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The Art of Bridging Theory and Practice

4/10/2009 --

Professor H. Nejat Seyhun gets down to business with benefactor Jerome York, MBA '66.

ANN ARBOR, Mich.—Finance professor and industry expert H. Nejat Seyhun (on right in photo) is the Jerome B. and Eilene M. York Professor of Business Administration at Ross. Recently, he sat down with Dividend writer Terry Kosdrosky and benefactor Jerome York (on left in photo), MBA '66, to talk about the valuable intersection of theory and practice. York has been CFO at Chrysler Corp. and IBM Corp. and is a director of Apple Inc. and Tyco International Ltd. Seyhun's research with Ross Professor M.P. Narayanan into the backdating of executive stock options helped expose one of the biggest corporate scandals of recent years. Each has a unique perspective on the world of business. In the following Q&A, both agree that regular dialogue between academia and the corporate world is the best way to bring optimum value to students and practitioners.

Dividend: Jerry, what compelled you to endow the York professorship at Ross?

York: The former dean of the business school, Joe White, contacted me in the late 1990s and told me that he was doing some fundraising. It was becoming increasingly competitive among universities to attract the best talent, and he said that since his budget was dependent primarily on the state of Michigan, he couldn't rely on the state to provide the resources he needed to compete. I met with Joe a couple of times and I bought into it. And I'm glad I did. Since that time, we've seen what's going on with the world economy. It's going to become even more important than it is today to have well-educated people who can compete in the marketplace with high levels of intellectual knowledge. As we all know, the manufacturing base has slowly but surely been moving offshore to lower-cost countries. So people are only going to be able to have good jobs if they have high levels of intellectual knowledge.

Dividend: What particular areas do you think business academics should be pursuing?

York: I think there needs to be what I call fundamental research -- trying to generate more understanding on things like capital markets and consumer behavior. That's very fundamental research. I also think there has to be a focus on the important issues of the day.

Seyhun: The kinds of research projects I choose depend on the intersection between things I'm interested in and my skill set. I may be interested in attacking some questions, but if I don't' have the skills to do so, I'd be wasting my time. So I need to find that intersection and use that as efficiently as possible.

Dividend: What do you think is the biggest challenge the economy faces right now and what should we be doing to solve it?

Seyhun: I think we really have not solved some very basic questions, such as what the size of the financial sector should be. Or what sorts of risks are okay, what sorts of risks are not okay. And what sorts of risks should be disclosed, monitored, and controlled. So we are grappling to just understand what kind of problem we have. Once we understand the problem, we can address some solutions. Right now we're seeing that things are quite haphazard. On the one hand Citibank is breaking up; on the other hand some banks are getting bigger and bigger. We don't know whether we should be injecting capital or whether we should be buying troubled assets. We don't know how much money is needed. We don't know how to prevent this in the future. So we have a lot of fundamental questions that we need to answer before the economy can recover and prosper.

York: I very much agree with everything said there. I would add that the fundamental core problem is that of credit markets. Anybody who is in the business of selling consumer products that require financing is in big trouble. So the big-ticket items are in the biggest trouble. At the top of the list is housing. Next on the list are automobiles. And then below that are things like washing machines and computers. The markets are fundamentally seized up. The government did put a little money into the automotive finance companies recently, which should help on the margin. But no one knows how bad this is. Billions have been pumped into financial institutions at this point. Everybody says, "Why aren't the banks lending?" Well, the best way to think about this is when a bank's balance sheet is operating at a low level; the first increment of new capital you put in is to just fix the balance sheet. Then on top of that you need another increment to permit the bank to lend. The best way to think about that is the debt-to-equity ratio.

Dividend: Talk a bit about the value of dialogue between the two of you, with one here at the University and the other in the private sector.

Seyhun: Good economic research needs to be grounded in practice and needs to communicate with practice. As an objective function, it needs to understand the real world. With that connection between economic research and practice, we can do much better work. When [Narayanan and I] wrote our paper on backdating stock options, we found some patterns, but we really didn't know what we had. Then we had lunch with an executive who suggested it was probably backdating. So with that connection we can do much better work. Being able to understand the real world helps us do better research. I think the two complement each other.

York: I think maybe the best way to think about the question is that we have two institutions we're talking about here. One is the institution of business, in the broadest sense, and the other is the institution of universities. And they both serve very important roles in our system. And I think interchange between those two institutions is potentially very valuable. We're just a small subset of this. Hopefully, this kind of dialogue is taking place in thousands of situations every week around the country. University people have the time to give thought to issues in great depth. You don't always have the time to do that in business. —Terry Kosdrosky



For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847, bernied@umich.edu