Idiocy?

Too much of the financial world is about idiocy. So writes Matthew Crawford. If you think he’s unfair, you’ve forgotten what private equity denotes.

On July 26, KKR, one of the world’s largest private equity firms, reported better-than-expected second-quarter earnings. But it also raised a few eyebrows. KKR’s capital-markets arm lent $325 million to a company KKR owns (Sedgwick Claims Management Services Inc.) so that Sedgwick could make a $375 million dividend payment (to KKR in part). KKR was paid three times over: The firm got a fee for arranging the loan, its share of a dividend payment from Sedgwick and a revived market for dividend recaps.

You can’t say this in polite company, but this is idiocy. “The Greek idios means ‘private,’ and an idiotes means a private person,” writes Matthew Crawford. Private industries rarely if ever understand the public implications of their work. “An idiot fails to grasp his public role, which entails, or should, a relation of active concern for the broader, public issues related to their work.”[1] Some would say private equity is idiocy.

Equity used to be imagined as creating a rising tide lifting all the boats. No more. Private equity creates islands of luxury in a sea of poverty. It’s a private club benefiting a fortunate few. It’s a far cry from what Thomas Lamont, the head of J. P. Morgan, told his colleagues in 1923. He believed the banker should make “constant and careful study” of the financial, economic, social and political conditions that bring about wellbeing for all “and that he shall have a wide vision over them all.” Equity was a public industry.

That was then, this is now. Iain McGilchrist says the narrowing focus of the financial world is largely due to the Enlightenment. It fosters a left-brained society. The “left hemisphere has no intuitive sense of what numbers means in the larger context.”[2] It sees finances in terms of individual, private returns (thus, private equity). The right hemisphere on the other hand has an “intuitive sense of numbers and their relative size.” It sees numbers as signifying relations in the context of their public implications.

Left-brained societies have a shrunken view of what defines a professional investor. Harvard professor Howard Gardner notes that the historic definition of a professional was a certified expert who did not enter the ranks of a profession in order obtain wealth or power but to do it out of a calling to serve. Financial professionals used to view their work as professing what investing ought to be. Today, they too often focus only on what can be done to goose individual returns. The Greeks considered this idiocy.

If the financial world is left-brained, the solution is including right-brain thinkers. Finance ought to left- and right-brained—ambidextrous. I work with two ambidextrous financial firms. Both have a BHAG (Big Hairy Audacious Goal). One is reimagining wealth. The other is reframing private equity. Both firms include right-brain advisors, collaborating in a roundtable with left-brain investors in pursuing the common good. Here’s how it works.

In general terms, left-brained investors are insiders, narrowly focused on deals. That’s necessary but insufficient. Right-brained advisors complete the roundtable. They’re outsiders, broadly vigilant in keeping the firm’s BHAG in focus. In biblical terms, right-brain leaders act as priest and prophet, widening the lens to promote purpose and note industry problems. It’s both/and. Left-brained investors think efficiencies—improving the bottom line (net earnings or net profits). Right-brained advisors add effectiveness—broadening the bottom line to improve society. They help insiders think beyond individual wealth and peace of mind to commonwealth and peace for all—shalom.

Crawford says we in the West have arranged our institutions to prevent the concentration of political power. We have the separation of legislative, executive, and judicial functions. “But we have failed utterly to prevent the concentration of economic power.” Private equity is mostly in the hands of a fortunate few. Creating a humane society requires reframing private equity. It also requires creating institutions with a wide vision for the wellbeing of all. Otherwise, we’ll continue to see all this idiocy.

[1] Matthew B. Crawford, Shop Class as Soulcraft: An Inquiry into the Value of Work (New York: The Penguin Press, 2009), p. 98.

[2] Iain McGilchrist, The Master and His Emissary: The Divided Brain and the Making of the Western World

(New Haven: Yale University Press, 2010)