The Fuzzy Math of Traditional "Capitalism"

So, it's been a while since I've been on but I've been thinking about this issue for a while and, as is often the case, my incessant watching of CNBC triggered a post in me today!

During a segment this morning on the prospects of the economy the topic of whether or not we should raise the minimum wage began to be debated. Now I know this is a tricky subject... How high should it be? If we go to $10 why not $15? I know I'm not smart enough to peg a number or ideal level for the minimum wage. I'm pretty certain there isn't such a thing but that's a debate for another time.  What does strike me however is the certainty with which the traditional capitalists, like the reporters on CNBC, analyze the effect of such moves on the economy like economics was a science like physics or something! 

The prevailing discussion was that any increase in the minimum wage, which would be aimed at increasing the buying power of the middle and lower classes in society and thereby continuing to bolster the economy, must necessarily be met with the requisite loss of jobs. This is stated so matter-of-factly as to be akin to the physical properties of a natural system. 

To paraphrase the conversation:

"Well what would you rather have, more people making less money or fewer people with a higher minimum wage"

"And with the 29ers and 49ers, do we really want to add an increase in the minimum wage onto that?" (By the way, 29ers and 49ers refers to employers keeping employee hours under 29 / week or hiring less than 50 people respectively in order to avoid being subject to Obamacare).

What amazes me is the answers or retorts to these are so obvious as to be pedestrian: There is no physical law that states that if you pay your employees a livable wage as a large business that you then MUST hire less of these employees. This my friends is not a law, it is a choice! A choice based on a short term mentality that places the shareholder at the intellectual and operational center of the organization. 

There needs to be a voice that makes people understand that this isn't the only choice that could be made. Instead, an executive could choose to pay a living wage, accept Obamacare as the law of the land and simply do it because it's the right thing to do, and then use these both to their competitive advantage. It's simply amazing to me that no one is saying: "Look, I'm going to pay people what they're worth and what they need to support their families. I'm going to provide everyone health insurance, period! And then I'm going to let my customers know that we do the things we do because we care about our employees, their health, their families and our communities just as much as we care about making a profit!" What do you suppose would accrue to the executive who took this stand?  Do you think she'd have really happy and highly engaged employees? (Yes I'm assuming she'll do the other things necessary, like training and monitoring of culture, enlightened hiring and firing etc...) Do you think those employees, who now feel like they matter more than just a line item on the balance sheet, are going to be better employees and offer discretionary effort? Do you think that effort will endear that company to its' customers and communities where it operates? And if all of that happens do you think those customers will show loyalty in the form of increased patronage and less sensitivity to price changes..which is the only thing (CUSTOMERS) that drives revenue and shareholder value?

I don't need to tell you the answer do I?

An Investment Bank for the Transformation of Capitalism

An Investment Bank for the Transformation of Capitalism

Marion Porter (or MP for short).

100 years ago today my grandfather Marion Porter Gunthrop was born in Great Falls, South Carolina. He married my grandmother Cleo Elizabeth Lewis and they went on to create, in my minds eye, the perfect family.

For a very long time we lived with MP and Cleo. Me, my mom and dad and my three sisters. In what I know now was a really small house in Queens, NY.  It didn’t seem small at the time. Nana and Granddaddy had a bedroom in the basement and we were all the way up stairs on the 2^nd floor. It felt palatial and cozy at the same time. In fact one of the few “traumas” I remember growing up was when my mom and dad decided to move us kids all out to Long Island.  I didn’t want to leave and remember how it felt to this day. That experience of living with them has, as much as anything else, made me the person I am today. I got to know all of my other relatives, including my fathers family in some sense, because MP and Cleo made it so that everyone always felt at home in our house and everyone was always welcomed. Fellie and Joyce, (My dad’s parents) were as close to MP and Cleo in my mind as was any others in each of their own families. In fact to me as a kid the whole group of them were indistinguishable as to who was related to whom.  It seemed like they were all simply brothers and sisters, aunts and uncles, nieces and nephews all just a big part of the same brood!

I’ve always felt that he was ahead of his time. But at the same time he lived in a way that wouldn’t let the best of the past get away. He lived in the city but was an avid outdoorsman. He traveled to his favorite place, upstate NY whenever he could, always stopping at the same roadside stream to bring us some “good water” back from the mountains. And if I was lucky enough to be in the trip, stopping at the same roadside stand for hamburgers from freshly butchered cows! Any wonder why I’m still a meat eater? At the same time he was a big city construction worker and spent his days creating the infrastructure of NY. He was a product of the rural south and certainly endured many indignities along the way, but I never recall him speaking out in anger or harboring resentment for anyone because of what they looked like or where they came from. He was big and quiet, funny and thoughtful. He worked as a “Sand Hog” (Laborer’s Local Union 147 in NYC) worked on Water Tunnel #3, the largest construction project in the history of New York State (it’s not scheduled to be completed until 2020). He was a blast foreman. He worked on the construction of the NY State Thruway. He ran a Jackhammer. He worked on the Pentagon the George Washington Bridge and if legend is to be believed (I may have made this up) was the first black foreman at the Brooklyn Navy Yard. He sometimes moved between jobs in Boston, Baltimore and NY by hoping on freight trains…and yes that made him a “hobo” but a more dignified hobo I suspect there never was.

When I graduated from high school we had a party at our house on Long Island. It was just after the graduation ceremony and me and all of my friends were looking forward to some time relaxing at the beach for the next few weeks … starting promptly that next day, Monday morning. My dad however had different plans. I was to begin work bright and early the next day as a messenger for his firm, Solomon Brothers. No days off, right to work. All summer long until it was time for me to report to football camp at Catholic University that August. As you might imagine I was furious. All I wanted was a few days to relax with my friends. School had just ended and I wanted to enjoy the summer for a bit. I pouted and sulked around my own graduation party for about an hour until Granddaddy pulled me aside. “You need to stop acting like this,” he told me. “I’ve been breaking my back in these tunnels all of my life. Now you’ve got a job and an opportunity to make something of your life. Take it and be thankful because you don’t want to end up like me.”  I’ve spent the last 34 years trying to become half the man that he was…I should be so lucky as to end up "like him."

Happy Birthday Granddaddy!

Choose Your Capitalism Indeed!!

(Or: Just in case you haven't voted yet!!)

New York Times economic reporter Eduardo Porter penned an interesting article last week: “At the Polls, Choose Your Capitalism”. He tells of the sense of “economic vulnerability” that has been hanging over the US middle class for more than a decade.

The common wisdom in the country, in many academic circles and in both political parties is that this is something that is beyond our control. The new normal; technological innovation and globalization have descended upon our middle class destroying once well-paying jobs through automation and competition with low-wage Chinese workers. As Porter states “these relentless dynamics have sent unheard-of profits to the prosperous few while threatening the jobs and eroding the wages of the rest”. But is that all there is to the story?  As Porter says we mistrust government more than ever (with good reason) and yet it’s pretty apparent we also have little esteem for corporate America right now. Where are we to turn? No matter how we feel about corporations we all still strive to become financially successful in some regard. And clearly there’s a role for government in our lives. If you don’t believe that just take a ride out to Staten Island this week and ask a conservative if he’d like a handout right about now?

Unlike the caricature that the politicians and news media would like to paint, I think I’m a pretty normal American when it comes to the issue of capitalism: Although I’m a committed liberal (or progressive I should say), mostly on social issues, I’m also a dyed-in-the-wool capitalist.  No other system of economic organization has provided as much benefit to humanity. Yet, like all complex systems, I believe we must continually improve even that which has benefited us greatly. Like it or not we are experiencing a crisis of confidence in capitalism today.  People simply don’t believe that the capitalists in America or elsewhere care about the welfare of the rest of us.  There was a time when that was accepted since, hey, its just business. No longer. We are evolving as a society and many of us have decided that the old shareholder-centric model of capitalism doesn’t serve us any longer. We want the companies we work for, buy from, invest in and allow to operate in our communities to take heed of how their actions affect us all and recognize their duty to contribute to our overall well-being; to enhance our lives not only through market innovations but also through societal innovations and economic growth for all of us.

Now some would argue that this isn’t a crisis of confidence in capitalism but a failure of the welfare state to create economic growth. But seriously do you really believe, that Mitt Romney’s economic policies are all that different from President Obama’s? They both tinker at the margins. One leaning towards the rights of corporations and the other leaning towards the rights of individual citizens but on the whole neither has looked at transformative notions of capitalism.  Find a libertarian friend and ask them what they think. I might not agree with their hands-off solutions to generating economic growth but I do think they have a sober view of the differences in the two approaches…not much they’ll tell you.

But there is an alternative out there and it’s not necessarily the alternative being pushed by either candidate or the press (mainstream or otherwise). Those of you who follow me (and my partner in crime Mr. Frazier…libertarian as he may be) know we’ve been talking about this for years: We call it conscious capitalism, which is embodied in companies that practice a business model that we call the multi-stakeholder system. Others have given it other names, stakeholder capitalism, good business but the moniker is not important. What is important is that the practitioners of this new form of capitalism understand that what we have wrought cannot stand. Yes we are rightly skeptical of governments ability to provide for equal financial opportunity but at the same time we need to disavow ourselves of this myth that a Darwinian market, winner take all and losers deserve what they get is the only other alternative. Our friend Ed Freeman, Professor of Business Administration at The University of Virginia and Academic Director of the Business Roundtable Institute for Corporate Ethics and the godfather of stakeholder management who began writing on the issue in 1978. He states clearly and precisely that “The alternative to capitalism as we know it is not socialism, but a better form of Capitalism – one that recognizes the existence of the commons and acts to prevent the single minded individualism capable of destroying it.” I think of this as a capitalism that softens the rough edges and takes into account the total complexity of human behavior and human needs in the consideration of markets and value creation.

NYT writer Porter points out that our “cutthroat” form of capitalism has been “ineffective at transforming affluence into broad-based well being.” As if anyone needed that to be pointed out? The problem is that most Americans not only think this is ok but they also remain unaware that capitalism can be practiced in another way. They think any change in capitalism; any evolution is a move towards “socialism” or “income redistribution”. That’s the economic war that the two candidates are currently waging but opposed to the myths on either side of this debate we have the opportunity to create a form of capitalism that, as Rick says, truly lifts all boats and not just the yachts. Not in the trickle down sense. That was and is a preposterous idea that doesn’t work. And not based on a government that taxes and spends in hopes of creating millions of middle class jobs. That approach is less preposterous but only slightly more effective in light of the financial resources we actually have to deploy. Wealth doesn’t trickle down and generally isn’t created in large enough measure by government spending. It’s created by a growing, well-employed and highly compensated middle-class. But there is a movement about to attack cutthroat capitalism with a device of it’s own creation: New, unorthodox and ironic “market based solutions”.  The movement started in 2006 with the publication of  the book “Firms of Endearment: How World Class Companies Profit from Passion and Purpose” in which the authors (Raj Sisodia, Jag Sheth and the late David Wolfe) offer stark evidence that operating from a multi-stakeholder model produces exponentially superior financial returns while simultaneously responding to the civic and financial needs of all the company’s’ stakeholders.  More recently Sir Richard Branson pens “Screw Business as Usual” in which he describes how the “boundaries between work and purpose” are converging, in fact must converge if companies are to continue to satisfy and depend on all the stakeholders they need to be successful. Then you have my friend Dr. Laurie Bassi an economist and the CEO of McBassi & Company, a consulting company that specializes in human capital analytics. Her 2010 book “Good Company” describes the “economic, social and political forces across the globe that are changing the contours of the playing field on which companies must compete”. And on the horizon the coming title “Conscious Capitalism” by Whole Foods CEO John Mackey and Firms of Endearment author Mr. Sisodia. All of these voices point to a need for a more critical discussion about the economic structure that underpins our social democratic system. A need to look at how short-term emphasis on earnings at all costs has impacted our society, and how we might transform our value creation processes into something that does indeed create the greatest opportunity for the largest contingent of our society; a way to stop the consistent bubble and bust cycles that we seem to have generated for at least the last generation. And yet the disconnected talking heads on CNBC prattle on about quarterly earnings and the demise of some company because they “missed earnings by a penny a share!” Not only do such pronouncements highlight their ignorance about what really matters but they are also a corrosive component of the infrastructure and dysfunctional dialogue that props up this system that no longer serves society to the greatest extent.

Stakeholder Capitalism:

According to the website of the Conscious Capitalism Institute, Conscious Capitalism “is a philosophy based on the belief that a more complex form of capitalism is emerging that holds the potential for enhancing corporate performance while simultaneously continuing to advance the quality of life for billions of people.” But what does that really look like? Well for our part when we talk about conscious, humane or stakeholder capitalism we’re talking about a type of capitalism that affirmatively provides for the opportunity of mobility for the middle-class. A system where once again what’s good for the company is also good for the employees and for the country as a whole. Shareholder centric companies maintain a single allegiance. Their pursuit of profit un-moored from any larger purpose. So layoffs of the employees who can least afford it, during what everyone realizes is a temporary slow-down, are not only tolerated but also encouraged by Wall Street investors and business school professors alike.  The shareholder centric model is the one that leads to the completely discredited notion that tax cuts for “business owners” will lead to job creation! Think of the recent spate of CEOs who, in the midst of record profits, have told their employees that they may face layoffs if President Obama is re-elected and their taxes are raised! If tax cuts were synonymous with job creation you’d also be hearing the other side of that story right? That if their taxes get cut under a President Romney all the employees would be getting raises and the floodgates of hiring would be opened. Of course you don’t hear this because in the shareholder-centric world the only thing that matters is “maximizing shareholder value”. Which has come to mean short-term profit and not long-term organizational health. You also don’t hear this because like all business owners they increase wages and hiring when demand increases…and tax cuts for “business owners” doesn’t raise demand…only tax cuts for consumers can do that. (Look here! http://www.youtube.com/watch?v=3Wc9bWc-WRs)

Stakeholder capitalism also looks to support suppliers. Not as servants but as partners. Actively seeking to help them generate adequate returns on their capital, helping them develop innovations and assuring that all the employees throughout their supply chain (even those that work for others) are treated fairly and humanely. These types of capitalists have an authentic respect for their customers, providing for their emotional as well as their technical needs because they view customers as whole humans not simply as participants in a transaction meant to extract value for shareholders. These types of capitalists recognize and respect the awesome power they have to impact the natural resources they depend upon as raw inputs…and that we all depend upon for life and joy. Thus they become authentic and dedicated stewards of those resources.

 

Although I do believe we are choosing how close we want to get to this type of capitalism at the polls today, ultimately government isn’t the answer. Mr. Romney will make it much harder to get there and the President will do less to keep us away from this end but ultimately it’s up to us, investors, employees and perhaps most important customers to drive this change.

In the end this is a choice between a point of view: One that places shareholders at the center and one that focuses on stakeholders as a way to create real long-term wealth. Those that chose shareholder centricity will continue to separate profit and purpose and we believe, make it more difficult for those businesses to create and maintain authentic relationships: Employees will become disillusioned and in-effective; suppliers will be uncooperative and unresponsive; communities and regulators will become more aggressive and assertive. All of which adds friction to the business, making it more difficult to engage customers. For our part we’re striving to help create these types of capitalists by bringing investment to them and helping entrepreneurs who want to operate in this manner thrive. I truly believe those who practice this type of capitalism in a democracy will find customers choosing to do business with them, communities welcoming them in and investors lowering their cost of capital…and ironically…creating real value for shareholders and for society.

I'm the 47%

I got student loans when I was in college (still paying!), was in a government sponsored minority business set aside program, had an SBA guaranteed business loan...I bought a house with my own money, I pay almost $700 a month for my own health care, I've started 6 businesses, at last count creating more than 200 jobs and generating revenues in excess of $100MM, was named to the Inc. 500 list as one of the fastest growing companies in America...oh and I pay income taxes...do I sound like a victim? Like I'm dependent? Like I believe government has a responsibility to care for me? Like I need to be convinced to take responsibility and care for my life??... I'm the 47%

Facebook and the Fallacy of Shareholder Primacy

I was just watching CNBC and a protracted discussion about whether Facebook should look to replace Mark Zuckerberg as CEO.  Sometimes it is amazing to me how much the stock market talking heads think they know about business…and how little they actually know. 

The entire conversation about Mr. Zuckerberg’s tenure focused on the fact that the stock has dropped by about 50% since the IPO.  No discussion was made about the fact that the company has almost a billion users; that the employees love the place with a fanaticism that borders on irrational. All of the criticism of Mr. Zuckerberg’s leadership centered around a temporary loss of un-realized gains for shareholders.  Of course this can only be the prime metric for CEO performance if you believe that shareholders are the primary stakeholders for his company. Which, of course, any businessperson worth their salt will tell you is not the case.  I’ve been railing at this ridiculous short-term mindset that is fostered on Wall Street for the last 6 years.  Noting how on so many occasions, including the one that resulted in our recent financial crisis, this short-term mentality can lead to executives making decisions that destroy long-term value. These yahoos on Wall Street have concluded from a single quarter of stock performance that this guy isn’t up to the challenge. 

I don’t know if he is or not, but I do know that Wall Street continues to look at all the wrong metrics.

Philanthropy or Humanity....

A friend sent me an article the other day about how us CEOs were recently lamenting the fact that investors don't seem to be interested in corporate efforts to do social good and philanthropy. (Click on the title above to see the article) The context for these comments was a conference by an organization called: The Committee Encouraging Corporate Philanthropy (CECP). For those of you who have read my writings before you might initially surmise that I'd opine on why investors are missing the point regarding how doing social good is good for business. But in fact, based on the way these ideas are being presented by CECP and many of these executives I'd agree with the sentiment they're experiencing from investors. Investors are in the business of making money. Most of them are also interested in living in a just and functioning society. And I'll bet that some of them are even proponents of Philanthropy. But philanthropy and business that creates social good are two entirely different things. One is about doing good for the sake of doing good. The other is about creating a business that respects its place in society as a social entity and operates in a fashion such that its entire ecosystem is sustained. That ecosystem must include investors and you must show those investors that you will provide them returns consistent with the money they have at risk in addition to honoring your place in and effect on society.

Oddly enough some of the executives at the meeting were indeed focused how efforts to do social good must become a profitable part of their core businesses. But as one of my partners often says; Language matters! In this case the language of an outdated paradigm, one that suggests you can either do well or do good, persists in the lexicon of even those executives who understand that we have shifted to an environment where you must do good in order to do well. If executives continue to use outdated concepts and phrases to describe what's happening in the world, the idea that companies can be instruments of good to society while also creating outsized returns will not gain traction because it will be mired in the old paradigms of environmentalism and "giving back". If you operate your business based on the notion that you are an instrument of service to society, even as you make money, you're not likely to have "taken" something in the first place. No reason to "give back" if you've been adding multiple levels of value (not just financial) all along.

It's amazing to me that after reading Porter's article on Creating Shared Value, we still have executives talking about philanthropy in terms of strategic and competitive advantage. Yes you can give money away in ways that might support your strategy, but those opportunities are minuscule compared to the good you can do and returns you can get by operating your core business in a way that honors the humanity of your stakeholders. 5 or 6 years ago in a "debate" put forth by Reason Magazine (I think that's where it was) the topic was posed as a contrast between Ed Freeman (Academic Director, Business Roundtable Institute for Corporate Ethics at The University of Virgina) who advocates managing for stakeholders and Milton Friedman who famously quoted about making a profit being the only social responsibility of business in the 70's. Ed addressed this then and the same is true now: CSR becomes an outdated and useless term (and therefore much less prone to attack by shareholders and other opposition) if we frame the idea as managing for stakeholders (long-term) vs. managing for shareholders, which has been co-opted to justify a short-term, "quarterly earnings above all" mindset. Yes, when the article says: "Corporate philanthropy is no longer just writing a check for charity - more executives are making efforts to do social good part a profitable part of their core business." its apparent that some CEOs understand what I'm saying here but they have such an outdated mindset that its impossible for them to get even their enlightened message across. If "Social good" is a profitable part of their core business can it or should it still be called philanthropy? Or should we just do away with the whole CSR infrastructure and operate our businesses so that we constantly honor the humanity of employees, customers, suppliers, partners and our local communities where we do business? This is not to say we should eliminate philanthropy. We will always care about things that bring us joy, beauty, and areas where we have no business interest but feel compelled to help. That's fine and its the right thing to do. That work though should be separated from operating your business as a tool for the betterment of society. That's not philanthropy. It's humanity and simply the way business ought to be approached. The Sustainability index idea (which was posed by some executives at the conference) is an idea that has come and gone if it is focused on the traditional definition of sustainability. We've not been able to prove that investment returns or corporate performance can be enhanced through the environmentally based definition of sustainable. If however they mean investing in businesses that sustain themselves, their employees and their employees families, their communities, their suppliers, their partners, their governments and their shareholders, well then that is an index that can and will be built and will indeed generate alpha. Investors are educated only when you can show them that your approach is good for you AND good for them. Some of the CEOs there wondered about the metrics for creating such an index. I contend that once you understand the right question to ask, defining the metrics is not difficult at all. Reporting standards for corporate philanthropy are useless in that they don't give investors any insight into risk or potential returns. What would give investors insight is if they new what types of cultural organization they were investing in; this would tell them about the potential for financial shenanigans, how engaged employees were and thus the likelihood that they would give discretionary effort, insight into the strength of the customer asset for these companies (emotionally engaged customers are loyal and more profitable), how they deal with human rights issues in their supply chain and how they work to sustain their local communities. Peter Drucker addressed this long ago when he separated social responsibilities into "social impacts," or what business does to society and social problems, or what business can do for society. My basic claim is that those impacts need to be eliminated to the greatest extent possible and the problems need to be addressed humanely, and companies that operate from a stakeholder mindset are more likely to find ways to execute in this manner. I recently read an example in an Insead article of how this works that describes my feelings pretty well: "Fast food companies certainly appear to have a responsibility to act to eliminate the negative social impacts evident in their contributions to obesity in children. In contrast, the pharmaceutical companies dealing with requests to give away life-saving drugs to all that need them are responding to what Drucker would term social problems rather than social impacts. They are not responsible for the limited healthcare budgets of developing countries that preclude purchase of drugs at developed country prices, but they might choose to act on the issue of access to essential medicines nonetheless."

The main take away: Identify and address, if not eliminate undesirable social impacts of business activities and if they cannot be turned into profitable business opportunities, seek a regulatory solution (industry self-regulation or government regulation) that creates an optimal trade-off for all parties. Social problems can also be sources of opportunities as described in "The Fortune at the Bottom of the Pyramid" by the late C.K. Prahalad. But not all of them. And that's where philanthropy comes in.

If CEOs want to contribute to this discussion they should simply be more transparent about their ability to, and history of, making these types of decisions in this manner.

Get Your Employees Engaged - Video - Harvard Business Review

Get Your Employees Engaged - Video - Harvard Business Review

Workplace design and Employee Engagement

I responded to a message board on LinkedIn this week, the topic of which is how big of a factor is workplace design in terms of employee engagement. Thought some of you might be interested in my thoughts. (there are a few references to other comments made in the discussion string so they may seem a little out of context. You'll get the point):
JC


we shape our buildings and afterwards our buildings shape us": Winston Churchill speaking to the House of Lords after the House of Commons was destroyed in 1943.

My firm consults to companies in an attempt to create performance by crafting environments that inspire behavior. There are two main issues I see time and time again when executives try addressing this issue: The first is how little a lot of people know about the effect the workplace has on performance and the 2nd is the simple fact that you can't address engagement by isolating any one component thereof. Engagement is built by the authenticity (Tara and Anne) and effectiveness of your culture in terms of inspiring people to do the things necessary for your business to be a success. The "environment" is the manifestation of your culture. When we talk about environment at my firm we are expanding the definition of the word to include everything that an employee encounters that represents the culture, helps or hinders her from doing her job and in the end drives engagement. not only is the physical space an outward demonstration of how a company feels about its employees, it is also a primary tool for getting work done. If you want your employees to be team players, we can create a physical space for you which is highly destined to make team work more apparent in your organization. Everything from the placement of printers and conference rooms, to the shape of circulation spaces and even how you use color and noise effects the brain (look at the work of the Academy of Neuroscience for Architecture). We can manipulate these components to trigger certain responses in employees and to make task associated with the behaviors required for strategic success more likely to happen. But for me the more interesting and appropriate part of the study that prompted this discussion came from the notion that integration of workplace solutions are what will drive value. This is the key to the 2nd point of departure we see when dealing with executives. If you are looking to engage employees, and by doing so elicit discretionary efforts towards corporate goals that are appropriate towards achieving those goals (take teamwork again as an example) you must create an ecosystem within your organization that inspires these feelings and these behaviors. That means creating physical environments that inspire and enable teamwork, it also means simultaneously creating a technology infrastructure that does the same, a process regime that does the same, training managers that these behaviors and ideas are important, paying people if they are good at teamwork, celebrating teamwork successes, telling stories about teamwork and yes firing people who don't follow your values even if they are creating financial success, (doesn't need to be done publicly to humiliate, employees are smart enough to see the message). These things must be integrated into a coherent whole, managed by a single executive who has a seat at the strategic table of the organization and given credence by the actions of the CEO. The fact that Michael Bloomberg sits in a cubicle along with everyone else at city hall is not meant to be just a gimmick. Although it could turn into one if the rest of the "environmental" components aren't telling the same story. Its meant as a part of a well thought out manifestation of the culture he wants to build there.

Get this right, show that your are authentic about your culture based on the reality of your entire environmental ecosystem and hiring becomes extremely easy because like minded individuals seek you out. Those that don't fit start to opt out.

If you tell potential employees that you are a progressive, innovative, fun-loving but hard working technology savvy organization, and you then show them around an office space that says anything but this, trust me, they'll understand quickly that the words are not the parent of the reality. Nothing could be less authentic.

A Short Riff on the Bain Capital Issue:

“The idea of making a short term profit actually doesn’t exist in business…”

Mitt Romney on the campaign trail this week.

In 2006 a study entitled: Value Destruction and Financial Reporting Decisions, John Graham and Campbell Harvey of Duke University – Fuqua School of Business and Shiva Rajgopal of The Goizeta Business School at Emory University in Atlanta reported that an astounding 78% of the executives surveyed for their report would legally destroy economic and shareholder value (by doing such things as eliminating value building projects if those projects were a risk to short term profits) in exchange for smooth and predictable quarterly earnings.

Which of these two points of view do you think is most accurate?

The Riff:

OK, I haven’t looked at Bain Capital’s record. I know that they have invested in some companies that are now alive and well and going strong. But here’s the truth, not all private equity companies are created equal. Some actually do destroy companies, perhaps not intentionally, but with a view towards making their money first, despite what happens to the company or its employees. They buy a company; leverage that company to the hilt so that they can pay themselves management fees. During the “turn around” period they force the company to buy raw materials from other companies owned by the firm or their partners at above market rates (According to an banker I know on the street with knowledge of this situation, this is one of the things that put the maker of my beloved Twinkies into bankruptcy), then, once they’ve taken their pound of flesh, they flip the company to another PE firm who egotistically think they can “turn around” this dog or they simply put it into bankruptcy. It happens all the time and to presuppose anyone who would ask a question about whether Bain did this sort of thing or not is “assaulting” the free markets shows either a purely political point of view or an ignorance of what happens in the free markets that is typical of politicians, pundits and anyone else who is not in the trenches of real capitalism.

Now it took me no time in terms of research to find out that Bain did do a dividend recapitalization of KB toys in 2003, which is just a fancy way of saying they issued debt in order to get their money out when they decided they couldn’t compete in the toy market. Sure, that might be a smart way to pay back their investors without actually turning the company around, and yes its business as usual. The question then is; is it fair to ask if this is the type of capitalism we want practiced in this country today? As a capitalist who cares as much about creating something of social value (like jobs) as I care about making money, I’d say this is a fair question. Not an indictment of the entire capitalist system.

Joe Scarborough said this yesterday morning on Morning Joe: “… it’s one thing if you go and you take a company that is going down hill and you invest, you try to turn it around, sometimes you succeed and sometimes you fail, when you fail, people loss their jobs…” This is true, the issue that many people have with some (not all) private equity shops is that often when the PE firm fails to turn the company around, they still find ways to make their money. Jobs, employees, neighborhoods and families be damned.

Occupy Wall Street: A "Wall Streeters" take on the occupancy...

Charles Krauthammer wrote a piece today (see below) about the occupy Wall Street movement that I think totally misses the point. Some are asking incredulously how can the occupy Wall Streeters rail against corporate greed and at the same time weep for the passing of Steve Jobs, a billionaire 8 times over? For me the answer is really quite simple: Firms of Endearment. People protesting income inequality or more accurately I might say, opportunity inequality, (not corporate greed) don't begrudge Jobs his billions, because they believe he ran an organization that cared as much about them as it does about making a profit. And I'd say that if more corporations acted or even made people believe they were acting this way, many (not all mind you but many) of the "occupiers" wouldn't be feeling as they do now. The pundits talk about "class warfare", attacking capitalism or making Wall Street a "scapegoat". My problem with this is the seeming lack of real critical thinking about the message of Occupy Wall Street. Do you think these people hate Capitalism? Of course not, in fact they are begging for a seat at the table of capitalism. They all would rather not be a part of the 99%. They all want to better their financial station in life. They want capitalism to thrive and flourish, only in a way that truly lifts all boats and not just the yachts of wall street. That's not to say that wall streeters don't deserve their yachts, they do and they should be trying to make enough money to buy more. But in the process they should also be looking for ways to give others the opportunity to buy a nice Boston Whaler or two. Not by sharing the money they've made with those sitting in a park, but by operating their businesses in a way that looks to create wealth building opportunities for as many citizens as they can...not just shareholders. (Creating shared value not sharing created value: per Porter HBR January 2011...look it up!)

The people in the park about 2 blocks from my apartment here on Wall Street aren't occupying Green Mountain Coffee Roasters; they aren't occupying Whole Foods; they aren't occupying Lulu Lemon, Under Armour or Southwest Airlines; and they aren't occupying Apple. They aren't occupying Warby Parker or Patagonia or Method Cleaning Products, Toms shoes, or Zappos. Be it perception or reality, people believe that companies like those I name above care, emotionally, really care, as much about their customers, employees, communities and suppliers as they do about making money for their shareholders. By running their businesses with this "Stakeholder" mindset first and foremost, they create a more conscious form of capitalism that creates greater opportunities for wealth creation for the greatest number of people, while amazingly creating more wealth for themselves. In fact it is my belief that organizations that truly understand and embrace the message I posit here, those that understand that income inequality is a bad thing for us all and then set out to actually do something about it, will not only reap the benefits of good press and good will. They will reap the wealth creating benefits of highly engaged employees and loyal customers willing to spend more and more on their products. Understanding this and taping into it will be the competitive advantage of the next 50 years and beyond.


An excerpt from Krauthammer's piece:

Exhibit C. To the villainy-of-the-rich theme emanating from Washington, a child is born: Occupy Wall Street. Starbucks-sipping,  Levi’s-clad, iPhone-clutching protesters denounce corporate America even as they weep for Steve Jobs, corporate titan, billionaire eight times over.

These indignant indolents saddled with their $50,000 student loans and English degrees have decided that their lack of gainful employment is rooted in the malice of the millionaires on whose homes they are now marching — to the applause of Democrats suffering acute Tea Party envy and now salivating at the energy these big-government anarchists will presumably give their cause.

Free at Last

As many of you know...(many, like there's thousands following this)...I've been in the throws of creating a new business for some time now. It's been an incredibly challenging endeavor and for the last three years my partners and I had been stuck inside and organization where we were unable to speak freely about our hopes and dreams and ideas for this new business. Well at long last we've been liberated! As such I thought I'd just post a piece I wrote at the beginning of this journey to give anyone who's  interested a view into what we hope is to come. Enjoy!

Investing in Companies with Soul:

” Soul is when you have the ability to make other people feel better about being alive, regardless of their condition”

Wynton Marsalis:

In his book, The Executive's Compass: Business and the Good Society, James O’Toole of the Aspen Institute posits a concept of “The good society.” It is a place where the citizenry feels at Liberty to pursue their own goals, where there is guaranteed Equality of opportunity, where efficient markets drive wealth creation and constantly increasing standards of living and where we care for our natural resources and engage in human interconnectedness so that Communities can flourish and create an ever improving quality of life. In other words, O'Toole's concept of the good society requires a state of "concinnity" among Liberty, Equality, Efficiency, and Community. Concinnity is an ancient English noun, rarely used today, that means "a skillful blending of the parts achieving an elegant harmony."

We firmly believe that capitalism has the greatest potential to breathe life into O’Toole’s concept of the good society. Capitalism is the engine of wealth creation and personal opportunity. It provides us with the resources to pursue our own goals, and affords us the ability and time to devote to community. Absent capitalism, the good society is unattainable. However traditional capitalism has historically levied what were seen as unavoidable ills on society as well.  Pollution and the depletion of resources, exploitation of workers and an ever increasing gap between the very wealthy and the poor even in countries with the most efficient private market economies has been seen as inevitable and justifiable for the sake of shareholder wealth creation. For capitalism to take root, basic conditions such as the rule of law, property rights, financial infrastructure, economic freedom and political freedom must exist. Admittedly, our ability to convince or influence countries to adopt these basic conditions is very limited. (Though we will strive to support individual organizations with a stated mission to do so.) However, what we can influence is the way capitalism is practiced within environments where the right conditions exist. We believe a new form of Conscious Capitalism, one that smooths the rough edges of traditional capitalism, is required for capitalism to flourish, spread and create the good society.

We believe strongly that in the era of Conscious Capitalism, great companies will be those that strive to create value for all stakeholders by operating in a state of concinnity in which stakeholders (customers, employees, communities, suppliers, investors) are sustained by the sublime experience of interacting with each other in elegant harmony. In their book, Firms of Endearment, authors Raj Sisodia, David Wolfe and Jag Seth, offer stark evidence that operating from this more holistic perspective can do more to increase shareholder value than operating from a more self-focused (i.e., shareholder dominant) operating model. These companies have accepted responsibility for becoming “instruments of service to society” in addition to their obligation to make returns for their owners. We believe this view of capitalism will be more readily and globally embraced and thus increase the likelihood of achieving the good society for more and more citizens of the world. 

Peter Drucker surmised that profit is not the goal of a business enterprise, merely a measure of the validity of its business model. Profits are a lagging indicator of what is in the hearts and minds of customers. We believe the hearts and minds of customers are yearning for companies that understand doing good and doing well are equal partners in capitalism. We believe in a model of evolutionary capitalism which aims to be an engine of value creation and service by tending to the interdependent needs of all stakeholders as a means of achieving the good society.

Why Conscious Capitalism Matters:

(I know this is way out of date…I wrote this last August. But I still thought it would be interesting to post….)

There was an article in last Sunday’s Washington Post about how BP “investors” are trying to factor in the costs of this horrific event and decide what to do next. Is BP a “buy”?

I put investors in quotes because as in most cases, the beneficial investors aren’t the ones making these decisions. It’s actually the Wall Street money managers, analysts and large institutional investment officers who get to decide. And with that in mind it should come as no surprise to most of us that 10 of the 14 leading investment analysts that cover BP now have a “buy” rating on the stock. As those of you who know me may imagine…I’ve got a different take on the situation.

Much of the focus on whether BP is now a “buy” centers on pure balance sheet analysis: which of the costs of containment and remediation will need to be internalized (or paid for directly by BP); do they have enough cash to pay that amount; how much will they have left and how much will the damage to their reputation effect their ability to continue profitable operations in the future and possibly effect their stock price? When you do the math, based on BP’s cash position, relative lack of debt and strategic and tactical relationships, many analysts simply can’t see a reason why investors would not get into BP stock at this point. And I suppose if money were all that mattered this all would make perfect sense.

If it has not yet become evident to Wall Street that there are other issues that matter just as much (not more, simply just as much) as money, I wonder if it ever will. If money is all that matters to you, if you don’t care about the lives of the people of the Southeast, if destroying the oceans and coastal waters doesn’t concern you, if you’re not concerned with the price or availability of some of the best seafood in the world, if the notion of killing an entire species of animals is secondary to how any particular investment you might make could fare in the next 12 months, then by all means, you should consider an investment in BP. If however these things are equally as important to you as making money (not more important mind you, only equally important), than an investment in BP or any company that views the world like BP does is strikingly counterproductive.

As many of you know, I’ve been preaching to anyone who would listen for the last 4 years that we need not continue to make the false choice between attending to the common good and creating economic value. In fact I believe that the majority of Americans (and most citizens in the developed world) are simply fed up with the notion that businesses, and the people who run them, are somehow exempt from the moral and ethical standards by which we abide in private life, just as long as they tend to the wealth of their investors and just as long as the don’t do anything illegal. At this point it’s unclear whether BP did anything illegal, and it will take some time to get to the bottom of the cause of this disaster. But it seems relatively clear that, in like most engineering disasters, many small seemingly unconnected decisions and mistakes led to a catastrophe, and that many of those decisions were justified in the name cost cutting and thus in the name of tending to “shareholder value”.


R. Edward Freeman, Professor of Business Administration at The University of Virginia and Academic Director of the Business Roundtable Institute for Corporate Ethics has stated: “The alternative to capitalism as we know it is not socialism, but a better form of Capitalism – one that recognizes the existence of the commons and acts to prevent the single minded individualism capable of destroying it.”

If managers (Not leaders mind…managers), take a dogmatic and myopic view of the purpose of the corporation being to provide for shareholder value, society and shareholders alike eventually suffer. It is just that simple: If on the other hand, managers (and leaders) operate from a Stakeholder mindset, it becomes, if not impossible, certainly exceedingly difficult for them to take decisions like BP did that were so clearly borderline in regards to ethics and morality.

BP, the 10th largest company in the world (according to 2010 Forbes Global 2000 list), pursued profits with that “single minded individualism” that now threatens to destroy much of the Gulf of Mexico and large portions of the Southeastern U.S. coastline.

Instead of operating from a mindset of a long-term exchange of value between stakeholders and the company, we now have a disaster created by the company, which will undoubtedly foment scores of CSR and / or philanthropic “initiatives” meant to atone for this disaster. It’s simply incredible to me that reasonable human beings can’t see the value of avoiding these types of disasters in the first place. If BP had operated from a stakeholder mindset as opposed to a shareholder mindset, it would have been simply unthinkable for them to put employee lives at risk in order to satisfy investor’s needs for quarterly profits. And the most ironic and heartbreaking part of this story is that focusing on stakeholders would have saved shareholders billions of dollars in cash, market cap and legal fees.

Those who cling to the notion that corporations exist solely for the benefit of stockholders need only examine this current crisis to see how BP has not only effected society far beyond it’s stockholders, but is even now looking to congress…and the American taxpayers, to limit it’s liability for the damage it has done and thereby transfer that liability to the broader society. I’m sorry but the “corporatists” can’t have it both ways. They can’t claim the company be run for the sole and primary benefit of shareholders and then require other stakeholders to pick up the tab when something goes array.

The argument goes that raising the cap on liability would increase the cost of oil exploration in the Gulf by 25%, thereby allowing only the largest companies to explore, reducing competition, eliminating jobs and reducing tax revenues. I’m assuming this is all because big oil companies would insure against this higher cap and that money spent on premiums wouldn’t be available for other things, like innovation etc. Additionally there’s the argument that smaller companies would be pushed out of the business of deepwater exploration (Congress…looking out for the little guy). Which of course is a silly argument; if a company is too small to manage the real risks of doing a certain type of work, they don’t get to do that work! That’s why Joe’s Construction Company doesn’t get to compete with Parsons to build skyscrapers in Dubai! But, that aside, isn’t it funny how these big companies, and the politicians who support them, want to worship at the altar of free market capitalism…except when it might cost them something to do so? Then they are all for government “interference”. For an industry that has fought regulation at every turn, they now want the government to impose a statutory remedy to their risk!

Now of course for every action there are sets of unintended consequences. But lets suppose for a minute that instead of just buying more insurance (against an event we were told would never happen…), the oil companies managed their risks by actually understanding how to prevent this type of thing, investing as much money in safety science as they have in drilling science moving forward? Which would actually create jobs for a whole new generation of engineers and scientists who are equally as concerned with sustaining the planet as they are in extracting the oil.

Conscious Capitalists look at the world through a different lens. They realize that profit is not a strategy, merely a measure of the efficacy of your business model. They realize that the most effective business models are those that put customers, employees, and society at the center of their world




The Dividend Discussion:


I feel for the pensioners in the UK who are going to suffer from the possible implosion of this company. But this should be a clarion call for the pension fund trustees who pick the fund managers who buy stock in these types of companies. Companies that chase earnings at all costs are eventually bound to make decisions that harm society. Those people who made the decisions to put their values aside because of their “fiduciary responsibility” to their pensioners need to re-evaluate what they do and how they do it. The AFL-CIO Office of Investment website defines Capital Stewardship thusly:

Capital stewardship means investing based on the principle that the long-term, sustainable value of any investment requires mutually beneficial cooperation among all those involved, including workers, managers, investors, customers and members of the community. When investors are choosing among comparable investments, workers and their benefit funds may choose those that support working families and their communities and are aligned with their view of value.

This doesn’t define the nature of a company like BP. The people responsible for the funds of these UK pensioners were not acting as “stewards”. The idea of fiduciary responsibility has been co-opted to mean profit and increasing portfolio value at all times at all costs. What if we start to think about fiduciary responsibility in terms of investing responsibly such that you try to preserve capital and grow it over the long-term? This is what Capital Stewardship is about. Not chasing quarterly earnings.

If you invest in companies that want to look like a good companies, through earnings management and advertising, instead of doing the real hard work it takes to actually be a good company: focusing first and foremost on customer needs, creating a highly engaged workforce, treating suppliers as equal partners in your business and not like indentured servants, and putting the common good of society at the center of their purpose for existence: the possibility of bad things happening to that company, and your pension, are simply amplified to an unacceptable level.

I was at a talk given by Malcolm Gladwell this week. I think Malcolm is a genius and I have always studied his insights. He’s developed a new theory about how complexity and the access to ever increasing information are changing the skills needed to now solve complex problems (what he calls mysteries) as opposed to how linear and “puzzle-like” (his idea) our complex problems used to be in society. I won’t get into the details of his arguments but I think they are cogent and worth exploring. In the process of this however someone asked him what he thinks about the spill. His explanation of what happened, I think, is right on the money. He said the accident is what we call a “Normal Accident”. Put simply, it happened because a series of small problems occurred simultaneously in a complex and highly connected series of sub-systems. Any one or any number of them individually would not have caused even a minor problem. But when a critical mass of these small, seemingly unconnected problems occur simultaneously or in a certain sequence, we get a major engineering disaster. Gladwell then went on to make the mistake that many people make; because these systems are so complex…accidents simply happen, its nobodies fault and all we can do is work to fix them. This line of thinking allows BP to abdicate its responsibility here and I’m here to tell you it’s just not that simple. Yes complexity creates situations that we can’t anticipate. Mistakes happen and sometimes a series of those mistakes end up causing catastrophes. But something else is often required for a “normal accidents” to occur: A sub-optimal organizational structure that in turn is subject to production pressures and managerial maneuvering (from the LearningLab website)…

What does this mean? Normal accidents happen; they are more prone to happen in an organization like BP whose culture has long been morally and ethically bankrupt. For years they’ve put the safety of employees aside in search of profit. I truly don’t think BP did anything criminal here and frankly I think the criminal investigation is a waste of time and money. An even bigger waste of money is an investment in a company that doesn’t care.

The Politics of Endearment:

My friends David Wolfe and Raj Sisodia gave me the honor of working with them on the recent book Firms of Endearment, How World Class Companies Profit from Passion and Purpose. The experience of working with these two extremely intelligent writers has influenced the way I look at the world. Much of progress is counter-intuitive. How do companies provide outsized returns for shareholders? Focus on long-term relationships with stakeholders not on “increasing shareholder value”. I was thinking of this notion of what David and Raj call Ironic Management (which is loosely defined as doing the opposite of the conventional wisdom as a way to success), this morning as I got my weekly dose of Meet the Press. David Gregory smirked at Valerie Jarrett as she suggested the President meant it when he said he doesn’t think about Sarah Palin. That he actually thinks about what the American people need and not about his next election. Smirk if you will, but please try to pay attention here: Successful politicians are those who, at least are able to convince the electorate that politics is not the important thing. Take care of the people, make their lives better, tell them how you did it and forget about the politics…the politics will then take care of themselves. Put another way, the only person worthy of the job of President is the one who can convince us that he or she really doesn’t want the job…those who will be willing to commit “political suicide” in order to do what they truly believe is right for the country.

The Irony of it all

All the talk about how the recent election outcome is going to be good for business (in addition to an article in the NY Post today by Charles Gasparino) got me thinking today about what's really happening here. Why people think republicans are pro-business when the stats always show that business prospers under democratic rule? Why republicans hold onto this disproved and antiquated notion that tax cuts are a silver bullet to job creation? (I've been a CEO for more than 20 years and I never hired a single person because tax policy was going to give me an extra $1000 in my next paycheck...so don't get me started on the Bush tax cuts..)

Anyway...here's something people don't understand about business: Everybody is saying business will now start investing because the republicans will curtail all of the liberal spending and anti-business policies, the "lurch left" on economic issues will come to an end. But here is a guarantee that I will make: In the next few months as "business" starts to invest again there will emerge some very clear winners; they will be the businesses who didn't buy into this idea that the President's policies were going to "ruin" the country, they will be the ones that were not focused on politics but focused on their customers. They will be the ones who have continued to invest in innovation, employee engagement, customer support, helping suppliers and bolstering their communities not despite or because of what the President did, but without regard to Washington. They have, as they always have done, focused on delivering value to their core stakeholders as a way of driving shareholder value. These companies will destroy their competition in the coming months, as they have been doing consistently even during the recession, because they weren't using politics and a temporary downturn in the economy (and it's ALWAYS temporary) as an excuse to horde cash for their executives, layoff workers or unnecessarily tighten loan standards. They were serving customers and preparing for the next business cycle...not screaming about how the sky is was falling because people who make $250,000 or more might have to pay a few percentage points more in taxes or because their hourly employees were now going to have better access to health care. The emperors that you see on CNBC-including the king himself, Jack Welch-have no clothes. The ironic thing is that all of these businessmen that have been spouting off against the "leftward lurch" have in my mind been blinded to the thing they always rail against: business as an un-impassioned and rationale pursuit. These titans of commerce who are the first to tell you "it's not personal, it's just business" (most stupid comment ever...but that's for another post) not only have let their politics get in the way of understanding what needed to happen with their businesses, they've done so to what will eventually be the detriment of their shareholders. As they were pushing their political agendas and cloaking it in the guise of "just what's good for business" some others were simply going about their business, tending to their relationships, spending on the things that matter and they are now poised to reap the benefits that will come as the economy expands. Mark my words on this, the spoils in this next cycle will clearly go to those companies who continued to invest, continued to train employees, not the ones who cut staff to the bone in order to bolster quarterly earnings or those who spent their time fighting with the White House instead of listening to their customers.

Politics and the Good Society

James O'toole of the Aspen Institute wrote a book called: "The Executives Compass: Business and the Good Society". In the book he lays out ideas about how we need to balance Liberty and Equality, Efficiency and Community in order to have a society that is both free and provides equality of opportunity, one in which take advantage of the benefits of efficient markets while also understanding and tending to the needs of community. The problem with republicans and conservatives is that given the choice they see the world as a zero sum game as as such always err on the side of Liberty and Efficiency to the detriment of Equality and Community. The world is not a zero sum world. The problems we face require more innovative thinking about how we manage the polarity of these ideals that are seemingly or some times actually at odds with each other. Republicans put forth that Liberty and Efficiency will always prevail because if you are freely unconstrained to pursue your own best interests we will all benefit. Of course we see by financial meltdowns and Bernie Madoff's and Enrons and Worldcoms and unjust wars and disparities in sentencing and gay bashing, etc, etc. that this is not always true. We must be ever vigilant about how our actions impact the broader community, especially those who have less of a voice in the system. We must be ever vigilant that Liberty is not purely the province of the wealthy and connected but that we provide equality of opportunity, through education, access to financing, pay and job equality, to everyone. This is how we get to the good society.

This I Believe

Yeah I know....been away for a while...here's some food for thought:



I believe that capitalism and free markets are the single best way to world wide prosperity and freedom.

I also believe that free markets need to be regulated vigorously because some businessmen will take advantage of the system and until Wall Street rewards ethical behavior, which now it doesn't, government intervention is essential.

I believe if we're going to have a government that tends to those things which we need to have tended to in the aggregate as a society that we all need to pay our fair share so that government has the resources to do that. And as such, small or big government is a futile discussion. We need to make real and hard specific choices about what government MUST do and what can be left to the market. BIg Government vs. Small Government is a fabricated and irrelevant debate, like abortion....we all would like a smaller government IF that smaller government could provide the things that we all need. (IE we all hate abortion but I have no right to tell my neighbor what to do with her body).

I believe since we have a private education system that forces individuals to pay for their education, especially in areas of public health, they have a right to demand adequate payment for having paid for that education and we as a society have an obligation to help all of our citizens have access to those educated providers.

I believe only those who work for it and can actually afford it however have a "right" to own a home.

I believe that we have an obligation to maintain our natural resources for future generations...no matter the cost. The Tragedy of the Commons is real and we must deal with this polarity.

I believe we have an obligation to provide all of our citizens with a basic level of education, no matter their financial standing.

I believe our justice system should treat everyone the same no matter their race, religion or economic standing.

I believe that civil society depends on us acknowledging that we're in this together and some people are in circumstances that require the rest of us to give them assistance and that government has a primary role and seeing that this will happen because it requires in many cases a centralized effort.

More later...

The Wall Street Earnings Game

OK, I know I’ve been at this for three years now, but this morning I finally figured out Wall Street. It’s not a pretty picture.

In some ways this whole thing of Wall Street and earnings calls is like a self-made gambling parlor. I was watching CNBC this past Thursday morning and they did a lead-in about the upcoming earnings story about Wal-Mart. Wal-Mart had a “beat” this morning meaning it’s earnings per share were better than the analysts had estimated, but “the street” is unhappy with soft guidance and weak same store sales. Now if you listen to Wall Street analysts, that all actually means something. And if you have money on Wall Street it I suppose it does. Analysts will lower expectations for the company, investment managers will sell the stock and therefore when there are more sellers than buyers the price will go down, temporarily. But if you just a regular investor, someone who’s not doing this for a living but just trying to invest in good companies in hopes of building some wealth what should you be looking for when you invest in a company? And what should the price of the stock tell you? Seemingly you’re buying stock in a company because you believe that company will be successful in the future, they will continue to grow and be profitable and if they do, then the future cash flow of the company will make it more valuable and therefore at some point you, or your children, or your estate can sell the stock for more than you bought it for. This will increase your own cash flow and allow you to do other things that you’d like to do with that money…like build a house or go on vacation. All that makes sense right? So the question them becomes, how do you determine if Wal-Mart will continue to grow, continue to be successful, profitable and generate cash flows in the future that will justify you asking for a higher price for the stock than that at which you bought it? Now I’ve had the benefit of running a few businesses so maybe I have more information than most people on Wall Street, but if I were still a CEO, I can tell you for certain that the fact that my quarterly earnings per share were higher than, lower than or equal to an average set by a group of guys who aren’t inside my business gives you as an investor absolutely zero understanding of the future prospects of my company. In business, things change everyday and the relationships that most large businesses have to navigate and manage are so complex (and the outcomes of those relationships can takes years to manifest themselves) that quarterly earnings tell you at most about (I’ll be generous) 20% of the story. Now add to that “soft guidance” for next quarter (which is again an earnings number) and same store sales, which I admit is a valuable metric in the retail arena. But again, what are you trying to understand? The Future potential of the company to generate excess cash flow (that which is in excess of what could be expected just from keeping up with the general economy). So is the guidance valuable? Well maybe…if you, your kids or your estate need to sell the stock within the next quarter then this is a very valuable thing to know. If however, you’re “investing” for some future longer than 3 months…next quarter’s guidance is a pretty useless number. If Warren Buffet’s ownership threshold is FOREVER…what the hell does he care about next quarter’s guidance? And what about same store sales? Well obviously if you own an asset and you can understand if that asset will be increasing or decreasing in value over the period when you own it, that would be a good thing. So the obsession with same store sales would lead you to believe if a company has one quarter when sales this period were lower than last, you should assume that this will continue on into the future without fail…does that make sense to anyone? The problem with Wall Street is that most of the people who work here first have never actually run a business and second have generally become very lazy. I’d submit that, again, unless you are a “trader” and don’t intend to hold the stock for more than a few hours or days and certainly not more than a few months, then there are a lot of other things you need to know if you want to understand whether or not the companies you own will be successful in the future…like how do employees feel about working there? Are they productive? Are they willing to give discretionary effort for the company? Do they know their jobs well enough so that when they do give that effort it is effective? Are customers loyal such that they will keep coming back year-after-year and be willing to pay a premium for the company’s products? What risks does the company face in the future? What is the corporate culture like? Is it one that focuses on caring and quality and innovation such that it will foster new products, make sure those products are always safe for consumers…because they really care? Will it stop them from treating customers in a ham-handed fashion when things do go wrong and keep them away from any financial shenanigans? How do the communities where the company operates feel about the company? Is it a welcomed neighbor or will it have to fight lengthy and expensive legal and civil battles simply to find places to do business? How do they recruit and hire new talent? By the way, if you run a business, these are the issues that really concern you, not quarterly earnings. The problem with all of this stuff is that it’s really difficult to find out and understand…and if you’re lazy, well you’d rather just pick something easy and use that as a metric instead of doing all of this work.

The amazing thing is that all of this laziness has led to a lot of people making a pot full of money. You see these guys have done something ingenious: They’ve created a framework which has nothing to do with the real value of the companies they aim to judge, they’ve agreed that this framework will be the basis of setting prices, then they’ve told the public a different story so they can fund the entire scheme with other peoples’ money. This is why you often hear Wall Street professionals saying that the system is rigged against the “little guy” meaning the retail investor. It’s all like an agreement that they’ve made amongst themselves. Quarterly earnings don’t really matter, but if we Wall Streeter’s all decide they matter, then we can trade in and out of companies as if they do, then prices will move and we’ll make money. Retail investors can’t do that. They have other jobs to do. That system only works for you if you trade stocks all the time, all day long as a professional. It’s like they’ve told the public “buy equity in quality companies and you’ll make money” then they set up the system so that making money has nothing to do with the quality of the company, only with the short-term price changes driven by the irrelevant metrics that they’ve created.

Just my two cents but time for things to change on Wall Street if you ask me.

Financial mess...redux

This is an old post that…I forgot to post!!! But I’m working on a book chapter about some of these issues so I thought I’d put this up now anyway just as food for thought.

I think it was on the CNBC show “Meeting of the Minds: The Future of Capitalism” which aired in May of 2009…but don’t hold me to this, but anyway, on that program, Larry Fink the CEO of BlackRock said that we got into this financial mess because we had a society that believed in housing. Now when I was watching the show I remember thinking to myself; “that’s just a lie!” But to say that may be a little to simplistic. The truth seems to me to be a bit more nuanced shall we say. I think we got into this mess because greedy mortgage bankers lent money to people who couldn’t afford to borrow that money. Bankers and money managers on Wall Street packaged those mortgages into securities without having the slightest understanding about the health of the underlying assets (CUSTOMERS) and ratings agencies were complicit in the entire scheme through an evident and obvious conflict of interest because they were being paid from the wrong side of the equation. What bothers me most about where we are is that the people who were responsible for this don’t want to take on any of that responsibility. If they don’t, if they’re able to deflect the blame and say that it was the low interest rates promulgated by the Fed or that it was all because the democrats were pushing home ownership for everyone, I’m afraid we’ll miss the real cause and be doomed to repeat this episode just with some other product. We are were we are because of greed, coupled with a lack of transparency, exacerbated by laws that made it easy to do, leveraged up by a ridiculously inadequate regulatory system, underpinned by a short term mentality that encourages making as much money as you can as fast as possible and bolstered by a long standing acceptance of the separation of commercial institutions from a responsibility for contributing to civil society in all of their day-to-day activities. “Market fundamentalists” want us to believe that “It’s business, it’s not personal.” But I’d like to suggest that if we had even a little more humanity in our businesses today we could have avoided a lot of this mess…just a thought.

Apple Cars...

My friend KstreetKate (http://www.kstreetkate.net/) twittered this morning about this entry on the Huffington Post. What if Apple Designed Cars? I didn't read Bono's Op-Ed in the Times about this but this is an old idea. In many forms it has been floating around the deisgn and progressive business community for years. It probably takes someone like Bono to give the idea the traction it needs but I can tell you we've always thought this was such an obvious fix that it had to just be more retardedness (is that a word?) by the US car industry that kept it from getting done. Say all you want about safety, gas mileage and all the other reasons that people will TELL you that they bought a car. As when we used to do customer value research, there are always two stories; the one that consumers tell you because they think its what they should be saying, and the real story. US cars are simply ugly, not sexy, not interesting; that's why no one buys them. Why wouldn't Detroit just outsource the design work to Ideo or Imagination? It's so obvious that we all just figured they'd thought of it and then convinced themselves it wouldn't work because they had all the talent they needed in-house...(NOT). Anyway, I hope someone with half a brain in Detroit....might be asking a lot...read this and what Bono had to say and does something about it. Jobs are created by smart creative people, not by people who think they know everything and can't possibly learn from someone outside of their organization.