|How a CEO's Mindset Could Guide the Fed|
By Randy Eckel AUG 22, 2011 10:30 AM
A long term outlook and an understanding of the business cycle would be a good place for the Federal Reserve to start.
I have recently been contemplating the divide between how investment managers and corporate CEOs think, and how to convert this understanding into economic and investment gains.
My firm believes that many investors (and all politicians) don’t really understand how a CEO thinks. This is a critical gap, as what executives' actions matter -- they control the majority of US commerce.
In this process, we use “CEO” collectively to mean chief executives of public and private companies, managing directors of non-profits, and any other leader that manages an organization that contributes to our GDP. It is an oversimplification, but these peoples' decisions can make or break an economy.
I believe that the following misunderstandings are perhaps at the root of our sluggish economy and wild financial swings. I’ve been on both sides of the equation, having spent 15 years as a CEO and seven as a financial analyst interacting with CEOs. We also talk regularly to hundreds of small business leaders in the technology space.
So how do CEOs think?
CEOs Need Stability and Visibility to Do Their Jobs
CEOs need a stable environment to plan against. However, the decisions they make usually require long cycles of investment and learning. They need to know that 3, 5, 10 years from now, some of their core assumptions will still be (primarily) accurate. That visibility makes them feel comfortable committing company resources, making acquisitions, and more importantly making hiring decisions. Hiring decisions require the highest level of comfort.
Why is it different? From a professional standpoint, hiring an employee (or group of employees) only to have to turn around and fire them is a leadership and judgment mistake, one that keeps you up at night. It can lead to the cascading effect of poor morale in both the company and with your reseller channel and/or supply chain partners. And when it’s part of a major strategy, it’s a mistake that can get you fired.
From a personal perspective, hiring even one employee is realizing that it’s not just your that person who depends on your judgment, but their family as well. Regardless of how it is often portrayed in the mainstream press/movies, putting little Timmy on food stamps is not something any CEO takes lightly. As a result, they are very careful in hiring decisions. Although one occasionally runs across the “ruthless” executive, the vast majority of those I have met are good people that care.
To the point about stability... it’s no accident that the late 1990’s was a great time for US business. A Democratic President and a Republican Congress almost insured that nothing big would happen on the political and regulatory scene. You could almost hear CEOs thinking, “Gridlock in Washington... now that’s something I can invest in.”
It’s also no accident that CEOs with international reach are investing heavily in the BRIC countries. They believe two things: First, that these countries will develop a much larger middle class over the next decade and the number of buyers of whatever they sell will multiply like rabbits. Second, by and large those countries want them there, and will therefore provide a business friendly environment.
In the US right now, it’s difficult to be certain about anything -- politically, fiscally, or regulatory. If any CEOs doubted that for a minute, the month of July set them straight.
CEOs Think That Investment Managers are Just Like Their Eight Year Old Daughter and Her Friends
Eight year olds live in a bubble of life that vacillates between giddy joy and deep unhappiness -- often in the same day/hour. Their view of long term is “what do I wear to school tomorrow” -- a far cry from the CEO’s perspective just laid out.
CEOs look at the markets and shake their heads. The markets’ perception of the future can change in days. The last few weeks are a perfect example of a manic 180-degree reversal in investor sentiment from business is great to business is horrible.
In the first quarter of 2009, when the market was reaching new lows every day, most of the investment world thought “things are just terrible”. We spoke with software ecosystem executives in February and March of that quarter who kept saying that “business is actually not that bad”. We suspect this will be the case when we talk to our channel in September. A good CEO looks right through these swings of investor sentiment and stays focused on executing his/her plan. Putting a plan in motion and executing against that plan is not easy. It typically entails a very complex set of parts; literally, a puzzle with ten thousand pieces that has been set in motion. And it’s generally not a good idea to make sudden changes.
On the NetApp (NTAP) quarterly conference call last week, the firm's CEO summed it up (and I paraphrase), “Why would we change our plan because of two lousy weeks when the world was focused on the reality show train wreck that was Washington D.C.?”
If the crisis persists for a few quarters, or the world does indeed have another credit crunch, he will alter his plan. Though if he does, it will likely just be a tweak. Things must have really tanked in his/her market for a CEO to change plans.
Good CEOs Understand the Basics of a Successful Business Cycle
They know from experience that most recessions are caused by the normal cleansing of bad business decisions. They know that corrections in inventory are what really slow down commerce. I mention this because the majority of CEOs are looking at the world around them saying, “Where is the excess inventory?”
And so on.
Where’s the excess that needs to be worked off... other than maybe in risk assets and the Federal government?
Why are the excesses of a traditional business cycle not there right now? Because CEOs treaded very carefully this time. They knew that short-term fixes don’t work. They knew “cash for clunkers” was not going to work. They knew QE2’s $600 bln over nine months was not going to work. They knew that spending “stimulus” in the form of transfer payments was not going to work.
So they moved slowly, invested overseas (if they could), and played for the long haul. Some call it “investing through a downturn”. But most have been investing in overseas growth because they don’t think the US is doing the right things to fix its problems.
Having no material excesses that need to be corrected almost guarantees that any slowdown will be shallow.
My firm believes if the average CEO could provide advice to Mr. Bernanke or our political leaders, it would be:
What's my point?