The Wharton Economic Summit

I apologize for not getting around to this earlier, but I wanted to mention my trip last week to the Wharton Economic Summit. The school turns 125 this year so it’s celebrating with a series of economic conferences around the world, and the largest one was in Philadelphia last week.
The first thing I have to mention is that if you’re ever in the Philly train station and you need to use the restroom, wait. Just trust me on this. Hold it in. I really can’t stress this enough. I promise I won’t go into the details but I assure you it’s sound advice. What happens in Philly I hope to god, stays in Philly.
Moving on….
The conference was in the convention center downtown and it was packed full of big wigs. You couldn’t throw a brick without hitting a C-level somebody. That must be the nice thing about Wharton alumni. Just pick up the directory, grab any name at random and presto, it’s probably someone important. The school is like Skull & Bones, except with more business jargon.
Here’s an example, I caught up with Art Collins, the CEO of Medtronic (oh, and Wharton ’73). I tried to talk him into making a counter offer for Biomet (it didn’t work, but I tried). I also asked him about Sarbanes-Oxley and he was surprisingly positive about it. He felt that something was needed, and the current law is better than what existed before (in other words, nothing).
He makes a good point that investor confidence was sorely needed in 2002. Personally, I wish Congress had been a bit more deliberative. Collins said that 404 needs some revising, but he likes the overall impact of SarBox. I think the smarter CEOs see that it’s not going away, so they’re ready to take what they can get. Of course, Medtronic is a big company so SarBox doesn’t impact them nearly as much as it does for smaller companies.
I asked Collins about compliance costs, and he said it was about $8 million to $10 million. That may sound like a lot, but for Medtronic, it’s less than a penny a share for a $50 stock. Of course, if you’re running a small tech start-up, you’re probably not so thrilled about writing those checks to your accountants.
One other thing about Collins. He wears nicer suits than me.
I sat in on a good session about CEO pay. The panel, which was mostly Wharton profs, felt that the issue was very overblown. I think the executive pay issue suffers from what I’ll call the “Parade Magazine Effect.” People are always comparing themselves with how much other people make. One of the professors said if all CEOs suddenly had a 25% pay reduction, it would have a microscopic impact on shareholder equity. Another prof said (I was too far away to make out the names) that the severance packages have gotten out of control. As a shareholder, I don’t mind paying for success. But paying for failure ain’t fun.
The profs said that one of the problems of CEO pay isn’t the pay itself, but the social blowback of the issue. I think that’s a bigger deal than most people realize. Sometimes I think that companies like Danaher are right. Try to make as little news as possible.
One of the members of the panel runs a head-hunting firm for hedge funds and private equity. Of course, you don’t find too many people complaining about hedge fund compensation. What I found interesting is that he said that today, half of the positions he places are for “infrastructure” jobs, like lawyers and compliance. In effect, the hedge fund industry is becoming institutionalized. Wasn’t the industry started to get away from that?
I thought one of the best points made about CEO pay is the overemphasis on pay, while ignoring the potential wealth that executives have in the stock. To give an extreme example, Warren Buffett gets a salary of about $100,000 a year. But when the market fell after 9/11, he probably lost a few billion dollars, even though he couldn’t control what happened. Many executives are in a similar position, but on a smaller scale.
A typical CEO already owns a great deal of stock, plus a lot of stock options. So if the shares fall for some transient reason, they can be out far more money than what they make in compensation. Yet, the public is still fixated on the Parade Magazine number.
At lunch, I sat next to two Wharton students from Singapore. Can you imagine what it’s like to go from spotless Singapore to Philly? Dear lord, talk about a culture clash! It sounds like a Fox reality show.
During lunch, there were two talks. One was by Jeremy Siegel and the other was by Michael Milken. You would have thought that this Milken fellow (Wharton ’70) went straight from Wharton to a career in funding all these wonderful initiatives in medical research and economic development. Any activities in between was politely skipped over.
Although Siegel seems very reserved on television, he’s surprisingly dynamic in real life. I was able to corner Professor Siegel for a 20-minute high-octane conversation. (By the way, major shout out to Tracy Simon of the Wharton staff for helping me out). He still likes the market and thinks equity prices are a good value versus fixed-income. Although, he said he doesn’t see major differences now between value and growth.
I asked him why value has outperformed even in this bull market. He said that it’s really a factor of growth still unwinding from the 1990s. I asked him about the earnings slowdown and I was happy to hear that he thinks it’s probably just a mid-cycle reversion to the mean instead of the beginnings of a recession.
I was also pleased that Siegel agrees with me that there’s no inherent problem in low equity volatility. I’m still confused why so many folks are worried about it.
Siegel also said that he wants to see higher payout ratios from companies. One thing that I was curious about was why WisdomTree (WSDT.PK), the family of ETFs he runs with Michael Steinhardt and Jonathan Steinberg (Maria’s hubby), is traded on the Pink Sheets. He said that it’s the legacy stock of Individual Investor, and the shares were going to hop over to one of the exchanges in the next few months.
We also talked about Jim Glassman and Kevin Hassett’s book, Dow 36,000, which relied heavily on Siegel’s book, Stocks for the Long Run. Siegel doesn’t buy their theory about equity premiums fading away (and neither does the market). He felt that their problem was ignoring the real return in treasuries that could be seen by focusing on the TIP spread.
It was a fun, fasted-paced conversation. (My only disappointment was that Professor Siegel said that he’s not a blog reader!) He always seems to have a fresh and interesting view on the market.
Here’s my review of his book, The Future for Investors.

Posted by on April 19th, 2007 at 3:23 pm


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