How Do You Vet Your SR Fund Manager?

Pax Management Group has been fined $500,000 by the SEC for having failed to properly vet its investment for being socially responsible, as promised. As a result, it made investments in companies that fail to meet its own criteria. The one thing that is good in all this is that Pax has not attempted to make excuses. Unfortunately, they also "haven't admitted guilt". But CEO Joseph F. Keefe has claimed they are doing a top-to-bottom review of practices to correct this problem for the future, and have already made significant improvements.

Perhaps the more interesting dilemma here stems from the way that they violated their principles. Amongst the offensive securities purchased are: Anadarko Petroleum Corp., an oil and natural-gas exploration company; Darden Restaurants Inc., which operates a chain with its own micro-brewed beer; and Jacobs Engineering Group Inc., a defense contractor. Why are these problematic? Because amongst the industries that Pax promises to avoid are those that engage in military contracts and tobacco commerce. But the lines are very broad strokes indeed: Here is a piece from the Pax Sustainable-Investing Overview brochure:





As you can see -- (well, it's kind of small. You may need to have a younger friend read it to you) -- the criteria are pretty loosy-goosy. Besides, in the world of consolidation and massive multi-national conglomeration, how do you escape the ultimate deconstruction of your investments into being offensive in a minimum number of degrees of separation?

Choose whatever "blue chip" security you like, and in a game not unlike the famous Kevin Bacon parlor game, in fewer than 6 degree of separation you can connect it, intimately, to guns, tobacco, human rights offenses and the like. Go ahead, try it!

Take, for example, IBM: What do you know, IBM owns oil refineries and oil "exploration" companies! Now, I wonder, do you think all that oil exploration is here, in the so-called FREE world, safe from the control of foreign oil? Doubtful.

Okay, what about, say, General Electric? What d'ya know, GE provides engines to the military. And so forth.

These are weak cases, easily found and so not as bad as one might expect. But dig deeper and you'll find those connections. So is it even possible to stay "clean"? Doubtful. But it's nice to think that people are trying, even if only for the sake of window-dressing. Right?

Here's Some Evidence That Change is Possible and Really Happens.

Having been in last place amongst major airlines for on-time performance, US Airways was a sort of pariah amongst fliers in the know. When your brand is that beleagured, in some ways there's no where to go but up.
Instead of mere incremental change though, US Airways has taken its dire performance and turned it on its head. Through a text-book example of strategic goal-setting, planning, operational improvement and some simple but effective ingenuity, they have taken over 1st place.
Southwest Airlines, the usually unbeatable rival, has been dethroned. The systematic approach to making these changes is a great object lesson in the massive strength of lots of small changes made at once, and consistently performed. No single step is Earth-shattering -- but neither was any circumstance used as an excuse for failure. Weather problems that plague the mid-west could have been an impediment -- so could the fuel prices that have forced flight cancellations. But Robert Isom, COO, never relented in his focus on turnaround, nor did he allow the entire organization to fall off the track. Instead, every instant of the chain from conception to flight was assessed, and each moment that could possibly be addressed was transformed from a moment of peril into a positive moment of truth. For detail read the article in the Wall Street Journal. Then extract any of a thousand lessons from this tale to use in your own life or organization's path toward being a high-performance, strategy-focused force of nature.

When Offshored Customer Service Sucks, Stock Value Drops. Shocking!

The WSJ report “How Offshore Outsourcing Affects Customer Satisfaction” states customer satisfaction drops when outsourced and off-shored customer service is implemented. They then cite reasons for that drop in happiness. I was bemused that these findings are seen as a “discovery”. It ought to be obvious that whenever an organization cedes control of the treatment of its customers to anyone, even an internal employee, things will go awry.

The same principles that make internal customer service work ought to be applied to outsourced or off-shored service. For example, most department store customer service lacks for the same reasons that the authors cite as causing deficiency in off-shored service: lack of training, lack of authority, lack of information. The contrast that proves the rule is an organization like Nordstrom. For them to deliver on the promise of their customer service they have multiple structures in place to encourage their employees to err on the side of great service, as well as granting sufficient authority to them so that they have the freedom to make those right choices. Go to any of their competitors and try to return an item and the violations of these principles are readily apparent. Returns are handled in a centralized location. Only certain employees (managers) have the authority to accept returns. The conditions under which returns are accepted are strict, making the entire process onerous. The limitations on authority make it a gauntlet. Remove those restriction, add a great deal of training on both operations and the logic and principles that underlies decision-making, and voila, customers have a good experience – a positive “moment of truth”.

These same kinds of problems are ubiquitous, both in internal customer interactions and those that take place via outsourced or off-shored employees. Organizations that want to avoid falling prey to the drop in customer satisfaction – a drop that obviously is causally related to a drop in stock value – need to be vigilant about maintaining a deep level of empathy for their customers’ experiences, and ensuring that they remain positive through their policies, procedures, training and control of the behavior of those acting on their behalf. Keeping it in-house is no guarantee of excellence. Off-shoring or out-sourcing is no guarantee of inferiority. Both are subject to the commitment and vigilance of the organization whose reputation and value perception is at stake.

So Who Is For This Campaign Finance Reform Thing? Not the Presidential Candidates.

So -- how about both presidential candidates de facto opting out of the campaign finance legislation that McCain co-wrote and Obama supports? Today we hear of McCain's benefiting from the back-handed slippery antics of fellow Republicans. Basically, State Governor's Association campaigns are able to collect unlimited funds that they promote as helping McCain's bid. McCain's campaign is adamant that they don't benefit and that they don't advocate the Governors Association representatives claiming otherwise. That's pretty hard to swallow. Clearly, unlimited funding of Republican interests in a State can't help but reflect back on McCain -- even just in the form of photo ops. But, as the campaign is keen to point out, they're not breaking any law.

And we all know about Obama's broken promise to use federal funding. His excuse? The campaign finance system is broken. Until it's fixed he's forced to receive private funding.

Both candidates follow the letter of the law -- neither the spirit. So much for being Principle-Powered.

It makes it hard for a simple girl like me to distinguish them from each other.

Although it makes it very simple to tell which one is the real deal.

Neither.

Starbucks' Strategy U-Turn

For many years now Starbucks has been lauded as the example of strategy that disproves the notion that close proximity of company-stores cannibalize each other's business. In fact, there are lots of management articles claiming that the seemingly epidemic-like proliferation of new Starbucks shops was proof that the market was "unsaturate-able".

"It is simple: saturate the market. The accepted business model at the time was to spread out the location of your chain outlets so as not to cut the profits of one store from another. Typically, stores would place their retail outlets in locations based on demographics, traffic patterns, the location of competitors as well as the location of its own stores. However, the Starbucks strategy went against the grain. Instead of following the trend, CEO Howard Schultz had a different idea. He decided that the Starbucks strategy would be to blanket an area completely.

Instead of worrying about stores eating up each other’s business, the Starbucks strategy focused on heavily increasing the foot traffic in one specific part of town. Not only would this cut down on the company’s delivery and management times, but also it would shorten the waiting lines for customers at each individual store and hopefully increase overall traffic. Schultz knew that his Starbucks strategy was a risk, but it was one he was willing to take.

In the end, the unique Starbucks strategy paid off. Clustering its stores in one area helped Starbucks quickly achieve market dominance. With over 20 million regular customers per week, no other American retailer can claim a higher frequency of visiting customers. Since the company went public, sales have risen roughly 20% each year. Even when the rest of the economy seems to be in a slump, loyal patrons keep returning to Starbucks for their regular cup of Joe. " (click here for full article)

If you, like me, were one of the doubters, you should feel vindicated. Starbucks is joining the legions of companies laying off employees -- 12,000 of them -- and closing 600 under-performing stores. Why? Well, it turns out that people are not as lazy as once believed, and stores across the street from each other share some of their customer base with each other. That means that a new shop doesn't earn its keep through the creation of a whole new marketplace.

Apart from the gloating opportunity that this is, there is a strategy lesson to be learned. The assumption that endless growth would ultimately saturate the market -- coupled to the belief that the saturation point was far off in the distant future -- underpinned the entire Starbucks strategy. That assumption also had an ancillary piece: that competitors would be squeezed or locked out by virtue of the seamless net of Starbucks shops. Neither assumption turns out to be true. The first for reasons already stated, and as for the second, the competitors continue to come. None can take away Starbucks' ownership of the space, but they certainly eat away at its dominance.

It's sad that Starbucks has taken so long to realize its error, and that so many will suffer as a result, they are demonstrating the notion of scientific strategizing. When the cause and effect relationship isn't borne out by the numbers (albeit by virtue of lagging indicators which come a bit late to avert disaster) the hypothesis must be reexamined. The reexamination was what the plunging stock prices were suggesting. At last, the advice has been heeded.

Thanks for the object lesson Starbucks!

Florida Goes After BoA Now That They Own Countrywide

Now that they own Countrywide, The Attorney General of Florida is hitting deeper pockets the day after the Bank of America acquired Countrywide (and all of its liabilities).

This is just another in a spate of suits against Countrywide for unfair practices as it spread the gospel of easy home ownership. But new revelations are emerging in this case -- revelations that go to the heart of being Powered by Principle. Amongst the accusations stated within the suit are claims that Countrywide "threatened to fire its own underwriters if they tried to verify the ability of borrowers to pay". Even when it was perfectly obvious that the borrower would be over-extended, and when conventional (and even extraordinary) standards for loan to income ratios were exceeded, Countrywide personnel rubber-stamped the loans.

What principles were expressed here? Certainly, quick revenue (and higher revenue gained from more predatory loans) was one concern. But where were the concerns about risk management, long-term shareholder value, customer service or any of the other stakeholder claims one would expect?