Category Archives: Management

Beware the Prince

I’m about as well sorted psychologically as I’m ever going to be but I get to use a shrink as consultant for niggling issues, an arrangement that suits us both. During a recent conversation, we were discussing some completely impersonal topic and after commending my insight, looked at me purposefully and said “But you’re not a Prince”. He started to explain what he meant, but I just raised my hand to stop him. I got it, I just didn’t like it.

As a group we like societal anomalies as long as we can feel superior to someone. The sick fascination with serial killers fulfills a violent prurience with the added benefit of guilty Shadenfreude regarding the victims. Positive outliers that make us feel inferior are less welcome. We don’t like those, to the point where psychological self-defensive concepts like “luck” and “cheating” arise immediately like squid ink.

Princes, winners of the genetic lottery in exactly the ways that count most, do exist unfortunately. Princes are separate from savants, the latter with skills so focused in one area that they’re completely useless and awkward in others to make us feel better. For the true Prince, as the name implies, the aptitudes and will are so strong and varied that future success is virtually preordained. They are not only capable of breezing through an applied economics final after no lectures and 30 hours of studying, but also know what you are going to do and say before you do or say anything.

Too many viewings of Good Will Hunting, you’re thinking. I wish that were the case but I actually know a Prince well who has operated so well in the back section of the FIRE acronym that having never been anything but self-employed, he personally owns his own jet (money enough not to waste time) and funds a major post-graduate school that has his name on the door. His social skills are legendary, maintaining varied and rarely overlapping spheres including prominent politicians, assorted billionaires, and his friends from high school. He is also a former professional athlete.

There is another business acquaintance whose history may indicate Princedom, but I don’t know them well enough to say for sure. He shares, and here finally we reach the point of this exercise, an interesting set of outwards traits with my friend, marked stillness and a vagueness equal parts camouflage and obfuscation. Whether this represents confidence, focus, strategy or an inability to connect to us regular mortals I have no idea. But, these characteristics make it extremely difficult for even the most observant meeting attendee to know what they’re dealing with.

Princes (of both sexes, I refuse to use “Princesses” here) do exist, which is the first thing to keep in mind. The second, more business-related point which follows, is that it is a very good idea never to be on the other side of the table from them. I’ve seen the advanced negotiation tactics and I will state unequivocally that an attentive person of above-average intelligence will not even know they are being applied. A lot of it is flattery, not sales, with hearty congratulations for coming up with an idea that “I never would have come up with myself”, even though the counterparty has been subtly nudged in that direction for a week and will have to get a cab home because they have unwittingly thrown their car into the deal. (that actually happened, btw). On the other side of the table, you will have brought a knife to a gunfight while being lauded for your impressive strength.

Money attracts talent and despite widespread charlatanism and scumbaggery, finance likely has more royalty than any other field. Beware the Prince.

Good at Finance vs Good at Life

There are few constituencies more in need of a sustained market rally than recently-married females in the 28-32 age group in search of positions in finance. Managers faced with continued budget cuts and looming layoffs, including their own, will implement any necessary degree of rhetorical backflips and rationalizations to avoid selecting a candidate that, after enduring the assimilation process, could be lost to maternity leave.  This same manager, who may very well be female, will admit after a couple of drinks that this process is brutally unfair and illegal in most states. Unless they’re really stupid, no inkling of this decision making will ever be committed to physical or virtual paper.

There is no way I’m going to defend this – I only point it out as an example of sacrifices that are being made to uphold the primacy of bottom line thinking. When profits represent the only “good”, in periods where they are threatened the achievement of every other type of benefit must be tossed until the pressure declines.

Every ambitious employee in any industry is frequently forced to choose between career goals and adhering to societal frameworks of “winning at life”. The dilemma is best identified with discussions of “work/life balance”, a concept in finance which, like “sustainable alpha” is best grouped with unicorns and bipartisan legislation. In my experience, without exception the individuals emphasizing their skills at work/life balance A) had large underpaid staffs who did all the grunt work and B) were eventually fired. The same bottom line orientation that makes life difficult for 28 year old females is in effect applied by each individual to themselves, requiring the de-prioritization of most, if not all, other factors.

I can hear the “Oh, poor baby” comments from ex-financial readers already. You can save them – no one on the trading floor or in banking feels sorry for themselves. These sacrifices are made by and large willingly in return for the outsized pay checks available in few other industries. Many, and this is an underrated factor, love the adrenaline rush of moving big sums of money around enough that the pay package is an ancillary factor, at least until the pants come down and the rulers come out at bonus time.

The outgrowth of all of this is that the financial services industry is dominated by a specific, narrow personality type that either never considers social benefits at all or considers them a bizarre, misplaced affectation. Yes, the hitters do give a lot of money to charity but anyone who’s attended related functions or been “strongly encouraged” to give to the boss’ pet cause knows that it is just another form of competition, one that is really, really annoying and fraught with potential political disaster for mid-level employees forced to buy a Tom Ford tuxedo they can’t afford.

What we’ve learned from the GFC and its aftermath, I think, is that these people shouldn’t be in charge. There are obvious exceptions, but the most successful participants in finance have been forced to jettison the thought processes the majority of the populace believes make up “being good at life”. It is also entirely likely that the current captains of industry are largely unaware of their dearth of humanity in the same way an obese person is stunned to look in the mirror and discover that they are 100 pounds overweight – like many terrible things it happens by slowly by degrees, thousands of small, seemingly innocuous cheeseburger versus salad decisions. I doubt, for example, Governor Romney thought twice about strapping that poor dog to the car roof (until now, when popularity, not profit, becomes the bottom line) as it was clearly the most practical solution.

There are, it must be said, thousands of incredibly giving, ethical people working in finance. In my experience, however, they are swamped by the cynically profit-seeking and are, while listened to, carefully kept away from the meetings where policy is determined. This “keep the bleeding hearts out” trend is most notable during periods, like now, where revenues are more scarce.

I have no idea how to move the goal posts to allow more of “the better angels of our nature” to rise to prominent positions in finance, or even if it’s possible. I do believe, strongly, that the personality type that typically rises to the top of a global investment bank provides further evidence that the current control over legislation enjoyed by the financial lobby should be brutally curbed.

Epicurean Dealmaker Explains Banking’s Role in Asset Bubbles Without Trying

This blog has no consistent mission statement or goal and hopefully will stay that way, outlining both the problems with the finance industry and the inconsistencies with anti-finance arguments. At the same time, it became apparent during the first month of writing that there existed a large body of content in a gray area consisting of things everyone within finance believes are unarguably true, but even reporters that have been covering the industry for 20 years do not. As an example, the fact that the industry is designed as structure to generate transactions, with all of the media appearances and research reports functioning as a Marketing Department roughly analogous to that at Frito-Lay, remains hidden from most investors and commentators.

That is all to preface a terrific post by The Epicurean Dealmaker (TED) over the weekend which, in 500 words, blithely defenestrates a well-intentioned academic study attempting to link CEO pay to risky management decisions. TED’s point is that CEO pay is largely irrelevant to the discussion. The real question is how much commission revenue was generated by department heads, a number that frequently exceeds CEO annual pay, and whether this formed a catalyst for risk-ignoring behavior. In my experience, it definitely does.

I want to extend the argument a bit further to propose that investment bank revenue is a net position of between 10-20 smaller “bubbles”, for lack of a better term, composed of each component of Capital Markets. Each sub-department of an investment bank – Equity Trading, Equity Sales, Investment Banking, Bond Trading, Structured Products, Prime Brokerage, Prop Desks etc -  forms one of these components.

To backtrack briefly, one of my former global investment bank employers used Revenue per Employee as the primary measuring stick for departmental budgeting, and at first this seemed a remarkably unsophisticated, blunt tool. Over time, however, it became apparent that the system had one extremely profitable outcome – it got human assets into areas with rising revenues and profits extremely quickly. (The other interesting side effect is that by not distinguishing by salary – an admin counted against you equally to a higher-salary skilled person – it kept the number of support staff to a minimum.). At any given time, staff and budget were being removed from departments with declining revenue and added to those with rising activity.

It is very rare for all departments within Capital Markets do be doing well at the same time, and this is the primary source of bonus time animosity and a vicious form of political skullduggery that would make the Tea Party look like, umm , a tea party. . The multi-gazillionaire Masters of the Universe bond traders of the late 80s were the miserable also-rans of the mid-90s. The Structured Product departments that were a major driver of profits starting ten years ago are doubtless shrinking rapidly as I type along with the death of the CDO market. The profitability of the investment bank operations overall, and thus CEO pay, is the net position of the success or decline of each department.

TED more or less covered this, only written better.  The part I want to emphasize though, is the way in which all of this structurally encourages asset bubbles. Because, if CEO pay is based on the net profits from all departments, the commission revenue from each separate department is clearly not. Remember that finance generates revenue primarily through the number and size of transactions, not successful investments or the course of markets. The key point here is that nothing generates transactions like asset bubbles. The more money that comes in, the more commission is generated, the more staff get allocated, the more product/ideas get generated, the more money all of those staff make in bonus.  The big money attracts big talent, people eminently able to invent new ways to exploit the trend.

Importantly, this hypothetical department is generally not exposed to a potential bubble’s inevitable collapse, outside of lower commission revenue and staff cuts, so they will wring every ounce out of that bubble they possibly can. After all, market tops are notoriously hard to call and Soros himself has noted, through his Theory of Reflexivity, that all bubbles go on much longer than anyone thinks possible.  We’ll jump off that bridge when we get to it – the legal department can take care of the lawsuits down the road. The department head, who might have made $10s of millions over the course of the rally, could likely care less about getting fired after all is said and done if it makes management happy.

So TED is entirely right – the place to look for excessively risky decisions is not the CEO, who is responsible for overall profits and cleaning up any mess than results from excess bubble stoking, but the individual commission-incentivized departments generating the highest profits.  Risk Management is essentially the process of standing on the tracks in front of the money train which is, to say the least, a politically unenviable position in any organization. For regulators, always fighting the last war, by the time they even start sorting out the whos and whys and where all the money went, the bubble has moved to a new department. Current candidates for this phenomenon include the lending operations under ETFs and funky methods for I-bankers to raise capital for banks ahead of Basel III deadlines.

I suspect that, although the process described above is Fisher-Price elemental for any finance employee with rudimentary observational skills, it will come as a surprise to many outsiders as an example of the Interloper “gray area”.  The interesting question for me is, given the literally thousands of reporters and commentators on the financial industry, why this remains so.

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Consultants, Fear and Portfolio Manager Incentives

In the late 90s, I lived in a big house with four other guys, only one of whom was in finance. One, I’ll call him Rob, was in business consulting. Rob was a recent graduate of one of the world’s top engineering schools, not CalTech or MIT, but always mentioned among them. As a Microwave Engineer he had perfect timing, this being the late 90s during the great information highway build out. His company flew him all over the country and charged $500 an hour for his work plus expenses, the latter including funds to fly home every weekend which, if he didn’t use, he kept (got a nice set of golf clubs for working one weekend).

His biggest project during the period was a TMT company that had been falling behind technologically and wanted advice as to future investment and restructuring. Rob, bulldog that he was, worked 14 hours per day analyzing, interviewing and studying the competition for, if memory serves, about 10 weeks. His conclusion was that the company was unlikely to catch-up in terms of novel technology and profitability would be much better served by “sticking to their knitting” or historical core competency.

The way Rob described it, the process for these things was for him to take his giant binder of full color charts and graphs, the fruits of his expertise and hundreds of hours of effort, and present it to a partner at his firm. The partner, in turn, would present the conclusions to corporate management. After this meeting took place, the partner’s reaction was something along the lines of “ This is excellent work, but I can’t tell them this. There would be no more business in it for us”.  In the end, the partner took three graphs from the binder, and built the rest of his presentation to management out of in-house material outlining the future riches available through mass investment in the wonders of new technology.

Thankfully, I have only had passing contact with management consultants; usually they were calling me for insight after winning a new contract (for free – this pissed me off no end). I have no idea if this story is an outlier or if it is indicative of a bubble environment that has changed since.  I have had, on the other hand, extensive experience with pension consultants. Some, I’ll mention Northern Trust here, are actually very good. Others show all the hallmarks of Rob’s old partner.

In discussing pension consultants, the key is to recognize that the incentives for pension managers are, with few exceptions, very, very different than for the average investor. Investors are afraid to lose money; pension managers are terrified of underperforming the benchmark. Underperforming the benchmark gets you fired. Following the benchmark lower during a bad year is not notable. Beating the index by a wide margin is usually considered a very bad thing, indicative of risk (they still focus on standard deviation, although will provide 90 pages of other stuff) that could, the following year, result in underperformance of the benchmark. Which will get you fired.

The levels of complexity built into the simple “don’t trail the benchmark, ” rules are unbelievable. There are 25, slightly different terms for index hugging – Information Ratio, Tracking Error, Style Drift* – that turn common sense into particle physics. The creation of “appropriate” benchmarks is, of course, the sole purview of Nobel Prize winners. This isn’t the Paleolithic era – you can’t use 60-30-10! If it weren’t crazy complicated, why would you need a consultant? Of course you need to know about the complicated private real estate transactions the endowments are doing and, for a fee, we can tell you how to do it yourself!

Business and pension consultants make a fuckton of money playing on their clients’ fears of being fired. Consulting companies have armies of brilliant, well paid dudes and lady dudes like my friend Rob who constantly derive new insights for the partners to manipulate into pitches for new business. But in almost every case I’ve seen, consultants are hired to tell managers and management things they already know, the hope being that the shiny new report will give them the backing they need to do things they already know they need to do. The (usually inevitable) failure to implement the strategy results in a new round of consultancy. And so it goes, round and round, proving again that fear trumps intelligence whenever big sums of money are involved.

 

*”Style Drift” is an awesome, all-purpose weapon for messing with the heads of PMs. If, for example, I were looking to get my way on any question regarding a value versus growth fund, I would just move utility, bank and pipeline stocks between value and growth benchmarks. I’d have good reasons, too – see Appendix 9 for methodology.

Michael Jordan, Steve Jobs and other socially beneficial psychopaths

I have a lot of time for The Atlantic’s online property and it was no surprise to see the recent announcement that the company now generates more revenue from online content than print.  The genius of the strategy was to focus on quality thinkers who, through their own contradictory personalities, were less inclined to spin off into dogma. Andrew Sullivan, now departed to The Daily Beast but previously a central component to The Atlantic’s success, is a staunchly Catholic, staunchly conservative, HIV-positive gay man and Megan McCardle is a libertarian feminist who probably cringes at the “world’s tallest female blogger” title. Newer member Daniel Indiviglio remains essential reading.

After an endorsement like that you are probably expecting an attempted smackdown at this point but that is not exactly the case. I actually liked Tom McNichols’ Be a Jerk: The Worst Business Lesson from the Steve Jobs Biography and the central point, that those already inclined will use the bio as an excuse to extend their assholery, I accept entirely. There was though, something that bothered me about the piece and initially I couldn’t put my finger on it.

The article ends thusly:

 

The fact is, Steve Jobs didn’t succeed because he was an asshole. He succeeded because he was Steve Jobs. He had an uncanny sixth sense about what consumers wanted, an unmatched ability to adapt existing technology and turn it into something new, and a commitment to quality that turned ordinary Apple customers into fans for life. Being an asshole was part of the Steve package, but it wasn’t essential to his success. But that’s not a message most of the assholes in the corner offices want to hear.

 

And therein lies my problem. There is little doubt, based on personal experience, that being an asshole was an essential component to Jobs’ success and, not only that, denying this fact represents a dangerous from of faux egalitarianism.

The first thing that must be kept in mind was that Steve Jobs was not just a member of the 1%. He was, like Michael Jordan or William Faulkner, in the top 1% of the 1% or, in other words, not a normal person or “Child of God like any other” at all. We are talking about a group of people for whom being born with at least one transcendent talent is a necessary but not sufficient condition. They also develop a degree of obsessiveness about honing their skills that at best borders on mental illness and usually goes beyond. For those rare people willing to look under the hood of fandom, the unifying characteristic of this group is an almost complete inability to form relationships with normal, healthy people. Society usually negotiates a de facto contract with heroes like this, accepting (and ignoring) the dark sides – the vicious competitiveness, the rampant alcoholism, the assholery – in return for the benefits, whether they be works of art, championship rings or iPads. The need to closely identify with members of this club is understandably aspirational, but also contains a healthy dose of wishful, delusional thinking.

In a corporate sense, it is not enough to have one leader, no matter how talented or charismatic. It is also necessary to attract other uber-talented people but even more importantly, a leader like Jobs must drag all of his employees into his obsessive, driven world at least to some extent. You do not do this with Montessori, self-actualization based techniques or with monetary incentives. You do it with fear – fear of being fired, excluded, publicly belittled or not living up to your own self-image. Greatness rarely, if ever arises from comfort, happiness and complacency and by all accounts, Apple achieved greatness through its CEO’s ability to extend his ruthless, obsessive, unsettled, perfectionist nature into every corner of the company.  By being a asshole.

It is true, as McNichol illustrates, that many hundreds of idiot managers with little hint as to the true extent of Jobs’ abilities will copy his affectations to the detriment of their staff and society at large. But Jobs, like Jordan and Faulkner before him, are not examples to be followed or even really to be fully understood. To attempt to do so is largely a conceit, an attempt to glean their advantages without the internal misery, single-mindedness and self-exclusion from normal life that the development of their talents required.

ceos and investors: strategy/execution distinction separates good from bad

Poll the more competent employees in Operations and any company is likely to find 20 good ideas for improving efficiency.  Do the same thing with senior management and you’ll be lucky to get one. The reason is not that Operations employees are brighter and more innovative, although this is infinitely possible, but that senior managers are much more cognizant of what can be accomplished. They may very well, for instance, have a great idea for tracking revenue but also know that the IT department is either too busy or too incompetent to ever implement it.  The CEO responds “Wow, you got 12 months to get that done” and you’re fucked.

The confusion between the brilliance of a strategy and the ability to execute on it is at the heart of every poorly managed company. Far too often, a lack of corporate performance is blamed on a bad strategy when the strategy was perfectly fine. In other words, the architect is always blamed when the house falls collapses but the fault is more likely to lie with the builders. Politically-minded executives (ie all of them) in underperforming companies will furthermore willfully blur the line between strategic design and execution to suit their own agenda.

There is a pervasive myth, propagated rabidly by biz schools and business consultants,  that a new “great management paradigm” has just arisen (coughsixsigmacough) that will transform your company into a global behemoth. The truth is that there is no premium on corporate strategy ideas – they are everywhere. The talent that is almost nonexistent is execution.

Jack Welch’s tenure is instructive in this regard. I worked for a manager who hand wrote his Christmas cards because he read that Welch did the same, as if copying Welch’s affectations had anything to do with his management skill. In truth Welch succeeded because he was an absolute ruthless bastard. The strategies he implemented were familiar to any four year old playing with their toys – break the three boring ones and beg for new ones. What Welch actually did in practice was fire entire buildings full of people in underperforming businesses, to the point where he was given the nickname Neutron Jack.  Anyone could have come up with the idea of getting rid of poor businesses and focus on their successful counterparts, but it took a singular talent like Welch to execute.

The same phenomenon is eminently present for investment strategy.  There are any number of historically profitable stock selection methods across the risk scale, which the majority of individual investors just do not execute well. What Buffett does, for instance, is about as complicated as Welch’s strategy – buy companies with consistent long term ROE assisted by competitive advantage when they are trading, ignored, at lower than historical valuation levels. His execution of the strategy, the unparalleled discipline, is what sets him apart.

All of this is not to say that managing money or global industrial companies is easy. The point is that, while there are multi-bazillion dollar industries trying to convince you otherwise, “The Plan” doesn’t really matter, it’s the person implementing the plan that does.

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