Wednesday, May 9, 2012

Entitlement in a Meritocracy

Three posts from the blogoshere caught my attention, as they seem to converge around a point worth underscoring.

  1. a post by a Venture Capitalist, praising the book Founder's Dilemmas, which the VC liked for many reasons, "including my favorite around wealth-vs-control ('do you want to be king or want to be rich?')" (the point seeming to be that only by agreeing with your VC investors will you be able to be rich - I wonder what Henry Ford would have to say about that, for instance?)
  1. a report published by The Kaufmann Foundation, criticizing the price/performance  experience of the VC industry from the standpoint of an Institutional Investor who provides the money, and pays the fees, to the VCs
  1. A post by John Fullerton at The Capital Institute on an article published in the New York Times about a book to be published soon by the former head of the NYC office of Bain Capital, reportedly defending the right of deal-makers to take and keep whatever they can from the deals they make, apparently on the theory that the deals they make make all of us better off - so stop complaining (the conversation as reported in the article spoke more about the superrich, but the superrich they are really talking about, it seems to me, are the deal-makers in the deal-making business)
As a member of the deal making profession, I like to think that investment is a difficult business, that it is also a very important business, that not everyone has what it takes to do it well, that those of us who do it, and do it well, should do well for ourselves, because we also do well for others.

But I have to admit to being troubled by what I see as a pernicious hypocrisy spreading through my profession.  We profess to be big supporters of meritocracy in the economy: those competitors who deliver value, should be rewarded with riches; those who do not, should be allowed to fail.  We call this the free market and the market system. But when it comes to the Capital Markets, it seems that what is good for the goose is not always good for the gander.  Too many people who are players in the Capital Markets (by which I mean they are playing with Other People's Money - a point that cannot be underscored too many times) want us to believe that theirs should be the only profession that should get rich just for trying: not for succeeding, just for trying.  If they do succeed, they cover themselves in riches and glory.  If they try and fail, they make sure they get well paid, anyway: someone else has to pay the price of their mistakes, misjudgments, and in some cases, misconduct.

Don't get me wrong.  Directing the Investment side of the flow of money through our economy in an effort to perpetuate our prosperity is an activity that requires that we try many things that do not work out.  In many cases we are dealing with change, innovation, adaptation, and we are trying to anticipate what changes the people will choose, and which they will ignore.  This is not an exact science that can be executed with engineering precision.  It is an expression of human ingenuity that works best when given room to make some big mistakes.  Those of us who participate directly in this process have to be supported in our efforts, even if we end up being part of one of those mistakes.  But support for trying is one thing; being rewarded for not succeeding is another. And making a mess, then leaving it for someone else to clean up, is yet another.

The Capital Markets would not permit such a circumstance to go unpunished in any other market.  Why should the other markets permit such conduct in the Capital Markets?

This is not something that can be allowed to go on, but it is something that will be all but impossible to deal with through regulation.  No, the market must speak.  The customers must call this Market to account.

Who are the customers of the Capital Markets?

Today, for the most part, they are the Institutions that have emerged as the new stewards of our personal wealth: Insurance, Endowments, Pensions and Annuities.  These are the people who have the money.  These are the people who have the ability to make the choice, not to deal with deal makers who do not take responsibility for the outcomes of the deals they make.

Right now, what other choices do they have, really?

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