalizing insider trading

Some economists and legal scholars (e.g. Henry Manne, Milton Friedman, Thomas Sowell, Daniel Fischel, Frank H. Easterbrook) argue that laws making insider trading illegal should be revoked. They claim that insider trading based on material nonpublic information benefits investors, in general, by more quickly introducing new information into the market.[20]
Milton Friedman, laureate of the Nobel Memorial Prize in Economics, said: "You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that." Friedman did not believe that the trader should be required to make his trade known to the public, because the buying or selling pressure itself is information for the market.[21]
Other critics argue that insider trading is a victimless act: A willing buyer and a willing seller agree to trade property which the seller rightfully owns, with no prior contract (according to this view) having been made between the parties to refrain from trading if there is asymmetric information.
Legalization advocates also question why "trading" where one party has more information than the other is legal in other markets, such as real estate, but not in the stock market. For example, if a geologist knows there is a high likelihood of the discovery of petroleum under Farmer Smith's land, he may be entitled to make Smith an offer for the land, and buy it, without first telling Farmer Smith of the geological data.[14] Nevertheless, circumstances can occur when the geologist would be committing fraud if, because he owes a duty to the farmer, he did not disclose the information; e.g., if he had been hired by Farmer Smith to assess the geology of the farm.
Advocates of legalization make free speech arguments. Punishment for communicating about a development pertinent to the next day's stock price might seem to be an act of censorship.[22] If the information being conveyed is proprietary information and the corporate insider has contracted to not expose it, he has no more right to communicate it than he would to tell others about the company's confidential new product designs, formulas, or bank account passwords.

There are very limited laws against "insider trading" in the commodities markets, if, for no other reason, than that the concept of an "insider" is not immediately analogous to commodities themselves (e.g., corn, wheat, steel, etc.). However, analogous activities such as front running are illegal under U.S. commodity and futures trading laws. For example, a commodity broker can be charged with fraud if he or she receives a large purchase order from a client (one likely to affect the price of that commodity) and then purchases that commodity before executing the client's order in order to benefit from the anticipated price increase.

Legal differences among jurisdictions

The US and the UK vary in the way the law is interpreted and applied with regard to insider trading.
In the UK, the relevant laws are the Criminal Justice Act 1993 Part V Schedule 1 and the Financial Services and Markets Act 2000, which defines an offence of Market Abuse.[23] It is also illegal to fail to trade based on inside information (whereas without the inside information the trade would have taken place). The principle is that it is illegal to trade on the basis of market-sensitive information that is not generally known. No relationship to the issuer of the security is required; all that is required is that the guilty party traded (or caused trading) whilst having inside information.
Japan enacted its first law against insider trading in 1988. Roderick Seeman says: "Even today many Japanese do not understand why this is illegal. Indeed, previously it was regarded as common sense to make a profit from your knowledge."[24]
In accordance with EU Directives, Malta enacted the Financial Markets Abuse Act in 2002, which effectively replaced the Insider Dealing and Market Abuse Act of 1994.
The "Objectives and Principles of Securities Regulation"[25] published by the International Organization of Securities Commissions (IOSCO) in 1998 and updated in 2003 states that the three objectives of good securities market regulation are (1) investor protection, (2) ensuring that markets are fair, efficient and transparent, and (3) reducing systemic risk. The discussion of these "Core Principles" state that "investor protection" in this context means "Investors should be protected from misleading, manipulative or fraudulent practices, including insider trading, front running or trading ahead of customers and the misuse of client assets." More than 85 percent of the world's securities and commodities market regulators are members of IOSCO and have signed on to these Core Principles.
The World Bank and International Monetary Fund now use the IOSCO Core Principles in reviewing the financial health of different country's regulatory systems as part of these organization's financial sector assessment program, so laws against insider trading based on non-public information are now expected by the international community. Enforcement of insider trading laws varies widely from country to country, but the vast majority of jurisdictions now outlaw the practice, at least in principle.
Larry Harris claims that differences in the effectiveness with which countries restrict insider trading help to explain the differences in executive compensation among those countries. The U.S., for example, has much higher CEO salaries than do Japan or Germany, where insider trading is less effectively restrained.[26]

See also

Notes

  1. ^ Insider Trading U.S. Securities and Exchange Commission, accessed May 7, 2008
  2. ^ "The World Price of Insider Trading" by Utpal Bhattacharya and Hazem Daouk in the Journal of Finance, Vol. LVII, No. 1 (Feb. 2002)
  3. ^ a b Stuart Stein. (2001). New standards for "legal" insider trading. Community Banker.
  4. ^ "Law and the Market: The Impact of Enforcement" by John C. Coffee, University of Pennsylvania Law Review (December 2007)
  5. ^ Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 29 "Insider Trading" p. 589
  6. ^ Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 29 "Insider Trading" p. 586-587
  7. ^ 17 C.F.R. 240.14e-3
  8. ^ Insider Trading – A U.S. Perspective
  9. ^ U.S.S.G. §2B1.4, http://www.ussc.gov/2009guid/2b1_4.htm 
  10. ^ Laws, at sec.gov
  11. ^ Laws, at sec.gov
  12. ^ Testimony, at sec.gov
  13. ^ Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 29 "Insider Trading" p. 586
  14. ^ a b Haddock, David D.. "Insider Trading". The Concise Encyclopedia of Economics. The Library of Economics and Liberty. http://www.econlib.org/library/Enc/InsiderTrading.html. Retrieved 2008-01-22. 
  15. ^ Christopher Cox, U.S. Securities and Exchange Commission Speech by SEC Chairman:Remarks at the Annual Meeting of the Society of American Business Editors and Writers
  16. ^ Law.com
  17. ^ Investopedia.com – Mosaic Theory
  18. ^ Gross, Daniel (2007-05-21). "Insider Trading, Congressional-Style". Slate (The Washington Post Company). http://www.slate.com/id/2166664/fr/rss/%20slate.com. Retrieved 2007-05-29. 
  19. ^ H.R. 2341 GovTrack.us
  20. ^ [1]
  21. ^ Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 29 "Insider Trading" p. 591-597
  22. ^ www.walterblock.com-Privilege.pdf
  23. ^ cato.org
  24. ^ Japanlaw.info
  25. ^ Objectives and Principles of Securities Regulation, IOSCO, May 2003
  26. ^ Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 29 "Insider Trading" p. 593

References

  • Stephen M. Bainbridge, Securities Law: Insider Trading (1999) ISBN 1-56662-737-0.
  • Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 29 "Insider Trading" ISBN 0-19-514470-8.
  • Grechenig, The Marginal Incentive of Insider Trading: an Economics Reinterpretation of the Case Law, 37 The University of Memphis Law Review 75-148 (2006).
  • Grechenig, Positive and Negative Information - Insider Trading Rethought (http://ssrn.com/abstract=1019425).

External links

Look up insider trading in Wiktionary, the free dictionary.
General information
Articles and opinions
Data on insider trading
Retrieved from "http://en.wikipedia.org/wiki/Insider_trading"

Wise investments for 2011

Source: The Motley Fool
By Alex Dumortier, CFA
January 10, 2011
If you're interested in asset allocation, the start of the year is an opportunity to think about the best way to position your portfolio for success around a small number of investing ideas. Here are three of my favorite themes for 2011:

Theme 1: Overweight technology and financials
Strictly on the basis of price-to-earnings multiples (on 2011 earnings estimates), the two cheapest sectors in the S&P 500 are Health Care (11.2) and Financials (12.1). While the P/E multiple has its limitations, research firm Morningstar has confirmed that these are indeed the two most undervalued sectors, by rolling up their analysts' valuations of individual stocks across each sector. At the end of last year, they pegged the percentage discount to fair value for both sectors in the high teens.
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Motley Fool Pro's $1.4 million portfolio has a clear tilt toward the technology sector. Hardware and software stocks represent nearly a fifth of stock holdings -- roughly 10 percentage points over the corresponding figure for the S&P 500 index.

Chip heavyweight Intel (NYSE: INTC) is the portfolio's second largest position, and the Pro team currently rates the stock a "Buy First"; advisor Jeff Fischer believes Wall Street doesn't appreciate the diminishing cyclicality of the firm's business. Intel also happens to be representative of my second theme for 2011:

Theme 2: Overweight large- and mega-cap, underweight small-cap
Small-cap stocks smashed large-cap stocks in 2010, with 26.9% for the Russell 2000 against 16.1% for the Russell 1000 indexes. The gap with mega-cap stocks is even wider, with the Russell Top 50 recording only a 9.5% return (all figures include dividends). Small caps' outperformance stretches far back, with the Russell 2000 ahead of its large- and mega-cap counterparts over the prior three-, five-, seven- and 10-year periods.

That phenomenon will reverse. Although no-one can be certain when that will occur, I'd rather bet on a reversal that has to happen, rather than on a status quo that can't continue indefinitely. At an estimated price-to-earnings multiple of 15.2, I much prefer the Russell Top 50 today (estimated P/E of the Russell 2000: 20.1).
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Indeed, high-quality large-cap stocks remain the most attractive segment of the market (although they are less attractive in absolute terms after the recent run-up in stock prices). Buying franchises like Wal-Mart (NYSE: WMT) at an 8% earnings yield, JPMorgan Chase (Nasdaq: JPM) at 10% and Hewlett-Packard (NYSE: HPQ) at better than 12% -- now that's a strategy that offers significant protection against a permanent loss of capital.

Theme 3: Long timber
Timber is an interesting asset in that it has a predictable growth characteristics, and it offers substantial diversification with regard to stocks or bonds. Fund manager GMO -- one of the best asset allocators out there -- estimates that timber will produce an annualized inflation-adjusted return of 6% over the next seven years, the highest of any of the 12 major asset classes it tracks.

There are a small number of timber REITs (real estate investment trusts) in the U.S., the most prominent of which are Weyerhaeuser (NYSE: WY), Plum Creek Timber (NYSE: PCL) and Rayonier (NYSE: RYN). However, as GMO's head of asset allocation, Ben Inker, told Barron's recently, if you want exposure, "you have got to own the trees directly ... unfortunately, it doesn't do you a lot of good to even own a timber real estate investment trust ".

Indeed, these REITs display a very high degree of correlation with the S&P 500 and Plum Creek shares -- arguably the REIT that is the best proxy for timber -- and have surprisingly low correlation with the NCREIF Timberland Index. That doesn't mean it's not worth owning: It has certainly provided historical investors with rich returns, but if it's pure timber exposure you're after, you could be barking up the wrong tree, so to speak. Unfortunately, I see no easy way for individual investors who don't have access to specialized vehicles to properly gain this exposure.

Stock picking plus
Motley Fool Pro advisor Jeff Fischer is a highly successful stock picker who also pays attention to broader market trends. With a 70% target allocation, individual stocks are the keystone of Pro's real-money portfolio, but Jeff also uses ETFs and options to take advantage of and hedge against opportunities and risks at the sector or asset class level. Stock picking while being mindful of asset allocation is a very powerful strategy, particularly in an environment where macroeconomic trends remain at the forefront of investors' concerns.

Your next step
If you'd like to learn more about Pro's approach to investing, simply enter your email address in the box below. In return, Jeff will send you his free report, 5 Pro Strategies for 2011, along with a private invitation to join Motley Fool Pro when it reopens this month. Take this simple step toward mastering the market in 2011!

Should IT execs get MBAs?

Source: Computerworld
It takes a monumental commitment, both financially and personally, but an MBA could be the fastest ticket to business proficiency.
By Julia King
January 10, 2011 06:00 AM ET
Computerworld - The CIOs at Procter & Gamble and Microsoft don't have one. Neither does the CIO at Wal-Mart. So, no, technically, you don't need to have a master's degree in business administration to be successful in a top technology position at a world-renowned company.

But realistically, it's an extremely good idea, especially for pure technologists. That goes not just for CIOs, but for project managers, business analysts and virtually any other IT professional aiming to climb to the top of the corporate ladder. One big reason: No one is exclusively a technology chief anymore. Everybody's a business executive, whether they call themselves that or not.

"CIOs are no longer developing technology. Instead, they're finding IT and putting it together in ways that change the top and bottom lines of their companies," says Ralph Szygenda, former global CIO at General Motors, Bell Atlantic and Texas Instruments and now a strategic consultant at iRise, a business applications vendor in El Segundo, Calif.

Preparing for digital leadership

The CIO's job today is 10 times harder than it was 10 years ago, according to Ralph Szygenda, whose CIO career has spanned more than three decades at global, multibillion-dollar companies.

"Today's CIO is running processes across the world rather than across country units. The CIO is also at the intersection of personal consumer technology and corporate technology and has to make it all work," he says.

Given this increase in complexity, Szygenda believes a "pure business degree" is insufficient preparation for the up-and-coming IT professional looking to assume a leadership role. For the past two decades, he has been working with business schools, helping to design a post-graduate business curriculum that combines coursework in finance, strategy and other traditional business studies with "a strong curriculum of IT courses," he says. Schools he has worked with include Carnegie Mellon University's H. John Heinz III School of Public Policy and Management, American University and Missouri University of Science and Technology.

Szygenda says that while at GM, he never hired anyone into a CIO role who didn't have "a balance of both business and technology experience." He also sent dozens of his IT staffers back to school to earn their MBAs through an online program he helped develop at Carnegie Mellon.

The program was specifically designed for future IT leaders. "It's about integrating the business and digital worlds, which is very different than traditional accounting, marketing and branding," Szygenda says. "It's for business people who want to learn more about technology or for technologists to learn more about the business. It's about trying to get [students] closer to what the next-generation digital leader should be."

— Julia King

"In the last 10 years, you could get away with [mainly] technology knowledge because a lot of the things a CIO did were efficiency moves, such as consolidating data centers. It was a great period for the technology CIO," says Szygenda. "But now, everybody has done the efficiencies. Growth is the big thing."

Szygenda himself doesn't have an MBA, yet like virtually all CIOs -- with MBAs and without -- he says enabling your employer's growth requires a comprehensive knowledge of business, particularly finance, which an MBA certainly affords. But going back to school to earn a two-year MBA can cost $55,000 to $60,000 per year. Meanwhile, a generous uptick in salary -- especially if you stay at your current company -- is by no means guaranteed upon graduation.
Fast-tracking
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But an MBA isn't the only way to acquire critical business knowledge. One alternative is rotating through various job assignments across business units to gain a first-hand understanding of processes associated with everything from sales and marketing to logistics, manufacturing and supply chain operations. The downside to that approach is that it can take years. Indeed, one measure of an MBA degree's worth, CIOs say, is that it is frequently the fastest way to acquire mandatory business knowledge.

"The traditional IT career path doesn't lend itself that well to building a mind-set and a skill set of how the CEO and CFO really think," says Peter Weis, CIO at Matson Navigation Co., an ocean freight carrier based in Oakland, Calif.

"Learning their language deeply by studying [business] cases and spending hours thinking about how other executives think is very hard to pick up in your normal work in the CIO role," adds Weis, who returned to school in his 40s to earn an MBA from the University of Pennsylvania's Wharton School of Business.

Yet going back to school, especially while continuing to work, is no easy feat. "It was maybe the hardest thing I have ever done in my career," Weis says. At the time, he was a single parent whose daughter had just left for college. His employer paid his tuition and expenses, but Weis was required to use one vacation day for every two days he spent in school. He also agreed to remain at Matson for three years after earning his MBA.

For two years straight, Weis worked full time and attended classes every other weekend, all day Saturday and Sunday. "On my off weekends, it was absolutely studying full time Saturday and Sunday, which made it a seven-day commitment."

"You're constantly battling to strike the right balance, performing your job and hitting all of your critical obligations," Weis says. "It was important to me that there be no slip in my performance at the company. That led to a 24/7 feeling all the time."

As for the career benefits, he says, "An MBA doesn't translate into instant financial gratification." Nor did it significantly increase his prestige among executives in Matson's C-suite, many of whom had already earned advanced degrees from top-notch schools.

An MBA doesn't necessarily enhance one's innovation and leadership abilities either, according to Paul Glen, an IT career expert, a Computerworld columnist and the author of the IT management book Leading Geeks. Glen, who holds an MBA from Northwestern University's Kellogg Graduate School of Management and has taught MBA courses at Loyola Marymount University and at the University of Southern California, says that "case methods that are taught in MBA programs can help people to think in different ways, but I've never seen anything that would teach someone to think innovatively."

Timing is everything when earning an MBA

The ideal time to earn an MBA is after you've had three to five years of experience in the business world, according to CIOs, academics and career experts.

"An MBA degree is meant to be very concrete and very practical," says IT management consultant Paul Glen, who at 27 was the youngest member of his class when he earned his MBA in 1991. "To go for an MBA when you haven't had enough work experience is pretty useless, because you have no reality to connect it to." In fact, Glen notes that the top business schools won't even accept MBA applications from students directly out of college anymore.

Sun National Bank CIO Angelo Valletta says if he had it to do again, "I'd have waited a little bit" before enrolling in an MBA program. He enrolled at the age of 22 immediately after earning his undergraduate degree, which he had pursued while working full time at another bank. That was more than 20 years ago.

"But I went straight through because the company was paying for it and I thought I might as well just keep on going," he says. But again, Valletta continued to work full time, supplementing his classroom and case-study learning with on-the-job training in virtually all business processes associated with the financial services industry.

Throughout his years in school, "I worked in back-office operations, I sold IRAs, I supported the credit card business, and I supported the retail business from a customer service standpoint. I don't think I would be successful without having both an MBA and the formative years in operations at the bank," he says.

Matson Navigation CIO Peter Weis had been in a management role for several years after climbing the corporate ladder in IT when he started to pursue an MBA. He says one huge benefit of earning the degree while simultaneously working as a CIO is that he was able to apply what he learned immediately.

For example, armed with a deeper knowledge of finance, Weis overhauled how Matson's project management office works. "We set up a business office, which runs all of our budgeting, project costing, administrative processes and all nontechnology processes," he explains.

IT budget requests also changed dramatically. "Now we don't issue a capital request without a net present value, payback period and a sensitivity analysis," Weis says. "All of that is standard fare for us now. That wasn't the case before an MBA."

— Julia King
Leadership skills are similarly glossed over in most MBA programs, Glen says. "Leadership is about understanding the emotions of people. MBA programs don't teach that well. Most MBA programs are far more focused on rational thought. They try to teach you how to think like a rationalistic CEO, but then you go back in the workforce and you're not a CEO. You're a manager, and you know how CEOs are supposed to approach problems, but you don't know more about managing people."

However, you do know more about how others think, says Weis.

"The biggest thing it has done is connect me to the financial, marketing, sales and operations issues. I see the business better through my peers' eyes," he says. Also invaluable, Weis says, is the deep knowledge of finance he acquired in business school. This has served him especially well in managing a large portfolio of competing projects and in negotiating with IT vendors.

Making global connections

After five years of working in the corporate world, Whirlpool Corp. CIO Kevin Summers enrolled at Duke University's Fuqua School of Business. He was inspired to earn his MBA after seeing how successful CIOs at his previous employers, including global companies like GE, Coca-Cola and AT&T, connected with all aspects of the business.

"I always wanted to stay in IT but progress quickly to the CIO level and to be a great business leader as well," Summers says. "An MBA gives you access to how to work in the global economy, in different cultures and in different parts of the world." That's important, he says, because in the course of a day, the Benton Harbor, Mich.-based CIO is talking to business associates in Asia and Brazil and throughout North America.

"I can also be in an HR meeting first thing in the morning, then on to a meeting about finance, and then in meetings about marketing and supply chain," he says. "An MBA gives you the ability to walk into any of those rooms and have a foundation in that part of the business."

— Julia King
John Seral, CIO at GE Infrastructure, returned to school to earn an MBA at DeVry University's Keller Graduate School of Management in Chicago three years after joining GE and six years after earning an undergraduate degree in computer science at the University of Illinois.

"Three years into the job at GE Capital, I realized I had a gap trying to understand cash flow and the language of the business. There were a lot of things I didn't understand. I asked a lot of questions," he recalls. "My background was very typical -- light on business courses, as I had pictured myself in math, technology and computer science."

Today, what he learned as an MBA student directly impacts how he finances and manages technology at GE Infrastructure. "Going deeper into accounting and understanding how costs are managed gives you different ideas about how to finance your projects and sell them internally," he says. "You earn credibility, and you have a lot more confidence selling your ideas."

Jim Marascio, chief technology officer at 11Giraffes in Charlotte, N.C., admits to being somewhat myopic in his approach to decision-making before earning an MBA at the University of Maine. He returned to school to earn an MBA after working a few years in a more engineering-oriented role as a technical liaison, which he landed after earning an undergraduate degree in computer science.

"One reason I went back for an MBA is that I wanted to be in a business leadership role rather than in the trenches in a development role," he says.

He says that having earned an MBA, he has a much better understanding of the views and opinions of everyone on the management team, which is invaluable because "if I can't understand why the CFO is positioning something a certain way, I'm not going to be successful working with the CFO."

Marascio says that in his role as an officer at a small digital media and products company, "an MBA is pretty close to mandatory. On a day-to-day basis, I'm working with operations people and marketing people and creative people and technology people. The ability to bridge all of those silos and to be successful really takes someone who is much more strategically than technically focused. I find that since I went through the program, I spend much more time viewing things from alternate perspectives and much more holistically."
Pulling the Right Levers

James Dallas, senior vice president of quality and operations at Minneapolis-based Medtronic Inc., agrees with Szygenda that growth is today's No. 1 business priority. Growing the business, he says, comes down to "knowing what the [business] levers are and which ones to pull to have the maximum impact." In short, it comes down to strategy.

Prior to earning an MBA from Emory University's Goizueta Business School in 1994, "I knew technologies and I knew how to execute on projects," Dallas says. He had graduated from college more than 10 years earlier, and in the intervening years he had supported a wide array of functions at his then-employer, Georgia-Pacific. "I started out supporting transportation and logistics, and I ended up becoming the general manager of that function. I supported our distribution and operations, and I ended up running the Mid-Atlantic and Southeast regions of that business," he recalls.

But it was as an MBA student that Dallas says he learned "how to look at business models and the key questions to ask at an enterprise level. The MBA allowed me to get better at deciding which projects to do and when to do them based on the phase and evolution of the business model in the overall competitive environment."

Dallas says it was after earning his MBA that he started being asked to go on sales calls to some of Georgia-Pacific's largest customers "to talk about IT from a business standpoint, addressing technology from the point of view of the customer."
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"I was also in strategy meetings to talk about overall business strategy, not just waiting for the IT part of the meeting to come up," he recalls. Now, if a business unit executive has a question about why his or her IT project isn't higher up on a list, Dallas simply traces how that particular project maps to the overall business strategy, and "if it isn't pulling on one of the specified business levers, it's not at the top."

The bottom line: "A CEO is looking for a CIO who will transform the business, not just implement technology. CIOs are being held accountable for their contributions to the bottom line, not just what they did to make things go faster," Dallas notes. "An MBA has allowed me to generate greater value."

MBAs lead to leadership roles

Make no mistake: An MBA might not be listed as mandatory in many IT job descriptions, but graduate-level management degrees are without a doubt preferred by companies seeking to fill business/technology leadership roles.

"All other things being equal, I'd give preference to the candidate with the MBA," says Jim Marascio, CTO at 11Giraffes.

At Matson Navigation, CIO Peter Weis notes that he just promoted an applications architect to a management role in software development, and "one of the primary reasons I promoted him is because he has an MBA," he says. Overall, about 5% of the professionals in Matson's IT organization hold MBAs. "I'd love for my entire project management office to have MBAs," Weis says.

"Absolutely you have to have an MBA if you want to be viewed as a strategic business partner," says Whirlpool Corp. CIO Kevin Summers. "In today's environment and in the future, there will be very few people at the VP-and-above levels without an MBA," he predicts.

James Dallas, senior vice president of quality and operations at Medtronic, says an MBA surely gives candidates who are up for leadership positions an edge. But what he's even more interested in is how and when the potential leader earned his MBA.

"If someone tells me they went to school at night while having a family and got their MBA, that tells me they can manage multiple priorities at one time, which is a key trait for an effective leader," Dallas says.

Moreover, Dallas advises his executive peers to be prepared with an advancement plan for employees with newly minted MBAs.

"Companies have to seriously think about what is next for the person" who is pursuing their MBA, Dallas says.

"Once you get your MBA, you want to apply your learning. I tell companies to be prepared once that person graduates. If you don't have a bigger role waiting for them, they will try to find one outside," he warns.

But a bigger role, additional responsibilities and a new title after earning an MBA don't necessarily mean more money, at least not initially. In fact, most recent graduates shouldn't expect to offset the tens of thousands of dollars they spent on tuition and expenses with a big salary increase in their first few years after completing school.

"I never did the calculation. In fact, I encourage people not to," says IT management consultant Paul Glen. "If people look at education only through the lens of investment, they are missing the point. It's about expanding your mind. If someone asks me about an MBA primarily as an investment, I tell them not to do it. If they want the credential more than the knowledge, they probably won't get the value from it."

That said, Glen estimates that he recouped the cost of his MBA within a few years. "But as they say," he cautions, "past performance is no indication of future performance."

— Julia King

Financial services grow but profits and staffing fall

Source: Walesonline
Financial services grow but profits and staffing fall
Jan 10 2011
By Sion Barry, Western Mail

THE UK’s financial services sector grew strongly in the last quarter of 2010.

However, despite growth for the second quarter in a row, profitability did not increase as fast as expected, growing at the slowest pace for 18 months, and numbers employed in the sector fell at the fastest pace for 17 years, according to the latest CBI/PwC Financial Services Survey.

Asked how their business volumes fared in the three months to December, 50% said that volumes increased and 23% said they fell. The resulting balance of plus 27% is in line with firms’ expectation (plus 24%), and just below last quarter’s balance of plus 28%, which was the fastest since June 2007. A slower rate of growth in volumes is expected in the next three months (plus 15%).

Business volumes grew for all sub-sectors of financial services in the past quarter, apart from banking where volumes were flat. Life insurers saw a year of growth in 2010 for volumes of business and profitability. For investment managers, all respondents saw activity grow in the past three months.

Across each of the customer groups in the overall survey experience was mixed. For business with private individuals, volumes were higher than three months ago.

Business with industrial and commercial companies was flat, and it fell slightly with financial institutions and overseas customers. In the coming quarter, growth in business activity is expected with all the customer groups, except financial institutions.

The value of fee, commission and premium income held steady in the past three months, disappointing expectations of a rise. However, the value of income from net interest, investment and trading fell in the quar- ter and a further fall is expected in the next three months.

John Cridland, CBI director- general designate, said: “Activity in the financial services sector grew strongly over the second half of 2010. But firms see growth slowing over the coming three months, and expect another fairly moderate increase in profitability.

“Numbers employed have fallen significantly and investment plans have weakened since September. This probably reflects renewed cost control given little growth in incomes and slower growth in profitablity.
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“Business conditions vary across financial services sub-sectors, however. Whereas the banks expect business volumes to remain subdued next quarter, securities traders and investment managers have fared much better and are continuing to take on staff.

“Growth in business with private individuals in the last quarter may well reflect households continuing to strengthen their finances. But, looking ahead to the next quarter, commercial business is expected to increase significantly.”

For the building society sector, profitability rose strongly for the second consecutive quarter, driven by growth in business volumes and income values. Another increase in profits is predicted for the next three months.

Andrew Gray, UK banking leader at PwC, said: “Despite subdued business levels, the banks are more confident than they have been at any point since 2005 in anticipation of stronger commercial demand. On the retail side, while banks are in good shape and able to lend more, actual demand is still faltering. Faced with weak demand for new mortgages and growing customer desire to pay down debt, banks will continue to find it difficult to raise margins – though they should benefit from reduced bad debts.

“While almost all banks expect compliance spend to climb this year, they intend to reduce overall costs putting headcount under continued pressure.

“Focus on balance sheet management as the sole priority seems to have come to an end, allowing more focus on market positioning and business retention. Falling activity with financial institutions suggests some banks are now able to be more self-sufficient and have more stable longer-term funding and reduced reliance on the inter-bank market.

“Building societies fared better than expected at the end of last year with higher reported business volumes and stronger income levels. The most likely explanation for increasing profitability is the value of non-performing loans, which the market views as unlikely to continue.”

University of Massachusetts ranked among top 100

Source: masslive.com
Sunday, January 09, 2011
By DIANE LEDERMAN
dlederman@repub.com
AMHERST - The University of Massachusetts has been ranked one of the 100 best values in public colleges in Kiplinger's Personal Finance magazine.
UMass was ranked 83rd in value for in-state students and 59th for out-of-state students.
Last year, the university was ranked 79th and 49th respectively.

Kiplinger looked at more than 500 public institutions to compile its ranking, according to its website.
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Kiplinger stated that they use admission rate, test scores of incoming freshmen, and four- and six-year graduation rates and then add cost data - including tuition, fees, room and board, and financial aid for in-state and out-of-state students to rank schools.
"It is this combination of academic quality and affordability - not any desire on our part to exclude a particular school - that determines which schools make our lists for best value," Kiplinger stated.
The top ranked school was the University of North Carolina at Chapel Hill. Total in-state cost there was $17,000.
The cost for attending UMass for in-state students is $22,071, according to the report.
The least expensive college was the University of North Carolina at Asheville for an in-state cost of $12,762 and a ranking of 58th for in-state students.
The most costly was the University of California, Los Angeles, at $27,210 and a ranking of 13th.
The University of Connecticut at Storrs was ranked 32nd with a cost of $21,998 for in-state students.
To see the rankings visit http://www.kiplinger.com/tools/colleges

Why did Hugo Chavez seize land from food company ?

Source: Nasdaq
Venezuela's Chavez Defends Seizing Land From Food Company
By Ezequiel Minaya, Of DOW JONES
NEWSWIRES

CARACAS -(Dow Jones)- Venezuelan President Hugo Chavez fired back Sunday at critics of the recent government's seizure of land from the country's top food processor and distributor, Empresas Polar.

Chavez ordered Saturday the takeover of the plot, a little more than two acres in a western district of Caracas, to build, he said, housing for families left homeless by recent floods and mudslides that have displaced more than 130,000 people throughout the country.

Polar officials condemned the move, saying that the land was slated for an expansion of a nearby children's nutritional center that the company funds for the benefit of the neighboring community.

"This center has offered a valuable support to the community for more than 15 years and the expansion plans require the land to continue the treatment of children and pregnant mothers of this and other needy communities," said a Polar spokesperson in a statement.

On his weekly television program Sunday, Chavez scoffed at the notion of Polar, which brews beer among its many products, running a nutritional center.
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He said it was worth wondering how many deaths Polar was "responsible" for because of the abuse of alcohol. "When you talk about beer you are talking about poison," Chavez said. "They have been poisoning society with alcohol."

Chavez and Polar have long had a tense relationship, with the president repeatedly threatening to take over the company. In May, Chavez said that if he moved to take over Polar, he would convert its breweries into ice cream factories.

Polar is one of the country's most popular companies and the leading producer of everything from beer to rice to mayonnaise. Polar also has a joint venture with PepsiCo Inc. (PEP) to bottle and help distribute Pepsi products throughout Venezuela.

Chavez has accused the company of creating sporadic shortages of basic groceries and sowing public unrest by hoarding products in hopes of undermining the government. Chavez has also said that Polar executives work with the political opposition to unseat his administration.

Polar's inexpensive beer and other products, however, are well-liked among Venezuelans, and Chavez's threats have in the past resulted in a modest backlash.

In 2010, Chavez nationalized more than 200 companies.
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