Good Story on Women in Senior Management and Performance

The Financial Times has an interesting piece on a new McKinsey study suggesting, at least in Europe, a correlation between having a high proportion of women in leadership roles and superior financial performance.

The report, launched at the Women’s Forum for the Economy & Society in Deauville, France, finds these companies do better than their sector in terms of return on equity, operating result and share price growth. The management consulting firm also reports that companies around the world where a third or more of the senior team are women score higher, on average, than those with no women on nine criteria of “organisational excellence”. These criteria include accountability, innovation and work environment.

Apparently, there has been research in the U.S. showing comparable results among the Fortune 500. McKinsey points out that this is an issue of correlation and not causality - there is no proof that senior women cause the improved performance. It could be that the presence of female senior managers helps change the corporate culture in ways that make higher performance more likely, or it could be that a culture that brings in a significant number of women happens to be the type of corporation that does better. I'd provide a link, but this is a subscription-only source.

Martin Wolf on Securitization

Securitization - or written with an s instead of the z, as the Brits do - was all the rage in the financial world, until the sub-prime markets slipped. Companies like the idea of bundling loans or receivables into financial instruments that they can sell to investors, gaining cash and spreading risk around (otherwise known as getting it off their books). Martin Wolf, writing in the Financial Times, had an interesting column on the topic that started with a John Maynard Keynes quote:

A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.

How unfortunately true. The risk that appears all too often to interest them most is the risk of embarrassment, not the risk to capital. The problem here is that bankers made bad loans that they figured they'd move on to someone else - in any other circles called a con job. According to his figures, and an interesting chart, US "asset-backed paper contracted by 21 per cent between August 8 and October 1." A brutal ouch. Wolf was taken aback:

What I am surprised by is how toxic securitisation of subprime mortgages has turned out to be for the financial markets. I admit that I thought securitisation had attractive features: it should allow banks to remain in the mortgage business as originators and intermediaries without taking too much of the interest-rate, term and liquidity risks on to their own highly leveraged books; it should allow banks to transfer those risks on to investors who want longer-term, higher-yielding assets; and, in the process, riskier borrowers should have access to more credit than before.

And he was right in theory, I think. As he notes, there were two main reasons for the crash. One was "all-too-familiar euphoria," as he puts it, though I'd term it historic and economic ignorance. Depending on rising prices to make everything work out, and to let people get out of the trap of credit priced too high for them, is as foolish as thinking that any type of market has an infinite size and can allow unlimited growth as long as someone might like.

The other reason, which I'd call duplicity and naivete, both in borrowers, lenders, and investors, comes about because of a change in the relationship between borrower and money source:

As Robert van Order of the universities of Aberdeen and Michigan points out, securitisation necessarily creates a chain of transactors where bank lending interposes just one institution between the borrower at one end and the depositor at the other. Such chains depend on trust or, as he puts it, "reliance on originators and servicers to originate good loans and service them properly". The trust proved misplaced and has duly vanished: credit means "he (or she) believes". Alas, he no longer does.

There are still some advantages for everyone if the system works well, but if it depends on trust, it could be years before it comes back. How long did it take for people to consider junk bonds after their time of dalliance in the 1980s?

Mattel Admits to Scapegoating China on Product Problems

According to the weekend Financial Times, Mattel had to apologize to "the Chinese People" last Friday. The company had been blaming its series of toy recalls this year on Chinese contractors:

The apology was in stark contrast to recent comments from Robert Eckert, Mattel’s chief executive. In testimony to the US Senate last week, he suggested that the fault for the group’s recent product recalls lay with outside contractors. “We were let down, and so we let you down,” he said.

The story that Mattel had told involved the presence of lead paint, but the vast majority of recalled units - 18 million - suffered from design flaws.

In a later statement, Mattel said that some reports had “mischaracterised” its comments and said it had “apologised to the Chinese today just as it has wherever its toys are sold”. But the statement made clear that it was also apologising to the country and its reputation over the magnet-related recalls.

Oh, what a mess Mattel has made. Just a month or two ago, the company was receiving accolades for its prompt attention to the problems and its handling of the public relations crisis. Guess they can toss the good work out the window - it was nothing but misdirection. I can remember at one point seeing the numbers involved in one recall and wondering why the bulk seemed to be about design problems, but I didn't follow up on that, and shame on me for doing so. But where were the reporters who were actively following the story for their news organizations? There appears to be a numbers phobia in the business press, which is disturbing considering just how much of business is related to and described by numbers.

Wal-Mart Thinks Small?

Yesterday the Financial Times had a story on how Wal-Mart is considering lessening its reliance on its Supercenters for future growth:

The world’s largest retailer, whose US stores had sales of more than $64bn last year, is seeking an executive to assess the “strategic implications of any possible M&A on our overall portfolio”, according to a Wal-Mart job posting.

I found it interesting, given my rant yesterday about the company's gas price commercial. It seemed like a contradiction - blaming "disappointing" results (though I am skeptical on how disappointing what you do can be when you're on the top of your particular hill) on high gas prices while essentially acknowledging that the biggest box store strategy might be a dead end, but on reflection it isn't.

If the story is right (and I suspect it is), Wal-Mart is looking at acquisitions, and sees this as an gengine of growth, not of continuance. So it's an addition - and that still leaves room to blame others. I think there's still a problem: economics, mathematics, and common sense suggest that there is only so much market share you can have. Eventually you run out of people who want to do business with you for whatever reason.

So, to get someplace new, give them a new reason to buy. The online music move is interesting - and even faster than Amazon.com. Maybe what Wal-Mart needs is a real challenge. Instead of acquiring some chain and then rebranding the name to some variation of its own, creating the inevitable emotional associations, Wal-Mart might think of doing heavy research, finding some concept that really is missing, and then investing and building its own chain with a different brand, from scratch.

That flies in the face of most assumed business logic, I know, but the idea would be to do more than just become more bloated. The company has all this money that could use investment. It could create an obvious internal challenge with a focus on something it could make happen rather than the fuzzier "get bigger." It could grow and make more revenue and profit as the natural byproducts of trying to achieve something concrete.

I think the psychological quirk of trying to control numbers and creating strategy as a result instead of the other way around is a definite problem in business. It led to the current mortgage market, to over-investment in the 1990s, and to many other general business failures. You don't get someplace by wanting to have fame as an explore; instead, you get fame as an explorer by heading to the North Pole. It's a lot harder, but ultimately more rewarding for management, for exmployees, and for investors.

Financial Times on Insider Trading

The Financial Times has another scoop - a study it commissioned, looking at stock trading in select compaines running up to announcements of big M&A activity:

Almost 60 percent of the 27 big deals announced in North America this year were precded by unexplained spikes in trading in the stock of the target company, according to a review of data by Measuredmarkets, a Toronto research firm. This compares with 15 percent for the seven largest deals announced in 2003.

Let's not go totally off the board, as 27 deals do not make a large subject for statistical analysis. And these were only "suspicious trades" and not an item-by-item analysis to see who was involved. But the analysis did look at whether news on specific days might have acted as an expected trigger for the activity. The pattern depended on the industry, with the spikes happening 80 percent of the time with hotels and casinos and just under a third of the time in telecommunications.

Although this isn't proof - let's be clear on that - it sure is a whole lot of smoke. Combine this with the study that the FT featured on July 30, showing that many Wall Street analysts received personal favors from executives whose companies they followed, and you've got to wonder if anything has changed in the world of big investing. Actually, you could assume that it's business as usual, which is a pity. Such activities are undertaken by robber barons - emphasis on the robber - and not real businesspeople, who have some regard for the entire activity of business itself.

The article itself is here, though you have to be a subscriber.

Executives Do Favors for Wall Street Analysts, Get Better Ratings

The Finanical Times had a story on Friday about a new study that proved mutual back scratching to be alive and well on Wall Street. Researchers from the University of Texas in Austin and the University of Michigan spoke with 1,800 analysts and hundreds of corporate executives. They then tied back admissions of favors given to nearly two-thirds of all analysts they interviewed.

The study found that by offering analysts favours, ranging from recommending them for a job to agreeing to speak to their clients, executives sharply reduced the chances of a downgrade in the aftermath of poor results or a controversial deal.

More specifically, an analyst who took two favors was 50 percent less likely to downgrade the company's rating after poor results. According to the CFA Institute, yes, this is unethical behavior.

The sad thing? I sent a copy of the story to some colleagues, one of whom used to work in investor relations and the other a former investment banking type. Their take was, "Ho-hum." They had found that corruption was systematic in their experience.

And what happens to the individual investor trying to make intelligent decisions? They have a good chance of effectively underwriting, with their own money, these backroom relationships because they may keep putting money in a poor investment based on biased advice.