Working Capital Review: Recent Episodes
Taegan Goddard
Working Capital Conversations offers engaging podcasts on business, technology and innovation.
Visit the website to learn more, or subscribe to the podcast on Apple Podcasts or Spotify.
Working Capital Conversations is sponsored by Clayton, Dubilier & Rice, supporting the people, ideas, and collaborations that build great businesses.
As global and domestic businesses enter a new and potentially-fraught economic environment, the relationship between the U.S. government and American business – always evolving – will face new challenges: Inflation, fair trade vs. free trade, China, protectionism, labor, supply chains, taxes, and of course, the massive humanitarian devastation and economic dislocation from Russia’s attack on Ukraine.
So how can – and should – government and business work together to maximize American competitiveness, navigate these shifting dynamics, and manage the tensions underlying global trade today?
U.S. Rep. Stephanie Murphy has a point of view. Murphy represents a Central Florida district that covers much of downtown and northern Orlando, and other cities. She serves on the House Ways and Means Committee and Armed Services Committee. She also is a co-chair of the Blue Dog Coalition, an official caucus in the U.S. House of Representatives comprised of 19 self-described “centrist” and “fiscally-responsible Democrats.”
We wanted to know from Rep. Murphy: How should Washington, DC and the business world interact, and what could they learn from each other?
Transcript
Chris Riback: Rep. Murphy. Thanks for joining. I appreciate your time.
Rep. Murphy: So great to be with you, Chris.
Chris Riback: I look forward to this conversation, of course, and getting your professional insights on important policies, including how D.C. and the business world interact, and based especially on your time as a US Representative, what each could law learn from each other. But, of course, for many of us, our professional views are built on our personal experiences, and your personal journey is quite extraordinary. Fair to say, you didn't follow a typical path to entering the US Congress?
Rep. Murphy: I think that's very fair to say.
Chris Riback: So, tell me if you would about your background and how you got here, please.
Rep. Murphy: Well, so I was a refugee and an immigrant from Communist Vietnam and my parents, and I escaped in the late 70s, after the end of the war because the new Vietnamese government was persecuting people who had been affiliated with the US military or the South Vietnamese government. And my parents were one of each.
And so we got on a boat in the dead of night with some other families and escape by sea only to run out of fuel in international water. And so a US Navy ship found my family and found our boat and they gave us the food fuel and water that we needed to make it to a Malaysian refugee camp. And then from there, we were sponsored by a Lutheran church and relocated to Virginia. And so I grew up in rural Virginia with very limited means, watching my parents work super hard and with their efforts and a hand up from the government, a public K to 12 education Pell grants that enabled me to go to college. All of these things gave me opportunities that my parents never dreamed of. And it gave me an opportunity live what is essentially the American dream. It's the reason why I love this country so much. It's the reason why I have chosen moments in my career to work in the public sector as a way of trying to pay off this debt of gratitude that I have. But this perspective and this experience also shaped my view on policy making and what I think will help move this country forward and has certainly played a significant role in my time in Congress.
Chris Riback: How old were you when you got on that boat with your parent?
Rep. Murphy: I was six months old. My brother was eight. I barely want to fly with my kids across country.
Chris Riback: Yes.
Rep. Murphy: So I can't imagine my parents putting us on this boat, but it tells you that people will do anything to enable their children to have better opportunities than they have. They will do anything for a better future. And I think the United States is the reason why we are such a big draw to people all across the world is that we have this duality, this democratic governance system with a capitalist economic system. And that combination is so incredibly powerful. It's the reason why we are one of the greatest, I think the greatest nation in the world. It has brought innovation to the world. It has brought prosperity to Americans and it is a model. But I have to say, I think our model is being challenged right now. It's being challenged and we are watching it be challenged in Ukraine by Russians. We are experiencing the Chinese, challenging our model all across the world. There are actors that want to see authoritarian government controlled markets prevail. They want to demonstrate that they are the better model. And I just simply don't believe that. I believe our democratic capitalism is the right model. We have to just keep working on it.
Chris Riback: So everything you are saying, not surprisingly, is consistent with everything that I have read about you. So let's talk a little bit more about that combination, our form of governance, plus our economic system and the challenges that you described. Some of those challenges have come internally as well. And some of the challenges around the balance and around some of the tensions perhaps that can occur even in capitalism have come from the left and the right. And I'm curious how you view those particularly given your private sector experience before you came into office. In reading about, I believe it's fair to say that you strongly support what you and others call a rules-based trading system. And I'm curious how you balance those beliefs with, as you just identified, particularly with China, some of the current global trade practices. Are trading partners like China sufficiently following a rules-based system and if not, how can or should government and US business work together to address that type of challenge?
Rep. Murphy: First, let me just say that I understand that there's a populist and maybe isolationist vein that is running through American politics today, but I don't have a ton of sympathy for it. The US needs to lead. When we lead, we make ourselves more prosperous and more secure as a nation. And those values spread around the world also help create a better system. As it relates in particular to a rules-based trading system, I think it's incredibly important that we have a rules-based trading system. The development of the rules-based trading system first with the GATT and the WTO is the reason why we saw such historic advancements and growth and interconnectivity between nations over the last half century or more. And I on any given day would put US companies and US workers toe to toe with any other country. And I think that if we are able to compete on an even playing field, the United States will win every single time.
And so that's why it's important that we have a rules-based trading system. What really is concerning to me that trade has become almost a four letter word here in Washington. And as a result, we are pursuing policies that I think in the end will create more self-harm rather than self-preservation. And I'll give you a couple of examples.
Chris Riback: Please.
Rep. Murphy: You asked me if I thought China were playing by the rules. I think you can definitively say China is not necessarily playing by the rules. We allowed them into the WTO over two decades ago and that experiment has shown mixed results. We thought that engaging with them economically would them along both politically and also economically.
Chris Riback: Yes.
Rep. Murphy: And that just simply hasn't manifested itself the way that we had expected. And while they violate the letter and the spirit of the WTO rules, we haven't done ourselves any favors by undermining elements of the WTO, like the appellate body. So the Trump administration basically handicapped the appellate body by not appointing new judges. They don't have a quorum anymore. And the Biden administration has continued that approach basically citing concerns with the appellate body...
Chris Riback: Appellate body within the World Trade Organization.
Rep. Murphy: That's right.
Chris Riback: Yes.
Rep. Murphy: The appellate body within the World Trade Organization where trade disputes get resolved.
Chris Riback: Yes.
Rep. Murphy: And if we have problems with the way that the appellate body is operating, we should work with our allies and other nations to fix the system and make it better. But we shouldn't abandon in it all together because without a forcing function... We like to talk a lot about enforcement here in Congress. Without an enforcement mechanism, how do you compel players like China and others who are violating the rules, how do you compel them to abide by the rules?
Chris Riback: And one can understand how it starts getting defined downward that if others aren't playing by the rules, then people internally, maybe within the US don't want to then have to abide by those judgements because the other players in the system aren't agreeing to the judgements or aren't playing fairly and all of a sudden it spirals downward.
Rep. Murphy: Exactly. It's about a level playing field.
Chris Riback: Yes. You've characterized the US as being a strategic competitor with China. I was wondering about that term strategic competitor. What does it mean to you? What do you mean by that term? What's the current status of that competition? Is the US on the right track?
Rep. Murphy: Well, let me just say for context though, that in this moment we are very heavily focused on Russia's despicable invasion of Ukraine right now.
Chris Riback: Yes.
Rep. Murphy: And when we talk about our near peer competitors or big competitors, Russia, China, those are the ones that we usually name drop. This particular invasion has required us to lead a global coalition to provide military in humanitarian aid and pose sanctions and a lot of other steps. But from a long term perspective, China is the primary long term challenge to the United States interest in values. And it has an economy that is much more of a strategic threat and a strategic competitor than say Russia or some of the other countries that keep me up at night like Iran and North Korea. But what China is doing is that it's challenging US global supremacy across virtually every geographic and functional domain. And I'm in Florida. So I just got a bill pass that requires an assessment of China's efforts to increase their presence and influence in Latin America and the Caribbean. They're buying up ports. They have satellite sites. There's just all kinds of things that they're doing.
Chris Riback: Belt and Road has extended to Africa, to LatAm, not just in other Southeastern Asian countries absolutely
Rep. Murphy: That's right. And so they are using a very coordinated effort to expand their influence and also to sell their model. And if you think the last a few decades were dominated by United States, let's take technology, for instance. The fact that our was the innovative platform, it was adopted by other countries, enabled us to set the standards. We were at the table setting the standards with our values. And our technology is about democratization. It is about allowing small businesses to flourish, allowing anybody to have a voice sometimes at the detriment to our democracy, but basically a democratization approach. Whereas if you look at Chinese technology, their technology is about ensuring authoritarian rule. You have to look no further than Shenyang or Hong Kong to see them implement this kind of technology and with it, the values that they have as an authoritarian nation.
And now we're seeing them spread all across the world with these tools and the value use, which I would say are not liberal values. They're not liberal democratic values and they're spreading quite rapidly. And as Americans, we should be concerned about this and focused on it. It's the reason why we should pass this. I don't even know what they're calling it these days. The name has changed so much, but the competes act, or they said the bill that allows us to make investments into our semiconductor manufacturing, as well as enables us to be more strategic about our competition with China.
Chris Riback: So much of Chinese foundries are based on semiconductor capability, made from the US, and to what extent do you keep providing that capability? And if you don't, does it then put China in a situation where they created on their own and in the short term, maybe they fall behind, but in 10 years, maybe they leap ahead. I know there's a lot of discussion around the whole semiconductor component.
Rep. Murphy: I agree with you that it is an issue that we have to look at closely. And my hope is that we here between the Senate and House come to a conference on that bill and strip the stuff that isn't necessary out and pass it quickly so that we can begin the efforts of competing with them in this area and make the necessary investments into R and D in other areas so that we can be competitive with China, especially since the Chinese have made no bones about the fact that they intend to, in a number of tech areas, outcompete us. And so they told us what they're going to do. We should believe them and we should be responding.
Chris Riback: We should believe them when they say it. And in addition to your point, the House and the Senate coming together, and sure surely that'll happen one can't imagine the House and Senate not seamlessly coming together to pass legislation. With you behind it, I'm sure that it'll get done.
Capitalism and protectionism. You mentioned earlier populism, and I know protectionism and populism kind of end up getting merged or conflated and influenced each other. Even in a system a capitalist system, I assume that you would believe me – and if you don't, you'll tell me, I'm sure – that even that system may not work flawlessly 100 percent of the time. That there are tensions and trade-offs and adjustments, even at times, there's regulation that must occur. And one such tension that one hears from the left and the right, is around what might be called protectionism. The push for fair trade rather than free trade. How do you think about that balance? Is a balance required and has your perspective shifted at all since entering elective office?
Rep. Murphy: I think that our capitalism does not work without representative government to provide the guardrails. So democratic capitalism is the way that you have an economic system that is governed by a government system reflective of the will of people. And that's so critically important. You can't really have one without the other. And you can see in other countries where they try to liberalize their economic system, but still try to hold on to up authoritarian political power that inevitably there's that friction that just doesn't work. And so we are lucky enough to live in a country that has democracy and capitalism so that the democracy part can be responsive to the people and make the necessary changes and create the guardrails on capitalism so that we make it a better system that's more fair and creates the opportunities that the American dream. And so that's critically important that these two things go hand in hand.
As it relates to protectionism, I think we are sometimes driven... And I know this is true of the democratic party. We are sometimes driven by forces that are reflexively anti-trade because they seem to think that somehow it takes jobs away from American workers. That trade negatively impacts American workers. But I think the truth is that trade helps more American workers than it hurts. And not enough Democrats are willing to say that. In Florida, one in five jobs in Florida are trade related. As we look at supply chain issues that we're dealing with right now, as well as inflation, imports actually lowers the cost and creates choices for our Americans. We shouldn't take any of that for granted, especially in this moment, but we aren't talking about trade, unfettered trade. We are talking about trade and I don't love the term free trade because it implies unfettered trade.
What is very successful in us advancing our economic goals, our value based goals, and our government model is for us to have trade that is regulated, that there are rules. And I'll just take, for example, the big win we had last Congress, which was to pass USMCA, the NAFTA 2.0, so to speak. Within that bill, we encapsulated so many American values to the point where I'm actually kind of surprised some of our trading partners accepted those terms, labor terms, environmental terms, things that we were able to use the carrot of trade with our nation, with the stick of the rules that we want these other countries to raise their standards and be on a level playing field with us and that helps their workers and helps their environment. So trade can be an awesome and powerful tool and way for us to export our model of democratic capitalism. And I wish that we didn't have so many forces making trade a four letter or word. I wish that more forces saw the opportunities that are present in engaging with the world on our terms
Chris Riback: To close out. I am sure that you are not yet in the reflective stage. You've announced that you're not going to run for a fourth term, and you have plenty of time before your current term is up. But I'm curious about lessons that you are coming away with around how D.C. and the business world interact. How would you describe the relationship and interactions between D.C. and the business world? Are there realities about business that you wish that your colleagues, your current colleagues better appreciated? And what lessons will you most significantly take with you should you return to the private sector? I don't know. Maybe you've announced what you're going to do. If you did announce it, I didn't see it. What will you take when you leave office next year?
Rep. Murphy: For the first time in my life, I don't actually know what I'm going to be doing next, but what I...
Chris Riback: Congratulations, good for you. Take a gap year.
Rep. Murphy: Yes. It's kind of nice to think about. When I worked in investments and in business, we were always so heads down building the next cool thing, hiring more people, expanding and growing and focused on that, and really felt like we were not only trying to make money, but also doing good for the world. And so I think when these companies I worked with felt the long arm of government, I guess, is the term, they always surprised because they were like, "Huh, we don't spend a whole lot of time thinking about government, but apparently government thinks a lot about us. And now maybe we should kind of see what regulatory risks or legislative risks exist in various in industries."
And so now that I've spent some time in Congress, what I realize is that a lot of my colleagues, it's very in vogue to be pro worker, but you really can't claim to be pro worker unless you're also pro-business, because I think most workers are employed by businesses. So we have to see this not as a zero sum game, but rather that employers and employees, businesses, and workers, management and labor, they have compatible interests. So in fact, they're mutually dependent on one another. So you shouldn't have to pick sides. How do we craft legislation? How do we think about the relationship wherein we can move both forward together as opposed to pitting one against the other? And I hope my colleagues come around to that perspective as opposed to continuing to pick a villain in that matchup.
Chris Riback: I hope that they do on both sides and that in the business world, they see the lessons that you are bringing as well. And I imagine that upon exit, should the role, I don't know who's in it now, so I'm not saying that anyone's leaving the role, but should the role of running US Soccer open up, it occurs to me that you might accept some role like that. Would you give up a gap year to have a role with US Soccer?
Rep. Murphy: Well, so you must have done a lot of good research because I would consider myself a soccer hooligan until I became a public figure. And my staff told me I could no longer heckle the referees, the way that I did. And yes. Oh, I would love that, but I'll settle for just going to see the World Cup.
Chris Riback: This fall, I think that is. Well, my guess is that you'll be able to get a ticket somehow. Rep. Murphy, thank you. Thank you for your time.
Rep. Murphy: It's so good to be with you. Thanks so much.
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit workingcapitalreview.substack.com
The Call In podcast helps leaders navigate today’s cancel culture.
The bi-weekly show addresses one of the most important (and least understood) issues – diversity, equity & inclusion – translating today’s DEI headlines into actionable guidance for any leader.
Visit the website to learn more, or subscribe to the podcast on Apple Podcasts or Spotify.
Call In is sponsored by Clayton, Dubilier & Rice, which is committed to a more diverse and inclusive future.
Julian Francis is President and CEO of Beacon Building Products – the largest publicly traded distributor of roofing materials and complementary building products in the U.S. and Canada.
A key component of the way Julian advances business success is through empathetic leadership, connecting a human understanding of each employee to the realities of what it takes to succeed in a competitive business environment.
We also discuss the specific, tangible ways that Julian brings his leadership philosophy to life: Discover ways to generate actionable opportunities for members of underrepresented groups, how to help employees balance personal and work needs, and learn about their innovative campaign for putting people first.
Transcript
Chris Riback: Julian, thanks for joining us. Dr. White and I are really looking forward to talking with you.
Julian Francis: Thank you, Chris. It's a pleasure to be here.
Chris Riback: So it's my point of view, and I think Dr. White's point of view as well, that how one leads today has not a little bit to do with how one got here, and who one was at the start. So could we start with that? Tell us a bit about you. Where did you grow up? How did you arrive at your current role? Was it a straight line or like many of us, a path with twists and turns?
Julian Francis: Well, I grew up in the UK, the capital of Wales, Cardiff. So it was a very industrial area of the world. It's coal and steel. And that's where I grew up. I went to school in South Wales as well. That my universe. I immigrated to the US in my mid-twenties and initially couldn't find a job, was unemployed for actually several years. And it was interesting because what I heard a lot from hiring managers was we don't understand your background. We don't understand where you come from. We don't understand your qualifications. I had an undergraduate in mathematics. I had a PhD in engineering. I'd worked for a big six accounting firm. And I said, just give me a job, just try me. I'll figure it out. But it was this structural barrier that I encountered and I didn't realize it at the time. It's only later in life as I look back on it. But what I did was I went back to school because I knew I was good at that, and I got an American qualification, I got an MBA and got hired straight away.
Chris Riback: I've heard those letters. Yes.
Julian Francis: Looking back on it, that structural barrier that's in place that people are just going, well, we don't get it. We don't get you background.
Chris Riback: And was it the educational barrier or was it the geographic barrier? Was it the so socioeconomic class of Cardiff in particular? How would you define the barrier?
Julian Francis: I think it was a little bit of all, I think in the US less so the socioeconomic. I will tell you, I always felt that I could never have accomplished in the UK what I've accomplished in the US because of the socioeconomic, where I was from as opposed to anything else, never felt that in the US, but it was the hiring practices. The HR teams needed to check boxes in order to say, this is what we need and I fit none of them. And that was a real struggle for me early on. But as soon as they could put a label on me. Okay. Got you. MBA. Got it. I know exactly where we're going to put you. We're going to put you in a finance role.
Dr. Alexandria White: And then along the way, Julian, did you have any support, a mentor who said, Julian, maybe you need to go back to school. How can I help you?
Julian Francis: Very much so. Early on, in my first role, the company, after my MBA, when I did get a job. And one of the senior executives there took a liking to me and I have no idea why or where for, but he came up to me after I'd been at the company maybe 12 months and said, okay, I was in finance in one of the divisions and he said, you need to go to marketing in another division. And I was always a little curious as to, was I so bad at finance that he need me to go to marketing? But three months later just so happened that a role appeared in that area. And I got the job. And that type of supports, knowing that there was someone there for me, shortly after that, he continued to support me all the way through. I had another mentor at the same company who just put me in rooms that I probably shouldn't have been at early in my career to give me that experience.
And that was always very powerful. And the folks that I mentor and support throughout my career, I've always told them that I can give you the opportunity, but I can't make you successful.
Dr. Alexandria White: That's right. That's right.
Julian Francis: But I will give you the opportunity. I will put you in the room. I will help to put you where you need to be, but you need to succeed on your own. And I think that's hard for some people, because, again, I go back to box checking. Often people think about careers and they say, well, I haven't done this role. I need to check that box. And it drives me nuts because I'm like, no, checking the box isn't what you're doing. You've actually got to succeed in order to advance.
Dr. Alexandria White: That's right.
Julian Francis: And it's not enough to check the box. If you're not going to be good at that role, don't do it. Don't do it, because failure will impede your progress. You've got to find those roles. I'll give you the opportunity, but you have to succeed on your own.
Dr. Alexandria White: I'm glad that you mentioned that you paid it forward. So when you were paying it forward and you were mentoring people, was there a distinction between if you mentored a woman, a man, a woman of color? Can you tell us a little bit about that? Or you just had a one size fits all mentoring?
Julian Francis: No, I will highlight a person, I'll name no names, but an African-American woman who was in the IT department at the first company I worked for just asked me out to lunch, and just sat down. I didn't know her and sat down, really enjoyed her company, but I was running the marketing department of the company at the time. And I was just like, you shouldn't be in IT, you should come work for me in the marketing group. And so I ended up finding a role and brought her over and she was phenomenal, just terrific. And I gave her a really difficult job of fixing a piece of the business that we were really struggling in. And she did a wonderful job.
When I left that company and moved on, she ended up following me to the next company as well. And again, gave her the opportunity, I think ultimately it wasn't to be, she ended up leaving that company, but she had a real passion to be effectively a general manager, run her own company. And she ended up deciding that she was going to leave and try to find a company to buy. And she's now a very successful entrepreneur.
Dr. Alexandria White: Wonderful.
Julian Francis: But it was very different giving her that type of role early on, pulling her out of the IT function and putting her in marketing. I don't know that I would've done the same for... I don't know. I think about it and I think that it's horses for courses, to some degree, you find people that you think, how can I use this person to help the business, but also how do I uncover what their true talents are?
Dr. Alexandria White: You just said earlier on someone pulled you in and said, I think you need to do this. And you just replicated what you had learned and what had made you successful.
Julian Francis: Yes. I like to think so. I certainly like to think I had an impact on those people's career. And I did it with people in, took an HR person and put them in sales, you just see these natural gifts I think people have, and it's giving them the opportunity. And I think probably what I learned was that it's the, again, it's the labels and the boxes you put people in limiting them and saying, forget where the box is, forget the line, forget what you think they are, if they're in HR, but they've got this outgoing personality and they're constantly selling you, give them a chance at sales. If you've got a person in IT, who's just a natural connector. Let's have them in marketing and see how they can bring those things together. I think it's talent, and how you deploy talent.
Chris Riback: So first of all, great credit to the woman whom you mentioned for reaching out to have lunch in the first place.
Julian Francis: Yes.
Chris Riback: Great lesson there, I would imagine for any of us. And you just said it again a moment ago, finding people in area A and moving them to a totally different area, like the woman whom you just mentioned. And I wonder about the amount of support and ways to support as those transitions occur. I assume that one doesn't just put someone into a new role, unfamiliar role, and say, congratulations, you've now got the opportunity of a lifetime, great luck to you. I'll see you in two years and see whether you succeeded or not.
Julian Francis: No, obviously there's some counseling and coaching and support along the way. I would tell you that the, when you find great talent, I think, well, something, I think you need to emphasize over and over again, great talent wants to be challenged, they want to be given the opportunity to do something they can't do. And I think one of the hardest things a leader can do is actually give someone you really care about and really want to see succeed a job that you have no idea how to do yourself, but that's actually, because then it's the counsel and the coaching you give is not solution provision. I'm not telling you how or what, because I actually don't know, but let me help you think about a problem. Let me help you frame the issue. How do you think about solving? And so I think that a big part of leadership and coaching is not, this is how you do it. It's this is how you think about doing it.
Chris Riback: Julian, let me ask you what potentially could be a challenging question for somebody and certainly a scenario that many people might have questions about. You are a White male. The woman whom you mentioned was a Black woman, I believe.
Julian Francis: Yes.
Chris Riback: The role of White men in supporting underrepresented groups. Were you conscious about that? Was that something that was actively part of your thinking? Talk to me, if you would, about the challenge of White men having the opportunities to mentor and work with underrepresented groups.
Julian Francis: Yes. Look, one, I feel a responsibility. I played sports growing up. I played with a lot of Asian, Indian, Caribbean Origin in Britain growing up, the sports I played. So it never really been an issue, certainly to say that there isn't racism would be just nonsensical. So had I seen it? Yes, of course. It just never occurred to me. I do think that there is a responsibility and I'll tell you over the last, maybe seven, eight years, I'm an immigrant and the rhetoric around immigration, but I don't look like an immigrant.
Dr. Alexandria White: Yes.
Julian Francis: So I'm a white, highly educated male, but I identify more closely today with immigrant status than I ever have before. And I could tell you a couple of horror stories about actually going through legal immigration in the US, that make your hair stand on end in some cases. But I think that's made me more acutely aware of my responsibility to underrepresented communities. I also think that I've grown in my understanding of the impact of diversity and inclusion and the role of those in the performance of a company, and the performance of a team. I think people talk a lot about wanting to more diverse workforce because it's about talent. If you don't hire from these pools of people, you're missing out on talent, I think that's an obvious one. It's right. But it's an obvious one. I think there's three other areas where I feel particularly focused on, not just from a talent standpoint. One is diverse teams get better outcomes.
Dr. Alexandria White: That's right.
Julian Francis: Diverse teams get better outcomes, not because they are better people overall, but because the questions they ask are different. And the mere fact of having to answer a different question gets a better outcome, because you've got to think about the problem differently. And so diversity and inclusion, if you don't include people and let them ask the question, that should be a goal in and of itself, not just about talent, but diversity gets better outcomes because you ask diverse questions. And the mere fact that you've got to think about that creates better outcomes. And I think that is a misunderstood point about diversity, people talk about, it's all about talent. It's not just about talent. It is about talent. It's the fact that you have to answer a different question. I think that is profound to me in terms of business leadership and the impact on the performance of a company.
Julian Francis: The second piece is I operate 450 locations around the country, these are industrial warehouse locations. We don't set them up on the north shore of Chicago, or in New Haven, Connecticut, these are in generally underrepresented communities. We've got great jobs in underrepresented communities. And so our pool of talent needs to draw on that. So there's this community aspect that I actually feel a responsibility to. When I go into these neighborhoods where we operate, they're often underrepresented communities, and that we're bringing great jobs into these communities. And I'd like to say internally, as much as anything else, there's a job for everyone and a career for everyone at Beacon. I don't care if you're a high school dropout all the way up to a PhD, you can build a career at Beacon. We've got every job you can imagine, roof loading, driving a trial, all of those elements, stacking in warehouses, but you can build a great career and we pay good wages.
So that community component of diversity, equity and inclusion is really important to me because we actually operate inside those communities. And lastly, one of our core values is do the right thing. Look, it's the right thing. You can't walk away from it. It's the right thing.
Dr. Alexandria White: Yes. And speaking of right thing, you are not only talking the talk, but you are walking the walk. I had the opportunity to actually listen to people who work for you. Reboot Accel were able to do focus groups and these focus groups were candid, Julian, they were very candid. And they talk a lot about Beacon, the community, how things work in the different facilities. And so I want you to talk a little bit more about how the role of diversity, equity and inclusion plays at Beacon. And you have to tell the listeners about the campaign of “Beacon has your back.” Tell me a little bit more about DEI and this wonderful, wonderful campaign that “Beacon has your back.”
Julian Francis: Thanks for asking about that. It's a couple of things. One is, we did ask Reboot Accel to come in and consult for us. And you, Dr. White, did conduct these interviews, and they were tough.
Dr. Alexandria White: Yes.
Julian Francis: It was tough to listen to. I've done some, a little bit of a listening tour and had asked people to connect with us and tell me their stories. And some of them were really distressing to me, hearing about how people had been treated in the workplace. I think the challenge was the thing that came out most strongly was the fact that one of the most difficult communities to deal with was actually the customers. And that was very difficult for the people at the local level to deal with when a customer actually comes in and is disrespectful or treats people poorly, particularly when they're from an underrepresented group, and how those people at the branch felt supported.
A lot of people said, my colleague's great, but it's really tough to work because of how the customer comes in and presents themselves. And as I sat back and I talked to the leadership team about what we could do, I think what we realized in the stories we heard was that it gets a lot easier as you rise up in the company. So actually stop and say, hold on a second, you can't treat our employees that way, and actually have a conversation with a customer in that way. So what we thought about was how do we put ourselves in that place, in the room? Obviously we can't physically be there, but we wanted to make sure that everyone felt that we were standing there with them and we would take action, and know that if they took action on bad behavior, we would be in the room with them.
Dr. Alexandria White: Wonderful.
Julian Francis: And so we thought about this concept of “Beacon has your back” and really saying that we want to convey to you that we stand with you at a field level. If you see something, say something, if you hear something, you will not be punished, you will not be treated badly, even if it's a customer, even if it's a great customer. And we had stories as we got into this, we'd had stories about actually having some really tough conversations with customers about how they treat our people. And so I think it's a really powerful statement, but we had to find ways to convey to our local branches and our local teams that even though we weren't physically there, we were standing behind them.
Dr. Alexandria White: Yes. And so for the listeners who would like to know what “Beacon has you B.A.C.K.” stands for, it is an acronym. And B stands for become an ally, A stands for address the situation, C stands for call for support. And K is to keep yourself safe. In our show notes, we will have a graphic, we will have a graphic to show you the intentionality of Beacon in their efforts to make sure that their workers feel included in their workspace.
Chris Riback: An excellent example of the tangible ways, when people talk about DEI, when they talk about empathetic leadership, there's a lot of theory. And that to of me stands as a tactical example, this has to be tangible and activated within the business process and the standard operating procedures. I assume you would advocate that Julian. Julian, as you know, this podcast is called Call In. And our goal is to help leaders navigate today's cancel culture. Why don't we start with the most loaded question, Julian. What's your view of cancel culture? How do you define it? Perhaps most significantly, how can a leader know when to call in and when to call out? How would you describe and how do you think about that balance?
Julian Francis: So, I can't say that I've actually experienced it, I think fortunately. The way I think about it is I think to some degree it's always been out there. People who say abhorrent things have always been called out, and in some cases lost their job. I was watching an ESPN 30 for 30 on Jimmy, the Greek way back when who said some abhorrent things and lost his job, that is...
Chris Riback: And got kicked off.
Julian Francis: ...cancel culture, but actually it was probably appropriate. What I struggle with is we need room to grow, and where I struggle with some of the tactics of the cancel side of things today, is that I don't know that it gives people room to grow. What I said 20 years ago, look, I probably have changed my position. I've probably changed my thoughts. I've probably grown. And holding me accountable to that, now pointing out that I said it, but give me the opportunity to grow and learn. I think we all want that opportunity. So I think that the ability to recognize the difference between strongly held beliefs that might be abhorrent, or might be counter to how I believe or anyone else believes we should behave, that's one thing, but actually not allowing people to grow and change and learn and develop is something that I find very difficult.
Now the flip side to that is I actually have some sympathy. The number of ways to simplify hate speech today is extraordinary. I don't think we've ever seen anything like it. The ability to hold a fringe point of view and amplify that fringe point of view seems to be just manifest everywhere. And I think it's increasingly difficult. So I think we do have a bit of a reactionary response to that ability to get this out there and not actually be shouted down. So, I do have some sympathy with it. I think it's always been around. I believe that we ought to have the right to free speech. You can say what you say, but even the Supreme Court accepts there's not an absolute. Again, you can't scream fire in a crowded cinema. There are some things that we've always tried to debate. I don't think we debate things anymore. I think we shout at each other. And I think that, that's where we lose so much nuance.
I think about this a lot, center of gravity. And I don't know that our center of gravity has moved a lot, but that doesn't mean the fringes don't get wider and wider and wider. The center of gravity stays the same, but the extremes can grow a long way apart. And I think what we've seen over the last five, 10 years is these extremes polarize, my guess is our center of gravity probably hasn't shifted very much.
Dr. Alexandria White: Yes. I always say we are more like than we are different. And then it goes back to one of Beacon's core values that you said, is just to do the right thing. And doing the right thing is being curious, listening, and even understanding people that you might disagree with. And so, yes, to everything that you said, that we are just, we're talking past each other. Let's talk with the each other now.
Julian Francis: Let me share one example. I sent out an email about vaccinations about a year ago, pleading with people I've been vaccinated. I said, I've done the research. And I got a call from a lady who said, look, I don't believe in this. And I don't see why you are interested in what I do. And I'm like on the phone with her one on one, she's actually, because I actually care. You work for me, you work for our company. I actually care what happens to you.
Dr. Alexandria White: Wow.
Julian Francis: And we were actually able to have that dialogue. She was vehemently opposed to vaccines and vaccine mandates. And I was saying, look, we'll comply with the law if there is a vaccine mandate, and I am vaccinated. But that ability to actually come together and for me to share that I care about her and for her to share her concerns about mandates, it was a perfectly happy conversation, and I think she got to understand that I do actually care. And I got to understand a little bit more about the people in my organization who were opposed to vaccines.
Chris Riback: Well, that sense of empathy or...what I just heard you trying to communicate is not, this is my view and you must follow my view. It is, I'm trying to put myself in your shoes and look at a life situation from others point of view. And that's how I view this type of thing.
You, of course, ultimately may have ended up agreeing to disagree, but that was your point of view, which leads me to my last question for you, which is this empathetic leadership. And to what extent leaders have had to evolve to a role of empathy? What have you seen around the need to evolve to empathetic leadership? And is it something that can be learned? Can leaders evolve to that point, or you either got it or you don't, and if you don't have it, well, this might not be the time and age for you.
Julian Francis: No, I think it can be learned. I think that as certainly in a senior executive role at a company, talent becomes the defining characteristic of your organization, ultimately what you do and how you do it. I joke that I don't do work anymore. I get other people to do work and that can be a challenge obviously, but trying to connect with people and do actually show that you care. Well, again, one of our core values, the one we put first was we put people first. We do actually care about our people. We want to make sure that they can grow, have great careers. We care about your health and safe. We do all of those things, but I think there's, if you talk about empathetic leadership, the way I would define it is, is about trying to understand, put yourself in other people's shoes and then get the best out of it.
Not challenge them, not, oh, I get it. It's a really tough situation. That's okay. It's not sympathy. It might be empathy, but it's not sympathy. I had a couple of situations in my career. I actually, early on I learnt, had a woman going, worked for me, going through a really difficult divorce. And she was struggling with the workload. And I actually ended up calling our employee assistance hotline myself, and saying, how do I deal with this?
Chris Riback: Wow.
Julian Francis: And their advice was you have to tell that the job's the job. And that was a tough message, because I'm like, I want to be supportive. She actually came back to me about a year later and said I'm so glad you did that, because it helped me focus. I knew I had to compartmentalize this. I had to get this behind me and I had to move forward. I sure as heck didn't think that I was being empathetic at the time, and you're going through this struggle. But in fact, it was probably the right thing for her to do, was you got to find a way to focus on work. So I think people want two things. They want to be challenged. And I actually think they want to know you as a person.
From a leadership standpoint, I think those are the two dimensions that we need to find ways to connect with our employees and challenge them. And that's what empathetic leadership is for me. It's that ability to, I get you. I hear you. I recognize your talents. I know how I can deploy you to the best use for the company, but I'm going to push you hard in order to achieve what we need to achieve. And that's going to allow you to grow, build a great career, advance, take care of your family. Do the work you need to in your community, will build that space for you. But I think that's what empathetic leadership is to me, it's more about connecting with people at a personal level and then challenging them to grow.
Dr. Alexandria White: I completely agree. I think I've worked the hardest for my supervisors, who I knew they cared about me. I didn't mind staying later. I didn't mind taking on an extra assignment because I knew that she actually cared about me. And so right now to the listeners, to the business leaders, it is so important to have empathetic leadership, especially during this day and time.
We have talked about mentoring, diversity, equity, inclusion and empathy and cancel culture. What would you like the listeners to take away with, I want to leave this space for you to give anything that you'd like to, or say anything that you'd like to give out to the audience.
Julian Francis: Yes, thanks Dr. White. One of the things that I'm really proud of, I joined Beacon about two and a half years ago now. And Beacon had come together through a number of acquisitions of a lot of local companies and built up over the past 15, 20 years. I sensed a, when I came here, actually there was a strong binding culture, but it hadn't been articulated. And we worked to put down what our core values were, and
Julian Francis: We have five core values that are critical to us and we think are foundational. Put people first, always be safe, do the right thing, own your day, and never stop building.
And I do think that articulating values is really, actually more important than I'd imagined, because I do sit down in difficult times and in difficult situations and think about, what is the right thing? Am I putting our people first? And I think having that values driven basis for the business actually is incredibly powerful. I think that that is maybe underappreciated. I think every company actually does put their values together. I think that sometimes it's, people ignore it. I think that's actually a really powerful basis on which to build a business.
Chris Riback: Julian, thank you. Thank you for this conversation. And I imagine it's fair that I don't want to speak for the people who work with you, but they probably say thank you for showing empathetic leadership every day. Thank you for your thoughts.
Dr. Alexandria White: Thank you.
Julian Francis: Thanks, I appreciate the time.
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit workingcapitalreview.substack.com
The Call In podcast helps leaders navigate today’s cancel culture.
The bi-weekly show addresses one of the most important (and least understood) issues – diversity, equity & inclusion – translating today’s DEI headlines into actionable guidance for any leader.
Visit the website to learn more, or subscribe to the podcast on Apple Podcasts or Spotify.
Call In is sponsored by Clayton, Dubilier & Rice, which is committed to a more diverse and inclusive future.
Reports note that 90% of Fortune 500 companies have employee resource groups, or ERGs, that provide important voice to under-represented groups, offer employees the chance to gain empathy and learn about others’ journeys, and create a majority experience for everyone.
But given the reality of work environments where many employees already have too much on their plates, how can leaders make sure ERGs work for everyone and don't simply pile new responsibilities on already overloaded team members?
Chris Riback: Dr. White, I've been looking forward to talking with you on this topic. Should we get right into it?
Dr. Alexandria White: Let's go.
Chris Riback: I saw an interesting stat that some 90% of Fortune 500 companies have employee resource groups or ERGs. Alex, what is an ERG? Why did they come about? What are their benefits?
Dr. Alexandria White: I am definitely excited about our conversation on ERGs. I think they are the new driving force for inclusion and belonging at many companies.
Many companies view ERGs as a competitive advantage. Employee resource groups or ERGs are usually employee led, experience based groups that highlight the lived experiences of employees at companies. ERGs have a mission to bring together people who share similar interests, identities, race, sexual orientations or even religion. And depending on which company, ERGs might have a different name such as working groups, communities, affinity groups or even network circles.
Chris Riback: They're not always called the same thing but they have the same purpose, same goal.
Dr. Alexandria White: Correct. There's many benefits to ERGs. Let's start with the employee. Why would an employee even want to join an ERG? Many people who are members of ERGs represent underrepresented groups in large companies, and so those ERGs can help give those employees the majority experience. By listening to their experiences at work, maybe highlighting their culture or discussing how the company can increase a sense of belonging for them. Also ERGs offer professional development. They have workshops, they have mentee mentor opportunities and even special projects. For Reboot Excel, one of clients is hosting a focus group for Black employees to hear candid feedback about their experiences at the company. It's a great way to get an insight to what's going on.
And what are they not? They're not opposition groups, they're not gripe sessions or unions or meant to be political or event planning organizations or they're not closed off to people who might not identify with that group. We'll talk a little bit more about allies for ERGs, but I definitely want to say what they are not.
Chris Riback: Alex, in listening to you, the question comes to mind, aren't they just a bunch of extra work? You just described a series of activities that employees who already have full plates, already have roles, responsibilities are taking on that they may or may not be getting compensated additionally for doing. So why should an employee do it?
Dr. Alexandria White: I think people join ERGs for a sense of belonging. I remember being in college and I was a member of lots of club and student organizations.
Chris Riback: I bet you were.
Dr. Alexandria White: I was a member of the Harry Potter Club, Black Student Union, Students Against Sexual Assault, the Jogging Club. And so being a member of all those student organizations and clubs made me feel heard and talked about my interests. And so for me, ERGs are like those student orgs and those clubs in college, where you're allowed to have a voice. You are allowed to talk about what's going on, your interests. You're allowed to advocate for something that's very personal to you. And so people want that space. Yes, it is extra work but sometimes the extra work really outweighs or the extra work is not in comparison to the sense of belonging that it brings to the people who attend.
Chris Riback: Tell me about some of the benefits of ERGs, especially as you think about the historical path that brought ERGs to where they are today.
Dr. Alexandria White: Okay. You mentioned earlier that 90% of Fortune 500 companies have ERGs. 90%.
Chris Riback: A big number.
Dr. Alexandria White: Yes. That means there is a benefit somewhere. And so I'd like to consider two aspects of the functions of ERGs. One, cost saving and two, revenue generating. We actually have a great graphic of the benefits of ERG, it's available on our website, there's a link to our website in the show notes and our website is callinpodcast.com
In regards to cost saving, when you have people who want to stay at a company, who enjoy working for the company and who know that they can advance the company, they stay there so the cost saving aspects of ERGs provides three legs to it: recruiting, retention and advancement.
Then revenue generating. How are ERGs able to bring money to a company? You're able to get insight from some of your ERG members about a product, about an initiative that might be coming out. Benefits of ERGs, improve retention, it's an asset to recruiting workforce, increased employee engagement and it's a product incubator. And I want to home in on asset to recruiting new workforce. We know that this new generation of workforce are very keen on a sense of belonging at their places of employment and understanding that everyone has a voice. ERGs provide that. And so when you talk about the benefits, it's not only personal but it's also professionally in regards to helping companies understand that it's a needed aspect in the overall workforce community.
Chris Riback: How do you think about those benefits in a hybrid workplace? As more workplaces go to that type of arrangement, do the benefits hold up similarly? Do they become more beneficial?
Dr. Alexandria White: As we help companies launch ERGs, during the pandemic, I cannot recall any clients right now who have had ERG meetings in person. And so they have been virtually, the launching of ERGs, the programming and the continuous weekly ERG meeting have all been virtual. And the participation and attendance is still there. And so in this virtual world, I think that ERGs are a necessity. Some people are working in silos. They don't have anyone in their department that might understand their lived experiences as a parent or caregiver doing the pandemic and being able to log in to an ERG meeting, to vent or get resources about how to balance those intersectionalities is so important. Yes, I think ERGs are able to be beneficial in the hybrid and remote and in person work styles.
Chris Riback: Yes. As you hear about certain companies worrying about the ability to advance culture, build culture during a hybrid environment, when maybe they don't even have all the employees at the same location at the same time, that this could be a tactic on that front as well. I'm hearing that in what you're saying. When companies do decide to launch ERGs, which ones do they typically launch first?
Dr. Alexandria White: Common ERGs that are launched first are a women's network, a network for people of color, an LGBTQ+ network – or right now working parents and caregivers during this pandemic are pretty popular. But I always tell companies if they want to be intentional, do a survey. I know some of companies are battling with survey fatigue from their workforce. But I think a survey to hear the voices of your workforce saying, "This is what I need. This is what I want to learn about. This is what I want to understand. This is what I would want the company to understand as my other intersectionality that I bring to work."
Chris Riback: I'm reading a lot about the connection between ERGs and diversity, equity and inclusion, DEI. And many companies tout their ERGs as examples of DEI progress. You know Alex, that we tie these conversations that you and I have directly into the news of the day. Well, Protocol recently reported quote, "Tech companies like to tout the number and variety of employee resource groups as an indicator of how much they care about diversity and inclusion. Ideally, these groups provide a place for employees with similar backgrounds to connect with each other and affect change in the workplace. Sometimes however, those tasked with leading these groups say they feel exploited and burnt out. Others have told the author, "they feel like ERGs undermine the efforts of a union." Let's start with the DEI component, are ERGs examples of DEI progress?
Dr. Alexandria White: Yes, they are examples of a component of DEI progress. There's still so much work to do so companies can't assume that, oh, I have these ERGs, check box. There's still work to do on this DEI journey. It takes more. It should be companywide initiative. Harvard Business Review actually did a piece on women and minorities how they're being taxed with leading these ERGs. How do you get the people from the majority groups to get involved in these initiatives and not just push it on to underrepresented groups? Some companies are tying compensation to involvement to DEI initiatives but what if that's not an option at your company? And so how do you get the majority groups, men, involved in DEI, and ready to get in the trenches to do the work? You link ERG participation to career growth. Having multicultural competency, attending meetings, attending ERG programming allows you to flex your multicultural competency muscle and being multicultural competent can be advantageous for professional growth.
Then you amplify the successes of the ERG at the company. For example, a new “Black at agilon” ERG has been instrumental in recruiting new members. And so now their programming has been amplified company wide. This month, they are inviting Ron Williams, Chairman of the Board of Directors for agilon and an operating advisor at CD&R, for a company-wide town hall. Plus all the members of “Black at agilon” ERG will receive his book, a great way to amplify the successes and the message of the ERG.
And then of course, engaging with those executive sponsors. Every ERG should have a lead, as well as an executive sponsor. I like to call them ERG champions, and that could be someone in the C-suite, that could be a CEO, CHRO, someone who can advocate. Last but not least, measure the success of the ERG. Tout it internally and externally. Talk about projects, promotion from ERG members, how are they leading throughout the company? And so that is how you can get the majority group involved so that all the work and all the extra things that go with ERGs, that they can get more majority involved.
Chris Riback: Let me ask you about what I think some of the pushback or some of the questioning around ERGs would be. One area of questioning quite obviously would be, are internal groups for women or underrepresented employees still needed? You know that people will ask that and so I'll give you a chance in a second, please, to knock that one out of the park. But in addition, in some way, do the ERGs make some of these very important efforts, in any way feel like a side project as opposed to center of the plate? As I kept listening to you, I was thinking more about your example of the clubs that you were are a part of at university and you were part of the jogging club. That's excellent. That's important thing to be doing. It's great for your physical health, mental health, makes you a better student, I would say most likely.
Dr. Alexandria White: Yes it did.
Chris Riback: But not center of the mission of the university. And so my kind of two pushback questions, are internal groups for women or underrepresented groups and employees, why are those still needed? But two, is there a risk that ERGs somehow make what are extremely important efforts instead, feel like a project as opposed to something center of the plate?
Dr. Alexandria White: Chris, ERGs are needed. Everyone deserves to have the majority experience. What does the majority experience look like in companies? For women, it could be sharing stories. Sharing stories of microaggressions, sharing stories of looking for a mentor, sharing stories of how to balance being a mother, a parent, a professional and sometimes a partner or a wife. And so having an ERG where like-minded or people who have similar experiences can discuss tactics, resource and provide advice is essential. And let's talk about those allies, those men who also want to attend ERGs. They might have a partner, they might have a wife or they might just want to understand how to be a better colleague and or supervisor to a woman. And so having these spaces, whether virtual or in person can add to retention.
And so you talk about what's the benefit? Let's talk about the Great Resignation. A common problem where people are leaving companies is they are not feeling connected to companies. Vocon survey shared what people are looking for in their office experience. 65% said building relationships, 64% said socialization and then 53% said linking it to their company culture. ERGs can do all of the above. Having people share their experiences, having professional development opportunities, these are all reasons that ERGs are needed today. And so does it really help employees or companies? It helps both – Helps employees stay there and it helps companies not have to continue to deal with the #GreatResignation.
Chris Riback: Well, that's the central question of this conversation. Did you just answer it? Whom do ERGs really help, employees or companies? The answer is both, huh?
Dr. Alexandria White: Correct.
Chris Riback: An additional point that you made that I just don't want it to get lost, that it can help make someone a better colleague. It can help make someone a better manager. And that changes the framework slightly, because when I asked earlier that kind of softball pushback question, are internal groups for women or underrepresented employees still needed?
Sure, the first perspective might be from the perspective of women, from the perspective of underrepresented employees. But you also have been really clear, and I don't think at the point should get lost, of the benefit to people who are not women, who may not be underrepresented employees, the benefits for them of engagement as well. Am I hearing you correctly?
Dr. Alexandria White: Correct.
Chris Riback: Yes, there's a lot there. As long as you're busy dropping wisdom, why don't we get to that part of the conversation that I like to call Dr. White's Wisdom? I feel like this is a conversation where we really need you as well for tactical tips. From a tactical point of view, how can companies create and run effective ERGs?
Dr. Alexandria White: Well, I always like to start with getting input of others. Survey your workplace to determine which ERGs are needed. Identify ERG champions, that's people who are passionate about a particular ERG. I think of the VetNet community at Google. It's a network, a large network of community of people who served in the military or military families and supporters. And so those ERG champions, as you mentioned before, they don't have to be a part of the particular demographic of the ERG. They could just be a champion, an ally, someone who wants to help with programming.
Next, create a mission, values and goals for ERG. It starts with simple goals. I tell ERG leaders and executive sponsors all the time, "Let's start small, two to five goals, get the input of members for the ERG and then we'll go from there. Track progress and impact." It goes back to how you can amplify the successes of the ERG. One of my favorites because I'm all about people getting compensated for their work, consider compensation and other benefits for ERG champions. There's a company right now that's paying $10,000 a year for ERG leads. We know that all companies might not be able to do that, but let's reimagine how you can compensate those ERG leads, stock options, discount on parking pass, extra time off. There's other ways to compensate those people who are putting in the work to ensure that your company is a more inclusive space.
And then of course we need allies, we need people who are going to advocate, who are going to listen and educate themselves about an array of lived experiences. And so when you create an ERG and an effective ERG, emphasize that all are welcome. It's important to have the people in the room to listen and understand so they can be a better colleague to a veteran, they can be a better colleague to Asian-American Pacific Islander colleague. They can be a better colleague to someone who has a disability. And so emphasizing that this is just not for this particular demographic, however, we want to hear their lived experiences, but we want to welcome you into this space as well. Those are my six: survey your workplace, identifying ERG champions, create mission, value and goals for ERGs, track progress and impact, consider compensation or other benefits and welcome everyone to your ERG.
Chris Riback: And that is how to make ERGs work for everyone. Alex, Dr. White, thank you.
Dr. Alexandria White: Thank you so much, Chris.
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit workingcapitalreview.substack.com
We know the headlines: Inflation is the highest in 40 years, climbing 7 percent last year. Stock prices and corporate debt have been running incredibly high. Unemployment, meanwhile, is incredibly low, while the U.S. economy grew 5.7 percent in 2021, its fastest full-year clip since 1984. The wealth gap, meanwhile, continues to spread.
To fight these realities – especially inflation – the U.S. Federal Reserve Bank will soon start unwinding their two most significant policies that drove extreme amounts of available money at rates that made that money virtually free to borrow since 2008 and the Great Recession and through the Covid pandemic: They will stop the extraordinary experiment of mass buying of U.S. Treasuries known as Quantitative Easing, and they will raise interest rates at least three – perhaps 4 or more times – this year.
The American easy money party is over, and it’s time to clean up any mess.
So how did this party get started? Why did it go on so long – long after the first signs of rising inflation arose last year? Who made the decisions and, perhaps more centrally, why is the U.S. central bank, comprised of unelected governors and bank presidents, so opaque? What happened behind closed doors?
Christopher Leonard has the inside story – and he tells it masterfully. His book The Lords of Easy Money: How the Federal Reserve Broke the American Economy, is a clear telling of Fed policy and the key personalities behind it: people like Jerome Powell, Ben Bernanke, Janet Yellen, and one you may never have heard of, Thomas Hoenig.
About Leonard: He is a business reporter whose work has appeared in The New York Times, The Wall Street Journal, Fortune, and Bloomberg Businessweek. He is the New York Times bestselling author of The Meat Racket and Kochland.
Transcript: Christopher Leonard
Chris Riback: Chris, thanks for joining. Really appreciate your time.
Chris Leonard: Thanks for having me. I appreciate it.
Chris Riback: So we should start, I am so sorry you've been getting such bad press on this book. The FT named it one of the books to read in 2022, and then The New York Times review, "A fascinating page-turner made from unlikely subject, Federal Reserve policy, Leonard, in the tradition of Michael Lewis, has taken an arcane subject rife with the risk of incomprehensibility and built a riveting narrative in which the stakes couldn't be any clearer." Chris, I'll tell you what, I'll take it easy on you in this conversation so you can try to dig out of this hole that you find yourself in.
Chris Leonard: Thank you.
Chris Riback: Sound fair?
Chris Leonard: Yes, sounds fair.
Chris Riback: Why do you think it's getting that kind of reaction?
Chris Leonard: Oh, that's a great question. Well, OK, a lot of this has to do I think with what drew me to this topic. I fell into this by accident when I was reporting a different project back in 2016. And one of the great benefits and privileges of this job is I just get to meet all kinds of people from all walks of life. And I met this really brilliant guy who's a trader in financial markets, hedge fund kind of guy. And he was really, really concerned with what he was seeing in the markets. And he spent hours walking me through what he was seeing and describing how the Federal Reserve had really embarked on an unprecedented and experimental path. And so what he was saying was shocking to me. And that's what got me reporting on this. And I guess I would humbly say that maybe the reason it's getting a little bit of reaction is that this story really hasn't been told of this critical part of what happened over the last decade in our economy. I don't feel like it's been written about deeply enough.
Chris Riback: Yes, I totally agree. It hasn't been reported on deeply enough and the connection of the reporting with the storytelling, in my opinion. That's what I think hasn't been completed. Also just very brief side note, you just mentioned that source, 2016, I noticed in the acknowledgements goes by the initials ZC, I think you wrote. You're not able to name the source. I just wanted to give you the chance to break news right now, reveal your source if you want to.
Chris Leonard: Well, listen, I've got no illusions, this isn't Deep Throat or anything. But I find it very, very, very valuable to be able to have conversations with people in strict confidence. And people are very comfortable talking with me when they know that they can just be anonymous and just be honest and tell me what's going on. And so that's why I agree to talk to somebody off the record anonymously. I don't say who they are and I consider it's kind of like very discreet country club membership. There's no membership rule.
And in this case, I think this is really important, and maybe you've seen this too, but when we talk about the Fed and Fed policy, there are kind of these two spheres of people that talk about it. One is the sort of economist PhD set that frankly really runs the Fed. And then you got the folks who are actually operating in the wake of what the Fed's doing on Wall Street, the traders, the hedge fund, the private equity people. And you can get a really good view of what's happening when you talk to both groups. And again, to talk to that kind of Wall Street group, it helps to have candid, off the record conversations with people. So that's what's driving that.
Chris Riback: Well, no surprise you didn't want to reveal the source right now. And yes, you outlined that tension between the PhDs and the Wall Street types as well the business executives out in the field. I would almost add that's another leg to the stool. So we need to get into, obviously, Thomas Hoenig. I think it might help to start at the end and then let's go back to the beginning and you'll explain how we got here.
Chris, how much trouble are we in? Your book ends fairly ominously. Quoting you, "This fragile financial system was wrecked by the pandemic. And in response, the Fed created yet more new money, amplifying the earlier distortions. The long crash of 2008 had evolved into the long crash of 2020. The bills had yet to be paid." Where are we now?
Chris Leonard: Well, that's actually a great place to start. And I will break some minor news, the original title of this book was “The Long Crash.” But that takes some time to explain what “The Long Crash” is. And it really gets at what this book is about, which is that the crash of '08, in many significant ways, never ended. And what this book really focuses on is the revolution that started in November 3rd, 2010, where the book opens with our main guy, Thomas Hoenig, who's making the most consequential vote as a senior member of the Federal Reserve that he ever made at that time. And he was voting on an experimental and unprecedented program at the Fed called quantitative easing. And to just give you the headline, in the first 100 years of its existence, the Fed steadily increased the pool of base money in our economy, which is the set of high powered dollars that only the Fed can create the monetary base. The Fed gradually increased the size of that pool to about $900 billion, slowly but surely. And then in a few years, between 2009, 2014, the Fed prints $3.5 trillion.
So that's three and a half centuries worth of money printing in a few years. And that money's not a neutral force. It had tremendous effect throughout our financial system, and the biggest effect was to push more money into riskier investments to pump up asset prices like the stock market and the bond market. Those are the kind of distortions I'm talking about that you just mentioned, that the Fed has been really assiduously and patiently pumping up these asset prices for years in hopes that it would eventually create economic growth. And my conclusion in this book is that the back end of that deal, where you get actual economic growth or productivity growth for wage earners was very, very weak and disappointing. But the asset bubbles that were created, the record breaking stock prices, the record breaking level of corporate debt, leveraged loans, collateralized loan obligations, that was a super-heated market that the Fed created. And that's where we are today, is in this terrible dilemma whereby if the Fed is going to ever tighten the money supply to fight inflation, for example, these asset bubbles prices will have to correct. So, yes, we're not in a great position. We're in a fragile, volatile and worrisome position right now.
Chris Riback: And going into that vote on November 3rd, 2020, and for context -- November 2nd was the election, right?
Chris Leonard: It was the 2nd of November, 2010. And I guess if I was writing a screenplay, this is how I would've written it. It was poetic in the sense that on November 2nd, it's the first midterm election of Barack Obama's presidency, the Tea Party sweeps into power. And, as we know, the fiscal authorities, the democratically controlled institutions in our country like Congress really grinded to a halt. And so over the next decade, I think it is very fair to say whether you're conservative or a liberal, our democratically controlled institutions like Congress did not step into the breach and solve some of the very deep dysfunctional pathologies that led to the crash of '08. For example, the too big to fail banks that caused that crash are now even larger and less able to fail. That's just a tiny example. And it was in the shadow of that, the next day on November 3rd, that the Federal Reserve, which of course is insulated from democratic pressures, steps forward and says, "Okay, we're going to become the primary engine of economic growth."
And that's what's so different about that vote that happened November 3rd, 2010, is this wasn't the Fed managing a crisis. This wasn't the Fed being the lender of last resort during a panic. This was the Fed saying, "We're going to step forward to boost overall economic growth by printing money on Wall Street." Something that had never really been done before. And the character you've mentioned, Thomas Hoenig, not coincidentally, at that time on the Fed's all important policy board, the FOMC, he was the longest serving member. He'd been at the Fed for 32 years. He had seen what had happened when you let money remain too loose or easy for too long. He'd seen the inflation of the '70s, the asset crash of the dotcom bubble, the asset crash of the housing bubble, and he really tried to stop this program. And the book gets into how he tried to stop it and ultimately failed.
Chris Riback: So one of the big judgements that one must make in terms of being a hawk or a dove around quantitative easing, is around unemployment, of course. Was an unemployment rate of 9.6% in 2010 too high? Was that basically an emergency or not? And you just indicated that one of the views, Hoenig's view, your view is that it might not be where we wanted it but it wasn't an emergency. It wasn't an emergency that required that level of intervention. Inflation would be another area. How high was the risk? And how problematic is a little inflation, and how do you define what is a little? Is it 2%? Is it 4%? Hoenig called it a deal with the devil, is how you describe it. Was it?
Chris Leonard: Yes. Absolutely. And we're paying the price. And the price is coming due now. And incidentally, when I wandered into this book as I described I, A, didn't really understand quantitative easy, to be totally blunt. And B, had a great deal of sympathy for the idea. There's a good case to be made that 9.3% unemployment is an emergency. I'm sympathetic with that view. But as I reported it more and had the luxury of going back and reading through the actual debates that happened inside the FOMC. As you know, those debates are transcribed and then released after a five year delay, which means they don't get read to the level they should, because thousands of pages are released at a time. But when you look at those debates, first of all, this key moment in 2010 when unemployment was high, I say it's not an emergency for a couple of key reasons.
First of all, everybody understood it was going to be a long, hard slog out of the whole of the financial crisis. Nobody expected that unemployment was going to be 5% by 2010. And secondly, the economy was starting to recover. Weak, fragile, potentially reversible? Absolutely. But as Hoenig was fervently pointing out in 2010, the economy was starting to grow again, and the Fed needed to display a little restraint and let the economy grow and adjust to what the Fed was doing. And Hoenig wasn't arguing, "Let's hike, interest rates up to 2, 3%." He was saying, "Let's keep them relatively flat, or maybe over time gradually hike them to 1%." Very mild.
But the plan that was chosen instead, of course, was pump $600 billion worth of new cash into the Wall Street banking system to push the banks toward lending or investing in whatever they could. And when he said, "It's a deal with the devil.", it's fascinating to me, the argument he was making had three parts. He said, "First, you're just going to in enrich the very rich. We all understand that this program is only going to stoke asset prices, which will benefit the rich. Secondly, you're going to create massive new levels of risky debt. We're going to pump up asset prices to levels that'll be unsustainable and dangerous, like with the housing bubble. And third, once you start printing this money, you're not going to be able to pull out. You're going to be stuck."
Chris Riback: Can't stop.
Chris Leonard: Yes.
Chris Riback: The new normal.
Chris Leonard: And he was correct on all three of those points.
Chris Riback: So the pushback, the vote in 2010 was 11-1. That's the central thesis of the tension that he feels personally and internally, and he brings it home with him and his wife sees it. And what a great quote you have, "How stressful it is to be a lone dissenting vote in a matter of such consequence." And as a reader, you feel the human emotion that he feels in these decisions, the weight of these decisions. And yet there is not unreasonable pushback. You mentioned some of it. You're not insensitive, you said, to a 9.6% unemployment.
There was some stat, I think it was the stat for that, where some intervention was going to reduce joblessness by 750,000 jobs, which wasn't going to make a complete difference, but certainly makes a massive difference to each one of those 750,000 people, as you point out. Some of the other pushback I think would be that yes, inflation is going up now, but we did have a number of years without high inflation. That yes, unemployment has remained low. The pushback that I've seen, maybe the most persuasive to me is: How do we know that Hoenig's counterfactual would have left us as good or better off? What are some of the arguments to the pushback to Hoenig and to what you argue for?
Chris Leonard: OK, great points all. And first of all, yes, I do point out in the book, you're right, when they debated this first round of quantitative easing, they thought it would only lower the unemployment rate by 0.3% or 750,000 jobs, which big picture isn't much. But I was a print reporter in St. Louis at the time and understood vividly how important a job is. We had people clinging to the middle class at the time. That really matters. So there's a case to be made. And Bernanke, the chairman of the Fed, Ben Bernanke, made this case again and again and again, there is a risk to doing nothing, and it is better to act than not. And again, as I said, I was very sympathetic to that argument going into this book.
Let me tell you where I really hit a hinge moment, when the subtitle of my book changed from How Quantitative Easing Changed the World to How the Fed Broke the American Economy. And to me, the moment was when I read the debates later in 2012, when they do the third round of quantitative easing, QE infinity, the largest round yet. At that time, the debate within the Fed was even more intense than when Hoenig voted no on that first round of its kind of quantitative easing in 2010. And first of all, I got to point out then, the vote was 11-1, but there was intense dissent inside the FOMC. It was just that a lot of the people against it were not voting members. But in 2012, you see people like current Fed chairman, Jay Powell, Dallas president Richard Fisher, Betsy Duke, Fed governor from Wells Fargo Bank, Jeremy Stein, a professor at Harvard, all of them making this argument that we are only going to get very small, short-term gains from this policy if we do another round of quantitative easing. But we're at the same time going to be piling up long-term risks.
Jay Powell spoke about this more starkly than anybody. He said we are elevating asset prices. If we continue to do this, we are going to have, quote, "a large and dynamic event." Which is sort of polite speak for a crash. "And we're not going to be able to handle it." And you also had people like Richard Fisher pointing out categorically this program will benefit the richest of the rich, the private equity firms, the hedge funds, the stock speculators. Those are the people who are going to benefit. People who earn wages are going to benefit far, far less.
And so there was a knowing push into this territory to inflate these asset bubbles on Wall Street, to build up the systemic risk for very small short-term gains. And I think that that is unwise policy. In fact, I'll go so far as to say it was hubristic. That it was an ability that we see time and time and again in different institutions to look like you're doing something in the short-term and taking action, when you're really delaying the inevitable or piling up risks that won't eventuate until down the road.
Chris Riback: And that hubris, you're really speaking largely of Bernanke.
Chris Leonard: Yes.
Chris Riback: And the characterization that you give, the reporting that you've done about the politicization of the internal workings of the Fed. Particularly, the way that he politicked and helped maneuver the Fed governors.
We all know that there are presidents of the Fed banks around the country, but they don't all sit on the FOMC committee, they don't all vote. But all seven of the Fed governors do vote. And you point out how Bernanke really would lobby and work those Fed governors to make sure that he had the votes. He did not want dissent.
Chris Leonard: That's exactly right. And it was an amazing story to me. So the policies we're talking about are set by the Federal Open Market Committee, or the FOMC. It's the most powerful policy board within the Fed. It's run by the Fed chairman. So that group is comprised of 12 voting members. Very importantly, seven of them are always the Board of Governors at the Fed, who are the sort of political appointees that all work in one office in Washington, DC. So you've got seven governors who vote, and then you've got five regional bank presidents who fly in every six weeks to vote. The governors always have the majority. And you can see it that the outliers and the dissenters always tend to be, or always are, the regional bank presidents who fly in, and then one or two might vote no. If two vote no, that's a big deal.
And it really hit home to me why this is when I interviewed that former governor, Betsy Duke. And she just explained to me how Bernanke will lobby the governor's on a one-on-one basis between meetings. So they're not having an actual meeting of the governors, but it can happen one-on-one, that's what gives the chairman so much power. And Betsy Duke told me on the record how they basically, as governors, all come to agreement on how they're going to vote before the meeting even happens. So that's why the regional bank presidents are left out in the cold and you can allow one or two of them to dissent without changing anything. And then you feed into that this culture that really prizes consensus. There's this key idea that you've got to have near unanimous votes inside the Fed so Wall Street will have full confidence-
Chris Riback: Full confidence in the institution, otherwise it'll demonstrate institutional weakness.
Chris Leonard: That's exactly right. But it disguises the fact that this committee is still made up of human beings and they are making policy decisions. They are not just PhD economists solving math equations. They are making policy decisions. And I'll tell you what, they operate on hunches. Ben Bernanke in 2012, this is one way he would politic, he'd go out in public to this big symposium in Jackson Hole, Wyoming in August and announce something. And he did this in 2012.
He gives this speech saying, "Hey, quantitative easing's been working like a charm." I am paraphrasing, the speech is public, it's in the book. But he says, "QE is working great. I think we're going to do more." And then in private, in the FOMC just weeks later he says another round of quantitative easing will be, quote, "a proverbial shot in the dark. And that we don't understand what's holding the economy back. We don't understand how our tools work or what this is going to do, but we need to try it anyway." So the idea that there's just this consensus all the time really disguises the fact that it's a policy making body.
Chris Riback: And as you pointed out around that Jackson Hole speech, and I think there's another one that he gives later, maybe it was one that Powell gave later, that by making the announcements in advance in a public forum like that, it gives a signal to the markets that this is going to happen. It prices that activity into the activity and into the market already, at which point, if X number of months later the FOMC were to vote against it, they would be in a sense almost unofficially changing policy that was already baked into the market.
Chris Leonard: That's exactly right. And they call it the announcement effect. And that's one way Ben Bernanke boxed in the numerous critics of these policies.
Chris Riback: Chris, as we conclude, I want to go back to your summation of Hoenig's November 3rd, 2010 dissent, where he said in short, "Once the Fed..." And we've talked about at this a bit, "Once the Fed started this program, it would create so many distortions and side effects that it would almost certainly not be able to end the program without causing massive instability or even a crash." That's kind of the center of Hoenig's dissent and his concern.
The last time the Fed tried to end quantitative easing, it didn't go so well. That was late 2018, early 2019. And you talk about the “Powell Pivot.” They backed off. As you know, as we're talking today, the Fed, Jerome Powell, they've signaled that quantitative easing is coming to an end again, interest rates are set to rise. This is all being done, of course, with the hope of a soft landing, controlled unemployment, reduced consumer price inflation and no bubble burst of asset prices. As we think about trying to do this soft landing with controlled unemployment, reduced consumer price inflation and no bubble burst of asset prices, Chris, how likely is a smooth landing?
Chris Leonard: Oh boy. OK. First of all, I did not come to this book as some kind of monetary hawk. Let me please make that point. I don't take joy in talking about this and I'm not some hike interest rates for the sake of it kind of guy. To me as a reporter, having been looking at this, the chances that we will have a soft landing is inconceivable. And it's really hard to lay it out so quickly. But as you talked about, they tried to, quote, "normalize" for years. And that culminated in 2018, 2019. But they are facing a tremendous problem if they ever try to raise interest rates or tighten the money supply. And this is how I would characterize it. The entire goal of 0% interest rates and quantitative easing, which were unprecedented in scale, just to put this again in context, interest rates had brushed up against zero a couple times in the past, we kept them pinned at zero for seven years during the 2010s, an entire ecosystem built itself oriented around a zero rate. And that has consequences.
I describe it as squeezing toothpaste out of the back of the tube. The Fed by intentionally drawing down yields on long-term bonds was squeezing investment in what we call a search for yield. It was squeezing loans out anywhere they could find yield, risky corporate debt, risky leverage loans, Tesla stock, which can grow more in a month than there's a total value of Ford and GM combined. When the Fed does what it did with these easy money policies, it pushes money out into these risk assets. This is not controversial. They knew what they were doing. The flip side of that coin is when you raise rates and when long-term yields rise, the mathematical equation changes and investors can withdraw from those risk assets. I describe it as like a seesaw. And so the money will start flowing out of the risk assets and back into safe havens as the Fed raises rates and yields rise on long-term bonds. There's no way to tighten the money supply without a downward correction in asset prices.
And it follows logically, the Fed knew it is pumping up asset prices for years. This is in the transcripts. They knew that's how the program would work. And we could have had a soft landing if the Fed had the luxury of maybe seven years to unwind this insanely gigantic balance sheet. Again, I sound hyperbolic describing this. The Fed's balance sheet was $1 trillion in '09, it's north of $8 trillion now. And $3 trillion of that came during the COVID crash, which by the way is when bills were coming due on the previous years of asset inflation. But yes, the Fed's hand, unfortunately for all of us, the Fed's hand is being forced and it's going to have to unwind this stuff much more quickly than it would want to.
Chris Riback: Yes. What did Thomas Hoenig tell you about the book?
Chris Leonard: Well, he is such an interesting guy and he's a big part of why I wrote this book. He's got this sense of probity, is how I would describe it. With all of my sources, I gave them a chance to fact check the material about them in the book. And his response was to correct mistakes he found. His dad leased a shop, he didn't own the shop kind of thing. I think he likes the book, because really my goal was to shine a light on how principled I believe he is and what a principled stand he made. But I don't know, it's been very official. I still call him Dr. Hoenig. And I know that since the articles and the book has come out, he's gotten a lot of calls from central bankers around the world, which I think is a great thing. I think he has a lot of wisdom that he can share with people.
Chris Riback: Chris, thank you. Thank you for the conversation, and thank you for the book, which is beyond a great read. It's a really important read. Thank you.
Chris Leonard: Thank you. Thanks for the time.
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit workingcapitalreview.substack.com
CD&R Co-President Dave Novak (left) hosts Professor Nien-hê Hsieh (right), the Joseph L. Rice, III Faculty Fellow at Harvard Business School, for a discussion about the cultural shifts around business and purpose.
As Founder, Chairman, Chief Executive Officer, and Partner over his three-decade career at CD&R, Joseph L. Rice, III shaped an institution grounded in a set of core values with integrity at the center. Joe spent the major portion of his business career in private equity and is recognized for his emphasis on ethical decision-making.
The Joseph L. Rice, III Faculty Fellowship is supported by a fund CD&R established in 2012 (The Fellowship Fund) to honor Joe’s contributions to the Firm and the private equity industry. The Fellowship Fund supports academic activity focused on the study of values, integrity, and leadership in business.
Professor Hsieh is the third HBS professor to be a Joseph L. Rice, III Faculty Fellow. In addition he is the Kim B. Clark Professor of Business Administration at HBS and Director of the Edmond J. Safra Center for Ethics at Harvard University. His research concerns ethical issues in business and the responsibilities of global business leaders.
Transcript
Dave Novak: Welcome to our conversation: Moving forward with purpose – leadership in the next chapter. My name is Dave Novak. We have the privilege of exploring some of the important cultural shifts around business and purpose with Professor Nien-hê Hsieh. Professor Hsieh is Joseph L. Rice III Faculty Fellow in the General Management unit at Harvard Business School. He’s also the director of the Edmond J. Safra Center for Ethics at Harvard. Ethics and purpose in business is a complex topic, and one that has become increasingly important as leaders are called to engage on social and political topics in a more active and meaningful way than they ever have in the past. This need has become even more acute during the pandemic, as people’s relationships with businesses have been questioned in ways they haven’t before – as customers, employees, suppliers, managers, and leaders.
Professor Hsieh’s research focuses on ethical issues in business and the responsibilities of global leaders. It centers in some ways on the question of whether and how managers ought to be guided not only by considerations of economic efficiency, but also by values such as freedom, fairness, and respect for basic rights. In a prescient 2018 research paper titled, “The Social Purpose of Corporations,” Professor Hsieh explores the question, what is a corporation really for? Now in 2021, many companies are wrestling with this very concept, and we’ll get into all that in our discussion today. But before we start, Professor Hsieh, how did you become interested in studying ethical issues in business?
Nien-hê Hsieh: Thanks so much, Dave, for that introduction. And for that question. Before I answer it, if it’s okay, I just wanted to mention how grateful I am to be here and also how great of an honor it is to have been named a Joseph L. Rice III Faculty Fellow at Harvard Business School, given the work and reputation of your firm.
So it goes back in some ways to the global. My mother was born in Japan during World War II. My father was born in China during World War II. And they met each other when they were studying at the University of Chicago as graduate students. And as you may be familiar, it was not common given the war, the history between the two countries, for someone from Japan and for someone from China to fall in love and be able to get married. But what enabled their marriage was a real sense of common values. The idea that there were certain values that unite us. There are certain ways that we can behave that are about treating each other with a degree of respect and equality that would transcend historical and cultural and national differences.
And just to sort of interject how personal it was, my father’s uncle on this Chinese side was actually a student at HBS in 1924. And he had gone back to China and was killed by the Japanese during the war. So these tensions and conflict run deep. And yet the fact that my parents could get married was, I think, a signal to my sister and myself that what we should really strive for is looking for those ethical values that can sort of bring us together. In that sense, ethics has always been there in terms of my life. The business side ironically comes out of the fact that I grew up in an academic family. And growing up in an academic family, it’s like an extension of school. And the world has a certain rhythm, where often the summer, things start in September.
So it really just feels like an extension of school. But the more time I spent looking outside of that academic life, I was just amazed at the diversity of activity that people were pursuing. and how much of that activity was really in the form of business. And how much of the needs that people were meeting through their work and business wasn’t really planned. It happened to the market, to people buying and selling. And so the fact that we can meet some of our most basic needs as human beings – food, clothing, shelter – through this kind of coordinated, but unplanned activity, if you will, really caught my attention. And so then in college, I studied economics, and sort of got into that. So then that’s where these things came together, because on the one hand, there are a lot of great things that can come out of business and global capitalism. But on the other hand, going back to the values piece, there can be some real challenges. And so how do we, on the one hand, really achieve what is great, while at the same time avoiding some of those challenges and harms and downsides. And making sure all of that’s done in a fair way is kind of what got me into thinking about ethics in business.
Dave Novak: What do you think accounts for the growing interest by corporations in considering potentially the trade-offs between the traditional economic efficiency model that has really guided corporate decision-making for many decades now, and this broader purpose, this corporate good?
Nien-hê Hsieh: So I think we should distinguish between sort of what you might call two ways in thinking about purpose or responsibility in the context of corporations. And one is what you might call the specific purpose or the specific conception of the responsibilities of a specific corporation. The other one is I think this more general question, which you’re getting at, which is certainly related, which is about the purpose of business and corporations more generally – contrasting that with the economic efficiency view that has been dominant for some time. I think a lot of what my sense is in talking to people, whether it’s students, business leaders, and also people outside of business, is that for the first one, thinking about a purpose in terms of a corporation or a firm or a purpose in a business is this real sense for people to find some kind of meaning in their lives. That they’re part of something bigger.
That there are engaged in an enterprise that isn’t only about what they want and what they want to do and their own success, but the idea that they’re part of a broader enterprise and a broader mission that’s contributing to something bigger than themselves, and that they can take that mission from elsewhere. Now, I don’t know where that is coming from. I think there’s lots of sources for why that might be on people’s minds. I think part of it is that maybe some jobs feel less meaningful, and so there’s a need to sort of put it into a broader context to help make sense of it. I think people maybe are looking for community and other spaces where they might not have gotten it before. So that sense of purpose, I think in the first sense, is definitely there.
I think we see that right now – the whole idea of the Great Resignation. The Great Resignation is a response to people thinking about, in the face of COVID, what do I really want to do with my life? And, I know it’s hard for businesses, and I appreciate that, but in a way that was already there before COVID. And the whole idea of thinking about the purpose of the corporation, that in a way was, I think, to meet people where they were and sort of provide that sense of purpose and belonging, that you’re doing something that’s bigger. And I know that’s, in talking to a lot of people, that was a big push for that. So I think that’s the way to understand that first sense of an increase in thinking about purpose and responsibility.
The second one, how do we think about the purpose in a more general sense, like the social purpose of business, or, the role of business in society, the role of corporations in society and the pushback on the economic view? That I think is the result of the recognition that the economic view had some potential downsides. So if we go back to the Economics 101, the view then is that, well, if we all pursue our own individual self-interest or pursue profits in the context of the corporation, and we do that in a way that’s respectful of basic institutions and laws – we don’t engage in outright fraud; we don’t engage in sort of outright theft – in doing that, ultimately everybody benefits in society. And so we have an overall social welfare that is increased. That’s kind of the view that I think drove a lot of that economic thinking. But as people have seen over the last number of years, that didn’t seem to work out so well for a lot of people.
Dave Novak: As long as institutions do no harm, it’s all fine...
Nien-hê Hsieh: And you just pursue yourself interest... and there are lots of ways that it hasn’t worked out well. So, again, going back to economics, a standard one is externalities. There are lots of negative impacts that aren’t being mitigated because of institutional issues, operating in institutional environments that aren’t able to sort of mitigate those externalities. Pollution is the natural one that people think about. Inequality – letting the market run on its own doesn’t necessarily lead to more equal outcomes. That’s not a necessary feature of markets. So that’s another way in which things happened. And, technological change, again, if it’s market driven, can lead to all sorts of dislocations and disruptions. And for some things, transition isn’t hard? We can change the price of goods and services. Capital can move pretty quickly if it’s in various forms, not always.
But , jobs, right, moving from one job to another, there’s a lot of friction there. That’s not something that’s easily done. Moving geographically, that’s not always something that’s easily done. And so I think people come to realize that the idea of where letting things run on their own is going to ultimately benefit everybody, that’s not entirely the case for a lot of people. So I think that’s sort of, what’s pushed a lot of people that I think about, well, maybe we businesses then, or corporations should have a different mandate to actually think about the externalities, to think about equality, to think about technological change in a way that sort of makes up for those shortfalls.
Dave Novak: Let me just grab on that for a second. You have a bunch of traditionalists or people who’ve been around a while or just believe, that’s capitalism – we’re comfortable with some lack of equilibrium of different outcomes for different people, but overall focusing on profits, letting the market drive winners and losers is OK. In the long run that creates the most growth, the most jobs, in which of course there’ll continue to be winners and losers, but overall that grows the pie the most. How do you respond to that?
Nien-hê Hsieh: No, that’s great So there are two ways to look at it. One is you can sort of say, look, it’s hard to know what the counterfactual would be. But I think there’s a lot of good empirical evidence to suggest that doing that there are alternative ways to do things, and it hasn’t necessarily led to the best outcome for all sorts of people. Look at the empirical evidence and economists have looked at this. They’ve looked at different economies over time, and how have they done things. If you look at the United States, for example, right, during the 50’s, there was a lot more regulation. There was a lot higher taxes, and yet overall the economy seemed to be doing better for everybody than it currently was. So I think that’s one way of looking at the empirical evidence. For me as somebody who studies ethics, I am interested in focusing on two other answers.
The first one is, is maximizing the size of the pie the only thing we should be thinking about. Shouldn’t we also be thinking about how the pie is divided? That’s sort of one kind of response that we could make. The other one, and this is something that’s really evolved in my own thinking over time, being at the business school, engaging with practitioners, is business ultimately is a human and social activity. It’s not done in this kind of vacuum of pure self-interest and maximizing social welfare. It’s done in the context of team members at a firm. It’s done out of relationships with other people. It’s done in terms of thinking about how to integrate one’s own values with one’s business practice. And if we take that perspective, I’m not sure we would say that, oh, in other parts of our lives, if we just sort of pursued our own self-interest and everything would be okay. I mean, certainly that’s what I’ve learned in my marriage. Or having children. And so once we embed, if you will, business activity into our broader lives, either as individuals, community members, family members, society, it becomes harder, I think, for people to sort of have this economic view, on the one hand, and make that cohere with everything else. And so that’s for me, the way that I like to think about responding to that issue.
Dave Novak: I think that’s a really good response. And the truth is it reflects reality. Everybody can relate to that answer. When you think about companies that do this well, exhibit good responsibility, versus those that don’t, how important is culture – people all adhering to and getting behind a set of shared beliefs versus something that’s written down on paper?
Nien-hê Hsieh: It’s a great question. I think it, so in addition to those things, I would also add just a pure compliance model or something like that, too. I think culture certainly is really important. If we understand culture is not just what’s written down on paper, not just as sort of what’s prescribed in terms of compliance, but culture really is about how people relate to one another and sort of the motivation that they have, then clearly culture is massively important in these sorts of endeavors to thinking about what works well and doesn’t work well. I guess the other thing that I would add to culture, maybe this is part of culture, is leadership. Not just having a common culture, but it really is leadership. So not in that sense of being dictatorial, as you mentioned earlier, but in modeling behavior – demonstrating how do we teach and engage with one another. I think also in setting the culture and, thirdly, demonstrating care.
So it’s not just modeling the values. It’s not sort of helping to set the values. But increasingly, the more time I spend looking at organizations, I feel like a lot of it comes down to the question of people answering the question of, does the leadership – does this company – care about me? I think that actually really helps create an environment where people aren’t going to do things that might have bad effects. And there are lots of ways to demonstrate care. It doesn’t have to be as explicit or profound. But take something like worker safety. Safety – I think to create a safe work environment – is one of the most basic ways that we can express the fact that somebody matters. Their safety matters. And so it’s those kinds of expressions and recognition of other people that I feel like is really important to creating that kind of environment.
Dave Novak: We think about that a lot, and in the companies that we invest in today, worker safety is a clear area of that. But a lot of it goes to wellness and benefits, maternity and paternity care, mental health support, access to proper healthcare if you’re ill. All of those kinds of things we have found to be very important ways to demonstrate care. And it’s interesting because, I’m in the private equity business and one of the mantras for private equity for a very long time –Michael Jensen worked wrote about it decades ago and I studied it decades ago – it’s around aligning incentives, if you will. It was quite easy to fall into the pattern that if people are economically aligned, financially aligned, if employees make money, if the investor and owner makes money, all good things happen. I would never say that that is not important, and there are not strong correlation between aligned incentives in that way. This concept about shared beliefs and values – this concept about feeling cared for in a lot of different ways – is proving to be more and more important in aligning incentives for longer-term performance.
Nien-hê Hsieh: That’s interesting. And if I could add to that, Dave it’s an interesting point, because I think what’s interesting about, for example, wellness programs or thinking about benefits and things like this is, they touch on not just the incentive side, but also on this caring side. So in other words, I think there’s one view, which is quite prominent now, which is that, well, if you treat your employees better then they’ll work harder and feel valued. And so that you could think about it as an alignment of incentives. But if the only reason that a company is providing those benefits is to align incentives, I don’t know if it actually works.
Because then it’s just another version of the earlier story. And for it to work, it may have to have something else there. The way I like to illustrate this question, I sort of ask people about trust. And so one reason, Dave, you might trust me let’s say, or I might trust you is that people are reliable. That’s why we trust. They sort of do what they say. They meet certain standards. They’re on time, they’re reliable. That’s kind of one version of trust. But there’s another version of trust, which people often talk about, which is trust is goodwill. I trust you, Dave, because I believe that at some level you actually have my own interests in mind when you’re engaging with me. And that’s not a purely transactional reliance model. That’s actually a different kind of trust. And so, thinking about employee benefits and this, we can think about it in terms of the reliance, aligning incentives, but also I think for it to work has to appeal to this other sense of trust as well. I think what you’re saying is that finding that that’s more important, really kind of gets at that point.
Dave Novak: I’d like to build on this care and trust discussion, and take it in a slightly different, but I think very relevant direction, which is around increasing diversity, equity and inclusion in all of our companies. In some ways the U.S. and many parts of the world are going through a bit of a social reckoning, frankly. And, on the heels of a lot of the events of 2020, many institutions have focused on it in ways in which they haven’t in the past. I think we’ve learned that increasing diversity amongst your people is one part of it and a very important part. But then making those people feel like they’re included – that they have an equitable opportunity to be successful – is critical. And I think this whole concept of trust and care is particularly relevant about that.
I looked at some of your work and some of the things you said in the past about that traditional power relationship between manager and employee and how important that is around these areas is one aspect of it. But then as your workforce gets more diverse, the complexity around the power dynamic, which really changes considerably when you think about other factors – gender, race, ethnicity, sexual orientation, etc. And so I’d be really interested to hear you talk and reflect on that a little bit as all these companies that we’re investing in and dealing with, and you’re researching and consulting with, are thinking about how to improve this and get good at it.
Nien-hê Hsieh: I think you’re right. That’s one of the biggest challenges. And this comes back to our earlier point, which is that having a common culture can be very powerful. And we often don’t even think about the kind of culture that we have, if we’re all similar. And it’s sort of just very easy to engage with one another. And we refer to things, that’s obvious what we referred to, so that’s kind of a sense in which thinking about greater diversity equity inclusion in the context of culture can be challenging in some ways.
So we’ve been thinking a lot about this issue, particularly for me most recently, in the context of the tech sector, which has been facing this issue quite a bit, whether on issues of gender or race and ethnicity. And my sense is that to make this work, it has to be part of people’s performance metrics. Don’t get me wrong – I’m not saying it’s not challenging. But the places where I’ve seen it work are places where these are part of one’s performance metrics. Who are we recruiting? How are we thinking about promotion? Mentoring? And so once that’s done, that in a way you can tell two stories: One is that, well, this basically sort of makes it a part of people’s incentive system. I think that’s possible.
I think more, and more than anything else, it just signals people that this is important, and we tend to shy away from doing things that are difficult. It’s probably human nature. And so, it’s more just reminding people: Know this is important and because it’s difficult, it’s especially important to remind people that we have to think about it. Because otherwise it’s easy to forget. And similarly, all of us are encumbered by implicit biases. And so again, making things explicit is a way to sort of get around that issue there. It’s not really addressing your question of how do we get around something that’s difficult. But my own view is that even before we can get there, we just have to make sure that people aren’t shying away from it, and that people are actually thinking about it directly. Because once it’s there, and we just get over the fact that it’s hard to talk about, we just have to get over the fact that it’s something that we want to shy away from.
I almost feel like we have to, in thinking about this issue and wanting to make it work so hard, we’ve almost become too polite sometimes. We just have to just accept that it’s not going to be easy. We have to accept that it’s going to be hard, and we have to accept that mistakes will be made along the way. Because without doing that, we’re not going to get anywhere. And so in talking to people in this space, that’s sort of actually the place to start, I think.
Dave Novak: Thank you. Before we finish up, do you think post-pandemic questions like this will be more prevalent in the boardrooms, among senior management teams. Will it bubble up from employees, customers, etc.? What can we look forward to?
Nien-hê Hsieh: My hope is that the pandemic remind us that we can’t take these things for granted – health. Fragility of supply chain. The need for people to engage with one another. These are things that sometimes we take for granted. So my hope is that going forward, what this will spur is a conversation around how do we make sure that we have these basics in place, and they’re not susceptible to the next version of the pandemic, whatever it is. And I think it was very easy for us to sort of engineer and optimize in certain kinds of ways, by taking lots of things for granted. I think what this has done has made people realize there’s some things that we just can’t take for granted. And so how do we shore up those basic things to make sure that we can really have a thriving economy?
Dave Novak: Thank you for that. It’s interesting because it’s on the one hand given how dramatic the pandemic has been and the impact of it has been on all of us, not only in our business lives, but our personal lives, we’d like to think that people won’t forget, for sure. I think there’s a decent chance that it has a lasting impact on all of us. At the same time, in some instances, humans have shown to have short memories. I guess we will see. Thank you very much for your time. I really enjoyed it. Really appreciate it. The work you’re doing is clearly at the forefront of what most business leaders are thinking about today. And as we discussed, it’s really impactful, not only in the business leaders, but employees at all levels and in all companies. So I hope we can do this again sometime soon. Look forward to hearing about, as you figure out your new balance of in-person versus remote versus in Boston versus travel, how that works out for you and what you decide.
Nien-hê Hsieh: No, thank you, Dave. Thank you so much for this opportunity. And again, I’m grateful for the faculty fellowship named after Joseph L. Rice III, and I look forward to continuing this conversation and to working with all of you and the students that we have from you going forward. So thanks very much.
Dave Novak: Well, I will say, Nien-hê, that the work you’re doing and the way you model it is absolutely consistent with Joe Rice’s values and his moral compass and the way he founded our firm and the way we all feel today.
Nien-hê Hsieh: Thank you. It means a lot to hear that.
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit workingcapitalreview.substack.com
It seems obvious: We are not exactly living in the golden age of trust. Everywhere one turns, trust seems to be crumbling – institutions, politicians, media, even science.
The causes, of course, are everywhere, starting – but not ending – with social media and that old line: a lie can travel halfway around the world while the truth is still putting on its shoes.
So given the current state of trust, what are brands supposed to do? What are the key trends around the building — and breaking — of consumer trust? What challenges do brands face? What do the good ones do well? How easy is it to lose? And as consumers increasing “expect” brands to take positions on our most divisive social issues, how exactly should brands manage those tensions?
Victoria Sakal is one to ask. Victoria is Morning Consult’s Managing Director of Brand Intelligence. She leads the company’s brand intelligence research, focusing on the intersection of data with marketing strategy, brand reputation, and consumer trends. She is also author of the intelligence company’s Most Trusted Brands 2021 report, in addition to recent reports on the post-vaccine consumer, examining evolved attitudes towards brands, categories, channels, consumption, Consumer-Brand Relationships, and more .
As you’ll hear, Victoria skillfully explains not only the key trends brands face, but importantly the key tactics that winning brands employ.
Transcript
Chris Riback: Victoria, thanks for joining me. Appreciate your time.
Victoria Sakal: Thanks Chris. I'm thrilled to be here.
Chris Riback: So I also am excited to have this conversation, because despite any challenges that might exist for brands, and we'll talk about them, the good news, and I think the headline good news is, trust is not completely dead in our society. Is it? There are still green shoots of trust out there.
Victoria Sakal: No, and you're right in that there's a broad range of how we're feeling about different institutions, but that is absolutely not the way we would describe it, especially when you get into the nuances around brands and categories across different consumer groups. Of course, one of my favorite topics, but I'm biased.
Chris Riback: You're just a little bit biased, but yes. And there is a lot of nuance, and that's important. But I think let's start at the top and most broadly, because I think doing some definition level setting will be helpful. What is customer trust? How did you define it? And do you find that all brands defined it the same way?
Victoria Sakal: It's a really interesting question because how we philosophically talk about trust, and what we know to go into trust is, of course, not what you are going to ask consumers about, you get at it through different angles and different types of questions that break trust as a concept down into pieces that they're more likely to understand and be able to evaluate brands against. So fundamentally trust has a couple of core different components. There are the competence side of things. Is it a ability to deliver in a way that you would expect it to, there's a benevolent side. So do I think that it's acting in my best interest, do I feel supported and encouraged, or taken care of by the brand?
And then connecting those two pieces there is an integrity. So I alluded to delivering on promises, but if we know the brand can do the thing, and we know the brand can act in our best interest, or is expressing that it's trying to do so, how is that promise actually being delivered? So we look at these different components and they tend, in a brand setting, to boil down to a functional and experiential side and then an emotional and social side that together all blend into this feeling of trust in a brand.
Chris Riback: And it's fair to say that it is possible to get one of those components right, and others of them wrong. And it's getting the complete blend, I guess, "right as defined by the consumer," that elevates a brand to the top and differentiates winners from losers and those in between.
Victoria Sakal: Yes. You raise a really interesting point, because that dynamic, the different combinations is where the challenge and also the opportunity for brands is. Different consumers have different weightings, if you will, of those different components, what matters more to them. Sometimes it's just delivering on the promise and carrying through, then you have younger generations in particular, there's that benevolence factor is the brand doing well and showing up in society? And then beyond the consumer angle, there's also the category dynamics. So you think about your car versus your potato chip brand. There are certain people's stakes that will matter more versus others. And there's also development trajectories that different categories are at where you think of healthcare and you think of something like e-commerce, or where Amazon is showing up. There are different stages of how they're able to deliver on these different pieces. All of that comes into play, and it makes what the implications are for your given brand really, really nuanced.
Chris Riback: Yes. The category and differences is one of the areas I really want to be able to ask you about, and to what extent can a skilled player overcome a negative category, overcome its birthright versus can, in some of the other categories that are well received generally at this time, so to give away some of the punchline, for example, healthcare. Can you sit in a positively aligned sector, but either deliver bad experience, deliver bad product, not act benevolently, whatever it is the audience member wants, the consumer wants, and not necessarily benefit from the sector that you are in?
But before we talk, maybe about how brands keep trust, give me a sense, not only of how easy it might be for a brand to lose customer trust, but of the stakes. How important is trust? When you asked if a brand or company you trust did something to break your trust, how would your loyalty to their products or services be affected, if at all? What was the response?
Victoria Sakal: It tends to have severe implications, and I will say severe with an asterisk and that, again, there's nuance there with the way that the brand might have broken the trust. Some of these things will be much more consequential than others, and this is where this topic became really interesting in the last 18, 19 months here, were the parameters of safety, of showing up into society and thinking about the different stakeholder groups and how you're engaging with them, what that means for how a brand is building, or potentially breaking trust, not showing up in the right way, can lead to breaks and loyalties.
So we do see that there is a cohort of consumers that are going to stick with a brand for the most part, no matter what. And that could be because of convenience, or because of loyalty, it could be any number of factors, but we do see, especially again, with those younger generations, there's an inclination to vote with your wallet. So if the brands are not engaging and building the trust, or protecting the trust in the way that those consumers are hoping for, they're very fluid in terms of finding something else.
Chris Riback: You've mentioned it a couple of times already, so maybe I just jump to it right now, the differences within the segmentation of consumers by age, or by generation, how hard is that for brands? How dire, or how strict are the choices that they have to make in terms of, let's say for a more senior consumer, the value or the capability of the product may matter more than for a younger consumer, what that brand stands for. How should a brand go about thinking about that tension and that balance?
Victoria Sakal: There are a couple of different axes to look at here. The first is, we've looked through the lens of generations, but actually there's another level of granularity below generations, which would be more of the pyschographic attitudes of different consumers. So you may find, for example, boomers who act like certain Gen Zers or vice versa, whereas the attitudes and the sentiments and the priorities that will dictate how those consumers behave, that tend to generalize around a generation, but that leads to the second point around the second axis here that can tend to be around which issues matter more or less to different consumers. So when you think about things like politics or some of these social justice issues, you saw younger generations getting more activated in recent months than maybe some of the older, more conservative generations. So thinking about these issues that will resonate with different audiences is important for brands to bear in mind.
The other piece is what aligns with a brand. So when I say activating around certain issues, sometimes it doesn't make sense for brands to have their voice in the conversation. And sometimes it's the table stakes for every brand everywhere to have a voice, and it becomes a question of which consumer group might I be alienating more with this voice, but understanding the issues that matter to different consumer groups and then looking actually beyond demographics and into more of those psychographics is how we've had a lot of success approaching it with our clients when we start to look at the category dynamics, these issues, and then the specific ways they can resonate with different audiences, even if you're potentially spanning a number of different generations to resonate.
Chris Riback: Did I read this correctly though? So we've all read the headlines and some of these issues that you might be talking about, whether it's taking a stand on voting legislation in Georgia, or abortion legislation in Texas, or continuing voting disputes in Arizona, and I know that many of these are topics or issues that have come up since you actually ran the data. So I'm not specifically naming those in terms of what you found, but the various political issues, social issues that we all know about, George Floyd, obviously was probably very prominent within the at the time that you ran your data.
One of the findings was that, "potentially polarizing instances of corporate activism," I'm quoting you here, "around important issues have rarely damaged relationships to the point of abandonment." So I'm trying to get to understand what you were just saying a moment ago about the different age groups, or psychographic groups. And in fact, you wrote, "A brand's stance on social or political issues has led just one in 10 to stop buying from, or using the brand, and fewer than one in 10 say the company staying silent on a social or political issue that was important to them has been a deal breaker." That surprised me. I would have thought that it would, did it surprise you?
Victoria Sakal: It did. And this is again where that nuance around who those people are, that one in 10 are, start to explain where your hypothesis might lie.
Chris Riback: And who your customers are, I would assume, knowing who your customers are.
Victoria Sakal: Exactly. So there will be certain cases where, and we're even seeing this now that brands are slow to have commentary around what's going on in Texas and some of that legislation, because they're getting a sense of where the scope of the issue lies and where their audience lies on the issue. Certain things that feel fundamentally just wrong and inhumane, like the George Floyd incident, led to a much quicker activation by different brands. But yes, the contradiction almost feel to those data points really lies in, at the end of the day, going back to what I mentioned earlier, there are extremes as far as what will lead consumers to totally abandon any sense of loyalty or connection.
There's also going to be pull factors in the sense of if the brand is on the shelf, and especially we look to longer time horizons, three months, let alone three years from now, will they remember the stance that the brand took around a certain issue? Maybe not, but if it's built into the brand's DNA and they realize, or they're recalling this either alignment with sustainability, or that they're always at the front of important issues, advocating for what's right, that will start to break through, but that goes to that point of authenticity and aligning with what you actually have always stood for as a brand in line with what your consumers may want or expect of you.
Chris Riback: It's making me think, and I hate to, I don't mean to throw you this type of soft ball. So, maybe home in on it a little bit for me, but on one level reading a report like this is really, really useful if I'm a brand, I would think, it gives me great top line insights, but then as I'm listening to you, is it fair to say that there's another layer that every brand needs to take, asking the same questions, or getting at these same concepts, but really specifically within their audience segmentation. There are broad insights or conclusions that one can draw, but they may or may not be directly applicable depending on who wants audiences. Is that a proper interpretation of what you're saying?
Victoria Sakal: Spot on, it would have been my dream to be able to test every combination of consumers and categories and brands and issues, and functional versus emotional, all of that, but you're exactly right. And that's where we've seen, even as we followed-up with elements of the journey and the customer experience and how that builds trust or breaks trust, there's so many different components that it's critical to route your actions in what you stand for, who your audience is, who your aspirational audience is, where your priorities lie, maybe it's in, again, the journey versus messaging, but all of that makes the research, you have to follow-up on this type of research with more nuance to be able to bring it home in a way that's relevant.
Chris Riback: Victoria, your research dealt, of course, not only with the US, but it also dealt globally. What is the state of consumer trust and how does it compare in the US versus global regions?
Victoria Sakal: That's the one dimension I didn't even mention yet, which you're right and the nuance there. There's multiple levels upon levels here. So what we see is first, it's important to look at this through the lens of different markets, or regions tendencies as far as attitudes. So certain regions you'll find are more trusting of entities, or institutions, let alone brands in general, whereas others are not. So there's interpreting any data that you see through that lens. What we also see is dynamics around the different types of organizations that different brands will trust. And this, of course, is coming out of the pandemic in many cases, it's coming out of the election, at least, specifically around the time that our data came out of field. And all of that will influence how consumers are feeling about, for example, brands made in America, or brands made in China, or international brands in general. So there's the point in time view as well as what your local market dynamics tend to be in interpreting how you fall on the spectrum of different consumers globally.
Chris Riback: Fair to say though, that Chinese companies face the biggest challenges globally.
Victoria Sakal: Yes, absolutely. There's quite a range as far as the most trusting of those types of companies versus the least trusting there.
Chris Riback: So you also identified the most trusted brands, and everyone loves a list. Who among us, Victoria, does not like a good list? So the top 10 were Google, PayPal, Microsoft, YouTube, Amazon, Sony, Adidas, Netflix, Visa and Samsung. What are the lessons other brands can take from these top performers? What did they do right? How did they secure trust in the first place? What are they doing right to maintain it?
Victoria Sakal: An important, I guess, contextual piece to bear in mind, as we think about those brands, is a point in time we were at early 2021 when we were assessing how these brands were performing, when it becomes really intuitive to think about where consumers were mentally, emotionally, their needs and how they might have evolved in the past year. When you hear brands like the ones you've listed, there's a couple of factors that explain why they rank as they do, and first is the size and the credibility that brings to their offer. So again, we think about competence, the ability to actually do the thing that they're setting themselves up to promise for consumers and then integrity, following through on that promise even when things get a little messy and supply chains get a little slow and new safety measures get introduced.
The other piece is around the actual need itself. So we have the convenience factor with Amazon. We have some of the digital elements with other brands, and especially the speed with which they were able to pivot to be available direct to consumer or online, but then we go back to some of those factors that were top drivers of trust. And we know that these brands tend to focus on as much of about the experience and the seamlessness and the convenience and whatever that means for their category as they do with delivering on the promise. But then starting to show up in different ways and consumers' lives that it's not just the transaction, but it starts to be more relational and emotional.
Chris Riback: So is there anything that maybe you have found in some of your subsequent research, because I know you've done a couple of other reports. Are there any brand strengthening capabilities that might have evolved or developed during that that first COVID hit, but have translated into enduring qualities for brands?
Victoria Sakal: The element of delivering on some of these functional value based drivers is still there. So we think about the availability being increasingly important, but then at the same time, the social side that we talked about in the report, and we saw it starting to surface as a differentiator for brands who, of course, check the box on doing what they said they were going to, and being present where they said they were going to be, but really starting to deliver on different stakeholders needs, taking care of employees and treating customers well, that has endured over time. And we're seeing that not just among younger generations, but increasingly creeping up towards the elder ones as well.
Chris Riback: Yes, the taking care of employees well really stood out to me, and it aligned, in my mind, with some of what we're seeing politically, some of what we're seeing socially around fair wages and around health care for employees. Is that what consumers mean by treating employees well?
Victoria Sakal: Yes, we're seeing this convergence of all these different spheres of people's lives, especially with the pandemic that is really underscoring what you've mentioned, and then you think about how consumers are as humans and as employees, the lines are starting to blur. So we have mental health, we have how physical health and there's the safety and COVID component, there's the reproduction rights component. There's also the element of society and the world that we're living in. And how are brand's leaning into their responsibility, if they're going to profit off of society, how are they leaning into giving back and contributing where they can, or using their voice, or their stance, or their influence either to push decision-makers or issues in the direction that feels right and intuitive. So the employee component is as much about taking care of, from a financial perspective, as it is with protecting and understanding the human behind who's showing up at work every day. And we see that employer brand component coming through if we talk about trust just as much.
Chris Riback: Yes. What a great line and great insight, because I think that is what's changing, is they're not just employees, they're human beings. What about other areas, corporate social responsibility, data breaches. How important on the positive side is it to take a proactive role on CSR, and how negatively impactful can a data breach be?
Victoria Sakal: So the CSR component is, as I sort of alluded to before, it gets interesting because we have brands generally delivering well and consumers generally recognizing that it's important to them to be executing on that functional component. And when we say functional that means things like is a good value, cost, delivers on my needs. All of those components. There's an experiential element that, again, consumers recognize and brands are generally delivering on as subsequent research has continued to explore in great depth, but this murky middle social drivers and these ESG factors, again, that stakeholders that could be contributing to communities in different ways. It could be stances around inclusion and diversity. That is less a differentiating factor at this moment, which tells you that it becomes a differentiating factor in the future. That right now it's back of mind, it's starting to surface. It is a core component of trust. We go back to benevolence, we go back to it being part of the relationship that you form with a brand who is showing up in your society and in your life.
So more and more as we see brands starting to lean into this side of their role in society, more than just delivering the shoes, but also thinking sustainably about the packaging that delivers the shoes, et cetera. We see those issues surfacing more and more. As far as breaking trust, we see that the privacy component being a really nuanced one and that consumers, and how comfortable they are with sharing information in the first place is a whole other conversation. You'll see real nuances there, again, not only demographically, but also psychographically. And then we get to this element of where it's affecting me. And if my information got shared, I'm probably more likely to care more and change my behavior if it's general data breach, and we've seen this with brands who either the ones in our own lives, or the ones in the headlines who experienced data breach, the time horizon for memory there can be a bit shorter. So there's going to be a short-term reaction.
But back to that point you raised where the top of our conversation at the end of the day, if it's more convenient to stay with your bank versus take advantage of their whatever protection that they're going to offer you on the heels of a breach, there is a stickiness factor, there is a relationship factor, and then there is the effort factor that will come into play as well, not to say that any brand should go out there liberally searching for these types of issues, but there are the parameters around how consumers engage with brands and how they're thinking about the calculus around their changes and behaviors to bear in mind when anything happens like this.
Chris Riback: And how difficult switching costs are, and to switch from a bank, the example you just raised is obviously very hard. As you were just mentioning a moment ago, CSR, corporate social responsibility, also environmental issues, you start to get into a little bit of the generational differences, maybe the psychographic differences, which makes me think as well about influencers, and makes me think about social media. In your September report, State of the Changing Post-Vaccine Consumer, as you know, Victoria, we see so much discussion about influencers and celebrity recommendations. I was surprised in that report to see customers don't say either one influences their intent to purchase very much. So I'm wondering first, do you believe that data? And two, how does that break down by segment and by audience age, or generation, as opposed to just looking at the top line result?
Victoria Sakal: This analysis is one of my favorite, because even when we started doing this and exploring influences on purchase, or likelihood to recommend way back at the beginning of the pandemic, it feels very unintuitive. There's so much info information and conversation around influencers and celebrity sponsorships. And at the end of the day, there's a couple of things that explain this somewhat strange feeling tension in what the data actually shows. First, being that word of mouth and that close knit peer, or family, or proximate influence is always going to be key. And we've seen that, frankly for thousands and hundreds of thousands of years, but we've seen that certainly in recent times as well. The other piece to bear in mind is that there's a lot of complexity around the degree of closeness around your influencers or your celebrities. So it can feel sometimes superficial and that can be okay in certain categories, you want to feel aspirational towards certain things. If you're thinking about a makeup or something that is going to relate to your skincare or whatever, you might trust someone who's lifestyle you align with, or who you know more personally.
So there's that lens to look at this data through. And then the last piece is always a fun one, what consumers think influences them versus what actually does. And so we've done quite a bit of work around that space as well that starts to get into system one, system two dynamics, but important to bear in mind that some of these things would not have continued over the last few months, let alone the last few years or decades, if they didn't have some sort of impact, but it does beg the question of, do the claimed experiences, are they being created in a way that are positive and at least engaging for consumers such that influencers, or social ads, or whatever, don't eventually become so disruptive to the experience that consumers gravitate away from the platform or away from the influencer in the first place making and undermining the influence of those different channels.
Chris Riback: That's part of what I was thinking. The person who says, I'm not influenced by advertising and, well, I guess billions of dollars of advertising spend and companies would seem to indicate that while you might not think that advertising impacts you, but it probably does. Victoria, to close, what's next? What are you curious about? What are you wanting to know?
Victoria Sakal: As we start to, I can't even say emerge, but ebb and flow and inch our way towards a return to, and again, not even a return, a resurfacing into more of a normal lifestyle, the nuances that we talked about today, there's on a global scale, there's across categories, brands, consumers, all of this channels even, there's going to be shifted behaviors among consumers, this is not news to anyone, but every single touch point consumers have with brands, with their employer, with their purchasing, is starting to be influenced by all of these things at the same time.
So what's really interesting to me, as we think about things like employer brand, and we think about some of these social issues, we think about the importance of employees and how a brand is taking care of employees and our purchasing decisions. I'll be interested to see, knowing that this is never going to, the cat's out of the bag, it's never going to totally return to how it was pre-pandemic. I'm very interested to see how things settle out. We even look ahead to the upcoming holiday shopping season, where we've got a ton of coverage planned, and it becomes interesting to understand how is that going to look different from last year? How is it going to look different in three years from now, and where are we going to net out on all of this?
Chris Riback: There is certainly more to come. And yes, I would imagine this has got to be a remarkable time for someone like you. The social change and impact of the pandemic and in our lives and our behaviors, and what that then leads to and what endures and what changes and what goes back to the way it used to be. It's a bit of a golden era. Victoria, thank you. Really, really interesting stuff. And thank you for taking the time to discuss it.
Victoria Sakal: Likewise, thanks for having me. It was a great conversation and always interesting, and happy to be talking about data, as you indicated.
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit workingcapitalreview.substack.com
Great business leaders are often seen as innovators, inspirational storytellers and brilliant leaders. They are keen and decisive observers. But would we envision any mathematical principles in their toolkit? Just as business finds solutions to various problems and hurdles, mathematical formulas and practices make sense of our chaotic world. What can business-minded individuals learn from these insights? How do principles of randomness and probability factor into shrewd business planning?
Jordan Ellenberg is the internationally-bestselling author of How Not To Be Wrong and the recently-published Shape: The Hidden Geometry of Information, Biology, Strategy, Democracy, and Everything Else. He holds a master's in fiction writing from John Hopkins and a Ph.D. in math from Harvard. He has been writing for a general audience about math for over fifteen years and advocates for leaning into the anxieties and misunderstandings many of us have about mathematics.
Transcript
Chris Riback: Jordan, thanks for joining me. I appreciate your time.
Jordan Ellenberg: Thanks for having me on, Chris.
Chris Riback: We live obviously in an age where everything has to be measured. And here I am talking to a mathematician as we sit, we wallow in this sea of data, making the point that yes, data matters but the narrative matters, too. The prose matters, too. How do you think about our times and the role? Is it an oversized role that we seem to give data in terms of driving decision making?
Jordan Ellenberg: I think that can be the case, yes, and I think it often is the case. There's a great book by my friend Cathy O'Neil called Weapons of Math Destruction, which is all about the things that can go wrong, and I mean really wrong, when you blindly say, "Okay, there's an algorithm, there's a spreadsheet and whatever the spreadsheet says, that's the truth. That's what we're going to go by."
I'll give you an example. To Facebook, I'm a long list of numbers. I'm maybe an ASCII characters and a long list of numbers that represents to it where I sit in a social network, what products it may think I'm likely to buy, what age it thinks I am, because I haven't told it my birthday. But, it can almost certainly figure out that pretty well. Some long list of some number of numbers.
Now, those are facts about me. The danger is if you start to think that is me, because I'm not a series of 1000 numbers and neither are you.
Chris Riback: That's fantastic.
Jordan Ellenberg: That's the mistake you don't want to make.
Chris Riback: For our business listeners, would you argue that's a pretty good reason why business people should understand geometry?
Jordan Ellenberg: Yes, I think, among most teachers to say why are we teaching your kids, or you, all this stuff about triangles? Is it because you got to go out into the world with a lot of knowledge about triangles? No, not so much. I love triangles, but it is true that I think most people see it as the point is to teach a certain mode of thinking.
Now, what is that mode? What we do in geometry that's different from everything else we do in the high school curriculum is we prove theorems. We really prove them by a strict process of logical deduction. Again, you might think, "Oh, I see. The point is to learn to prove theorems." Kind of, but it's also true that out there in the business world, nobody's ever going to ask you to prove to theorem. That's not what you're actually doing.
Okay, now I seem to have painted myself into a corner. So, what is the point? Well, the point is that people say they're proving things all the time. Prove is a much used word. I always say every time I hear someone say the word therefore, my red flag goes up. People all the time are trying to basically assertively express a chain of opinions and then say, "See my logic, you have to accept my conclusion." I think the point of knowing what a theorem is to know what a theorem is not.
It's to be able to look at that and say, "That is not the thing we do in Euclidean geometry. I can see the spaces between your assertions where you want B to follow from A, but really all that happened is you said A and then you said B."
Chris Riback: I am so glad that you made that point. I had a teacher once ... and as a result, it was just beaten into me and I don't use it ... who would not allow us to ever us the word therefore in our writing and highlighted that therefore was a symbol of an illogical conclusion.
Jordan Ellenberg: Right. It's a sign. If you find yourself reaching for it and having to say it, it's probably a sign that you have not justified what you're saying well enough because you wouldn't feel the need to reach for that big hammer of a word.
Chris Riback: I'm going to make an assumption here and you'll please, please correct me if I have it wrong. Among the most significant current intersections of math and business are around machine learning and around the applications of that. I can see on the Zoom here that you're shaking your head yes, so maybe I'm not so far off.
Explain to me, if you would, what kind of math is machine learning and what in the world does it have to do with being a mountaineer.
Jordan Ellenberg: This is one of the parts of the book I was most excited about writing because, of course, machine learning is incredibly important. It's incredibly exciting from a scientific point of view. It's not my research area but I go to tons of seminars about it and learn a lot about it from the practitioners. In many ways, it's a new field of math that we're building under our feet as we go. It's tremendously exciting, and most of my scientific and research life, I'm working in very classical areas of math where the ground rules were laid literally thousands of years ago.
This is a very exciting scientific moment. That being said, a lot of people treat this stuff like magic and it's not magic. In some sense, the basic mathematical principles, which I'm about to tell you of what machine learning is, are very simple. And, it's this: It's a dressed up version of trial and error. The metaphor that I rely on in the book is imagine you're a mountaineer and you're trying to get to the top of mountain. But now let's imagine that the landscape that you're exploring is completely overgrown with brush.
It's a deep forest, and you cannot see the top of the mountain from where you are. You can't even see what direction it is. All you can see is the immediate neighborhood around you. What would you do? Well, there's actually a pretty good answer to what you would do. You would look at the ground where you're standing and try to see in which direction is the upward slope, and maybe of all the directions you would walk, you could see which one has the steepest upward slope and then you take a couple steps that direction and then you reassess.
Now you're standing in new place where maybe the slope is difference and now you figure out which way to go affords you the highest slope. What I just told you seems very simple minded, right? But that's it, dude. That's machine learning.
Chris Riback: That's all it is.
Jordan Ellenberg: It's that plus some technical details, but literally that's a process which in math we would call gradient descent. That's the fancy name for just being mountaineer and looking for the direction of steepest slope.
There are details, but the basic thing that's driving the method is this very simple trial and error. What's the best small change I can make to the thing I'm doing right now? Do that and then ask yourself again what's the best small change from the thing I'm doing right now? It's such a simple principle, but nobody ever says that. People describe it as if just some Merlin person is stirring a vast cauldron of math and Spotify comes out of it or something. It's not like that.
Chris Riback: I think the use of something like therefore, or it is evident that the tendency of many us to make things like say machine learning, make an explanation of something so much more complicated than it has to be where you just made it clear, think of it like mountaineering, is also a bit of a trick to try to intimidate others and keep others ... Explain something in a convoluted, confusing way and it puts the other person in a situation where they now have to ask, "What do you mean?", and then well, if they don't understand what you mean, maybe they're not smart enough to get it in the first place.
Jordan Ellenberg: Yes, and I would hope that in the scientific community, that motive is there. Most of us are teachers by profession, like those of us who are in academia, so hopefully we are not trying to confuse or intimidate. The problem is that when academic scientists talk to each other, we have a technical shorthand that we've built up over many years and it's a very efficient means of communication. It's not there to be confusing or to intimidate other people. It's there to get things done quickly and precisely.
But, it's not built for outsiders. I want to be a conduit to say I'm going to put aside the complicated ... because as I said, in the implementation, there's lots of super, super complicated stuff. I don't want to lie about that, but I also want to be able to tell people what the main ideas are.
Chris Riback: Well, it's quite a skill to be able to speak both languages for sure. Continuing with this idea and the machine learning, and its applications to the rest of our lives, how significant of a risk is local optimum?
Jordan Ellenberg: A local optimum, what that means is the following: you're carrying out this strategy of at each moment, find one small change you can make that improves your strategy a little bit, that seems to give you better results. Now it might happen that you get to a place and you're like, "Wow, any little change I make, it doesn't seem to improve my situation. Maybe any little change would make my situation worse."
You could say, "Okay, at this point, I found it. I found it. I'm at the summit. I'm at the best of all possible worlds," but that might not always be true. You might be at the top of some little helix that's actually far away from the main summit. The example I use of this in the book is it’s like when you're caught in a procrastination loop. You have some massive pile of crap that's destroying your desk and office space, and you know you have to deal with it. You know it's stuff you're never going to deal with, so you should throw it out but you can't bring yourself to do it.
At any given moment, the small step of starting to do that, is that going to make your life better? No, it's going to make your life worse in the short term and in the immediate situation. Your day is going to be better if you don't start dealing with it.
But of course, you're not at the real optimum because the real optimum is if you actually deal with the whole pile and deal with it all. It's like in mountaineering, sometimes you have to go down in order to go up. Sometimes you have to get off you're little helix, go down through the valley to get up to the main summit. That being said, one of the great mysteries of this subject in contemporary machine learning is that this very simple minded process of always just looking for short term advantage, this so called greedy algorithm of gradient descent and just making small changes that improve strategy, that definitely theoretically and in principle can get caught in a local optimum like that.
But usually, it doesn't and we don't know why. That's one of the most interesting theoretical questions. Again I, with one hand, am trying to make the subject sound simple, what the actual mechanism you use is pretty simple, but I also want to make the subject sound deep, because it is because it works much better than it has any right to. That's a huge open theoretical question. We don't actually really understand why.
Chris Riback: Would you apply that in any way as you think about the we don't know why? Is there any aspect of that around that can applied to business decision making? On the one hand, I'm listening to you and the first half of what you said made me feel really good about myself. You were giving a mathematical explanation to why I procrastinate, and I plan to quote you on it with my wife and explain why my stuff's all over. But then you said well, but sometimes you do have to take a step down in order to go forward.
Are there ways to think about it mathematically where you know when you should take that step back, let's say, to go forward? That step down to go up? Or, does it not work that way?
Jordan Ellenberg: First of all, I think just having the conceptual language of talking about it I find helpful. At least for me. I'm N of one so I can only say that anecdotally. I would also say ... Well, a couple things. One, absolutely there's a real difficulty there because it may not be obvious. You can say, "This hill is not that high. Maybe I need to go down in order to go up." But now it may not be so obvious which direction to go. Maybe if you choose the wrong way, you're going down in order to go even further down.
Look, nobody said business was going to be easy. There's some questions that you can't immediately answer. But I would say actually to me it seems like some of the strategies that machine learning people have devised to get out of local optimum when you are stuck in them, one is just take a random big step. Literally random. Choose a direction at random and take a big step instead of a small step and see if maybe that gets you some place from which you can get to the summit.
The randomness is important because you can get stuck saying, "But, how do I know what big leap to take?" You got to accept that you don't know, and certainly in math, being a mathematician, you have to accept all the time that there's a lot of stuff you don't know and that you're going to make some leap, make some action forward, try some strategy with no good reason to think it will work.
Chris Riback: What are under-fitting and over-fitting? Which is more problematic? How do we avoid both of them?
Jordan Ellenberg: Oh, it's like trying to pick between your two kids. I can never say which is more problematic. Each child is problematic in their own way, right? There are two things that can go wrong when you're trying to develop a machine learning solution to some problem that you're trying to study. Under-fitting is a little simpler. It means you just haven't taken into account enough the data that you have in front of you, the examples that you've already seen.
So if you were trying to develop some business strategy, it might mean you just didn't really take into account what happened before when you did similar strategies. And if you do that, you're probably going to develop a strategy that doesn't work so well going forward.
Over-fitting is more subtle. Let's see how best to do it verbally, because over-fitting means taking the data of the past too much into account, which it seems like wait, isn't more data always good? Isn't refining your strategy to more closely be something that would have worked well if you've done it in the past, isn't that the best possible strategy? Well, not necessarily.
For example, you might say ... All right, give me a moment to formulate this one because this is a little bit of a challenge but I'm going to do it. I'm just going to sip my coffee, because that's what I do when I need to think.
Chris Riback: That's the card you pulled from the deck.
Jordan Ellenberg: Exactly. A typical example of an over-fit strategy might be something like that. You say my strategy is if I encounter a situation in my business that is exactly something I've encountered before, I take the course of action that would've been the best for that situation knowing what I know now. I look back on all the decisions I've made, I decide whether they were right or wrong, and then if I encounter that situation again, I'm going to do the thing that's right instead of the thing that's wrong.
And, if I encounter any situation that is not exactly something I've encountered before, then I just flip a coin because I have no idea what to do.
Okay, that is not so useful of a strategy to have. It's not awful, but it's pretty bad because it means it's perfectly fit to the data that you have in front of you. It works perfectly on every situation you've already experienced, but it totally fails to generalize to new experiences.
So in some sense, where you want to be is somewhere in between those two things. You want to be able to learn from the past, but you want to do something that's not just memorizing, it's actually learning. One way to put it, because this brings us back to geometry, is that you want to recognize when a situation you're facing right now is not identical with a situation before but it's close enough. You might say, "What's the closest situation to the current predicament I face?"
Well, there's that word again, close. The moment you say that, you're saying there's some geometry of all possible situations where some are near to each other and some are far from each other. Any machine learning scenario is exactly based on that.
Chris Riback: In this part, I found myself thinking about the cost and benefits of postmortems. Perhaps you do them after each semester after you teach a class. Maybe you personally, or with a colleague or the dean of your school, go through postmortem. What went well? What could I have done better? It happens in business. It happens in life all the time. What I took from my reading of over-fitting and trying to understand what you just described was what becomes important is not just to go through the postmortem of what previously occurred and understand that, and maybe document it in some way, but that becomes the utility of it is its applicability going forward.
The going forward, when I then get into another situation, the key perhaps is not necessarily only having all of my notes from that previous postmortem, but is having an understanding of how close or distant the new situation is to what I went through previously and in what ways is it different, and do I now have to change my strategy based ... Are those differences material or not so relevant? Can I apply the data from previous or no, is that not relevant because the delta to the new situation is so significant that it might appear to be the same as previous but in reality it's not.
Am I getting close to what I'm supposed to be taking away?
Jordan Ellenberg: Totally. In fact, I like that so much. This happens to me a lot. Once the book comes out and you converse with people about it, it is a process of realizing all the cool stuff that you could have put in the book because different people read it and I'm like, "Oh, that concept of the postmortem." When you say it, I'm like oh. That literally is humans doing the thing that a machine learning algorithm does. You have your existing strategy. You see the results. Then, you go back ... This is akin to the process called back propagation in machine learning ... and say, "Okay, these are the results I got from this strategy. If the strategy had been a little different in some way, would I have gotten better or worse results?"
That kind of reflection is, in a human way, exactly what the machine is doing. In particular, the point you make about understanding which deltas matter and which deltas don't, this brings us to Henri Poincare who is a major figure in the book, one of the founders of modern geometry as we have it today. He's back from the late 19th, early 20th century. He is also one of the most quotable mathematicians ever. I had to restrain myself from quoting him on every page, but one of his best slogans is he says, "Mathematics is the art of calling different things by the same name."
Now, this is deep. This is deep because it's exactly this point you make that you never step in the same river twice. No two situations are identical, but some differences matter and some differences don't. You can't think mathematically and you can't think reasonably unless you're willing to understand which things you're willing to call the same because they're the same enough. They're the same in the ways that matter, even though they are not literally the same. They are literally different.
So this process of calling different things by the same name is so central to modern geometry but I actually think that that principle is useful for all kinds of thinking.
Chris Riback: And, it would seem to me that there are people who can be incredibly successful because they innately do the math. My presumption is it's a skill, and maybe it's one that some people are born with and maybe in others we can develop it, but somehow they do the math very quickly, instinctively in their heads on how big that delta is, how much the difference is and which lessons apply and which don't.
Jordan Ellenberg: No, but actually I'm curious. Can I ask a question, Chris?
Chris Riback: Please.
Jordan Ellenberg: Because when you say there seem to be some people who seem to be able to more rapidly or more accurately mentally capture which deltas are important and which are not, are there particular people you have in mind? Are there people in the business world who are known for this? I'm just curious.
Chris Riback: I'm certain that there are. Just off the cuff, hearing your question, there are maybe two that come the mind, one in particular. One that comes to mind, and this is not an endorsement but I mean it in a very particular way potentially is Elon Musk. The part that I mean it on, and I was just having a conversation on this with a friend of mine the other day, is electronic cars, battery powered cars totally predated Elon Musk. He didn't create ... but what he noticed, what's the delta on his execution versus most of the ones that occurred before?
In my opinion and my friend's opinion, the biggest difference that he saw was it wasn't necessarily about the fact that the car was electric. That wasn't going to drive people to buy that car. It was, was it a great car? How did it drive? What were the other interfaces that it provided? What were the other things that it could do that made the experience differentiating and special?
He took what other people were doing, Chevrolet, like many other car makers, were making-
Jordan Ellenberg: And, is.
Chris Riback: And is, and yet he defined which difference really mattered. Apparently, I don't know, I don't own a Tesla, the batteries are really good but let's just say the difference wasn't that oh my God, I have to make this incredible other worldly battery that's going to last decades longer than the other ones. No, he recognized that it was the other differences that were most material. Does that work?
Jordan Ellenberg: It does, although it's funny. For me, the whole appeal is that it's electric and when I actually sit in one, it feels plastic and cheap and unpleasant but I'm like, "But, it is cool that it's electric" even though it feels dingy as a car.
Chris Riback: On the seating of the car, as I've sat in them, sometimes I feel that way, yes, but the other aspects of what it does, the self-driving, the integration of technology, the fact that you can just download the upgrades and all of a sudden have the next generation of the car, that stuff all seems really cool to me.
Jordan Ellenberg: Yes, and I got to say on the subject of my lack of intrinsic geometric ability, if you saw me try to parallel park, they would take away my PhD for real. That aspect does appeal to me.
Of course, in reality, the space of strategies that you're searching when you try to develop some algorithm using a machine learning system is way more than three dimensional, right? In the case of GPT-3, one algorithm I write about which generates natural language in a really cool way ... or, seemingly natural language ... I think if I remember right, it's 175 billion dimensional.
Okay, so nobody can visualize that. We are not literally visualizing that, and in some sense, one of the glories of modern geometry is we erect all this formal structure. Going back to the beginning, this set of formal and rigid rules that we learn in school, why is it important to have formal and rigid rules? Because the formality entwines with our intuition and allows us to go farther than our intuition can go. We can't visualize 170 billion dimensional space directly but once we really have a feel for how two dimensional space and three dimensional space work, 175 billion dimensional space works pretty much the same way.
So in some sense, the level of formality I had to learn in order to overcome maybe some slight lack of innate ability to visualize things in three dimension. It serves you very well if you want to take the geometry farther.
Chris Riback: That's fascinating. Jordan, thank you. Thank you for your insights. Thanks for just a terrific mind bending book that required and rewarded with all sorts of new thinking. Thank you for your time.
Jordan Ellenberg: Thank you for having me on. This was great.
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit workingcapitalreview.substack.com
(Click audio player above to listen)
Podcast: What Makes an Effective Board of Directors. In the time of an unprecedented global pandemic, boards – private and public – have been forced to re-examine priorities. And it’s not just trying to manage through Covid. ESG, diversity & inclusion, an evolving remote-work dynamic, a growing expectation that corporations will engage with social issues around race, gender and more. As companies face new challenges, what makes an effective board of directors? And how are companies with strong board compositions and engagement better equipped for turbulent times? To find answers, we spoke with Roberto Quarta. Roberto is Chairman of CD&R Europe, in addition to being Board Chair of WPP and Smith & Nephew. He is a former CEO and serves on both private and public boards. And as you’ll hear, to drive success, there’s one agenda in particular that has captured his attention – it’s what he calls the “human agenda.” (Working Capital Conversations)
The World
Tech blowout: Apple, Microsoft and Alphabet said their latest revenues and earnings had surged above the stock market’s already optimistic expectations, confirming that demand for their digital services and gadgets continued to soar as some countries began to emerge from the pandemic. (Financial Times, Wall Street Journal)
Microsoft reported its highest quarterly revenue ever, exceeding expectations, and it projected overall sales for the current quarter of up to $44.2 billion. Microsoft's increase in gaming revenue was bolstered by hardware sales, while Microsoft's Teams reaches nearly 250 million active monthly users.
Google parent Alphabet had its largest percentage jump in quarterly sales in more than 14 years, as retail accounts for the largest portion of Google’s advertising.
Apple posted its best fiscal third quarter in its 45-year history, though Apple tempered sales predictions for its current quarter ending in September, saying it expects revenue growth to be lower than the 36% it just reported in the June quarter, in part because of supply constraints.
President Biden warned that cyber attacks could escalate to full-blown war amid growing tensions with Russia and China at a time of escalating hacking incidents on American soil. Biden said that cyber threats including ransomware attacks “increasingly are able to cause damage and disruption in the real world.” “If we end up in a war, a real shooting war with a major power, it’s going to be as a consequence of a cyber breach,” he said at the Office for the Director of National Intelligence, which oversees 18 US intelligence agencies. (Financial Times)
US military leaders said they see Arctic operations as a deterrent to China, which has staked a claim to the region as part of its Belt and Road Initiative, and increasingly as a base for operations in the Indo-Pacific. (South China Morning Post)
As food grows scarce, North Korea accepts South's olive branch. North Korean leader Kim Jong Un and South Korean President Moon Jae-in start mending fences with the return of hotlines after a year of silence. (Nikkei Asian Review)
Developing economies’ limited access to Covid vaccines threatens to hinder the global economic recovery from the pandemic, the IMF has warned, as it upgraded its growth projections for advanced economies but lowered them for other parts of the world. The Fund still expects overall global growth of 6% this year. (Financial Times)
England is poised to reopen its borders as soon as next week by allowing fully vaccinated travelers from the EU and US to enter without quarantining. Ministers are expected to approve the plans today after Boris Johnson is said to have become concerned that the EU is ahead of Britain in enabling international travel. (The Times)
Fresh coronavirus outbreaks are forcing factory shutdowns in countries such as Vietnam and Bangladesh, aggravating supply chain disruptions that could leave some U.S. retailers with empty shelves as consumers begin their back-to-school shopping. “Nobody can get anything,” said Steve Lamar, CEO of the American Apparel and Footwear Association, “Do your Christmas shopping now.”(Washington Post)
White House staff told to wear masks again, as cases rise in the capital. (New York Times)
The number of Covid-19 cases across the US may have been undercounted by as much as 60%, researchers at the University of Washington have found. (The Guardian,
The Biden administration announced that long Covid, a condition where people experience long-term Covid-19 symptoms long after clearing the actual virus from their system, could be considered a disability under civil rights laws. (Politico)
Big drug companies and their lobbyists have a message for Congress: Don’t raise taxes on the industry that brought you fast-tracked Covid-19 vaccines. Pharma executives, lobbyists and consultants are mobilizing to fight what has become a threat to drug companies’ bottom lines: a sweeping agreement by many of the world’s biggest economies to better harmonize corporate taxation around the globe. Earlier this month, 130 countries agreed to broad outlines to establish a minimum corporate tax of 15% within their countries, reducing opportunities for international tax avoidance. (Wall Street Journal)
UN data from Afghanistan shows that the country experienced a resurgence in civilian deaths in 1H21. The toll has been particularly severe since the beginning of May when international forces commenced their final withdrawal at the same time as the Taliban launched a major offensive. (Statista)
Russia is stepping into the security vacuum created by the withdrawal of US troops from Afghanistan, with President Vladimir Putin looking to re-exert influence in central Asia and prevent Islamist extremism from spilling over the borders. (Financial Times)
Economy
The 20 Republican-led states that reduced unemployment benefits in June did not see an immediate spike in overall hiring, but early evidence suggests something did change: The teen hiring boom slowed in those states, and workers 25 and older returned to work more quickly. A new analysis by payroll processor Gusto, conducted for The Washington Post, found that small restaurants and hospitality businesses in states such as Missouri, which ended the extra unemployment benefits early, saw a jump in hiring of workers over age 25. The uptick in hiring of older workers was roughly offset by the slower hiring of teens in these states. In contrast, restaurants and hospitality businesses in states such as Kansas, where the full benefits remain, have been hiring a lot more teenagers who are less experienced and less likely to qualify for unemployment aid. The findings suggest hiring is likely to remain difficult for some time, especially in the lower-paying hospitality sector. (Washington Post)
Wall Street’s return to Manhattan dims suburban office dreams: It was a tantalizing idea early in the pandemic — With New York skyscrapers emptied and bankers hunkered down in homes outside the city, a handful of finance firms decided to scout alternate office locations in areas like New Jersey, Stamford and Long Island. That interest has fizzled. Much to the dismay of suburban brokers and landlords, the prospect of outposts in outlying areas failed to translate into deals. Instead, major Wall Street firms have ramped up return-to-office plans at their major hubs. (Bloomberg)
Work-from-anywhere perks give Silicon Valley a new edge in talent war: Startups in smaller markets feel pinch as coastal tech giants poach their employees; ‘a national competition’ for every hire. (Wall Street Journal)
U.S. economic growth will likely slow significantly in 2022 as the services sector’s recovery fades, according to Goldman Sachs. The U.S. bank expects the world’s biggest economy to return to trend-like expansion of 1.5%-2% in the second half of next year. It also cut its forecast for gross domestic product growth in the final two quarters of 2021 by one percentage point to 8.5% and 5% respectively. (Bloomberg)
Lysol. N95 Masks. UPS. For some pandemic winners, the boom is over. Growth is slowing for some businesses, adding to challenges as they deal with rising costs and supply constraints. (Wall Street Journal)
A selloff in Chinese technology stocks accelerated as investors unnerved by China’s widening crackdown on Internet companies and other industries sold down their holdings of many popular stocks. The Hang Seng Tech Index tumbled 8%, its third day of declines. The flagship Hang Seng Index dropped 4.2%. (Wall Street Journal)
"Buy now, pay later" is becoming a commodity. Investors are pouring money into the sector, and established players are jumping in, too. CB Insights is tracking more than 50 "buy now, pay later" startups. So far in 2021, they've raised $2.1 billion in 20 deals. Visa, Shopify, Apple, Amazon, American Express and Citi are also playing in the space. Credit-card giants aren't going to give up their hold on consumer lending easily. (Protocol)
How ‘Buy Now, Pay Later’ consumers differ from credit card users. U.S. consumers who used a “buy now, pay later” service in June are more likely to be low income and report income volatility than those who live in a credit card household. BNPL users report less control over their finances than those who live in a credit card household. BNPL users also reported more progress towards financial goals such as eliminating debt than those with credit cards.(Morning Consult)
Technology
Facebook will limit ads children see after revelations Australian alcohol companies can reach teens. Meanwhile, Instagram introduced protections for its teenage users to default young people into private accounts and make it harder for "suspicious" adults to make unwanted contact. (The Guardian, NBC News)
Ratings for the Olympics are down generally, but NBC says streaming viewership of the Games is breaking records. Roughly $1 billion has been spent on advertising around the Olympics. At this point, traditional ratings are still the only real metric marketers can use to justify much of that spend. From Friday to Sunday, primetime coverage of the Olympics averaged 15.8 million viewers on across all NBC properties, down from 27.27 million across those three nights in 2016. A lot of the NBC's success this year will be determined by whether it can get people to subscribe to its streaming service, Peacock. But streaming may be part of the problem, as the myriad of viewing options and paywalls is likely causing some confusion for consumers. (Axios)
Five years ago, Salesforce paid $750 million to buy a startup called Quip that made an internet-based word processor and spreadsheet app meant to give Microsoft’s competing Office products a run for their money. That didn’t happen, but Salesforce did get a valuable asset out of the deal: Bret Taylor, Quip’s founder, who has risen to become the No. 2 executive at Salesforce. Now Taylor has the job of making sure the biggest deal in Salesforce’s history—its nearly $28 billion acquisition of Slack Technologies, which closed last week—works out better than its purchase of his startup did. Like Quip, Slack faces the formidable task of competing with a product from Microsoft. (The Information)
Activision Blizzard staff aim to walk out today, demanding fairer treatment for underrepresented staff and ending arbitration clauses in staff contracts. (Bloomberg)
The theater recovery that wasn't: So far in June and most of July, with more than 80% of all theaters open, ticket sales are still about one-third of what they were on average during those months pre-pandemic. (Axios)
Smart Links
Canada border guards vote to strike days ahead of reopening to U.S. tourists. (Reuters)
Apple’s controversial Safari redesign is now optional in the latest iPadOS 15 beta. (The Verge)
Walmart now offering free college tuition and books to its 1.5 million U.S. employees. (Washington Post)
Foreign purchases of U.S. homes fall to new low. (Wall Street Journal)
U.K. home prices set to rise 9% this year, up from original 4% prediction. (Mansion Global)
Meeting global climate targets will lead to 8 million more energy jobs worldwide by 2050. (Science Daily)
Mayo Clinic named U.S. News top hospital for sixth straight year. (U.S. News & World Report)
NBC News adding 200+ jobs as part of major streaming push. (Axios)
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit workingcapitalreview.substack.com
It goes without saying – nearly every sector globally has been affected by the Covid-19 pandemic. But for few sectors are those effects more evident than universities. From admissions to in-person classes to college sports, there’s hardly an element of the experience that hasn’t had to pivot quickly.
So what about endowment investing? As universities face untold economic uncertainties and challenges, what impact has it had on the approach endowments take. Put differently, have the characteristics that make endowment investing different – from time horizons to information access and beyond – been helpful in navigating these new challenges?
Daniel Feder is one to ask. Dan is a Managing Director with the University of Michigan Investment Office and leads the endowment’s investments in private equity and venture capital. Prior to joining Michigan, Dan was the Managing Director of Private Markets at the Washington University Investment Management Company. Previously, among other roles, Feder served asManaging Director of Private Markets for the Sequoia Capital Heritage Fund, Senior Investment Manager in the endowment services area at TIAA-CREF, and Managing Director at Princeton University Investment Company, the investment office for Princeton University’s endowment.
Transcript: Daniel Feder, The State of Endowment Investing
Chris Riback: Dan, thanks for joining me. What's the current state of endowment investing?
Dan Feder: Well, before I get into it, I just want to make sure, just say one thing, which is, I think is really important. The world in which we're talking about, which is endowment investing is just a very small corner of the world. It's a very small corner of the economic markets and it's a very small corner of what's going on generally. I just feel like I would be reminiscent, not just mentioning the fact that the loss of lives, the impact on lives, livelihoods relationships, access to healthcare, mental health education, and really every facet of life, that we're navigating right now, as a result of the impact of COVID-19 or just, front and center. The question around what's the impact, or what's the state of endowment investing today. I want to just make sure that I put that in proper context.
Chris Riback: Indeed, nearly everything these days needs to have a context and perspective and thank you for providing something.
Dan Feder: Certainly, I feel like what we do in managing an endowment at the university of Michigan I'm sure anyone who manages endowments, feels the same way, which is this is important work because we're supporting institutions that are very important, especially today. And so the state of endowment investing today in many ways, is really the same as it ever was. We have the same objectives that we've had all as always, the investment model or the endowment model, is more or less the same with a very large caveat attached to that, which is there is no single endowment model of investing.
We have the same objectives for the most part, and those are maintaining purchasing power of our institutions, providing some investment gains to support spending at the institutions and if we do a good job providing a real return above spending and purchasing power, if we can. So in many ways the state of endowment investing today is really the same as it ever was. The events of COVID-19 and the impact of COVID-19 have changed some things in very important ways. One of the things that it has changed or created a heightened awareness about is the fact that all colleges and universities are not the same operating businesses.
They don't operate in the same way. If we look back over the past 20 years, we've had, now this is our third major dislocation. We had the TMT bust in 2000, and then we had the global financial crisis in 2008 up to 2009. Now we have, and we continue to have the dislocations related to the COVID-19 pandemic. I know it's dangerous to say this time is different because whenever someone says something like that, they're proved wrong, but I really do think this is different in some important ways. Those prior two dislocations were really about what happened in the financial markets and what's happening today is a terrible set of events that are having a great impact on the real economy, not just the capital markets. That is especially true when we look at the impact on the dominance and more broadly on the institutions that we support, the colleges and universities for whom we work.
Chris Riback: Why is that? Why do the real economy effects have a bigger impact than just market effects?
Dan Feder: Because this is what happens in real life. At a college or university, one thing that colleges and universities have in common is that we are gathering businesses. We put people together in many different ways. We put them together in classrooms and dormitories and research facilities and hospitals and fraternities and sports venues, and the activities that happen on the campus of a large research university are very different than what takes place at a small liberal arts college. The activities in a college, a university that's located in a rural area are very different from a one that's located in an urban area and so forth. And so that really, it doesn't trickle down, it's part of what we do as an endowment and in those prior to dislocations, we were all more or less effected in similar ways, but in this one, the actual activities and the business that takes place on a college or university campus, the impacts have just been very different across institutions.
Chris Riback: I know that that occurs. And you mentioned it that occurs in every aspect of the university life in the classrooms, in the neighboring businesses, but, just being very focused on where you are and what institution you work at, is there a more visual representation of the impact than seeing what feels like a couple of hundred people sitting in the big house in Michigan Stadium for the football games? I mean, watching it on TV, it is so stuck and it's not the only place, obviously it's basically every stadium that we look at. But, given the fact that you are at University of Michigan, that stadium is such an iconic place. I've seen it a few times on TV. That is just a visual reminder of exactly what you're talking about.
Dan Feder: Yes, it certainly, as the absence of that activity is tangible and on a day-to-day basis. When I go out for a run in Ann Arbor, I see it every time I go outside and especially if I run anywhere near where the medical center is. It's just a really stark reminder of what it is that's going on here. What it is we're facing when you go past or around a medical facility or through the center of town, which is empty or on a Saturday when there is supposed to be a game and nobody's around, those are all great and important, tangible reminders, they are reminders of things that we ought to have in mind, day-to-day, as we manage an endowment and going from the kind of the 20,000 foot or 30,000 foot level down to the very granular of what happens or how we think about investing an endowment program.
The fact that the activities on campus, from one university to another one college to another are different, do serve as a reminder or reminders that the way we invest also ought to reflect the institution in many ways.
3 Advantages in Capital Markets
Chris Riback: How do you mean?
Dan Feder: In portfolio management, one way, that I think is really important is that colleges and universities generally have the same three advantages in capital markets. And those three advantages are an ability to have a long time horizon. We have access to information and people that is differentiated from other institutional investors, and we have access to opportunities that are unique to our institutions, and it is important to keep those in mind I think in how we go about investing and how we go about designing our portfolios, because having even a single advantage in the capital markets is just a great and valuable thing, and we have three of them.
We ought to be thinking about how do we apply those advantages in a way that can advance those three objectives of our investment programs in the greatest way possible. Just to bring some, I guess, context to that, in the case of a large research university, we have by definition, a lot of research, a lot of innovation going on here at campus. We invest in venture capital funds, and we hope we're investing with the very best, VCs in the industry. And we can make ourselves a better partner to those VCs by creating connectivity between what happens here on campus, in the area of research or in tech transfer with what our partners are trying to do as investors. That kind of connectivity works or can work in really powerful ways in both directions and it puts us in a position where we can have access to investment opportunities that other institutions don't have, and it gives us insights into markets that others simply don't have.
How do we apply those and where do we apply those and where can we get the greatest bang for the buck, so to speak in going after opportunities where we can make returns that are maybe not generally available or just hard to achieve, by institutional investors. That really does speak though, to what are the unique attributes of each of our institutions in doing that.
Chris Riback: Are the advantages even greater now, or are they somehow diminished slightly because of the crisis?
Dan Feder: The advantages that I outlined, were clearly there before the COVID pandemic. They were there before the global financial crisis, and they were there before the TMT bust. I think the change is how we go about applying those or the impact is how we can go about applying those to what we do day to day. I think, on balanced. It may sound naive to say so, but I don't think that they've changed all that much.
I think that perhaps we have a greater awareness of the role of our institutions in how we go about forming our portfolios and managing them. That may be, it's very small silver lining to a cloud. I mean, this is not a case where, the silver lining is as large as the cloud. This is a case where the silver linings are way smaller than the size of the cloud. But one of the positives that we're observing right now is the fact that we work, with the university, around, how all this comes together, how it all fits together is something that is just really important. It's not something we've lost sight of, but it's something that is taken on just a massive importance.
I think it's just a very small silver lining to this cloud that, going forward, there's, I would think there'll be more integration, more dialogue across institutions, not just ours, but all colleges and universities about how endowments and endowment, like assets of universities and colleges fit together with working capital and tuition in flows and research dollar in inflows and so forth.
Pressure-Testing Governance
Chris Riback: What about governance? How has the pandemic added anything to your governance process, your approach, have you had to consider it differently or from the different perspective, has it proven out, have you kind of felt helpfully, "Wow, we had pretty good governance in place and it was in place exactly for circumstances like this?"
Dan Feder: I can only speak from the perspective of where I sit and, you know, without a doubt, the COVID-19 crisis is pressure tested any number of aspects of how we do business at a university, and certainly how we do business as an endowment. And we're just very fortunate and I can speak to our experience here, but one of the things that really drew me to endowment investing in the first place was exactly the topic of governance. And if done properly, endowments and foundations are really, in a special place, with respect to doing investing well, we have far fewer agency issues than you would expect to see at a corporate investor or any place where interests of the individuals can override the interest of the institution.
We have people around the program, whether they are advisors or alums, or have people within the administration and people within the investment office who are involved because they really do have a deep affinity and a lot of, sort of personal reward wrapped up in the success of the institution. And so when you have that, it really helps clarify how you make decisions and it makes, investment decisions a lot more rational and sensible than you might see in places that have more agency issues running around them.
Chris Riback: What about sector views? Do you have a stronger affection for interest in various sectors? Has that changed as a result of the crisis or are you kind of sector neutral? And instead you look to utilize, leverage the advantages that you spoke about earlier, regardless of what sector that impacts?
Dan Feder: Well across an endowment we can't, or we shouldn't have a point of view that one sector or another is going to dominate everything else. We want to have a diversified portfolio. We want to have a number of drivers of return that allow us to have both intergenerational equity with respect to spending and support of the university, while also generating returns that some sense we should have less sensitivity around volatility for there are segments of the portfolio where sectors do figure more prominently and they are in the areas where we do much more bottom up or bottom up oriented investing and the clearest cases that would be in venture capital, I think, so in the case of venture capital, we are in the midst, I believe, and we can debate this, but I think the facts are fairly compelling around it, that we are in the midst of something that feels like an industrial revolution.
It's a technology driven industrial revolution. In the venture capital part of the portfolio, we are trying to invest into that in very real ways and this goes also back to some of our advantages. I think that we have as an investor. So as a research university where we have access to world-class individuals in the research function, through our tech transfer across the university, we have an ability to diligence ideas. We also have a vast network of loyal alums and networks of people who come from our business partners, meaning our firm managers that, can help us navigate places to invest that we think are really compelling in a very much, a bottom up way.
Some of the areas that have been really productive for us and I think are going to be hugely productive going forward, involve, new advances around drug discovery and life sciences, advances, we've made some investments that way too early to declare victory or defeat, but I think we're positioned extremely well and we're positioned extremely well because we have an ability to think about these things in a bottom up way. That makes a lot of sense and then I guess more broadly, we think opportunistically, especially in the area of the portfolios, I said that, probably more over on the private equity and venture side where we're much more bottom up, but we think opportunistically across the portfolio and things just come our way.
I guess, because we look for them, but also because, they do come our way and it can come in any number of packages and that can be a little bit from anywhere, but, so not sector specific, but I'd say, one area where we really do have a conscious effort in terms of sectors around technology and innovation. Especially in the venture end of the portfolio, that's where we really want to be long innovation.
Chris Riback: Well, it makes sense for all sorts of reasons, including of course, one of those advantages you mentioned, that the access to cutting edge ideas and insights that would come from a university and the university of like university of Michigan. I just want to be really clear though, on one point that you made earlier, Dan, under no circumstances, would I be looking to debate with you in the first place? I would simply lose, so that's not something I would ever even think about doing thank you for the warning, but to your specific point, I would never even debate that. I totally agree. It does feel like an industrial revolution as opposed to a debate that that actually might be something for a future conversation, because we're in the middle of a massive change. Aren't we?
Dan Feder: I think, well, I'm convinced we are one of our partners, one of our venture capital fund managers, had a little snippet that I thought was really interesting. And he said that, during the industrial revolution that we would refer to, or when the electric electrification of industry was taking place, there were people in companies called chief electrical officers, and we don't have that anymore. Now we have chief technology officers and this point was we look forward a bit we probably won't have chief technology officers that will just be part of what we do, and it is part of what we do.
It's not different this time. It's, there's an innovation cycle that's happening right now. And the mount of innovation and the amount of disruption that's occurring right now is formidable. It's exciting. It's also a little bit scary in some ways, but it is exciting as an investor.
“Investing into Uncertainty”
Chris Riback: Two thoughts to start to close out the conversation. One is picking up on the point that you just were making, you have spoken previously, you have written previously about the benefits of investing into uncertainty. Of course, part of me wonders if you want to be careful what you ask for we've had plenty of uncertainty, but would you explain again, your philosophy for listeners and tell us how it's currently holding up?
Dan Feder: Well, I'd love to explain my thesis, but my thesis is really stolen from an economist named Frank Knight. So I've got to give credit where credit is due. Frank Knight in the early 1900s wrote a dissertation for economics PhD, which is now published as a book called, "Risk uncertainty and profit." The proposition there is that there is a big difference between risk and uncertainty. Uncertainty is really the realm of things that are not known and are not knowable and risk relates to looking at data sets or information from the past and creating a point of view of the future and what the power of uncertainty provides, I think is that if one is able to invest into conditions in which others don't know something and can't know them and can do so well and consistently that durable profits ought to result.
So what does that mean in the realm of venture capital? It means that if you are a venture capitalist and you have access to an entrepreneur or a founder, who's come up with a business idea or an innovation that is not known to the rest of the world and is not knowable to the rest of the world and you as a venture capitalist are able to invest sensibly in that idea, and you can do that sort of thing repeatedly. Then you ought to have the opportunity to generate real economic profit on a consistent basis. And that's what we're trying to do in the realm of venture capital.
It's what I try to do when we're investing in areas where we can put those three advantages that an endowment or an endowment related to a college or university has, which are access to information and access to people, that others don't have and where time horizon comes into play with all that is that when we invest into those sorts of opportunities, they are by definition illiquid, they have to be. If something is not understood or the attributes of that investment are not really knowable, and it will take time for the goodness of those ideas to become known or knowable by others.
Well, they are illiquid until that happens. The idea of investing into uncertainty, I think it's just very powerful. We have a lot of uncertainty in the world right now and I certainly wouldn't advocate investing into those realms, because we don't have any advantages in understanding what's happening. We do have some advantages in understanding uncertainty better than others in some areas and that's where I try to focus some of my time and attention, particularly in private equity and venture capital.
Looking to 2021
Chris Riback: To close out, Dan, as you do look towards 2021, how are you framing your thinking? Is there anything that you are viewing opportunistically, any risks that we haven't discussed, that you are particularly wary of? How do you view the year?
Dan Feder: Well, I'll tell you one thing that does worry me and it's ketchup. It's ketchup because when I was growing up, there was ad campaign that Heinz had on television, for its ketchup and the tagline of it was anticipation. The idea was that, you turn this ketchup bottle over. If it's a high quality ketchup, made by Heinz, it would take a long time to come out and it's okay. Because anticipation is a wonderful thing. If what comes out is-
Chris Riback: Is as delicious as Heinz ketchup. I understand.
Dan Feder: So, why do I worry about ketchup? Well, we've had a really good run in some areas of the portfolio and especially in venture capital and in technology based businesses that have stayed private for a long time. They've developed in many cases into becoming really substantial businesses. But they're illiquid and we have more and more of those, and we have a backlog of those and those are the ketchup in our bottle. The problem is, and the thing that I worry about is the aperture of the opening just doesn't change and we're happy to take a long term view of things and be illiquid up to a point. But I do worry that if we get too much ketchup in the bottle it's going to be a problem. We can shake the bottle and we can do all sorts of stuff to try to get the ketchup out, but the opening stays the same size and even banging on the number 57, which is supposed to be the magical thing.
Chris Riback: It's the key, I've won plenty of bats by banging on the 57 on the side of a Heinz ketchup bottle.
Dan Feder: But what does worry me a bit is that we get a backup of things that really ought to become liquid, and that exercise in and of itself in how things become liquid, how value is realized, is important. If there's anything that's on my mind right now, it's how do we manage the portfolio, in parallel with this process of seeing good companies and great companies become public or become acquired so we have room to make more investments so that we can participate in what we think are great opportunities where we can be long innovation. Again.
Chris Riback: Do you have any finger on the pulse as you look at IPO offerings, any acquisitions that are kind of occurring the pace of things over the last weeks and anything you're hearing in terms of maybe Q1, anything that's giving you a sense of the finger on the pulse of that pace?
Dan Feder: Nothing that's unique, other than to say that a lot of people in the market think that the opportunity to get companies public one way or the other, or realize value, if there's a lot of depth to that. I think there is a lot of depth to that, but, up to a point, so I'm not by my comments, I'm not trying to leave you with the impression that I think we're in a lot of trouble. I just worry that, we do perhaps had too much of a good thing in terms of there are companies that are on the precipice of becoming public or where we can start realizing some of our value.
Chris Riback: Excellent. Well we'll look forward to that. We will see what happens, and we will all keep banging on the 57 of the Heinz ketchup bottle and hope that it brings the rewards that sit inside the bottle. Dan, thank you. Thank you for your time. Thank you for your views. And thank you for sharing all of that with us.
Dan Feder: Well, thanks for making time to speak with me. It's been a real pleasure.
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit workingcapitalreview.substack.com
While the terms diversity, equity and inclusion are not new, the movement – across society, institutions, and businesses – gained extraordinary momentum this year. Obviously, this push for increased understanding, awareness, and action was greatly inspired by George Floyd’s death. It has grown from there.
But what, exactly, does diversity, equity, and inclusion – often called D.E.I. – actually look like? What tangible steps can business leaders take to integrate the principles not as one-off projects, but rather on going standard operating procedures? And what might those changes mean – for immediate adopters and companies slow on the uptake – for any business’ ability to compete and win in a next-generation workplace?
Dr. Alexandria White works with organizations to create more diverse and inclusive workplaces. She serves as Director of Diversity for ReBoot Accel and as an adjunct faculty in the University of Mississippi’s School of Education. Dr. White has worked in retail banking, leadership, community activism, diversity planning and higher education and founded S.A.M.S. – Student Affairs MomS – the largest online community for mothers who work on college campuses. As you’ll hear, she brings deep perspective, experience, and actionable tips to the conversation.
Transcript
Chris Riback: Alex, thank you for your time. I appreciate your joining me.
Dr. Alexandria White: Thank you. I'm looking forward to our conversation.
Chris Riback: Me, too. I've been looking forward to this as well. We should start, I think, with apologies at what is, surely, the most obvious for you. But it is probably important for the audience to understand and me to understand and make sure we all are speaking and understanding the same terms. What is diversity, equity, and inclusion? I say the words. I know the words individually. What does that mean together? What does it mean as a business strategy?
Dr. Alexandria White: I thought about, given the whole academic version, but let's go with analogies. I love analogies. My grandpa used to give me analogies all the time.
Chris Riback: Let's go with what your grandfather would recommend, absolutely.
Dr. Alexandria White: Let's go with something that we do every day, and that's eat. My analogy is going to be focused around food.
Chris Riback: You have my attention.
Dr. Alexandria White: Diversity is me inviting everyone that is listening to my home for dinner. That's diversity. Everyone, every listener. Inclusion is making sure that all of you eat. Belonging is asking or getting a preference for what kind of dish or cuisine that you would like. Diversity is inviting everybody to dinner. Inclusion, let's make sure everyone gets something to eat. Belonging is that part of making it specific to what everyone's taste palate would enjoy. That is how I break it down for clients and people who just want a simple term. We throw it around so much, right, Chris?
Chris Riback: Yes, we do.
Dr. Alexandria White: We're throwing around these terms: diversity, equity, inclusion, belonging. Let's just break down that barrier, so that more of us can learn and build and be more inclusive of one another.
Chris Riback: To the point that you were just making, I said, diversity, equity, and inclusion. You talked about belonging. Is belonging a synonym for equity? Is it an additional concept that I ought to add into the three-word mix and make it a four-word mix?
Dr. Alexandria White: There's different versions of that. Equity, in regards with the dinner analogy, is the continuous serving of what you need of your dish or your cuisine or your drink of choice. That's equity. Belonging is making sure that we have something for you. That equity is we're going to continue to serve up whatever you like, Chris. Is it a rose? Is it some sparkling water? We're going to continuously to serve that up.
What I mean by that in a professional setting is there is not a diversity finish line for companies or organizations or universities, because we are continuously in the process of being equitable to everyone involved. That's diversity, equity, inclusion, and belonging.
Chris Riback: The analogy or the metaphor holds, I would assume, as well, because even at a dinner party, at one point, one might feel completely satiated. I've had enough, boy. Great meal. Thanks, Alex. Got to go. You know what? Pretty soon, 12 hours, six hours, 24 hours, I'm hungry again. To carry out your metaphor, I assume, you're never completely full.
Dr. Alexandria White: Never. A lot of people are, "We've just done this. We've just initiated or completed this new project or this new initiative to help an underrepresented group. Are we done?" No, we're not. In order to continue to be more equitable, it's a process. It's continuously. There's no finish line. It's okay, because we are all in this together. That is my passion, Chris. That is what I hope to continue to give out to the masses and to people that I interact with, that while this could be another checkbox, it's got to be more than a moment. It's got to be a movement.
Diversity, equity, inclusion — a business strategy
Chris Riback: Alex, I understand why I need to eat. Why do we need diversity, equity, inclusion, and belonging as a business strategy?
Dr. Alexandria White: I think, one, it's a moral case and a business case. I'm going to start with moral case.
Chris Riback: Tell me about both of them, please.
Dr. Alexandria White: The moral case is personal impacts professional. Things that happen to you at home with your partner in the morning, Chris, it can reflect your work throughout the day. That can be numerous things. When I talk about to companies, what's the business case? Why do we even need diversity right now? It isn't going to be impactful. Yes, because companies are made up of people. There are intersectionalities. They are more than just a number. They are more than just a memo. They are more than just things that produce items for your company.
Once companies understand that the personal impacts the professional, then we start talking about the business case. The business case can be found in many reports, from BCG to the Deloitte to McKinsey, that diversity and being inclusive can help and improve innovation. Innovation is perpetuated and motivated and propelled when there are different voices in the room. Different voices bring different perspectives. Different perspectives fuel innovation. Innovation fuels productivity and profit.
I think what's crazy is that you just sent out to some of your readers, Chris, the Morgan Stanley Second Annual VC report. I actually want to quote some things that I just read within 24 hours about how 70 venture capital firms. I want to repeat that, 70 venture capital firms. They surveyed. 75% of those 70 venture capital firms strongly agreed that it is possible to have an investment strategy which brings profit when you intentionally invest in women and people of color and underrepresented groups, because it maximizes returns. That just came out.
Chris Riback: It wasn't that great data. To your point, these are folks, their business is about making investments that deliver outsized returns. If they can't do that, they're out of business. Those data were extraordinary.
Dr. Alexandria White: Let's not forget, it was a 55% increase from last year. This is 2020. They did this survey in 2020. It's a 55%-increase from last year. That's my whole point right there. That's the business case wrapped up neatly in a bow. That is your moral case and that is your business case when it comes to why diversity, equity, and inclusion matters.
Chris Riback: Based off of what you just said, and particularly, your note that those data went up, the sentiment went up in 2020, and we know that this has been the most extraordinary awful, insightful, eye-opening, terrible of years. It's been everything. Is it a trend based off of what's happened this year? Or, is this a sustainable business movement?
Dr. Alexandria White: Chris, I have been doing these 15 years, ever since from community activism from the South Side of Chicago to Indiana, to overseas. This seems like a seminal moment. This really seems like a seminal moment.
Chris Riback: Why?
Dr. Alexandria White: I'm getting that a lot. It starts with what I've seen. I started doing this work being intentional with doing this work with educating myself and making sure that I have the tools and making sure that I'm able to give this content and create this content for people, so that we can embrace differences. That started in 2013 with the acquittal of George Zimmerman for murdering Trayvon Martin.
That was my seminal moment. That was my impactful moment. How can I use my voice, my energy, and my strength to be more inclusive and to make companies and organizations more inclusive? It's seven years later. This time, it feels different. It really feels different. Let me give you some examples.
Chris Riback: Yes, please.
Dr. Alexandria White: Chronologically, we have the pandemic. It started becoming more and more in February, March. Ahmaud Arbery in Georgia, Breonna Taylor in Louisville, KY, and George Floyd, back to back to back. Because I work in this space, because I am grateful that people valued my opinion, I was inundated with texts and calls, impromptu FaceTimes. It was from a segment of people. From CEOs to administrative assistants, to students, to deans of colleges, calling me to pick my brain, to see where my headspace was.
How I feel this is a seminal moment is, because the CEO of a Fortune 500 company canceled things for his whole company and did an impactful and soul-searching virtual Town Hall. It highlighted what's wrong? And, how did we get here? He also acts for permission for his select African-American employees to share their experience. By the end of that virtual Town Hall, Chris, there was not a dry eye. I know I was very emotional, as well as the participants. That is the first time that I had saw what leadership can do and how it can impact their employees.
Leadership
Chris Riback: I want to ask you about that leadership. Just bring that a little bit to life for me, so I understand the specifics. I'm assuming this was in the period right after, or sometime after George Floyd, is when you're talking about?
Dr. Alexandria White: Yes, I think within 48 hours or 72 hours. It was prompt.
Chris Riback: It was like an all-hands Zoom of some kind? It was a virtual event and employees from all over the company, or various folks could participate and give their personal stories and share context and information, is that what you're describing?
Dr. Alexandria White: Very much so. It stuck with me because that was a shift. That was a complete shift from what I had been working with, where, sometimes, a memo is sent out, or there's nothing sent out. This was that pivotal moment. It has continued. I have interacted and spoken with some very influential people. While they might not get it perfect, Chris, they are trying. They are saying statements. They are putting things out there. I peruse the internet and look for statements or diversity statements by companies.
I want to know what companies are saying, or, are they putting anything out? There's a company called James Hardie. I don't have it verbatim, but they are a company that I have actually used as an example because their statement is so authentic. It talks about, we have not always been on the front lines of social justice and equality and being open to it, but we're taking a stand now. Why I use that example is because they are so authentic in their response. It shows me that people are trying, that they might not know exactly what to do, but they want to do something. That's from CEOs to CHROs.
Currently, I'm the Director of Diversity for ReBoot Accel. It's a women-led, women- owned consulting company in Silicon Valley. We are very, very intentional when we're going into companies and organizations. Tell me about your leadership. Are they bought into this diversity, equity, inclusion? If they are not, then our work is going to be a little bit harder. We have seen wonderful, wonderful results because it is a strategy, it's a business case, and it's also a moral case. That is why I feel this is a movement now, Chris. This is pivotal. Things are changing. I'm proud to be here. I'm proud to be in this space and working with people so that we can be more inclusive of others.
Chris Riback: I am sure that you are. I want to ask you in a moment about some of those results and about, very tangibly and tactically, what you've seen companies do, what companies can do to deliver those results. I want to follow on two points that you made previously.
One, I just found so thoughtful, which was your point, and it's around leadership, that you don't necessarily have to know all of the answers to be able to start asking the questions, is what I heard you. That's how I interpreted what you were saying. Did I hear you right?
Dr. Alexandria White: You did. I tell people all the time, "Don't be afraid. The fear of paralysis will interrupt or disable anything that we want to do." People are scared. I don't want to be in the next news cycle. I don't want to say the wrong thing. Cancel culture is quite prevalent now, Chris, you know it, right?
Chris Riback: Yes.
Dr. Alexandria White: Everyone can cancel. He said this wrong thing. We don't get any take backs now.
Chris Riback: No forgiveness, not much room for error right now.
Dr. Alexandria White: I hear you. I understand that. However, your paralysis is not moving the needle. What I hope to do and what people that do my work, we hope to do is, we know you are afraid of doing the wrong thing, but, as leaders, as progressive leaders, you have to understand that that is not an option. We give actionable steps. We're going to motivate you. I love motivating people. I love putting out fires. I love under understanding how some people feel about these courageous conversations or this touchy subject regarding diversity. I'm also going to give you some actionable steps that you can do.
That comes the part. That comes the strategy and the action planning. This is the succession planning. What happens if? Any anticipatory things that might come up as we go along on this diversity, equity, inclusion journey. That is the conversation. It's quite prevalent. We help with language and words, and giving you tools on what to read, how to interpret that, taking the role of the other. We deal with a lot of people who they're CEOs, they're quite busy and already doing things. How can we be more effective? How can we make sure that you're an inclusive leader from the top down?
Chris Riback: Don't let being afraid of doing the wrong thing keep you from doing the right thing, is what I'm hearing from you.
Dr. Alexandria White: Correct.
Chris Riback: The second question that I wanted to follow up on of your earlier point, I can't get past the power of this all-hands Fortune 500 leadership-led event with the CEO. I think you said the CEO was a male. Didn't you say he, I think?
Dr. Alexandria White: Correct.
Chris Riback: I'm curious, what is the race of the CEO? Before you answer that, did that matter? Whichever race the CEO is, did that matter? Was that a factor?
Dr. Alexandria White: Let's just be candid. Most CEOs are white males, Chris. We know that.
Chris Riback: I've seen the data, yes.
Dr. Alexandria White: You've seen the data. Let's not even talk about the makeup of boards.
Chris Riback: I've seen the data.
Dr. Alexandria White: Exactly. We're going to use that as our foundation in this next segment. White males make up great amount percentage of CEOs, boards, private equities, an array of things in corporate America. We know that. I get the question, "Can I talk about diversity? I'm a white male." Yes, you can. Because of your privilege and your access and your network, you would be a supreme ally in this discussion. I love working with white males who are on their journey to intentional allyship. They're ready to have these courageous conversations. They're ready to say, "I don't know what I don't know. How can you educate me?"
Another thing that I am noticing, these are just from white males that I deal with in different aspects, many of them are coming to this conversation with a level of vulnerability and humility. The conversation is off-record. They impact me and I know they impact them. It is so profound. We often don't give people in positions of power the ability to be vulnerable.
It's another call. It was another call that I was on. The CEO was so vulnerable about his experience being a minority as a white male, being a minority in a setting and how he changed and understood how it feels to be a minority in a setting. This was on a company-wide call. People were so impacted because, I guess, he had never shared that before.
It just showed that this CEO, he was a minority in a situation and how it changed and how he learns to take the role of the other and, sometimes, understands or empathize with people who might be the only in a room or the only on the board or the only underrepresented person in the room. That's what I'm seeing. That is what I'm seeing.
Then, everything is not great. There's still some people who need some more education. But overall, Chris, whether they are white, male CEOs or someone who is just beginning on their journey, this has been very receptive from my lens and my perspective.
How to put DEI into action
Chris Riback: Well, that's excellent to hear. Those moments, what you're describing, moments can be so powerful and can carry on beyond the actual time that they occur, in terms of influence and in terms of being a common touchstone across a company, I would assume. I can imagine what the power is of those moments.
Before I took us back to two of those points that you had made earlier, you were starting to talk about results, you were starting to talk about outcomes and ways, I think, in which companies can, this is my word, not yours, maybe, institutionalize or regularize various behaviors or processes towards goals. Tell me more about that. What do those results look like? Are there tips or guidance that you can give, that folks can kind of grab a pen and paper and jot down some of your thoughts right now?
Dr. Alexandria White: Of course, in my other life, I'm a professor. I love when people say, "Take out a note and a pen and paper."
Chris Riback: As long as you don't grade my penmanship, I'm happy to take out the pen and paper.
Dr. Alexandria White: Let's talk about some action steps.
Chris Riback: Yes, please.
Dr. Alexandria White: We're going to talk about all of these things and mindsets and words. We've got to do something that can be strategic. First thing, if you are in senior leadership and you are beginning the journey of "Let's start the diversity, equity, and inclusion conversation," you've got to listen. You've got to listen to your community. You've got to listen to your internal and your external community.
I say external because our businesses are in places that we live, work, and play. We are not an island in our corporations. Making sure that you have that external, I'd say, polls is very important. Listening sessions. Now, in this virtual world, you can create a virtual listening session by a couple of clicks. Invite everyone. Make sure that everyone's voice is heard, if possible.
If you can't do a listening session, a lot of our clients are doing poll surveys. They are sending them out. We're making sure that there is not survey fatigue because we know, in this day and age, meetings are obsolete. We do poll surveys, climate surveys. You can't be inclusive if you don't know what the people need. That's that equity part.
Next, a lot of people, corporations, clients, once we've listened, once we've heard what people want, now, let's implement something. We've got to have a council. We've got to have a committee. We have to have an accountability piece to this because we want to make sure that we are doing this, and that is just not a trend, that is just not a moment. It is a movement.
I can't think of the recent well-known company. I think it was Starbucks. Correct me if I'm wrong. They are attaching bonuses and incentives around diversity efforts. That accountability piece can also be in the form of making sure that senior leadership or directors, that they are held accountable in the regards of making sure that their teams or their hiring practices are diverse.
Next, mentorship is a key component in pushing the needle in regards to diversity, equity, and inclusion. People like to see people in senior leadership or visible role models that help them, that can show, "Hey, I see someone who looks like me in senior management and senior leadership. I think I can stay here." That helps with retention. Retention helps with profit. It decreases turnover. Mentorship programs, sponsorship program. You can see how many programs that many, many Fortune 500 companies are doing in implementing because they know that visible role models is just one metric on how they continue to move the needle in the diversity space.
Another thing that we are talking about and that we are implementing is you set a goal. One thing that we advise against is, no, do not do a quick or knee-jerk reaction, because people will know if it's authentic. This is a marathon, not a sprint. We usually start with three to five goals. Do not get overwhelmed. There's so much work to do. We understand that. This is a marathon, not a sprint. We usually advise three to five goals that can be measurable.
I love data, quantitative data. I need to see visually that this is working. I need to see the numbers. We have a diversity dashboard that we use for those metrics. What's the metric? By 2022, we would like our board to be made up 70% of a diverse representation. That's measurable. We can see that. By 2022, we would like this many number of employees to be in our leadership program, in making sure that it's diverse. We can see it. We can quantify it. We can do a plan to do that.
Those are some of the actionable steps that I often consult with and give those feedbacks, because we want to see the needle moving. We want to be impactful, intentional, and we want to have an overall goal and be accountable in that regard.
Chris Riback: That's a fantastic list. Anything that I've stopped you too soon on, that you wanted to add on that portion?
Dr. Alexandria White: It is a continuous process. I don't overwhelm people, but there's so much work to be done. It starts with how you hire. One of people that we work with is, how are our hiring processes inclusive? Chris, there is research out there that, if you have an ethnic-sounding name, that you are 14% less likely to get a call back. Yes, this is true. The research has been done over and over again. Companies are saying, we know that there are biases associated with people's names. Let's have blind resumes, or let's remove identifying names from the application process. It worked. You got a more diverse population and candidates by just that one simple gesture.
Chris Riback: Being a little bit mindful, being purposeful around the actions can make a difference.
Dr. Alexandria White: Being purposeful and understanding that. Then, I actually do diversity search committee training, which, every company, when you're hiring people, there's more than likely a search committee. Making sure that the search committee is objective and aware of their biases, because they're the front line. They're the ones that are going to be interviewing those candidates. Training evolves around making sure that the search committee is having inclusive practices. That is just another arm of the diversity work, starting on the front end with hiring.
Chris Riback: One needs to have mindfulness around the process as well.
Dr. Alexandria White: Yes, you have to be mindful. It starts with your mindset and understanding that these can be barriers for people. Let's talk about inclusive practices in the company. Many of us have attended retreats and off-sites. There are clients who, exotic animal hunting or cigar rolling, or different things that might not be inclusive of people, or late night events, off-site events. Are you taking to account people who have children? Are you taking to account of people who might not be able body?
It's that constant mindset, even when someone is hired. Things that you might not even think of. We talk to people. Some people disagree with exotic animal hunting and some people agree with it. Is that an inclusive opportunity for everyone? It's just that mindfulness or being able to, "Let me step back and think about this for just a moment."
Chris Riback: On that front, though, let me ask one question that I could imagine somebody asking, which is, "Alex, I hear you. Yes, I want to be inclusive. Of course, I don't want to do things that are going to annoy people, make them feel lousy, have them not be included. But I can't please everyone. I'm not going to come up with something like that. You know what? I got to just do some events and I'm not going to please everyone, Alex."
Dr. Alexandria White: Man, that's so familiar, Chris. I'm not going to be, "Everybody's so sensitive."
Chris Riback: Yes, everyone's so sensitive, Alex.
Dr. Alexandria White: I do two-fold with this one. I say, I understand. Things are changing. You have been doing this quite a long time. Many of them, "Well, no one has ever complained about it before. Everything's just so sensitive now." I say, "How can we work through this?" One of my techniques, because I'm working with this, is I don't want to ever think that we all have to be on the same page by the end of this meeting, that by the end of this 90 minutes, we are all going to agree that we should not do this. I think that's inauthentic.
While someone disagrees with me and pushes back and thinks I've always done this way, I always ask them this. Do you understand the other point of view? They usually say, "Yes, I just don't understand why we can't continue to do this." I say, "What is the overall goal of this activity?" They say, "It's a fun time. We're building rapport. We've done this." I say building rapport or fun time, those are all aspects of someone that you want to keep in the company or that you want to build a relationship with.
Because you are in this leadership position, I know that you understand that people managing and building relationships is one of the foundations of your success. Don't you think you would be a little bit more profitable or inclusive to get more people and build better relationships? They ponder and they think, "Well, yes. I agree. I just don't want it to be." Of course, we go back and forth.
What I want them to understand is, one, as inclusive leaders, you have to take the role of the other. As many reports have said, Generation Z, millennials, up and coming people, diversity, equity, and inclusion are some of the key factors where people are looking to spend their dollars, where they want to be employed, and where they want to give their energy to. Being sensitive or thinking, "Why do we have to change?" It's a business and profitability aspect to that.
I also want to tell you, within the last couple of months, Glassdoor, of course, is a very, very influential aspect in hiring and recruiting. They will now have a metrics where people will be able to go on and say, "This is a space or this is a company that is inclusive of everyone." It will be broadcast. It is now becoming broadcast when companies and organizations are not taking a diversity lens and being inclusive.
With all of this and a lot of understanding, and not necessarily agreement, I'm usually able to diffuse that conversation and come to an understanding on why it would be beneficial and advantageous for you to possibly alter something that you had been doing previously.
Chris Riback: What an important point that is. Understanding does not have to equal agreement. You can disagree, but I'm hearing you say it's about putting yourself in a position to understand another point of view. It doesn't mean you'll agree with it.
Dr. Alexandria White: Correct.
Moving forward
Chris Riback: But maybe, just for a moment, you can understand it. Alex, as I come to a close on the conversation, the question that's coming to my mind, I know the answer to it, but I'm really curious about the why, which is, are you hopeful? I know you are because I can hear it. That's got to be your personality. You, surely, are not a person who goes into it. You can hear it. You're not a person who goes into something without hope. Yet, we're approaching six months since George Floyd, that we are in a politically-charged period.
As you and I are having this conversation, we're still in a pandemic. We didn't even talk about that. We can save that for another conversation about the diverse impact that the pandemic has had on diverse populations in this country, and frankly, around the world. As you think about DEI within corporations, within companies, within business, are you hopeful? Might I add, are you so hopeful? I sure hope you don't take this the wrong way, that, perhaps, we could look forward to a day when you will be out of a job?
Dr. Alexandria White: That just gave me goosebumps, Chris. It really did. I pray, one day, I will not have to have these discussions. I pray that for my grandchild, my future grandchild, and their children. This is closing. I have to be hopeful. I want to talk about hopeful in a personal and a business case. Personally, I am hopeful because someone listening on this call, maybe, get another perspective. Maybe, they hear another perspective and they take something that I've said and they go implement that. That's personal hope.
I get hopeful when I will never forget it. I'm trying not to get emotional. It was two days after George Floyd. I'm at the post office. I'm sitting in my truck and I'm not focused. I know I'm not. I'm just dealing with a lot. This white lady knocks on my truck window, Chris. I look up at her. I rolled my window down. Of course, I'm perplexed. I'm like, "What does she want?" Out of nowhere, this lady says, "I don't know you. I am sorry for what has happened in our country. I love you."
Chris, she and I just cried in the parking lot of a post office in Oxford, Mississippi, a random stranger. Actually, this is my first time sharing that story. That gives me hope. Random strangers who know that this is just more than a business case, that this is a moral case. That gives me hope, professionally.
On the business side, I do this every day, Monday through Friday, and sometimes, Saturdays. It is so many people. It doesn't matter who they are, a CEO or someone who is just on a council. They're ready to have these courageous conversations. They're ready to mess up and learn and keep going.
Overall, we are more than like than different. This is a seminal moment in everyone's lives. It is not going away, pre-pandemic, during the pandemic, and post pandemic. That is my hope. That is why I do this every day. That's my demeanor. Thank you for that question. Thank you.
Chris Riback: Well, thank you for that answer. Thank you to those two women in a parking lot in a post office in Oxford, MS for giving us all something to aspire to. Alex, thank you. Thank you for your time. Thank you, most obviously, for the work that you do every day.
Dr. Alexandria White: Thank you, Chris. Thank you for this opportunity.
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit workingcapitalreview.substack.com
As we consider the future of diversity and inclusion in private equity, can the industry meet the challenge?
To seek answers, the Private Capital Project at the Harvard Business School and the Private Capital Research Institute recently hosted a webinar with a group of limited and general partners. What did they find?
We spoke with one of the conference leaders, Dr. Josh Lerner, the Schiff Professor of Investment Banking at Harvard Business School. He co-directs the National Bureau of Economic Research’s Productivity, Innovation, and Entrepreneurship Program and serves as co- editor of their publication, Innovation Policy and the Economy. He founded and runs the Private Capital Research Institute, a nonprofit devoted to encouraging access to data and research, and has been a frequent leader of and participant in the World Economic Forum projects and events. He has been named one of the 100 most influential people in private equity over the past decade and one of the ten most influential academics in the institutional investing world.
Transcript
Chris Riback: Why did you bring together this group for the discussion? What was your goal?
Josh Lerner: It really was two-fold, one of which is that I'm convinced that this is a topic that has really under-researched, that there's just so much more need to build understanding of this, of the issues here and that I was hoping that this would stimulate the academic work, but on the other hand, there's also just been enormous practical interest around this, that pensions, endowments and others are thinking about and grappling with these issues and sort of bringing together some thoughtful people who know the territory well, I thought it would be very helpful as well.
Chris Riback: So have you been getting questions and inquiries from the marketplace?
Josh Lerner: Well, we did a series of studies for the John and James Knight foundation, which essentially looked at diversity and diversely owned asset managers. So essentially saying when we look across various asset classes, from public to private and then within private from real estate to venture, to hedge funds and so forth. What do we end up seeing in terms of the role of firms that are diversely owned, whether women owned or minority owned and using various thresholds, but largely focusing on 50% plus ownership. So at the time that we originally did the work with Knight it got some attention, but not an extreme amount of tension. But really within the last six months, there's certainly been explosion of interest in this topic. And a lot of inquiries from people within the investment management world. Yes.
Chris Riback: And was your goal in bringing together the folks that you did was your goal to identify challenges and issues, or was it to find actual solutions?
Josh Lerner: A little bit of both that I think that certainly when you think about the work that we did with Knight, it documented the nature of the problem, but it really didn't either get into the root causes of those problems or with the best solutions would be. And clearly those are really first order problems. They're obviously very linked because without really understanding the root causes, it's hard to come up with solutions, but really wanted to advance the discussion around how to address the disparities. Certainly seen in the numbers that we put together.
Chris Riback: So let's start talking about some of the areas that you explored, what is the build the pipeline problem?
Josh Lerner: Well, essentially one way to think about it is that the way in which one gets a lot of diversity owned firms is that one that it's in some sense, no, from any other kind of new private equity groups, that in some sense, what you say, what is the most common way of getting a new private equity group or new real estate group, or even for that matter, a new public market group. It tends to be people who are working for the established groups, where the most established firms in the industry who spin out and start their own groups. Right? So,
Chris Riback: Yes.
Josh Lerner: If you were to look at private equity as example there's just been generations of people who have left the Bain's and general Atlantic of the world with great track records. And then that their success has ended up allowing them to go out and begin their own firms.
And in the same way when it comes to diversely owned firms we'd like to see that same process working yet historically when you look across the senior investment staff in many corners of investment management, it has been not a huge amount of women in not a huge amount of minorities. So in a way, the first challenge really is this building the pipeline of people within the large firms. Who with an eye towards the thought that some years, hence once they've developed a terrific track record that they might consider spinning out themselves.
Chris Riback: I was surprised I've got to say, to read your finding that, and I'm reading from your report now, hiring decisions are too often made by unseasoned junior associates who are less cognizant of the broader goals of the organization and less experienced in finding talented minorities. And then you continued that this change will require involvement of the most senior people at the organizations. It also may require a change in mindset, okay. Moving on there. So the junior versus senior, every organization I have ever had you've talked with studied research, I would assume the same is true for you. You're the one who does that for a living. We'll say number one, talent is what matters talent is our differential, it's the people. How could you have found that this type of hiring was being done by unseasoned junior associates?
Josh Lerner: Well, I just think that it's probably fair to say that rookie hiring, no matter what the field is, a lot of work, right? You have to go through a process of plowing through a lot of resumes. There's a lot of interviews, a lot of screening. Yes. It's just a laborious process. So it's not surprising that whether we're looking at investment banks or private equity groups, or for that matter academic institutions, there's a tendency on the part of the old guys sometimes to say, "You guys go and do it." Right? In some sense, the appeal of having young people do this is that they have the time and energy. And in many cases, they're close in age and can read between the lines in terms of people in a way that certainly seems appealing.
But I think the concern which was highlighted is that in many cases there's sort of a tendency on the part of young people, just nature the world to end up looking at and ending up hiring a bunch of people who are more or less like themselves. And if one's goal is to sort of dramatically improve the diversity of an organization, there's often a need to, what was the phrase the Apple use think different, right?
Chris Riback: Yes.
Josh Lerner: A little bit outside the normal pipeline, that's there and to really challenge some of the assumptions as to what makes a promising candidate and what are the, what are we really looking for? And I think it's that sort of ability to think different that is probably not what one's typically going to see among the, in a situation where a lot of the hiring decisions have been devolved to the younger generation, no matter how smart and ambitious they are.
Chris Riback: Are you finding within the industry a desire to think differently about HR and about hiring in general? Or have you not necessarily seen that yet and that's one of the reasons why you have this recommendation?
Josh Lerner: Well, I think that in a way there's a two-sided answer. I mean, so certainly today everyone's saying the right things to have paying attention to this issue, but I think if you were to look over, for instance, the history of investment banking and recruiting there've been a series of initiatives over the years where there's been a lot of attention paid to this issue and a lot of commitments made to focus for instance, on increasing minority hiring. And the like, but often it seems that these things there's initial wave of enthusiasm and then it just sort of Peters out. Right? And it goes back to the way that the world's always always been. So I think the question is not really about the short run and interest in the short run, but really more in terms of whether this time can be different in terms of a real long-term commitment to this kind of hiring and building the pipeline that's needed.
Chris Riback: In terms of the long term and in terms of thinking about this beyond just the short term requirements, that's where I would think investment starts to come in and rethinking the investment criteria and the role that the LPs can play. For LPs, they operate though under a defined set of investment criteria. Are those criteria properly defined to meet this moment and challenge?
Josh Lerner: I think it's a very interesting and important question. I think one thing that we shouldn't do is minimize the challenge that LPs face, that they've got a lot of money to put to work. There is a general temptation to say, "We want to write only a few big checks. We have a limited number of relationships," just simply because it's challenging to manage a whole bunch of smaller, a smaller set of ties. There's almost inevitably going to be a bit of a bias towards saying, "Let's go with the most established and seasoned groups out there." As I'm sure you've heard many times, there's that old saying about no one got fired for buying IBM. I think that a little bit of that carries over into the investment management world as well, saying that choosing some of the most established and safe names is in some sense a no lose strategy.
I think certainly one of the challenges that many diversely-owned firms face is that they're smaller. They're younger, so less of a track record. So as result, even if they're potentially very attractive, for instance just to raise one criteria, they may be profoundly differentiated in terms of looking at market segments and having networks that majority-owned firms are going to find very difficult to penetrate. At the same time, they're going to be difficult to fit in using the standard plain vanilla criterion that a large pension fund might use.
Chris Riback: So what guidance do you give LPs? I'm sure you are sensitive to the challenge. They, I'm sure, would argue simultaneously that yes, absolutely, they want to support in any way possible diverse GPs and diverse opportunities. At the same time, what they must do is be absolutely blind to that because what their responsibility is in terms of a return on their investment and to look at every investment based on the financial factors. How do you encourage or persuade a balance? Is there a market case for what you're arguing?
Josh Lerner: Yes. So first of all, it's important to re-emphasize that there really isn't a trade-off here, that certainly the work we did looking across a wide variety of asset classes found that diversely-owned firms, whether in private equity or real estate or so forth, did as well, statistically indistinguishably different from the majority-owned firms. So it's not like we live in a world where there is essentially some sort of expectation that because one has a diversely-owned firm, there's going to be one he has to accept by definition some lower performance as a result. That being said, clearly there needs to be, in some cases, a broadening of the criterion.
So just let's think about size, for instance. Many of the diversely-owned groups are smaller because they've been around not as long and haven't broken into the firmament of mega funds. But that being said, there's nothing written in stone that pension funds, for instance, have to put all their money with very large managers. What the conversation highlighted is really saying, "Let's, without posing this false dichotomy of diversity versus performance, well, try to think about where are the stumbling blocks that lead asset owners to say, no, even if there is a very promising diversely-owned group?"
Chris Riback: What's the role for activism in generating change here?
Josh Lerner: Well, I think that's a very interesting question, which has got a bunch of different sides to it. Certainly there've been a number of concerted efforts in the last year or two to try to highlight the fact that diversely-owned managers represent a small part of institutional ownership. And in some sense, I think it's hard not to respect that effort. As one of our panelists pointed out, there's been a long history of people saying stuff in the United States about why minorities can't have this or can't have that. And largely, they've not changed their mind on their own accord, but they have responded to external pressure.
At the same time, there is... I'm cautious about a problem that I sometimes call the intolerance of failure. One of the things that we saw looking in depth at private equity and private equity investments by institutional investors in the last several decades, is that it seems that diversely-owned firms have been treated differently from majority-owned firms when it comes to how under performance is treated. In particular, it seems that diversely-owned firms are punished much more severely for under performance in terms of being either unable to raise the follow on fund or just simply getting their fund size dialed down very dramatically in a way that many majority-owned firms haven't. In some sense, we know that part of the investment business is under performance, that even if we think about some of the great names in various asset classes, they almost all went through some period where they had a rough patch and had some disappointing returns. And in many cases their investors stuck with them and allowed them to work their way out of the woods and right the ship and all that.
In a way, it's hard not to think that a little bit of the intolerance of failure problem stems from asset owners who went along with investing in a diversely-owned fund, but weren't really committed to it and then were far more unforgiving of a little stumble than they would have been of a majority-owned firm. So in a way there's a bit of a balancing act there, but certainly I guess my feeling is that anything we can do to very much encourage attention to this issue and to highlight the potential in diversely-owned firms is going to be positive by and large.
Chris Riback: So that's exactly what I wanted to ask you was, so how do you get the word out? The intolerance of failure dichotomy that you just described. The fact that the return on investment from diversely-owned firms is the same, the data that you talked about earlier in the research that you have done, the importance of changing the filling-the-pipeline process and getting senior managers more engaged, how do you get word out on that message?
Josh Lerner: It's a great question, Chris. I think there's a couple areas that I would highlight. One is that I think there is need for continuing data that in some sense, we know that old saying about how you can't manage what you don't measure. Our work with Knight was an initial effort to try to measure some of this stuff, but keeping up the measurement and having dashboards and understanding what is happening with the industry, I think is an important aspect. Beyond that, I think there's also a real need for best practices, that when you look across the industry you see that there are some asset owners who seem to have been quite successful in getting their funds in the hands of diversely-owned managers and really doing well with it.
There've been others who've been quite successful in encouraging their GPs to pay serious attention to this issue. I think that one of the things that really behooves us as academics is to capture some of the best practices that are out there in terms of building diversity in the industry and really highlight the nuts and bolts of what they did so that these things can be more widely emulated throughout the industry.
Chris Riback: And is that work that you're doing? Or is that a nugget that you're putting out there hoping that another big fish like you will come along and take a bite and carry things forward?
Josh Lerner: Well, we're taking a stab at it ourselves, but I think that this is a big issue with a lot of aspects to it. So hopefully some of my colleagues will get excited about this area as well.
Chris Riback: Why are you doing it, just to close out? You've got limited, we all have limited time. There are a lot of different areas that you could and should be researching. Why for you personally, are you devoting time, energy to this topic?
Josh Lerner: The patterns that we see in data are just really striking in terms of... And when you think about financial intermediation, obviously venture and PE and real estate are great examples of this, there's really two aspects that make having diversity really important. One, of course, is just simply wealth creation. We know that owning asset management firms has been a route to wealth creation. And in as much as we're concerned about the uneven distribution of wealth in this country, I think anything that can be done to encourage wealth creation in the minority communities especially, is going to be a strong, positive aspect.
But the other aspect is something which the academics sometimes call homophily, by which they mean that people tend to fund other people who are like themselves. And in a way, if we're really interested in trying to boost, for instance, entrepreneurship and new ventures in the minority communities, having a bunch of diversely-owned, well-capitalized investment managers is I think, in many senses, a really important piece of the puzzle. So in a way, when we think about these intermediaries, this is really high-powered money. It can really have second order effects, which can really impact society in a very broad kind of way.
Chris Riback: Well, it's high-powered money. It's also high-powered work and it's high-powered importance. So thank you, Josh. Thank you for your time and thank you for the work that you've done.
Josh Lerner: Really enjoyed having a chance to talk. Thanks again.
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit workingcapitalreview.substack.com
How to listen now: Click audio player above to listen.
Exclusive subscriber benefit: Working Capital Conversations podcast. Our podcast on Ideas that Drive Global Business. Previous guests include leaders across business, academics, public policy and more: Joseph Stiglitz ( Nobel Prize, Economics); Alvin Roth (Nobel Prize in Economics); Dr. Simon Levin (U.S. Presidential Medal of Science; Princeton Univ); Gene Sperling (former Director, U.S. National Economic Council); Austan Goolsbee (former Chairman of the Council of Economic Advisers); John Chambers (former Cisco CEO); Beth Comstock (former GE Vice Chair); Chris Whittle; Nikhil Sinha (GSV); Josh Lerner (HBS); Anousheh Ansari (XPrize); Liza Landsman (NEA Partner, former President, Jet.com); Janet Cowell (CEO, Girls Who Invest); various leaders from Wharton, HBS, MIT, Northwestern; among others. Subscribe via Apple Podcasts.
Transcript: Joe Coughlin, CEO & Founder of Corporate Risk Solutions
Businesses, of course, face risk every day, whether from supply chain disruption, calamity, or as we’ve seen from a series of hurricanes of the last years, Mother Nature. But most of these risks have a foreseeable ending – after all, at some point the hurricane passes.
But among the many business risks during this Covid age are the unknown risks – how long will the pandemic endure? Which geographies will be hit hardest? What might recovery look like?
And while the insurance business can account for many of the regular risks, Covid brings a new, challenging dimension.
How are the insurance companies thinking about Covid-19? Perhaps more significantly, how can businesses measure, plan, and account for the risks they face? How should they think about the problem?
Joe Coughlin is the one you want to ask. Joe is CEO & Founder of Corporate Risk Solutions. With decades of experience in the consulting, advisory, underwriting and brokerage segments of the insurance industry, he has seen virtually every kind of risk – and understands what makes the current pandemic unique. Over that time he has originated thousands of engagements and provided services for many of the largest and most intricate transactions within the private equity and distressed debt markets.
Chris Riback: So, a professional in the insurance business, I’m sorry for how slow things must be for you. How in the world do you pass your time, Joe?
Joe Coughlin: In many different ways. Every time the phone rings, there’s a different challenge. But we’re in the problem solving business, so I can think of no better place to be.
Chris Riback: Well, there are plenty of problems. I can’t imagine that things have ever been much busier, but you’ll tell me about that. Give me the overview. What is corporate risk solutions? Where do you fit in the insurance and business risk ecosystem?
Joe Coughlin: We are an independent risk advisor that serves in the alternative capital space primarily. And by alternative capital space, I mean by normally people that have raised third-party capital, either through private equity funds, through distress debt funds, hedge funds, venture capital firms, but they’ve raised this third-party money from endowments and pension plans and wealthy individuals, etc., and they’re deploying that capital and they’re looking for superior rates of return. So we’ve focused in that marketplace the most because it tends be repeat business.
If you’re doing a good job for a particular sponsor, they’re going to call you back on the next deal and the deal after that and the one after that. So you can have a very long area or a level of continuity with these clients.
Chris Riback: Now, do you work then directly with the sponsors? Do you work with portfolio companies to the extent that the sponsors with whom you’re working are investing in specific companies? How does that work for you?
Joe Coughlin: In a perfect world where we start our relationship almost universally is at the sponsor side. So we’re actually dealing with the fund, we’re helping the fund assess their own risk. And that’s normally in the form of general partnership liability. It’s protecting the actual fund for all the things that they’re doing while they’re looking for deal flow or while they’re assessing businesses to buy. And so when we start with that, the general partners quickly see that we really do understand the space and we understand what they’re about.
Chris Riback: I’m not trying to be smart here, but why do they need you? Why can’t they do that themselves?
Joe Coughlin: Well, I can honestly say this. In 34 years of being exclusively on the private equity side of the house, meaning the sponsored business side, we have never met a risk manager that has been able to have a grasp of what’s going on in the marketplace. If you’re a risk manager and you happen to be in a private equity fund, you have between nine and 15 assets that you’re possibly looking over at any given time. That might bring you into contact with multiple brokers, but for the most part, a private equity fund like that is probably dealing with one or two, maybe three different brokers, and then those nine different portfolio companies as they come up for renewal at various times of the year, that’s nine or 15 different times that they’re out in the marketplace.
And depending on what kind of assets they own, if… Maybe they’re in consumer products, maybe they’re in real estate, maybe they’re into some kind of energy, silos or something like that. But it’s a finite view of what’s going on in the market. What we are doing is by dealing with the breadth of clients that we have, which is some 100 plus funds that are in every industry vertical, we’re dealing with brokers all around the world, in all of these different industry groups. And whether you say they’re six primary or they’re 14 subset of business silos, we’re in with every one of them. And then we’re dealing simultaneously with every relative underwriter, which brings you into the hundreds of underwriters that are around the globe.
Chris Riback: So you’re really understanding both sides of the equation. You have to understand both sides of the equation.
Joe Coughlin: The thing that we believe in very firmly is that the client needs to be as close to the capacity as possible. When I say the capacity, I mean that that is the actual underwriter, that is the insurance company that has entered into this agreement. What we’re doing is we’re acting as this navigator, we’re acting as this Sherpa guide by saying that, “This is what the marketplace looks like. Here are the carriers, here are the underwriters, here are the insurance companies that like your business, they are interested in your business.”
“Not only that, they excel at writing this business. They’re committed to writing it. They’re not just going to come in this year and then next year that they’re going to hammer you with rate increase. They really like this business.” So what we’re trying to do is to build partnerships that will be sustaining.
Chris Riback: Now, if you are the Sherpa, talk to me about the Mount Everest that I am assuming the business risk management world is today. Have you ever seen anything in the business risk management field like what we’re seeing now?
Joe Coughlin: No, that’s it. It’s an emphatic no. So I’ve been in the business for 40 years. And I grew up in an insurance family and knew a lot of people that were in the insurance industry. And the last three hard markets that we had prior to this one, which I’ll get to in a second, were… it was 1975 to 1978, 1984 to 1987, and 2001 to 2004.
Chris Riback: Tough times.
Joe Coughlin: Yes. If you go back into the last hard market cycle of 2001 to 2004, that’s when you were really starting to come off of Wilma and… Well, actually when you get into 2005 and 2006, you had Wilma, Katrina, and Rita and all of those things.
Chris Riback: All of the hurricanes.
Joe Coughlin: All of those. Now, the property pricing bumped up for a little while, but then it went right back down for a really a 14-year period of time. And that then finally got hit again in 2017 with the worst catastrophic claims in recorded history. And that was about $135 billion was recorded in the third quarter of 2017. But it still took another two years, so it was really in September of ’19 that we started to see the pricing really firm, and that was because a lot of the reinsurance treaties started to expire.
Chris Riback: And just refresh my memory. What occurred in that quarter in 2017?
Joe Coughlin: It was a combination of a whole host of things, but it was really Sandy, Harvey, Irma, Matthew, Maria, those just on the hurricanes alone. I think that really it just got to the point that… and there was other factors. I don’t even want to say extenuating circumstances. I would say that they are just circumstances that directly correlate to the industry, because the reality is, while this may be a gigantic industry when you take all the players that are involved in it, the reality is that when insurance dollar comes into an insurance company, it sits there. Then depending on what happens with the claims during the course of the year, the insurance company has to post reserves. The other thing is that insurance companies are the largest buyers of fixed income instruments. They are big government bond buyers. They have to put their dollars into very prudent investments. And those prudent investments don’t have very good rates of return as you can imagine. And as you well know right now, we’re in the lowest interest rate environment ever.
Then you’re looking at a stock market that fluctuates around, it goes from highs to lows in a matter of weeks if not months. Well, and then you take things that have happened litigation wise over the last few years. You’ve got these social justice claims that are taking place. You’ve got the changes that took place in regulatory side. You had the GDPR, which is Europe’s anchor to regulation on privacy.
Then that’s followed by what California did, which is leading our country, which is the CCPA, the California Consumer Protection Act. And those are privacy things that directly affect employers and then the employers are insuring these potential fines or transgressions. So you had this culmination that all came down the pike at the same time. And after this sustained 14-year soft cycle, the insurance companies said, “That’s it.” And once the retrocessive market, which backs up the reinsurance market, which backs up the insurance carrier market, dried up, then all of a sudden, the capacity, the price to rent the balance sheet of an insurance company went through the roof.
So right now, we are absolutely positively – and I’m not shy about saying this, because people say, “You all know that market,” – but this is the worst market in 40 plus years without a doubt.
Chris Riback: And now, what does COVID do?
Joe Coughlin: Yes, COVID is the icing on the cake. Here’s my answer on COVID. It’s hard to say, right? There is speculation that COVID, on the one side, it’s estimated that it could cost the industry $56 billion. On the other side-
Chris Riback: Just COVID alone?
Joe Coughlin: Just COVID alone. On the other side, it says that COVID could cost the industry some $556 billion.
Chris Riback: Explain that to me, because that’s a massive range obviously.
Joe Coughlin: So yes. If anyone said to you that somebody is a treasurer or a CFO has something for me and they came back with that, I don’t think they would last too long.
Chris Riback: Yes. You’re really good, Joe. That is a lot of years in the industry to be able to narrow it down to just 500 billion range.
Joe Coughlin: I know.
Chris Riback: There’s a why behind that. Tell me the why.
Joe Coughlin: Well, the why is there’s really two components of COVID, right? One is that there is this healthcare side, which clearly, that is really the easiest part to see, because there’s all these models that are out there. By the way, if every single day that you open up the newspaper or you hear on the news, there is a new announcement on what’s going on with COVID. Do the antibodies survive for longer than 36 days? Well, it used to be the antibodies would last for years if not forever. Right?
So getting the true facts out to a public on a new disease is very hard. But what we do know is that for those patients that do contract the disease, if they don’t go into an intensive care unit, then the average cost that they’re seeing as of right now exceed about $11,000 per patient. If you go into the ICU, it could be as high as $35,000, and that doesn’t include any short-term disability that may be provided in there. So by capitizing the number of people – if we had 10% of the population that contracted the disease, then that has its own math. If it went up to 20%, then it has another math.
And if it goes up to what people have said is the worst case scenario, which would 60%, when it was thought that… What is herd immunity? Well, at first, herd immunity was 70%, then it went to 60. We’re now hearing, as of last night, we-
Chris Riback: Yes. I saw it.
Joe Coughlin: It was like herd immunity might be as low as 20 to 40%, right? So it depends on really what’s happening. But the reality is that the healthcare side is easier to see right now than the property and casualty side. And when I say property and casualty, I mean really everything else other than healthcare.
Chris Riback: So explain that to me. I understand why healthcare… X number of people are going to get sick, there’s going to be an average of Y amount of cost per person. I get that math. Why so much unknown on all the rest of it? What might be all the rest of the potential claims and why is it a gray area?
Joe Coughlin: Right. And there is where you can’t say the icing on the cake, right? Where you can say it could be the cake itself. While we’re talking about all these things that… ESG is environmental, social, and governance types of things, and as we just got done talking about the social justice type of things, no one really knows because we’re seeing a lot of things that were never intended to happen are happening now and that rules are being changed and-
Chris Riback: Meaning abilities for businesses to stay open, not stay open, who can be where, what types of transactions can take place. Do you mean those types of different rules changes?
Joe Coughlin: I think people are really trying to grasp and grapple with the fact of what is fairness. When you have hundreds of thousands, or make that millions of people, that are either out of work or are wondering about their future status with work, or they’ve been working at restaurants, or they’ve been working at stores… I mean, let’s face it. If 80% of the economy is driven by small business, then those small businesses have been affected. And the speculation is that it’s a loss of some 225 billion to $450 billion a month.
Chris Riback: A month?
Joe Coughlin: A month. Right. That is no longer going into the general economy. Right? And so, if you have enough people that are saying, “Somebody’s got to pay for this,” right? Because you thought you were buying insurance, right? Now, insurance thought it was pretty clear, the insurance companies. They looked and they said, “Well, after SARS came about in 2006,” they said, “Wait a minute, there is no way that we can offer insurance for a pandemic and communicable diseases. It’s anathema to being in business.” And I really do thank Evan Greenberg who runs Chubb… And he’s been a long-time friend, way back when he was at AIG. But Evan just brought it right back to light when he said that, “The thing about property and casualty is, it’s defined by time and geography.”
And by that, I mean that if you take a major storm, if you take a hurricane and it comes up from the Caribbean and it comes and it hits Florida, let’s just say it’s category five storm, and it goes all the way up to Maine, it’s defined by time. And it might take a week.
Chris Riback: At some point, it ends.
Joe Coughlin: It ends. Right? And it’s defined by geography, right? Because it eventually moves on and leaves, and it dies. I don’t care if it’s a typhoon, I don’t care if it’s an earthquake, it’s a wildfire, but there is a degree of time and there’s a degree of geography. But in a pandemic, as we are seeing right now, there is no time limit, left onto itself, and there’s no geographic limit, for an insurance company to say that, “We are going to underwrite these losses for business interruption.” They say, “No, we can’t do it.” So in some cases, the policies actually provided some coverage because they wanted to make it simple enough to say, “We’d rather offer you very, very little, but offer you a coverage but show that it ends here,” rather than say, “There is no coverage,” and argue about it.
Chris Riback: Has that question been litigated? Have businesses gone and said, “Well, you are my insurance company, bad thing happened, I thought I was insured, what do I have you for?” And the insurance company says, “You had me for A through Z, but not this thing that has no time and geographical boundaries.” Is there a litigation status on that or that’s-
Joe Coughlin: Yes. There’s a lot of litigation status. There hasn’t been that much in terms of where it’s been adjudicated, but what we do know is there’s some 450 ongoing or at least filed lawsuits as of this point in time.
Chris Riback: Wow.
Joe Coughlin: There are a whole host of class action lawsuits that are saying that this is a business interruption and an indemnifiable business interruption. Texas, as of right now, there was a Liberty Mutual case where they have stood by the carrier in their ruling. But just last week, Missouri allowed some hair salons and some restaurants to proceed with their suit alleging that the physical damage actually applies to their countertops. Now, normally in business interruption, there clearly has to be direct physical damage that took place. So remember when COVID first came out, everyone was saying, “I couldn’t get to my place of employment. I couldn’t get there. It was closed.”
This is one of these things that it was like, “Well, it’s pandemic. It’s a communicable disease and there is no coverage for that.” So what’s being argued now is, will… By the way, Louisiana, Massachusetts, New York, Ohio, and Pennsylvania are now looking into doing the same thing and saying that this is what’s going on here.
I, firstly, would have to think that my money would be on the insurance companies because it is contractual law. And unless somebody is going to backstop all of these insurance companies… because there’s only so much money that can go around, right? And as big as the industry is, and whether it’s $20 trillion in assets, those $20 trillion is already tied up in reserves and it’s already tied up in low interest rate returns that, one year, the industry would be bankrupt. It’s a very, very, severe-
Chris Riback: Yes, what a challenge. I’m sure you are shy of making any type of prediction on anything, except but for the idea that this very well could end up in the Supreme court at some point.
Joe Coughlin: Yes. I definitely think it goes to the Supreme Court. And what you’re seeing right now is already they’re modifying these policies and these coverages. There were those that went out and bought coverage for this, and Wimbledon is probably the best example of it. But Wimbledon, for the last 14 or 16 years, has been buying… Well, since SARS, so 14 years. They’ve been buying pandemic coverage in the event that Wimbledon was going to be canceled.
Chris Riback: And not cheap. It’s not cheap insurance.
Joe Coughlin: No, it’s not. I think it was like a million, five pounds a year. I think that the number is in US dollars. They put in some 31+ million dollars over the years to buy this. Right now, they’re looking… from what I’ve read, is that they’re looking to collect $142 million on this. And you’d say, “Absolutely.” And you should. But there’s tens and tens of thousands of people that never bought that. But now, what you’re going to see is that policies are going to clearly now. I mean, they’re going to get far, far more restrictive in what they will do and what they’ll put out there. And so, what happens at the end of all of this? It’s just question marks everywhere.
I mean, that’s where risk really comes down to. People have to think and I think that every business has really got to the point that you have to say, “What is the worst case scenario and what do we do if there’s some kind of systemic change that takes place?” That’s all.
Chris Riback: What are businesses calling you about now and what are you telling them?
Joe Coughlin: Right now, there has been… for April, May and June in particular, we had a lot of more people calling specifically regarding COVID. I’m not going to say that’s not going to stop, but it started to… I think they were getting a lot of conflicting information, and I’m not looking to get into any battles with any law firms or anything, but they were… I think maybe for some places there were providing hope where there maybe shouldn’t have been as much hope. So people were exploring options as to what the realities were. But right now, our main business is trying to help our clients stave off the effects of what was the hard market before COVID.
And that hard market is still with us. There is a scarcity, a dearth of capacity that’s out there. These carriers have a finite balance sheet and they are very selectively they are renting that balance sheet out to a client base that they feel that they can, again, partner with for a few years and that they feel as though they can collect a justified amount of money for a risk that they’re taking on and that both parties feel good in the process. And-
Chris Riback: So is there a situation? Are businesses in certain cases having trouble getting insured, because there’s just not a market to insure something?
Joe Coughlin: Oh, yes. Very much so. And-
Chris Riback: And what’s that doing to their business? How can a business go forward without insurance backing it up?
Joe Coughlin: It’s extremely difficult. And depending on what business that you’re in and what types of margins… I think everybody, by and large, I always think that you want to be in a business that you’re getting 30 plus percent in a margin, right? Reality is, some make a lot more than that and some don’t make close to that. But whatever your profit margin is that keeps somebody in business, you’re looking for a return. You normally just don’t go into a business just to tread water. But if you now have to start passing on those increased prices if you are in the restaurant business or you’re in the transportation business… And transportation business is a commodity business. It’s separated by a half a penny depending on the miles driven.
And now you have to start to increase your pricing because your insurance costs more across the board. And look, you’re going to self-insure, you’re going to do whatever you possibly can, but at a point in time, there’s certain things that you do have to provide for, and cyber liability, things that could really knock you out. You’ve got to have these business plans for. But if you start to pass that onto the consumer, everyone’s sitting there and say, “Well, geez! And it makes the flow of that client go someplace else. So there’s real ramifications of this. So what we’re trying to do is do what we’ve always done, and that is to act as a fiduciary for the client and to be able to say, “Okay, what do you got? What concerns you? Where do you stand right now? What have you been told?”
And now, what we’ll do is either one, if you’re dealing with a company that is really well prepared and really well-represented both by their insurance companies and by their brokers, we might just be simply giving a good housekeeping seal of approval saying, “There is nothing more to do here or you can tweak this around the margins.” But, more often than not, we’re finding that there’s a bunch of rocks that haven’t been overturned or looked under and we’re providing options that haven’t been seen before. The client just can’t know that. They’re just not ever going to know that. And the only way they can do it is they’ve got to put their program in competition with another broker, and that sometimes becomes a real pain. I’m trying to choose-
Chris Riback: Yes. I understand you. That can never be fun. But you’re describing a process that feels like it could be potentially as integral to business success as any operational efficiency.
Joe Coughlin: Absolutely. Yes. I’d say like, “Look, it’s not just us, I know that there’s other firms that are out there, but you need to know it.” It’s something that clients, you don’t need to do it every year necessarily, especially if you’re working with an advisor. You want to be able to go say, “All we’re really doing, is it best practices?” Right? Best practices, you need to know what your competition is doing, you need to know what the market is doing. And it’s a big, big market. I mean, there’s hundreds of insurance companies that are out there, and that at any given point in time, somebody is going to be saddled with legacy claims that it’s trying to run off that book of business until it can get back on its feet in a particular way product line. And that means that new capacity. And by the way, that’s the thing we really haven’t touched on.
The reason that this market started to drive up to the way it is today is the fact that the capacity drive dried up and that we were not getting the private equity firms and the hedge funds that were coming in, that were feeding these green shoot, new companies, new insurance companies, that had come up in the ’80s and the ’90s and even in the early 2000s. So we’re starting to see a couple that are out there, and with that new capacity, once they realize that interest rates start to firm up a little bit and once people start to think about there’s some stability in the stock market and once interest rates start to rise a little bit more, and once there’s a little bit better feel on the litigation side of the house where people could start to feel a little bit more comfortable that this is the way courts will rule and there’s not as much of a… like a-
Chris Riback: Uncertainty. Yes.
Joe Coughlin: Yes. Then we will see it. I know that sounds like it’s like, “Oh, that’s too feel goodie,” but reality is, it does, and it will. It will come back. I have no doubt about that because I personally, if I was sitting there with hundreds of millions and billions of dollars, would I right now be putting money into some very seasoned professionals, some underwriting teams that come out of some of the best insurance companies in the world and saying, “I want to underwrite this line. I want to underwrite this. This product line, I’m going to be a little of this, a little of that.” And I put those teams out and I say, “Here’s my balance sheet. Now let’s go to work.” Yes, I would. I definitely would. And you would be able to pick up some fantastic business which right now can’t move. It can’t move because there is no market.
Chris Riback: Joe, to close things, we’ve talked about some incredibly important topics; the capacity challenge, COVID, the hard markets, the pending or the existing litigation and the pending outcomes, the uncertainty, but I feel I really should end this with what has to be the pertinent question, which is, why did you put Eagle Scout in your bio, on your website?
Joe Coughlin: Yes, I put it for a reason that… I put it because is scout oath, scout law, but trustworthy, loyal, helpful, friendly, courteous, kind, obedient, cheerful, thrifty, brave, clean, and reverent. The word fiduciary is when you engage a third party to act on your behalf, as in this case, the subject matter expert on insurance and on risk. Then we have to, we have to act as the fiduciary.
And as an Eagle Scout, I felt as though that that should and I believe it does. It sends a message that you are something more, that you strove to be something more in that regard. And it doesn’t mean that you’re not going to tick off people from time to time, and it doesn’t mean you’re not going to push them, but it does mean that there’s a level of fairness, but there’s a level of trust and honesty that has to be involved here. So that’s the part that we just like to think that it differentiates the way that we’re going to act and the way that we’re going to communicate with our clients and the people that we’re working with, whether that be broker, underwriters, or wholesalers, or excess surplus lines underwriters, whatever that’s out there. It doesn’t have to be this hard if everybody was really doing the right thing,
Chris Riback: Doing the right thing. I can only imagine how good your former scout master would feel hearing you reel off the list of Eagle Scout oaths or words to live by, whatever it was that you just gave, like 27 words in about five seconds, but-
Joe Coughlin: It’s just 12. But yes, exactly.
Chris Riback: But the fact that you still have it imprinted in your mind and it sounds like in how you seek to carry yourself and your business every day. Joe, thank you. Thank you for taking the time and for enlightening us on what’s happening in this business insurance risk world which seems like it could not get crazier, but I bet no one would insure me against that bet, so let’s just say, “If we think it can’t get crazier, it probably will.”
Joe Coughlin: Well, thanks, Chris. It really has been a pleasure.
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit workingcapitalreview.substack.com
(Click player above to listen)
Working Capital Conversations: Myron Scholes, Nobel Laureate in Economics
Issue: Nobel Laureate in Economics Myron Scholes is the Frank E. Buck Professor of Finance, Emeritus, at the Stanford Graduate School of Business and co-originator of the Black-Scholes options pricing model.
Scholes argues that focusing on diversifying risk over time has a greater impact than cross-sectional diversification and can keep risk closer to target — and it should command more of our attention than it does.
The World
U.S. initial unemployment claims fell to 1.5 million last week, as the total drawing unemployment benefits declined slightly to 20.9 million. (Wall Street Journal)
Treasury Secretary Mnuchin said that shutting down the economy for a second time to slow Covid-19 isn’t a viable option, as Wall Street concerns grew and the U.S. could reach 200,000 coronavirus deaths in September, according Harvard’s Global Health Institute. Oil dropped more than 6% over second wave fears, but air travel is up 400 percent from its record-low. (CNBC, Reuters, CNBC, Washington Post)
Mnuchin called for additional fiscal stimulus -- particularly for businesses struggling to reopen. And despite Republican misgivings about extending an additional $600 a week in unemployment benefits, Mnuchin said, “We’re going to need to look at doing something there.” (Bloomberg, Finance 202)
Federal Reserve officials signaled plans to keep interest rates near zero for years and said they were studying how to provide more support to the economy. The Fed now projects the economy will shrink by 6.5 percent this year and close out with 9.3 percent joblessness, falling to 5.5 percent by the end of 2022. (Wall Street Journal, Finance 202)
Japan and France confirmed close cooperation through the G-7 in responding to China's Hong Kong policies, and the E.U. accused China of waging a pandemic disinformation campaign. (Nippon, Washington Post)
Twenty-two Republicans have rebelled against President Trump’s plans to withdraw 9,500 American troops from Germany. Meanwhile, the U.S. and Russia agreed to begin talks on replacing the only remaining nuclear arms control treaty between them. (The Times, The Times)
The top U.S. military official apologized for taking part in President Trump’s walk across Lafayette Square for a photo op. “I should not have been there,” Gen. Mark A. Milley, the chairman of the Joint Chiefs of Staff, said. Meanwhile, Pentagon leaders outlined the military’s role in the recent unrest in a letter to Congress. (New York Times, Washington Post)
In the last two weeks, American voters’ support for the Black Lives Matter movement increased almost as much as it had in the preceding two years. (New York Times)
Economy & Finance
Investors are rushing back into the U.S. subprime bond market as lenders say borrowers with weak credit scores are weathering the Covid-19 storm better than in previous downturns. The gap between yields on subprime-backed securities and US Treasuries has dropped sharply. (Financial Times)
Goldman Sachs’ commodities unit generated more than $1 billion in revenue this year through May, pouncing on wild swings for its best start in a decade. Much of the boost came from oil traders, who correctly positioned their desks for the collapse in prices. (Bloomberg)
American shoppers started spending at closer to normal levels again last month. Retail sales, including online and in-person transactions, fell 5.6% from a year ago, an improvement from the 14.1% drop the previous month. (Bloomberg)
The EU plans to file formal antitrust charges against Amazon as early as next week. The formal charges would be latest step in a nearly two-year probe into Amazon’s alleged mistreatment of sellers that use its platform. (Wall Street Journal)
Technology
A campaign to expand U.S. semiconductor manufacturing gained traction with the introduction of legislation to allocate tens of billions of federal dollars to domestic chip-making and research programs. (Wall Street Journal)
IBM said a networking failure involving a third party caused a serious cloud outage widely felt by customers who lost access to their environments, status screens and consoles, and had “no sense of what was happening.” (CRN)
Facebook has been hiring seasoned tech investors to help lead a new "multimillion dollar" investment fund within its experimental apps team. (Axios)
Amazon said it will stop providing its facial recognition technology to police for one year. But the moratorium has “major loopholes” as Amazon hasn’t said if the move applies to federal law enforcement agencies. (TechCrunch)
Zoom closed the account of a group of prominent U.S.-based Chinese activists after they held a Zoom event commemorating the 31st anniversary of the June 4 Tiananmen Square Massacre. Apple pulled podcast apps in China after government pressure. (Axios, The Verge)
Smart Links
Saudi Arabia’s tax gamble. (The Atlantic)
Instacart blows past Walmart in online grocery business. (The Information)
The Iowa State Fair was canceled for the first time since World War II. (Des Moines Register)
The PGA Tour returns at Colonial Country Club in Fort Worth, TX. (Fort Worth Star-Telegram)
Public transit looks surprisingly safe in Japan and France. (CityLab)
Buyer’s market for the Bordeaux 2019 vintage. (Barron’s)
This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit workingcapitalreview.substack.com