Wednesday, December 21, 2011

The New Frontier of New Ideas

Expansion is sustainable as long as there is a New Frontier
Evolution is sustainable as long as there are New Ideas

The Old Patterns (Growth)
The New Patterns (Sustainability)
Trend Lines
Cash Flow Waterfalls
Org Charts
Knowledge, Networks, Routines
Flow Charts
Contributors to Prosperity

Economics today are pretty much about looking back on innovations that were cutting-edge in the 1800s, and trying to make them fit our needs as we move into the 21st Century.
But our world today is very different place.
In the 19th Century, America invented the Exchange-Traded Corporation as a technology for organizing value creation, capital formation and wealth distribution to meet the unique requirements of American Industrial Expansion along our Western Frontier, driven by innovations in Economies of Scale.
This innovation of Exchange-Traded Corporations proved to be the right thing for those times.
Throughout the 20th Century and right up to our own time, much thought and effort has been invested in understanding, expressing and applying the basic patterns of Exchange-Traded Corporation finance.  There seems little we don’t now know about historical trend lines, management of organizations, and processes for scale and efficiency.
But our mastery of these patterns seems to be unable to deliver the one thing we seem increasingly to value most: sustainability.
Why?  An economy built on expansion can only deliver sustainable prosperity if there is a New Frontier into which that economy can expand.  Even then, the truth is, expansion economics have consistently delivered alternating cycles of booms that always, eventually, go bust, as investment creates jobs that commerce will not support.
This observation may not resonate with those of us who are personally and professionally invested in the ecology of growth, but those of us who have already come to grips the simple fact that we have reached the geographic limits of our world see that this continued obsession with Growth is really just giving us ever bigger booms that more frequently go bust, with increasingly devastating consequences to both personal prosperity and the public good.  We just cannot keep doing this.
Nor do we have to.
The economics of growth have done much to reveal to us that the real driver of our prosperity is not actually growth, but the innovations that made growth possible.
It is investment in innovation that really drives value creation.  The fact that innovation in 19th Century American focused on economies of scale is more an accident of history than an economic universal.  When European genius for mechanization took root on US soil, it had lots and lots of running room.  And run it did!
Now we in America are catching up with our European cousins (and pretty much the rest of the World) in having to live within the limits of geographical boundaries.  Some of these limits are physical; others, political.  But they are all, nonetheless, real.
Good news is, geopolitical expansion is not the cause of innovation.  The cause of innovation is disappointed expectations that lead people, as individuals, to think there has to be a better way, and the inspiration that leads us, as individuals, to seek until we find that better way.  So, even without a Frontier, we can continue to have Ideas.  And it is ideas that drive innovation.
The patterns of innovation are not the patterns of expansion, they are the patterns of inquiry and insight that lead to the invention of new knowledge that lets us do work in new ways, providing ourselves with a wealth of better options for how we choose to live our lives.
The old patterns of investment in expansion are not the right patterns for investment in innovation.  The patterns of expansion are circumstantial.  The patterns of evolution are more elemental.
They include:
1.     The cash flow waterfall, that captures the way Items of Value are delivered in commercial exchanges that generate the Revenues to pay the costs of delivery, including returns to Investor and profits to the Enterprise drivers;
2.     The Knowledge, Networks and Routines that allow the Enterprise to initialize and sustain its cash flow waterfalls (Routines are what get scaled according to the principles of Economies of Scale); and
3.     The Contributors to Prosperity, who each must do their part to keep the cash flow flowing.
These are the new patterns that we need to master as we build a new economy of sustainability in our times.

Wednesday, December 14, 2011

What are we doing?

I have been investing a lot of time over the last while surfing the Web and learning about the thought leaders and early adopters who are driving what I have come to talk about as the "money, plus..." movement.

The ellipse in the "money, plus..." moniker is intentional and important.  It points to the idea that whatever particular agenda, in addition to making money, any given investor wants to pursue is, and should be, individual to that investor.  It may be everything from a generalized desire to invest in a way that encourages a more sustainable prosperity (see CALPERS, for example), to something more programmatically specific, like farming local (see Slow Money, as a "for instance").

As I get more familiar with the themes and players in this movement, however, an opinion is forming that this movement is still rather poorly defined in its goals and objectives.  Like Occupy Wall Street, it seems to be unified by a widely shared sense that things are not working right, and something has to be done.  But there is less of a consensus on what, exactly, is not working, which means we cannot even begin to agree on what can and should be done to fix it.

Yesterday, for example, I came upon a blog post on by Jim Epstein and Alicia Epstein Korten.  They make the point that there are too many labels floating around this space, and proposed "Common Good Enterprise" as a single label that could encompass all these different nuances. Common Good to me sounds too much like Common Wealth -- or public governance. Instead, I suggested the term Blended Value Enterprise.  To me, this is a combination of Jed Emerson's theme of blended value investing, and my own idea of repurposing tax partnerships, aka Special Purpose Entities, as a more generalized tool for aligning the interests of Enterprise and Investment along multiple points of value: money, plus...  Alicia thinks this label is too investment-y.  Which caused me to ask, what is it, really that this movement is all about?  Who is the audience?  What is the message?

Are we working to re-invent finance?
Or, are we working to re-invent philanthropy?

If the former, then I have something to contribute to the conversation, especially when the discussion turns to the topic of how we need to move beyond 19th Century technologies of corporate finance and Exchange-traded capital that are fundamentally incompatible with the emerging ethos of sustainability in the 21st Century.

If the latter, that is a very different conversation.

What do you think?

Wednesday, December 7, 2011

Blended Value and the Liquidity Thing

Blended Value is a widely recognized way of referring to the well-known, but hard-to-express, desire of many, if not most, investors, both institutional or individual, to put their wealth to work in ways that make a positive impact, not only on their portfolio, but also on the larger world in which we all live.

It's part of the movement towards Socially Responsible Investing, or just Social Investing. This has, in turn, given rise to discussions about Social Entrepreneurship.

Social as used here does not mean disguised philanthropy. It means making investments that are calculated to deliver returns that can be measured in both financial goods and other goods.

In this regard, I contend that almost all Entrepreneurship is really Social Entrepreneurship. There may be some people who start a new business just to pump it up and sell it off, but I don't think most entrepreneurs feel like that. I think most are really trying to make a positive improvement in their lives and the lives of others by bringing new and needed goods and services to the market at affordable prices.

And, I contend that most investors are really Social Investors. There may be some people who just care about making a buck, and don't really care how, but most people want to do right both by themselves and by others. After all, at the end of the day, we're all in this together!

But then there is the liquidity thing.

When we think about finance and investing, for social impact or otherwise, we have all been trained to think about the Market. What is meant by the Market is the public equity and other financial markets, or what is more commonly known as Wall Street (although, really how common is real knowledge of how Wall Street really works?).

The Market (or Wall Street) is really a system of Exchanges for trading in financial instruments. As with so many things, the great strength of the Exchanges is also their greatest weakness: they are built to provide instant liquidity. Their whole reason for being is to constantly attract “the next new buyer”. Even when we look beyond the public equity markets, to such innovations as Venture Capital or Private Equity, we are still looking at models built for liquidity. It’s just that in VC/PE models, liquidity is deferred.

We pay a high price for all this liquidity. First, there is the volatility it engenders, and the instability that comes with volatility. But there is also a more subtle, but more pervasive skewing of our values. Once an Enterprise enters an Exchange (or commits to entering the Exchange markets, by going the VC/PE route first), it goes to work for that Exchange. Every decision that Enterprise makes has to be calculated to please the Exchange. If an Enterprise tries to run its business without regard for the Exchange, it does so at its peril!

The same is true for Investors. When an investor commits to an Exchange-traded instrument, it is not making an investment in the underlying Enterprise that issued that instrument. It is making an investment in the Exchange on which that instrument is traded. The returns to be realized depend on the liquidity of the Exchange, which is at least one step removed from the fundamental prosperity of the underlying Enterprise.

The Exchange stands between Enterprise and Investment, and imposes its values on both. And those values are not blended. They are singular.

The Exchanges are built to optimize one single point of value: the market clearing price. It's best if the price goes up, but it's OK as long as there is a price. The Exchanges, after all, make their money on the trade.

There are times when Enterprise and Investment both need liquidity, and for those times, there is no better option than the Exchange.

But when our focus turns to making real, meaningful, long term, sustainable impact for the better, do we really need that much liquidity? In this context, liquidity is at best, a distraction. At worst, it can be disruptive (see the story of microfinance as Antony Bugg-Levine and Jed Emerson tell it in their new book, Impact Investing)

There is another choice. That choice is to follow the example of the tax partnership. Tax partnerships are the granddaddy of impact investing, bringing billions of dollars of socially responsible institutional equity into social enterprises in affordable housing, renewable energy and community development. We’ve been using them successfully for decades.

The problem with tax partnerships is, of course, the "tax" part of the partnership. But the tax part is not essential. We can redeploy the tax partnership structure as something I call the Base Case Partnership, and voila, we have a field-proven, reliable structure for bringing Enterprise and Investment together in shared pursuit of longer term, stable, sustainable prosperity; prosperity that can be measured financially, but that can also be measured in other ways.

If you're interested in Blended Value, consider the whole liquidity thing, and then consider the option of a Base Case Partnership for blending your values into your investments.

Let's discuss.


Wednesday, November 30, 2011

My son, Conor, sent me this very interesting graphic he found on-line at

It shows an interesting correlation between Computing Power and Trading Volumes on the NYSE.

Perhaps just a co-incidence, but may not.  It makes sense to see that computers have given the Exchanges much more power to handle trades than when they were first organized to operate by people doing trades on paper.

Maybe, however, what we have now is too much of a good thing?

Tuesday, November 22, 2011

How Private is "Private Equity"?

Yesterday I was looking at the website of Insead ( where Cynthia Owens posted her article: "Private equity comes of age in China, India and Brazil".

Some colleagues and I are working on several projects that have connections into China, including one that is based in Brazil, so the article caught my eye.

One point I picked up on was this.  Private equity in China is very dependent on exchange listing (Initial Public Offerings) for investor exits.  India seems to be more of a Mergers & Acquisition play.  Brazil is more of a public markets play.

This got me thinking that "Private Equity" is really a misnomer.  These funds are really better described as "Pre-Public Equity".  It seems the US model is being copied internationally, with real access to capital being made available only to an Enterprise that commits to become funded through an Exchange (or to get sold out to another enterprise that is Exchange-traded).  The only real difference between public equity (i.e. exchange-traded financial instruments) and this kind of Private Equity, so-called, is timing.

The great strength of public equity, which is also it's greatest weakness, is it's laser-focus on a single point of value: the market clearing price.  This single-point-of-value dynamic is deceptively simple.  The truth is, the market clearing price is actually driven by a large number of converging dynamics, some of which are related, and others not.  Fundamentally, the price is determined by expectations for share price appreciation, which, in theory, are driven by supply-demand dynamics in the underlying commercial markets.  In practice, the layers don't line up so well.  And there is the added complication that the real, structural value of an exchange is to provide liquidity to investments that are not, of themselves, particularly liquid.  So, we have the core business of the exchange, which is arbitraging differences in the liquidity needs of different investors at different times, layered over the micro-economics of value creation inside the Enterprise, wrapped up inside the bubble-causing effects of macro-economic faith in historical trends as predictors of future value, all being spun around by the "herd mentality" of price point speculators, producing the herky-jerky up-and-downs, and booms-and-busts of the exchange-traded solution.

By comparison, rocket science is simple!

So-called Private Equity is not really an alternative to this.  It's more of a transition point into it.  Instead of guessing today what the market clearing price is likely to be tomorrow (the typical short-term event horizon of the average public equity stock portfolio manager) these Private Equity portfolio managers take what they like to call a long-term view: they look out 3-5, maybe 7 years, and guess what the market clearing price will become, out in the future, once a market is established for the stock.

That's not really private.  It's pre-public. And it's not really long-term.  It's more pre-term.  The fundamental structural problems remain, unchanged.

The Enterprise still cannot base decision-making on what is best for the business, in terms of profits, but also sustainability and what John Fullerton of the Capital Institute has nicely dubbed, "resiliency".  Enterprise still has to do what the Exchange demands.  Today.

Investors (not their professional management agents, but the actual, principal sources of capital available for deployment in expectation of earning returns by sharing in the value being created inside an enterprise) still find it next to impossible to achieve true programmatic alignment between investment goals (both financial and additional) and investment choices.  They still have to take what the Exchange gives them. At the moment.

Not much of an alternative, really.


I posted a comment on John Fullerton's blog at that got cited yesterday as Comment of the Week.  Pretty cool.

Wednesday, November 16, 2011

Inverted PIPESs

A PIPE is a private investment in a public entity.  It is a financing technique useful for bringing new equity capital into a public reporting company without increasing the number of shares floating around the stock market, at least not right away.  It's primary competitive advantage is that is allows some control over the potentially adverse impact of perceived dilution when new equity is brought into a company that is not immediately accretive to earnings, i.e. that will not produce incremental new profits right away.

I got to thinking about this, because I am aware of an Enterprise looking at putting together some mining interests in South America, with possible Investment out of China.  Doing a little background research on mining companies, lead me to the website of Barrick Gold, a company that promotes itself as the largest gold mining company in the world.  They are a US public reporting company so they are required to disclose considerable amounts of detail pertaining to their business, which is worldwide.

Searching through all this data hoping to get some insights into the mining business, generally, it struck me that very little data about their underlying businesses are actually reported to the public.  In truth, I see this company as more of a highly specialized investment management business, whose corporate activities really relate to its success at managing a portfolio of investments in Enterprises, some wholly owned, some apparently owned in partnership with others, that actually conduct mining operations.

They are a kind of inverted PIPE: a public investment in private entities.

I think many of our largest public reporting companies are properly described as "inverted PIPEs": more highly specialized investment funds, than businesses directly engaged in commercial enterprise.

Explains a lot.

Monday, November 14, 2011

"Playing with the House's Money"

As I sat thinking over morning coffee today, I puzzled over the curious experience I have, when talking with investors about an investment opportunity that pays returns from the cash flows generated by the Enterprise, how much trouble people seem to have with cash flow as a return strategy.

Consider this.  I have been aware for the last while of an Enterprise that for some very special reasons can sell large amounts of its product for long periods of time at market clearing prices that allow the Enterprise to earn really, really big profit margins.   I see this Enterprise as a "poster child" for the use of a partnership solution for its financing needs.  In part, because of its very robust cash flow waterfall; and in part because its capital needs are also extraordinarily small, relative to that waterfall.

To me, this would be a phenomenal opportunity for a return motivated investor to earn a simple return (payback of principal) on a very accelerated timetable, from shares of cash flows generated by the Enterprise, so that in a very short period of time, the investor would have really nothing invested in the deal, but would still be getting substantial cash distributions: they would be "playing with the House's money".

When I talk to people about this idea, they always ask: "but how will I get my money back?"  It doesn't seem to resonate that they get their money back first, in the form of early cash payouts, then start making money as they continue to receive additional cash payments from the Enterprise over time.

People seem to need some form of exit by sale.  Even when I show them, side by side, how a traditional exit-by-sale strategy returns them less money than this kind of partnership pay-out strategy, it doesn't seem to resonate.  They want the sale, even though it's worth less.  A lot less.


Wednesday, November 2, 2011

Banks vs. Institutions

Liquidity vs. Prosperity

Yesterday I was reading on article on Peter Victor, published over the Capital Institute blog (

Peter is an economist who thinks a lot about the challenges we are facing and will continue to face coming to grips with what he sees as our new reality of encountering the physical limits of the Earth's ecosystem.  Heady stuff!

Among his many insightful comments, Peter laments our perceived structural inability to make choices that are not driven by considerations of short term immediacy.

That set me to thinking.  I believe Peter is right in some respects, but also points the direction to places where we can make the important innovations we need to make to build and operate an economy that can deliver sustainable prosperity in a new reality that does not include open-ended possibilities for geopolitical expansion along a Western Frontier.

As Peter points out, the economy we currently live within is dominated by an intellectual ethos of Growth, but what underlies that ethos is our obsession with liquidity in the Capital Markets.

This is interesting, because many, if not most, of the actual capital providers to our Capital Markets are Financial Institutions that have a longer term view of their wealth building needs.  These include Pension Funds, Endowments and Life Insurance Companies.  All of these Institutions are mostly interested in making investments that will empower them to meet their wealth needs over the long term, out in some future point in time.  They tolerate liquidity -- and volatility -- because "that's how it's done", but do they really need it?

I would also suggest, although this I cannot prove, that most individual investors, both the wealthy and the not-so-wealthy, when they think of investing, are thinking of the future.  They want most of all to grow their wealth over time, so it will be there if and when they need it, down the road.

It's the banks -- both commercial and investment -- that value liquidity.  Why?  Because that's what they know how to do.

Commercial banks provide liquidity in the form of loans against assets and future earnings.

Investment banks provide liquidity in the form of trading in financial instruments.

Growth becomes important to investment banks, especially those making a market in corporate shares, because they depend on constantly accelerating growth in "shareholder value" to drive constantly accelerating increases in share price to constantly attract a growing number of new buyers to keep their markets liquid.

Of course "constantly accelerating growth" is the financial equivalent of a perpetual motion machine: nice, but not possible.

The result, as we all know too well, are massive disruptions of underlying economic processes that give us a prosperity of booms that always, eventually, go bust.

Interesting thing is, both the instruments that investment bankers trade and the customers they effect trades for actually share longer-dated realities.  Neither one of them really likes it when they get caught up in a boom that goes bust.

This raises the question: why are we doing this?  Why don't we just construct a Capital Market that is designed and operated to match longer-dated wealth-creating Enterprises with the longer-dated wealth-building event horizons of Investors, both individual and Institutional?

Food for thought.

Tuesday, November 1, 2011

Solyndra and Sustainability

There has been much noise in the media this last while over the dramatic collapse of solar technology innovator Solyndra, after receiving a very large - and spectacularly unsuccessful - US Government guaranteed loan financing.

Much energy seems to be getting spent looking for people to blame, and reasons to blame them.  This unproductive finger-pointing is keeping us from the more difficult, but important, work of understanding the fundamental design flaw in the government guarantee program as a tool for using taxpayer dollars to shape market choices.

It would have been better if the DOE spent those same dollars by taking up the role of customer in a project financing, buying power at prices sufficient to make the project viable, economically, and re-selling that power to the local load serving utility or other commercial customer at prices that come closer to a competitively determined market clearing price.   The Government would absorb the negative spread, in order to subsidize initial efforts to commercialize this new and needed technology solution.

This is effectively the Defense Department model, and it works quite well there.  The Government contracts with private enterprise to purchase the output of new and needed technology innovations, paying pretty much whatever it takes.  Stabilized by a reliable customer willing to buy volume at a price that works, the Enterprise can focus on building its knowledge base, its network of commercially important connections and its routines for delivering new and needed products to the market.

Some don't make it.  If the Military proves to be the only customer willing to pay the price, the Enterprise must either build its prosperity solely on making Military sales, or it must find something else useful to do.

Some do.  Stabilized by Military contracts, they perfect their ability to deliver products to the private sector on commercial terms.  Witness: the mircowave oven.

Another solution that works: targeted tax credits.

Tax credits are anathema in some circles.  I don't get it.  A properly constructed tax credit program is a proven, effective, "minimally invasive" technique for using taxpayer dollars to adjust market dynamics to align them more closely with the public good.

An effective tax credit program does have to be designed properly, but we have a proven design in the Low Income Housing Tax Credit.  This is a true federal-state, big-small, public-private partnership program that has effectively and efficiently delivered decent housing to decent Americans who just need a little extra help getting by. It has done this for more than 30 years.

There are Energy Tax Credit programs, but for some reason, the design of the Energy Credits does not build on the successes of the LIHTC design.

Why is that?

Tuesday, October 25, 2011

Re-Writing the Investment Compact

Being raised in New England, my history of the American Experience tends to begin with the Mayflower Compact.

This is a very short document, signed by the Pilgrims as they disembarked to found their colony at Plymouth, evidencing the agreement of all to "combine ourselves together in a civil body politic, for our better ordering and preservation and furtherance of the ends [of forming a colony in the New World] and by virtue hereof to enact, constitute and frame such just and equal laws, ordinances, acts, constitutions and offices from time to time as shall be thought most meet and convenient for the general good of the colony".

Thus began the rule of law by common consent that we, as American, cherish to this day.

This notion of a compact, and of "combining ourselves together" is a quintessentially American experience that permeates virtually every aspect of our commercial as well as governmental and community activities.

It's how we allocate our resources, and decide what work is going to get done, and by whom.

Many of these decisions are arbitrated by the financial markets, and those markets also operate on the basis of a fundamental compact between Enterprise and Capital regarding investment and returns.

The essence of this compact is that Investors will be allowed to realize returns by selling shares in the public markets.  I call it the Wall Street Compact

This Compact served us well for some while, but it is increasingly showing signs of no longer being so well-suited to our needs as we now experience them.

Increasingly, we feel the need for an investment compact that allows us, as a community, to balance financial returns with non-financial choices: the environment, society, governance.

The Wall Street Compact doesn't meet that need.

When an Enterprise agrees with Capital to adopt Gain On Sale as the primary strategy for investment return realization, that Enterprise commits to always being up-for-sale.  Running the business is not about either the Enterprise, or its Investors.  It's about the next would-be buyer, and the drive to support a rising stock price to continually attract those buyers.

This effectively erects a wall that keeps the Enterprise from reaching agreement with its Investors on the proper balance of financial returns, environmental concerns, social decency and sustainable prosperity.

It doesn't have to be this way.

One small change can take down this wall, a small adjustment in the agreement between Enterprise and Capital on the strategies employed to realize investment returns.

The change requires financing solutions that stay within the four corners of the Enterprise, offering Investors cash-flow based strategies for realizing investor returns by taking positions in the cash flow waterfalls of the Enterprise.

These solutions are available and widely used today in Real Estate, in Energy and Infrastructure, and in Tax Benefit Monetization (where I learned how it is done).  

Why not apply them more generally, to finance any Enterprise that has strong enough customer support from within a stable enough competitive context to generate stable, steady cash flows, at least sufficient to repay principal to investors, with additional opportunity for earning incremental returns as well?

There is reason to believe Investors will respond to such an innovation.  It can be found in the themes of Investor Activism, Socially Responsible Investing and Impact Investing that are current today within the Institutional Investment community.

Investor Activism is a return to the original theory of the investor as stockholder.  In the strictest legal sense, a corporation is owned by its stockholders, and the values and practices of the corporation are established and enforced by those stockholders.  The stockholders elect a Board of Directors, who then appoint Officers who, in theory, are supposed to execute the decisions of the Board, taken as an expression of the will of the stockholders.

When, however, Investors are really stock traders (not holders), this structure loses its integrity.  The market in which stocks are traded is really the holder of the shares, defining the values of the corporation, and the market really only values one thing: transaction volume.  That's how the market earns the commissions and profits that it exists to earn.

Socially Responsible Investing is an effort being made by many very large institutional stock traders to act like true stock holders, and demand that the corporation share their values - or at least not make market-driven choices that are too much at odds with the Greater Good, as articulated by these large investors.

Impact Investing pushes the envelope one step further, and attempts to align the programmatic and financial objectives of the institutional investors, by seeking to make investments that pay returns but are also aligned with the underlying beliefs and values of the investor.

Unfortunately, the impact of all this, to date, has been small.  What sounds good, in theory, is proving difficult to realize in practice.

The problem is the wall.  As long as investors, institutional or otherwise, are required by the available mechanisms of finance and investing to adopt Gain on Sale as their strategy for realizing investment returns, it is the motivations of the next new buyer that will shape the values that drive decisions being made within the Enterprise, not the values of the current holders.

If we are going to change the way Enterprise values get set, and decisions get made, we are going to have to change the way investment returns get realized.  Not just on the margin, with those few special businesses that also align with the public good, but right at the center, at the very core of our economy, with those businesses that meet all the different needs and wants of the community, at the scales required to be both effective and efficient within the competitive context as it applies.

We are going to have to re-write the Investment Compact.


Friday, October 21, 2011

Can We Make Wall Street Socially Responsible?

A current theme among institutional investors - especially public pension funds - is socially responsible investing.  Sometimes referred to as ESG, for Environment, Society and Governance, this movement seeks to improve the non-financial impacts of investments made by these investors on the world at large.

It is a noble undertaking, much to be encouraged.  But my point is this.  If we really want to get serious about socially responsible investing, we have to get serious about providing the enterprise with a choice in addition to Wall Street as a solution for getting financed.

Wall Street dominates finance today, and Wall Street has one, single mission - to trade stocks, and other financial instruments.  Stocks trade when prices change, and prices change when the market perceives that enterprise value is going to increase (or decline, but increases are better!).

So, once an enterprise enters the Market, it commits itself to a constant campaign, 24/7, to generate investor perceptions of increasing enterprise value.  Every strategic decision the enterprise makes from that point, forward, has to be made with an overarching concern for how it will affect share price.

For an enterprise in the midst of rapid organic growth - Apple Computer in these heady days of iPods, iPhones and iPads comes to mind - this in not a problem.  The choices they want to make for business and social reasons are also choices that will drive up share price.   Their business is naturally aligned with the Market.  But what about companies whose business is more stable, more mature, more steady state?  These companies may want to make choices that are socially responsible, but they can't.  Not if they got money from Wall Street.  Social responsibility does not drive share price.  Growth does, and so they have to do whatever they can to manufacture growth.  This they do through a variety of choices.  Some of the most effective are not what can be called socially responsible.

We can't change these choices by telling an enterprise they're being bad managers.  They're not.  They're doing what their Master demands.  Their Master is Wall Street, and Wall Street demands Growth.

We also can't change this by telling Wall Street it's bad.  It's not.  It's just doing what it was designed to do.

If we are serious about Socially Responsible Investing, we have to not so much get better at the way we manage the investments we already make, as to begin making investments in a better way.  We have to offer the enterprise another way to get funded that isn't the Wall Street way.

Wall Street is one dimensional.  Business is three-dimensional.  One dimension is growth, which Wall Street handles very well.  Another dimension is keeping on, something Wall Street simply cannot value.  A third dimension is making a change, which Wall Street really doesn't understand.

When an enterprise that should be keeping on is forced, by Wall Street, to manufacture growth, bad things happen.

To prevent these bad things from happening, we have to give these firms another way.

That's my challenge to people who support socially responsible investing; to also support the invention of new approaches to investing that will reward a business for doing the right things, at the right time: for growing when it is time to grow; for just keeping on, when it is best to just keep doing the same thing, over and over again, reliably and well; and for making a change when we really do need to make a change.

We can't ask Wall Street to come up with that invention.  It has to be done a different way.

Thursday, October 20, 2011

Free Markets and the Greater Good

There is much noise in the media today that sounds like this: “Markets are right.  Government is wrong.”

That’s ridiculous.

Governments exist to regulate markets, because markets that are not regulated cease to operate.

It’s never a question of whether we should regulate our markets, but how we want our markets to be regulated.

A market cannot be allowed to regulate itself, because the market is focused only on itself.  It will not make choices “for the greater good”.  That is why we need government.

What is Wall Street but a giant market?  It is a very special kind of market, a financial market.  Finance plays a very special role in our economy, and therefor, in our society, and our politics.  It decides in some very important ways what work gets done, by whom.  An enterprise that gets funded competes.  An enterprise that cannot raise funds, closes.  Every enterprise gets its funds, ultimately, from its customers, who pay the price for value delivered by that enterprise.  Finance anticipates customer choice.

Finance is itself an enterprise, with customers that we call Investors.  Investors participate in the formation of a commercial enterprise in anticipation that the enterprise will attract enough customers of its own, who will pay enough of a price for enough of the items of value to be delivered by the enterprise to generate a flow of cash in which the Investors then share.

Financial markets arbitrate the anticipations of Investors relative to the ability of an enterprise to deliver value at a price and in volume, over time.

This is a function of critical importance that affects far more than the private lives of individual Investors and the enterprises competing for investment.  Investments, once made, are not easily unmade.  If badly made, they generate losses that ripple through an economy and impact the whole of society. 

Mistakes are inevitable.  That is how we learn, and through learning, how we discover new and better ways to do our work, and to build for ourselves a wealth of choices for living, and living well. But the costs of making mistakes cannot be allowed to overwhelm the benefits of learning.

A well-run financial market works best, in the long run, if it operates correctly to constrain these losses. 

But markets don’t exist for the long run.  They exist to make the sale.  The customer may not always be right, but the customer is always the customer.  They get what they will pay for, even if, in a larger sense, they are wrong to be paying for it.

This short term focus on making the sale does not always line up well the broader needs of the public good.  Which is why, from time to time, financial markets fail.

When they do, we all pay the price of their short-sightedness. 

The question is not, do we pay, or even should we pay.  The only useful question to be asking is, “what is the best way to pay?”

Is it better to prevent catastrophe, or to clean up after it?

Wednesday, October 19, 2011

The Real Message of the Tea Party Movement

Like OCCUPY WALL STREET, the Tea Party started out as a gathering of citizens expressing more or less vaguely a strongly emotional sense of dissatisfaction with how things are going.
Personally, I still find the message of the Tea Party a little bit less than clear.  It feels to me like they want to debate philosophy, in general, rather than specific choices that need to be made, in the context of the lives we live today.  My problem with that is we all pretty much share the same philosophy.  The devil is in the details.
One detail that does seem to bedevil the Tea Party is taxes.  They just don't want to pay taxes.
Who does?
But if we want to live in an ordered society, we have to pay the cost of maintaining order.  So, we all have to pay our taxes.
Let’s start with a quote from a British Philosopher of Revolutionary Times, Thomas Hobbes.  Hobbes is famous for many things, including his quote that goes something liek this:  “Life in a State of Nature is nasty, brutish and – above all – short.”
His point, as I take it, is that we choose to live in civilized society, even though doing so contrains our freedoms, more or less, because the life we live together is so much better than any life we could live, if we all had to live it all on our own.
That resonates. 
We choose to live in a society of shared economics and shared politics in order to build a public quality of life that provides the context within which each of us can then build for ourselves the private life that suits us best, all things considered.
Public life is not free, and quality does not come cheap.  We need rules to regulate commerce, and we need government to enforce those rules.
Government comes at a cost, and that cost is paid through taxes.  There is no other way.
To say you don’t want taxes, is to say you don’t want government.  To say you don’t want government is to say you don’t want to live in a civilized society.
I don’t hear the Tea Party advocates really saying they want that.  They are not Anarchists.  They value order, just as we all do.  And I think they know that order comes at a price.
I think what they are trying to say, but cannot find the words to express themselves correctly, is that they want order, but not oppression.
There, they have a point.
The truth is that government is about rules, and rules have to be enforced.  So, with government, we get bureaucracy.  Bureaucracies have a remarkable ability to perpetuate themselves, and to expand their field of influence.  This is not always a good thing.  The choices a bureaucracy makes when acting in its own self-interest are not necessarily always also in the best interest of the people whose choices are being constrained by that bureaucracy.  Sometimes, there is a disconnect.
So, when I hear the Tea Party protesting “taxed enough already”, what I hear them really saying is that to them, there is a disconnect.  Government is not working right.  Not by them.
Fair enough.  We’re all in this together.  We have to build a consensus, and that takes compromise.  Let’s talk about that.
But let’s be practical.  The devil is in the details, so let’s get down to the details.  And let’s not forget that what we are really discussing are the details of the public context in which we all want to live out our private lives.  And let’s not kid ourselves into thinking that somehow, magically, we can each enjoy the private lives we want to live, without also participating publicly in the public life that makes our private choices possible. 
That’s just not practical.

Tuesday, October 18, 2011


Here we go again!
In cities all across America – and the World – young people of this generation are taking to the streets to protest…what?
They seem to have no message.  There is no one thing they are asking for, no one thing that they are mad about, or stand against.  They don’t seem to know what they want.  Kids.
But these are our children. 
We know them.  We love them.  We have raised them and cared for them. They don’t have to tell us what they want. We already know.
They want what we told them they would have.
We said to them, when they were young, “The world is your oyster.  Work hard.  Apply yourself.  Be assertive, but respectful, independent, but co-operative, and we will bequeath to you a future of your own making, one in which you and yours can live well, and be happy.”
Now, they are grown: prepared, focused, ready to take on the future, and make it their own.
But what are we giving them?
They look out on the world that we have built for them, and what do they see?  They listen to that world, and what do they hear?  “The rich get richer.  You get to muddle through. You can be free, but only if you agree. There will be no debate.  There will be no compromise. You have no say.”
It is to this that they are saying “Hey!”. 
They are not alone.  Others are joining in.  From all walks of life.  All expressing the same general sense of dissatisfaction.  Something isn’t right.  This is not how it is supposed to be.