Saturday, January 12, 2013

The Export of Money Management Values


The Export of Money Management Values

I’ve just finished reading Jon Gerter’s book, The Ideal Factory: Bell Labs and the Great Age of Innovation.  The book delves into the company that gave us many of the building blocks of today’s economy such as the semi-conductor, laser, and mobile phone service.  While the book explains some of the key breakthroughs, Mr. Gerter’s major accomplishment is describing the culture, values, and management style of the professionals who ran the lab for fifty years before the breakup of AT&T.  The organization was far from perfect, and enjoyed the benefit of being funded by a regulated monopoly.  While much has changed in the past thirty years, Bell Labs and Mr. Gerter’s book have much to offer us today.

Destroying Value (1997)

The people who worked at Bell Labs didn’t make huge salaries, they didn’t receive big bonuses or stock options, and they didn’t reap huge profits from their inventions.  In fact, they signed away their rights to any patents for one dollar.  Nonetheless, some of the greatest minds in mathematics, physics, chemistry, and engineering gladly joined the Lab and spurned offers that would have paid them more money.  They were drawn to the Lab by the opportunity to confront complex problems, and a culture that permitted them to work collaboratively and pursue their intellectual curiosity.

In today’s world, this business model is an impossibility because the principles of investment management have permeated the rest of the economy.  In money management, there is only one value: making money.   The foundation of an investment shop rests upon on its bonus plans, profit sharing arrangements, carried interest, and tax schemes.  Money managers routinely warn us that they’d stop managing money if we tampered with these financial arrangements.  We’d probably be better served by taking them up on this dare.  While money managers espouse all kinds of laudable values, money trumps everything else.

In the past forty years money management and finance have consumed an increasing share of our economy.  More perniciously, the values of money management have been exported to the rest of the economy.  As a result, our CEOs and their management teams are compensated like investment bankers.  Whether a company is developing a strategy to grow or reverse its downward course, the first order of business in today’s economy is to set up a set of financial arrangements that provides financial incentives to deliver the desired result, and keep the management team happy.  If you truly want to understand my point, spend a couple of hours with one of those proxy statements that you routinely throw in the recycling bin.  The proxy statement is supposed to be about the governance of the company.  However, you’ll realize it’s really an exposition on financial incentives for a handful of people.  The predominant value is money, and making that money in the short-term.

Imagine if were setting up Bell Labs today?  We’d spend countless hours creating key performance indicators (KPIs) and tying them to bonus plans and stock grants.  By the time we were done developing our plan, creativity and cooperation would be subordinate to financial incentives.  We might well attract some amazing talent, but the talent would be forever weighing offers from competing labs.  Moreover, the research would almost always be directed toward the KPIs.

I’m not proposing that we eliminate all financial incentives and simply rely on other values to generate innovation, sales, or profitability.  What I am suggesting is that we’ve lost our balance when it comes to corporate values.  Money managers may need their financial incentives in order to continue to pursue their craft, but that doesn’t mean that their values are a good thing for the rest of us.

I doubt we can create or even need another Bell Labs in telecommunications.  Times have, in deed, changed.  However, we can’t solve our deepest economic problems by continuing to export money management values into the rest of the economy.  Intractable problems in health care and energy aren’t going to be attacked or solved on a system geared to rewarding quarterly financial results.

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