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Investment LeadershipBuilding a Winning Culture for Long-Term Success
By Jim Ware Beth Michaels Dale Primer
John Wiley & SonsISBN: 0-471-45333-1
Chapter OneLeadership and Culture in the Investment Industry
The most important lesson I have learned is never to forget that investment management is a people business. -David Fisher, Chairman, Capital Group Companies
Proactive attention to leadership and culture will help create sustainable success for your organization. To begin, leaders of investment firms must tackle the realities of this industry. This chapter covers:
* The traits of investment professionals and why they create distinct challenges for firm leaders.
* The myths of the financial industry and how they affect success and sustainability.
* The quantifiable difference in business results between firms that attend to leadership and culture practices and those that do not.
* The differences between leading and managing your firm.
* The definition of effective leadership activities.
* The questions that must be answered to distinguish your firm's culture.
* The financial impact of having a flexible culture.
In 1999, "Allstar Capital" was enjoying the fruits of a 17-year bull market. Since 1996, the firm's equity assets had grown from $13 billion to just under $40 billion. The firm's senior leader had become a minor celebrity in the investment field, having been asked to speak at manyconferences and having been the subject of several press and trade articles and interviews. He was proud of the firm's success: During the past 20 years, only one investment professional had left for reasons other than retirement. In the past 10 years, no clients had left because of disappointment with his firm's performance. The firm was very profitable and at least 20 of the investment professionals were shareholders of this private firm. The credentials of the staff-MBAs from Harvard, Stanford, and the University of Chicago, plus CFA and CPA designations-were proudly displayed in a booklet in the reception area. The firm's exceptional track record and reputation attracted chunks of money from huge mutual funds, which Allstar Capital managed as a subadvisor. The managing director believed that teamwork accounted for much of the success. He explained in one speech that investment decisions at his firm were made as a team. Leaders at the firm wanted the professional staff to enjoy a "long-term and mutually satisfying relationship."
The Allstar story is a thread that runs through this entire book. (Note: Allstar represents a compilation of true stories from different firms with which the authors have had experience.) But why begin a book about investment leadership with a fabulous success story? After all, good news is boring. Everyone knows that there are lots of successful investment firms, making lots of money and keeping their clients happy. What is unique about Allstar Capital?
Its dramatic and complete failure. In 2002, Allstar collapsed. In just three short years, it went bankrupt. The $40 billion had shrunk to $2 billion. Allstar survived only because of an infusion of cash from a merger. Half the staff quit or was fired. Worse yet, one 43-year-old portfolio manager, with a wife and small children, was dead from what seemed to be a stress-induced heart attack. A wonderful success story that had taken more than 20 years to build was gone in what appeared to be the blink of an eye.
That's the point, and that's why we begin the book this way. This book is about sustainable success. We've isolated and detailed the critical success factors necessary for investment firms to thrive in the face of difficult market conditions. Bull markets and tech bubbles can hide lots of flaws. Perhaps no other industry is as vulnerable to the sin of hubris as the investment industry. While the Allstar Capitals were sailing, were they good or just lucky? When they failed, were they bad or just unlucky? Did these bright MBAs suddenly get stupid?
To make it crystal clear, Allstar's collapse was not caused by criminal acts. It was not an Enron or WorldCom or Andersen. No Allstar employees broke the law or created a scandal. So ... what factors accounted for its success and then its collapse? How do you build a sustainable organization? What can be learned from Allstar's experience? That's the subject of this book. Our charge is to equip investment leaders, especially the "Bruces" and "Janes" discussed in the preface, with the mental models and tools that will help them create sustainable success.
Within the topic of strategies for building successful organizations, is there something unusual about the investment industry? In a word, yes. Investment professionals share a unique set of personality traits and personal values. To generalize, professional investors tend to be:
* Independent thinkers (nonconformists).
* Tough-minded (not sentimental).
* Naturally skeptical ("prove it" attitude).
* Anti-authoritarian (don't like to follow rules or sing company songs).
* Creative (question the status quo).
* Conceptual and task-oriented (rather than people-oriented).
When you add these characteristics up, you've got one hell of a management challenge! The television commercial that shows the ranchers herding cats isn't far from the truth.
Patrick O'Donnell, formerly a managing partner with Putnam, described the typical investment professional in similar terms, and noted that anyone charged with managing these folks "certainly needs a management structure that accommodates these individuals-a structure that develops and challenges analysts and one that provides for appropriate evaluation and compensation." With this recognition and these characteristics in mind, we've written this book specifically for this audience. Later in the book we address the personality traits of investment professionals from a more objective, quasi-scientific perspective, using the Myers-Briggs Personality Type Indicator as a psychological measure. For now, let us just say that we know each investment firm will have its own set of challenges based on the people who are attracted to it.
Before we discuss our findings from extensive research and experience, we begin with several myths-peculiar to the investment industry-that we discovered and shattered during our research of successful firms.
Myth 1: Money is everything
Reality To be sure, investment professionals are fascinated by money, and the industry is clearly one of the most results-driven. Nevertheless, our research shows that the most successful firms do not focus on their own profit. Yes, they are fabulously profitable, but mostly because they focus on their clients and how to serve those clients (namely, through excellent service and performance). In this regard, the best firms reflected Warren Buffett's view: "I love the process more than the proceeds, though I've learned to live with them, too."
When it comes to employee satisfaction and loyalty, again, money is not everything. Yes, compensation is important, but survey results from Capital Resource Advisors show that the two most important factors are leadership credibility and organizational culture and purpose. Other studies, by reputable firms such as Russell Reynolds and Associates, confirm these findings: Money is not the top motivator. Paul Schaeffer, formerly of CRA and now with SEI Investments, summed it up well: "The investment management business is about a lot more than just making money." Compensation becomes a major issue when employees feel that they are not being treated fairly. In this sense, "fairness is everything" does generally hold true in the industry.
Myth 2: Brains are everything
Reality As with Myth 1, many investment firms fail because they believe that sheer intelligence wins out over everything else. These firms recruit the top brains from business schools, pay them top salaries, and then turn them loose on the markets. In our Allstar example, this was the firm's strategy. It worked beautifully right up until the company fell apart.
The best firms realize that brains are enormously important, but also recognize that there is a second, equally important factor: cultural fit. Individuals need to share a sense of common purpose and guiding principles. The best firms hire for skills and fit. Gary Brinson, a legend in the investment business, addressed this myth head-on:
Given a choice between a highly talented but introverted, self-serving, and unenthusiastic person and another person who is not as smart but very enthusiastic, I will choose the enthusiastic person every time. The enthusiastic people may not have the highest test scores or may not have gone to prestigious colleges or universities, but they will fit much better within the culture of our firm.
Myth 3: We can fix it ourselves
Reality This one is related to Myth 2, as many investment professionals believe that their high IQs will allow them to solve any problem. They don't believe that they need new mental models or advice from outside experts; they just need to turn their powerful brains to the problem at hand, and they will see the solution.
Einstein had a wonderful saying in this regard: "A problem cannot be solved by the same consciousness that created it." Anyone in the investment industry will tell you that there is no shortage of ego among the professionals. Brains and arrogance combine to make it very difficult for investment leaders to ask for help. David Maister, Harvard professor and consultant to professional service firms, has some apt comments about investment professionals:
In many professions, especially the advisory professions, clients need trust and reassurance, and, to be successful, professionals must project an air of omnipotence and omniscience. Naturally enough, this manner carries over into other areas of the professional's life and breeds a sense of self-confidence, of mastery, that can handle anything.
Myth 4: Good performance equals strong culture; bad performance equals weak culture
Reality We have met no one in the investment industry who likes to lose. By definition, this is a competitive group. When we show our culture research to investment professionals, they often react with, "Sure, the culture results look great for those firms; they have terrific performance records!" In other words, culture is seen as a proxy for investment success. Winners are happy people with a strong corporate culture; losers are unhappy people who complain bitterly.
This viewpoint may sound reasonable, and it may align with human nature-but it is not supported by our research. Many firms that we surveyed were in the middle of a very bad stretch of performance, but nonetheless showed remarkably healthy and strong cultures. The adversity had not caused the organization to break down. Alison Winter, executive vice president at Northern Trust, told us, "Of all the things I'm proud of about this team, I'm most proud of the fact that we've stuck together during these tough markets." There's an old saying: Weave your parachute before you have to jump! Alison and her team had created a strong culture before the hard times hit.
Myth 5: Bigger is better
Reality Sandy Weill and others appear to be living out this myth. Their thinking is that strategic acquisitions, huge capital pools, and economies of scale will win the day. Possibly, but our research shows that small and medium-sized firms can establish excellent track records for long-term success, without making any acquisitions. Charles Burkhardt was right when he said, "Investment management is not inherently a scale-oriented profession." Research from Capital Research Advisors bears out this statement, showing that profit margins do not increase with firm size.
Myth 6: Honest guys finish last in the investment business
Reality With Drexel Burnham Lambert, Salomon, and Enron grabbing headlines for their misbehavior, there is a sense that playing it straight is a sure way to miss the glory in the investment business. An old joke in the investment business involves the ethics portion of the Chartered Financial Analyst exam: "What is the correct response to the ethics question?" Answer: "The one that makes the least amount of money." (Tom Bowman is not laughing....) In sharp contrast to the jokes, stereotypes, and general perceptions, we found that the best firms are fanatical about ethical behavior. Each of them had stories about turning away a profitable deal because it would have compromised their values.
Myth 7: Investment firms are unique and need different rules
Reality The suggestion inherent in this myth is that the nature of the industry, and the nature of its professionals, are sufficiently different from any other industry to warrant a different set of rules. We were open to this possibility as we performed our research. What we found, though, is that the same principles that drive other successful organizations hold true for investment firms as well. Human nature is, after all, human nature. Rather than say that investment firms require different rules, we believe that the same rules apply-but in some cases face unique obstacles. One of the reasons we wrote this book was to address these obstacles: How do you apply the time-tested principles of leadership and culture to the investment industry?
Myth 8: Investment professionals must lead investment firms
Reality Unlike doctors, who realize that the head of a hospital need not be a physician, many investment professionals believe that their leaders must understand the nuances of markets, foreign currency, valuation techniques, asset allocation, and the like. Often the excellent leaders do emerge from the ranks of investment professionals, but just as often we found that the top firms have assigned leadership to noninvestment professionals. In fact, one success model for investment firms was to turn responsibility for the day-today operations over to business experts and allow the investment pros to focus exclusively on the markets.
Myth 9: The investment industry has shifted from a star system to teams
Reality Not so. The industry has shifted to talking about teamwork, but in many such firms the star mentality is alive and well. Investment leaders have heard and seen a lot of evidence that the team approach is better. So they announce to their team on a Wednesday afternoon, just after the market closes, "Hey, you guys are no longer individual stars, you're a team."
You can imagine how well this works. The most damning evidence in this scenario is compensation. Some firms that talk team still compensate their staff in the old Allstar way: bonuses for individual performance. So much for the team approach.
Excerpted from Investment Leadership by Jim Ware Beth Michaels Dale Primer Excerpted by permission.
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