Charlie Munger on GE culture

Charlie Munger is the (older) long time business partner of Warren Buffet, and billionaire investor in his own right. He is Chairman of the Daily Journal Corporation (since 1997) which is legal publishing and software business with a portfolio of investments on the side. The AGM serves as a Q&A of Charlie Munger wisdom more than a scrutiny of the Daily Journal business. The business itself is in the $40m sales range, so not large in the world of big business. 

These are some comments from his recent AGM.

On GE and on culture:  “what caused the failure of performance at General Electric? …part of it I would say, is the system at General Electric where you rotate executives through so different assignments as if they were so many army officers, building up a resume to see if they can become Generals. I don’t think that works as well as keeping people in one business for a long time and having them identify with the business, the way Berkshire does….” 

"... How can an outsider really know a company’s culture? And then finally how do you go about assessing the culture of a company like General Electric.., 

…you understand culture best where it’s really dominant. So for a place like Costco, and there the culture is a vast and constructive force. And it will probably continue for a very, very, long time. And then you get into General Electric, part decentralized, partly not. And it gets very complicated. What is the culture of General Electric? The businesses can be so radically different. 

Maybe headquarters can have a certain kind of culture. .... And I do think it’s, there are very few businesses like Costco that have a very extreme culture ... basically one big business all the way. 

And I love a business like Costco, because of the strong culture and how much can be achieved if the culture is great. But the minute you get into bigger and more complicated places, I mean can you talk about the culture of General Motors, or the culture of AT&T, it’s a very difficult subject. 

What big businesses have in common is that they get very bureaucratic. That’s the one norm in culture is they get very bureaucratic. And this happens to the government too. Big governmental bodies. I don’t like bureaucracy. I mean it fixes a lot of errors, I don’t have any substitute for it though. But I don’t personally like big, bureaucratic cultures. I don’t think very much about big bureaucratic cultures. 

I don’t know how to fix bureaucracy in a big place. I would regard it as a sentence to hell if they gave me some company with a million employees and told me to change the culture. I mean it’s hard to change the culture in a restaurant. If a business is already bureaucratic, how do you make it un-bureaucratic? It’s a very hard problem..." 

On banks: "Banking is a very peculiar business. The temptations that come to a banking CEO are way, the temptations to do something stupid are way bigger in banking than they are in most businesses. Therefore it’s a dangerous place to invest. There are a lot of ways in banking to make your near term future look good by taking risks you really shouldn’t take for the sake of your longer term future. And so banking is a dangerous place to invest, and there are few exceptions. And Berkshire tries to be in the exceptions, as best it could. And I have nothing more to say on that subject except, I’m sure I’m right.” 

On investing: "...the first rule of fishing is fish where the fish are. And the second rule of fishing is don’t forget the first rule. And investing is the same thing. Some places have lots of fish, and you don’t have to be that good a fisherman to do pretty well. Other places are so heavily fished that no matter how good a fisherman you are, you’re not going to do very well. 

And the world we’re living in now, an awful lot of places are in the second category. 

I don’t think that should discourage anyone. I mean life’s a long game and there are easy stretches and hard stretches and the younger generation has opportunities. And the right way to go through life is to take it as it comes and to do the best you can. And if you live to an old age, you’ll get your share ..." 

"Thoughts on the valuation of software companies like Apple, Facebook, Google, Amazon, Alibaba. Are they overvalued, potentially undervalued, too early to tell? 

Well my answer is I don’t know. Next question. " 

Full transcripts available here.  One of the best Munger speeches on how to think about a mental model of inversion can be found here.

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If you'd like to feel inspired by commencement addresses and life lessons try:  Neil Gaiman on making wonderful, fabulous, brilliant mistakes; or Nassim Taleb's commencement address; or JK Rowling on the benefits of failure.  Or Charlie Munger onalways inverting;  Sheryl Sandberg ongrief, resilience and gratitude or investor Ray Dalio  on Principles.

Cross fertilise. Read about the autistic mind here.

More thoughts:  My Financial Times opinion article on the importance of long-term questions to management teams and Environment, Social and Governance capital. 

 How to live a life, well lived. Thoughts from a dying man.      

CEO pay quiz

Top paid US CEOs. How many can you name? Which were the best S&P500 stocks since 2010? What’s the overlap? Which companies made most profit?

Note, Larry Page = $1 salary, Alphabet CEO, but Sundar Pichai, GOOG CEO is at $200m so almost double Hock Tan.

Of course, there are several problems with this simplistic look (length of CEO tenure) and there are several academics who warn of the danger of pay ratios (eg Alex Edmans).

Still it is noticeable that so few CEOs presided over the best stock returns.

And out of the best paid, not that many CEOs preside over the largest profit.

Source: Bloomberg.  I doubt anyone is silly enough to think there is any implied recommendation or analysis here. But in our increasingly disclaimered world, there is not plus see disclaimer link on site. These are total stock returns since Jan 2010 until Feb 2018. No particular reason for date range, only a relatively log length of time of approx a business cycle.

Top 20 paid MSCI World CEOs by total $ comp.

A very similar result to above with just 4 new entries if you look at ex_US companies.

1. WPP Plc (WPP): Martin Sorrell ($65.3m).

2. Valeant Pharma (VRX): Joe Papa ($62.7m).

3. Liberty Global (LBTYA): Mike Fries ($40.1m).

4. BankGuam Holding (BKG): Tony Pidgley ($36.0m)

H/T Ross Yarrow at Baird. I source further data from Bloomberg. 

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If you'd like to feel inspired by commencement addresses and life lessons try:  Neil Gaiman on making wonderful, fabulous, brilliant mistakes; or Nassim Taleb's commencement address; or JK Rowling on the benefits of failure.  Or Charlie Munger onalways inverting;  Sheryl Sandberg ongrief, resilience and gratitude or investor Ray Dalio  on Principles.

Cross fertilise. Read about the autistic mind here.

More thoughts:  My Financial Times opinion article on the importance of long-term questions to management teams and Environment, Social and Governance capital. 

 How to live a life, well lived. Thoughts from a dying man.      

Skin in the Game, Nassim Taleb

The Less Obvious Aspects of Skin in the Game: Those Hidden Asymmetries and Their Consequences. The book as Taleb suggests is: 

1… ...bull***t identification and filtering, that is, the difference between theory and practice… 

Don’t tell me what you “think” show me your portfolio (and why investment managers should eat their own cooking)  

It is also relevant to me in my interest in autism.  If you’ve met one person with autism, you’ve met one person with autism.   

So much theory vanishes in the face of meeting ASD people in practice.  

And academic theory (of the bad kind) has been responsible for much pain, disaster and cruelty in this area.  (Yes  I’m thinking of you Bruno  Bettelheim - abuser of children, fraud of qualifications with the hugely damaging "theory" that "cold refrigerator" mothers were responsible for autism - the descendants of this theory are still very much alive in France and thus still causing immense harm to 0.5 million French and their families - see BBC link here and Guardian article here).  

2..it is about the distortions of symmetry and reciprocity in life: If you have the rewards, you must also get some of the risks, not let others pay the price of your mistakes. 

Whereas the key concepts in  

Fooled by Randomness (on how we tend to mistake luck for skills, how randomness does not look random)  [amazon link]

Black Swan (on how high-impact but rare events dominate history, how we retrospectively give ourselves the illusion of understanding them thanks to narratives)  [Amazon link]

Anti-Fragile (on how some things like disorder (hence volatility, time, chaos, variability, and stressors) while others don’t, how we can classify things along the lines fragile-robust-antifragile)  [amazon link]

...would be new for many people, the first order surface notion of aligned incentives would at first glance be known to many.

However, the insights come from the less obvious aspects and second order thinking plus the emphasis on the downside disincentives, the symmetry or not of the incentives.   [Second order thinking is important if you want to outperform as an active manager, see Howard Mark's Book, amazon link]

This focus on what people have to lose not merely on what they have to gain is an idea that arguably has not had as much attention although embedded in the skin in the game notion.   

3...the book is about how much information one should practically share with others 

Taleb shared a portion of this discussion earlier and there’s a practical moral dilemma from Greek philosophy that I comment on here on the ethics of stuffing

If you know something about trade ships coming into port that no one else knows, do you tell your customers?  (ethics of stuffing)

My view is that transparency is very important and in the long run it can save you.   

4 ...it is about rationality and the test of time. Rationality in the real world isn’t about what makes sense to your New Yorker journalist or some psychologist using naive first-order models, but something vastly deeper and statistical, linked to your own survival. 

This point chimes very well with Poor Economics by Banerjee and Duflo [amazon link here].  They look at people (about 900 million) who live on 99c a day (15 small bananas) and the rationality of their decision making 

The book explains the rationality behind:  “why microfinance is useful without being the miracle some hoped it would be; why the poor often end up with health care that does them more harm than good; why children of the poor can go to school year after year and not learn anything; why the poor don’t want health insurance.”  [amazon link here].

A reading of both can open up your second order thinking on “rationality”.  

Finally re-emphasising an expansion of point 2: 

“Do not mistake skin in the game as defined here and used in this book for just an incentive problem, just having a share of the benefits (as it is commonly understood in finance). No. It is about symmetry, more like having a share of the harm, paying a penalty if something goes wrong. The very same idea ties together notions of incentives, used car buying, ethics, contract theory, learning (real life vs. academia), Kantian imperative, municipal power, risk science, contact between intellectuals and reality, the accountability of bureaucrats, probabilistic social justice, option theory, upright behavior, bull***t vendors, theology …” 

Two other lesser known point on Taleb.  He is an advocate of the precautionary principle with respect to climate change and believes we should be combatting it.  

“We have only one planet.  This fact radically constrains the kinds of risks that are appropriate to take at a large scale. Even a risk with very low probability becomes unacceptable when it affects all of us - there is no reversing mistakes of that magnitude. 

Without any precise models, we can still reason that polluting or altering our environment significantly could put us in uncharted territory, with no statistical track-record and potentially large consequences…” [Link to his co-author abstract on this here]

He gave a commencement speech to the American University in Beirut which you can view and read here. 

[Amazon link to Taleb's Skin in the Game]

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If you'd like to feel inspired by commencement addresses and life lessons try:  Neil Gaiman on making wonderful, fabulous, brilliant mistakes; or Nassim Taleb's commencement address; or JK Rowling on the benefits of failure.  Or Charlie Munger onalways inverting;  Sheryl Sandberg ongrief, resilience and gratitude or investor Ray Dalio  on Principles.

Cross fertilise. Read about the autistic mind here.

More thoughts:  My Financial Times opinion article on the importance of long-term questions to management teams and Environment, Social and Governance capital. 

 How to live a life, well lived. Thoughts from a dying man.       

2bn loan tied to ESG metrics

ESG Innovation: rate on Danone’s EUR2bn 5 year syndicated credit directly tied to ESG metrics. 2 components: i) B-Corps certified sales ii) Ratings based on a) Sustainalytics, b) Vigeo Eiris

Implications: single demonstration that ESG directly impacts cost of debt and —> weighted cost of capital and thus impacting firm value via discount rate.

12 bank* syndicate shows serious financial institutional backing (although risk to banks likely considered low)

Lends weight to notion of ESG ratings. Lends credibility to B-corps certification process.

Concentrates power in ratings and certification providers.

Critique: following the criticisms of Cary Krosinsky on fund ratings** this potentially emphasises backward looking tick box scores too strongly.  ESG ratings providers show low (but positive correlation) approx 0.3 in this study***

Counter: use of both B-corps impact methodology and two forms of ESG ratings, all independent (although question of who pays fees cf. standard bond credit ratings) reduces reliance of single interpretation.  Single company ratings different from portfolio scores.

Further implications: ESG and B-Corp supporters can argue ESG direct meaningful financial and cost of capital implications.  Critics can still invoke virtue signalling concerns.

Models for sustainable finance are still developing (cf. green bonds) but if genuine incentives exist and those incentives credibly encourage long-term sustainable strategies then long-termism supporters should be enthused.

Of note: MSCI is not used as one of the ESG rating providers. Some observers might suggest this shows the French/Euroland strength of Vigeo Eiris over MSCI

*Bank syndicate (Best of my belief):  BNP Paribas,  Societe Generale, Credit Agricole, Natixis, HSBC, Citibank, JPMorgan, Barclays, ING, NatWest, MUFG and Santander.

Link to Danone Statement:

**Cary Krosinsky: Failure of Fund Sustainability ratings. 

*** Chatteji et al.  (2014).  Do [ESG/CSR] Ratings Converge ? 

Goldman Sachs on ESG

Goldman Sachs: “top-quartile returns companies with stronger ESG performance have seen meaningfully less returns erosion over time than high-returns peers with lower ESG scores. This underlines our point that ESG integration, when done well, is complementary and accretive to fundamental analysis rather than a distraction to it.”

“We believe that ESG can offer valuable insights on a company’s culture and risk profile, but only if done properly — i.e., with a narrowed focus on the most material factors in each industry, emphasizing measurable performance over vague policies, etc. What are the rewards for investors? We think there are potentially many, in terms of linkages with superior growth, profitability and lower cost of capital. One that we particularly care about in our process is the durability of returns on capital.”

Comment: This adds to the debate on materiality of various ESG factors. Read in conjunction with theacademic Prof. George Serafeim, Mozaafar Khan, Aaron Yoon paper : "Corporate.Sustainability: First Evidence onMateriality  it points to the importance of a materiality assessment in this area.

View: This is similar to traditional finance metrics eg RoE (return on equity) today for biotech is usually not material or useful measure for investors or management. So no surprise that materiality for extra-financial metrics also need to be assessed.

Open question is how skilled an investor needs to be, to use this information effectively.

H/T Derek Bingham and GS Sustain Team  Source: Goldman Sachs

More thoughts:  My Financial Times opinion article on the importance of long-term questions to management teams and Environment, Social and Governance capital. 

If you'd like to feel inspired by commencement addresses and life lessons try:  Neil Gaiman on makingwonderful, fabulous, brilliant mistakes; orNassim Taleb's commencement address; or JK Rowling on thebenefits of failure.  Or Charlie Munger onalways inverting;  Sheryl Sandberg ongrief, resilience and gratitude or investor Ray Dalio on  on Principles.

Cross fertilise. Read about theautistic mind here.

More on  ESG, Stewardship and Fund management – here.

CityMapper starts London mini-Bus service

Citymapper is taking on Uber in the City of London.Starting with a free trial, it's closer to a mini-bus service  than a taxi but on City routes (more to come if this goes well, see picture for coverage area) that are supposedly not served well.

Will be interesting to watch if this succeeds.  Londoners also waiting to see if Lyft will try and enter.

London remains one of the most lucrative but competitive urban transport markets in the world.

Now where are the Tesla or EV mini buses ?

Healthcare spend, US no consensus on health as a right

More noise on US healthcare as JP Morgan, Berkshire Hathaway and Amazon form a venture to look at lowering healthcare costs (Bloomberg article). I’ve been meaning to write a long series of pieces on health, given it is one of my specialties and I can talk about health for almost as many days as I can talk about theatre or investments and sustainability.

But, it’s hard to compress those thoughts succinctly.

So, I only wanted to point out 2 points. First, US healthcare spend is at around 16.6% GDP (in 2014; but close to 18% in 2017 and likely 20% in 2025!)  and now  vs UK at 9.9% (2014 adjusted) and Germany at close to 11% and China at about 6%.  (Noticeable for the UK its health spend is one of the lowest in the G7, on this measure although higher than the OECD average for now, it probably falls to average in next few years;  UK data here and more and world bank data here;  US govt analysis here)

These averages disguise a huge amount, which is a discussion for another time, but it is much larger than other developed nations and on balance the average health result in the US (again the mean and median disguising many items) are not as good as other developed nations, across many health measures (see a balanced view on key measures here from Kaiser    

I’ve also seen data where items such as socio-economic status, smoking, obesity and other key factors have been balances and US is still worse at the mean).

One of the problems in the US, is that there is no socio-political consensus that healthcare is a human right, in the same way it is in Europe.

Ultimately funding healthcare is as much (or if you follow Cambridge economist Ha-Joon Chang’s line of thinking, the politics is everything (23 Things They Don’t Tell You about Capitalism) political as economic. Some of the US population believes healthcare is a right and should be public funded, but others in the US do not believe it is a right.  Those others believe the healthy should not subsidise the unhealthy. This gives rise to the system the US has and there is the added difficulties of the healthcare economics  of risk pools, which is perhaps somewhat unique to healthcare.

So even as the economics of US health weigh even more heavily, I don’t see any easy way out for the country unless they can form a consensus on whether it is a right and settles once and for all if it should be privately or publicly funded or what the split should be and then perhaps  move towards a system like Singapore or Switzerland. Or can think about distributive justice.

When a board can't detect fraud...

I’m still utterly amazed at large company fraud. Christo Wiese owns 23% of Steinhoff and was Chair, and didn’t know anything about it at Steinhoff.  Highlights to me that choosing the CEO is still one of the most important if not the most important job of a board.

“Normally when you’re in a business, and you’re responsible, you can see the problems coming, you’re aware of them,” Mr Wiese said. “This came like a bolt out of the blue.” “I can only say that cleverer people than this board have been duped before by people committing fraud,” he added. “To detect fraud in a company is an extremely difficult if not impossible task and it becomes more difficult when, as is alleged in this case, the CEO is directly involved.”

Jan 31, FT article here  and  Dec 2017, Bloomberg article here   

Also, highlights the problems the board has if it can't assess what management are showing them. In the light of the UK's Carillion failure, its board have been given a hard time too.