The New Capitalists
Oh. Hello and welcome to the h p r i d cast now coming to you weekly from harvard business school publishing on home like woman online editorial director here penalty your host uhhuh hm oh in this week's feature segment idea cast producer steve center talked with john will come back about his new harvard business school press book. The new capitalist. How citizen investors are reshaping the corporate agenda. The new owners of corporations that is large institutional shareholders mutual funds and even individual investors through retirement plans on the like are causing corporate boards and executives to become more accountable than ever before. Become the car excuse the new models for corporate governance must become more than simply legally stick track lists. If they're to respond to this rising class of citizen investor and he says if cos do it right they will generate increase shareholder value in the long run. And then the n. r. h. b. r. and b. segment. Well tell you how to turn great strategy integrate performance so joined us now as we venture into the new world citizen investors oh first up the new capitalist. I'm here today with jungle comic managing partner of saint clair capital l l c and the co author with stephen davis and david pit walked in of the new harvard business school press book the new capitalist. How citizen investors a reshaping the corporate agenda welcome john thank you like a year. John in the book you talk about how the owners of today's organizations aren't really the corporate titans of old but the millions of share holders of mutual funds retirement plans and the like. It's really a democratization one son corporate governance and it's causing an evolution and how corporations and boards responded. Now it's been five years since the enron bankruptcy and we're still feeling many of those after effects. We seen the enactment it's r beans obsolete the public companies accounting oversight board the elliott's bitter investigations the various f. c. c. reforms affecting mutual fund. We thought maybe this storm was over but now there seems to be more problems brewing with back dating of options at a number of companies and. John what's the status of corporate governance today what you're seeing play ah is the do. Civilly five if you will with corporate governance based on the creation of sherman ah you and the that'll places like i see it says here to answer that question. Not is because it should be and improving tremendously. Is the betty ford of the creative destruction of capitalism. Perhaps the worst and those produce shouldn't widespread old happens. That kids people into trouble gets corporations it's a think of corporate garbage as a legally stick checklist with which to complain. But that's complaints. Dot corporate governance. And go play facilities available for pull which society will tolerate certain behaviors could corporate governance by contrast provided accountability framework. Yeah it did lose entrepreneurial leadership four ish. Wall provide a the attic with checks and balances. For instance we've been told repeatedly that hewlett packard. Was issue registered destination into border weeks legal. Legally the technical standard it's can place so far as i know they didn't ask a ship a bunch more fundamental questions was it the right thing to do with their hooters' approve what directory. Jeez what they were doing it hands shareholder value what is it just to the control. Gratification audio is that one of the things that went wrong a hewlett packard then the fact that the board just said this is legal but didn't get any further definition around that. Obviously hewlett packard stories hits lay out there criminal investigation but i think what's interesting about hewlett packard is that the commentators or taking. Recent pre taxing schedule. Yeah has a stand alone of it. Though yeah he's the hewlett packard supported a dysfunctional for four years. They had the very public fight what folder humid. Over the compaq merger and they encouraged it well and behavior at that site um which was what ethical in the least for instance threatening which i think. Was was holding investment banking work in return for their food an asset manage side for the merger. So far as i don't don't wouldn't cold carly if you read uh wars here for carpet for that and say look. We're hewlett packard we exactly we like to win this battle but we don't do it anymore and we certainly don't do it by threatening hours well there's looked at it at the church but. Okay that hopefully period i don't know quiet book um it's telling her story but that would be the the pointed and dysfunctional board. Somewhere along boy. Hewlett packard where it has understand that it was the lowest inviting. Is not a scandal pollution which would expose the public landscape resolved skip every day seems to bring some new notices an activist heads on trying to change the management or bored of a company. What's bring about this sudden surgeon activism and you think it's a good or bad thing ways of the second question first is it good or bad um i think it distinguish between the overall fact of increased activations. And implementation of activities and each specific. Activists obviously common every shape and size. Um calipers the california public place retirement system is not the same as the one you hedge funds. Well i can teach situation according to the competing plans for the company between the conference and searches or the actors and i look to which i believe we create more value folders over the long term. In general active is is expensive. Time consuming it's difficult doesn't guarantee success lawyer's fees were supposed dollars so responsible activists. Really don't you take it unless they believe thinking that value and the comes in management just doesn't understand or one act. Also activists. Have work half of is going to cos and off and then in compass management for the economics of the situation to to me one should generally. They tend to be good situation don't think as much down the attacks against the recent trend towards activism has been a positive. An older why would i object to to were were very smart economically motivated parties trying to convince me to teach and planted maybe more money than the other. So it's in saint paul answer to your first question these interviews checklist radiation for the first question. Is that it has been cleared that activism. Can create access returns work helpful they returned skills in the language institutional investors that's been clear for some time since late eighties. The question really use whitehead could happened earlier. And you're correct in thinking with the proliferation finish first. And the reason is the economic woes to hedge funds let's take a a traditional mutual funds and my children half a percent to manage money. Is. You'd think at you could improve uh performance or the tool return called by twenty percent. And you have. A hundred million dollars and uh company then you can increase the value working values service for two hundred twenty million. But you don't get paid or that's what he deleted you increase the value of except for and a half a percent that. You you were allowed to keep his extra c oh and by the way all your competitors world for that company reap the benefits of your work. So there's a free ride or central page funds and in fact some of the longer lives relationship funds which would object to being called twins. Yeah they carry incentive see that kicks in as a result of their success generally twenty percent. So if you can improve that hundred million dollars. By twenty million two hundred twenty you get to keep twenty percent four four million dollars. The economics part very different and that's one active isn't it comfort strategies interests you're pretty optimistic about the future of corporations in spite of the fact that in the book you out lina let needs failures. Well you what why is that town i'm very optimistic i really do think this is sort of capitalism curing capitalism. Um i see the changes and what we called market eco systems. Legal auditors were no longer conflict brokers workable ah the rights of quite honestly i governance industry institutional shareholders services single largest global provider of proxy voting advice. It is up for sale as we change this idea cast. He's asking for a half a billion dollars. To be so. That is ten times. The prices so for five years ago. You see i i s s no it's three competitors including one and received a huge um influx of capital formation well financial in china of all places and it's now. Clearly versus and upper to proxies mushrooms. Way for proxy advising here or multiple reading services that try to provide investors let's see since um. How well they cos run a full were investors those in texas pre in one so everywhere you look in in every aspect of this morning it goes system. You see. The twins being developed to do you investors. The ability monitor and creepy accountability necessary for corporations to flourish. Even for individuals boarding star now rates. Mutual funds on how wealthy perform their fisher applications individual investors. Choose retrieve up and down the chain. Their government refers to be sure um we can argue about whether or not service obstacles reached or the public complete counting word um yes focusing on the right areas they exist. Or reforms in the u. k. internet island japan what gives me the most. Oh after this going forward art he's in markets based accountability service providers. Well on that optimistic no john thank you very much for your time today. You're very welcome thank you huh huh huh uhhuh uhhuh uh ah ah so and alright she only three seconds turned grey strategy integrate performance. Most companies strategies deliver only sixty three percent of their promised financial value why leaders press for better execution when they really need a sound or strategy or the cross the new strategy when execution is the true weak spot. How to avoid these errors you strategic planning and execution as inextricably linked and raise the bar for both simultaneously. Start by applying seven deceptive lee straight forward rules including keeping your strategy simple in concrete making resource allocation decisions early in the planning process and continuously monitoring performances you roll out your strategic plan. My following these rules you reduce the likelihood of performance short falls and even if you're strategy still stumbles you quickly determine whether the fault lies with the strategy itself your plan for pursuing it or the execution process the pay off. You make the right mood course corrections promptly. And as high performing cos like cisco systems dow chemical on somebody on have discovered you booster cos financial performance sixty percent to one hundred percent. Next the idea in practice seven rules for successful strategy execution. Number one keep it simple avoid drawn out descriptions of lofty goals instead clearly describe what your company will and won't do. There's an example. Executives at european investment banking giant bar claes capital stated they wouldn't compete with large u s investment banks or in on profitable equity market segments instead they position bark place for investors burgeoning need for fixed income. Number two challenge assumptions. Ensure that the assumptions underlined your long term strategic plans reflect real market economics and organizations actual performance relative to rivals there's an example. Struggling conglomerate try go commission cross functional teams in each business unit to continuously analyze their markets profitability and they're offerings cost and price positioning relative to competitors. Seems met with corporate executives bi weekly discussed their findings revamp process generated more realistic plans and contributed to tie goes dramatic turn around. Number three speak the same language. Unit leaders in corporate strategy marketing and financial teams must agree on a common framework for assessing performance. For example some i performing cos use bench marking to have to make the size of the profit pool available in each market there cos search the pools potential growth and the companies like we portion of that cool given it's market share and profitability. Oh using the shared approach executives usually agree on financial projection. Number four discuss resource deployment early. Challenge business units about when they're on these new resources to execute their strategy my asking questions such as how fast can you deploy the new sales force and how quickly will competitors respond you create more feasible forecasts implants. Number five identify priorities delivering planned performance requires a few p- actions taken at the right time in the right way make strategic priorities explicit so everyone knows what the focus on. Number six continuously monitor performance track real time results against your plan we setting planning assumptions we allocating resources as needed you'll remedy flaws in your plan and it's execution and avoid confusing the two. And number seven develop execution ability no strategy can be better than the people who must implement make selection and development of managers a priority there's an example parkway is top executive team takes responsibility for all hiring. Members that each other's potential hires and reward talented newcomers for superior execution. And stars aren't penalized if their business centers new markets with lower initial return uhhuh uhhuh uhhuh uhhuh oh we hope you've enjoyed this addition of the h b r i e cast. And we also hope you'll be willing to give us some specific feedback on this program. For example do you like the format on the length. Please email your comments to us at this address idea cast at. H. b. s. b. dot harvard dot e. d. u.. 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