"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

These participant's notes were created in real-time during the meeting, based on the speaker's presentation(s) and comments from the audience. These should not be viewed as official transcripts of the meeting, but only as an interpretation by a single individual. Lapses, grammatical errors, and typing mistakes may not have been corrected. Questions about content should be directed to the originator. These notes have been contributed by David Ing (daviding@systemicbusiness.org) at the IBM Advanced Business Institute ( http://www.ibm.com/abi).

Welcome

• 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 Eastern world)
• Feudal states:  geographically limited states
• Roman Catholic Church
• 19th and 20th Century:  nation states, had more resources
• For first 3/4 of 20th century, global centralization
• Marxist Leninist to Lyndon Johnson
• Broad claims
• 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.

Agenda:

• Roger Martin, "Capital versus talent"
• Dan Trefler on childhood development
• Foursome of Rotman stars:
  • Jack Mintz
  • Maria Rotundo:  performance review
  • John Hull:  financial derivatives
  • Jim Fisher: leadership
• Session closes with Shoshana Zuboff, Harvard Business School
  • 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 SARS
  • Shoshana is helping out in a pinch, will be speaking from a tv studio in Portland, Maine.

"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 list.

IBM, Intel, etc., no students were showing up for campus interviews

• Everyone going into consulting firms, or tiny companies with no resources

1987:  Buffett invests in Solomon, Inc -- investment banking

• Terrible returns
• 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
• Capital won

Labour collectivized and politicized:  1935 to 1960

• 1935 Roosevelt government passed National Labour Relations Act
• American Federation of Labour created organization of labour: AFL/CIO
• 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 labour.

Will be a miserable time for capital.

• Changed reality
• 1960 to 2000 will be seen as a magic period for capital.
• Labour hadn't woken up.
• Little pools of talent had, but not widely.

Capital will get hostile:  tired of passing through talent.

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, publicists.
• Each has finger in the till
• Record business has these problems, plus downloading kids
• 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

[Questions]

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 talent!
  • The only way to judge a good surgeon is to be a good surgeon judging
• 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 return
• 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 2020?

• Do talk about this in the article.
• Capital as abundant and generic -- mostly in America, in the creation of capital markets.
• 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 that did.
• 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 enough
• 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 capital.
• 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 leave.

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 countries.
• But compare Bangalore, even as compared to 100 miles from Bangalore.

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 business.

• There's talent in every business.
• The cutting edge question is the "how much" versus "what's enough".
• In investment banks, there's a huge number of people in the "how much" category.
• 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" category.
• In investment banking, 55% to 60% of people are in the "how much" category