05.27.08
Ageism, Mistakes, and Corporate Governance
Law is the wisdom of the old,
The impotent grandfathers feebly scold;
The grandchildren put out a treble tongue, 

Law is the senses of the young.
—W. H. Auden
“Law Like Loveâ€
One of my favorite moments from investment meetings occurred when an analyst in his mid-30s was struggling to explain why his favorite investment idea had gone awry. This was a major consumer products company whose stock had tanked and new CEO and management team had been sacked, having badly misjudged the company’s markets and squandered a good deal of the company’s magnificent brand equity. “I just don’t understand it,†he’d said. “They were even . . . young.â€
There may not be much that is new under the sun, but I would submit that comments such as this were unlikely to have ever been made anywhere in the world before our present age. In the wake of the latest bursting bubble, and only eight years after the collapse of the High-Tech stock market, perhaps investors need to consider whether the prevailing ageism of our society has risen to the point where it becomes a concern for corporate governance as well.
Usually, it is the other way around. An aging or even senescent chairman and his long-serving board refuse to surrender control or designate successors, and a shareholder revolt is necessary before fresh blood can be brought in to revamp strategy, modernize production, and eliminate poorly-performing product lines. This is the reason why most governance activists focus some attention upon the ages and lengths of tenure of directors, and most consider it positive if a company has retirement rules for directors, as it does for other employees. Just as a ‘seniority culture’ can rob a company of innovation and energy, as well as fueling turnover of exactly those employees one needs to retain, a gerontocracy in the boardroom can make it impossible to implement long-needed changes of the most fundamental sort. A major objection to the “Imperial CEO†is that, as human experience has all too often shown, most absolute rulers stay too long, not that they do not stay long enough.
But one can have too much of a good thing. Not only does imposition of a radical youth culture rob a company of the judgment most likely found in experienced managers and directors, it removes all sense of continuity. The young have no investment in the past because they have very little past to invest in. Outsiders are in an equivalent position: with a different personal history, they normally have no feeling for what made the company (and most of its existing employees) tick, and what will motivate or demotivate them. Too much turnover at the top can cause the company to lurch first in one direction, then another, with very little ability to keep the whole organism (and a company is an organism, no matter what the charts and diagrams in a consultant’s presentation might imply) working smoothly together. One major consulting organization supposedly recommends an employee average turnover rate of seven years. Unless one is dealing with a totally failed business culture, such advice is not only erroneous, it is criminal.
As Shakespeare’s Iago ironically notes, you cannot make a silk purse from a sow’s ear. Nor, pace naive optimists, can you make an honest man of the vicious, deceitful Iago. Similarly, you cannot make a tractor and earth-moving company into a branded fashion products company, a distilling company into a media company, or the Last National Bank into Goldman Sachs. You can, of course, fire everyone and start from scratch, but that is not transformation, it is green-site construction using someone else’s money. Re-positioning can be beneficial and necessary, but there are many limits, not the least of which are public perceptions and the entry barriers to another, already competitive marketplace. The chief virtue—and vice—of the young is that they have always had a hard time believing in limits. And occasionally, amazing transformations do take place. But they are the exception, and to depend too much upon one’s ability to make miracles is a good way to land with a crash. For one’s employer, older and supposedly wiser, to depend upon a lucky star to continue to make miracles, is not merely the triumph of youthful hope over experience, it is imbecility.
The dream that someone has come up with a way to repeal the hard laws of “that dismal science,†economics, is a youthful dream. Enormous advances have been made, and we no longer live either in the subsistence economy of our ancestors nor in the Malthusian world of the 19th Century. But the New Era of permanently higher equity prices of the 1920s dissolved in tears, conglomerates turned out to be less, not greater than the sum of their parts, the Nifty Fifty with their 40 to 100X p/es were taken out and shot one by one, Web-based merchants turned out not to be able to sell more than the disposable income of every country on the globe, and now we have discovered that a carefully structured basket of high-risk mortgages is still risky. It is not that the enthusiasm of so many young analysts, portfolio managers, and traders was utterly misplaced, but that having demonstrated there was merit in their analyses, large organizations proceeded to bet their entire future upon them.
Concerned, responsible investors—not those momentum-driven types inclined to chase every ignis fatuus hither and thither in the swamps of investor fashion—should be equally concerned when the management of a company in their portfolios shows no sign of being capable of renewing itself with fresh blood, and when a management commits itself blithely to radical house-cleaning for no obvious reason. A lack of experience is always a disadvantage, just as is a refusal to take reasonable risk, or a refusal to pay attention to new trends and developments in the marketplace. Sometimes one may compensate for one’s own disadvantages by judicious use of the abilities one does have, but it is a struggle, and it is up to the skilled manager to see that a certain balance is preserved in decision-making, and in the corporate culture. It is a board’s job to see that management tries to compensate for its deficiencies, not that it pretend those deficiencies do not exist because the last few quarters have been strong.
The Société Générale’s senior management was stunned that a rogue trader could almost destroy their bank. Daniel Bouton, the Chairman and CEO, was especially astounded that so much damage could be done by someone so young and unimportant that no senior executive had so much as heard of him. I must insist on the contrary, it is only someone so young who would have had the temerity to try such an outrageous scheme. We have all grown up with the ever-compelling story of the fearless youth: a young man no one had ever heard of scaling the heights, unaided, in one heroic rush. It is the story of the youthful King David, the Siegfried of Wagner’s Ring, the boy Arthur who pulls the magic sword from the stone. It is also, alas, the real-life history of Jérôme Kerviel, except that he and his employer fell flat on their faces. This is the true apotheosis of the youth culture.