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Q&A: "Okay, but what about ...?" (financial management) (Special Global Report) (panel discussion)

The speakers invited to FEI's 59th Annual conference held in Chicago recently are all high-level business and political figures in the U.S. and Canada. They're strategic thinkers, the people who lead our country throgh their decision-making. At the conference, they spoke of the global implications of our actions at home and the national implications of our actions abroad. But some of the most important insights they shared with the financial executives were their impromptu answers to some provocative questions posed by the audience. Here's a sampling of those exchanges.

Q: What will the financial services industry look like in 10 years? Who will survive?


Chairman, Continental Bank Corp.: "I think it will be much more differentiated. One player will sell one thing, and another player will sell another. There will be fewer players, but the ones remaining will be more focused. And I hope that a reasonable proportion of American firms will survive globally. I don't accept the notion that we're condemned to failure by the regressiveness of our government policy."

Q: What effect will the new risk-based CaPital rules have on the pricing of bankproducts?

THEOBALD: "First, I think the approach is fairly esoteric. The Central Bank regulators, including the Federal Reserve, have tried to capture more components of risk than are obvious on an FASB-type statement, to use that as a measure of capital required in a bank. But analysts, rating agencies, even regulators continue to use standard, FASB-type reports. So the risk-based rules have had a relatively modest impact on pricing.

What will raise prices, however, is that there will be fewer banks and these banks will commit less capital to the corporate business because it hasn't been very profitable. Fewer salespeople will try to get your business, because salespeople are expensive and they haven't been covering their costs."

Q: What are your views on computerized arbitrage trading between Chicago and New York? How about 24-hour trading?


President and CEO, Chicago Board of Trade.. "While there's nothing wrong with arbitrage trading-in fact, it brings the markets closer together-what you really need are coordinated circuit breakers. The NYSE recently assembled a blue-ribbon committee that recommended circuit breakers at certain levels, but when the Chicago Board of Trade and the Chicago mercantile Exchange adopted the resommendation, the NYSE committee rejected it. If the markets are going to function as we want them to, we need some coordination.

"Twenty-four hour trading is here to stay. A few years ago, when the Japanese decided they wanted to trade the U.S. Treasury bond, we decided we couldn't let them get a toehold on our market in their time zone, so we would need to begin trading in an evening session. But that meant establishing another operation, another entire shift. So the then-chairman of the CBOT and I went to New York to get advice from 10 of our large member firms-companies like Goldman Sachs, Salomon Brothers, and Dean Witter. All but one advised us against establishing an evening trading session, saying we could never beat the Japanese. We realized that, if that's the type of confidence that American business has in American exchanges, we've got a major problem. We opened our evening sessions anyway, and today we trade four to one against the Japanese, because we make a better market. But if we would have shrunk at the challenge, they would be taking our market away right now."

Q: How do you verify the quality of the information you use when viewing foreign investments?


President, Fidelity Management Research Co.: "About three years ago, Fidelity established a joint research venture between our international and domestic companies. We now have 30 analysts abroad following foreign companies. It costs more and takes more time and attention to cover foreign companies than it does to cover those in the U.S., and the quality of information is not as good. Both disclosure requirements and conventions abroad are very different. in some foreign markets, for instance, companies will not respond to our monthly phone calls, which is one way we collect information in the U.S. The only way to assure yourself of quality information is to have analysts on the ground, and it takes a lot of them to do a satisfactory job."

Q: What method should an individual investor use to find undervalued foreign investment opportunities?

BURKHEAD: "You have to have access to good investment research. Many U.S. brokerage firms are putting substantial numbers of analysts abroad, hiring good people in Tokyo and London, and these companies can provide good investment advice.

"One caution: investment research abroad is not the same as that in the U.S. The level of research we get from brokers in London and Tokyo, for example, is very different. For one reason, the financial problems of the London brokers have curtailed their availability to investment data."

Q: How will the definition of creditworthiness change to make credit more difficult to obtain?


President, CIGNA Investments: "We'll get back to the basics when we're looking at businesses and their cash flow and balance sheets. That in itself will make it more difficult for some companies to get credit. The other reason is that there is less credit available, with the bank and S&L problems. But those are short-term problems that will work their way through.

"We do, however, need to look more rigorously at what we're financing, particularly in the real estate market. That market will see the greatest change in how money is made available."

Q: Is your answer the same if you believe the U.S. savings rate will increase?

TRUMBULL: "Yes, because in a global financial market, we'll look to invest in companies that offer the best value. And I don't believe they will always be U.S. companies, but rather companies that have global operations, be they U.S.owned or not."

Q: How do we get professional investors to consider long-term rather than short-term results?

TRUMBULL: "Well, how do we get customers who ask professional investors to manage their money to consider long-term rather than short-term results? I tend to take a longer-term view because, in the end, reality is the best test. But it's interesting how, when I own a million shares of stock in a major U.S. company, the CFO wants me to take a long-term view, to understand R&D spending, to understand reduced earnings because of an investment in a new factory. When I talk to him about the money I manage for the firm, however, he wants to know why the company's equity funds went down 1 percent in the last quarter. It's an inconsistency."

Q: Do you believe the role of the Federal Reserve Board in managing interest rates will change in light of recent global developments?

TRUMBULL: "Yes. It changes all the time. The Fed is going to adjust to what it sees as the real issues. Chairman Greenspan has said he wants to achieve zero inflation in the U.S., and he believes it's possible. I'm not so optimistic. But Greenspan is rigorously managing the Fed policy to achieve that goal, even if it requires him to change his tactics now and then."

Q: Should the government get out of the deposit insurance business? If so, what's a workable alternative?

THEOBALD: "Government, at least the FDIC, ought to sharply cut back deposit insurance activities. Everybody in Washington says that, realistically, insurance protection can't cut below the $100,000 level because that number is enshrined in the American consumer's mind. I don't accept that, but I believe the level will stand. However, there's no reason to protect the institution as opposed to the depositors. The protection level ought to stop at $100,000; if your company has $1 million on deposit, you ought to be worrying about the last $900,000. That's Part of market discipline."

Q: Will we have Federal regulation on insurance soon?


Chairman, Sedgwick James: "I think so. The pressure is building-maybe for the wrong reasons. I think the Federal government will legislate commercial insurance-the type you buy for your companies-and will leave to the states such personal insurance as home owner's, automobile, and personal accident, as well as small commercial insurance. And I think most insurance industry experts today will say that's the right way to go. "

Q: What's ahead for the Big Six in the next three to five years? More consolidations?


Co-Chief Executive Officer, Ernst & Young.- "I don't see a dramatic change in the direction of the top six firms. Of course, they'll become more global and offer more professional services to meet market demands. By the end of five years, I think we'll also see a heavy interchange of people. Young employees will expect to join firms-any type-and be able to change career directions three or four times in a 30-year career. When we visit campuses today, we sense there will be more cross-functional people."

Q: What will happen in the area of accounting standards and the rule-making process over the next three years?

GROVES: "I see a period of great volatility for accounting and standard setting, not unlike the economic environment we'll be experiencing over the next three years. The measurement process will be volatile because the SEC seems to be embarking on a market-related measurement process and, if we're in volatile markets, the financial reporting will be volatile. I think the SEC will go back to where it was in the '70s, being much more aggressive, even impatient, about the pace of change."

Q: Are we at a big disadvantage globally because most Americans speak only one language?

GROVES: "Based on my experience, it's not a disadvantage when we're dealing east toward Europe. it is, however, a disadvantage when we deal west toward Japan.

"Indeed, the whole education process, not just language, in Japan has been a factor in that country's success. We may not agree with the Japanese approach to education-the hours they spend, the discipline in their schools-but the results are astounding. "

Q: What is the private sector's role in improving our education system?


Chairman of the Executive Committee and former Chairman of the Board, Motorola:: "Every company should assume a greater role in training in its own shop to stay competitive. But you have to be competitive one person at a time. At Motorola, we look at our counterparts in rival firms and say, I have to be as smart as Mr. So-and-So at Company X.

"But employees can't do it on their own. They have to be trained, and that means having in-house mentor and training programs. Motorola offers everything from classes in English, algebra, and data entry to sessions on thinking creatively and strategically. We figure, if we can make our employees smarter over the next four or five years, then maybe they'll encourage their kids to be smarter, and they'll encourage their kids, and so on. Everybody does his part."

Q: Can the U.S. afford to support the world militarily while Japan and the EEC focus on their economic improvement and emerge stronger than they already are?


Counselor, Center for Strategic and International Studies: "In recent years, we have been spending about 7 percent of our GNP on defense. But that spending is not the source of our economic illness. just look at our rivals: the Koreans, who are emerging today as real competitors in trade, spend about 20 percent of their GNP on defense. The Germans, the biggest traders in the world, spend about 4 or 5 percent on defense. The French spend slightly more. It's true that Japan spends only 1 percent on defense, but is that the reason it's more competitive?

"Let's not try to find scapegoats for why we're not doing so well competitively. It's not because the Japanese are not spending enough on defense or because other countries are cutting corners. The reason is that our society has gotten lazy and fat. It's true of labor, which is overpaid for shoddy work, and it's even more true of our executives, who are vastly overpaid-by any global standard-for a leadership that is increasingly short-sighted, preoccupied with perks for the executives and their families, and set on ripping off the stockholders. Look at the compensation of top executives in large American corporations. Look at the cars, resorts, vacations, special pensions, and side deals. It verges on a scandal. if you want to find the real reason for America's lack of competitiveness, look in the mirror."

Q: Is Japan's major objective to dominate the world's services industry?


Director of Economic Research, The Bank of Tokyo: "Japan's globalization is very young, only a decade or two at the most. We don't have enough professionals to manage the expansion needed to dominate the services industry-or the manufacturing industry."

Q: What does Japan expect to do about its aging population and workforce?

HONDA: "By 2020, one out of four Japanese will be 65 years old. That is certainly a concern for us. To cope, Japanese industry is trying to rationalize the production process. in the services industry, we're relying more on electronic data processing. We want higher productivity per person. And that indeed is the main reason that Japanese capital expenditures in the domestic economy are still so strong, around a 15- or 16-percent increase each year. And that momentum will be accelerated."

Q: How is Japan responding to the idea of the North American trade zone, i.e., the U.S., Canada, and Mexico as an economic unit?

HONDA. "Most Japanese aren't honest in their responses. We say that the multilateral trading environment is the only answer, yet Japanese companies are truly worried about the EC 1992 fortress and the trade agreements among the U.S., Canada, and Mexico. We feel isolated. That is certainly one reason why so many Japanese firms are sending survey missions to the EC markets."

Q: What Canadian businesses will benefit the most from the Free Trade Agreement with the U.S., and which will be burt the most?


Chairman and CEO, Bombardier Inc.: "It depends on Canadian policies. To have Canadian manufacturing companies compete with their U.S. counterparts, we need the Canadian dollar to be at a value that can compete. The dollar has to be at around 80 cents to be on par with a U.S.-based company. Also, Canadian companies need to specialize more in some of the sectors that are especially suited to the Canadian base if we want to benefit from the Free Trade Agreement. Otherwise, more Canadian firms will be hurt by the agreement because of the country's small base market."

Q: What do you think of the Mexican stock market?

BURKHEAD: "It has been a good market. Volatile, yes, but mainly volatile up. It's off about 25 percent so far this year [as of October 1990], and the liquidity in the market is very small indeed. But important, fundamental changes are taking place in Mexico. The people there are determined to pursue a reduced inflationary course, to develop their financial markets, and to develop their relationship with the U. S."

Q: What can organizations or individuals do to aid Russia in its establishment of a free market system?

BRZEZINSKI: "If you have the time, means, and inclination, you can do many things. In terms of Eastern Europe and the Soviet Union, many organizations are recruiting managerial skills and technical advice or are engaging in joint ventures with the East Europeans and Soviets.

"The opportunities come from both government and private initiatives, though primarily the latter. Some initiatives, like the National Endowment for Democracy, which is semi-private, promotes the organization of democratic institutions through teaching the East Europeans accounting and banking, helping them to develop their infrastructure, or developing city-to-city relationships, in particular in the Soviet Union.

"With the changes in the Soviet Union, many Russian cities have become emancipated islands of democracies. But they need support. With new non-Communist leaders, they are finding that they don't know what they own. For instance, Moscow doesn't know if it owns the city's airport. It doesn't know how to collect taxes. We can offer them a lot of advice, as organizations and as individuals, if we want to be involved."

Q: What risks do you see to companies who are attempting to do business in Russia right now?

TRUMBULL: "The risks in Russia are political. My major short-term concern is that the armies of some of the separate republics have tactical nuclear weapons. If there is an internal conflict, those weapons will be used, unless the central army soon completes the process of taking control of these weapons. But, even if that happens, we need to see more evidence of stability in Russian politics and improvement in the economy. I understand that U.S. companies may participate in the plan to get oil out of Russia, but that's a decade away-and a decade is a long time."

Q: Will the countries of Eastern Europe substantially improve their transportation systems in the foreseeable future? If so, will American or Eastern European companies be in a better position to take advantage of the change?

BEAUDOIN: "Definitely, the European countries will benefit more from any changes because of their location and previous dealings with the Eastern European countries. I think that German firms will benefit the most. That's why we need to make acquisitions in Eastern Europe, especially in France and Belgium, where we feel we'll be well positioned to take advantage of the market. North American companies that are not located in Eastern Europe will find it difficult to have a piece of the market."

Q: Do you foresee an easing of the regulatory barriers in the EEC? If not, what are the alternatives for U.S. entry into that market?

PAGE: "I think the barriers will be eased in the Community, but the real question is whether it becomes `fortress Europe.' If we don't give the EEC countries easy access to the U.S. and free access to our trade-and if we don't allow the insurance companies in the EEC to find their way into our 50 jurisdictions, then we're going to have trouble doing business in Europe."

Q: Does Europe have the same type of insurance, such as workman's compensation and directors and officers liability, as does the U.S.?

PAGE: "No. That's one of the reasons why the EEC is taking such pains to provide uniform coverage within its own countries. That's also why it's difficult to have an international employee benefits practice, because you have to deal with the legislative coverage in each country."

Q: What trends do you see in the U.S. and Europe in product liability costs? PAGE: "Product liability is one of the few lines that will be a problem for awhile. Right now, buyers can do a lot for themselves to reduce their product liability risks by engineering the risk better, assuming more risk, or looking to insurance companies purely for catastrophe coverage. We find with major clients that the more risk they assume, the better they manage that risk. if a company is a multi-location manufacturer, for example, the more costs it passes on to its individual plants, the better the safety records of those plants. And, if the company ties the salaries and bonuses of the plant managers to the risk assumption program, the firm gets even better results."

Q: What can a company do if it leases data processing equipment and needs to upgrade or downgrade? How can the company break the lease?


Senior Vice President, Comdisco, Inc.: "Most lessors won't want to let you out of an initial agreement because they have financial obligations on the back end. This is where your sublease protects you. If you have an open-end sublease contract, you can independently market your asset outside and then decide about your new or down-sized processor-with a separate lessor, if you want. But you have to negotiate sublease flexibility."

Q: What's the competitiveness between lessors, say IBM Credit Corp. and a third-party firm like Comdisco?

HAMILTON: "It's very competitive. You may see on bids a 1- or 2-percent spread in the numbers, but if there's much more than that, something is probably a part of the deal that you need to take special note of. It could deal with upgrade limitations or some other hook in the transaction. I'm amazed at some of the competitive lease agreements, both manufacturing and nonmanufacturing, that get signed by sophisticated financial institutions."

Q: Has Corporate America and the labor force become "fat and lazy?"

GALVIN: "I wouldn't use language quite that emphatic, but I do think we have insufficiently sited our expectation levels. We've become satisfied with our expectation levels, and that has to change. It's a bigger problem than whether or not people are `lazy.' People want to achieve, but you and I have to tell them that something more is achievable than was achievable yesterday."

Q: Are top executives overpaid?

GALVIN: "Yes."

Q: What is the Japanese view of the American executive?

HONDA: "The Japanese believe that moving your body busily means you are fully employed. You Americans, on the other hand, know how to sit still while your computers are running and your secretaries are working efficiently. So, superficially, you look lazy, but I don't think you are."

Q: What do you think about recession in this country?

THEOBALD: "I think we've been in a recession for the last few years. That's why I don't understand the GNP numbers coming out for the last couple of years, because we hardly have a customer category in which the customers haven't been struggling to sell or to cut costs."
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Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Publication:Financial Executive
Article Type:panel discussion
Date:Jan 1, 1991
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