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04/19/93

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Business School creates financial services industry/academia partnership

STANFORD - The financial services industry faces turbulent times. Regulatory issues are uncertain. There are wide swings in profitability and dramatic changes in both information technology and markets. Some firms face capital shortages, while issues of excess capacity trouble other players in an industry experiencing increasing competition worldwide.

To better understand these changes, the Business School at Stanford University has launched the Financial Services Research Initiative, an intellectual partnership between Stanford faculty and top managers from financial service firms around the world. The program currently involves leaders of 22 firms, including commercial and investment banks, insurance brokers/dealers and thrift institutions, plus industrial corporations with sophisticated financial services capabilities.

Risk management has been the principal area of collaboration during the first year of the program, including a daylong seminar that drew more than 50 participants to discuss "Past, Present and Future of Risk Management." Both industry and faculty participants are now preparing chapters for a book on various facets of this subject, to be published within the year.

"A key goal of the Initiative is to ensure the steady flow of ideas between the business and academic partners," said William H. Beaver, Joan E. Horngren Professor of Accounting, who serves as co-director with management professor George Parker.

"Our industry partners deal with relevant questions that, without this cooperative effort, occasionally require an unacceptable length of time to reach the academic community," Beaver said. "At the same time, we in academia occasionally develop relevant research or teaching materials that are of interest to the industry but would normally take considerable time to make their way from academic journals to the business community.

Some small group meetings have been held with a half dozen faculty members and executives from partner firms to explore such areas as managing various types of risk (e.g., currency risks, interest rate risks and credit risks) and how to integrate the risk management function across the components, internal capital allocation and mark-to-market accounting (e.g., how to build informative accountability systems that track economic exposures). In a meeting of faculty and commercial banking executives, participants explored how to integrate myriad risk categories to allow the firm to determine which risks to keep and which to transfer to some other entity.

The first year of the Initiative also has created opportunities for ideas to flow back into Business School classrooms in the form of new case studies and occasional guest lectures.

"The Initiative is opening doors, building close relationships, and supporting case and course development that will enrich our classrooms," Parker said. "Among the benefits to our partners is that more MBA graduates will have gained a better understanding of the industry through an enriched classroom experience."

In their course Options, Futures and Risk Management, finance professors Darrell Duffie and Ayman Hindy have incorporated data from some of the partner firms and invited executives into the classroom to describe their companies' systems for risk management.

"These activities help students visualize how financial tools are used in different industry settings," Hindy said. An example is Initiative participan Enron Gas Services' innovative gas bank. The firm writes long- and short-term contracts between natural gas suppliers and consumers and then stands between the two to manage the price risks," said Hindy.

The idea for the Initiative was born out of the Business School's long-standing connection to the financial services industry and from the strength of faculty interest in the area.

"A year and a half ago, we conducted a long-range planning study within the School to identify new programs that would allow us to have the greatest possible impact on management education and practice," said Mark Wolfson, associate Business School dean and Dean Witter Professor of Finance.

Given the significant interest and expertise of faculty at the Business School and across the Stanford campus in the financial services industry, establishing the Financial Services Research Initiative seemed a natural choice," he said. "It was especially challenging because of the dramatic evolution of the competitive structure and technologies employed in the industry."

At present, the Initiative is designed to run for a minimum of three years. Future research topics could include such areas as human resources management or strategic planning in the financial services industry.

Financial Services Research Initiative

CORPORATE MEMBERS (as of March 1993)

Company Liaison

Title

American Savings J. Taylor Crandall

CFO, Bass Group Bank

Andersen Joel Friedman

Managing Partner Consulting

Banco Nacional Carlos Nunez-

Deputy President

de Mexico Urquiza

Bangkok Bank Vichit Suraphongchai

Exec. Director

BankAmerica Corp. Lewis Coleman Vice Chairman

Banc One Richard Lodge Sr. Vice President

Bankers Trust Yves de Balmann

Managing Director

Alex Brown, Inc. Mayo Shattuck

President & COO

Enron Gas Services Jeffrey Skilling

Chairman & CEO

Goldman Sachs Eff Martin

Partner

Industrial Bank Yasunori Nagai Dir., International

of Japan

Finance

KPMG Peat Marwick Joseph Mauriello

Partner

Merck & Co. Judy Lewent Vice President & CFO

Merrill Lynch Jerome Kenney

Exec. Vice President

Nikko Securities Otohiko Yasuda Dir., Inst. Invest.

of Technology

Norwest Corp Richard Kovacevich President & CEO

Salomon Brothers Deryck Maughan

Chairman & CEO

Charles Schwab Charles Schwab

Chairman & CEO

State Farm Roger Joslin Sr. Vice President &

Treasurer

Tong Yang Group Jae-Hyun Hyun

Chairman

Wells Fargo Nikko Frederick Grauer

Chairman

Invest. Advisors

Wells Fargo Rodney Jacobs Vice Chairman and CFO

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