As I speak with colleagues of mine, I have clearly come up with a consensus that the “Wall Street” on which we grew up during the 80’s and 90’s, has been indelibly changed. Culminating with the 2008 crisis, this has been a transformation that seems irreversible.
Unlike the “crash of ‘87″, the “‘94 Gulf War crisis” or even the bursting of first Internet bubble, this correction is unyielding. In the past, we had the biotech and technology revolutions as antidotes. However, with the collapse of residential and commercial real estate, and a global contagion created by our zeal for novel and far-flung opportunities, we have finally hit the proverbial wall.
Perhaps, this is the ultimate symptom of the hedge fund phenomenon that began in the early 1980’s. High fees demand extraordinary returns. In a quest to find those prospects, we were forced to visit new frontiers, both geographically and product-wise. Thus began the emerging market and derivative craze. Now, we are left with a hangover that defies resilience, save for total rehabilitation.
Conceivably, this series of events began with the public offerings of major bulge bracket firms. Starting with the likes of Merrill and Hutton, and leading to the publicly traded equities of houses such as Bear, Goldman and Morgan. While the former might have worked, given their steady revenues due to recurring commissions, the model was severely stressed when transferred to firms that were more proprietary in nature. Thus, we have reached a period that calls for reconstruction.
Make no mistake, the financial industry is populated with some of the most intelligent and creative minds found anywhere on the globe. This period will be painful, all rehabilitations are, but what will emerge, if executed properly, will be a sustainable and more permanent system. Let us call it the “new Wall Street paradigm.”
This is less about a place on the southern tip of Manhattan, and more about a new strategy, where the clients and the service providers are truly separate and each party’s interests are clearly defined. This shift is inevitable, given the new regulation engulfing the post-Volcker period. The “Street” has proven adaptable in the past; there is no reason to feel it will be different this time. The reality is that given the shifting landscape toward a more sophisticated consumer base (30% of Americans over age 25 now have Bachelor’s degrees), and an ever increasing regulatory environment, there is no other choice.
This leads me to this edition’s topic: a review of Larry Bossidy’s book, Execution. Bossidy is well-known in business circles as a successful former CEO of Honeywell and Allied Signal. More relevant to his bona fides was his tenure as COO at GE, developing legendary productivity and strategic innovations working under Jack Welch. His co-author is Ram Charan, a Harvard professor who specializes in strategic development and is an advisor to Fortune 500 companies.
Together, they collaborated to write this acclaimed book on linking people, strategy and operations together in order to effect a new vision. The central tenet to their thesis is creating a business based in conceptual honesty and realism. In the final analysis, what Execution aims to teach us is central to many business hypotheses. While creating new commercial concepts may be intellectually rewarding, without execution, it becomes an exercise in futility.
I am well aware of the criticism the financial industry faced when it previously tried to utilize industrial corporate methods. I remember working for Dean Witter when they merged with Sears, and hearing the jokes about selling stocks and socks. Yet, that was in 1982, at the advent of one of the greatest “bull runs” in corporate history. In a period like that, you can throw out the play book and just reap the fertile harvest.
We now stand at a new epoch, one marked by a period of intense regulation, and a push for far greater consumer protection. It is with that in mind, that I opened Bossidy’s book.
His era was marked by America’s need to compete with more efficient Japanese and German manufacturers. GE created the successful use of the quality management tool “Six Sigma” and GE Capital. He was part of a cadre of business leaders who perceived a need for change and engaged it. In our new paradigm, financial firms will be forced to either become client- or self-focused. They will also need to be structured more like the old partnership model. This will either happen organically or by fiat. In the new paradigm, Wall Street firms will have to bear responsibility for their own risk and reward. Those firms that choose not to place their own wagers will need to exclusively and completely service an ever more knowledgeable consumer. We are headed back to the future, so to speak.
Execution deals with this by advocating a need to acknowledge a gap and close it. In one of his more salient sections, Bossidy spells out seven essential behaviors behind results oriented leadership:
- Know your people and your business.
- Insist on realism.
- Set clear goals and priorities.
- Follow through.
- Reward the doers.
- Expand people’s capabilities
- Know yourself.
As Execution expands on these behaviors, it demonstrates a demand for an honest, robust dialogue, one based in the realization of a need for a new model and the means to achieve it. By focusing on a set of clear goals, combined with the pragmatic assessment of an organization’s limits, effective execution is possible.
In later chapters, Bossidy and Charan study the link between people, strategy and operations. Here, they constantly stress the requirement to assess the skill set of one’s employees, and the crucial element of placing them in the right positions. Most accomplished are leaders who consistently seek feedback from the troops and fairly enact it. Ultimately, by rewarding the best behavior, a business can successfully fulfill its new mission.
Finally, the book speaks about the need to create a realistic business plan that considers both the external and interior environment. One centered on understanding your client’s desires and the best path to meeting those needs. In a word that has become almost faddish, the last result of a sound business strategy is one that has “sustainability.”
Getting back to finance, what today’s firm needs is a strategy that realizes a demand for educating its client, and then meeting their goals. They should do this while constantly retesting their own assumptions and recommendations. A plan that honestly creates that atmosphere will be well prepared for the new paradigm.
Execution is a well-thought-out guide for corporate change. Given our current state of affairs, a Wall Street CEO could do worse than to pick up Execution, a study of “the discipline of getting things done.”
A follow up on the Jeremy Lin phenomenon:
We are now into week four of the Jeremy Lin phenomenon, and there is much to be learned regarding the parallels between “stocks and sports.” Lin, like a soaring growth stock, has now appeared on everyone’s radar. Admirably, he has handled the new pressure to perform and delivered results. The Knicks are 9-3 since his hot streak. However, 9 -3 does not a dynasty make and Lin is intelligent enough to realize that. Professional defenses will adapt to him, and the hard reality of the hyper-competitive NBA life will continue to be a challenge for Lin. To his credit, he seems like someone prepared to withstand the onslaught.
What dismays me, is that we are already hearing the rank and file call for a Knick upheaval that would include trading Carmelo Anthony. That is just plain wrongheaded. Players like Anthony have been through many seasons and challenges; they are battle tested stars and for good reason. They have delivered throughout their careers and they will adapt to new teammates in order to win. They have succeeded because of their determination and competitiveness. Trading an Anthony, a Durant or a Bryant to make room for a new star, is like kicking Coca Cola or Microsoft out of your portfolio for the latest biotech.
We like Lin, and everything he brings to the table. His future may truly shine bright. Let’s just give this kid a chance to acclimate himself to his new status, while we still hold on to the proven warriors.
Until the next time … The Thoughtful Arbitrageur.
Edward Strafaci is not an investment adviser. Nothing he writes should be construed as investment advice or an endorsement of any particular security. From time to time, a family trust with which he is associated may have positions in the securities he writes about. When it does, he will tell you. What he writes is meant to inform and in some cases to entertain and amuse. HedgeWorld’s Alternative Reality is not an investment advisory site. As a general rule you should not take investment advice from blogs, anyway. Consult a financial professional for investment advice, not a blog.
