Winning at Active Management - Welhoelter Michael A.

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to firms’ prior work to understand their areas of expertise and skill, and even the reliability of their services in the past, but a firm’s success depends greatly on the context – for a law firm, the facts of a court case, or for a consultant, the state of a client’s affairs before a business is redesigned. Compared to a physical, manufactured product, the design of which can be reworked over many years, the environments in which professional service businesses work are often too complex, varied and rapidly changing to provide reasonably objective evaluations ahead of time.

      The identity of professional service firms is closely tied to the people in possession of skills – individual lawyers, consultants or asset manager teams. (An investment industry bromide says that a firm’s most valuable assets leave by the elevator every night.) Accordingly, successful employees in these firms are highly compensated and often hold equity stakes, in order to tie their day-to-day efforts and resulting personal wealth to their firms’ long-term success.

      Of course, professional partnerships have senior management teams: a completely flat organization, where everyone is enabled to decide and act on anything, would be chaotic. Senior management’s role, however, is more about leadership – guiding firm strategy, high-level business development and problem solving – as their detailed involvement in every client situation would be impractical and unnecessary. Professional partnerships operate by a set of rules, but don’t have a single absolute ruler, as do command-and-control organizations.

      Senior management also typically sets compensation and controls the addition of new partners. Importantly, in less tangible matters, senior managers provide practical examples of the firm’s culture and what constitutes good behavior. Meanwhile, in handling client engagements, client teams apply their own experience and judgment to handling challenges as they arise rather than follow specific directives made at the top.

      The differing characteristics of command-and-control versus professional partnerships will attract different sorts of people to each type of culture. Professional partnership careers tend to require more extensive training just to enter, and typically call for greater commitments of time to the job. Taking intelligent risks and raising individual initiative also are central to professional work. People with risk-seeking natures are more likely than not to be attracted to the more complex and challenging careers of professional partnerships, while risk-averse people may prefer a different environment.

      The Partnership Culture Model

With less involvement of senior management in day-to-day decisions, the economic success of a professional firm is dependent on “multiple leadership,” that is, key decisions being made at many points in the firm. Figure 1.1 illustrates the relationships among the financial and working elements of a partnership: interdependence in carrying out their work, and support that individuals offer and rely on from one another. Both are built on a foundation of economic interests shared among the partners.21

Figure 1.1 Tenets of Professional Partnership

      Source: Epoch Investment Partners

Interdependence

      In serving the complexities of a given assignment, client-serving teams at professional partnerships often are likely to draw on the expertise in several areas of the firm. Attorneys, consultants, and investment analysts should be eager to share their knowledge, both within and among teams, in the interest of providing the best service to clients and moving the firm forward. Implicit in those goals, of course, is that the hard work and judgment has to be reciprocated among all members of the group when called for.

      An illustration: in an investment management setting, it’s typical for analysts and portfolio managers in a firm’s equity group to share insights on the prospects for individual companies or industries with those running fixed-income portfolios. Each approaches the analysis a bit differently, providing complementary (and sometimes opposing) views.

      Narrow views and overspecialization often get in the way of idea sharing, typically to organizations’ detriment. Gillian Tett, the U.S. managing editor of the Financial Times, has written on corporate culture and idea sharing from the perspective of an anthropologist, noting: “We need specialist, expert teams to function in a complex world. But we also need to have a joined-up flexible vision of life.”22 She cites companies hobbled by the “silos” within their structures, for example, Sony Corporation beginning in the 1980s, and the turnaround potential of removing them, such as at IBM Corporation in the mid-1990s.

      Ms. Tett lauds Facebook, Inc. for its resistance to building silos, instead promoting an open organization where employees rotate through various teams, and come to know people in all parts of the company. It’s not the most efficient structure, she concedes, but citing a senior executive, “[It’s] a small price to pay to meet the goal of keeping the organization fluid and connected; it was crucial to have a bit of slack, or inefficiency, to breed creativity and give people time to stay connected.”23

      Rotating people through the firm’s various departments isn’t feasible for us at Epoch (or for many asset managers). The knowledge needed to work on the investment teams, for instance, is quite specialized, and assigning people without in-depth training to our portfolio teams would fall short of our fiduciary obligations to clients.

      In the case of Epoch Investment Partners, we manage several complementary strategies – all in equities, but investing in various markets and company sizes, and we encourage analysts and portfolio managers to share whatever they know about their companies with anyone else who might be able to use it. We don’t obligate people to rely on others’ decisions, but what counts is that the information – in the forms of both data and opinions – is freely available for everyone’s use. (Epoch maintains a research database that is open to all analysts and portfolio managers.) It is not uncommon in some firms to find people who feel protective of their hard work and want to keep it for their sole benefit, but in our case not sharing insights with another analyst or portfolio manager will lead to a collective loss – or at least a forgone opportunity to enhance the returns of another strategy. And since we reward employees on the firm’s overall results, the effect on returns from not sharing affects everyone’s rewards.

      Fostering that sort of sharing is not easy, however. Some people that are drawn to the specialized, expert nature of investment management are introverts, and would be more comfortable in their offices than handing away their insights (or fitting the insights of others into their own work). We try to create a natural environment for sharing and collegiality with a set of regular meetings, on companies’ earnings reports, portfolio performance reviews, and the like, to give people a chance to hear what others are saying, and to offer their own ideas. By so doing we hope to avoid the NIH (“Not Invented Here”) syndrome – “If I did not invent it, the idea has little or no value.”

      Epoch’s ultimate success in winning for our clients depends in large part on our ability to transfer knowledge from one person to another. Firm meetings are a platform for people to then form their own groups, where they discuss in greater depth the good and bad points of different ideas or decisions. In turn, we hope the individuals in those groups will reach out to other portfolio managers, or the senior management team, and share their thoughts, even if their points include disagreement or opposition. What counts is that all the ideas are given air time: for the interdependence principle to work, people at all levels in a professional partnership need to know that their opposing views, and their reasoning behind them, are welcome.

      “Everything we do should be about transferring knowledge with one another.”

– Bill Priest

      At Google, Eric Schmidt and Jonathan Rosenberg caution against the encroachment of HiPPOs, (or Highly Paid Persons’ Opinions): “When it comes to the quality of decision making, pay level is intrinsically irrelevant and experience is valuable only

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<p>23</p>

Ibid., 179.