A new opportunity on Wall Street
Baby Boomers are inheriting trillions. That’s good news for family firms hungry for capital.
When your family business needs capital, according to conventional wisdom, you can’t eat your cake and have it too. You
1. operate on a limited budget; or
2. go into debt; or
3. take on unwanted partners; or
4. sell your company’s soul to Wall Street, whose heartless bean counters care only about your latest quarterly results.
But suppose Wall Street wasn’t such a brutal place after all? Suppose it was run not by folks like Gordon Gekko but by erstwhile hippies and tree huggers who care more about saving the world and rewarding good corporate citizenship than about maximizing their return on equity?
No, this is not a dream. It could happen. In fact, it’s happening already. Those hippies from the ’60s have now reached their 60s, and they’ve inherited trillions from their parents, some of which they’re already passing on to their kids. Over the next three decades, Federal Reserve senior economist Robert Avery estimates, the Baby Boom generation will bequeath some $35 trillion in assets—the biggest potential intergenerational wealth transfer in the world’s history. But when it comes to investing those assets, many of these new inheritors still cling to their old warm-and-fuzzy values. In the process, they’re changing the whole character of Wall Street in ways that could benefit warm-and-fuzzy family companies.
Welcome to a brave new phenomenon called “socially responsive investing,&148; now the investment industry’s fastest-growing sector. SRI, as it’s called, was once the province of dowdy church endowments or peace-and-love activists in isolated college towns, but today it caters to a potential audience of 50 million “New Age” Americans (plus another 80 million to 90 million in Europe) who’ve emerged as a major market force in the past generation.
As defined by sociologist Paul G. Ray, these “cultural creatives” are folks who “care deeply about ecology and saving the planet, about relationships, peace, social justice, and about self-actualization, spirituality and self-expression.” And they’ve put their money where their hearts are—specifically, more than $2 trillion in SRI portfolios, or one of every nine investment dollars currently under professional management in the U.S.
“These SRI investors are people who read a lot, listen to National Public Radio and shop at Whole Foods,” says Stephen Schueth, past president of the Social Investment Forum and also president of First Affirmative Financial Network, a nationwide network of some 100 financial advisers whose clients want SRI. “They fueled the green movement, alternative health care and organic foods, and now they’re doing the same for SRI.”
This burgeoning market has channeled about $151 billion into more than 200 SRI mutual funds, each with its own social agenda (the Sierra Club Stock Fund, for example, avoids companies with poor environmental records) and many with sophisticated research departments devoted to evaluating every imaginable corporate sin, from growing tobacco and fomenting gambling to overpaying executives and underpaying workers. The SRI movement has also spawned a mushrooming subculture of “shareholder advocates” (like the Millennium Fund) that seek, with increasing success, to use proxy resolutions to reform corporate behavior from within.
Although some SRI boosters trace the movement’s roots to the Bible and the Koran, its modern seeds were planted by the political protesters who took to America’s streets in the 1960s and ’70s. Their successes in mobilizing for civil rights, peace in Vietnam and women’s liberation eventually emboldened them to expand their focus from the halls of government to corporate executive suites. This newfound interest in the private sector occurred at just the time that some of these Boomers were beginning to inherit sizable stock portfolios from their parents.
Meanwhile, the advent of computers made it feasible for the first time to attempt to track and quantify the social behavior of hundreds of publicly traded companies. And as women—the more nurturing and thus more socially conscious gender—entered the workforce in large numbers, assets invested in SRI grew dramatically. (Women account for 60% of SRI fund holders, according to the Social Investment Forum.)
But SRI strategies aren’t limited to the save-the-whales-and-recycle-your-empties crowd. The field runs the gamut from politically liberal investors, eager to reward companies that support family planning and gay/lesbian rights, to investors on the religious right who are equally determined to punish such companies. Either way, it’s an industry that appears to be attracting many of America’s best and brightest young minds with its astonishing message: Idealism can be just as lucrative as greed.
“Were it not for SRI, I wouldn’t be in financial services, because it’s too boring,” says Steve Schueth, who at age 51 has spent 16 years in SRI.
Against seemingly insurmountable obstacles—like the higher cost of all that social research, plus the smaller universe of stocks to choose from—today’s alternative world of SRI stock indexes, research programs, websites and specialized services often outperforms the market as a whole. Which makes sense when you think about it: SRI screens against polluters and labor exploiters often serve as a de facto early-warning system against wasteful and shortsighted managements.
Even corporate executives, who once regarded the SRI crowd as a pain in the neck, have grudgingly come to perceive SRI as a valuable ally against all those myopic money managers preoccupied with quarterly earnings results.
Who ever thought we’d see the day when the forces of capitalism would be mobilized to make the world gentler and corporations friendlier?
A lesson from Terrell Owens
If the problem is Freudian, who ya gonna call?
The wide receiver Terrell Owens, late of the Philadelphia Eagles, was (is?) a spectacular individual performer playing in a team game: professional football. When he joined the Eagles in 2004, Owens signed a seven-year contract for $49 million. After one sensational season he tried to renegotiate. When the Eagles insisted on holding Owens to his original contract, he rebelled last fall by skipping the first week of pre-season training camp, refusing to speak to teammates and coaches at practice sessions and games, and verbally attacking his coach and teammates in media interviews.
In an age when professional athletes switch teams every few years, the Philadelphia Eagles aren’t really a family. But family companies often encounter a very similar scenario: the prodigal son (or daughter) who’s a star performer but who harbors Freudian resentments against his siblings or parents. No one can work with him, but you can’t fire him without wrecking your family. What to do?
Or consider a problem that arose recently in a private Philadelphia lunch club to which I belong. A longtime devoted member, now in her 70s, began displaying signs of dementia. At lunch she would drink too much and talk too loudly. When guest speakers addressed the club, she would interrupt them with pointless questions and then repeat the questions. As a result, lunch at the club—the club’s primary function—became a less pleasant experience, and members and guest speakers alike began avoiding the place. Like a drop of ink in an otherwise pure glass of water, a single rogue member might ruin the club.
Again, family companies often face a similar challenge: How do you handle a beloved old relative or employee who’s been around seemingly forever and who’s now losing it to such an extent that he’s more of a liability than an asset?
There’s no easy solution, but both of the institutions above, in my opinion, could have handled their situations better than they did.
• The Eagles, concluding that no team can function with a fifth-columnist in its midst, suspended Owens without pay for the maximum permissible period (four games) and then deactivated him altogether while continuing to pay his extravagant salary. For whatever reason—perhaps because of Owens’s disruptiveness, perhaps because of his absence, perhaps because of other players’ injuries—the Eagles suffered through their worst won-lost record in a decade.
• My club’s board designated a “minder” to sit with the errant member at lunch and try to limit her wine intake. That didn’t work. Then they gave her a session or two with a psychiatrist who belonged to the club. That didn’t work either. Then, with much reluctance, the board placed the poor woman on probation for three months in the hope that this sanction would shape her up. It didn’t, of course, because she was no longer capable of functioning rationally. So when she returned from her probation and resumed her old dotty ways, she was expelled.
These days, lunches at the club are indeed more pleasant. But a cloud hangs over the place, and several members have resigned to protest the harsh handling of a loyal member who was no longer responsible for her actions.
What would I have done? I’m no psychologist—which is precisely my point. The science of psychology is barely a century old, which means we humans have just begun to unlock the secrets of the human psyche. Nevertheless, good organizations have learned to use business psychologists to deal with institutional challenges. For family businesses, that can mean quarrels between parents and children or between siblings and cousins. Or it can mean parents who are afraid to sell their company for fear that their kids won’t be able to survive elsewhere. More than a thousand business psychologists practice in the U.S., by most estimates. (See “This is no job for an ordinary mortal,” by Alan Horowitz, FB, Winter 2003.)
Maybe it’s too much to expect a not-for-profit social club with a voluntary board to keep a psychologist on retainer. But it astonishes me that most professional sports teams, with their centomillion-dollar payrolls, haven’t thought to spend six figures or so for a full-time team psychologist. Some NFL teams, like the Arizona Cardinals, use a team counselor to detect potential leaders and potential troublemakers. And in 2001 several NFL teams brought in sports psychologists to address players after the traumatic events of 9/11. But most teams see the use of sports psychologists as the prerogative of individual players—as reflected in Baltimore Ravens coach Brian Billick’s suggestion last fall that his flaky quarterback, Kyle Boller, “may need to see a sports psychologist.”
On teams as in families, lawyers and arbitrators should be the last resort, not the first one. I can’t help thinking that a psychologist could have found a way to make Terrell Owens click with the Eagles. Well, do the Eagles have a team psychologist? “That’s information we would not disclose,” a team spokesman replies.
Next question: Since when is use of a psychologist something to be ashamed of?
Contrarian follow-up
Catching up on a couple of items from my previous columns:
1. The “New Nepotism” at Dow Jones. The Wall Street Journal‘s parent company used to prohibit spouses from working there simultaneously. That has changed with a vengeance, I observed in Summer 2003: Several married couples were sprinkled throughout the company, most notably CEO Peter Kann and his wife, Karen Eliot House, who was appointed the Journal‘s publisher in 2002. This situation raised an interesting question: If Kann were to be fired, would House quit out of loyalty to her husband, or would she stay out of loyalty to the company?
Update: Under pressure due to Dow Jones’s sluggish stock performance, Kann announced his retirement (at age 63) as CEO this past January. His wife was one of three finalists to succeed him. But Kann bent over backward to avoid lobbying for her, awkwardly describing House as “a longtime colleague” and “a very good publisher of the Journal,” who “also happens to be my wife.” When House was passed over for the CEO job, she too announced her retirement. Wall Street seemed relieved: That day, Dow Jones’s stock rose by 10%.
2. Secretary as wife as boss at Bertelsmann. During the American Revolution, John Adams explained to his wife, Abigail: “I must study war and politics that my sons may have liberty to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce and agriculture, in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry and porcelain.” In Summer 2004 I caustically suggested that Bertelsmann AG founder Carl Bertelsmann might have reasoned this way: “I must study business, Protestant morality and social betterment so my great-grandson can produce illegitimate children with his secretary and subsequently marry her and turn control of the family company over to her.”
Update: The founder’s great-grandson, Reinhard Mohn, died in July 2004 and passed control of Europe’s largest media company to his wife, Liz, now 65, who was previously his secretary and lover and mother of his three illegitimate children before he divorced his first wife to marry her. Bertelsmann is private and the Mohn family owns 75% of the vote, but Liz Mohn is now battling to prevent Belgian investor Albert Frère from selling the other 25% to the public, lest the company be exposed to public scrutiny.
“Liz Mohn is a street fighter,” one Bertelsmann insider told the Financial Times. “Her origins are humble…. She doesn’t want outsiders peering in because she fears for her children’s careers.”