Business school professors’ picks

Welcome to professors’ picks, offering a weekly curated selection of FT articles by and for business school faculty to connect classrooms to current events and to develop students’ critical thinking.

Read all submissions at www.ft.com/bschoolpicks. Save this link in myFT to receive emails alerting you to each new edition. Search the tags for relevant topics to illustrate teaching points. Encourage students to join the debate in the comments section beneath the article.

Comments or contributions? Get in touch at [email protected] 

Financial management, investment

The great European disentanglement from US stocks has only just started

Tags: portfolio, diversification, investment, global asset allocation. 

Summary: European stock markets have outperformed their US counterparts so far this year. This is partially due to the global fund flow — investors, particularly in Europe, have been diverting their investments from the US back to their home market.  

According to diversification theory, the US equity market had been long overweight in global investment portfolios compared with its capitalisation globally. The trend seems to be reversing as investors rebalance their allocations. However, the underlying reasons are unclear: it could that active investment managers are chasing better returns in anticipation of higher European growth or more disciplined execution of passive investments replicating each country’s market-value weight.      

Classroom application: This article sets up an interesting context for the discussion of global asset allocation under diversification theory, as well as real-world frictions and challenges to the theory.  

Questions:  

• Research out the market value of stock markets in US and Europe. Identify the approximate weights of equity investment in US and Europe. If investors were to diversify investment in line with global capitalisation, what would be the direction of capital flows and how large would be the fund flows? 

• How do currency exchange rates play a role in balancing the weights? Could this explain the recent volatile currency market? 

• Is the flow of funds caused by expectation of higher European growth, or is it reverting to the theory and practising diversification by allocating assets in accordance to their value weights globally?   

• In behavioural finance, there is a so-called ‘home bias’. Do you think this is behind the recent European funds redirecting back to Europe?  

Zhun Liu, Senior teaching fellow, Warwick Business School

Auditing, White collar crime

Credit Suisse to pay $511mn over helping wealthy Americans hide more than $4bn

Tags: Financial crime, financial misconduct, whistleblowing, Credit Suisse, UBS, tax evasion

Summary: UBS bankers allegedly travelled to the US 3,800 times a year to meet clients with offshore accounts and even undergoing training in counter-surveillance techniques to avoid detection by the FBI. Credit Suisse was accused of narrowly defining ‘US persons’ to deliberately exclude many US taxpayers, falsifying IRS forms and advising US clients to withdraw less than $10,000 at a time to avoid triggering automated alerts.

Many decades ago US authorities identified offshore tax-evasion as a multitrillion dollar problem and were taking measures ostensibly to restrict the use of tax havens. But there may be no jurisdiction in the world provides less transparency than is available to companies in the state of Delaware.

Classroom application: Auditors and rating agencies have few incentives to deal with wrongdoing even though their very purpose is to help investors and regulators understand what is going on inside those companies. They are hired by executives and paid by companies, creating a conflict with the public interest.

For some psychologists, criminality stems from psychological aberration. Others attribute it to stress or hubris. Some argue that it is just an outcome of excess greed or ambition. Encouraging a classroom discussion will help students gain a broad understanding of how poor managerial intuitions motivate fraudulent behaviour culminating in the use of nefarious means of malfeasance and misreporting.

Questions:

• Very few people leave a leading business school or embark on a new career with the intention of doing harm or committing a white-collar crime. What are the factors that motivate them to take this route? Nature or nurture? Logic or intuition?

• Did the appointment of chair Urs Rohner radically change Credit Suisse’s plan of dealing with the regulators? How effective was his strategy of fighting litigants rather than opting for early settlement?

• When Credit Suisse decided to finally get out of the business of helping clients avoid paying taxes, its so-called “exit projects” failed miserably. Why so?

• The FT article explains how the misconduct by Credit Suisse breached a 2014 plea agreement struck by the bank with US Department of Justice. How can regulators detect (and even better, prevent) such instances before they start hurting society?

• What measures could be adopted to protect whistleblowers who still face major uncertainty, harsh treatment and tough dilemmas?

• The new Corporate Transparency Act 2024 requires corporations to file with federal authorities the names of key beneficial owners and those in control of all corporations in US. How effective is this regulation?

Krishnan Ranganathan, Guest faculty at Indian business schools

Sustainability, Marketing

Corporate buyers still fall for green marketing puff, study finds

Tags: Corporate sustainability, Green Marketing, Greenwashing, Business-to-Business

Summary: A new study reveals that corporate purchasing managers in the EU are just as susceptible to greenwashing as retail consumers, often favouring products with flashy but uncertified environmental claims. Despite being willing to pay significant premiums for “green” products, many managers appear unable to distinguish between credible and superficial sustainability claims. The findings point to the need for clearer certification standards, better procurement training and stronger regulation, such as the forthcoming EU Green Claims Directive.

Classroom application: This article presents an excellent opportunity for business and marketing students to discuss the drivers and negative implications of being influenced by greenwashing practices as a business customer. It also provides an opportunity to engage in a potential simulation role-playing.

For example, the students can be divided into procurement and marketing teams. The marketing teams are provided with mock products to pitch, some with certified sustainability claims and others with uncertified ‘’green’’ language. Then, the procurement teams choose a product and justify their decision. Finally, the professor reveals which claims were substantiated and facilitates a discussion around these questions.

Questions:

• Why do you think corporate buyers were more influenced by ‘’green’’ language than independent certification?

• What are the risks for businesses that base procurement decisions on unverified sustainability claims?

• How might the proliferation of eco-labels affect the credibility of legitimate certifications?

• In what ways could internal green marketing training help procurement professionals make more informed decisions about sustainability claims?

• Do you think the EU’s Green Claims Directive will be effective in reducing greenwashing? Why or why not?

• How might corporate buyers’ scepticism towards environmental claims of products affect the environmental performance of their company?

Karolos Papadas, Associate professor, University of York

Finance

US stocks end higher after Trump soothes Fed independence worries

Disciplines: Finance, international entrepreneurship, international strategy

Tags: Federal Reserve Bank, US stock market, monetary policy, investor confidence

Summary: After President Donald Trump reassured investors that he had no intention of firing Federal Reserve Chair Jay Powell, investor concerns regarding the central bank’s independence were allayed, and US stock markets surged. This promise came after a period of market turbulence brought on by fears of possible political meddling in monetary policy. The experience emphasises how crucial it is for political leaders to communicate clearly about economic governance and how sensitive financial markets are to opinions about central bank authority.

Classroom application: This article can be used in the classroom to discuss broader issues such as the independence of the US Federal Reserve bank, how monetary policy is affected by politics, and how and why markets react to political statements. Additionally, it can be used as a catalyst for talks about leadership, the checks and balances of the different branches of the federal government, ethics and the historical precedent of Fed independence.

Questions:

• What effects does the idea of central bank independence have on market stability and investor confidence? What might happen if this independence were to be undermined?

• How may economic decision-making be affected by political pressure on monetary authorities? Talk about striking a balance between central bank autonomy and democratic accountability

• What causes markets to react so strongly to monetary policy pronouncements made by political leaders? Examine how such pronouncements affect financial markets

• Assess how important it is for political and financial leaders to communicate clearly and consistently to preserve economic stability. In what ways might misunderstandings increase market volatility?

• Talk about the moral ramifications of a politician trying to sway or fire a central bank employee. Which governance frameworks are in place to stop these kinds of incidents, and are they adequate?

Case Discussion Positioning: According to a March article, the Fed will probably need to cut the US growth forecast, in part due to President Trump’s policies. Kevin Warsh is an ally of Trump and a former Fed governor. He might also be a contender to succeed Chairman Powell. The Fed remains ready and able to stabilise markets if necessary. According to an April article, the legal route to remove the Fed chair remains obscure.

Gregory Stoller, Master Lecturer, Boston University Questrom School of Business

Got feedback on professors’ picks or willing to contribute? Get in touch at [email protected] or add your selected articles and questions in the comments below.