"Capital vs. Talent: The Battle That's Reshaping Business", Roger Martin -- Rotman School -- Lifelong Learning, May 30, 2003, 8:30 a.m.
Roger Martin, Dean, Rotman School of Management, U. of Toronto
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Lifelong learning: warranting your degree for life.
Proactive maintenance every year.
A great business school should create great content and share it when it's at the leading edge, not when it's late.
Financial Times: 5 years ago, U. of Toronto was in top 100, now top 10
The last dean thought becoming a top school was an embarassing goal.
Theme: A tricky time of capitalism
Theme of previous issue of Rotman Management.
Capitalism is facing a tricky future
Throughout history, a institution has picked up the
responsibility of well-being and prosperity.
First city states.
Then empires, e.g. Roman Empire (and similar in
Feudal states: geographically limited states
Roman Catholic Church
19th and 20th Century: nation states, had more
For first 3/4 of 20th century, global centralization
Marxist Leninist to Lyndon Johnson
USSR fell, China backed down, Chile / Haiti / Iran; Thatcher and Reagan --
nation state couldn't guarantee well-being and prosperity
Argue that business has been thrust into the position.
View that government is context
Church for spiritual
Business for economic
Argue for corporate social responsibility
No institution that can push business out of the way.
Business can't do it all.
Wrote Virtue Matrix
Focus on corporate social responsibility.
Roger Martin, "Capital versus talent"
Dan Trefler on childhood development
Foursome of Rotman stars:
Maria Rotundo: performance review
John Hull: financial derivatives
Jim Fisher: leadership
Session closes with Shoshana Zuboff, Harvard Business
Wrote in 1988, The Age of the Smart Machine
Just wrote The Support Economy
She will be controversial
Originally she wasn't on the program
Original speaker said couldn't come, because of
Shoshana is helping out in a pinch, will be speaking from a tv studio in
"Capital vs. Talent: The Battle That's Reshaping Business"
Article that Rogert Martin is publishing in July 2003 Harvard Business Review, so this is a preview
Meeting in 1978 -- George Lucas, Michael Eisner
(Paramount), Barry Diller (Paramount)
About rights for Raiders of the Lost Ark
Lucas and his lawyer wanted a 50/50 split
Eisner and Diller asked what Lucas would put up; he said the film
In addition, wanted 50/50 split after distribution and overhead
Paramount decided they would take the deal.
Theodore Forstman -- fund
2% management fee, but in addition, 20% of upside
over 6% return.
Now he's worth $800 M
George Soros followed with the hedge fund
Kleiner Perkins venture capital
By 2000, 15 venture capitalists all on the top Forbes
IBM, Intel, etc., no students were showing up for campus
Everyone going into consulting firms, or tiny companies with no resources
1987: Buffett invests in Solomon, Inc --
Every though ROE dropped, bonus pool for partners was
up $12M for 12 partners
He took over as chairman, and took $110M of bonus
pool to shareholders
Then widespread defections that made Solomon less
Traveller, then Citycorp, now Solomon name doesn't existe
1991: Jeffrey Katzenburg (Disney Studios) leaked a
note to Variety -- why do studios take all of the risk and put up the money, but
the talent (writers, actors) get rich?
CEO compensation dropped between 1960 and 1980
33% less per dollar of earning generated
1980-1990, pay for CEOs doubled per dollar of earning
Quadrupled between 1990 and 2000
What happened around 1980?
Pattern that connects strategy consultants, Lucas,
Initial skirmishes in a long and tough battle between
capital and talent
Echo of the 20th century war between capital and unskilled labout
Second industrial revolutoin: 1900 to 1935
Movement to cities -- Morgan, Rockefeller, Forbes,
... investing in large factories
Needed unskilled labours, bid down returns to labour
Labour collectivized and politicized: 1935 to
1935 Roosevelt government passed National Labour
American Federation of Labour created organization of
In 10 years, tripled the number of union members
Mainteained this stabley until the 1960s
Round three: 1981
Business moved to Sun Belt, Far East, non-union
telecomm and computers
Strong support of political right: Thatcher
1979, Reagan 1981
PATCO air controller strike 1981: fired those
who didn't go back to work, with little impact to safety
Labour in full-scale retreat: 13% in 2000
Bull market 1983 to 2000
Talent began to flex its muscles
All decided that their share of market was too small
There's an abundance of capital, and a buck is a buck
It used to be associated with Rockefeller, etc., with a specific person
Returns gets bid down
Emergence of skill as important
1950s: Choice between financial assets or human asset?
Would choose financial. Now would choose asset.
Talent is now in its ascendency
Between now, and 2025
New types of talent: pharmaceutical engineers,
In dot-com era, 5 software engineers put themselves
up on eBay.
Now, question is how much
Shift from what's enough, to how much can I get.
Uniqueness: will be difficult for generic
Will be a miserable time for capital.
1960 to 2000 will be seen as a magic period for
Labour hadn't woken up.
Little pools of talent had, but not widely.
Capital will get hostile: tired of passing through
Think that labour will collectivize and politicize (again)
e.g. Canadian Coalition for Good Governance: pension fund managers to
fight against talent, specifically CEO
Think Canada will be a leader.
David Beatty is president of this coalition
Politicization: Bill Clinton signed on taxation limit -- the
first $1M taxable, based on pension funds
Pension funds are allied with the left -- a flip flop, Democrats support
capital, leaves Replicans supporting labour
Drucker: pension funds became capitalist, but the capitalists came
under attack by talentx
What strategies for capital?
Don't do an Edgar Bronfman, Jr. -- trading Seagrams /
Dupont for Universal was a dreadful idea
Movie and record business are talent businesses, lots
of layers of capital
Who lies between capital and their returns?
Movie business: Production companies, stars, agents,
Each has finger in the till
Record business has these problems, plus downloading
These aren't great industries for capital, although
they're great for talent
e.g. consulting business
Best businesses for capital have three characteristics:
Assets that can be built with relatively generic talent.
Can own asset
Don't need masses of talent to operate
e.g. Canadian retail banks are good for this; Canadian
investment banks are bad for this
e.g. P&G is good; Loblaws is good -- Dick Currie
earned a lot of money, but he was the only one
Capital has to watch for a run on the bank:
Major contagion effect
When Lucas started this, everyone else followed
Diller called this Eisner's decision
At this moment, capital should have exited the business
Similarly at the mid-point of dot-com boom
Talent got spoiled
Owners of capital need to stay involved
Unatttached capital will get taken over.
Self-directed RSP is one less than professionally managed -- means will
pay top dollar.
Capital and talent will work together
Lucas with Eisner
The first real auction.
Group together talent (e.g. George Lucas) and CEOs (who destroy capital by
taking some). Distinction?
The ability to judge, ex ante, capital, is difficult.
If they could judge talent perfectly, they would be
The only way to judge a good surgeon is to be a good surgeon
Dick Currie earned it; George Lucas earned it.
The problem is that there are a whole mess of others
who have a claim to talent, but can't make it.
Only solution to hire talent to pick talent, but then they'll take their
Capital will pass through the hands of more talent
In globalization, the ideas on the western world. The lines are getting
blurred. Human capital is becoming available. Powers like China by
Do talk about this in the article.
Capital as abundant and generic -- mostly in America, in the creation of
In India, capital is much more important.
What's important is arbitraging happens much more rapidly.
Why 45,000 Indian engineers in Silicon Valley?
They didn't have an upper hand in their home country, and went to a place
This is a tricky issue for global development.
Said that capital could collectivize and politicize, as did talent.
What should talent do?
Talent did collectivize and politicize.
Capital is mad. They will be more aggressive.
Talent and capital in marriage, in entrepreneurism.
Attached capital will be the strongest form of capital.
e.g. Bill Gates has money tied up in his business.
Others have extracted a lot, e.g. Steve Ballmer -- how much, not what's
The publically-traded corporation is usually thought of as the epitome,
but it's only been around for 70 years.
Think will head back to more semi-private companies, as in the 1920 and
1930, as with Rockefeller and Morgan.
Then investors have some one who will look after their
It's more indicative of what will happen in the future: talent says
that I can extract lots of rents.
e.g. Stronach at Magna
The concern is that it's so up front -- the rents are built into the constitution
Shareholders will find that executives get 20 years of pension benefits,
right before they were fired.
Long term: what's the internal sharing of the 6%? Will
Stronach keep most, or will he share with others, so that the talent won't
Right now, an oversupply of capital. Capital is available for a low
price. In certain sectors, IT services in less-developed countries.
Is this something that capitalists can leverage?
Yes, this is one tactic, where capitals use talent from other
But compare Bangalore, even as compared to 100 miles from
In the global economy, a lot of financial services impacted by IT. e.g. ING
Direct. Platforms threaten franchise. Banks have huge capital
bases. Steady returns. Necessity for talent management in stodgy
There's talent in every business.
The cutting edge question is the "how much" versus "what's
In investment banks, there's a huge number of people in the "how much"
Was in a position leading consultants, giving bonuses. Give $2M,
but then consultant argues as compared to how much?
On the retail side of bank, 95% of people in the "enough"
In investment banking, 55% to 60% of people are in the "how much"
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