“The dumbest idea of the world”: The most noteworthy Mea Culpa of this month came from Jack Welch, the former Chairman of General Electric.  He stated in an interview to the Financial Times that the concept of shareholder value and focusing on consistent quarter results were “the dumbest idea of the world”.  “Shareholder value is a result not a strategy”.  

Jack Welch made the concept of shareholder value famous in a speech a the Pierre Hotel (NY City) in 1981, following that the short term goal of rewarding shareholders by increasing profits and dividends every quarter has become a mantra for companies around the world.  The concept was quickly picked up by consultants and imposed on their clients.  Businesses that did not fit that concept regardless of historical cyclicality or short term market weakness were disposed of, restructured or moved ‘off’ the balance sheet.  GE became an exporter of financial talent (many companies hired GE trained CFOs) and its own financial arm GE Capital became the lead money maker and the largest unregulated bank of the world.  This of course has all changed with GE Capital having become a toxic asset, thus GE is rethinking its position as an engineering company meaning lets go back to the roots and everything else was ‘a dumb idea’.

About company directors: Russell Reynolds, the doyen of American headhunters, said directors will have to be both more selfless:  ‘Gone are the days when directors played golf but did not understand the risk-reward ratio of the business.”

About the largest fraud in history: Bernard Madoff, in pleading guilty to 11 counts of fraud, perjury and money laundering said he was deeply sorry that he had hurt so many people (investors).  The amazing aspect of his Ponzi scheme was nothing more complex than depositing funds from his clients into a Chase Manhattan bank account hoping new investments would exceed withdrawals.  

About failed regulators:  The answer why the SEC failed to act on Madoff came from the former S.E.C. Chairman Christopher Cox: “Our initial findings have been deeply troubling, the commission received “credible and specific allegations regarding Mr. Madoff’s financial wrongdoing,” but did not respond aggressively.”

About exuberant lending: Alan Greenspan, the former Chairman of the Federal Reserve Bank, said in a hearing of the House Committee on Oversight and Government Reform, “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.” Admitting that he was wrong in putting too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending.

Source: Financial Times and Intrepid Explorers, Inc. (IEI) commentary

BIIA Newsletter March 2009 Issue