Excellent interview. A few comments and questions...

2009-10-31T10:30:46.613-05:00

Excellent interview. A few comments and questions…

Bill George’s bottom-line assessment of the corporate and financial disasters of the last decade is as clear and compelling as a classic morality play. He makes a strong case for short-term-ism as the root (evil) cause of all such catastrophes, from LTCM to Enron to AIG. His plea is unassailably reasonable: Why can’t we all – investors, CEOs, boards of directors and IROs alike – think more like Warren Buffet?

Mr. George also feels that there is a generational aspect at work. No doubt, public displays of impatient greed have reached new depths in recent times, but in my opinion the issue is as old as the hills. Before Warren Buffet, I recall Peter Lynch in the 80s and 90s decrying the focus on quarterly results and preaching essentially the same mantra of long-term value creation. And I’m sure he was not the first. Before folks in the current generation started craving “instant gratification,” their parents and grandparents were often sucked in by “get rich quick” schemes going back to the turn of the last century (and earlier, of course).

Nor is the problem geographic. The debacle of mortgage derivatives on Wall Street has been paralleled on Main Street by U.S. auto executives who mortgaged their companies’ future on the equally risky, now toxic SUV markets. The problem is as ancient and widespread as the human condition itself. It’s the lesson parents try to teach their children by insisting they finish their vegetables before they eat dessert. It’s the simple wisdom that says, if it seems too good to be true, it probably is.

Mr. George sums up neatly and cogently what when wrong. The real debate begins, however, when we ask the obvious follow-on questions: What could we have done about it? How can we prevent it from happening again on such a grand and scary scale? How do we all get long-term religion and stick to the straight and narrow? How do we deter risk taking when there is simply too much is at stake?

In the area of investor relations, many of us have held at least faint hope that the recent rise of shareholder activism might shift the focus toward the longer term. But isn’t it somewhat naive to expect CEOs, boards and investors to rock the boat when stellar quarterly results are driving the stock to record highs? Or to ask these same folks to do or say nothing when the stock is tanking due to quarterly disappointments?

Obviously we need more than elucidation. We need some combination of initiatives, regulations and incentives to help us resist temptations that can lead not only to self-destruction but to mass systemic damage. And this is where it gets messy and tricky and political. What can we do and how far will we have to go? A renewed emphasis on teaching ethics at business school? Well, that’s a start. A return to 1930s style regulation of the capital markets? Probably necessary in one form or another. New disclosure and reporting requirements for greater transparency in all trading and investing activities? Certainly makes sense, especially when the trader is not betting his own money. The resurrection of anti-trust enforcement to prevent entities from becoming too big to fail? In the real world that might be tough, both practically and politically. Criminalization of bad corporate governance? Now perhaps I’ve gone too far. Or have I?

Assuming such measures are implemented, will they do enough to reduce our collective risk to an acceptable level? And even if they do, will they also create other significant problems, as we’ve seen with the unintended consequences of SOX on so many small cap companies? It’s not clear cut. But one thing we should know by now: Doing nothing is not really an option; that would be too risky.

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Excellent interview. A few comments and questions...