Sunday, November 16, 2008

Being John Bogle II

A few days ago I commented on a post, Leadership Farming, written by John O'Leary on Tom Peter's blog about financial engineering as opposed to engineering products. As I am not a financial expert, I simply wrote about what appeared to me. So, this afternoon it was good to read that my hunch was not too far off, as the financial veteran of 57 years, Jack Bogle, writes about financial engineering in his newest book, Enough. True Measures of Money, Business, and Life that bore relevance to my thoughts. He writes:

In my speech at Georgetown, I noted that during 2006 the financial sector alone accounted for $ 215 billion of the $ 711 billion in earnings of the 500 companies that make up the S & P 500 Stock Index — 30 percent of the total (and perhaps 35 percent, or more, if we included the earnings of the financial affiliates of large industrial companies, such as General Electric). The domination of financial companies in our economy and our stock market has been extraordinary. The earnings of these financial firms alone totaled more than the earnings of our highly profitable table energy and technology companies combined , and about three times the earnings both of our booming health care sector and of our giant industrial firms.

By the time 2007 had ended, the financial sector earnings had plummeted by almost half, to $ 123 billion for the year. Not only had fi financial sector earnings shrunk from 30 percent to 17 percent of the $ 600 billion earnings total of the S & P 500 companies; the sector also accounted for fully 90 percent of the S & P 500 decline in earnings for the year. The carnage has continued during 2008. Call it poetic justice.

But is it? The clients of the banking firms have lost hundreds of billions of dollars in the risky debt obligations that the banks created, and layoffs of employees are rife — more than 200,000 financial sector workers have already lost their jobs — yet most investment banking executives continue to be paid at astonishingly high levels.

We have moved to a world where far too many of us seemingly no longer make anything; we're merely trading pieces of paper, swapping stocks and bonds back and forth with one another, and paying our financial croupiers a veritable fortune. In the process, we have inevitably added even more costs by creating ever more complex financial derivatives in which huge and unfathomable risks have been built into the financial system.

The discussion at was on leaders and protegees. Here is what I wrote:

There is no doubt, keeping with the fruit analogy, that the apple doesn't fall too far from the tree. Also, in the same vein, the fruit of love, which is the basis of leadership, is collective. Love is the best gathering force that initiates and implements projects, bringing together important elements such as respect, creativity, openness, passion, rigor, ambition, and thoughtfulness. Where love is lacking there is a lot to be desired. Have you worked on a project where nobody cared? Where ambition was the only driving force? Where apathy was so deep that it's difficult to go into the office?

The leader sets the tone and guides the group. While this is happening, it may appear that all is well and the direction is copasetic; the numbers may even prove so at the moment. But some years later some have argued that if you look at that leader's company and those of his proteges, there is, in fact, much to be desired. In such a case, has the leader not developed his proteges well and promoted unsustainable models over the long haul? Or, is it a matter of the necessity of change? (Disclaimer: What's to come is NOT an indictment of any one man nor of any one company. I am not adept to speak in depth about these things. These are just thoughts from a point of leadership and succession.)

Consider GE, for example. Some point to financial engineering as a big culprit in its steady stock decline over the years as well as the companies of those that have taken on this model. This model appears to have reduced products and expanded paper. Many leaders came out of the mode of Mr. Welsh and have themselves come to lead major companies. Leaders were "popping up like shoots around" him, pointing to the fact that he had "likely done something right." We are sure he did and we have enjoyed reading his books and have learned from them as well. Many thanks!

But why the steady stock decline of these companies over the years? Perhaps as leaders we give what we can give at any particular time. Perhaps what's also important is to be forever open and honest about where we are and quick to change directions once we see things clearer. For this, Paulson can be appreciated. He came out yesterday and said we have made changes to the financial rescue package because "the facts changed and the situation worsened." We can't throw money at bad paper whose worth can’t even be determined. Many have always thought that thought this was ill-conceived. Perhaps this was a bit of election fever to propose such a thing from the start. As Paulson sees it, credit has improved but other industries have worsened.

But what happens when we do not see that our processes or when our plans are ill-conceived and we continue to develop and promote them? Could it be the toppling or the threat thereof of the leaders' companies and the proteges' companies too? Can the blame be laid at the feet of the leader? Some have remarked that Mr. Welsh's GE and the companies of all his proteges are now in trouble because of a bad business model. Personally, I don’t know. These are just thoughts.

As I read Mr. Bogle's first chapter, "Too Much Cost, Not Enough Value" in a section entitled, "Money," I am reminded that sometimes hunches can be spot on.

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