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Monthly Archives: September 2020

Intellisight 2020, from a Student’s Viewpoint

24th September, 2020 · CFAMNEB · Leave a comment

By Jason Chen
Financial Math Graduate Student at University of Minnesota

Jason Chen

I went to the presentations of all three financial companies (Physicians Realty Trust, StoneCastle Finance, and Piper Sandler Companies). I chose these companies because I am a graduate student majoring in financial math, so I’m more familiar with this topic in general compared with consumer goods, industrials, etc. I wanted to learn more about these financial companies, what they do, and what information they would choose to make public. It was a great opportunity for me to know more about the industry and gain more experience. What I took away from these presentations was probably not as comprehensive as other audiences because I am not an investor, and the content of the presentation itself was not as useful to me at present. What was important to me was the experience: I learned how companies would introduce and present themselves, their concepts in the business, and how to handle questions and other unexpected things that can happen during a meeting. So, overall, that was a very interesting and helpful event for me.

A virtual conference is very different than an in-person one, and my overall experience of Intellisight 2020 was very positive. I’ll list some pros and cons on both sides from my perspective. Virtual conferences are very convenient and easier to organize. Audiences don’t have to physically go to the conference; they could simply log on virtually sitting in their office/home. Likewise, the organizer doesn’t have to set up the conference room/building, and there is not a lot of equipment needed. Theoretically, conference organizers would save a lot of time/energy preparing for the conference. But, speakers will deliver much better content in the in-person conferences. Speakers will have communications and interactions with the audiences and the audiences are able to participate more directly. It was very hard to stay focused on a screen to follow everything the speakers said all the way from the beginning until the last session in the afternoon. I believe audiences get tired easier and can be easily distracted in a virtual conference.

I think the organizers did a very great job preparing for the conference and made me feel like they had done it virtually many times. There were no mistakes or technical issues I experienced. But there were things I feel like could be improved. Each session was very short and limited from the company side that 35 minutes were not enough for them to finish everything. So, typically they went fast, and as a listener, it was very hard for me to catch and follow everything, especially when there was one session after another. We couldn’t see the speakers, so staring at the slides for the whole time was easy to lose focus and we couldn’t just raise our hands to ask questions, but instead needed to type in our questions. But the speakers would pause to wait for questions, and it would take a few minutes to just answer a question. So, after a few times, the audiences just didn’t ask questions.

I would participate in a virtual conference in the future. I believe the main reason that not too many people asked questions during the conference was each session was too short. Most presenters didn’t have enough time for Q&As. They only had time to answer 2 or 3 questions. So, if presentations were longer in the future, I would definitely participate. 

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Posted in Hot Topic Commentary, Intellisight |

Milton Friedman Was Wrong About Everything

14th September, 2020 · CFAMNEB · Leave a comment

By Susanna Gibbons, CFA
Managing Director, Carlson Funds Enterprise
Carlson School of Management, University of Minnesota

Susanna Gibbons, CFA

In 2013, Paul Krugman wrote an opinion piece titled Milton Friedman, Unperson, in which he suggested that the Nobel Prize-winning economist had essentially vanished from the scene of economic policy-making. He highlighted two key points: First, not only is monetary policy not sufficient for management of an economic crisis, the Fed cannot even control the money supply itself using monetary policy. Second, the link between unemployment and inflation is tenuous at best, rendering it less-than-useful as a policy tool. We are seeing this play out today, as the Federal Government (at least initially) unleashed unprecedented fiscal stimulus in an effort to minimize the downside economic impact of the coronavirus-induced recession.

There is, though, another area where Milton Friedman’s influence continues to be felt. In 1970, he wrote an essay titled A Friedman Doctrine: The Social Responsibility of Business is to Increase its Profits. This piece rested on the same free-market ideology upon which he built his economic theories, and essentially laid the groundwork for the greed-is-good generation. On this point, in spite of the steady march of the country towards incorporating ESG factors into their decision-making framework, policymakers from the Department of Labor continue to rely on the Friedman Doctrine. They have proposed new rules, which would impose burdensome requirements on anyone who dares to mention an ESG-based argument.

These rules display a real fear that this mysterious “ESG” is really a socialist plot intended to saddle pensioners with weak performance while simultaneously forcing corporations to provide chakra-reading reports instead of profits.  The rules require investment managers to prove that there are no non-economic considerations at play, imposing a new burden on those who have developed robust ESG integration policies to prove they don’t benefit personally, while strangely assuming that managers who do not integrate ESG are somehow engaged in a better fiduciary process because they ignore, say, the long-run economic risk of climate change.

The backstory for the proposed DOL rule is the Friedman Doctrine. The theory of shareholder supremacy really came into its own as a result of the initial LBO wave of the late 1980s, when entrenched managers were forced out of power by corporate raiders. I was fortunate to be sitting in Delaware Supreme court to hear the management of Macmillan explain why they could ignore Robert Maxwell’s higher bid for the sale of the company, and found their self-described actions to be such an egregious violation of their duty of loyalty. The Delaware Supreme Court agreed with me 😉 noting in its decision that evolving law required “the most scrupulous adherence to ordinary standards of fairness in the interest of promoting the highest values reasonably attainable for the stockholders’ benefit.” [1] So there it was, shareholder supremacy enshrined in law, and I agreed whole-heartedly with that decision.

That law, so seemingly straightforward, has become increasingly complicated to apply. In its decision, the Court did not say anything about ignoring the long-run consequences of legitimate business choices. It said that the Board and Management could not make decisions for their own benefit instead of the general shareholder. It is specific with respect to timeframe – this was part of an auction process, so there was no trade-off between the time preferences of different owners. This is actually a pretty narrow situation that has become broadly applied.

For a going concern, the concept of maximizing profit is beguilingly simple, but in real life, managers are constantly presented with complex trade-offs between short-term considerations (earnings this quarter) and the long-term health of the corporation (investing in supply chain redundancy to protect against loss of key products in a pandemic). And that’s really what ESG is all about: forcing all of us to think about the complexities of those trade-offs.

The only way to make sense of the Friedman Doctrine is to extend it well beyond the plain text of the original essay. The long-run health of the corporation, and therefore its ability to maximize profits, depends entirely upon the health of the system in which it does business. If it ignores the welfare of its employees, the health and safety of its customers, and the viability of land upon which it rests, its value will deteriorate. The corporation is a creation of the state – it owes its very existence to a political act. To have the little Adam of our labors[2] turn on is, claiming it owes us nothing, is preposterous on its face. If the corporate form does not serve society, then we can get rid of it.

But what the heck do I know? Milton Friedman was a Nobel prize-winning economist, and I’m just a middle-aged Mom sitting in the basement doing laundry.


[1] https://law.justia.com/cases/delaware/supreme-court/1989/559-a-2d-1261-5.html

[2] This is a reference to Mary Shelley’s Frankenstein, in case you never actually slogged your way through it.

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Posted in Hot Topic Commentary | Tags: Covid19, ESG, Monetary policy |

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