Monthly Archives: October 2014

Panel Discussion on Conscious Capitalism

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Mary Daugherty, CFA

FEI (Financial Executives International) and the Minnesota Chapter of NACD (National Association of Corporate Directors) hosted a panel discussion on Conscious Capitalism earlier this month. The panelists were Brad Anderson, former CEO and Vice Chair of BestBuy, Stephen Young, Global Executive Director of the Caux Roundtable and Christopher Michaelson PhD, Associate Professor of Ethics and Business Law at the University of St. Thomas.  The panel was moderated by Neal St. Anthony, business columnist and reporter for the Star Tribune.

The idea for this program began over a year ago at the 2013 NACD Annual leadership conference. Raj Sisodia was one of the keynote speakers. He discussed the book he co-authored with John Mackey, “Liberating the Heroic Spirit of Business: Conscious Capitalism”. He started his speech by highlighting the positives of capitalism; “No human creation has had a greater positive impact on more people more rapidly than free-enterprise capitalism. Capitalism is unquestionably the greatest system for innovation and social cooperation that has ever existed. In the past 200 years, business and capitalism have transformed the face of the planet and improved the complexion of daily life for the vast majority of people, allowing us to lead more vibrant and fulfilling lives.”

The panelists addressed the idea that companies are about more than making a profit. The benefits of capitalism extend far beyond the walls of individual businesses into the lives of the entire population. After centuries in which the vast majority of human beings lived on less than a dollar a day in today’s terms, worldwide per capita incomes have increased nearly fifteen-fold in constant dollars. Today, about 16% of the world’s population lives on less than a dollar a day. Adjusting for quality and affordability, it is estimated that the average American is 100 times better off today than 200 years ago.

The proponents of conscious capitalism hold these truths to be self-evident: business is good because it creates value, it is ethical because it is based on voluntary exchange, it is noble because it can elevate our existence and it is heroic because it lifts people out of poverty and creates prosperity. Free enterprise capitalism is the most powerful system for social cooperation and human progress ever conceived. It is one of the most compelling ideas we humans have ever had.

But in spite of all this change, capitalism is coming under fire.  Capitalism is now often synonymous with greed and power.  This change in attitude is at the root of the conscious capitalism movement. Clearly capitalism has gotten a bad rap lately. To quote Bill George, the former CEO of Medtronic and now a business professor at Harvard: “As a committed capitalist, I worry a great deal to see how capitalism has gone off the rails the past quarter century and acquired such a bad name, much of it deserved. We know that leadership matters. We need to be conscious leaders. With the enormous loss in confidence of our leaders in the past decade, developing conscious leaders is the best way to rebuild trust in our leaders and in capitalism.”

So what is conscious capitalism and why should we as directors and financial executives care? Conscious Capitalism is not about being virtuous or doing well by doing good. Rather, it is a way of thinking about business that is more conscious of its higher purpose, its impacts on the world, and the relationships business has with its various stakeholders. Conscious capitalism reflects a deeper consciousness about why businesses exist and how business can create more value.

As board members and corporate executives we recognize that every stakeholder is important, and that the business must seek to optimize value creation for all of them. You cannot have a conscious business without conscious leadership. We need to motivate the leaders around us to create value for all the stakeholders. The culture of a conscious business ensures that its purpose and core values endure over time ultimately creating value for all stakeholders.

With the theme of conscious capitalism as a backdrop, the panelists addressed the following themes:

  1. The theme of creating shared value for business and society is gaining currency among capitalists.  What practical advice do you have for leaders seeking to create share value?
  2. What elements are required to build a conscious capital enterprise?
  3. What are the duties to shareholders and stakeholders in conscious capitalism?
  4. Can you make a purely financial return on investment argument for conscious capitalism?

The takeaway from the panel discussion is the importance of having a conversation in the board room on how director’s duties intersect with conscious capitalism.

The Fall of the House of Usher

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Susanna Gibbons, CFA

Perhaps we started putting nails into the coffin of the corporate credit market a bit too soon. After last week, characterized by high volatility, modest trading activity with poor liquidity, and minimal new issue supply, both spreads and activity seem to have rebounded. Overall, corporate credit spreads have tightened by about 3 basis points since last week’s sell-off. This is still a far cry from June levels, and about even with the start of the year, but the market overall feels a lot less scary.

One probably should be cautious investing around one’s feelings, though, as they are rarely the best guide in decision making. While improved market sentiment allowed the corporate bond market to re-open, ushering in about $24 billion in supply (compared to $6 billion last week), performance has not been all that great. A lot of the deals we checked are flat to wider since new issue, like Ingersoll Rand’s new ten year bond, which priced at a spread of +135, and is now trading 137/133. Verizon’s new 10 year priced also priced at +135, and is also trading 137/33. Verizon’s 20 year fared even worse, pricing at+ 145, currently trading 150/147. Not as frightening as Lady Madeleine of Usher at the door, to be sure, but not exactly the picture of market strength either.

Last week, on the other hand, very few issuers braved the market, and those that did had to pay up for it, to the benefit of investors willing to step in. JPMorgan issued $2 billion of a 5 year bond last week at +100, and those bonds are now trading 88/84; General Mills priced a 5 year at +80, now trading 77/72. Apparently it is better to buy credit when the market is a little shaky.

This is not exactly a mystery insoluble – the notion that one should buy risk when getting paid to take risk. It is oh-so-hard to implement, however, as we are always tempted to let our bets ride just a little bit longer. Yet when we step back and look at the current market – how far it has come over the past few years, and the level of risk for which we are now being compensated – we are inclined to take less credit risk rather than more. We may still be a little early in declaring the corporate market dead, but it is surely past its prime. One way or another, we think this house will surely fall.

Ask the Ethicist: Discussing Work at Home

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I live with a significant other, and we are not engaged or married. We talk about our days at work openly. I strongly trust my significant other, but being in the securities industry I am terrified of inadvertent information leaks and others we know trading on the information. That person agreed verbally never to talk about my activities outside our home. I want to keep myself covered, but I also want to be open to my significant other about my life’s work. What can I do?

Dear terrified investment professional afraid to discuss work at home:

You raise some good points but have nothing to fear. You are smart and it is prudent to agree with your significant other that he should not discuss anything about your work with third parties. This understanding should also include not tipping or trading on any such information. You, like most people, naturally want to talk at home about what happens at work since we spend so much time at work. The need to share with our significant other often conflicts with employment and compliance policies that prohibit disclosure of proprietary information, and securities law and fiduciary duty restrictions that prohibit disclosure of work-related activities.

This issue got a lot of attention recently when the SEC Enforcement Division brought an insider trading case against Filip Szymik, whose roommate worked as an analyst at William Ackman’s Pershing Square Management. Szymik learned from his roommate that Ackman was going to make a public presentation on why Herbalife, a publicly traded company, is a ponzi scheme.  Szymik had told his roommate that he would not trade on the information. Despite the understanding, Szymik told a friend named Peixoto about the upcoming presentation. Peixoto bought put options that traded in the money when Herbalife stock tanked after Ackman’s presentation.  Peixoto made only about $47,000.  The SEC charged Szymik with insider trading for tipping material nonpublic information to Peixoto who traded on the information and made a profit.  This case demonstrates the risks of trading and tipping material nonpublic information, and shows that the SEC will bring cases even against relatively small players to deter misconduct.

You have nothing to worry about from the SEC if you do not disclose material nonpublic information that your significant other could trade on or tip to another who trades.  What constitutes material nonpublic information is often a difficult interpretative question. Because Ackman is a prominent activist investor and his views and positions will affect the market, his views on Herbalife were clearly material.  Materiality is usually defined as what a reasonable investor would deem to significantly alter the total mix of information available or what a reasonable investor would deem significant in making an investment decision given the total mix of information available.  The SEC has not defined materiality, it has been defined in court cases.  Usually, but not always you know if you have material nonpublic information.  If you learn about key events before they are public such as a merger, tender offer, earnings information, loss or acquisition of key contract or business relationship and the like, you probably have material nonpublic information.  If you are trading for a client that is acquiring or disposing of a large position, you probably have non-public information.

If you need to talk about your work at home, try to talk about work in a general way without revealing nonpublic information to avoid breaching duties to clients, violating employer’s policies or securities laws.

Battle of the Fed Clichés

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John Boylan, CFA

If you grew up in the 1970s or 80s, you probably watched “Battle of the Network Stars”. For those of you too young to remember Howard Cosell and Telly Savalas, “Battle of the Network Stars” was a very successful limited run TV show that featured celebrities competing in athletic events. Nowadays it seems as though we are going through the “Battle of the Network Market Commentators Clichés” about the Fed’s potential next move.

It doesn’t matter if its TV or the financial press you can’t escape various Fed prognostications such as: The Fed will raise rates soon because unemployment data is reaching its threshold and might surpass it soon—remember what happened when the Fed tightened too early in 1937, or the Fed won’t raise rates because it is worried about the dollar and what is happening in Europe or China, and so on and so on. It gets to the point where I have heard the same arguments pro or con so many times, they do become clichés.

But still, interest rate moves deserve consideration. When it comes to the Fed and interest rate changes, I have two basic questions for myself at this particular moment in time:

1. Q) Do I think that the Fed will raise rates during my investment horizon (i.e. next 18 months)?

    A) Yes.

2. Q) Do I care?

    A) No.

Why? Rates can only do one of two things at this point in time, stay the same or go up. Eventually they will go up. A healthy percentage of market participants like me believe that. However, that forecast is already in my investment thesis and forecasts for the market. What is vastly more important to me is if interest rates are going to go up materially faster than I predict and will it happen during my investment horizon. There is nothing in the data that leads me to believe that it will. For example inflation is relatively tame, wages are stagnant at best, money velocity is nothing to write home about, and retail demand is just OK. Unless I was convinced that any of those things in combination above were to evolve into something more malignant during my investment horizon, there is no reason to drastically modify my investment thesis for the market.

What I try do to do in these scenarios is try to develop a list of potential market-moving events, like some of the things mentioned above like wage inflation, and monitor them for moves that go beyond my expectations. If enough of those things on my list change where my investment thesis is in danger of breaking regarding the Fed and interest rates, then I act. Until then, I don’t.

Therefore my suggestion is ignore the clichés about rates in the short term and pay more attention to matters that can cause events to materially change your investment thesis.

Oh yeah, one more thing. “Don’t fight the Fed”.

Happy Birthday Freezing Assets!

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Happy Birthday Freezing Assets!

Two years ago this month your CFA Society of Minnesota decided to embark on a project that would attract both the creative and analytical writing talents of CFA members in our region. Additionally we wanted a method of distributing important proprietary content generated from CFA Minnesota, such as the Compensation Survey and presentation summaries from local and guest speakers at CFA Minnesota events throughout the Upper Midwest. Eventually the fruits of this effort became FreezingAssets.org.bday

We recruited an Editorial Board, gathered volunteers to help generate content, and launched the site in early August of last year. The response we received both inside and outside our region for Freezing Assets vastly exceeded our expectations. As of mid-September, 2014 we received over 7,700 unique views with nearly 35% repeat visitors since our launch. This also includes over 12,000 page views and over 300 views internationally. Freezing Assets was also a part of a broader Excellence in Member Engagement nomination for the CFA Society of Minnesota at a recent CFA conference in London earlier this year. While we did not win, we were happy to receive recognition.

Therefore we would like to thank the CFA Minnesota Staff, the Freezing Assets Editorial Board, and our great contributors for a job well done.

But, of course, our greatest thanks goes to you the reader. We appreciate your support and readership over the past 15 months. We will strive to improve and broaden this blog as time progresses.

If you have any suggestions, or wish to contribute a posting yourself, please contact editor@freezingassets.org.

 

Thank you,

The CFA Society of Minnesota