Morgan Stanley recommends the following books to young employees, interns, and job candidates for their continued education of the financial industry.
History Tidbit: The Founding of Morgan Stanley
In 1933, the Glass-Steagall Act, and the broader U.S. Banking Act of 1933, mandated that commercial banking and investment banking operations could not function under a single holding entity. In response, the partners at J.P. Morgan & Co. led by Henry S. Morgan (grandson of the legendary J.P. Morgan) and Harold Stanley opened Morgan Stanley for business on 16-September -1935. Morgan Stanley currently has 60,000 employees in 1300 offices and operates in 42 countries.
Recommended Books on Legendary Investors and Personalities
Recommended Books on “The Great Financial Houses”
Recommended Books on Capital Markets, Financial Industry, and History
During his adored tenure as Chairman and CEO of General Electric, Jack Welch created a strategy development framework that was implemented across the vast organization. managers across General Electric used the winning corporate strategy model to gauge their businesses and make decisions about where to go next.
Jack Welch advocated that strategy is not something that should be left to the management and strategy consultants. He called strategy “a living, breathing, totally dynamic game.” In his book “Winning” (with wife Suzy Welch,) Jack Welch declares the key to success is to “pick a general direction and implement like hell.”
For Jack Welch, strategy was a “killer idea” or a “winning value proposition” that can provide any organization a general direction for durable competitive advantage. He described strategy as a living, breathing story about how your organization is going to win. In this pursuit, strategy should be a tool, that is agile and can change over time, but it is not arbitrary or indiscriminate.
Jack Welch’s Questions for Strategy Planning
Conceptualizing and developing a successful business strategy lies not in having all the right answers, but rather in asking the right questions. Creating a winning corporate strategy is the process of asking (and answering) the question of what needs to change and why? Jack Welch proposes a rapid, practical questioning procedure to come up with a winning corporate strategy by probing for answers to five key questions:
- What does the competitive playing field look like?
- What have our competitors been up to lately?
- What have we done lately?
- What future events or possible changes keep us up at night with worry?
- And, given all that, what’s our winning move?
Theme 1: What the Playing Field Looks Like Now
- Who are the competitors in this business, large and small, new and old?
- Who has what share, globally and in each market? Where do we fit in?
- What are the characteristics of this business? Is it commodity or high value or somewhere in between? Is it long cycle or short? Where is it on the growth curve? What are the drivers of profitability?
- What are the strengths and weaknesses of each competitor? How good are its products? How much does each one spend on R&D? How big is each sales force? How performance-driven is each culture?
- Who are this business’s main customers, and how do they buy?
Theme 2: What the Competition Has Been Up To
- What has each competitor done in the past year to change the playing field?
- Has anyone introduced game-changing new products, new technologies, or a new distribution channel?
- Are there any new entrants, and what have they been up to in the past year?
Theme 3: What You’ve Been Up To
- What have you done in the past year to change the competitive playing field?
- Have you bought a company, introduced a new product, stolen a competitor’s key salesperson, or licensed a new technology from a startup?
- Have you lost any competitive advantages that you once had—a great salesperson, a special product, a proprietary technology?
Theme 4: What’s Around the Corner?
- What scares you most in the year ahead—what one or two things could a competitor do to nail you?
- What new products or technologies could your competitors launch that might change the game?
- What M&A deals would knock you off your feet?
Theme 5: What’s Your Winning Move?
- What can you do to change the playing field—is it an acquisition, a new product, globalization?
- What can you do to make customers stick to you more than ever before and more than to anyone else?
Strategy Questions for Global Competition for Resources and Market-Access
In the context of global completion, both for resources and access to markets, leaders need to identify factors and attributes that will shape the future of globalization. Such a framework should provide guidance to those who will make, influence, and predict decisions about the global economic structure and develop a game plan to succeed in an increasingly global environment. Here are Jack Welch’s five strategy questions modified for the global nature of business.
- What does your global competition look like over the next several years?
- What have your competitors done in the last three years to upset these global dynamics?
- What have you done to them in the last three years to affect those dynamics?
- How might your competitor attack you in the future?
- What are your plans to leapfrog the competition?
Applying a strategy-development framework can help companies focus their activities and goals in ways that are more efficient and lead to a more powerful approach to growing their business. The framework helps analyze the dynamics of the current line of attack, reveal the forces currently influencing the global competition. The framework works by, in part, by recognizing that the strategy must not only be understood by everyone in the organization, but must be acted on by everyone.
Recommended Reading: Best Books for Strategy Planning
Recommended Reading: Best Books on and by Jack Welch
A joint venture represents the prospect of two businesses that believe that they can collaborate to accomplish marketplace goals that neither could achieve single-handedly. Joint venture partnerships are essential to how multinational companies can best achieve their global business objectives and improve top-line and bottom-line growths. Alliances and joint ventures provide many benefits, including filling gaps in capabilities or facilitating entry to new markets. Through carefully structured joint venture partnerships and international alliances, businesses can combine mutual strengths and capabilities to gain the benefits of scale that they would be unable to realize without help.
Each company must strive to be exceptional in how it develops, manages, operates, and evaluates joint venture partnerships. Joint ventures frequently go wrong due to neglect of the first stage (development of strategy) and operating implementation. A frequent and detailed joint venture assessment can determine if the company’s partnerships are being operated and managed in a way that provide real value to end customers and the joint venture partners and to determine ongoing improvements to ensure that the joint venture represents a rapid and very effective mechanism for strategic growth.
Statements of Joint Venture Management Excellence
- The JV partners and the joint venture recognize the needs of the end-customers in order to present tangible business value.
- The joint venture partnership is structured and leveraged to generate multiple sources of economic value for each JV partner.
- JV partners pay particular attention to the ownership and governance arrangement of the joint venture.
- Business objectives, strategies, and processes of the joint venture partnership are aligned with the objectives, strategies, and processes of the respective JV partners.
- The support mechanisms and processes of each JV partner that are significant to the success of the joint venture partnership are documented, synchronized and controlled to generate measurable results.
- The JV partners set priorities, convey the underlying principle behind them, advocate them even when the outcomes are undefined, and provide the support that the management of the joint venture needs to stand behind those choices as well.
- Business and functional leaders of each JV partner offer best practices and capable processes, tools and people to sustain the joint venture partnership.
- The joint venture partnership is managed using best practices, processes, tools, and quality standards as established by the JV partners.
- Confidential information received or created by the joint venture partnership is defined and maintained in a confined environment.
- Regular and consistent communication and flow of information occur within the joint venture partnership and between all parties at numerous levels.
- Representatives of the JV partners engage in shared activities that develop mutual trust.
- The parties openly define the roles of the JV partners, the Board and operating management of the joint venture partnership, and then they authorize the management and operate according to the agreed definitions.
- Managements of cross-border joint venture partnerships consist of a diverse mix of local managers and locally capable expatriates. Companies that survive the experience of doing business in other countries can learn from this experience and develop a distinctive competitive advantage that will serve them well when entering comparable challenging markets around the world.
- The right environment within the joint venture partnership is established based on reciprocated trust and shared respect. By understanding the changing nature of business and the potential pitfalls of joint venture partnerships, businesses can collaborate stronger alliances that benefit both JV partners.
- JV partnerships operate in conformity with all governmental laws, regulations, environmental standards, and safety standards and with the codes of conduct of the JV partners.
- JV partners are treated as customers and favored suppliers. Profitable exploratory actions hold more meaningful lessons for companies than failures do.
- Joint venture partnerships use shared problem-solving tools as reciprocally agreed by the partners. Lean manufacturing and other reliable management principles are used to identify and deliver process improvements.
Businesses pursuing joint ventures would do well to contemplate on the lessons of other companies that have engaged in joint ventures to improve the chances of success.
In 1991, Wall Street investment bank Salomon Brothers was embroiled in a bond-rigging scandal. U.S. Treasury Deputy Assistant Secretary Mike Basham ascertained that, between December 1990 and May 1991, Salomon Brothers’ trader Paul Mozer had dishonestly been submitting false bids to purchase more Treasury bonds than a limit imposed per buyer. Salomon was fined $290 million for this breach of rules.
Warren Buffett was the largest investor in Salomon Brothers during the days of this Salomon scandal. Warren Buffett took the helm as chairman and chief executive of the embattled company for an annual salary of $1.
Here is Warren Buffett’s opening statement before the Subcommittee on Telecommunications and Finance of the Energy and Commerce Committee of the U.S. House of Representatives:
Mr. Chairman, I thank you for the opportunity to appear before this subcommittee. I would like to start by apologizing for the acts that have brought us here. The nation has a right to expect its rules and laws to be obeyed. And at Salomon, certain of these were broken. Almost all of Salomon’s 8,000 employees regret this as deeply as I do. And I apologize on their behalf as well as mine.
My job is to deal with both the past and the future. The past actions of Salomon are presently causing our 8,000 employees and their families to bear a stain. Virtually all of these employees are hardworking, able and honest. I want to find out exactly what happened in the past so that this stain is borne by the guilty few and removed from the innocent. To help do this, I promise to you, Mr. Chairman, and to the American people, Salomon’s wholehearted cooperation with all authorities. These authorities have the power of subpoena, the ability to immunize witnesses, and the power to prosecute for perjury. Our internal investigation has not had these tools. We welcome their use.
As to the future, the submission to this subcommittee details actions that I believe will make Salomon the leader within the financial services industry in controls and compliance procedures. But in the end, the spirit about compliance is as important or more so than words about compliance. I want the right words and I want the full range of internal controls. But I also have asked every Salomon employee to be his or her own compliance officer. After they first obey all rules, I then want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper, to be read by their spouses, children, and friends, with the reporting done by an informed and critical reporter. If they follow this test, they need not fear my other message to them: Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.
Recommended Reading: Liar’s Poker by Michael Lewis, an autobiographical account of Michael Lewis’s own experience as a bond salesman at Salomon Brothers where the Liar’s Poker is a figure of speech for the Salomon culture of intense risk-taking with immediate payoffs.
Bottom line refers to a company’s net income — the “bottom” number on a company’s income statements. Therefore, bottom line is a company’s income after all expenses, charges, costs, and are subtracted from its revenues. A company’s bottom line is the same as its net earnings or net profits.
Top line refers to a company’s gross revenues or sales.
The terms bottom-line growth and top-line growth refer to the growth of the company as measured by the respective numbers. Both these numbers are helpful in understanding the financial strength of the company. They are not exchangeable.
Bottom line trends measure how efficient the company is with expenditures, operating costs and controlling these costs. Top line trends measure how efficient the company is at selling its products and services. Top line trends do not measure operating efficiencies.
Turns out that Apple might be paying about 10% of its pre-tax income in taxes as compared to a 35 percent federal corporate tax rate. However, details of Apple’s tax practices indicate that there Apple engages in merely tax avoidance. Tax avoidance is not quite unlawful. There seems to be no evidence that Apple engaged in tax evasion, which is indeed unlawful.
Apple uses a tax avoidance scheme known as The Double Irish, which came under scrutiny during the Senate testimony. Using the Double Irish scheme, Apple instituted a shell subsidiary in Ireland, an offshore tax haven, and assigned the majority its intellectual property rights to this shell subsidiary. In turn, the subsidiary charges fees and royalties and receives billions of dollars in revenue. On these receipts, Apple pays about 2% in corporate taxes in Ireland instead of the high tax rates it would pay for the same receipts in the United States.
It can be argued that the Apple’s management is indeed doing what is best for Apple’s shareholders. Apple’s senior management and the board have a fiduciary responsibility to do anything in the best interest of its shareholders, as long as such actions are lawful. Had Apple ignored this prospect of reducing its corporate tax bill by using the Double Irish scheme, the senior management and Board may possibly be accused of being negligent in their responsibilities towards shareholders.
The actual problem might just be that the Congress hasn’t taken any wide-ranging measures to make all tax avoidance schemes illegal and ensure that companies pay their fair share in taxes.
Apple has $137 billion of cash on its balance sheet (as of 12-Feb-2013.) Microsoft has $68 billion, Google $48 billion, Cisco $45 billion, and Oracle has $34 billion.
Too much cash on a company’s balance sheet is not necessarily a good thing. Large cash balances reduce shareholder value because they produce lower returns on invested capital. Further, excess cash puts pressure on corporate management to put the cash to work. Often, management chases wrongheaded acquisition strategies or make poor capital allocation decisions.
Peter Lynch alluded to a bladder theory of corporate finance in his classic, “One Up On Wall Street: How To Use What You Already Know To Make Money In The Market.”
… as propounded by Hugh Liedtke of Pennzoil: the more cash that builds up in the treasury, the greater the pressure to piss it away.
Bladder theory of corporate finance states that the more cash that builds up in the treasury of an organization, the greater the pressure to piss it away. Stock repurchases, dividend increases, and special dividends are effective uses of excessive cash on balance sheets. J Hugh Liedtke, former CEO of Pennzoil, believed that “companies should pay out cash so the managers wouldn’t drain all the money away.”