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Transcript
Rob Johnson:
Welcome to Economics and Beyond. I’m Rob Johnson, President of the Institute for New Economic Thinking. I’m here today with Jim Nadler. He’s the Co-founder, Chief Executive of KBRA Bond Rating Agency. Prior to today, we’ve had some lovely discussions about all of the challenges that we face, in the realm of credit, municipal bonds, educational institutions and the whole, which you might call spectrum of things that fall under the umbrella that people are rising to explore now called ESG, Environmental Social responsibility and Governance. Jim, thanks for joining me.
Jim Nadler:
Thanks Rob. It’s great to be here.
Rob Johnson:
Let’s start with big picture. I’m talking to you about public policy, but you’re also a person who is serving clients, investors, trying to keep them from losing money. We all know we’re in a world of change. I make a joke that the pandemic is what really unmasked us in terms of the need for transition in our social philosophies, designs and implementation. But you see this very clearly from our previous conversations. How do you see your role in society as a new and innovative reading agency?
Jim Nadler:
Thanks for that, Rob. That’s a great question because rating agencies historically have been viewed as protecting investors. That is our number one priority. That is why we’re in business. It’s a raise on detra, but we have another role, that is to facilitate commerce. I like to say that the reason that rating agencies are in that role is a little bit like, why we put brakes on cars. You don’t put brakes on cars so they can go slow. You put brakes on cars so they can go faster. It’s our job to make sure that the investors know that the brakes work. That the brakes are there and that there’s someone always fine tuning the brakes.
One of the things that the great financial recession of 2006/2007 showed us was that the two big monopolies that are in this space were asleep at the wheel. We were born out of that crisis. Our goal was to bring this new thinking, the landscape, the financial landscape is changing so rapidly, you’ve got this monopoly that is continually looking in the rear view mirror, and that’s not going to do for investors the work that needs to be done going forward, we’ve got to be more nimble.
The information landscape is changing so rapidly that you have to be part of that and part of that discussion to make sure that investors are being looked after and that they’re getting the best possible information and protection. It’s one of the reasons that we decided to build the bond rating agency. It’s one of the reasons we’ve been successful and it’s really the mission that we’re on to change this entire landscape.
Rob Johnson:
Let’s talk about this new phenomenon. I mentioned in the introduction, ESG Investing. One of our board members, Julian from the Financial Times now has changed her presentation to what’s called Moral Money. She’s exploring the ESG environment every week. But tell me how you see, what it is, what the dangers are of a false consciousness and what its potential looks like.
Jim Nadler:
Let’s start with a really positive aspect of ESG. And that is, the awareness of ESG and its importance in, just in the last, I would say 12 to 18 months has increased dramatically. That alone is something that we should all be happy about. That there have been people ever since Rachel, I believe her name is Rachel Conrow, Silent Spring. I don’t think I got her name right, but ever since Silent Spring was-
Rob Johnson:
It’s Rachel Carson is her name.
Jim Nadler:
Carson, sorry about that. Ever since Rachel Carson wrote Silent Spring, there’ve been a number of activists in the environmental space. We know about the social change that’s gone on in this, in this country. It’s been happening since the early beginnings of our country, but today, the awareness is broad and it’s on everyone’s plate. Everyone’s looking at. The downside is, you raise this, is that there are people who are trying to take advantage of it. There’s this phenomenon known as greenwashing where it’s just taking some old product, putting a little green wrapper on it and getting investors to buy in to it being sort of this new type of security that’s great. I think that we have to be careful about that.
There a number of what are called ESG ratings out there, our competitors have their own ESG rating scales. I think those are very detrimental. I think they stand to do an enormous amount of harm to the investing community because they boil everything down to one number or one grade. The ESG space is not built like that. There are so many nuances that come with each of the different disciplines, whether it’s environmental, whether it’s social responsibility or whether it’s governance, each of these disciplines are so vast and so nuanced, that it’s really requiring a new way in a broader way of thinking.
The last thing I’ll say on the topic is that, this new sort of, awareness of ESG is great, but now the hard work begins. That’s what KBRA is all about. We are all about the hard work of ESG. It’s why we’re on a project to develop how to think about carbon, with respect to companies. Companies are afraid to talk about carbon publicly because they’re afraid it’s going to be used against them by investors, by regulators, by taxing authorities. We’ve got to find a way that companies are comfortable discussing carbon and how it’s priced so that we can get a handle on it.
We’re working with community banks to help them find an effective and cost efficient way to disclose their carbon footprint, to disclose some of the ESG attributes. This is hard work. This is not something that happens overnight. We’re committed to doing this hard work, and we’ve got a lot of hard work ahead of us in this, but it’s our mission also to sort of get other people to start doing the hard work of ESG.
Rob Johnson:
That’s true. I’m coming back to you from listening with two notions. Well, this is a famous old notion in philosophy, abstraction enables cruelty, meaning, it provides a mask for 40 hours.
Jim Nadler:
That’s right.
Rob Johnson:
The other is my dear friend, Charles Goodhart, who was a monetary economist at London School of Economics is emeritus and Goodhart’s Law was essentially anytime you put some kind of measure or marker or rule in place, it starts to lose its power because people figure out how to work their way around it. Deep dive into the texture of understanding these things and understanding which might call a map of what rules, producing behavior and what that does for the environment, I think, is essential to making progress using the power and the energy of capital around the world.
Jim Nadler:
You’re absolutely right. Rob. I think one of the things that we realized early on, it’s why I spend so much time in Washington and why we spend time in Brussels, is the regulatory environment around ESG is going to be critical. What we want, is we want regulators to understand how nuanced each of these fields are, that we don’t end up with regulation that causes unintended consequences. We end up with, when regulators do come out with regulations and with… But these regulations are able to evolve because this area of ESG is growing, it’s changing. Regulation as well as credit analysis has to keep up with it.
Rob Johnson:
I would say, to be really fair, we’re in the process of a learning curve. You’re taking a cutting edge role in protecting your investors as one part of the mission, contributing to, minimizing unnecessary losses from cumbersome, how do I say, constraints on behavior, allocation of capital and what have you. But we’re in a learning curve, just as in the technology sector. I would think it would be terrifying to work at the Federal Trade Commission right now, unless you really knew tech inside out, how many people do?
I mean, they know how to program, they know how to play with cryptocurrency or this or that, but how do you govern something that is so, what you might call powerful, but not yet completely understood and defined. You got to be careful of weeding out the good while trying to protect from the bed. I would imagine also in the realm of things like, intellectual property, rates market share and monopolies. You’re going to have guys on some side that are pretending something is bad because it would allow new entrance in that compresses their profit margin. We see that in the pharmaceutical research and approvals, that lobbying is quite intense.
Jim Nadler:
Rob, I you’ve hit on a couple of really interesting points. I think that the idea that the regulation needs to not only incorporate the understanding of ESG, but understanding technology, because today the world of technology and the world of ESG are coming together in ways that are dramatic and in ways that are speeding up the pace at which we get and analyze information in the ESG space. I think one of the biggest concerns, both from a regulatory standpoint, but also from when I think about our competitors who are much larger than we are, is that they are behind the eight ball that they’re not understanding how rapidly this intersection of credit, with respect to ESG and technology are merging and helps them matter that in the way that they evaluate what’s going on in ESG.
Just a small example, the technology today, to understand, to look at a state and determine with heat maps, where we’re going to see the next problem with wildfires. Online astonishing. That technology is only getting better. Every time I can meet with this company that’s doing it, there were several that are doing, it is getting better and better. Understanding that and understanding how to use that information and use that data productively, both from a rating standpoint, but also just throughout the entire landscape of the financial sector. All stakeholders understand that, and are using it in a way that makes them more knowledgeable and helps them make better.
Rob Johnson:
Well, I know a lot of people have used a lot of technology in that realm, for instance, using online sites with photographs. For instance, you can detect on the rest in Baltimore, Maryland more accurately about five days before it hits the newspapers and, I don’t mirror other companies, they’re worked closely with people like Bridgewater Capital are very good at helping people see things sooner, probably say more accurately. I know, years ago I was involved in the conversation with the Federal Reserve System about the aggregation of credit card data, things on Google’s website and others. But you could discern the ubs and flows in the economy all the way down to zip code, but you could aggregate it up to state region sector, what have you.
Instead of the Federal Reserve waiting six weeks for an employment number to come out, 72 hours after the transactions occurred, how do you say much more accurate and much more timely in helping in the management of our macroeconomic society. It may be difficult to change your habits. I think there’s a lot of potential here, but I also think there’s something that you alluded to early on the word monopolies’ habits are hard to break. And when you were profitable, perhaps for reasons that have less to do with your value added and more to do with your value extraction, it may be difficult to change your habits, because if you can stay in the saddle and just keep turning the crank and making money, that how would I say that’s very satisfying to some people.
Jim Nadler:
I mean, when, even after the financial crisis still have operating margins in excess of 50%. Today, their stocks have a PE of over 30 it’s a astonishing, It’s true. What you just described, what that does is, that’s not a great environment for innovation and for changing the way that you do business. We see that today, it manifests itself in the way that they evaluate all sorts of different types of assets. I’ll give you a couple of examples and then I’d love to talk more about the impact that is happening in municipals and large… When you look at municipals as a whole, but particularly in higher ed. But a couple of great examples, I loved it, when we started call, I’ve always been fascinated by the bank, the financial institution ratings at our two biggest competitors.
They seem to be very size biased. They seem to, bigger banks get better ratings and there doesn’t seem to be a lot of sort of, differentiation among the financial institutions. It’s really has a lot to do with size, it’s correlated highly towards size. What that evolved over the years is that they, they just had this notion that they didn’t like, small regional banks and large community banks. Now, there are probably 2000 small banks that have assets under $800 million. Those are never going to be investment grade, but there’s a large segment of those banks, probably six, five or 600, four or 500 that, could benefit from a rating and particularly a smaller group that could benefit from an investment grade rating.
We did a very large study that looked at how financial institutions fared during the financial crisis. What we found was antithetical to what was being done. We actually found that this mid-level of regional and community banks performed better than the larger banks that had to be bailed out during the financial crisis. We started rating these banks investment grade, giving them access to cheaper capital, giving investors more high quality rated paper that they could invest in. What happened over time is that all of our competitors set up units to start rating these mid-sized banks. Now, I assume they’re using our research because I still haven’t seen any research from them, but I think that that’s one area where they were just set in their ways.
Once they saw us doing it, because it was a competitive issue, they started doing it. And so I do think we’ve been able to have a positive impact on the industry by being more forward thinking. We’ve done this in a few areas. Airports is another one. They were sort of bound up in old criteria. We did new research and started rating airports. Now, I thought you find, when you look at our competitors, they’ve all updated their criteria, but this is an issue that broadly impacts ratings generally, but it’s particularly important in the municipal area where I think that the there’s a combination of things that are happening. The landscape is changing very quickly. ESG is impacting these communities in ways that, particularly if you are a community that may have to deal with changes in storm patterns, or you’re a community that is on the Atlantic coast. Or, you’re worried about rising sea levels, or you’re a community in California, you’re worried about forest fire.
That’s just one example. This is changing very quickly. This antiquated thinking and antiquated way of looking at these type of bonds has a real impact. Not only to investors, it could put them in jeopardy, could put their investments in harm. But it also, in some cases like, in the community bank illustration could deny access to the capital markets to a group of companies that really deserve that access to the capital market. We see this in a number of places. I think higher ed is a great example. I think particularly when you look at the Historically Black Colleges and Universities. That’s an area where, the criteria that was developed 40 years ago, even though you say to the world, “We look at it every year and we rethink about it.”
If you’re not really thinking about it in the context of today and the next 10 years, you’re really doing a disservice to these universities. I know there’ve been several studies, we’re actually in the middle of doing our own study, but I know there’ve been several studies that show that Historically Black Colleges and Universities pay more in fees in the market, end up spending, their debt costs them more. I think that’s a huge red flag. I think that a company like ours has a responsibility to not only our investors, but to those schools, to make sure that they’re treated fairly when their credit is assessed and that you put them in the appropriate lights so investors can make much more well-informed decisions.
Rob Johnson:
Well, how do I say triggering all kinds of things, the first one I want to say is that, they say that imitation is the sincerest form of flattery. When you got them to do in the middle sized bench, you should be grinning when you look in the mirror.
Jim Nadler:
It does make me happy. I will say waited years. But, it does make me happy. If it’s making you proud of it.
Rob Johnson:
The second thing is I used to work with the United States Senate Banking Committee, is I see this question of the large banks, which so-called the too big to fail banks. It’s difficult to rate them when you know that their scale and size means that if they fail, they can do so much damage to the real economy that they’ve almost taken what you might call the Central Bank’s balance sheet prisoner. The contingent fiscal capacity of the United States is being reserved for those who can do harm and what some have called the mother of all moral hazards.
It’s very tricky, I would think from the standpoint of your business, thinking about the reaction function of bailouts in conjunction with, what you might call the ratios in standalone integrity of an institution. But this moral answer is very dangerous because what it does is it, the [inaudible 00:23:41] ties this, the credit default risk premium in the funding costs for the big banks. It gives them a competitive advantage and they large in large market share and are able to take more risk. I think it’s a very complicated environment. I’m curious what your thoughts are.
Jim Nadler:
I think you hit on a really interesting issue. Actually, this issue cuts back to Howard University and I’ll bring it back in a second. There is this idea that’s too big to fail that idea. We saw it in the financial crisis, just before these banks were held were bailed out. They all had investment grade ratings. The rating agencies knew they were going to get bailed out. This thinking permeates their credit process and what it creates at investors is this idea that not that we have to understand what’s going on with these institutions, we have to make sure we keep understanding which institutions are too big to fail. It sort of divorces the credit process away from actually looking at credit metrics and it becomes this sort of game of like, okay.
Which institution today is so systemically important that if there’s a crisis, it’s going to be fine because the government’s going to bail them out. I think that it does raise a number of issues. Particularly, the issue that you raised about moral hazard. It does change the calculus of moral hazard, and it provides a safe haven for larger financial institutions that isn’t accorded to the other 7,000 financial institutions who live and die by the decisions they make. The way this carries over to Howard is really interesting. Howard is a federally chartered higher ed school. It clearly has the support of the federal government. As much as every time it comes up, they’ve as much have said that.
It’s interesting to me that I think one of the rating agencies has Howard below investment grade. First of all, I’m just using this as an example, but, you think about how are they have about a $700,000, $700 million endowment. Yet being non-investment grade says that you have a 10% risk of default, 20% risk of default in the next five years. I don’t think there’s a person in any financial capacity, whether you’re an investor or a banker that thinks that Howard University is gonna be in default in the next five years. It’s insanity. Why that institution is so willing to apply the standard of too big to fail to a large financial institution, but is not willing to, I’m not saying that’s the right way to do it, but if you’re doing it over here, you should at least say, “Well, they’re not going to let Howard fail either.” They’re at least investment grade in the way I look at them.
Rob Johnson:
Protection is protection.
Jim Nadler:
Protection is protection. You may disagree with it, but it’s the reality of where we live. What I really find interesting is the despair- the willingness to, on the one hand say, “I believe the government’s going to bail them out.” But on the other hand, all evidence shows that it’s true, but they’re willing to say, “But, oh, no, no.” They’ve had a couple of management problems. They’ve had this problem, that problem, they’re really, they need to show us more before we’re going to give them an investment grade. I find what I find really interesting is this ability to separate, to compartmentalize the way they evaluate the governmental support. You either believe it or you don’t. I find that the most interesting. It’s specific to what we’re talking about Rob, because it gets to the way that different institutions are viewed and it’s probably has to do with the way they’ve been viewed historically. I think that’s what has to change.
Rob Johnson:
Let me ask you, because we’ve talked about this once before, which, was a large part of what inspired me to want to do this podcast with you. When you compare something like Howard, where the student body is African-American, just by the numbers, a lower net worth group of people than what you might call high brand name, liberal arts schools, places like, Swarthmore, Haverford, Middlebury, whatever. I’m not picking on any one in particular, but if you were to look at them blind, in other words, take away the name and look at them in blind as ratios and balance sheets, Howard might stand up pretty well with that $700 million endowment.
But there is some inference, perhaps, that’s being drawn that the students will all need financial aid. You’re going to draw on that more at those colleges where places like Bowdoin, the student body is wealthy and will tomorrow call, rally together or support the institution as alumni, not ever need to draw on financial aid, but these are conjectures that I think what you might call, they always sort of burden the hands with two in the bush. That money in that seminar, a million dollar endowment should be raising their credit rating compared to ones with weaker ratios. It’s not happening.
Jim Nadler:
That’s right. I think you’ve raised a couple of interesting points. The idea that it is somehow, I’m not naïve, it is from a standpoint of prefer ability. Of course, it’s great to have, if half of your students are full pay that changes the amount of work that you have to do to raise financial aid for other students. But I think the way that we need to start looking at this is through a different lens. That is, that look at Howard’s ability to raise this type of financial aid and still have an endowment that is $700 million.
The other thing that I think you raised, which is really interesting, is his idea of, this notion that if you’re a small liberal arts school, predominantly white, that you’re going to be able to rally the parents and the alumni. Look at what’s happened just recently, with respect to Howard and their alumni. The vice president is a Howard alum, Chadwick Boseman, one of the greatest films that has been done in the last few years, Black Panther, he was a star. I mean, the sort of now recognition that Howard has these incredible alums and people are seeing it now.
Rob Johnson:
Roberta Flack and Donny Hathaway in the music world of the ’70s were continued geniuses, and they were friends in Washington DC.
Jim Nadler:
Exactly. Now, we need to change our view of that and say, “Oh, well, they have the same type of alumni, and they’re going to rally to their support. And they have rally to their support when they’ve had problems.” You’re exactly right, it’s that I always love the story about the, I forget which orchestra it was but they weren’t, they just weren’t hiring women. They finally put a screen up when people were auditioning and lo and behold, they started hiring women. What does that tell you?
I think your example of let’s take the names off of the universities and let’s just show what’s happening in the numbers and start looking at it through that lens, and that’s going to change the way that we evaluate these institutions. Just broadly speaking, it’s going to be a much better analysis for investors and for those institutions.
Rob Johnson:
At some level we’re all affected by inferences and conjectures and parables and stories, not just the raw science, but if you really narrow down the signal to noise ratio to the scientific measures, you probably will, in this context, improve how you serve your customers, meaning the investors who’d do place a bet. I find though, as you know, I made a podcast recently, we talked about [inaudible 00:33:41] Jenkins, brilliant young historian from University of Chicago’s History Department, who did his PhD dissertation on California in these municipal bonds.
What you might call distorted ways of measuring and handling things. The very painful contortions in urban cities. He obviously focused on San Francisco while he was at Stanford, but because the insights into things like the Detroit bankruptcy of just a few years ago are extraordinary. There are a lot of ramifications here, in getting down to, what I’ll call that just passionate science, might make more sense. I had one question I wanted to ask you about Howard though, when Donald Trump was in the white house, people sensed that, which you might call racial polarity and inclusiveness was on the deployment. Did Howard’s credit rating go down for fear that, support that bail out money wouldn’t be there on the Trump administration’s like it would be say in the Biden and administration or the Obama administration before that?
Jim Nadler:
Rob, that is a great question. I have to say, I don’t know the answer to it. I’ll have to look now that you’ve raised it. That’s a really great-
Rob Johnson:
Just thinking what kind of conjectures people would draw about that. But the other thing that I think is important here, about what you might call scientifically precise and fair quality measures. We talked earlier with ESG about how they make guidance to do better things for society. But the other thing is expertise is under so much criticism now. When you’re doing false rituals, quantitative rituals of expertise that are really expert per science, or when you’re bailing out the too big to fail guys and pretending like that’s all okay or necessary, you’re destroying the credibility of governments, of expertise and of the institutions like [inaudible 00:35:54] and others that accompany or compliment that process. That demoralizes the public. That’s probably part of what fuels the flames and builds the kind of things like January 6th. I’m not trying to draw too tighter connection, but the process of integrity really matters.
Jim Nadler:
No, listen, you are drawing the right inferences because I think that, scientific analysis, however you think about it, has been under attack. This idea that institutions are somehow doing nefarious work, is because, these institutions have to do a better job of transparency. That’s the one thing that we believe in. First of all, I think it was under assault because, Trump didn’t like the results. That’s why it was under assault. We need to all understand that. But I also think that many of these institutions now fall [inaudible 00:36:59] in particular, because there’s this notion that you didn’t have to be transparent. You didn’t have to show your work. I used to have a teacher that always said, “Show your work.” Because you’re licensed by the ACC, people have to listen to you. Well, you know what? They don’t have to listen to you.
We built our company based on going out and talking to investors. Everything in the world is not black and white. There’s a huge gray area, particularly in the financial landscape. The gray area is messy, and it requires work. You’ve got to go out and you’ve got to get a 100 opinions and you’ve got to bring those opinions back and you have to synthesize them, but you’re going to come out with a more enlightened viewpoint that is transparent, and people are going to believe you because you’ve gone through that hard process. That’s what we’ve done and that’s what I encourage all of our competitors to do. In fact, I encourage all institutions to do that.
This idea that you can get away with, “It’s this way, because it’s always been this way and because we’re telling you that it’s way,” it’s not going to cut it. Young people today, they don’t buy into that. They want to see the facts. They want to see how you arrived at your conclusion. We have to be better about doing that. I think, it’s one of the strongest things that we’ve done. It’s one of the reasons that we have such a strong connection to our investors that we serve as. I think it’s one of the reasons that we’ve been able to build our company so quickly is that, we have spent the time and we continue to spend the time, I mentioned it before, when talking about ESG, it is hard work, the gray area, the messy part of every problem is always hard work. That’s where we thrive. That’s where KBRA really shows what we’re made of. And that’s what we’ve really got to change.
We’ve got to have investors that are demanding that, of everybody in the financial market, that we demand that you show transparency, that you show us how you came to that conclusion. As you said, that makes things. Then they’re blind to these eight needle, these antiquated thoughts that have sort of crept in to the way that we look at things. Because when you have to show your work, you can’t have a bias one way or the other. If the work doesn’t prove it, you can’t have a bias. I think that transparency is going to be the disinfectant that we need throughout the market. That’s really what KBRA is all about is this idea of showing your work.
Rob Johnson:
That was just fascinating, because, what you’re describing is providing a better service as a private sector entity to your customers. That’s a good thing.
Jim Nadler:
Correct.
Rob Johnson:
But it has something like an ESG side effect, which is, if the young people in this world see examples like you’re describing your firm, how do they say, aspiring to be. Then the notion that expertise is not just a ritual in marketing for power or for whatever agenda, but it’s actually a public good, helps improve the faith in the integrity of our system. I think that faith and integrity is in very short supply right now. You’re kind of doing well for your customers and doing good for rebooting for our society. I think these are very important concepts in expertise, whether you call it elite brand names or degrees or whatever or being laughed at on social media and there’s something-
Jim Nadler:
Right.
Rob Johnson:
… wrong, there’s something dangerous about that. But the idea there is dangerous because then how would I say, it’s like driving the ship without a rudder.
Jim Nadler:
Well, it’s how you get away with making outrageous claims that you can’t support. It’s because you get your customers so numb to not seeing how you came to your conclusions or how the expertise that, that people then start to question everything. That’s why I think you’re exactly right, right. We’ve got to get back to a time when people can rely on institutions, we can rely on expertise and it’s incumbent upon us to make sure that we’re doing everything in our power to make expertise important again. That I believe is through transparency.
It’s interesting, every year we hire interns and we hire young people and there’s been a dramatic change in the last 10 years in the way young people view the workforce, they’re demanding more of their companies. They want to know what your company’s view on Black Lives Matter. What’s your company’s view on Pride Month. What’s your company’s view on integrity? What do you stand for? I think that companies need to think about those things and need to be able to articulate those values in order to not only attract the type of investors that you want to attract and customers you want to attract, but also to attract people that want to work for your company, that see themselves in what your projecting. That’s a cataclysmic change.
When I started at Pricewaterhouse, nobody asked them what their views on racial diversity was. Nobody asked anybody, you were just glad to have a job. You didn’t want to raise your hand. You wanted to do your work and show that you could do your work. That’s not the world we live in today. I think it’s a good thing, because I think that the people are becoming stakeholders across the board and they’re wanting to be heard. I think that’s going to be a real force for good. We’re, I think learning as a company, how to take that really powerful viewpoint and then become sort of, have that help transform the way that we relate to our customers, whether they’re investors or whether they-
Rob Johnson:
I often tease my young scholars initiative. And they say, “Well, why are you so involved with us?” It’s now about 16,000 young people. I said, “Well, I’m here to mitigate the depth and the duration of your future mid life crisis.” I’m making a joke but not really, which is the nature of what you’ve done. Because the only thing that you have, that’s really scarce is time. How do you use your time? When you look back and tell your grandchildren, I have one grandchild and one on the way in the next couple of weeks, when you get back and you tell them what did you do? That question of, did I go to a firm where I was proud, not proud to have the brand name, proud insight of what I saw and when I used to- I used tot teach that joke, when I was in the hedge fund business with source fund management. Lots of students at Columbia University would come and want to get, what you might call career advice. We’d go out to a local pub or something and look at their resume and talk after class. I used to say to them, “The early part of your career, do not treat some money or prestigious brand names. Find a person as a mentor, who you would like to be like in an experience that will make you unusual. and that will create an attraction. Then it will create the skills and the compass that helps you navigate through what this is called, the sound souls of temptation.”
I just think this you’re you’re and by the way, it’s really awakened now. Because when I was talking to those people in the early ’90s the concerns about environment, the concerns about gender and race were nowhere near is heightened as you just described to me. But this is very important for, like I said, mitigating that future midlife crisis because some of this wisdom, rather than being kind of fast and loose, it’s very important.
Jim Nadler:
It’s interesting, Rob, when I put a woman on our board, I did it because she’s a fantastic person and she’s, wonderful. She was the CFO of Chicago, terrific person. But I will tell you, I was struck by, and it impacted me more than, than anything else was. I was struck by the number of young people, both men and women who came up to me and said, “Glad we have a woman on the board. This is terrific. Glad we did that. This really shows what we’re all about.” To me, it really, I think, put into focus and sharpened my, really got me much more attuned to, what people are thinking today and what young people, what they look at and what they value in the company they work for.
I think it’s happening across the landscape. I think we’re also seeing it from customers. They want to be in business with a company that has the same values that they have. That importance is only going to grow. It is, I think, going to be one of the ways in which we continue to grow, we continue to be able to grow much faster and much better as an economy, is that pressure by stakeholders, that are demanding that corporation. It’s interesting. I’ll give you a great example. You see all these studies that say, you can’t really tell whether a diverse board has any impact on the bottom line of a company.
I’m like, “You know what? You’re probably right. We probably don’t have enough. We haven’t had diverse boards for long enough to test that empirically, but I will tell you, because we talk to stakeholders all the time. Investors are beginning to demand that companies they invest in, have diverse boards and employees are beginning to demand that they work at a company that values and promotes diversity. That may not affect the bottom line today, but five, 10 years down the road that could impact the bottom line.” It’s important and we need to understand it and be able to incorporate it in the way that we evaluate companies going forward.
Rob Johnson:
Well, I think there are two dimensions that I would advocate and listen to you. One is, you want to live in a society where people are treated justly and what we call merit or whatever it is, somehow honored regardless of your gender, your race or age. That’s living in a more society, which is comforting. We all have subconsciously visions of a haunted house where something may make us the outcast. We see other humans treated badly. You don’t project say, “Oh, they’re doing that to Black people in Detroit where I grew up.” I don’t feel like, “Okay, they’re coming after me tomorrow.” ‘Cause I’m Caucasian.
But I do say, “They are going to have to change the conditions to where that kind of inhumanity could be visited on somebody because they went to MIT or arbitrary inhumane criteria.” I think this notion of justice on the platform, particularly for employees, whether it’s board members or their supervisors is important, but there’s another dimension of this. I’ll use a pen naval analogy, with more diverse experience, more diverse sensibilities, more varied, historic experience, becoming your compass and your radar. Your company is likely to be surprised less frequently because you have detectors from different vantage points.
Jim Nadler:
Right.
Rob Johnson:
All of whom serve, which might call the collective good for that company. I can see both reasons for the feeling of working in a just place and feeling you’re working in a more intelligent place and they’re not in competition with you.
Jim Nadler:
Right. We end up coming to more enlightened conclusions because we have much more diversity opinion and have much more diversity of input. I agree with you. I think it’s both sides of that equation.
Rob Johnson:
Well, when I thought about our conversation the other day, I often, as my audience knows, bring some kind of musical analogy or whatever, to the conclusion. The person that came to my mind when listening to you the other day, right as you were talking, was Bob Marley, because I have always felt he’s the person who fused good hearted, what we might call love with politics in a way that was very nourishing and inspiring. A friend of mine sent me a little image with a picture of Bob Marley and not because we talked, but it was coincidence.
Rob Johnson:
I saw it this morning. Marley said, “The greatness of a man,” and it could be a woman, but that this I’m just reading what he said, “The greatness of a man is not in how much wealth he acquires, but in his integrity and his ability to affect those around him positively.” That’s what I sense you’re doing. I’ve said it couple of times, you’re doing good and doing well at the same time, but they’re not… Well, if their intention, you have cultivated a spirit, which knows how to, as I call it, push away those siren songs of temptation and navigate on true paths. I wish you all the best in making as much money as possible. I want people to become more and more familiar with your example, because I do think you’re affecting those around you very positively at a critical time.
Jim Nadler:
Thank you, Rob. I really appreciate it. I can’t tell you what being compared to Bob Marley is going to do for me with my credibility about my children.
Rob Johnson:
Well, you earned it. That’s a good thing. If they want to argue about it, to send them to me. Thanks again.
Jim Nadler:
Thank you.
Rob Johnson:
I really thank you. Check out more from the Institute for New Economic Thinking .ineteconomics.org.
