robert lawrence kuhn
First, a disclaimer. The global financial crisis has engendered a great deal of serious suffering across our country and around the world, and what I address here is a minuscule and perhaps inconsequential subset of it. But it is the subset into which I and many readers of Chief Executive fall, and the principles we discern may help broader groups. We are the psychologically damaged: those whose financial losses, though substantial, do not affect our families’ lifestyles or our personal careers, but who nonetheless feel personally diminished by the decline in our net worths.
What are some symptoms?
Checking stock prices addictively, multiple times a day, especially if we hardly ever trade. The telltale sign is how we feel when we haven’t checked prices in a while. Do we begin sensing a pressure welling up, so much so that we cannot continue our normal work until we check the Dow again, even if we just checked it less than an hour before, and even if almost nothing we might learn could cause a change in behavior? It is much like someone with obsessive-compulsive disorder(OCD) might feel if trying to restrain himself from yet again washing his surely clean, red-raw hands.
Second-guessing oneself-the coulda-woulda-shoulda routine-and doing it frequently. Playing over and over and over again the steps one might have taken-selling this or that investment, not investing in this or that company-all with the acuity of perfect hindsight. This is another OCD-like behavior.
Depression, modest or otherwise. There are diverse signals: changes in eating habits (under- or overeating); insomnia and/or oversleeping; abnormal fatigue; extra sensitivity to rejection; disinterest in work or hobbies; mood swings or exaggerated emotional responses to normal situations; feeling sad, lonely or hopeless; diminished work drive; diminished
sex drive; going through the motions of anything (say, work or sex) devoid of usual passions. I could go on, but better, now, to move on to some remedies. These prescriptions are not the only ones-everyone has different circumstances and personalities. Consider these a starter kit.
Recognize Relativity. Our sense of "satisfaction" is perceived relatively, so that how we feel is measured as a dynamic comparison, not an absolute condition. A person who just lost $1 million of her $10 million invested in the stock market will feel worse than a similar person who just made $1,000 on her investment of $8,000, even though the first person has $9 million and the second person has $9,000. That’s human nature. Consider the adage: "I cried because I had no shoes,until I met a man who had no feet."
Dissect Decisions in Context. Assessing investment decisions retrospectively must be done in their original contexts, not in light of subsequent developments. This is not a simple task but it is instructive and necessary to improve future decisions. In my situation, I think it fair to say that, in hindsight, my worst investment decisions were driven by an accurate and in-context appropriate tax analysis, but the deep flaw was the hubris of accreting wealth that distorted a more conservative strategy. A clear-minded, toughminded self-analysis will be cathartic, and help break OCD behaviors.
Circle the Wagons. Simulate the worst. Stress-test your personal financial condition. Develop scenarios for what you would do under an even-more-disastrous financial collapse. While this also may be helpful in reality, the point here is psychological. You will feel better imagining the (reasonably) worst, because reality will not be so grim (hopefully).
Disentangle Your Ego. Most businesspeople have formed a tight mental bond between their ego and sense of self-worth on one side and their job and financial condition on the other. This is natural, and even-in normal times-helpful for driving ambition and a competitive spirit, but can become destructive, even devastating, in troubled times. The antidote is to reflect on those things of deeper, perhaps ultimate, importance. For many it’s family and children. For some it’s religion. For others it’s hobbies. The idea is to establish nonbusiness, nonfinancial groundings of life.
Allow Habituation to Apply its Balm. When we put on clothes, we feel them at first; then we do not. It’s called habituation and it enables us to function. If we felt our clothes all the time, we’d be distracted all the time. The same habituation works on your mental states so that pains you feel now will diminish over time. And as we habituate to new realities, and no longer feel so bad, emotional relativity will kick in, so that small success will actually make you feel good. Don’t squelch these feelings; use them as motivators.
Get Back to Work. Whatever you need do, do it-career, family, daily chores, all. Do even if you don’t feel like doing. If you must, just go through the motions. The more you do, the more your emotions will change. Doing shapes emotions. If you force yourself to hold a posture of confidence, even if you don’t feel confident, you will after a time actually feel more confident.
Now two personal confessions, odd things I thought about in these times of stress. Perhaps they might help. One day, while trying not to playing the second-guessing-myself game for the umpteenth time, and nursing a wounded ego, I suddenly realized that "other smart people have made worse mistakes." Kennedy at the Bay of Pigs; McNamara in Vietnam; Nixon at Watergate; Bill with Monica; professional financial advisors who put their own money with Madoff. Then the best example popped into my head. Even God, I thought, makes mistakes. "The LORD was sorry that He had made man on the earth, and He was grieved in His heart." (Genesis 6:6)
Now you may not believe in God, or if you do, you may think God’s "mistake" anthropomorphic and allegorical (i.e., so that we humans can understand) or explained away with deep theology (e.g., God is timeless and unchanging). But the simple words that God was grieved for what he had done were comforting to me, being at the time "grieved" for what I had not done (not selling a stock). My only point is that it gave me a chuckle. Just a chuckle, nothing more-but it came when I needed a change of spirit.
My second confession is more awkward to disclose, a personal reaction of which I am not proud. It was another down day in the market, but not particularly bad, and I was taking a taxi. I guess the cumulative effect got to me and I found myself about to give the driver a reduced tip (around 15 percent instead of my usual 20-plus percent). Mind you, that although I was suffering like everyone else, the totality of the crisis had not and would not change my lifestyle. But yet I was about to reduce this poor driver’s tip by pennies! I even recall, if my memory is not playing tricks, that I tried to justify this evil deed by thinking, "Well, everyone should share the pain."
I gave the driver a 30 percent tip. He was surprised and thankful (pennies, remember) and I felt much better. A few days later I sent a notinsubstantial monetary gift to my former and much-deserving secretary, who had recently lost her job.
So now, whenever I begin backsliding and feeling sad at my loss of net worth, I fight the feeling by giving higher tips. Each time I feel a twitter of misplaced anxiety about depleting my reserves a little more but each time I batter back that absurd notion and give the larger tip.
I leave you to ponder a favorite Chinese saying. As I heard it, it was about "Wang," an ordinary person, and a "horse," one’s most valuable possession (at the time). The saying is short and you will at first think it incomplete-and if not complete then empty or absurd. Stay with it.
Wang lost his horse...
But he didn’t know whether it was
a bad thing or a good thing.
Robert Lawrence Kuhn, an international investment banker and corporate strategist, is a long-time advisor to the Chinese government and senior advisor to Citigroup. Dr. Kuhn’s forthcoming book is How China’s Leaders Think: The Inside Story of China’s 30-Year Reform and What This Means for the Future. His television series, Closer To Truth: Cosmos, Consciousness, God, is broadcast on PBS and noncommercial stations.
As we enter the high season of the quadrennial circus called the
So that's a difference. Or is it? Unless a CEO founds her own company (or is related to the founder), then what she says while ascending the corporate ladder will influence her ultimate selection by the board of directors. Personal politics is largely the same in any organization, whether public sector, private sector, not-for-profit and, yes, even religious institutions. People jockey for position, promote themselves, undermine rivals, try to get ahead.
Where companies and countries differ are in their goals and objectives, which are relatively homogeneous in companies and heterogeneous in countries. In companies, generating highest profits or return with minimum risk is the goal, and the trade-off battles, which may be fierce, are generally confined within economic boundaries: projects competing for investments, long-term vs. short-term results, promoting this or that executive, buying or selling divisions, and the like.
In countries, the issues are diverse and can be divisive. Consider immigration, abortion, estate taxes, health care, free speech, religion in the public square-not to mention the Iraq War-where not only do opinions differ but there can be fundamental differences in belief systems that lead to hostility and rancor.
What can senior executives learn from the presidential campaigns? What lessons lurk? Try these.
Align Strategies to Situations
Hillary Clinton assumed the nomination was hers by inevitable default (or by inalienable right). The message she sent was "Experience," and the team she fielded was the
CEO Lesson: Don't compare alternative strategies in the abstract. When evaluating strategies, consider under which conditions each would be optimal; then select based on current conditions.
Assess Timing and Allow Serendipity
Obama began his campaign 30 percent or more behind
CEO Lesson: If there's an opportunity that is unlikely to present itself again, even if the likelihood of its success is not high, consider going for it (as long as risks are bounded). Give serendipity a chance to work its magic.
Don't Give Up
You can't win by quitting. John McCain, so far down in the campaign's early days that he was carrying his own bag through airports, had to navigate the fine line between reaching out to the social conservative base of the Republican Party without alienating his appeal to independents.
CEO Lesson: In the world of M&A, it's the rare deal that gets done without threat of collapse. Virtually all business opportunities, whether acquisitions or new projects, go through cycles of death and resurrection, before one or the other becomes final. Don't expect otherwise.
Don't Overstay Your Welcome
Hillary, famously, didn't quit even while almost all the pundits, and most of her friends, were advising her to bow out. Her motivation? Talking-head- land was awash with speculation. Some said she wanted to weaken Obama so that he'd lose, enabling her to run in 2012. Others, that her driving ego swamped all logic.
CEO Lesson: Don't fall in love with projects or deals. Each is a means to an end, not an end in itself. (As an investment banker, I can keep on a deal long after it would seem inefficient to do so, and indeed most of the time, I've just squandered more time and money. But on rare occasions, I've made "impossible" deals pay off.)
Reposition After Failure
Even though John McCain lost to George W. Bush in the heated presidential primary in 2000, he set about to support him, particularly in 2004. That put McCain in position to run after Bush (sooner if Bush had lost). Mitt Romney has now done the same. After a rancorous primary battle with McCain, he has become an outspoken and aggressive supporter (perhaps looking ahead to 2012 or 2016, perhaps positioning himself as a potential running mate, perhaps an administration appointment).
CEO Lesson: When evaluating senior executives for promotion, assess how each handles competitive failure, in terms of personal attitude, corporate commitment and relations with other executives.
Handle Problems Rapidly
The more serious the problem, the faster it should be handled. When the Reverend Jeremiah Wright controversy broke, Obama gave his nuanced speech on race. When Wright continued his histrionics, Obama denounced him immediately. When The New York Times ran a front-page story suggesting an improper relationship between John McCain and a lobbyist, both McCain and his wife spoke out the same day. That lesson was learned from John Kerry's hesitant response to the "Swift Boat" ads challenging his war record in
CEO Lesson: Corporate crises, such as product-safety issues, demand intense focus. Stonewalling usually makes it worse. Bad news drop by drop can compound and prolong the problem. Hiding facts, or worse, covering them up, tantalizes the media, stokes their flame. Lance the boil. Get it all out fast.
Find Your Base
Hillary's remarkable persistence in the race, winning key primaries after most thought she had no chance, was due to her appeal to blue-collar workers. The ultimate insider, she masterfully repositioned herself as a "fighter" for working families and seemed comfortable drinking beer with the boys. It worked for her because her opponent, Barack Obama, Ivy-league schooled, was perceived as an elitist (not to mention the undercurrent of racial bias).
CEO Lesson: Competitive analysis is key. You may think your company is weak with a certain customer class, butif your competition is weaker still, that class can be a comparative strength.
Whenever Hillary was herself-natural, open, personable, warm-not pompous, overzealous, strident, burdensome- she won (e.g., New Hampshire). McCain is best in town hall meetings. Obama did not do well bowling. (In 1988, when posing in a tank, George Dukakis looked comical.)
CEO Lesson: Your public posture is paramount; to no small degree the image of the company reflects the image of the CEO. Even internally, CEO image instills employee confidence and sustains morale. When visible, be natural.
One can exaggerate so often that one comes to believe one's own bull. That's what probably happened with Hillary's dodging those imaginary bullets in
CEO Lesson: Exaggeration is a common proclivity. Corporate leaders, because they've had success, are particularly vulnerable. In our Internet age, exaggeration travels at the speed of light. Bloggers love to expose it. Media loves to puncture the balloons of personal aggrandizement. Be vigilant.
Never Assume Privacy
Privacy is dead. Confidentiality has lost its power. And the more prominent you are, the greater your chances of exposure. When Obama spoke "privately" to his
CEO Lesson: Imagine that every statement you utter will be uploaded to YouTube, and every email you write published in The Wall Street Journal. Imagining what one might do as president is fun fantasy, muffling the surround sound of political posturing. But CEOs can not only imagine the best policies for their companies, but they can actually implement them. You have the power to institute real change, and you do not have to win elections to do so. To do it best, learn the lessons of campaigning.
Robert Lawrence Kuhn, an international investment banker and corporate strategist, is senior advisor to Citigroup. He is the creator and host of CLOSER TO TRUTH: Cosmos, Consciousness, God, the public television series (www.closertotruth.com). His forthcoming book will be the inside story of how China's leaders view 30 years of reform and opening up, the historical legacy and future impact.
Of late, I've been following large organizations in historic flux. Consider, on the one hand, the Democratic and Republican parties of the
The Democratic Party: Change vs. Experience
Before Hillary Clinton lost her first caucus or primary, she had already ceded the high ground of political positioning. Her superficially sensible but strategically flawed decision to embrace "experience" as her prime distinguishing characteristic crowned Barack Obama, uncontested, with the shining mantle of "change." The more she stressed Obama's inexperience, the more she solidified herself as the "Status Quo Candidate."
The promise and inspiration of change-something different in the future than what we had in the past-is what energizes the Obama juggernaut. Obama is the novelty, the Hope of the New, while Hillary, by reiterating her impressive but monotonous litany of wonk-founded positions and intricate proposals, seems by comparison downright dull.
There is nothing about change that makes it inherently better than experience; each makes sense in the right conditions. Context is everything, and the context of what Americans want in 2008 is change, not experience. Democrats even more so.
The Republican Party: Ideology vs. Practicality
When Rush Limbaugh, the leader of right-wing talk radio, attacks John McCain, and when Ann Coulter, the outrageously aggressive conservative personality, says she would rather campaign for Hillary Clinton than support McCain, you know something's up in the GOP. Although McCain's positions on certain issues have deviated from conservative orthodoxy, he is unambiguously more conservative than any Democrat running. Why then would any conservative not support him in an axial election that will shape
Here's how certain right-wing Republicans think: Anyone other than their image of what an orthodox conservative candidate should be is so distasteful, so repugnant, that they would rather lose the election than have their party win with a non-core conservative as its leader. A loss by McCain, they believe, would enable "real conservatives" to take charge thereafter. That such behavior might ensure Republicans remaining the minority party for the next generation is somehow not relevant. When the Romans laid siege to
The Communist Party: Intra-Party Democracy
I follow the political philosophy of
Minister Li regards Intra-Party Democracy as the cornerstone of political reform because it achieves multiple objectives: empowers individual Party members; increases transparency; subjects higher bodies to the supervision of lower bodies; introduces voting to prevent "arbitrary decision-making;" solicits public opinion of candidates; and expands a system of direct elections at local levels. All this would have been unspeakable, unthinkable, until recent years.
I am convinced that on political reform there is now a major shift in how
Why would a ruling party seek to enhance democracy? First, it is the right thing to do, and Chinese leaders recognize this. Second, as another minister told me, "If the Party does not serve the people's interest, it will no longer be the ruling party." It used to be that Party leaders dictated what they wanted and the people had to follow. Now the people assert what they need and want, and the Party must provide and deliver it.
Principles of Adaption
So here we have the Democratic and Republican parties of
The Past is Past. No matter how strong the organization was in previous times, no matter its triumphs, it is likely different today. Organizations that work by interacting with the broad public are inherently dynamic, and organizations that do not know this ossify. Historians should handle past glories; current leaders should not fight the last war.
Determine Core. What is the essence of the organization? What differentiates it, maintains its uniqueness? The danger is that a series of beliefs becomes, over time, welded inseparably together so that, if you are a Republican, you must subscribe to a specific position on each and every one of a long list of often unrelated issues. John McCain doesn't, which is why he has a problem with the Republican right wing, but at the same time this is why he is so strong with Independents and conservative Democrats.
Fit Current Conditions. Once the organization determines not to ossify and to focus on its core beliefs, the crucial step is to match those core beliefs to the real world. For Democrats, it's choosing between experience and change. For Republicans, it's accepting a less-than-perfect conservative leader. For Chinese Communists, it's figuring out the proper course of political reform.
Align Speed of Change. When change is required, assess its optimum pace. For the Democratic Party, there is urgency since its members are clamoring for change. For the Communist Party, stability for
Know Your Constituency. Whom do you serve? The Chinese Communist Party has come to realize that their leaders must serve the people's interest, in reality not just in theory; not the reverse, as it once was. Companies call this "Know Your Customer."
Align Leaders. Do leaders fit strategies or determine them? Both, of course, and the process is often a positive feedback cycle. Barack Obama has surged because change is a Democratic need, and his surge amplifies the centrality of change in their party. Since the beginning of reform in
Recognize Internecine Conflict. I do not say "avoid internecine conflict," because that is obvious, and conflict is often unavoidable. But to recognize its unwelcome emergence is to contain its insidious enervation. In
Strengthen Organization. In today's turbulent world, the most important task for an organization is to make itself more robust, better able to weather unforeseen storms. Robustness, more than growth, is the highest contemporary good. The Democratic Party must avoid alienating either Obama's or Clinton's supporters. The Republican Party must want election victory more than ideological purity. The Chinese Communist Party must serve the needs of the people. Summing up, if I had to select a single principle, indeed a single word, to characterize the optimum relationship between a publicly interacting organization, whether political or commercial, and its dynamic, mediasaturated environment, that principle, that word, would be alignment.
Robert Lawrence Kuhn, an international investment banker and corporate strategist, is senior advisor to Citigroup. He is co-editor-in-chief of China's Banking and Financial Markets: The Internal Report of the Chinese Government and author of the No.1 best-selling book in
It struck me when I was writing two articles at the same time, both on politics, largely late at night. One was for an American publication on the new generation of Chinese leadership, appointed last October at the 17th National Congress of the Communist Party, which is held every five years. The second was for a Chinese publication on the American presidential campaign, which is held every four years. The simultaneity was coincidental, but as it turned out, revelatory.
On Chinese Politics for
My article on the new Chinese leaders noted that by appointing two younger men to the Politburo Standing Committee,
At 54 and 52, with Ph.D. degrees in law and economics, respectively, Xi and Li are widely anticipated to become the future senior leaders of
The contrast to the American system seemed especially sharp during this hectic season of presidential primaries, where week-to-week during 2007 we could hardly handicap our likely next leader.
On American Politics for
A few months ago, I had written an article in
So I was writing for my Chinese readers right after one of the most startling and dramatic weeks in American politics. First, Barack Obama made history in his stunning victory in the
With all the hype and frenzy, it is sometimes hard to remember how important the American election really is. Indeed, I have a concern. How could such swings in political passions and fortunes occur so quickly, and what are the long-term implications of such volatility? Such instant, unanticipated tsunami waves of change would have been unthinkable in previous elections.
Why now? One reason is the instant nature of news and information, from 24-hour cable news to the Internet. It is as if the entire country is hard-wired together and resonates together. This deep connection is driven by in-your-face emotion. There is little time for reflection. There is minimal inertia in the system. Any influence can move opinions rapidly, perhaps too rapidly.
All this political action may seem like fun; it's certainly exciting to watch. But with so much at stake, so much volatility may not be so healthy.
Which System Works Better?
Those being my two articles, one on Chinese politics for America and the other on American politics for China, I began to reflect on the obvious question of which system works better? I have, as you'd expect, a built-in prejudice that Western multi-party democracy, in Winston Churchill's famous adage ... is the worst form of government ever devised by man, except for any of the alternatives. Virtually all Americans believe that our political system, notwithstanding our election-year capriciousness, is surely best for our country and likely best for every country. Most (but not all) Chinese believe that their system, assuming the continuation of reforms, is best suited for the realities of
Applications to Corporate Governance
I began to think about the broader ramifications of predictable stability versus dynamic uncertainty in the governance of institutions, particularly in the selection of their senior leaders. Can what we see in the process of choosing our government leaders help in the process of choosing our corporate leaders? I came up with some general principles. See what you think.
Competition among leadership candidates is good; transparent competition is (usually) better.
Lack of competition allows entrenched leaders to become enshrined; there is high inertia to change as policies and positions become ossified and unable to adapt. The Chinese system does have competing interests. At the highest levels, competitions are opaque to the public; though at lower levels, they are beginning to emerge through the development of what is called "Intra- Party Democracy," which empowers individual party members as never before and develops degrees of transparency in Party operations.
In leading corporations, when internal candidates vie for senior positions, the competitive process stress-tests candidates and puts even subordinates on alert. Selecting the successor to Jack Welch at GE was the classic case.
Stability in leadership is the default objective.
Stability in leadership operates optimally at the extremes, both under normal conditions and during times of high exigency when change could be destructive not just disruptive. (Obviously, if leadership is the cause of problems, then the organization has no choice but to change it.)
Dynamic uncertainty in leadership is optimal only under specific conditions.
When change should disrupt the status quo, but not destroy the organization, that is the time for dynamic uncertainty.
When changing leaders, assess the tension between stability and dynamic uncertainty.
Given the different situations in the
It usually just happens that an organization either has stability or dynamic uncertainty in maintaining or selecting its leaders. I'm saying that this dichotomy-how best to match the leadership-selecting process with the needs of the organization- should be a proactive choice, not a reactive accident.
Robert Lawrence Kuhn, an international investment banker and corporate strategist, is senior adviser to Citi group. He is co-editor-in-chief of China's Banking and Financial Markets: The Internal Report of the Chinese Government and author of the No. 1 best-selling book in China in 2005, The Man Who Changed China: The Life and Legacy of Jiang Zemin. Dr. Kuhn's articles describing and explaining investment banking are posted at www.chiefexecutive.net/investment
Notwithstanding all talk about their gargantuan bonuses, investment bankers evince no chagrin about the fees they charge. They unabashedly retort that they are paid only a small fraction of the value they add to transactions. It is this "value-added," they claim, that justifies their hefty emoluments, that when they raise billions of dollars in public offerings or get a few dollars more per share in a corporate merger, shareholders reap enormous benefits. Investment bankers state that their fees are only a small fraction of this incremental benefit.
Does the economy need investment bankers? Do companies? Are financial intermediaries promoting their own profession over professional service? What service can they provide, and how can senior executives use investment bankers to their firm's advantage?
Though public policy debate will continue, the task for CEOs and CFOs is to determine if, when and how to use their investment bankers. Investment bankers perform a real service for companies, but knowing how to use these services will make the process more efficient in cost and more effective in results. I've been in this business for about thirty years, and I've seen them all in action. Consider these tips for tangling with investment bankers.
Specify Your Goals
Know in advance precisely what your company wants to achieve in the anticipated transaction. In a public offering, consider the range of pricing; in M&A, prepare a list of objectives. Generalized goals make weak foundations. Proper financial goals should have the following characteristics: clear not vague (everyone should understand them); specific not general (precise and accurate in numerical terms); focused not diffuse (wish-lists are fine; just remember what you really need); contained not boundless (don't swing for the fences unless you've already assured your minimum goals); difficult not easy (if you don't stretch you'll never get the best results); consistent not inconsistent (financial goals must mesh with all other corporate goals); measurable not immeasurable (you must know when it works); and achievable not unachievable (living in blue-sky dream worlds frustrates closure).
Become Familiar with Comparable Transactions
Know what other companies have done in similar circumstances. Learn what happened in the past-but never be satisfied with history. Keep current: the market changes constantly, new deals are going effective daily and you need to be aware of what's happening. Ask questions, suggest alternatives, interact with your bankers. Above all, don't be intimated. The best antidote for the poison of embarrassment is continuous updating of knowledge. (Note: Selecting comparable transactions is usually as much art as science, since true comparability is uncommon. Investment bankers are often quick to list comparables; their assumptions should be challenged.)
Interview Several Investment Banking Firms
The courting process is important. This is your time to expand horizons. You will never be treated as well as when you haven't made your choice. Your prospective bankers will never be more solicitous or more patient. (And if they're not solicitous and patient now when they want your business, how much less will they be when they have already gotten it!) During the interviews, ask about transactions on which they have been the lead-the "book runner" on public offerings-not just a co-manager. Note the level of bankers with whom you are meeting; the usual procedure is for senior bankers to make the pitch-but then, for smaller transactions, junior bankers will be doing the work. Ask about the team that will be actually executing the transaction, particularly about the involvement of the senior bankers.
Worry First About the Deal, Then About the Fees
CEOs are often so concerned, even nervous, about investment banking fees that they may pay less attention to the transaction. This is a mistake. When speaking with several investment banks, compare fees, sure, but look carefully at the services. Sometime a disparity in fees is due to a disparity in service; sometimes different firms have radically different perceptions of the transaction or the kind of work required. One of the most astute entrepreneur-financiers told me that he doesn't mind paying high investment banking fees since by doing so he knows he will always get the best service (e.g., if an attractive acquisition emerges, investment bankers will likely show it first to those who pay full fees). Furthermore, when this entrepreneur was making a key divestiture, he hired two investment banks, paying a combined fee that was 50% higher than normal, just to ensure that the best price was obtained.
Select the Firm That Meets Your Needs
Name and reputation are important, but not all important. How valuable you are as a client to a given firm, among high quality firms, is sometimes the most vital factor in the selection decision. You want a banking house to be well experienced in the specific kind of transaction you seek (you don't want them to learn to shave on your face). A top-bracketed firm with little commitment to your specific needs may be the worst of all-the illusion of expertise mixed with the frustration of neglect. In reality, in doing your deal, the key success factor is often the individual bankers working on it.
Maintain Relationships with More Than One Firm
No matter how well you are working with one investment bank, always keep one or two others in your back pocket. Stay in touch with the competition. Don't feel guilty about it. Don't even hide it! Companies maintain relationships with more than one commercial bank; the same principle should be applied to investment banks. You never know when your investment bank will undergo a radical change-corporate restructure (eliminating your personal bankers), corporate reallocation of resources (going out of your business), or plain disappearing altogether. Furthermore, by talking to your banker's competitors, you can keep an eye on the pricing markets and prevent your banker from taking you for granted.
Minimize Downside Risk; Then Try to Get Lucky
The deal business is intoxicating, and CEOs can be tempted, hearing all sorts of stories from their investment bankers, to reach for more than they are likely to achieve. Ego is usually a liability in transactions. This is especially dangerous in transactions that are essential for the overall welfare of the company. First, be sure that you get what you really need. Ensure the bare minimum; secure that bottom line-this takes all danger out of the situation. Then, and only then, go for it.
Motivate by Ego As Well As Greed
Investment bankers are motivated by money, sure, but even more important is often their reputations and relative positions. Rankings among investment banks are critical, and whether the adjudications are quantitative (the so-called "League Tables" that list the leaders in public offerings and M&A) or qualitative (their reputations), investment bankers will work even harder when their egos are on the line. Astute CEOs can increase the intensity of investment bankers' efforts by appealing to their egos.
Don't Be a Pioneer (Unless You Want to Be a Pioneer)
Investment bankers like to do deals that their peers will talk about. This means doing something bigger or better or unusual. The danger for a client company is that an investment bank may want to do a deal that is more in the interest of themselves than their clients'. Convincing a client to pay a very high price for an acquisition has happened repeatedly. Creating a structure that is original, such as for tax purposes, may not be in best interests of the client.
Work Closely with Your Investment Bankers
It is a mistake to assume that your bankers are always working for you, that they are living and breathing your deal. They are working with many clients on many deals (not infrequently focused more about getting the next client than satisfying the current one). Your deal is the most important to you, but it may not be to them. Keep on their tails.
Maintain Control of the Process
Senior management must participate actively with their investment bankers. CEOs should never allow the apparent complexity of a financial structure to pressure them into abdication, to disenfranchise them from able involvement. If you are a CEO, it's your company, not the investment bankers'. You know it better than anyone else. So although you may not be a finance expert, you are probably better able to integrate the financial structure with the business structure than those hotshot bankers. The subtleties of the business are often harder to appreciate than the complexities of the finance.
Used properly, investment bankers can add substantially to the worth and wealth of a company. But investment bankers, for all of their value-added contributions, tend to put the deal ahead of the company, and they can often intimidate senior management into acquiescing to their recommendations. Knowing how to use investment bankers keeps the CEO in charge of the transaction.
Dr. Robert Lawrence Kuhn is Senior Advisor, Citigroup Investment Banking, and the author or editor of numerous books in business, finance and science, including The Library of Investment Banking and, most recently, China's Banking and Financial Markets: The Internal Report of the Chinese Government (John Wiley) and Closer To Truth: Science, Meaning and the Future (Praeger). Previously, Dr. Kuhn was president and co-owner of The Geneva Companies, the largest M&A firm representing privately owned, middle market companies (in 2001 he sold Geneva to Citigroup). Dr. Kuhn has a doctorate in anatomy / brain research from UCLA and a master's in management from MIT.
Investment banking is the business of money. Its primary purpose is to link users of capital with providers of capital, seeking optimum financial efficiency for both. It is the intermediary channel through which capital is distributed efficiently and exchanged effectively. As such, investment banking claims to be capitalism's critical mechanism for facilitating the resource allocation decisions that epitomize the free market system. To no small degree, investment bankers believe that they fuel the world economy.
But what actually is investment banking? It is transaction oriented, a service business. It manufactures no goods and sells no merchandise, yet it influences virtually all enterprises that manufacture and sell. Its primary asset is financial intelligence, and its primary products are financial advice and financial instruments. Investment banks make things happen, energizing corporations to grow and expand and enrich their shareholders.
Some see investment banking as the indispensable hub of the wheel of commerce, the vital force of companies and industries, the market catalyst of economic productivity. Others consider investment banking-why mince words?-to be a parasitic profession, feeding off the productivity of its clients. Investment bankers, these critics complain, are overcompensated and underproductive, a drag on the system.
I deal with this paradox. My objective is to discern the fundamental nature of investment banking, and thereby ascertain its fundamental worth. The search is for intrinsic value and meaningful contribution, for the deep structure of investment banking. My quest is for "essence"-a philosophy, if you will, of investment banking.
WHAT IS A PHILOSOPHY?
In general, philosophy is the search for sense, meaning, cause, and principle using logical thinking and rigorous thought. Philosophy excavates foundations and stresses being and mechanisms, discerning what things are and how they work. It is an attempt to perceive what things really are, not how they appear to be, and to discern how things really work, not how they appear to work. Philosophy seeks ultimate, irreducible truth.
A philosophy of investment banking may seem pretentious (or worse, silly) surrounded by such towering achievements of human knowledge as the philosophies of science, education, history, law and religion. Philosophy claims to be able to make sense out of any human awareness or endeavor, however massive or minuscule. Perhaps we will find interesting things about the nature of investment banking.
DEFINITIONS OF INVESTMENT BANKING
If we are to lay claim to constructing a philosophy of investment banking, we must begin by introducing some rigor into the process. A philosophy flounders when language wobbles. An incipient philosophy needs verbal precision.
Even within the finance community, the term "investment banking" is used rather loosely. Such usages range from widely inclusive of virtually everything that large Wall Street firms do to narrowly restrictive to only certain conventional investment banking functions, primarily underwriting. Part of the problem is the evolution of the field.
Traditional investment banking was the underwriting of common stock equity and investment-grade corporate bonds. But the financial world has changed dramatically, and investment banking, the key catalyst of the metamorphosis, has widened its scope proportionately. Following are four definitions of investment banking; the order proceeds from the most broad to the most restrictive.
1) Investment Banking as Everything Major Firms Do. All Wall Street activities are encompassed here, including personal financial products and retail investments.
2) Investment Banking as All Capital Market Activities. All capital raising and corporate finance functions are included, such as mergers and acquisitions (M&A), merchant banking, fairness opinions, fund management, venture capital management, investment research, risk management and the like-in addition to traditional underwriting of debt and equity securities. Excluded are consumer markets, retail investments, branch management and the like (but would include market making and institutional securities trading). This definition is my personal preference.
3) Investment Banking as Some Capital Market Activities. Some usages of "investment banking" restrict its connotation to only some capital market activities, stressing underwriting, mergers and acquisitions, fairness opinions and the like. Excluded are money management, trading for their own accounts, research, commodities and some risk management (i.e., trading).
4) Investment Banking as Only Underwriting and Raising Capital. This traditional definition, limited to raising capital for corporations in the public markets and trading securities, is the most restrictive. It is hardly a defensible position today not to include M&A as central to mainstream investment banking.
What is the fundamental basis for investment banking? Why does a free market allow, indeed encourage, the existence of highly compensated financial intermediaries who make markets but not products? Following are areas of high value-added contribution-"worth"-that investment bankers provide for financial markets.
Worth of Underwriting Investment bankers float and trade securities; they set standards and establish prices in the underwriting process, and they broker trades and make markets in the subsequent trading of those securities. As such, investment bankers are the essential intermediary that establishes the market between buyers and sellers. They assure the efficiency of the market by their issuer selection process, due diligence procedures, pricing mechanisms, distribution allocations, supply and demand equilibria, and the like. In syndication, investment bankers distribute the risk of underwriting new securities among various firms; the process is important in that it requires one investment bank to convince its peers of the efficacy of its proposed offering, thus building checks and balances in the system.
Worth of Broker / Dealer / Market Making The trading of securities provides liquidity by enabling the continuous buying and selling of those securities. Such liquidity is vital for giving investors confidence that their investment can be converted into cash easily and quickly, which works to lower the cost of capital for issuers. Investment bankers assure a ready and efficient market for both buy and sell sides; they act as brokers, who are commissioned agents for buyers and sellers (brokers hold no inventory and therefore assume no price risk); dealers, who set bid-and-ask prices for each security they offer for trade (dealers assume a price risk for all securities they hold in inventory); and market makers, who establish (and support) the entire market for a security, normally following its initial public offering.
Worth of Mergers and Acquisitions Investment bankers perform a service greatly desired by both buyers and sellers, helping each to achieve economic goals not attainable as efficiently through any other means. When corporate buyers and sellers have a ready, fluid ("liquid") M&A market, there is more incentive to build companies (e.g., cashing out is easier and more lucrative) and more opportunity for effective strategic planning (e.g., growth through acquisitions is more practical). The intrinsic worth of hostile takeovers-i.e., assessing and comparing the often competing interests of stockholders and management-is a complex issue. On the one hand, it is disruptive for executives to spend their time devising legal and financial techniques to defend their companies against unwanted suitors. On the other hand, an efficient market demands that inefficient corporate structures should be subject to restructure, and sleepy underperforming corporate managers (e.g., highly paid and perked executives who own little stock in their companies) should be subject to change.
Worth of Merchant Banking / Private Equity When investment banks risk their own capital to facilitate M&A deals, whether as short-term bridge financiers or as long-term equity players, the process enables more companies to be on the market and more deals to get done, thus enlarging the M&A market and making it more liquid and more efficient.
Worth of International Investment Banking By extending financial markets worldwide, investment bankers achieve greater efficiencies in optimizing risk and return for both issuers and investors. (Portfolio Theory explains the benefits of such diversification.) In addition, the internationalization of financial markets supports the globalization of business, the development of third-world countries, and the emergence of new markets.
Worth of Fees and What They Mean The enormous fees that investment bankers make in mergers and acquisitions are often used to question M&A's value to the economy (e.g., critics contend that when investment bankers churn companies they increase personal fees not industrial productivity). Yet, viewed from another perspective, these admittedly huge fees can demonstrate the desirability of the service. After all, chief executives are not easy marks; they are not in business to overpay; they are not suckers or easily bullied; and most of all they are used to getting what they want. If these seasoned corporate leaders are paying such spectacular sums, who's to say that they are not getting their money's worth?
BODY OF PROFESSIONAL KNOWLEDGE
Recognizing and appreciating this knowledge base in investment banking is essential in evaluating its philosophy.
Finance Theory If finance is the intellectual foundation on which investment banking is built, then finance theory supplies the raw materials used in its construction. Knowing why a particular financing technique works is often critical in knowing how to make it work better. Seeing deeply into the structure of financial instruments gives a definite competitive edge. But although finance theory is necessary in investment banking, it is not sufficient.
Financing Experience Experience in financing is part of the knowledge base. The collective record of financial performance from thousands of financings is the firm platform on which to construct future financings. Similarly, a keen sense of the outcomes of innumerable mergers and acquisitions over many years provides insight into how to make current M&A clients more successful. But wide experience in financial transactions, like technical competence (or even brilliance) in finance theory, is also not sufficient.
Business Savvy and Industry Expertise First-rate investment bankers understand general business principles and specific industry fundamentals. They are astute at analyzing companies-say, the changing competitive structure within given industries-and perceiving what it takes for enterprises to be successful within their product/markets. They are expert at articulating a company's current business requirements with the technical features of various financial instruments in order to formulate and implement the optimum structure for the proposed financing. Likewise, the ability to evaluate senior executives of issuer companies gives critical insights.
Market Savvy and Financing Insight Investment banking is an art as well as a science, and perceptive insight is as important as technical analysis. The best investment bankers just seem to "know" when an underwriting makes sense, and at what time, and at what price. They can discern a hot property, the next big market winner. They also have a nose for the negative; they can sense a problem quickly, whether with the products, markets, systems or management. Traders, dealers and market makers have their own special sense of the world and the markets; they have an instinctive feel when to get in and get out of securities, and they trust their intuition as much as their analysis.
Interpersonal Skills The importance of competence in working with people cannot be overstated. For example, appreciating the psychological subtleties of the deal-making process is often more valuable than knowing the technical aspects of those deals.
CLIENT SERVICE AND PROFESSIONAL INTEGRITY
Primary regard for the client's interests and welfare is sacrosanct. But doing what is best for the client in the long run is not always what the client thinks is best right now. What clients require may differ from what they request. Investment bankers are financial architects, engineers and physicians. Like good architects, they work intimately with their clients, discerning what is needed even if contradicting what is asked. Like good engineers, they coordinate all aspects of the assignment, insisting on internal consistency among all functions and tasks. Like good physicians, they base their diagnosis strictly on the facts, never biasing their opinion because of client wishes. The only thing more important than serving the client is upholding the profession. It is wrong to subvert the highest investment banking standards, even for the cause of assisting a client. Such subversion undermines the profession and diminishes future service.
Investment bankers design and plan financing mechanisms and then fashion and construct them. Formulating and implementing financial strategies and structures are what they do, and, when they do it properly, everyone benefits.
Dr. Robert Lawrence Kuhn is Senior Advisor, Citigroup Investment Banking, and the author or editor of numerous books in business, finance and science, including The Library of Investment Banking and, most recently, China's Banking and Financial Markets: The Internal Report of the Chinese Government (John Wiley) and Closer To Truth: Science, Meaning and the Future (Praeger). Previously, Dr. Kuhn was president and co-owner of The Geneva Companies, the largest M&A firm representing privately owned, middle market companies (in 2001 he sold Geneva to Citigroup). Dr. Kuhn has a doctorate in anatomy / brain research from UCLA and a master's in management from MIT.
I am ever enchanted by George Bernard Shaw's comparison of the scientist and the philosopher. The scientist is said to learn more and more about less and less, while the philosopher is said to learn less and less about more and more-so that in the end the scientist knows everything about nothing and the philosopher knows nothing about everything.
Just to survive, investment bankers must be both smart and savvy, and to prosper they must be extraordinarily smart and savvy. Business executives can learn key principles of business and finance by examining how the best investment bankers think-a sophisticated system of reasoning and procedure that generates consistent, high-quality financial output. In addition, we explore the personality of investment bankers-what makes them tick?
PRINCIPLES OF INVESTMENT BANKING
The way of thinking in investment banking can be described by the following six categories: financial maximization; financial optimization and cost/benefit analysis; independent judgment and due diligence; financial innovation and new product development; capital allocation and efficient utilization; and client service and development. The first two are client-centered, the third and fourth are market-centered, the fifth is both client and self-centered, and the sixth is largely self-centered.
Financial maximization seeks to get the most while giving the least. In underwriting public offerings, this means achieving the lowest cost of capital for issuers and the best risk/return ratio for investors. The lowest cost of capital for equity issuers results from the highest market capitalization (which is the current value of all the company's equity computed by multiplying the total number of outstanding shares by the current market price per share); the lowest cost of capital for debt issuers results from the lowest interest rate and most flexible covenants. The best risk/return ratio for equity investors is achieved by the lowest market capitalization; the best risk/return ratio for debt investors is achieved by the highest interest rate and strictest covenants. Investment bankers are usually on both sides of security transactions, and as such the market is cleared between issuers and investors at a rational intersection point between issuer cost of capital and investor risk/return.
Obtaining the lowest cost of capital is the holy grail of investment banking. Raising the most net-net dollars for the least all-in costs is the key criterion, and around this icon does the entire profession dance. The maximization mechanism works by investment bankers choosing and/or designing highly specific financial instruments tailored to each highly specific financing situation.
The financial maximization process is quantitative (i.e., algorithms, spreadsheets and mathematical simulations), a numerical determination of how return can be maximized and cost minimized. This is basic business, the way of the economic world, and it epitomizes investment banking thinking when representing clients in financial transactions. By being analytical, the process of financial maximization encourages the development of innovative financial instruments.
Financial Optimization and Cost-Benefit Analysis
Financial optimization seeks the ideal financial structures and mechanisms given specific conditions. Such thinking takes both a short-term and a long-term perspective, seeking to balance the sometimes conflicting pressures between the two poles. The process is partly qualitative, a non-numerical determination of economic efficiency and best choices.
Investment bankers analyze all aspects of a client's company and formulate those financial strategies and implement those financial structures designed to produce the most effective overall outcome. Aspects that must be scrutinized include business as well as financial elements. Financing is one part of an enterprise's operations, and internal consistency among all parts is essential.
Note that optimization is not maximization in that what is "best" may not always be what is "most." For example, if the least expensive financing requires a maturity or covenants not consistent with business requirements it is not optimal even though it is maximal. Another example is the setting of security prices in an initial public offering; if prices are too high and the aftermarket becomes weak, investors will sour on the company and sit out future financings, thus raising the long-term cost of capital.
Financial optimization can be considered a cost-benefit analysis, which compares relative value between the pros and the cons of alternatives. Developed for situations where numerical analysis is not relevant (e.g., government agencies and eleemosynary organizations), cost-benefit analysis can be an effective technique for discerning optimization in situations where numerical analysis is relevant.
Independent Judgment and Due Diligence
Independent judgment establishes the credibility of investment bankers, and due diligence is a primary expression of this independence. Confidence is the primary building block of investment banking; without such trust on both sides financial transactions cannot occur.
Investors realize that when investment bankers represent issuers they are committed to obtaining the best possible transaction for their clients ("best" usually meaning "most"). But these investors must also be able to rely on the statements and presentations that the investment bankers make regarding the issuer. For the system to work, investors must believe that everything material that the investment bankers state to be true is in fact true; investors must be able to trust the reasonable veracity of what investment bankers present. (In this context, investment bankers differ from attorneys in representing their clients.)
Due diligence is the process by which investment bankers validate the claims of their own clients. For example, in preparing an underwriting, investment bankers must make reasonable efforts in examining all material aspects of the client's company, however laborious or complex or expensive the process. Such detailed checking is required by law.
What would happen to an investment bank that gets a better deal for its issuer clients than the facts would justify? That investment bank would sustain competitive loss, not achieve competitive gain. Not only would the investment bank suffer severely as an underwriter but it might also be exposed to legal liability.
A similar requirement for proper due diligence applies in mergers and acquisitions. If an investment bank makes exaggerated claims for its client seller, it risks ruining its credibility in future transactions and thereby losing its comparative strength in attracting new clients.
Financial Innovation and New Product Development
Financial innovation is a prime characteristic of the way of thinking in investment banking. In former decades, underwriting had little variety; stocks and bonds were "plain vanilla," each having largely similar features. But the plethora of new financial instruments changed the old world forever. And, once started, such change cannot be contained.
Today, innovation is a major competitive weapon of investment banks. Each tries to upstage the others in bringing to market more focused and more efficient instruments for its clients. Client service is certainly a motivation here, but the primary impetus is the investment bank's own reputation.
Capital Allocation and Efficient Utilization
The adequate availability and efficient use of capital is a recurring theme of modern finance, and investment bankers apply this fundamental principle both to client companies and to themselves. The availability of capital is critical for the successful implementation of all corporate strategies. Client companies need sufficient capital to finance their businesses, whether for fixed assets (e.g., plant and equipment), working capital (i.e., receivables and inventories), or building the company (e.g., marketing and advertising, research and development). Investment banks need sufficient capital to support their underwriting, securities dealing, and merchant banking functions.
The efficient use of capital is the central mediator of the financial markets. Capital is allocated to where it will produce the highest returns for the lowest risks, i.e., the optimal risk/return relationship. Regarding client companies, investment bankers always want to understand the "use of proceeds"-i.e., how the monies that are generated from the underwriting will be employed in the business. Issuers must be able to demonstrate that their use of proceeds will generate sufficiently high returns to justify the investment, certainly well in excess of the cost of that capital. (No investor wants to watch his or her invested money sitting idly in Treasury Bills-investors can earn Treasury returns themselves, with full control and no risk.)
Regarding the investment banks themselves, the same efficient use of capital is required. In recent years, investment banks have been scrambling to increase their capital bases in order to compete effectively, especially in firm commitment underwritings, trading for its own account in the world securities markets and merchant banking. Yet, returns on that capital must exceed significantly the cost of that capital. In bull markets for underwriting, trading and merchant banking, the returns are appropriately high and heavy capital is essential. However, when these markets turn down, the returns decline rapidly since the capital base is so high. When returns on capital fail to approach the costs of capital, this can mean that there may be too much capital in the company.
Client Service and Development
Investment banks are service organizations, and as such, attending to clients is the highest good. In most investment banking transactions there are many organizations and individuals involved, but no matter the complexity, the best investment bankers never forget who are their clients and what are their needs.
Clients may be issuers or investors depending on the power relationships in a given market. Clients are those with the independent power to generate opportunities for making money in a financing situation. Power is critical here, because given the specific condition, such power may reside with either the issuer or the investors.
Blue-chip, investment-grade companies or hot initial public offerings draw in their own investors and issues are sold (and oversold) rapidly; the clients here are the issuing companies and investment banks compete to offer these issuers the best services. In the high-yield market, on the other hand, power often resides with the investors, those institutions that buy below-investment grade paper. Generally, there is more investor demand in the investment-grade market and more issuer demand in the high-yield market.
PERSONAL ATTRIBUTES OF INVESTMENT BANKERS
The personal attributes of investment bankers can be explored in three categories: natural abilities and learned skills, attitudes and ethics, and coping with professional tension.
Natural Abilities and Learned Skills
It is an historical truism that those professions perched on the highest strata of society, and/or enjoying the largest relative proportion of society's material benefits, attract the best and brightest members of that society. In points past, such a profession might have been the priesthood, the military, or the foreign service. Today, worthy or not, investment banking makes claim for the honor. This is not intended as an absolute value judgment (i.e., I do not assert that investment banking should occupy the highest strata); the dubious question of intrinsic social superiority or relative moral position is not the issue. The only point here is that where investment banking stands in our socio-economic system is a fact.
By providing very large compensation packages, investment banking is no exception to the historical rule of attracting the smartest and most ambitious young members of society-in this case, the graduates of America's leading business schools. Many critics lament the consequences of this magnetic draw, claiming that since investment banking promotes more paper shuffling than product productivity, the smarter the bankers the more shufflings will occur. The fact that investment banking has attracted the best and brightest has energized the field with high competitive energy and rapid dynamic change. The best and brightest are creative and innovative as well as dedicated and ambitious.
As discussed above, there is a substantial body of knowledge that undergirds investment banking, but there are a myriad ways to achieve its mastery-and personality is often as important as intellect in the process. Having an intuitive sense for people and relationships is as important as having an inherent capacity for numbers and formulas. For example, those with the ability to bring in new clients (called "rainmakers") are highly prized and rewarded. Knowing what to do is one thing; having the opportunity to do it is something else. You cannot show your stuff without getting the chance. Winning the assignment comes first: You must get the business before you can show your brilliance. So whereas technical competence may get the highest score, personal charisma gets you into the game.
There are different sets of skills that can lead to success in investment banking-technical, insightful, personal and managerial-skills that are neither complementary nor mutually exclusive. Though few are gifted in all four areas, many investment bankers show strengths in several.
Technical Technical types analyze financial situations and develop financial instruments. The paragons are the so-called "quants," those mathematicians and scientists who have migrated to Wall Street (drawn by the tingle of tough competition and the heat of hot dollars). Computer technology has changed dramatically how Wall Street works, from market arbitrage to back office administration. Quants, those who specialize in quantitative analysis, are the new gurus on the old Street.
Insightful Insightful types see behind numbers and beyond technical analysis. They are often creative in spirit and enjoy innovating new concepts and products. They devise fresh financial instruments, and they add novel "bells and whistles" to transform ordinary products into special products. They find unrecognized M&A candidates, and they devise fascinating ways to make doable M&A deals that others think undoable. They are the ones with the sixth sense of market savvy, making the best trades with the right timing. Admittedly, insightful investment bankers have a tendency to ignore facts; but this weakness is also their strength. Ideas fly with high frequency. But insight is optimized when analysis is not slighted. They do the analysis, then have the confidence to leap beyond the logic.
Personal Personal types are the leaders of the investment banking world. They lead by "making it rain," by developing client relationships and bringing in the business. They have high charisma; they attract people by their often magnetic personalities. They also lead by shaping the system, by influencing the people and events of the internal environment.
Managerial Managerial types run the organizations. They maintain the delicate balance between the high-ego, individual investment bankers and the collective authority needed to assure conformity with corporate goals. Managing investment banks-and investment bankers-is more like running an opera company or academic department than a traditional manufacturing or service corporation. Not only do you have all the conventional business problems, you also have the added aspect of managing prima donnas. Managers of investment banks work to focus the independent dynamism of investment bankers toward achieving corporate goals.
Attitudes and Ethics
Professions are characterized by specific standards of performance and codes of behavior to which members must conform. Such standards and codes serve to unify diverse aspects of the field. It is difficult to examine attitudes and ethics in investment banking except in the context of controversy. But the import of ethics must supersede its fractious recent history and intense media attention. Ethics is a prime building block of investment banking. Ethics generates confidence, and without the confidence of clients, investment banking cannot exist.
Coping with Professional Tension
Like law and medicine, investment banking is a profession where providing the best service to clients is the highest good. But investment banking is also a business, the business of finance, where money is not only used to keep score but it is also the product and service being sold. Furthermore, the money is massive, moving it around seems easy, the financial leverage is enticing-and investment bankers control the whole process. This atmosphere causes a certain tension to develop, a tension perhaps unique to investment banking.
Client service and private benefit can conflict. Though present in all professions, such strain can become exceedingly intense in investment banking. Why the greater problem here? The prime reason is the huge stakes and the competitive environment. The pie is so spectacularly large that even a small piece translates into grand personal compensation. And in the world of investment bankers, perhaps more than in any other profession, public status and personal success are judged in terms of compensation comparisons with peers.
Progressing further, many investment bankers would envision themselves as entrepreneurs, where personal productivity and creativity should lead to professional advancement and personal wealth. This desire, like most human emotions, has both upside and downside. The upside is enhanced individual effort; the downside is increased conflict of interest. Coping with such professional tension-resolving the conflicts that surely appear-is vital.
Dr. Robert Lawrence Kuhn is Senior Advisor, Citigroup Investment Banking and the author or editor of numerous books in business, finance and science, including The Library of Investment Banking and, most recently, China's Banking and Financial Markets: The Internal Report of the Chinese Government (John Wiley) and Closer To Truth: Science, Meaning and the Future (Praeger). Previously, Dr. Kuhn was president and co-owner of The Geneva Companies, the largest M&A firm representing privately owned, middle market companies (in 2001 he sold Geneva to Citigroup). Dr. Kuhn has a doctorate in anatomy / brain research from UCLA and a master's in management from MIT.
Robert Lawrence Kuhn, an international investment banker and corporate strategist, is senior adviser at Citigroup where he focuses on China. He is editor in chief of a new book, China's Banking and Financial Markets: The Internal Report of the Chinese Government. His articles describing and explaining investment banking, which advise business executives on how to optimize investment banking products and services, Can be found by clicking on following links.
- A Philosophy of Investment Banking
- What Investment Banks Do
- How Investment Bankers Think
- How to Use Investment Bankers
- What M&A Banker Would Rather I Not Write
- Inside M&A Banking
Before I became an investment banker, I studied to be a doctor. (I did a Ph.D. in anatomy/brain research at UCLA, never returned to medical school at Johns Hopkins, and 15 years later went to business school at MIT-but that's another story.) An investment banker sees many businesses. In my case, running a firm doing M&A for medium-sized companies, I saw over 12 years perhaps 15,000 companies whose CEOs either wanted a valuation or decided to sell. I was like a doctor examining a very large number of particular patients: One comes to recognize the symptoms of their special diseases and comes to learn how best to treat them.
Some of the "diseases" that CEOs catch may seem minor; these can be the virulent ones that morph stealthily into major corporate illnesses. Following are some CEO diseases and my prescriptions for treating them.
Talking Too Much. You never learn by talking, but some CEOs imagine the world to be in desperate need of their constant wisdom. It is a rare subordinate who will risk stifling a CEO.
My Prescription: Track the percentage of time you speak compared to that of your subordinates. Yours should be a lot less. If you want to give a speech, call it that. Otherwise, control yourself; to be blunt, shut up.
Goals Too Aggressive. Unrealistic goals "demotivate," especially when compensation is involved. One CEO expected his plastics company to continue its 30 percent annual growth rate, not appreciating that with a larger base and a mature market their era of high growth had to end; the result discouraged managers.
My Prescription: Set goals that have, say, a 35 to 45 percent likelihood of success. (Assume all works well but not extraordinarily well.) Goals should make your executives reach, but not too high.
Power Building Trumps Wealth Building. CEOs tend to make decisions that enhance their scope and influence, even at the expense of increasing shareholder value-and this can be paradoxically true even when the CEO is a large shareholder. Sometimes, for effect, I put it this way: "I want a CEO whose greed exceeds his ego." Sure, greed and ego are both unpleasant traits that are impolite to laud in public, but by privileging greed over ego I make the point that good CEOs should be motivated more by amassing wealth for their shareholders than by accreting empires for themselves.
My Prescription: Take this psychological test. When making a big decision, ask yourself how it will build the market value of your firm. Then, immediately, shift the introspective question to how the decision will increase your personal power. It is the speed of your answer, not its substance, that I'm assessing here. If the speed of your internal answer to the second question, stressing personal power, exceeds that of your answer to the first question, stressing firm value, your ego may be exceeding your greed, and this should be a cause for concern.
Not Respecting or Recognizing the Ideas of Others. In general, CEOs are egotistical. Highly successful almost by definition, many CEOs would seem to have every right to be self-impressed. However, when you hold the top spot, puffing yourself up at the expense of subordinates pollutes the organization. You benefit when your people are encouraged and empowered to generate novel ideas.
My Prescription: Do the opposite of what comes naturally. In a situation where a good idea was really or largely your own, go out of your way to give credit to others.
Seeing Only Summaries. A CEO should perceive the world as it truly is; if cluttered and chaotic, so be it. When information is always "high level," predigested by staffers, a CEO may be perceiving an artificial world, a virtual reality as it were, of cleanly manicured lawns. Most CEOs have great instincts about their businesses, and such instincts should be nourished by raw data, like, for example, call reports of customers.
My Prescription: You know the critical success factors of your business. Demand unsimplified information for these factors. And get it randomly so that your staff never knows where or when you will require raw data.
Don't Fall in Love. Your social life is your own affair, but when you sit in the corner office, follow your head not your heart. Every business must have a strategic or financial purpose, and if a business happens to make you feel good that's fine as long as your emotional attachment doesn't interfere with your rational decision-making. CEOs are particularly vulnerable when making acquisitions -who knows why Ford bought Aston-Martin?
My Prescription: Engage the executive most likely to call your favorite business babies "ugly." You don't have to agree, but you do have to listen. Also, when an executive challenges your favorite projects, praise her.
Feeling Invincible: CEOs to be CEOs must have superb track records-some are almost unblemished -so they have a proclivity to imagine themselves as invulnerable. The natural corollary is a robust confidence, even if subconscious, that past success assures future success. I can't tell you how many dozens of CEOs I've seen who refused to sell their companies at what would turn out to be, in hindsight, their peak market values, simply because they were convinced that tomorrow's prospects would mimic yesterday's triumphs. Looking backward and looking forward, a humble, healthy respect for the subtleties of serendipity is the beginning of wisdom. As the Proverbs say: "When pride cometh, then cometh shame" (11:2): "Pride goeth before destruction, and an haughty spirit before a fall" (16:18).
My Prescription: Even the best CEOs are lucky, and although I agree with the adage that "the smarter you are the luckier you get," the relationship is far from perfect. A sobering exercise is to analyze your career, looking for "luck." Also, don't believe your own hype.
Personnel Too Similar. In some organizations, many of the senior executives look like the CEO. I mean this quite literally and it can be very funny. Not just obvious characteristics like gender and race, but also personal traits like size and stature, political philosophy, sporting interests, demeanor, even style of dress. In a globalized world where customers and suppliers may be very different kinds of people, it is not wise for the executives of a company to be homogenous, and hence, uniform in their thinking.
My Prescription: Look at your key external relationships; target those who are markedly different from you, and ask yourself whether any of your top executives are like them. If not, hire some.
Generalizations. CEOs like to spot trends, spot trends, finding deep principles to predict and affect business. But beware of averages, which can deceive. For example, assume that, in a pharmaceutical company, prices are declining for one-half of the drugs and increasing for the other half; the fact that the average price of all drugs has remained steady is worse than meaningless information. Strategies for drugs that kept prices steady might not work at all with those whose prices were decreasing or increasing.
My Prescription: Recognize that as the world has become progressively more narrowcasted in demand and supply, the power of generalization has become progressively more suspect.
Not Asking the "Stupid" Question. You learn by asking. If you don't understand something, you can't make a proper decision. CEOs are not known for sporting small self-images, but if these top-floor egos are so fragile that they can never appear uninformed, CEOs will suffer strategic disadvantages. It is astounding how many "dumb" questions, well timed, might have prevented poor decisions.
My Prescription: Go out of your way to ask stupid, dumb questions-even when you don't need to-just to get your ego conditioned to how it feels. In this way, when you really need to ask that key question, your ego won't immobilize your tongue.
Falling for Current Trends. It's easy to be sucked into the vortex of current trends, whether macroscopic movements or management theories. Think Time Warner purchasing AOL at the height of the dot.com boom and destroying most of the acquirer's value.
My Prescription: Ask yourself whether you really believe the current trend or whether you are feeling socially coerced? Your instincts are often a better strategic guide than the hot stories in the latest business magazines.
Falling for Contemporary Tricks. Every few years, it seems, there is some new fad with which CEOs must contend. In the 1960s, conglomerates grew by accretive acquisitions, seeking earnings per share growth and cyclical balance. In the 1980s, highly leveraged financings were the rage. And in virtually every decade, specious tax shelters and spurious tax gimmicks always pop up (e.g., trying to postpone huge capital gains taxes through tortuous and ultimately disallowed techniques).
My Prescription: Most CEOs should be wary of cutting-edge finance and simply stay away from tax dodges. Playing near the foul line isn't worth it. How to diagnose your own CEO diseases? You will have to be your own doctor since I do not make house calls.
Dr. Robert Lawrence Kuhn, an international investment banker and corporate strategist, is senior adviser to Citigroup Investment Banking. He is the author or editor of numerous books on business and finance; his latest is China's Banking and Financial Markets-The Official Report [of the Chinese government], forthcoming from John Wiley & Sons.