University of Chicago: Practical Theories

Profs help execs ponder refinancing, stock repurchases, and the risks of risk-management programs.
Craig SchneiderApril 2, 2002

Talk about putting theory to practical use. Shortly after taking a four-day University of Chicago course in financial strategy, Jeffrey Szorik, assistant treasurer at Shurgard Storage, was hauling class handouts into executive-level meetings to help with the decisions. “Last year we did about $1 billion of capital transactions, and wanted to make sure we had cutting-edge tools to properly evaluate whether or not we were using the correct structure to refinance the $1 billion of assets,” he says.

The company was also looking at whether to do a stock repurchase, recalls Szorik, a Chicago MBA alumnus. “One of the issues was whether to use a fixed-price tender, a Dutch auction, or a standard open-market purchase. And the course taught us how to identify the advantages of each structure,” he says. Ultimately management decided the repurchase wasn’t the best course of action for the company at the time. “Using a dividend can be a more efficient transfer vehicle for shareholder distributions than a stock repurchase,” Szorik says.

A discussion of Precision Tree, software that uses expected values and probability in financial decision-making, also bore fruit for Szorik. “I had exposure to that theoretically, and owned the software,” he says, “but [Chicago professors] did a good job of showing how you can weave it into your day-to-day operations.”

Szorik was one of several senior financial executives who enrolled last year in the popular executive education seminar “Creating Value Through Corporate Financial Management.” The course, which costs $5,750 and will be offered April 29 and October 21, tackles valuation, compensation, capital structure, and risk management.

Besides making theories practical, Chicago professors also try to get finance execs to think strategically about their decisions. “How much risk should be managed? How should they organize the risk-management function? What type of incentive problems does it create and how they would organize it—these are the types of questions a CFO or treasurer might ask,” says Raghuram Rajan, Gidwitz professor of finance at the university.

It can boil down to managing the risks of risk management. In that light, J. Eric Miller, principal consultant of structured finance within the treasury department at Conoco Inc., found one case study about hedging policies particularly insightful. “The policy was probably written by this company in the case study for basic controls around hedging,” he explains, “when it fact what it did was [to drive] the opposite behavior, to take more risk than what was absolutely necessary. In this environment it’s very relevant.”

Rajan agrees. “What we go through is how easily the process of risk management can get out of control and do exactly the opposite of what you intended to do,” he adds. “How do you actually try to provide incentives so it doesn’t become an operation that takes the firm down?”

To be sure, the professor admits that some of the control solutions in the risk case study are a matter of common sense. For instance, it’s important to make sure risk management focuses very narrowly on managing the identified exposure without having other objectives like making a profit. “Once you tell them to go make money, it’s often a license to speculate,” he explains.

The practical application of real options theory to evaluating corporate investment decisions was another favorite takeaway from the course. While real options techniques have been around for several years, they have taken a long time to catch on in the corporate world, Rajan says. “I never heard of it before,” says Rob Tonkinson, vice president of finance at Carilion Health System and an alum of the seminar. “I would say most of my peers in health care would not be familiar with the concept.”

“Has it changed any of the decisions? Probably not,” says Tonkinson. “It does affect the way I think about things strategically.” For example, when someone talks about a new initiative needing $10 million of the budget, he explains, with real options, “instead of allocating $10 million, we’ll allocate $500,000” and then look at it again when more information is available.