We could use some more time to understand what went wrong with our economy, and to get Wall Street back in proper perspective
Everyone is asking the same questions: Have we hit bottom yet? When will the recession end? When will things go back to the way they were?
As a chief executive, I'm as eager as anyone to put the recession into the past. A growing economy benefits everyone.
But now that there are signs of recovery, there's a part of me—and I'm reluctant to admit this—that doesn't want things to get too good too fast. I think we could use some more time to understand what went wrong with our economy.
That's because I'm not sure we've fully absorbed the lessons from this difficult, painful, and troubling time.
Saving for the Future
To be sure, we've learned some things. We've begun to save for the future instead of spending money we don't have. We're more wary, as we should be, of people selling us investment products that sound too good to be true. And we've learned that no company is too big to fail. Size alone does not guarantee long-term survival. To the contrary, the aggressive pursuit of scale—whether it's more revenues, profits, customers, or stores, or a bigger market capitalization—tempts companies to lose sight of the values and principles that lead to true sustainability.
If we return to business as usual too quickly, we will miss the opportunity to create the new habits of thought and behavior that we need to build sustainable economic growth.
One place to start is by restoring Wall Street to its proper role in society, which is to serve investors, entrepreneurs, and companies. For the past couple of decades, America's best and brightest college graduates and MBAs flocked to Wall Street. And they did so for a simple reason: They could get rich quickly.
As Simon Johnson, a professor at Massachusetts Institute of Technology's Sloan School of Management, reported in The Atlantic, between 1948 and 1982, average compensation in the financial sector ranged between 99% and 108% of the average for all domestic private industries. On average, Wall Street bankers made just a little more than executives elsewhere. Compensation in financial services began to climb in the mid-1980s, and in 2007, it topped out at 181% of pay elsewhere.
Wall Street's profits grew rapidly, too. During the market slump of the 1970s and early '80s, the financial sector never accounted for more than 16% of domestic corporate profits. By the 1990s, banks and insurance companies were capturing between 21% and 30% of U.S. corporate profits. During the 2000s, the figure topped 40%.
By then, the investment banks were focused on "innovation" and "financial products," including the structured finance products, collateralized debt obligations, and credit default swaps we've heard so much about. While some of these creations were well intentioned—mortgage debt was pooled, in theory, to reduce risk and enable more people to buy their own homes—much of it was overly complicated and intended to enrich the bankers at the expense of their clients.
In the rush to create new financial "products," banks lost sight of their core mission. In truth, their role is to safeguard the financial resources of their customers and to help allocate capital to productive uses in society. In the future, bankers should worry less about their own "innovation" and more about supporting the real innovations of entrepreneurs and others who create tangible value. Wall Street is supposed to be in the financial services business—that is, the business of serving others.
A society that has too much of its energy, smarts, and capital flowing to Wall Street is, by definition, underinvesting in the rest of the economy.
In the future, let's focus on the traditional strengths of the American economy. Here are three things we do well:
1. We produce trust better than other societies.
The U.S. economy has prospered because we respect the rule of law, contracts, intellectual property, and transparency. That's why it's so painful when trust is betrayed. By rebuilding trust, America will attract the capital and the people we need to thrive. Banks will again lend, investors will embrace risks and entrepreneurs will dream big—but only after trust is restored.
2. We solve problems by deploying the forces of capitalism.
While government policy is important, businesses built the railroads, created the automobile industry, enabled global communications, and generated the growth in personal wealth that, even now, after the housing bust, allows about 67% of Americans to own their homes. We need our best and brightest today to devote themselves to our big problems: the environment, health care, and education. Business can help lead the way. Many companies already are—look at Wal-Mart's commitment to sustainability or GE's new effort to help deal with the cost and availability of health care.
3. We create real value from values.
We do our best when, instead of pursuing short-term success, we are inspired by values. Most great businesses are driven by values. By that, I mean that they are other-directed; they focus on the needs and wants of their customers, workers, and communities. Just as important, they go about their business in a principled, consistent and transparent way. Examples abound: Google (GOOG) with its drive to organize all of the world's information, Walt Disney (DIS) with its desire to entertain families, UPS (UPS)with its goal of enabling global commerce to thrive.
These are among the big ideas that we can take away from the global economic meltdown. They're about more than spending, saving, borrowing, regulating, or reading the fine print in an investment prospectus. Business leaders need to have a thoughtful conversation about these ideas—and that will take time. Let's get started now.