Mihir Desai is the Mizuho Financial Group Professor of Finance at Harvard Business School and a professor of law at Harvard Law School. He teaches finance in the HBS Executive Education General Management Program (GMP). Desai recently shared his thoughts on the challenges facing CFOs today and on how his classroom approach equips executives from diverse backgrounds to approach financial decision making with confidence.
I was born in Bombay and grew up in Hong Kong and New Jersey. After a stint as an analyst on Wall Street, I completed my MBA at Harvard Business School, spent a year in India, and came back to Harvard for a Ph.D. in political economy. After that, I came back to HBS. It's been a great journey. My students and colleagues are incredible. Harvard is a great community for an economist and has given me significant opportunity to pursue my varied research interests.
I engage in research and teaching. Both are about asking questions. As researchers, we try to come up with big, deep questions and then inform them in some way with our research. That's fun for a curious person like me. Then we disseminate knowledge through teaching. We ask our students questions and push them to think in new ways. Those two activities are highly complementary—and enormously rewarding. Both give me an opportunity to change the world a tiny bit.
I teach finance, which many people find intimidating, difficult, and boring. But as executives advance in their careers, it becomes increasingly important to have a working knowledge of finance. To help them achieve that, I try to make finance very clear and intuitive, and I work to show that everyone can learn the essentials.
For example, I provide very simple examples that relate financial principles to the executives' everyday lives. Once they think they understand a concept, I challenge them to explain it to a loved one or a classmate. That's when they know they are learning. It's gratifying to hear someone who never thought about finance explain a concept by saying, "Well, it’s like when you buy a house..." This shows they've learned to map complicated financial logic to something already understood. My goal is to give executives from all backgrounds the tools to engage in financial discussions and problem solving and to not be intimidated by finance.
The ideal participant in any HBS Executive Education program is curious and willing to work. These are the two most important prerequisites for our classrooms because we rely on participants to contribute actively. For GMP, participants need two additional qualities. They need to have significant experience in the work world that will inform their questions. They also need to have enough time left in their career to really take advantage of their learning. They have pressing concerns and are anxious to go out and execute.
The heterogeneity of our participants is wonderful, but it can be a challenge when people have different levels of financial knowledge. We have very dynamic discussions and involve everyone in teaching their peers. As a result, people who have a lot of background in a given area end up becoming part of the instruction, and people who don't have that background force everyone else to explain ideas in down-to-earth, common sense ways.
When I force executives to explain financial principles to each other, the participants become better at explaining. That is an important skill, because it is exactly what they are going to have to do for the rest of their careers in heterogeneous organizations where they will have to communicate with everyone. They won’t use intimidating acronyms that only specialists understand.
My task as an instructor is, first, to empower the people who have less knowledge—to get them to realize that they are smart and can learn what they need to know. My second task is to push the people who know more about the subject to become better explainers and really think through the logic of their ideas more deeply than they may have in the past.
Case studies connect the principles we are studying to real-life settings. With a case, we know that the final outcome matters a great deal to the people involved—it becomes personalized, not just theoretical.
The case also connects the lesson with decisions executives have to make in their own businesses. Executives read the case and think, "I remember conversations in our organization about this same issue." When they discuss the case in class, the lesson stays with them and they can draw on it later. It might seem more efficient for me to lecture because I could deliver the material faster, but the lesson would not sink in nearly as much. Cases help to embed the lessons so they become part of an executive's repertoire of intuitions.
A big part of what we do at HBS is to encourage people to set their sights a bit higher than they would have otherwise. Guest speakers serve as inspirational role models. Many of the guests are decision makers who have appeared in our cases. Meeting a decision maker takes the case to a different level. Executives realize that the person is not some caricature or hero, but rather a normal human being not that different from them.
Living groups are a microcosm of the GMP classroom. I'm always stunned by the diversity of the living groups, both in geography and function. Most participants have not had that kind of experience before. This range of backgrounds gives executives practice in understanding parts of the world and parts of the organization they would not have encountered otherwise.
When you are part of a living group, you have a knowledgeable sounding board outside your own professional context that you can trust. That's rare. You can be honest with the people in your living group because no one has anything at stake in your organization—and yet they understand what you are facing. These people are your peers—and soul mates in a business sense—and they come to know you well. They know what you are good at and what you’re bad at.
At the same time, you make some very good friends and have a lot of fun together. The living group becomes a very important community and a valuable resource. Those bonds are very special and can last a lifetime.
That modular structure is valuable for two reasons. First, it fits with the reality of people's lives. Being away from home and office for very long periods can be difficult and costly. The modular structure helps to mitigate that and allows more people to consider attending. The second reason is pedagogical. When participants have the ability to take some time and allow for their on-campus experiences to soak in, they can truly absorb the lessons.
We cover a lot of finance material when they are on campus for Module 2. Our goal is that when executives go back to their organization for Module 3, they can talk to their colleagues who are in finance with a new level of understanding. I love it when people come back from Module 3 and say, "I sat down with my CFO and asked a bunch of questions that I could never have asked before, and now I understand." That is fantastic because they are deploying the knowledge in their own context. It’s only the beginning of what will be a very productive interaction.
When you take time out of your career for GMP, several things come together. First, taking time out from day-to-day responsibilities is incredibly valuable. You learn a lot about yourself. Second, you benefit from spending this time in a structured way, with really smart and thoughtful people. Third, you spend that time in a pedagogical setting where you can learn much more than you could learn by yourself. That is the benefit of the case method, exercises, and a carefully designed curriculum. Finally, you have a community you can continue to leverage for the rest of your life. That combination is truly unique.
The structure of Module 5 helps executives work in a systematic way to absorb and apply what they have learned. But the program does not end with Module 5. GMP alumni become part of a very special community. We try to find ways to reconvene every so often and find out what’s going on in each other's lives. I recently taught in a reunion of GMP alumni, which was fantastic. I also went to Dublin and saw a group of GMP alumni there. The GMP community and the broader HBS alumni community enable all of us to continue learning from each other.
I work on issues associated with corporate finance and public economics—all in international settings. I ask many questions. For example, once firms go abroad, how does finance change? How do companies deal with issues such as exchange rate risk? How do they finance themselves around the world, invest around the world, and analyze the cost of capital around the world? My colleagues and I have looked closely at multinational firms as a laboratory for understanding how global firms should be structured.
My second research focus has to do with tax policy and how governments should react when companies go abroad and generate income around the world. For example, companies leave the United States for tax reasons. How are tax policies making business leaders decide issues in ways they would never do otherwise?
As is common at HBS, I have approached these two research strands through large-sample research and theoretical research, which results in a set of publications. I also work on case studies where I try to find examples of the problems and find out how people are overcoming them.
The biggest challenges today are around capital allocation. In this era of activist investors, the capital markets won't tolerate inefficient capital allocation. If you are a CFO, how do you think about distributing capital to shareholders and how do you decide how to invest?
Companies that are going to invest need to decide whether to grow organically or pursue a merger or acquisition. The common mistake is to assume that mergers and acquisitions are quicker, less risky, and easy. All the evidence leads us to the opposite conclusion. They are costly, risky, and they take time.
Another challenge is that we're living in a very remarkable age of huge liquidity. What does a company do with all this cash? Do you invest it or do you disburse it to shareholders? This problem is easier to solve than finding capital, but it's not trivial. Companies are getting rid of cash faster than ever before. We're seeing share buybacks at an unprecedented rate; we're seeing dividend plans we've never seen before. While some CFOs may be optimizing their strategy, many are making these decisions at the wrong time for the wrong reasons.
Companies that are highly respected, such as Amazon and Apple, are viewed as very good companies in terms of product and service delivery. What people don't appreciate is how smart those companies are financially. Both have a business model that includes a highly articulated financial model. Truly great companies almost always have a great financial model. They love to talk about their products and their customers, but the financial model is a huge piece of why they are successful.
