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Being a CFO. Some of my thoughts and observations after years of being a CFO

Developing staff or fighting sharks with spoons

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On March 29, 2016

In CFO

I had a request to do a blog entry on developing staff. I have done a few turnarounds in my career and one of the key success factors in that is getting more out of your existing staff. I have always thought that one of the most important roles you have as a CFO is making your staff better.

I have joked in the past that the best way to develop staff is to arm them with spoons and throw them into shark infested waters. Whoever survives is developed and those that kill a shark are your next leaders. That is tongue in cheek, but there is a kernel of truth in that. You cannot make your staff members better without them gaining experience in tough tasks and they cannot get that experience if you take all the tough tasks onto yourself.

The first principle for me in developing staff is that development is not training. Training is to add or polish skills. You need a skilled workforce but you should be hiring professionals with an advanced skill set already. If you inherit a team that lacks basic finance skills, you are so far behind that development is not going to work. You probably need to fire and hire in successive waves until the base skills are competitive.

I am not saying that your should not make training available for your staff. Your accountants need continuing education and to learn new accounting pronouncements that come out. Your analysts can also use additional systems training. But that is just making sure that they can get the floor level of their job done. Your accounting staff should not be making accounting mistakes and they should be up to date in their knowledge. If you actually have to make that training available vs. allowing them to get the training, then you already have an issue as good professionals keep themselves competitive and ready without being spoon-fed. Your role as CFO should be to support training and make sure time is allocated and approved for it, but you also need to police hiring and performance reviews to make sure you have the right skills in your group to begin with.

The second principle is one I learned from taking over finance departments that I had been told were bad and where I would need to fire and rehire a lot of people. You can do some selective changing, but when you are in a turn around and there is a crisis mode in place, you are not going to be able to replace staff and give the new staff the luxury of coming up to speed in any great numbers. It is also hard to attract people to weak companies that are struggling. What I discovered the first time I needed to work with an existing staff is that no one in that group woke up every morning and went into work with the intention of doing a bad job and adding no value. No one wants to mess up and be thought poorly of by their peers. When I invested in developing them, suddenly the “bad” staff I had inherited started performing and I had the advantage of all their experience as well.

The third and perhaps most important principle is that if you do not invest the time and effort into this, then it will fail. You need to lead by example. If you don’t, then no one will take it seriously and the development plan will die via inertia and lack of real commitment from the staff. Make sure you keep the time available for this. It is a manual and relationship based exercise, so you need time. I probably spend at least 5 hours a week, every week on this. Not in meetings dedicated to “development” or performance assessments or training but in time spent with your staff helping them over hurdles, encouraging them to take on more and new tasks and in praising their successes. Development is not via a stick, it is via a carrot and the support of you and the team. Give constructive feedback. As I discussed in my blog on corporate culture, always remember that they are people, and do not allow yourself or them to be put into a box and betray yourself or allow them to betray themselves when under pressure.

This is a very hard and necessary part of your staff’s development. They need you working to remove barriers and get them resources when they need it. You need to do this while allowing them to actually do the work. You have to invest upfront. For example, if you want one of your Vice Presidents to lead a large financing, you need him on your team on a previous financing learning the ropes and seeing what works and does not work. That is a learning stage of development, but it is not doing. No one learns enough from just reading a book or a blog. It can help give you a structure and keep you from making a few simple mistakes, but you only get the knowledge and confidence from doing a task. When your staff sees you making a genuine investment of your time and effort they will know that it is important to you.

Finally, put your staff in harms way working on projects that will make a difference and don’t kill them if they fail and give them all the credit when they succeed. They should be working on projects that make a difference in the execution of your company’s strategy. If they don’t succeed, there should be large enough stakes on the line that there are consequences for failure. This means that when they do succeed, there will be even more to celebrate. Make sure the project they are working on moves them out of their comfort zone. Make them sweat, even if it is just mental sweat. I will say it again, when they win, make sure they get the credit for it. Nothing steals the thunder from someone like their boss taking credit for their work.

Giving your staff credit for their work is more than just a pat on the back and a short speech in a staff meeting (or Board meeting). You should be promoting from within wherever possible and bending over backwards to give your staff a shot at internal promotions. My rule of thumb has always been that after 2 years in a position any of my staff can move, even if outside of Finance. You cannot freeze them in position and it is your responsibility as a senior leader to replace them if they do move. If your employees believe that they are liked and valued and get first shot at internal promotions, they will have higher morale and be happier even if they do not want the opportunity.

Don’t be afraid to rotate staff from an area of their speciality to an area they are not familiar with. You want your staff to be cross functional where possible, so give them that opportunity. There is no reason why someone with a strong accounting background cannot become an analyst or a Treasury manager. They can learn on the job and the more areas of finance they know, the more useful to you they are. Help them jump outside of Finance if they want to. You’ll only benefit over time by seeding other functions with people that understand the numbers and cash flow and investment returns spread across your company. Developing staff means not being selfish. Sometimes you don’t have what someone needs in your company and they’ll leave. Trust me, the good one that appreciate and realize that your focus on their development is important will be back at some point.

This is another soft area and needs stronger people skills than pure number skills. If you don’t have good skills there, then you can develop yourself. I am an introvert by nature, so the face to face time this requires is harder on me than others. I think there is huge payback from investing time in your staff and it is worth the additional discomfort for me. You cannot win battles and wars with poor troops, so developing what you have is the most cost efficient way to multiple victories.

I sometime get asked how do I get my staff to work such long hours and really push themselves. The only answer I can really give is that they know they matter to me. I show them that by giving them opportunity. The opportunity is always beyond their job description and it means they need to commit. All I do is help to ensure that when they succeed they get the fruits of their victory. Because I honestly believe that they will succeed, they believe too. The end result is that I have a stronger team and my staff is better and we win more often. Winning is the heart of strategy and wants makes a good company great. Develop your staff. Reward them. Become great.

The Fifth Discipline: The Art & Practice of The Learning Organization

Non-Deal Roadshows – what happens on them?

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On March 22, 2016

In CFO, Investor Relations, Working With Investment Banks

Last week I covered investor conferences, this week I will discuss non-deal roadshows (NDR). In a typical company, NDR are the second highest source of in person meetings with investors (conferences tend to have the most meetings).

In many ways, NDR are very similar to investor conferences, they are another form of corporate access run by the banks that being management to meet with clients of the banks. Their difference is that the meetings are in the offices of the investors instead of at the conference site, but otherwise the meetings are similar in format to those at investor conferences. They are either questions and answers directed by the investor, a review of the standard investor relations presentation by the company or usually a combination of both. Regulation FD (fair disclosure) is still in full effect, so no material, non-public information can be discussed. You need to be extra cautious on any answers related to disclosure as you cannot confirm guidance as the SEC considers that as giving new guidance.

The main reason for doing a NDR is that it greatly increases the chances of you talking directly to portfolio managers or other key decision makers. These are the people that make the buy or sell call on your stock and they normally do not go to conferences on a regular basis. Normally they send their analysts to conferences. Another important advantage is that the larger firms with multiple funds often send multiple analysts or portfolio managers to your meetings where in a conference they normally only get one slot. So you directly access more decision makers at once. For the large companies, who and how many attend can be a good indication of how deep and broad the general interest at the firm is.

Logistics

Banks normally ask you to do a NDR for them. If there is significant demand, you may even get requests from banks that do not cover you. I recommend sticking to the banks that cover you as a courtesy and payback for the effort they make, but there might be a specific reason to use another bank. If no one has asked you and you want to do one, reach out to your covering analysts yourself or the investment banker that covers you.

Meetings are normally arranged by the sales force with the assistance of the analyst. If you remember from my blog on working with investment bankers, the sales force works for “the desk”, so your banker can help give a push inside the bank. So even if the analyst asked you to go out for them, there is no harm in mentioning it to your covering banker.

You can arrange your own meetings or suggest investors that you are targeting or that have requested a face-to-face meeting. The bank will want to limit the meetings to their clients and different banks have different tiers they service (large banks do not have many small clients while smaller banks will have more small clients). Even if you are suggesting a meeting, it is good practice to tell the investor to contact the bank and ask as well. The sales force may appreciate a chance to pitch to a client and start a relationship.

You are expected to make your own travel arrangements and pay your own hotel and meals expenses. The bank almost always provides local transportation at the city where the meetings are happening. Meetings are typically booked in 1.5 slots with 1 hour of meeting time and 30 minutes of travel time. In some cities the travel time is reduced and sometimes when there is big demand for meetings the meeting time gets crunched down to 45 minutes. Expect a long and tiring day, so try and get rest before the meetings. If demand is really large, expect a group lunch or dinner. Otherwise, make sure you eat.

Typical cities

This will vary, and I am writing as a USA-listed company CFO. I have lived in Asia, so I have more experience there, but not as much in Europe and none in the Middle East.

New York and Boston

These two have the most funds and have the most investment dollars available to invest in US companies. When you are offered an NDR, the analyst, who is at least partially paid based on trading volume run through his firm, will wants to do meetings in these two cities. I don’t mean this to be a travelogue, and I would assume that most people are familiar with the cities. NYC is bigger and even with the high density of funds, there can be lots of travel time from place to place. Very often you will get to a meeting faster if you walk. Traffic can a very, very bad. When the UN is opening a session or the President is visiting (or another major leader like the Pope), bad traffic can turn into a nightmare. Boston is a little easier to navigate as the central core where most of the funds are is smaller. There are several very large funds in Boston where you could draw a large crowd if they are interested.

There are a few pockets of investors outside in the greater NYC area, but normally the time it takes to get to New Jersey, Connecticut or Philadelphia is not worth it. NYC tends to have more hedge funds. Boston a bigger concentration of more traditional mutual funds. Both cities draw lots of management teams and the funds are not as excited about that as other cities are.

If you are traveling between the two cities, I suggest the Amtrak Express train. Much less affected by weather and the stations are right in the middle of where your meetings are. One major fund company is a cross the street from South Station in Boston.

Give yourself extra time, especially in NYC, to show ID to enter every building. Security can be tight. Make sure you bring picture ID.

London and Europe

This is probably the location with the largest concentration of investors. A few other cities like Zurich and Frankfurt have a good amount as well, but London is the biggest. My experience here is much more limited, but I have been to both conferences and NDR in London. Not too different than NYC where the concentration is good but traffic and the sheer size of the city means that getting from meeting to meeting can add delays. I was stuck behind the Queen in a horse drawn carriage once in London as some ceremony in the Parliament had her traveling and the traffic loop in from of Buckingham Palace is a main route to and from the City. You can end up with a few meetings pretty far apart and the Tube is the best bet to avoid traffic in that case.

Zurich, Geneva and Edinburgh are other cities that may be worth a visit. I have not been to Frankfurt or Paris but both have fund managers there as well. If you are already in Europe anyways, it may be worth an extra day or two to visit cities other than London.

Hong Kong

Like NYC, this is the city with the highest concentration of investors and probably the one where you are most likely to walk from meeting to meeting. The walking is through a maze of shopping malls, so a local guide is good. A lot of American and European funds have their Asian office here, so if there is an Asian connection to your company it is a good place to visit. Many hedge funds here that are either local money or branches of other Western hedge funds.

Singapore

I lived here for a few years and was CFO of a company listed in the USA but HQed here, so I did quite a few NDR there. You probably will not do too much walking here because of heat and humidity but the central core with most of the funds is not that large. For the most part, the funds here also have an Asian theme so not as much demand for pure American companies but if you have flown to Hong Kong it is not that far to Singapore. The sovereign wealth funds here can be good, long term shareholders if they are interested.

Smaller USA cities

One you get out of NYC and Boston, it does get harder to fill a whole day with meetings in most other cities. However, there are probably 10 other cities that have enough funds that a visit is worthwhile. One big benefit is that management teams do not travel to these cities anywhere near as often and you are much more likely to meet with a portfolio manager or other investment decision maker in a smaller city than a larger one. Smaller cities tend to have smaller accounts and make a good match for any smaller banks that cover you.

The meetings themselves

As always, I suggest that you do not go to the meetings alone. Running around NYC or other cities can be a logistical nightmare, and having a friendly person in the room with you can help protect you should strange trading happen while you are doing the NDR and people wonder what you said.

Your covering analyst will often go to meetings with you. They will write a report after the NDR, usually after giving their clients a couple of days to act themselves. This is a good chance to make sure they know you story better and can articulate the points you were making in the meetings. You also will get to spend more time and develop a better and more personal relationship with your analyst. I have never met one that was not overworked and understaffed, and spending 2-3 days with you on an NDR is a pretty big commitment. Understand that and try and return the favor, even if it is a few kind words about the analysts to the accounts they cover.

The other person that may attend your meetings in the sales person that covers the account. It might be tempting to think they are not as important as the covering analyst, but they are the ones with the day to day relationship with the people that may be buying and selling your stock. Many are very experienced and meet management teams all the time. Saying a thank you for their help and asking them what their clients are worried about might give you a good tip or two. I do know a good sales team makes a difference for your covering analyst and it doesn’t take much effort to show appreciation for the meetings you set up. If you ask in advance, the sales force will print your standard presentation out and make sure that their accounts have a copy. When they can’t attend the meeting, they might give you a copy to leave with their client.

Some accounts, especially in Boston, do not allow banks to attend unless on a deal roadshow.

The meetings with the investors themselves are quite different than at conferences, if only because they are in their office. You probably are meeting with some of the most senior people at the firms you are visiting, so listen to what questions they ask and ask a few questions back to them as well. I have always found the very big funds in Boston are the most courteous and respectful but they are also super professional. The notes from your meeting will go into a database and they keep track of what you say and what happens. The meetings are very much part of judging you as well as the company and the person that could be pulling the trigger on very big investments in you is asking you questions.

Like any marketing speech, you need three to five key points you want to leave at each meeting. Make sure you know what they are and deliver that message each time. You really only have time to do a few NDR a year at most, so make it count. Unlike investor conferences and talking to analysts, talking to portfolio managers at their offices can lead to quicker decisions.

Beating the Street

One Up On Wall Street: How To Use What You Already Know To Make Money In The Market

One Up On Wall Street: How To Use What You Already Know To Make Money In The Market

Investor Conferences

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On March 15, 2016

In CFO, Investor Relations

A pretty standard press release from most public companies is an announcement that their executives will be attending a conference sponsored by a bank where they will be meeting investors. I’ll try and use this blog entry to describe what goes on at a typical conference and how to get your company invited to one. Unfortunately, these conferences tend to be invite only for the investors and they invite professional investors that manage money for mutual or hedge funds for the most part. There are conferences to meet angel investors or other forms of venture capital, but that is not what I’ll discuss here. Some conferences invite some private companies as well, but usually the presenting companies are all public companies.

You normally will want to go to a conference because it is a chance to directly talk to existing or potential investors. Almost every single potential investor will have evaluating management as one of their investment criteria and meeting in person is important. A non-deal roadshow is typically better because you meet more portfolio managers or other top decision makers, but conferences are an efficient way to meet many different investors all on the same day.

The first thing you need to do is get your company invited to the conference. These are run by the research division of the bank and legally they are separate from the investment bank services. So the banker you may have a relationship with can ask that you get invited but there is no guarantee (it almost always will be honored). If you are covered by the research group, you will almost automatically get invited to their relevant conferences. One service they offer to their customers is access to management and the conferences they run are very important to their marketing.

As coverage on your company grows, the number of invites to conferences also will grow. You will get invitations by banks that do not cover you. At a certain point, you will start to have to make choices about which conferences you will attend because you will get invited to more than makes sense, but that is a good problem to have. I tend to focus on and choose conferences held by the banks that cover my company to try and repay the resources they are spending on us, but you may also be building a relationship with a bank in the hope of getting coverage so that is just a rule of thumb.

Once you are invited, you need meetings. Normally, these are arranged by the sales force, sometimes with your analyst pushing. The investors that are attending have the list of attending companies and they normally request the companies they are most interested in. I generally try and be as efficient as possible and only sign up for one day if there are multiple days available. If demand is high, then you end up with some meetings of smaller investors that are 2 on 1 or 3 on 1. If demand is very high, the bank will ask for another day.

Conferences are a good opportunity for you to bring other staff along to learn something about investor relations. If your Controller has a goal to be more involved in IR, a conference can be good training. Since you are not doing a deal and because the meetings are a little more controlled and private, a conference is a good place to do some training and allow more staff to answer some questions. For local conferences, I have brought along the staff analyst who helped prepare the presentation. It is a good opportunity for them to see what questions you are asked and helps for the next version of your IR presentation.

I always try and have at least one other friendly person in the room with me. I do this for two reasons. The first is so that you have someone to help by giving you a break and answering a few questions or who can handle logistics like the presentation slot prep work. Although I have not actually had this happen, it is defensive as well. In case there is any doubt what was said in the meetings, you have another witness with you.

Conferences typically have two different ways of talking to investors. The first in private meetings, usually in one of the hotel rooms. They remove the bed and replace it with a small table and chairs. Most of your day will be sitting in that hotel room at the table talking. In a conference with normal demand, you will be answering questions from 8 AM to about 6 PM with the investors changing every 30 to 45 minutes. When I first started, it used to be common for management and investors to be constantly changing rooms and often dashing from floor to floor, but now the organizers tend to keep the companies in one room and the investors rotate.

I cannot emphasize it enough that you need to be prepared to be talking pretty much non-stop the entire day. Some meetings with just be you reviewing your standard presentation. Usually that is for investors that do not know your company or your sector very well. It can be a little frustrating to realize that you have potential investors in front of you that know little to nothing about you. You would think that they would do so,e homework before getting in front of a senior executive or that the covering analyst would have prepared them. However, many analysts use conferences to develop new ideas on companies or areas that they may become more interested in. Quite often they do not know your covering analyst as they have not really started to do any work yet. They have not done a lot of research on you yet either because they have not decided if you are worth it. So this initial meeting is your chance to make a good first impression. Of course, some people just randomly take a meeting to fill up their day and really should have done more work in advance, but you do want to talk to potential new investors so a few meetings like that can be good.

The other style of private meeting is just questions and answer. You never quite know what questions you’ll be asked and exactly what the topic will be. Time passes a lot quicker because you’re answering questions instead of doing your prepared pitch (which can get dry and boring if you do it often enough). You need to be careful when you answer questions because reg FD is in full effect – you cannot reveal any material, non-public information. You need to be particularly careful about guidance. You cannot reiterate guidance or change guidance. The SEC views both as new material, non-public information. Any past guidance needs to be treated as a historical fact, and you cannot express a current opinion on it.

The whole private meetings content is somewhat ironic. You are not supposed to reveal anything new that is material. You can give out some explanatory color around your public statements, but you need to be extra careful about what you say. That means in your scheduled meetings and in social events at the conference. Essentially the meetings should be about assessing management and filling in tiny holes in the public disclosure.

As an aside, it is not uncommon that someone does not show up for one of your meetings. Things happen and plans sometimes get changed. Let the event organizers know and ignore it. If there are a lot of cancellations maybe the demand was not too high and the sales staff tried to stuff a few meetings in but their clients changed their minds. Nothing you can do about it at the conference, so don’t let that effect your other meetings.

The other event that usually happens is some form of presentation. This is either you doing you pre made presentation or some form of fireside chat or panel in which the covering analyst asks you questions. If the conference offers the opportunity to webcast these, then take it. Each person at your individual meetings probably invests an order of magnitude more than any retail investor, but your retail investors are usually the largest investor, in aggregate. They are usually starved of any direct contact with management and the earnings call and anything you webcast from conferences is the only chance they will have to hear you speak.

No matter what, whether in one-on-one meetings or in the presentation, you need to have your key talking points decided before the conference even begins. Like a politician, not matter what the questions are, make sure that you deliver your message. This is an absolutely key feature of the conference. It is a chance to hammer home a specific message over and over.

When you are done, you might be thinking if what you just did will impact the stock price. There might actually be a big move around a conference but that is normally caused by groupthink of all the investors there. They tend to know each other and talk. If there is a good and positive vibe that comes from the conference they get excited. If they pick up a lot of negative body language from a lot of management teams they may get down on your sector or the market as a whole. Otherwise, as a general rule, you are talking to an analyst at the investor fund and they need to get back to the office and do a report to their boss, the portfolio manager. If they like you and convince their boss to invest it might be a week or two before any decision is made. If there is an immediate move in your stock at a conference you need to consider if you have out material non-public information.  If you did, involve your lawyer right away and there is a good chance that you need to put out a press release.

The final advice I would give is that other covering analysts often ask you to meet with their clients while you are in town, or even do an NDR and you should say no. As a general rule, it is considered to be impolite to book client facing activities around the conference. So meeting with the analyst themselves is ok, but if you do client meetings you will distract attention from the conference you are at. So unless there is a very compelling reason, politely decline client meetings except at the conference.

(picture taken at Dana Point, CA at the one conference a year with that type of scenery)

Working with investment bankers

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On March 8, 2016

In CFO, Finance, Working With Investment Banks

If you have followed a normal career progression through finance to make it to CFO, you probably worked with investment bankers at least once along the way. It is possible you did not, maybe you are at a start-up that is just now successful enough to go public or do some form of pre-public fund raising and you are dealing with bankers for the first time. It is a fallacy to believe that working for a big company means you would have worked with investment bankers as you climbed the ladder as normally only the Treasury department and the CFO do that, division finance staff normally are not involved. Even if you are involved, it is as a data source, not negotiating the deal. Mid-sized companies tend not to have formal Treasury departments and are a lot more egalitarian, so a much better chance of gaining some experience.

This blog is about working with the bankers themselves. Each investment bank is different and has resources far beyond the bankers that directly cover you, but you will probably never see the rest of the bank, just the small staff that covers you and the few people within their bank that they introduce you too. I try not to be too caught up in the name of the bank they work for and focus more on what my coverage team can deliver. Obviously, there are different tiers of banks, but which ones want to serve you is already at least partially driven by your company size. There just is not enough business for larger investment banks to devote resources to smaller companies.

Investment banks and their bankers get a lot of negative press. The recent, Oscar nominated film “The Big Short” is a good example. They usually are a topic in just about every major political campaign, and populist anger is stirred up against them. The current hit musical “Hamilton” has some of the Founding Fathers attacking them as doing nothing but moving money around. At the end of this blog, I will link some books that are quite critical on bankers and their culture. I can tell you that I have worked with quite a few bankers over my career and I have cannot remember working with any that are like the tell all books I have read, but the banking culture certainly is a culture into and of themselves. I will also link a few more “studious” books as well, if only for balance.

Let’s start with describing the three types of bankers you are likely to work with. The first, and most important, in your coverage banker. The leader of that team is almost always a “managing director” and typically has a small team that works for them. The MD is usually an industry specialist but otherwise a generalist. The next type of banker that you are likely to meet is a product specialist. There are many different products that a bank can sell to the market or to you and the product specialist is the one that supports the MD in pitching the products. Examples are syndicated loans, hedging instruments, convertible bonds, asset backed securities. The bank probably has someone who specializes in that product. The final banker that you are likely to meet is someone from one of the “desks”. This may or may not be one of the specialists that came to sell a product to you, but the important ones you want to meet are the heads of the Equity Capital Markets desk or the Debt Capital Markets desk.

The “desks” are always a little hard to understand, but the easiest way to think of them is that they run the sales force that will be selling your instrument to investors and they are the ones that decide on how it will get allocated between the bank’s customers (not you in this case).

What is very important here is that your coverage banker must be experienced and have clout internally. If you do a deal run by that bank, you need to best and most experienced team executing the deal and the relationship that the coverage banker has with the desk is key. A good relationship can result in above average resources devoted to your deal. A bad relationship or lack of clout in their bank and you might get the the C team and so-so execution.

One question that I get from time to time is how do you even get covered by a bank or bankers so you can get access to them and their resources. I find that question a little strange because bankers survive on fee income. So if there is a way for them to earn a reasonable fee, you should be able to get the attention of a banker. The main way to meet a banker up front is through your lawyers, accountants or through your investors if you are VC funded. If you have a deal for them or a good possibility of a deal in the near future, you will get some attention at least. If you actually have a transaction like an IPO, you can do a “bake-off”, and get a few banks to compete for your business.

Choosing a banker

Let’s say you have had your bake-off, or you have met a few bankers and now you are trying to decide which one to go with. I’ll try and list out some of the things that I consider the most.

The first is that is this is not a smaller transaction, then you probably will have several different banks working on the deal. Whoever you choose as the lead banker (the bank on the left of the list of bankers on the front page of the offering document) will end up controlling the deal, so I generally try and focus the most on picking that one. As an aside, banks and their bankers are very competitive and expect to have several ridiculous conversations about position and typeface and variations of the title they are called. You will need to make it very clear that the banks are to work together well. Most are professional, but they also want to position themselves for the next deal and they are perfectly happy to throw their competition under a bus if given a chance.

I tend to look for experience, both in the bank and from the banker, trustworthiness, and strategic sense. All banks will have two different experience elements in their initial pitch books – league tables and deal tombstones. They will cut industry data in a way that shows that they are a leader, usually the leader in whatever deal they are trying to get onto (or your industry if an initial meeting). They will list out all the deals they were on, sometimes even if they had only very minor roles if they need to, but usually any deals they were some form of bookrunners.

I am a little cynical about league tables because the data chosen is cherry-picked to make the pitching bank look good, but they do have some reference value because if you have 3-4 banks come see you, you can compare the tables and see if there is a pattern as to who is number 2 or three in all of them. That is a good indication of who the leaders really are. Having a big market share and being a leader for a long time can be a good indication of how strong the bank is. And if the banker cannot make his bank look good, then you need to ask yourself how good a job they will do for you with investors.

The tombstones are much less useful. I normally look at the dates to make sure enough are recent, and I ask if the banker and his team personally worked on the deals presented. With typical turnover, anything more than several years old was likely done by a different team and different leaders at the bank.

The next criteria is trustworthiness. This may be surprising, but even with the books listed at the end and my cynicism about the process, I like my current bankers very much and I have had almost uniformly positive experiences with them. What I need to know is that are they there to help me as their priority or themselves or their bank and if they can keep details confidential. Both are easy to tell. Are they listening and advising or are they selling? Are they sharing details of competition that would make you uncomfortable if they shared the same about you?

One of the best ways to tell if you are a priority is coverage (visits, phone calls, emails) even when there is not a deal on the table. The next best indication is if they lend you resources, typically an associate or two to help in a project you are working on. Banks tend to have very good in house models for M&A, for example, or they may have very good knowledge and advice on what to use for standard valuation metrics.

The final part, their strategic ability, is the toughest to determine from just one meeting. Normally this comes out over time. I already have defined that the purpose of strategy is to win. If you find a banker that can help you win more often and by bigger margins, then you have found someone worth their fees. The first thing you need as a start is that they have to look at your business and start giving suggestions. Could be a suggestion on recapitalizing your company. Could be intel on what the competition is up to. Maybe how to reposition yourself with your investor base. The idea is some value added advice that. Comes from them and. shows their understanding of your business and how it is positioned in the marketplace. I have found that the average banker I work with to be quite smart, And the more experienced and business savvy ones can give you very good advice.

Fees

Fees are always negotiable to a certain point. If there is push back on banking fees, you can often tackle it another way via professional fees like the lawyers and accountants. Your lawyers and accountants can tell you what is usual and standard. Do not be afraid to push back here. There is a risk that if you push the fee too low the desk and sales people may not be too excited to sell your deal, but normally only the hugest deals get the very low fees. You can move part of the fee into a success or bonus fee payable at your discretion for over performance.

This isn’t an area to ignore as they can add up, but better performance can give you much better terms than expected and will save a lot more than a small fee reduction up front. Of course, the fee reduction is guaranteed and the extra performance is not, but you do want a motivated banking team.

Indicative Ranges

When a banker is pitching a deal to you, they can be a little too aggressive on the terms they say they can close a deal at. I have seen interest rates quoted well below the last few deals for similar companies quoted to me. Some think that once they have won your business and you are committed and on the road with them, they can always talk you up and blame market conditions. You are somewhat trapped and exposed once you start a deal process. This is where pushing the fee down and making some contingent on performance helps. If they start waffling on their indicative terms once you put some of their fees at risk, you know they are not as sure as they claim. You can always ask them what rate they would backstop the deal at or if they are willing to make it a bought deal and they take the risk or reward of the marketing. This is an area where getting several different banks pitching gives you a much better read on the market.

You need to trust your banker and believe that he is honest if you are going to be happy working with them. Their honesty about indicative ranges is a good touch point. No one can really guarantee what the market will be when the deal is launched, but over promising is dangerous to you. Someone that is not scared but who properly prepares you before a deal launches is very important. Fund raising is very much your responsibility as CFO and delivering a good deal reflects well on you. You need a banker that is a reliable team member.

A few final items

I have been out at events where several CFO’s are being taken to dinner. I find it quite questionable that some take the opportunity to order the most expensive bottle of wine. As much as you will see stories from the books I linked below about the excesses of Wall Street, the real crazy days are way behind us. You don’t want your banker to take advantage of you, so give him the same respect and courtesy. This may be someone you build up a relationship that spans years and maybe they are the one that give you the recommendation that gives you a board seat later in your career.

If you borrow staff and get additional support over time, remember that and try and steer business their way. If they do well, recommend them to other business contacts. They can be very helpful to you personally and can make a big difference in your career prospects, and it is much easier to work with people you respect. Don’t forget their lower level staff that work on your deals. Far too often the celebration at the end forgets your staff and the banking associates. Try to make sure that they get included. If not appropriate for the formal closing dinner, have the junior bankers take your junior staff out.

Finally, don’t get too caught up in the anti-banking media hype. There are plenty of good bankers out there that really care a out their clients. Be careful, remember that they are probably smarter than you with much more resources than you can bring to bear, but buil the right mutually beneficial relationship.

Books and Movies (I have read or seen these myself)

The Culture of Bankers

Liar’s Poker

Liar’s Poker (Norton Paperback)

Liar’s Poker (25th Anniversary Edition): Rising Through the Wreckage on Wall Street (25th Anniversary Edition) Kindle

The Big Short

The Big Short: Inside the Doomsday Machine

Bankers Behaving Badly

Straight to Hell

Straight to Hell: True Tales of Deviance, Debauchery, and Billion-Dollar Deals

Wolf of Wall Street

The Wolf of Wall Street

The Wolf of Wall Street (Blu-ray + DVD + Digital HD)

The Buy Side

The Buy Side: A Wall Street Trader’s Tale of Spectacular Excess

The Industry

Too Big to Fail

Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System–and Themselves

The Bankers’ New Clothes

The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It

Corporate Culture – Hearts at War and Peace

By

On March 1, 2016

In CFO

If strategy, the subject of a previous blog, is what to do, culture is the wellspring of actually doing it. The energy and drive that the company needs to execute comes from the people there and the culture of the company greatly impacts what they do and how successful they will be.

Culture is just about as soft as you can get when you look at leadership. It is feelings and emotions and learned behaviors. Certainly some of it is mirroring the top leadership and how they act, but sometimes it is different. As soft as it is, it is absolutely crucial to making sure your company will succeed. Even with the best technology, the wrong culture can mean you don’t get the full benefit of it or you completely beat even your high expectations.

Here is a reasonable,definition of what corporate culture is from Investopedia:

Corporate culture refers to the beliefs and behaviors that determine how a company’s employees and management interact and handle outside business transactions. Often, corporate culture is implied, not expressly defined, and develops organically over time from the cumulative traits of the people the company hires. A company’s culture will be reflected in its dress code, business hours, office setup, employee benefits, turnover, hiring decisions, treatment of clients, client satisfaction and every other aspect of operations.

http://www.investopedia.com/terms/c/corporate-culture.asp

Cultures in companies evolve and change over time. The small team that was there at start-up probably had one culture t it might not be the right one 10 years later. A culture that works in one country may not work well in others. For example, some countries require some form of national service and at least all the men and sometimes the women as well have served in the military for a year or two when they were younger. There is a much higher chance that a more hierarchical culture is more natural. If you expand into or out of such a culture from a more free wheeling culture, you might run into clashes and resentment.

Although culture is not strategy, morale and people working together obviously is a key concern of strategists. In his Earth book of his The Book of Five Rings, Musashi says:

“The comparison with carpentry is a metaphor in reference to the notion of houses. We speak of houses of the nobility, houses of warriors, the Four houses [there are also four different schools of tea], ruin of houses, thriving of houses, the style of the house, the tradition of the house, and the name of the house. Since we refer to houses all the time, I have chosen the carpenter as a metaphor.”

In the examination of corporate culture and how it fits with strategy, you need to know what you have and what state it is in, you need to know what style of house you have and what the traditions are.

“The master carpenter should take into account the abilities and limitations of his men. Circulating among them, he can know their spirit and different levels of morale, encourage them when necessary, understand what can and cannot be realized, and thus ask nothing unreasonable. The principle of strategy is like this.”

As a member of the senior leadership team, you need to know what you have and what can and cannot be reliably done. If you do not understand the culture of what you are working with, you well thought out strategic moves can easily fall flat. You also cannot only rely on what you have done before, what others do, or what you prefer.

Finally Musashi makes clear that you should not rely on only one weapon but use whatever one is best. So you should be able to cope with whatever the culture is and get good results. If you need a more traditional culture on a job and you are in a “flat” culture, then build a more traditional team within your company.

I will make a broad and sweeping characterization of cultural types:

Hiring priority:

A) Team first – hire based on fit into existing staff without concentrating as much in experience or raw qualifications.
B) Skills first – hire experts based on skills and not so much focus on how they fit with the current team.

Organization structure:

A) Horizontal – very few or no layers. Most employees have immediate access to top leadership. Common in start-ups. Functional roles may be blurred somewhat.
B) Traditional – more defined hierarchy with clear roles and responsibilities, may not be many layers but they are there. Traditional functions exist.
And one final group

A) Transitional – a culture or company that is going through a large change. Maybe because of an M&A event or maybe a significant setback or success made the old mode less useful. Could even be a death of the founder or a handing from one generation to another, something as simple as a CEO change.

There is no obvious right culture or organization for every circumstance and every country you do business in. You can change the culture, but it is never a quick process. How to change a culture is a very demanding process. I will address that topic in a future blog, but you certainly need to create a transition culture before change can happen.

As much as I admire Musashi for his deep insight into strategy, if you approach the company culture looking for the right tool to apply, you are almost guaranteed to fail. The simple reason is that the culture is made up of people, not tools. From a top level strategic view point, the culture is a tool you are handed. In actual execution, you are dealing with people.

The Arbinger Institute has published two excellent books on effective interpersonal relationships. These are Leadership and Self Deception and The Anatomy of Peace. The foundation for both books is the work of philosopher Martin Buber. Buber identified two views you can have towards other people – I Thou and I It. One is seeing others as people and one is seeing people as objects. He actually does not say one is markedly better than the other, he more explores the way our thinking changes depending on how we view the others.  http://www.iep.utm.edu/buber/

The Arbinger Institute has developed the basic point that our thinking changes based on if we see people as people or objects into an entire program to improve interpersonal relationships. It applies just as much to the team first structure or the expertise first structure and they argue that if you want a truly effective and committed company culture, you need to insist that the culture is built on I Thou, not I It.

The heart of the books is the idea that once you view someone as an object, as I It, you commit an act of self betrayal and enter into a state where conflict is much more likely. Once you put yourself into that box, it is hard to get out and others are highly likely to react the same way. Your heart is at war. Not with others, with yourself. Since no one likes to think of themselves as a bad person, you start justifying your behavior. This pattern tends to lead to more conflict and there is so much investment in the conflict that the whole organization becomes frozen in it.

Is not unusual for a company to get stalled in cultural issues, and making sure you do not put yourself into a box (the books have different names for the different self justification archetypes we inflict on ourselves). As CFO, you do not have time to get mired into conflicts caused by the corporate culture, you need empowered teammates that feel that they have good prospects and a leader that sees them as people and not as a means to an end.

Of course, people need to do their jobs and you can have high expectations, but you need to act like a leader, and not allow yourself to work against your natural and best instincts. The culture usually is at least a partial mirror of the leadership and if you set and live the right example, you can influence the culture and that can result in better results over time.

When I first was exposed to the ideas in the books, I thought that it was saying to be soft and overly caring, but that is not the message at all. If you think of your staff as people, not objects, then you will want them to do well and have good careers. That could mean that they need to improve. There is nothing that says you cannot wage war with s heart at peace, just that the way you execute will be better.

This is something that I struggled a lot with earlier in my career because my people sense was off. I was too busy in my box thinking others were slow or incompetent or lazy or all the other labels that spring to mind when you try and justify your own bad behavior. I was lucky and had a few good mentors, but I also was in a larger company that had been around a long time. Many of my peers started in smaller companies and did not have that same opportunity.

So read your Musashi or whatever strategy wizard inspires you. Just don’t forget that you will quickly have to work with the messy people issues soon enough to get things done. Knowing yourself and acting well, staying out of the self betrayal box, keeping your heart at peace when working in teams, that is a skill that you can practice. As Musashi would say, this needs to be considered deeply.

There are a few other topics that I want to explore, such as how to write an earnings release beyond just the outlook section I already wrote about, but I will return to the question of corporate culture soon and in more detail. Toxic corporate cultures are all to prevalent and there is a lot of work here that needs to be done.

Books on avoiding self betrayal

The Anatomy of Peace

The Anatomy of Peace – kindle version

Leadership and Self Deception – getting out of the box

Leadership and Self Deception – getting out of the box kindle version

What does it mean to be a strategic CFO?

By

On February 23, 2016

In CFO

I think that the term I hear the most often when a recruiter calls me for a CFO opportunity is that their client is looking for a “strategic CFO”. I also see a lot of articles in Finance trade press on the importance of being strategic or on the new CFO that goes beyond the traditional roles of the CFO.
I’ll start by saying that many of the definitions used by those articles of a “traditional CFO” are quite narrow and probably apply to a Controller or Head of Accounting more than that of a typical CFO. I can forgive that, it makes for a more likely to be read article if you are claiming to provide some new insight, but I do find many of the articles to be shallow and they often do not seem to understand what a CFO has always done.

Quite often one of the main things claimed to be needed to be a strategic CFO is to be forward looking. That is probably the claim that puzzles me the most. Even basic accounting and reporting needs to be forward looking because the very basis of accounting for most companies, that they will continue as a going concern, requires forward thinking and analysis. Preparing budgets and forecasts is a core Finance skill. Some are better than others at building relationships outside of finance and get better insight, but that skill is a basic finance skill. Finance usually sits in the middle of the information flow for any company because Finance monitors cash flow, so building relationships is even easier. So I don’t think being forward looking alone makes a CFO strategic.

Other articles encourage CFOs to go beyond the traditional Finance work areas. This is also somewhat puzzling advice for a CFO because is seems to be part of their job to begin with. A CFO is a member of the senior leadership team and often one of the main outside and inside faces of management. Most of us have worked with a variety of functions as we moved up the ladder earlier in our career. A few of us even came over from other functions and hopped over to Finance.

With all of that good experience, trying to run other functions can be disruptive to the team. Everyone already has one clear boss, the CEO. They really do not need another boss. A good CFO will keep the company accountable to the goals everyone is shooting for, especially the financial goals, but be someone that enables success, not trying to run everything and make some sort of success themselves. You’re often in the role of risk control and doing reality checks if goals are being missed, so the CFO is often trying to overcome the bearer of bad news role that is natural to them.

This type of advice varies with the size of the company and what stage it is in, of course. In a smaller, earlier stage company, the CFO (if they are even called that) often have all of the admin functions under them. It is not uncommon for IT to report to the CFO as well. However, as a company grows and becomes more mature, you typically have several clearly defined functional heads. The CFO role usually gets more complicated as well, first with VC fund raising or with investor relations if the company is public. Treasury and fund raising consumes a lot of time as well. So there is limited usefulness in trying to do every function under the sun while CFO. A well structured expansion of roles can work well as part of career progression towards becoming CEO. I don’t think it is the best option when that is not the case and even when it is the intent, the CEO must back it and be clear about why it is happening.

That does not mean that the CFO cannot be deeply involved in areas outside of Finance. You can help the sales team close deals and reduce currency risk via hedging and ensure smooth revenue recognition by getting the contracts right day one. That only happens when you have a good working relationship with that team. You can help Purchasing in negotiating contracts with suppliers. CFOs make excellent bad cops and you might be able to bring financing contacts to the table that can ease the pain of pushing out terms. You are usually the natural ally for IT and the Legal department. Your COO will probably greatly appreciate any help you can give to drive down costs and help in choosing a location for a new plant. CFOs are often made the leaders of large, corporate-wide initiatives, so there is plenty of opportunity to lead teams with other functions under you.

All of these sorts of activities will make you a better CFO. You will make better informed decisions and your team will also make better informed decisions. Communication will increase and improve. You certainly will be much better regarded and that will make difficult tasks easier. So I suggest that you get out of your Finance department comfort zone and expand your horizons. When you complete that big, strategic M&A , you will be able to integrate and get synergies much easier because you work better with all your company’s functions.

I don’t think all of this will make you the “strategic” CFO your boss and the Board is looking for. You’re probably a pretty good CFO but somehow might be missing the “strategic” designation.

I think to have a proper understanding of what is meant by strategic, you need to go to the root of the word and then go from there. From what I can tell from some quick research, the use of the word strategy in a business context only became popular sometime in the 1960’s. Until then, it was meant only in the context of war. The root is a Greek word that means General or battle leadership.

Wikipedia has a good compilation of the meaning of strategy, from a pure definition standpoint to several noted military strategists and writers such as Carl von Clausewitz and B.H. Liddell Hart. The definitions can be boiled down to using all available and appropriate military resources to achieve political goals.

Sun Tzu said in The Art of War “If you know yourself and you know your enemy, you will not lose one fight in a hundred.”

I prefer Miyamoto Musashi’s discussion of strategy in his Book of Five Rings. His Earth Scroll (the first of his 5 scrolls) contains a long discussion on strategy. He even discusses strategy in business (in the 16th century, well before the 1960’s commonly described as the beginning of using strategy in business):

“In the way of business, there are cadences for making a fortune and cadences for losing it. In each way, there exist different cadences. You must discern well the cadences in conformity with which things prosper and those in conformity with which things decline.”

That is quite a profound statement by someone who was mainly known as a sword master. He tells his readers that a businessman needs to see the rhythm in their business and when you can prosper and when you would tend to decline. If you think about it, the CFO sits in the middle of everything as cash converts to reporting and is analyzed. That gives you the base for understanding the cadence of your business, but only by going outside your own department will you fully comprehend the cadence as numbers tend to lag reality. They are easier to see patterns in, but getting in front of the patterns normally comes from something more outward looking like Sales or Purchasing. So it is not being multi-disciplined or leading many departments that matters, it is understanding the rhythm of your business and when you need to act.

Musashi lists 9 things to keep in mind when trying to be strategic:

“
1. Think of that which is not evil.
2. Train in the way.
3. Take an interest in all the arts.
4. Know the way of all professions.
5. Know how to appreciate the advantages and disadvantages of each thing.
6. Learn to judge the quality of each thing.
7. Perceive and understand that which is not visible from the outside.
8. Be attentive even to minimal things.
9. Do not perform useless acts.”

I think these are all very valuable if you want to be a strategic CFO. He again stresses the need to keep a broad mind and not just learn sword fighting (finance in our context), not to do evil or useless things, and pay attention to details and learn to look beyond just the outside. I find the instructions to not think of evil things and not to perform useless tasks to be advice that all leaders should consider. Don’t step over the legal or moral line when plotting strategy of the consequences may derail all the company’s plans and you will put yourself and your career in jeopardy. Don’t do useless busywork, spend your time on actions that add value.

Musashi’s advice to learn the ways of other professions was meant more in the 4 professions framework he used (warrior, the peasant, the artisan, and the merchant) but in his own life he certainly farmed and mastered several arts himself. He was a big believer in doing instead of just reading or thinking about something, and he thought that the path to master the way of strategy was not just by becoming good at fighting with a sword. It was a primary activity, but not the only one. I first read his book when I was in my late teens when I first started sword fighting, and it is an excellent book to help make you better at that. However, once I finished school and started my career, I found his advice to be much broader than just sword fighting and he intended it to be broader.

In the context of a large company, Musashi gives good advice on strategy as well:

“Regarding grand strategy, you must be victorious through the quality of the people you employ, victorious through the way in which you utilize a great number of people, victorious by behaving correctly yourself in accordance with the way, victorious by ruling your country, victorious in order to feed the people, victorious by applying the law of the world in the best way. Thus it is necessary to know how not to lose to anyone—in any of the ways—and to firmly establish your position and your honor. That is the way of strategy.”

He makes it clear that you can take knowledge of individual combat and apply it to larger fights, but you cannot rely on just your individual victory. Rather, you need to take the same foundation you developed to win a sword fight yourself, against one of more enemies, and then use the greater resources your army gives you to win a bigger fight. If you are good yourself, think of what you need others to do to leverage your strengths and their own strengths. He says you need good quality people and then you need to lead them well.

Musashi says “It is necessary to know ten thousand things by knowing one well. If you are to practice the way of strategy, nothing must escape your eyes.”

His advice goes back to this theme quite often. He tells you to see, not just look. To understand and use your understanding in a broad way.
“You should not have a predilection for certain weapons. Putting too much emphasis on one weapon results in not having enough of the others. Weapons should be adapted to your personal qualities and be ones you can handle. It is useless to imitate others. For a general as for a soldier, it is negative to have marked preferences. You should examine this point well.”

With this advice, Musashi tells us that we should not have only one weapon or way to solve problems and not just to blindly copy others. He tells us to be versatile and open to what is the best technique for the problem in front of us. Far too often a CFO will try and use numbers to win, and sometimes it takes something different than numbers. Even if you don’t like leverage, borrowing money might be the right thing to do.

Finally, Musashi makes it very plain what the purpose of strategy is, to win.

“Generally speaking, when people contemplate the heart of warrior thought, they consider it simply a Way in which a warrior learns to be resolute toward death. But this is not actually the essence of the Way: what distinguishes the warrior and is most basic in the Way of the Martial Arts is learning to overcome your opponent in each and every event.”

“The true Way of swordsmanship is to fight with your opponent and win.”

“Your real intent should not be to die with weapons worn uselessly at your side.”

If you want to be a strategic CFO, you must be able to help or make your company win. There are no shortcuts or avoiding this. You may not have to leave your opponent on the ground bleeding to death or already dead like Musashi did, but you do need to win.

Business can be very black and white. There are winners and losers. No company consistently wins over time without the right strategy and culture. I will address company culture in a blog in the future, but the management team needs to be able to develop a winning strategy and execute on it.

I think there is nothing more that you boss hopes for more from his CFO is for them to help him be a winner. No one likes to lose, so the basic risk control and proper reporting skills of a good CFO are appreciated, but not losing is not necessarily winning. A winning strategy might be to survive a down cycle, to understand the market cadence that says you cannot prosper right now so you save resources for when you can, but more often winning is marshaling your internal resources and leveraging the external resources you have available to you.

Musashi says the heart of strategy is winning. He says to fight with what you have, not to leave weapons unused. No company is limited to only Finance tools. A strategic CFO knows how to enable or lead other functions when they are needed to win.

Assuming that you agree with me that the heart of strategy is to win, then you might be wondering what you can do to become a strategic CFO and to become a winner. I can tell you that I personally am not 100% sure how to answer that question from my own experience. I have done well at the various companies I have worked at and in all cases we grew and won. However I know that I am still on the path, I have not arrived at the destination. I do think that the advice that Musashi gave on this is quite good.

“See to it that you temper yourself with one thousand days of practice, and refine yourself with ten thousand days of training.”

When you are not doing, you need to be practicing. Develop skills, develop staff, debate and fight practice battles with your team and the senior management team. Experience helps. When the moment comes to execute and you need to make a decision that leads to victory, if it is something you have practiced or at least thought of in advance, then you will be quicker to act and more likely to make the right choice. Even practicing choosing helps.

This has just been the broadest overview on what strategy is and how you can use that understanding to be more strategic in your career. I plan on delving deeper into this topic in future entries in my blog and try to use some specific actions and examples I have encountered in my career. For those that care about my hobby posts, I will also go deeper into Musashi and how his book can make you a better sword fighter. I have a few other topics I want to discuss first, but feel free to contact me and ask to move up these discussions.

Strategy Books (all of which I personally own or have visited)

Website with an online, free copy of The Book of Five Rings

The Book of Five Rings

Books, either in paper or on Kindle (all links go to Amazon.com)

The version I quote here:

The Complete Book of Five Rings

The Complete Book of Five Rings – Kindle version

The translation I first read

A Book of Five Rings: The Classic Guide to Strategy

A Book of Five Rings: The Classic Guide to Strategy – Kindle Version

An account of Musashi’s life

The Lone Samuari: The Life of Miyamoto Musashi

Fictionalized versions of Musashi’s life

Musashi

Musashi – Kindle version

Samurai Trilogy [blue-ray]

Responding to a comment letter from the SEC

By

On February 16, 2016

In Accounting and Reporting, CFO

imageThere is a particular circular logo that always worries even the most experienced CFO. It is a simple logo and it means that the SEC has looked at your filings and has some questions. If the letter is something as serious as a Wells Notice, then you need to engage with your outside counsel right away and I can’t really give advice as I am not a lawyer.

Comment letters are a lot more common. You can expect that your filings will be reviewed every 2-3 years and every special filing you make (like an S-1) will draw a comment letter every time. They are common, and the typical result is improved disclosure the next time you do a filing. A bad outcome is the need to restate which can have significant personal and valuation of the company repercussions. A disaster is a Wells Notice and a full legal investigation.

When I first started, responding to a comment letter was much more difficult and you needed to rely much more heavily on your auditors and your lawyers as they had many examples of responses from their client base and you typically had nothing except for anything you had done yourself or within your company in the past. Ever since the SEC made comment letter responses available online, you should be much more capable of answering them yourself or with a lot less help from your outside advisors.

Here is my general advice on what to do when you receive a comment letter.

As a general comment, you are dealing with very experienced accounting and legal professionals at the SEC. The team that reviews filings and comments on them tend to be very experienced accountants and lawyers who read and comment on filings for a living. Their letter is reviewed by even more experienced staff before it is sent to you. The SEC monitors trends and usually every year there are specific areas of accounting and disclosure that get extra questions for just about every filer that it applies to. Unless you do actually have a very severe issue, there pretty much is no intent to “get you”. I have found 100% of the SEC staff I have worked with over the years to be professional and courteous and generally helpful where they can be helpful. They tend to be pretty flexible where they can be.

Expect an iterative process. There was one pretty long letter that I responded to that the SEC accepted all my answers the first time, but usually is takes 2-3 rounds of replies with more questions.

The first thing you need to do is read it through at least once. You don’t need to fully understand or do any deep research at this point, but make sure that you and your Controller have read the comment letter and have a general idea of what is in it and what the main questions seem to be. You will be very quickly involving others in the process, and they will be relying on you, so make sure that you know how serious the letter appears to be. It usually is pretty easy to identify the most important questions, as the examiner normally makes them pretty clear. There might be a question or two that are trickier and if answered the wrong way will cause a spiral into more questions and a much higher chance of restating.

Now inform your boss and the audit committee. This should be done quickly, your process of reading and getting a general understanding should not take long at all and you need to treat every comment letter with a sense of urgency. It is a good idea to inform your lawyers and auditors immediately and I advise that you copy legal counsel on your communications where appropriate as it is possible that the comment letter will result in legal action against your firm or you personally. The SEC does not allow you to use them as a direct legal defense and your work on replying to a comment letter can be discoverable if not protected. If you are not sure what that means and how to protect yourself and your company, seek legal advice.

I always have a very strong sense of ownership of what we file. I have always found that my reporting is better after I get and respond to an SEC comment letter. You will be engaging and using outside help, but you own the comment letter responses just like you own the filings you did. Do not allow the outside advisors to take over the process. They are not always on your side. If something needs to be restated, or if more serious issues come up, they may also have the agenda of protecting themselves. Remember that auditors commonly get sued as well if accounting issues come up from an SEC review. That means that they are very much on your side until they are not. Chances are pretty good that it will not be an issue but do remember that they have their own priorities and that may mean protecting their business just like you are trying to protect yourself and your company.

Now that your boss and the Audit Committee are informed, you should have also formed a small team to actually answer the comment letter. You need to divide up the comments and delegate them to the people best able to answer the questions (and this may be you). Personally, I think the company should write the first draft of all the responses but you may not have the expertise. If you do not, remember it because you have a skill set hole in your company that may need to be fixed later after the comment letter process is done.

Now that the SEC has made other comment letter responses public, you should be able to find the same questions answered by other companies. There is no rule against using other responses word for word. No such thing as plagiarism or copyright when reviewing SEC submissions. If you check competitors or similar companies and they have identical questions, then you know that those questions are focus areas for the SEC this cycle. Look at the answer(s) that the SEC accepted in the past and consider if the same answers or something very close also applies to you.

I cannot emphasize this enough. Prior SEC filings are a huge resource and you should absolutely use them to guide your answers. There are no prizes for brilliance and answering every question yourself with completely original answers.

Dire warnings aside about making sure you understand the risk that outside advisors may have their own agenda, your auditors are a very good resource. If you are using a Big 4 firm, then their SEC advisory group will have people that recently worked at the SEC. They probably have other clients who have received comment letters from your examiner and have more personal read on his or her style. When it comes to very technical accounting questions, your technical partner can be a big help in drafting a response that cites the correct and most compelling parts of GAAP.

I personally like my responses to be direct and to the point. Sometimes your advisors like to toss in introductory phrases like “we respectfully submit”. I never answer like that. Many times the comment letter asks you to enhance your disclosure in the future. Unless the suggestion has some fundamental error in it (which I have never found in any comment letter I have received), the correct response is to say that in future filings you will do what is requested. List out what was requested and what you agreed to. When the SEC asks for support for your current accounting, provide it in a straightforward manner. Your examiner will have several open files and comment letters they are responsible for. The more clearly you write and the more simply you write, the easier you will make it for them.

One final resource is the examiner themselves. Sometimes their questions are not very clear. You are allowed to call them up and talk to them. Like your written answers, you need to be careful what you discuss with them, but as I said earlier, they are not out to “get you”. They are limited in what they can answer. You cannot run a response by them, all responses must be submitted in writing and they can only respond in writing. However, they can clarify what a question means. You can call them and let them know that you are on a tight deadline for a filing and that you would appreciate them working as fast as possible. Sometimes it can help to have a personal relationship when they have to make a final call on an accounting item. If you are more than just text on paper, maybe something will go your way. I know that it even helps me to respond when I have a voice to go with the words on the paper.

Before you send in your response, give it one last read through. Make sure all responses follow the standard format of repeating their question and then responding. Make sure you are sure the questions are actually responded to. Double check the wording to make sure it is direct and clear. Make sure each one has enough detail but not too much that it clouds your answer. If you see an answer that disagrees with a disclosure request, ask yourself why you are not just agreeing to the additional disclosure. Sometimes if you agree then you are actually agreeing to accounting that you do not think is right, but normally fighting over disclosure requirements is just not worth it.

There is an almost certain chance that you will receive another comment letter on your responses that focus on the questions that either were not fully answered or where the examiner disagrees with you or feels that there is insufficient support for your answer. If they disagree, then you are starting to have a problem. You need to be extremely careful with any question in the second set of comments because those are the ones that the examiner is most interested in.

Hopefully you will make it through the response process with nothing more than agreeing to improve disclosures in future filings. Don’t forget to actually improve disclosures when you agree to it. It should be part of your reporting checklist to ensure that you disclose what you agreed to and how you agreed to.

“Smoothing” your numbers

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On February 9, 2016

In Accounting and Reporting, CFO, Finance

As you advance up the ladder in your Finance career, it is almost certain that you will arrive at a level of responsibility for the numbers where your judgment become key in determining outcomes. At the same time, you will be confronted with one of the two most common issues – numbers not being smooth or what looks like a temporary operations issues that can be fixed by some smart accounting.

There is no requirement to qualify for sainthood while being a CFO. You are part of the management and public image of the company, and investors and employees are relying on you properly present the historical results of the company and the expected future performance. You do not have to be the most conservative person in the country and report and book every possible downside and flagellate yourself publicly over every single misstep. Honesty is important but you also need maturity and respect for your audience. No one expects that you were perfect or that you will be perfect. Being overly optimistic is not good but being overly pessimistic is also a problem. Your investors will be expecting a fair accounting of results and possibilities so they can make choices in who to invest in. An immature management team that does not promote their company somewhat will result in an additional valuation hit because of a perception that management is not strong and does not believe in their company. Even in bad times, if you are still there with the rest of the management team, you must believe that you are part of the solution.  Therefore, mention the issues but focus on the solutions.

I can give a specific example from earlier in my career. The GAAP accounting for stock options granted to employees used to make expensing the options optional. This was an option that Silicon Valley companies did not take. Almost no companies expensed options, but Silicon Valley greatly depended on options and fought against changing the accounting. During that time, I believed that they should be expensed. In accounting discussions with other accountants, I would question the basis for not expensing them. Even with my strong belief that they should be expensed, I did not do it in the books I was responsible for. It simply was not the accepted practice and it was proper under GAAP to not expense options. There was absolutely no reason to “punish” my company compared to others just because I could get on my high horse about the proper accounting for options. Once GAAP changed, technology companies either reported non-GAAP numbers without the options expense or they provide the information so outside analysts could do the same. I provided the information just like others in the industry did because investors expected it.

This is actually an important concept to understand. US GAAP is very specific in many ways but judgment is still a key foundation on the accounting that is done. As I explained in an earlier entry on when I would do a prerelease, the SEC and FASB have both put judgment calls firmly on the shoulders of management. As the CFO, you will be making most of the calls. Other management team members including your boss will come to you with transactions they would like to get booked. You can wrap yourself in a holy mantle of GAAP and always say no, or you can listen to what they are trying to do and try and find a solution.

This brings me back to the original choice I started with. The world is random and bumpy. Investors prefer smooth results that fit an easy to understand framework. Closing the books means making a lot of accruals and valuation judgments and it is really easy to smooth everything out. Be very careful here. Sometimes GAAP really does result in smoother results. If you have a constant production base and higher demand at the end of the year and less at the beginning, you can naturally smooth out the unit cost by building inventory at the beginning of the year and thereby absorbing overhead that otherwise might be expensed and then not overdriving production at the end of the year and over absorbing overhead which results in lower unit costs. You essentially borrow the good news at the beginning of the year and repay it at the end of the year. The accounting matches actual production and you do incur a risk of falling costs at the end of the year or dropped demand meaning your working capital investment may not pay off in better over all results, but the results will be smoother.

Then there is the actual issue that sometimes business just doesn’t match arbitrary quarter end boundaries. It really should not make much difference in the valuation of your company is a deal actually closes January 1 instead of December 31, especially if it was supposed to close earlier and you and rest of the management team forecasted it in good faith to close before December 31. It shouldn’t, but it does. Even if your business does not have big contracts, there might be a snow storm or a flood at your main warehouse and you may miss a week of shipments right at at quarter end. Even in a regular quarter, you may run into a shipping bottleneck and customer orders may not make it out in time even though they were ready.

Sometimes the plant operations group misses their cost takeout targets. Could be an operational issue or maybe the market just didn’t correct quite fast enough but should be ok a few months from now. The shortfall easily can be made up via a slight change in inventory valuation.

Believe it or not, sometimes you get too much good news. A big customer moves up an order and suddenly this quarter is way exceeding goals. Currency moves in the right way and your gross margin now exceeds expectations. Of course, now the next quarter doesn’t look quite as good in comparison and you are wondering if you should burn some of the current good news to smooth out the next few quarters?

Finally, you can often see an issue coming a quarter or two in advance. Does it look like your sales team is making the quarter numbers more and more by borrowing from the next quarter? Did you start this quarter with a vacuum of sales and opportunities because most were recognized the quarter before? Did costs go up and a lot of the cheaper inventory from a prior quarter get used up? If so, expect results that are not smooth or within expectations are probably coming soon.

Like all good CFOs, you probably has a few accounting ideas or changes in the back of your mind that you have been thinking about for a while. Maybe just some tidying up of some overaccruals from prior quarters. Maybe a tweak in inventory accounting that you have been considering. Is this the time you should step in and do it?

I was given some very good advice by a boss early in my career when I had the first exposure to being able to suggest accounting changes. He told me “Never solve an operational problem by moving it onto the balance sheet. All you do is make an Operations problem a Finance problem and when it does come off the balance sheet no one will remember that you were a hero in the past.  You defer changes that might be needed and hide the problem so it might not get priority.” This came from someone that I considered to be a very good accountant who had championed a change in accounting that resulted in a better results for a decade into the future. I had also suggested an accounting charge at the start of the planning process (salvage value) that was accepted by him as a good idea to be implemented. The advice was not by someone that was not able to look for better and more accurate accounting, but from someone that had already made that mistake himself and seen others going it in the past and where he wanted to warn me of the consequences.

So now I always replay that advice in my mind when making a quarter end accounting judgment call. Is Sales now asking about bill and hold after the quarter has already ended to handle that inventory that did not make it over the finish line, or was this planned in advance and did the request come in before quarter end and is documented properly? Is cost higher than hoped for and your COO is looking for more expenses to capitalize into inventory to make the target? Did you just figure out that you beat expectations and now you are looking for extra reasons to boost up reserves that you felt were adequate last quarter or even last week?

I have not been afraid my whole career to make sure that our accounting is as advantageous as the accounting in my industry normally is. However, that good advice early in my career when I was at AlliedSignal still sticks to me. I don’t think that any CFO doesn’t know when the are pushing the accounting too hard.

Try to remember that no one really will think you are a hero today. That entry will be in the background and you will not get any credit for it. Remember that your boss and the rest of the management team will not remember why you capitalized those items a year ago, they will just be mad that you are expensing them now. Remember that your integrity is even more on display when you publish the numbers to the outside world. If you push the accounting too hard you could lose standing with your auditors, if there is an operations blow up and a miss and you get sued, it will come out in discovery later. If the rest of the management team gets cynical about the reported numbers, then they may start messing with them without you even getting involved.

Do the right thing for your company. Try and get the best accounting results where it makes sense and is part of a plan in advance. Otherwise, don’t try and fight the random world too much by double entry bookkeeping. Life is not smooth. Expectations do get exceeded or missed sometimes. Make sure that investors who do their work can at least rely on you and your numbers.

——

Some books on the effects of “Number Smoothing”

Confessions of a Wall Street Analyst

The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America

The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron

Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, 3rd Edition

How I approach the outlook section in an earnings release

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On February 2, 2016

In CFO, Finance, Investor Relations

Every quarter, investors pour over actual results and react to a company’s guidance. Before it appears in the press release, I have to work out what is should be. I often see retail investors wonder where the numbers come from and if companies sandbag or otherwise fool around with guidance. So I decided to write a post on the process I have followed to first support the process when I was a Controller and then to help decide as a CFO.

Helping to decide is important to remember. It is easy to get a little ahead of yourself as CFO during the earnings and forecasting process. Take a deep breath and remember that you are part of a senior management team. Remember that there are two types of forecasts, lucky and wrong, and that the longer period of time being forecasted the higher chance you have of being wrong.

I start my outlook process by asking questions and listening. Of course, I keep up with the business as best I can during the quarter, but the reporting process is where you get to ask questions and explain. Take advantage of that and start to form an idea of the opportunities and threats that are coming up.

I am going to assume that you have a reasonable forecasting system for revenue and cost that you are able to rely on to make management decisions. How the actual forecasting is done is not really relevant (Gaussian Cupola or whatever wizardry is used), you just need something that has proven it works in the past. Units, ASP, expected costs, any expected deviations from your normal SG&A spending. Some form of view on what effect foreign currency is likely to have.

You should use the information from your forecasting system to build a draft forecasted financial statement. This is the raw and preliminary numbers that I rely on to start the judgment process of the outlook I eventually publish. Using that first set of numbers, I start to work through a standard checklist of accuracy items (not judgment yet):

1) Revenue – usually the internal forecast is good at predicting when the goods will ship. What is not considered is when you can recognize it. Double check that. Look at the terms being used and any carry-over from the prior period. Be careful with percentage of completion and double check the reasonableness of the calculation. Make sure that items that require contract analysis have been reviewed and that the terms allow revenue recognition as hoped for. Make sure any inter-company sales are properly treated.
2) COGS – usually you get the latest cost numbers from the factory, but that probably is not what will show up in GAAP. Very often their numbers do not include warranty reserves, equity compensation, inventory reserves and potential equipment write-offs (which may need to go into COGS). If costs are rising or falling there will be a lag as production runs through inventory so make sure that is accounted for. Any inter-company profit in inventory that needed to be eliminated? Inter-company items are often overlooked, so check that again.
3) SG&A – talk through the numbers and see if there are unusual things happening this quarter and make sure the numbers are there. If there is a risk of a large A/R write-off or a large fee that is being paid that quarter that needs to be expensed, make sure it is included. Think about bonus accrual catch-ups, if you are beating or missing bonus targets is there a risk that an adjustment to the accrual will be triggered this quarter. Are there large asset write downs, big A/R wrote-offs that could happen or other such one time items? If so, are they in the forecast (of course, if you are so sure that it will happen, ask why is it not recorded in the about to be reported quarter). These type of forecasts are often just run-rate extrapolations, so make sure any effect of adding or selling a business recently was thought through and recorded.
4) Interest and other charges – normally this should be about the same as prior quarters. Double check to make sure any changes or expected changes are reflected in the numbers. Usually companies do not forecast specific foreign exchange swings but if there already has been a large one or a large one is likely you probably should be modeling here.
5) Taxes – typically this is just a forecasted percentage, but work through the logic of the forecast. Did the country mix change since the prior quarter or since the percentage was last set? If so, you may need a different rate and should let people know to change their rate.
6) EPS – double check the diluted EPS calculation. If you recently added convertible bonds, check to make sure the EPS is on an “if converted” basis. Most people just assume that there only is dilution if the bond is in the money and that is not the way the share count is determined for convertible bonds. If you are close to a trigger point for a large tranche of options to go in the money, consider reminding the reader of that. If they have been outstanding long enough to be vested and around for several periods there may be enough added in to swing the EPS calculation.

That is not an exhaustive list. Companies that sell software and other service type contracts need a robust revenue recognition review process for both actuals and forecasts. The list above is all for accuracy before discussing with the greater team. It is all fine and nice to be a strategic CFO but if the base numbers are all wrong then no one will listen to your business ideas.

If you do find errors during the forecast review, go back and fix what did not work in your process. Double check the actuals as the same people usually work on actual and forecast and if the forecast has an error, the actuals might as well. Reporting is a process and you need process controls and feedback into the process.
I am sure that some people started reading this blog and we’re hoping that I would talk about what system to use, what IT tool I recommend relying on. I am always concerned about over reliance on tools and not enough review and finance judgment being applied. A good tool poorly used just gets you the wrong answer faster. There are quite a few good tools out there and I generally recommend that you use one that works well with your existing accounting and consolidation system. Most of my experience is using the Hyperion suite of tools (Oracle product now but used to be independent), but I have used others as well. Even simple excel spreadsheets can work depending on your business. I do think that if the Excel spreadsheets get too big, the risk of formula errors also grows too much.

So now you have a forecast (I tend to have an income statement and balance sheet ready with a cash forecast from another process as well). You now move to the validation and judgment phase. Share the forecast with a small number of senior executives and start the discussion with them. Do not over rely on email. Call them up and talk through the forecast.

Go through each section with them and make sure they understand what assumptions are being used. Then listen. They know their area of the business better than you. The COO probably just heard that there is a part shortage and production will not be able to hit the cost target or the volume target. The SBU business head might have just come from a customer meeting as has good news. Take notes and ask clarifying questions but now is not the time to be pushing back or disagreeing. If you go into target mode and start arguing why results need to be better, you probably will shut down conversation and miss something.

One of the people you should be talking to now is your boss. The CEO will have even more insights into business conditions and the two of you will be making the public commitment. Review the different options from the management team, weighing factors like personalities, some people are too conservative and some are too optimistic. Reach a conclusion about what you will commit to in the quarter or year to come or whatever period the public outlook will be. Make sure the targets needed to hit the goals are rolled out to the people that need to execute.

One of the last things you need to decide on is the range of expected results you will disclose. You need to pick a range that is typical for the metrics you will be disclosing. I get asked very often if I set the range lower so we can easily achieve it and then “beat” the numbers. In my whole career I have not followed that strategy. It becomes very obvious over time if you do that consistently and analysts will start setting their own much more aggressive expectations. You are essentially lying to your investors about your real expectations and trust in management is often a key metric for investors. You also are advertising less than what you can do and if your competition does not under call as well, you will suffer in comparison.

Never set expectations you know you cannot meet or that would take perfect execution, but do not be afraid to set your own internal goals as the public expectation. If you miss or beat them, know why and explain it. If you set reasonable expectations that a good effort should have achieved and you miss, do not try and hide the fact that you missed. Be honest and outline what will happen in the future to avoid surprises and underperformance. If your internal process to arrive at the number was bad, fix that process. If you set expectations that are way too high, you may get a short term bump in share price but you will be reporting actuals in 3 more months and you will lose in trust much more than what you gained in the short term. Be confident, but not overly rosy or arrogant.

Pay attention to the text explaining the numbers to ensure that there is no disconnect.  If you expect conditions to be tough, make sure the text reflects that.  If you are setting another record, acknowledge it.

In the end, there is no magic formula. You need to do your best and make your best judgment. Make sure your process is robust and repeatable. Be inclusive of your finance team and the senior management team. Don’t sweat it too much, a miss or beat is news for maybe ½ a day if it is a slow news day.

Who to blame for the 2008 financial crisis?

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On January 26, 2016

In CFO, Finance

Hamilton was good enough that I did a review just on it alone, but I recently saw The Big Short as well and decided to write something on both of them.

My background is accounting and finance and I like history a lot. When I moved from Canada to the USA, I decided I had to read up and study American history to get a better understanding of it. Simplistically, I was not really against the British in the American Revolution (Canada certainly is Loyalist) and the Civil War was just the good guys who were anti-slavery against the bad guys who were slavers. I delved somewhat into the Founding Fathers and the Constitution and tried to understand the first few Presidents and how their terms effected the USA. However, that was 20+ years ago.

When the financial crisis bloomed in 2008 (it had been growing for a while before that), many of my friends either were personally hurt by it or people close to them were hurt by it. When people are hurt they usually get angry or scared or both. People who are angry or scared tend not to think well, and they want to react. They need to blame and attack something. Bankers make a good target.

The Big Short and Hamilton both share the same great strength. They take what can be very dry history and they make it very interesting. By the time you finish watching The Big Short you have learned the tools that were used to both make the small problem into a catastrophe and to profit off of it. Hamilton has the battles and such of the Revolution there, but through song and comedy it really shows us the power of ideas and what happens when great men with powerful ideas are at a fulcrum point in history.

So, I bet even before you watched The Big Short, you knew that the bankers were at fault based on politics and news for the past decade or so. They were corrupt. They were greedy. They were liars. And the movie reinforced it. So funny and witty to see the heroes of the movie realize the illusion that everyone was living in. The stripper with all the houses and loans and the real estate agent talking about a gully when there actually was a cliff. The bankers laughing and smirking at our heroes as they made money and tried to pretend that the bets they made were not bad even when there was no denying that they were.

All a consistent message that those banks were the ones to blame and of course where there are banks there are bankers.

Personally, I find it funny that heroes worked for 3 hedge funds. Normally hedge funds are villains too in popular press and politics. In the story, they were smart and right and made a fortune, they took a noble stand and stuck to their beliefs even when others around them doubted them and scorned them. It made for a great film, but I hope everyone knows that hedge funds often are the main financing source for movies and that they just might have a small reason why they would fund and fill up a movie with A-list stars that just so happens to show the hedge funds were the only heroes in a time of greed and evil. It also ignored all the hedge funds that lost a fortune then.

I am going to write some posts in the CFO/Finance Tuesday posts on some of the tools used and I am also going to discuss corporate governance. Discussing tools and basic corporate governance is not really worth the effort without a basic criteria being met. You cannot use tools and make decisions without critical judgment and the ability and desire to do a little research on the item you are making a decision or judgment on.

You may be shocked to learn this, but it was not the bankers and their CDO that caused the crisis. It was you and me. We wanted to own our own houses. We have wanted to have our very own place to own and live since before the country even came into existence. We have voted in people that would facilitate that for generations. All those bankers and government people, they are us. Our neighbors. People we do business with and who probably have helped us all our lives (credit cards are a banking innovation).

The base laws that were changed and pushed us over the edge were passed by Bill Clinton with a Republican Congress. He repealed the Glass-Steagall Act that kept different banking functions separated and controlled the size of banks (which at the time was viewed as making American banks less competitive on the world stage). He also signed the Community Reinvestment Act that placed additional pressure on lending into low income areas. He signed a law that removed federal regulation on some credit swaps that became important leverage tools that later blew up.

Clinton and the Republican congress are not solely to blame, of course. There are whole books on this but essentially laws were passed that made possible to have the Federal government guarantee mortgages. Mortgages that have tax deductible interest which is really just a way to increase how much you can borrow and make buying a house easier. If you happen to sell a house and make a gain, well, that is no problem too. If you buy another house for more then no taxes are due on the gain.

We’re the people that elected and lauded the government that made all those changes. The changes even do not make sense. Cheaper mortgages just mean that you can afford to pay more for the same house so housing values rise. That means you need to borrow more, so you pay more interest than you might with no interest deduction. All these laws are meant to make it easier for the poor and middle class buy houses, but I am sure that you know that rich people pay higher percentages of their income as taxes so they get more from this law than the poorer people do. Many small mortgages do not even have enough interest to mean that you use anything but the standard deduction. Richer people also can afford more expensive houses so they get more tax relief on capital gains.

More mortgages led to bundling them together and making the mortgage bonds. This was all backed by the rating agencies which just happen to enjoy special laws and protection. Those bonds were made even safer via government guarantees. Bonds that did not have the government guarantee needed other guarantees and private insurance was created and more exotic credit swaps sprang into existence. We all wanted homes and we wanted our local bank to lend to us and that bank needed money from somewhere. Global investors wanted safety and higher yield.

Leverage, leverage, leverage and it all rested back on the faith and confidence of the United States.

Where did that confidence come from? The faith in the credit of the United States?

It came from one brilliant man. One of the founding fathers. The first Treasury Secretary.

Alexander Hamilton created it.

He gave us the fulcrum right when the country started.

We made the lever that rocked the markets and brought them all tumbling down.

Luckily Hamilton and the other Founding Fathers also left us a system of government that has worked so well for so long that with just a few words and promises, they were able to lift it up again enough to hopefully give us time to sort it all out. But if you need to blame someone and don’t want to point fingers at yourself, blame Hamilton.

Obviously that is somewhat tongue in cheek. The real point is to do a little research before making a snap judgment. Assume that others have agendas that make them want to make motives and who gains and loses as obscure as possible. Tax deductible interest makes for larger loans and more interest which helps the banks and they certainly do not want that to go away. Easy enough to lobby on the supposed benefit to the little people when it really just helps the fat cats.

My Tuesday posts will all have critical thinking as an assumption. The above is an example. Don’t take my word for it. Use your favorite search tool and spend a few hours doing some reading. In your finance and leadership career be informed. Don’t read only things that make you comfortable.

And blame Hamilton for getting himself shot before he could get the rest of his work done.

The Big Short: Inside the Doomsday Machine

The Big Short [Blu-ray]

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