How 'Lehman Siblings' might have stemmed the financial crisis
Editor's Note: Could 2008 have ended differently if there were more women at the decision table at Lehman Brothers? Former Citigroup Chief Financial Officer Sallie Krawcheck thinks that's a possibility.
Lehman Sisters, however, wouldn't have worked either. For Krawcheck, chair of the new Pax Ellevate Global Women's Index Fund, gender diversity is the key to combatting the kind of groupthink that has dominated Wall Street and led to the financial crisis.
She made that case in an interview with Paul Solman on the NewsHour Tuesday. And in an extended conversation with Paul on the Making Sen$e page, she explained how women have been told to keep their heads down, plus how she climbed the corporate ladder as a new mom. By supporting women's networking and directly investing in women-led companies, Krawcheck seeks to help other women achieve the same level of success.
In this extended conversation with Paul, the text of which has been edited and condensed, Krawcheck explains how having gender diversity in the workplace makes smart business sense.
— Simone Pathe, Making Sen$e Editor
Sallie Krawcheck: We've recently launched The Pax Ellevate Global Women's Index Fund.
Paul Solman: Ellevate?
Sallie Krawcheck: E-L-L-E-V-A-T-E, with a play on the French "she," which is the first and only mutual fund that invests in the top-rated companies in the world for diversity — gender diversity. So companies that have the highest percentage of women in their senior management team, the highest percentage of women on their boards, with the underlying idea, building on the research that purports to show that greater diversity is associated with better business results.
This mutual fund is available to anyone. And in fact, when I thought about what we wanted to launch, having a mutual fund that was accessible to the individual investor with $1,000 minimum investment was important to me because we have lots of funds – not enough – but a number of funds that invest big sums of money behind women-owned venture capital start-ups. Again, not enough, but for the high-end investor.
What we were hearing very much from what I term the "emerging investor" — women and millennials — is that they want to invest and have an impact. Ninety percent of women want to have a social impact. Something like 77 percent of women globally have reported they want to invest behind companies with greater gender diversity.
It's beginning to shift with men as well, where people are saying, geez, just like I want to work at a company where I both make money but also makes a difference in the world – and you see this with the younger investors, the Toms, the Warby Parkers — I also want my dollars to make a difference. I don't want them to do things that I think are evil; I do want them to do things that I think are good. And for so many millennials and women, gender diversity – this inclusiveness — particularly when it drives better business results, is important.
MAKING SEN$E OF BENEFIT CORPORATIONS
Based on my own experience, and I've worked in financial services for more years than I probably want to share with you, diverse teams I've seen may not make quicker decisions, but they tend to make more effective decisions.
And the underlying reason for it is that they bring in more perspectives. They're not all looking at the same thing in the same way. There's piles and piles of research that do show that greater diversity is associated with better business results, whether it's higher returns on equity, whether it's greater innovation, whether it is greater client focus, greater long-term focus, and in fact, even lower gender pay disparities within the company.
This fund gets to the purer play of gender diversity. We're looking at the percent of women on boards, percent of women on senior management teams, and for this fund, that percent is 31 percent representation of women on the boards, 24 percent of women in the senior management teams, versus 11 percent as a global average overall.
Paul Solman: Eleven percent of boards…
Sallie Krawcheck: Of both boards and senior management. The number coincidentally is the same. When we started this I thought, what are these companies going to be? Are these going to be just the women-based companies? Are these going to be macramé companies of people macramé-ing in the woods and eating granola?
But as we looked at the companies, it's the top-rated 400-ish in the world: it's the GEs, it's the Xeroxes, it's the Proctor and Gambles – what I think of as high quality companies. I think in part because they're seeing markets that other folks don't see.
MORE FROM MAKING SEN$E
I think about my old industry – financial services, where my experience watching those companies go into the downturn was not, "it's a bunch of evil geniuses who perfectly foresee the downturn." Quite the opposite. It was a group of hard-working individuals who miscalled the downturn. And as I think back to those teams, which are pretty non-diverse, they were people who had grown up together, gone to the same schools, looked at the same data over years and years, and came to the wrong conclusions.
Paul Solman: Peas in a pod.
Sallie Krawcheck: Peas in a pod, so to speak. I'm not sure they'd love it if you called them that, but peas in a pod. And I remember clear as a bell one day where a senior investment banker was describing a complex security, and a woman who was in a consumer banking role stopped and said, "What the heck is that? And why are we doing it?"
And there wasn't, going into the financial crisis, enough of "what the heck is that?" And I'm not saying — people have said if Lehman Brothers were Lehman Sisters it wouldn't have happened; I wouldn't go that far. I'd say, if it were Lehman Siblings, we would have had more of a fighting chance.
Paul Solman: And you think the financial crisis was, to some significant extent, a result of non-diversity in financial services?
Sallie Krawcheck: I am firmly convinced the financial crisis was caused by many things. One thing I am convinced of, having been at the front row, is that one of the causes was groupthink. And that it was individuals who came to the same conclusions because of having similar perspectives, backgrounds, etc.
Paul Solman: A kind of groupthink solidarity, supporting the same things…
Sallie Krawcheck: …And finishing each others sentences. I've seen that a million times. And not wanting to be the one who raises their hand and says, "I don't have a clue what you just talked about."
In fact, during Senator [Carl] Levin's hearing on the London Whale, the J.P. Morgan whale losses, there was a point at which he read back some of the language that was in the proposal to approve the trade, and no one at the table could actually tell him what those words meant. And I could just see in my mind what I've seen time and time again, which is, I think everyone else understands it, I've been here for 10 years, or 20 years, or 15 years or five years, and I'm way past being a beginner…
Paul Solman: But are women actually more likely to say, "I don't get it?"
Sallie Krawcheck: I think when you get diverse groups together who've got these different backgrounds, there's more permission in the room — as opposed to, "I can't believe I don't understand this and I'd better not ask because I might lose my job." There's permission to say, "I come from some place else, can you run that by me one more time?" And I definitely saw that happen. But as time went on, the management teams became less diverse. And in fact, the financial services industry went into the downturn white, male and middle aged. And it came out whiter, maler and middle-aged-er.
Paul Solman: Well that's somewhat distressing.
Sallie Krawcheck: And counterintuitive. But what has been shown to happen in industry crises, any industry, is that the industry comes out less diverse.
You may remember that I ran Smith Barney going into the downturn.
Paul Solman: No, I didn't remember that.
Sallie Krawcheck: And I was fired during the downturn, and that was driven because I was, I believe, the only senior executive who fought to return client funds. We had mis-sold – and to the best of my knowledge, and I assure you I've been through all of the documents – not because folks were evil, but because we made mistakes. We had mis-sold products as low-risk when they turned out to be high-risk.
Paul Solman: This is thinking that groups of mortgages were diversified and therefore there was a low risk…
Sallie Krawcheck: It was a group of fixed-income instruments, and because it was a different kind of fixed-income instrument, they were diversified, so the product was leveraged seven to one, which was risky…
Paul Solman: That means you borrowed seven dollars to buy one dollar.
Sallie Krawcheck: And when the market cracked, rather than going down a few cents on the dollar, these products went down most of their cents on the dollar. I looked at this and said, I see the fine print that says clients can lose all their money. Here's the big print that says this is low-risk. I think we should share the pain. We eventually did, but in the course of that, I was fired. So I had a very different perspective than some of my peers.
And while for years, I would never say it was because I was a woman, as the years have passed and I've looked at the research — the research says women are more risk averse, women have greater client empathy — and I remember those nights when I would wake up at 2 a.m. and think about the clients who lost money because of a mistake we'd made.
Paul Solman: I've seen research, controversial to be sure, that shows that men are greater risk-takers.
Sallie Krawcheck: Well, men take more risk. There's actually research that shows that women are better investors – that they are more risk aware. So what you actually do see amongst venture capital startups, you'll see that the women-owned companies perform better. They'll hit more singles and doubles, whereas the guys will either typically hit a home run or are more likely to flame out.
Now, what's interesting in venture capital: We all love the image of the lone genius in the garage with the big "aha" moment. That's not really how most innovation takes place. A great deal of innovation [comes from] people with diverse ideas coming together, clashing with those ideas.
[So] this fund is investing in a broad range of companies because idiosyncratic personalities can overtake anything. This is why investors should be well diversified. There's no investor in the world to whom I would say, buy one stock. And in fact, many investors really got burned because they owned their company stock in the downturn. Diversification, I wouldn't go as far as to say it's the one free lunch in investing, but it's probably a free appetizer. Having a range of investments can help drive lower risk and a fair return over time.
Goal of the Fund
Paul Solman: [So if diversification is the strategy,] what's the main purpose of the fund? You're going to do social good, promote women's rights, make more money because this is an underlooked sector of the economy or way of investing in the economy?
Sallie Krawcheck: You know, it's funny – I just saw an article that talked about how overdue this fund is because there are so many funds that invest in a range of, in theory, performance-driving characteristics. Someone said there's even a vice fund – I haven't seen it – a vice mutual fund. But there isn't one that has focused on diversity as a driver of performance. Now, that being said, funds have focused on management quality since I think the first investment was ever made.
The first focus has got to be on the investors. Is this a strategy that can drive a fair return for investors as well as having an impact for them?
Paul Solman: But a "fair" return for most investors? Don't most investors care about the actual financial return on their investment?
Sallie Krawcheck: You know what most investors care about? Firstly, themselves, as they should. I've actually spent a long time in the industry, and I've never had an investor come to me and talk about the things we in the industry talk about. We spend a lot of time talking about basis points, and alpha and standard deviation…
Paul Soman: And how the stock market moves as a whole?
Sallie Krawcheck: Oh no, no, no, now you're talking beta. In fact, my point is the industry has built up an entire nomenclature, an entire infrastructure that gets very complicated, that essentially drives this idea of outperforming the market. But if we're really talking about what investors want, as opposed to the words that Wall Street uses? What investors are looking for is a fair return.
Paul Solman: Not a superior return?
Sallie Krawcheck: Sure, we can go for superior return, but with lower risk.
Paul Solman: Well, that's what everyone wants.
Sallie Krawcheck: And those things can be very difficult — some might argue impossible — to achieve. So I use the term fair return, which really pulls in the idea of risk as well because that massive upside you get is not so great when you also have a massive downside on the other side.
Paul Solman: But just to explain, because some people won't understand – it's an index fund as opposed to a stock picking fund? Why, and what does that mean?
Sallie Krawcheck: Well there are a couple things with an index fund. An index fund, one because of not having the active management component to it, can have lower fees. It starts with a very broad, diverse array of global stocks, and then winnows them down coming to what we view as, what the numbers show to be, the top-rated companies in the world for gender diversity.
Paul Solman: And that's why this is an indexed fund, as opposed to picking companies based on some intuitive or analytic approach to the companies themselves?
Sallie Krawcheck: It gets back to the idea, again, of what are the numbers; let's look at the facts. I learned years ago is that intuition is good for a whole bunch of things. It can be good for choosing a husband, right? It can be good for taking an assessment of someone, but I can get caught up in the market the way that other people can get caught up in the market; I can get overly bullish; I can get overly bearish — it tends to be the mood of the market. This [fund] really tries to take a step back – what are the facts around this? And in fact, the argument would be, you want to be investing in companies when you personally might not feel so good about them.
We believe that can come out in a lower-risk profile for the companies. For example, we're not investing in a number of the investment banks out there. The companies that had very big difficulties during the downturn went down a lot. Now there are periods in the market when they'll go up a lot. But, we believe that by looking at them through this gender lens and not investing in them, we can deliver to investors lower risk, as well as a fair return.
Paul Solman: Is it fair to characterize your fund as the fund that doesn't invest in the good old boys network companies?
Sallie Krawcheck: If you would like to, you can characterize it that way. Although I want to be very, very clear – and I really hope this makes the cut – but I really, really like white middle aged males. I want to make that perfectly clear. I am married to one.
Paul Solman: I'm tremendously relieved to hear it, frankly.
Sallie Krawcheck: I know a lot of them. I promise you, this isn't an anti-guy thing; this is a pro-all-of-us thing.