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April 2009 

 

Future Agenda for the Investment Industry: The Head and Heart of Leadership

 

Firm Success: Leading Your Investment Firm

Jim Ware, CFA

A white paper summarizing this study will be available from Focus Consulting Group in the summer of 2009.

We recently engaged in a dialogue with over 20 investment leaders on the topic of "leadership for the next century" in the context of the incredible upheaval in the world’s economy and financial markets.

 

Investment leaders, at least the ones we interviewed, are aware that the skills and approaches of the past century will not suffice for the challenges of the next. So they accepted the challenge of addressing and wrestling with the question: What next? What must we as leaders do to succeed in the years to come?


Trust was the clear winner, with nearly all of our leaders identifying it as the top issue.

 

The Centrality of Trust

Trust plays a crucial role in creating passionate firms that strive for noble ends. Obviously, if leadership acts a way that erodes trust, staff members will not fully engage and probably won't believe any rhetoric about noble goals. Passion and pride are hallmarks of great investment firms, and they don't live side by side with distrust. In fact, if leaders speak of lofty goals and then don't walk the walk, the result will be cynicism and low levels of passion and engagement.

 

Perhaps the aftermath of the Bernie Madoff scam has intensified the focus on trust. Perhaps the level of fear in the markets has driven up the interest in trust. As Richard Barrett, an expert on values-driven companies, writes, "Trust is the antidote to the fear that your staff or clients may be feeling."1

 

In any event, a sampling of statements from our group of investment leaders on the importance of trust makes clear that market-savvy people understand markets don’t work without a sufficient level of trust:

 

"If people are truly going to be at their best, they need to be trusted and allowed to move the ball forward."

Jim Laird, COO, Diamond Hill

 

"Fear is not a productive place to work, doesn't get results. Trust leads to honesty, so collaboration improves. Trust is what we sell to clients, so we must have it internally."

Bill Quinn, CEO, American Beacon 

"We need to teach leaders how to build trust. Creativity depends on high levels of trust."

Roger Clarke, Chairman, Analytic Investors

 

"Trust is the real foundation of the business. How do you achieve trust with the clients? We must work all day to get trust back."

Andreas Sauer, CEO, Panagoric

"Trust is necessary for progressive, creative thinking."

Paul Schaeffer, President, ReFlow

 

"I trust the people to whom I delegate authority. They've earned it by delivering on their promises. Fear paralyzes."

Britt Harris, CIO, Texas Teachers

"If we are frozen in the headlights (fearful), then we will miss opportunities. People have to be willing to make mistakes."

James Walsh, CIO, Cornell

   

  

Passion and Excellent Thinking

The conversations with these investment leaders concerning trust seemed to split into two distinct categories, what I refer to as "head" and "heart" issues.


Matters of the Head

Top leaders will focus on creating environments that bring out the best thinking of their teams. This will involve creating true meritocracies where the best ideas rise to the top, regardless of origin. Several sub-themes arose to suggest ways to do this:

  • Depoliticize
  • Flatten the organization
  • Encourage cognitive diversity, i.e. different thinking styles
  • Share the direction and decision making

 

The investment profession is the quintessential knowledge business. The entire value of an active manager is based on the ability to collect information, process it, and make excellent decisions. The quality of thinking determines a firm's ability to add value. Investment leaders identified trust as a key ingredient to fostering the best thinking from a team of investment professionals.

 

Four areas in particular were cited as dependent on increasing trust in the firm and reducing fear: 

  • Curiosity
  • Candor
  • Creativity
  • Risk taking

 

The overriding idea from the leaders is that each of these suffers to the degree that fear increases and trust declines.

 

Matters of the Heart

Leaders will also focus on matters of the heart: creating and encouraging passion on their teams, and creating compelling visions that motivate the team, even during difficult times.

 

The second big theme to emerge from our conversations was passion. Despite the fact that 80 percent of the investment professionals orient around "thinking" versus "feeling" in the Myers-Briggs personality assessment,2 it would be a huge mistake to say that investment people are not passionate.

 

The people in this profession love it. Warren Buffett has described this passion well with his now-famous one-sentence interview question: "Are you a fanatic?" (To get a job with Warren, you must answer enthusiastically, "Yes!") Great investment professionals are fanatics: They love the markets, the challenges, the puzzles, and the buried treasure for winners. In this context, two themes emerged that are more “heart” driven than “head” driven: 

  • Creating communities of passion
  • Serving a higher purpose

 

The first of the two — creating a team that is fully engaged and passionate about its work — was a clear choice of the leaders interviewed. The second, serving a higher purpose, was more important for some than for others. Steve Potter, at NTGI, was clearly a proponent of supporting humanitarian goals:

 

"Volunteerism is big. Leadership must advocate it and be involved. We encourage employees to participate on volunteer boards and with industry groups, undertake community service, and contribute money to good causes."

 

Rob Vanderhooft (CEO, Greystone) added,

 

"Community work is important. People won’t fit here at Greystone if they don’t value that."

 

Other investment leaders were equally clear that these humanitarian higher purposes were laudable but not part of their vision of success. When we drilled down into this question of "higher purpose," we found a common ground amongst all the leaders:

 

"The investment work itself must be important and meaningful beyond just the monetary reward."

 

Once it became clear that a "higher purpose" did not necessarily mean a humanitarian issue, all the leaders agreed that investment teams should be motivated by more than money. Jeff Diermeier, CFA made this point clearly: "People don't work just for the money; in fact, money can create disloyalty. The best firms have a bigger 'why?' in mind than just paying the bills." Similarly, Maury Tognarelli (CEO, Heitman), a strong proponent of the theme "the work of management serves a higher purpose," said,

 

"Our purpose is not tied only to economics, it's far more important than that. When I started as an analyst at Heitman, I told people that I would do this for free. I would choose to be in this environment to learn for free, motivated by respect and accomplishment. Group dynamics created trust, people were embraced for their talents, and the result was passion."

 

When Maury conveyed this story, I was reminded of a similar Buffett story, in which he went to work for Ben Graham for free, for similar reasons.

 

Honesty: The Best Policy

In short, then, two organizing principles emerged from our discussions with investment leaders, both of them driven by trust. Most leaders understand that trust is the fuel that drives high-performing teams. In our work with investment teams, we measured their levels of trust and then compared the results with fund performance. Not surprisingly, high levels of trust correlate with higher investment returns.

 

At the most basic level, honesty is indeed the best policy for prosperity.

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1 Richard Barrett, October 2008.

2 We have collected data from over 500 investment professionals using the MBTI instrument.