Confessions of An Economic Refugee

There is an informative article in the latest issue (Nov 27,2006) of Fortune Magazine that examines the differences in management style between public and private equity-owned companies how these differences favour the PE firms. For example, in the 12 months to June 2006, returns from investments in PE firms averaged 22.5% vs 6.6% for the S&P 500 and over the last 20 years, the respective performance has been 14.2% vs 9.8%.

The specific factors the article cites in operating mentality in PE firms specifically are:

1. Management @ PE firms have short term objectives (2-5 years) to sell the company or take it public creating a more focused decision-making environment.  This is contrast to management of public companies run the company as a ‘going-concern’ with a time horizon stretching to infinity.
2. Management @ PE firms often are required to have a significant portion of their personal wealth invested in the company.  This creates true alignment between owners and managers.  Remuneration techniques in public companies such as stock options or restricted stock which, while they do provide upside, have little downside for the ownership.  This potential creates a misaligned incentive structure where management will take greater than prudent risks (‘increase the beta of the company’ in finance parlance) to get their options and restricted stock to actually be worth something.
3. PE firms can afford to pay executives a lot more.  Free from the scrutiny of the press and ‘goverance activists’, PE firms can afford to recruit the truly elite talent with pay offers that would be impossible for a public company to offer.
4. This one is generally well known but PE firms don’t have to worry about pleasing the gods of Wall Street with offerings of regular and consistent growth in quarterly earnings.  Management at PE firms are free to do what’s right for the long terms health of the company instead of handcuffed to managing the share price
5. Management at PE firms can devote 100% of their time to minding store.  Managers at public companies are lucky to be able to spend 60% of their time to actually running the company and the rest managing the investing public.
6. PE firms are the primary focus of the activity, not a far off business unit that is peripheral to the corporate mission.   This focuses and raises the morale of management.
7. Boards of PE companies are smaller and focused on making the company a success vs. thinking pondering corporate governance issues.
8. Because they ARE the ‘old boy network’ PE funds can leverage their connections to benefit the business.  Think Keireitsu capitalism on a massive scale.   
9. PE firms are laser focused on cash flow – not EBITDA, EPS, ROE or corporate social responsibility.  Think of Gordon Gekko’s "Greed is Good" speech.  "Greed clarifies and cuts through."

That’s the theory of PE funds inherent advantages anyways.  But never forget that PE funds are merely traders and like any other traders, their objective is to buy low and sell high.  Whether they are actually aiming to create long term value or merely put up a facade of value-add is debatable.

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In any company, there is always going to be folks in some organization somewhere who believe you are useless and/or overpaid.  (If not, you are spending too much time at work.)  Just make sure your boss or your boss’ boss aren’t one of those folks.

Always ask yourself if you are adding value to the company – if not, you are useless.

Always ask yourself if you are learning new transferable skills in your current job – if not, you are unemployable outside your current company.  Can you live with being a slave to your company?

Always compare your career progress to the overall job market.  Don’t let the company waste your time.

Your workload will always grow to occupy all your free time.  The faster you get your work done the more work that will be assigned to you.

There is often little correlation between how hard you work and how fast you get promoted and/or how much you are paid.

Don’t blindly take on assignments.  Often they are merely distractions.  Ask if they will still need to complete that assignment 2 weeks from now.  When someone says "it’s urgent" it’s often code for "I screwed up in planning and now my ass is on the line"

Try to figure out if an assignment is critical and/or high visibility before you pour your heart and soul into it.

A good manager will communicate all the important things to you and shield you from the crap.  A good manager will clearly communicate the goals and objectives of the team.

A good employee will always try to see things from the perspective of his/her manager and work to the benefit of his/her manager and the team.  – A good manager will see and appreciate this.

Bitching and getting distracted by events beyond your control does not advance your career or help the company.  Stay focused.

Often you have more power over your manager than you realize.  Firing and rehiring is a bitch.

Your manager is not responsible for your career development.  You are.

However a good manager will give honest career guidance in your best interests when asked.   Bad managers will give you advice that only benefits themselves. 

Don’t waste your time.  Don’t let your career stagnate.

Titles and jobs come and go.  Your relationships and your reputation are your most important assets.

People would rather work with the competent likeable guy than the brilliant asshole.  Be brilliant but don’t be an asshole.

Any other rules you would like to add?  Add a comment.

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This post was written in the aftermath of the 2006 midterm elections where the Republican Party lost control of Senate and the House of Representatives.

Dear US of A,

Thank you for finally coming back to your senses.  Thank you for realizing that a government that misleads its people to invade a country under false pretenses, that abridges the rights of citizens; that grossly mistreats the captives in its care; that tramples on the rule of law and that destroys the precious moral authority that has made it the beacon of hope throughout the world does not deserve to stand.

Thank you for realizing that a ruling party in the hock of corporate interests, that irresponsibly jeopardizes the fiscal security of its entire population in order to undeservedly enrich the wealthiest 1% of is population and to support a wasteful form of corporate welfare for its patrons, and then intentionally polarizes the population and trade on fear and paranoia in order to cling is ultimately harmful to the society as a whole and needs be excised.

Sure it only took a massive corruption scandal, a sex scandal, a bridge to no where and the completely incompetent mishandling of a natural (not terrorist-initiated) disaster at the hands a inept former equestrian adminstration of a political appointee to helpfully remind you of how dysfunctional your country had become when you woke up on the morning of November 7, 2006. 

Thank you America, for coming back to your senses and taking the first step to putting your house back in order.  The world does not benefit from a weak, divided and fiscally and morally bankrupt US of A.  We are diminished if we live in a world where the ‘American Dream’ no longer meaningfully exists to inspire and give hope to the poor and less fortunate.  Here is to the aspiration that 2006 is not a reprieve from the past 6 years but a significant turning point from it.

A humble observer.

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It used to be that to change the world, one either had to have raise an army, win/buy political office or write a book (and hope people read and agree with it).  Of course there options are bloody, expensive and or time-consuming.

In the age of the Internet and the supremecy of the Marketer, it seems the fastest way to change to the world is to make a (good) movie.  Consider the impact the following films have had in either altering the behaviour of businesses and/or governments.

• Walmart: High Cost of Low Prices
• An Inconvenient Truth
• SuperSize Me
• Who Killed the Electric Car?

Consider the impact each of these movies has made:

• Walmart, in trying to redress woeful employee medical coverage, vowed to aim its low cost model at pharmacy to provide cut rate meds to all its customers, employees included.
• An Inconvenient Truth generated huge awareness for the dangers of global warming, reestablishing credibility to the topic and made it, dare I say it, ‘hip’ to be carbon-conscious (not carb-conscous).  The result, several major companies including Goldman Sachs and GE recently announced its intent to reduce its ‘carbon footprint’ in the world.
• McDonald’s pulled the supersize option and from its menu after SuperSize Me supersized awareness of just how plain bad for your McD’s food is.
• GE recently announced it would be building plug-in electrics again.

It would seem the way to change the world would be to become movie moguls.   Who knew that to do good nowadays one would have to go to modern day hell-on-earth?

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