Who Keeps You Honest? Really.

A recent LOL on “Willful Blindness” lit up our phone banks.  The basic response from concerned readers was, “Yikes!  Are you trying to lose all your clients?!”  The theme of the piece was that all of us have blindspots.  Especially as it relates to our breadwinning activities.  We quoted Upton Sinclair on this point:

“It is difficult to get a man to understand something when his salary depends upon him not understanding it.”[1]

Given both the level of interest and the importance of the topic, I offer this antidote to Willful Blindness: Someone who keeps you honest.  In many client engagements, FCG will ask the CEO this question, “Who keeps you honest?”  Sometimes the question is met with a quizzical stare, and the response, “What do you mean?”  So we explain that everyone needs a person who will call bullshit on them.  Given the nature of Willful Blindness and Sinclair’s quote above, we need someone who is not afraid of us and who is quite willing to challenge our thinking…or lack thereof.

FCG’s experience shows that many CEOs do NOT have someone who keeps them honest.  Like Warren Buffett, we all need a Charlie Munger to call foul.  If I go through my mental rolodex and picture CEOs who don’t have a “BS whistleblower,” there is a common denominator:  Ego.  Insecurity and Ego are opposite sides of the same coin.  The biggest Egos that we’ve experienced at FCG are masking the greatest insecurities.

Andrew Lo (MIT) wrote a recent piece in which he commented on Willful Blindness and how it leads to disastrous consequences.[2]  Lo uses the fictional character Gordon Gekko to illustrate how Ego-driven, greedy leaders can create toxic cultures.  Lo then asks, what is the best way to immunize against the Gekko effect?  Lo’s answer is:

The psychologist Philip Zimbardo [who did the prison guards experiment at Stanford][3] put the answer succinctly:  resist situational influences.  Zimbardo was lucky enough to have a dissenting opinion [e.g. his wife!] that he implicitly trusted before his prison experiment spiraled out of control. Since that time, Zimbardo has investigated how good people can be influenced into doing evil things by their surrounding culture, much as the character Bud Fox was seduced by Gordon Gekko’s culture in “Wall Street”.[4]

What Lo—and Zimbardo—are saying is that situations can influence us to behave poorly so we all need a reality check.  We need someone we trust—possibly outside the environment—who can give us candid feedback about our decisions and behavior.  Zimbardo’s list of antidotes to Willful Blindness includes the following:

  1. Someone who will keep us honest
  2. Willingness to admit our mistakes
  3. Willingness to challenge authority
  4. Ability to prioritize the future over immediate present (e.g. instant gratification)
  5. Adherence to the values of honesty, responsibility, and independence of thought

Returning to #1 above, ask yourself:  “When was the last time someone blew the BS whistle on me?”  For many of us, the answer is:  a long, long time!  Like when we were in grade school and told the teacher, “My dog ate my homework.”  And we got busted for telling a lame whopper.  Some CEOs are still telling whoppers and going bust-free.

Zimbardo rightly identifies “situational influences” as the real culprit in Willful Blindness.  I confess to sitting in more than one strategy session in which I said nothing while the leadership team discussed ways to push questionable products on unsuspecting clients.  Why was I silent?  Situational influence.  It seemed so uncomfortable to speak my conscience when the whole room was aligned around the “vibe” sell, sell, sell.  Like I would be the world’s biggest spoil sport to ruin everyone’s fun.  (Frank Burns in MASH, the classic wet blanket.)  And, of course, remember Sinclair’s caution that interfering with someone’s salary is never a popular choice.[5]

Assuming you have the wisdom and courage to welcome a bona-fide BS whistleblower into your life, how do you avoid situational influences?  Very simply, work around them.  In other words, don’t expect your “keep-you-honest” partner to operate in public settings, like staff meetings.  Instead, meet with him or her privately and solicit feedback.[6]  Ask specifically, “What possible blindspots did I have in that meeting?”  Note, the question is not, “Did I have any blindspots?” because that makes it too easy to receive a one word answer: no.  Rather, assume you have a blindspot—we all do—and ask for feedback on what it looks like.

A common blindspot that FCG observes is blaming.  Most investment leaders recognize that blame is toxic in organizations.[7]  But then they subtly—or not so subtly—turn around and blame someone in a staff meeting.  If you have an honesty partner, they can provide feedback after the meeting.  This awareness would allow you to then use Zimbardo’s #2 point above:  admit your mistake.  Far too many leaders allow their egos to tell them:  don’t admit mistakes.  Why?  It makes you look weak.  One of my favorite TV heroes, Jethro Gibbs on NCIS, is guilty of this same stupid advice to his team:

Rule 6: “Never say you’re sorry.  It’s a sign of weakness.”[8]

This may be one of the dumbest “rules” going in the corporate world.  We are all human and we all make mistakes, so why pretend that we don’t?  So, let’s all get this one straight:  appropriate apologies are a sign of maturity, humility, and respect.  Not weakness.

Of course, if your career is an unending series of apologies, then something else is wrong.  That’s different.  We are talking about the occasional, sincere apology when you screwed up.  In FCG’s experience, the willingness to take responsibility for a mistake—and apologize—is nearly always met with appreciation.  People realize it takes courage to apologize.

So, what are we suggesting in this blog?  Here’s the simple checklist:

  1. Establish someone in your professional life who keeps you honest. (Your own personal BS whistleblower)
  2. Acknowledge that you have blindspots and ask your BS whistleblower to point them out.
  3. Do this in private, so that “situational influences” don’t overpower the whistleblower.
  4. When you get feedback that you have screwed up, admit your mistake. And when appropriate apologize.

This seems simple enough.  Why don’t we do it?  Ego.  The simple prescription above is the LAST thing that Ego wants.  Ego loves to be in control, to look good, and to be right.  Ego hates humility.  Ego is constantly on the lookout for whistleblowers, so that it can root them out and crush them.  If Ego reads this blog it will tell you, “this is the dumbest thing you’ve read all week.  Ignore it!”

Of course, many readers will react to this blog by thinking, “I don’t need this coaching, but so-and-so definitely does!”  OK, first off, ask your BS whistleblower if that is really true:  that you don’t need this coaching!

Then, if you must, print this piece and leave it on so-and-so’s desk, with the appropriate parts underlined! J

Meantime, I want to thank my whistleblowers.[9]  My business partners, who don’t seem at all afraid to call me on my BS.  (Clearly I have been way too lenient in my leadership…)  And my ultimate whistleblower, my wife.  She is not the least bit intimidated by me.  I can’t get away with anything.

Curiously and humbly yours,


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[1] The Investment Challenge by FCG, 2015, pg. 8

[2] “The Gordon Gekko Effect: The Role of Culture in the Financial Industry.”  Andrew Lo. January 4, 2016.  Special thanks to Tom Brakke for bringing my attention to this paper.  Lo opens the paper by stating “Culture is a potent force in shaping individual and group behavior, yet it has received scant attention…”  I couldn’t help it.  At gunpoint, my Ego made me send Andy an email indicating the FCG has produced 3 books, 15 white papers, 37 blogs, and over 200 speeches on the topic…but who is counting?

[3] Zimbardo asked Stanford students to participate in an experiment where some students were prison guards and others were prisoners. Within a few days, the experiment devolved into “Lord of the Flies” behavior and Zimbardo ended the experiment early.

[4] The Gekko Effect, pg. 34.

[5] Kudos to my partners Keith and Michael, as they frequently will call BS on clients when appropriate.  Michael by nature has a healthy dose of conscience, courage and skepticism which makes him an excellent whistleblower.

[6] “Better yet, form what Eisenhower called a “kitchen cabinet,” composed of people who will speak the truth to you in private.  I adopted that idea years ago from Fred Martin, CEO of Disciplined Growth Investors.

[7] See the paper we co-authored with Jason Hsu, “The Folly of Blame” on our website www.focusCgroup.com

[8] This rule has been mentioned throughout the series, but it given a specific number until Flesh and Blood (episode). The rule is also a direct reference to John Wayne’s catch phrase in She Wore A Yellow Ribbon (John Ford, Director).  Wayne said:  “Never apologize, mister, it’s a sign of weakness” to subordinates in a military situation. DiNozzo notes the connection in Hiatus Part 1 (episode).  Mark Harmon’s career has paralleled John Wayne’s.  They both were quarterback of their southern California college football team, both went into acting.  (Harmon’s father, Tom Harmon, was a Heisman Trophy winner and actor & announcer as well.)  Note: This is continuously told to Tony, Ziva and Tim through a smack to the back of their heads.

[9] Fred Martin, quoted earlier, is one of my whistleblowers.  In reviewing this blog, he added these good thoughts: “Please be specific about your own kitchen cabinet.  You were too cavalier about your wife’s influences.  I was left wondering what kinds of specific decisions she helped you with. You also should be more specific about your associates.  What specifically have they done to help you deal with your blindspots?  Are there any other members of your kitchen cabinet?”  JW: Fred makes a good point.  I think the response is long enough to constitute another LOL blog.  Which I intend to do.


Clear-Eyed Solutions to Willful Blindness

As I was finishing this piece, I got dizzy and almost fell off my soap box.  That got me thinking, I should probably run this one by our editorial board, lest I end up sounding like Frank Burns of the old MASH television series.  (Millennials: ask your parents to explain…)  After some good feedback from the likes of Charley Ellis, Paul Smith (CFA CEO), James Montier and a few others, I’ve reworked this piece to where I don’t appear to be barfing all over my chosen industry.  Montier said it well in his feedback note:  “We should be stewards of capital with a noble duty to our clients.”  Amen.  And indeed FCG has experienced this with countless clients.

That said, the investment industry does present brilliant examples of what Margaret Heffernan calls, “Willful Blindness.”  In her fine book[1], Heffernan writes, “We turn a blind eye in order to feel safe, to avoid conflict, to reduce anxiety, and to protect prestige.”  And to make money.  (As to our position on making money, FCG is for it.)  Two recent pieces by Sir Bogle suggest that “willful blindness” is alive and well in the investment industry.  In short, the investment industry exploits the naïve amateur investor.  Bogle shows this powerfully in his analysis of two 30 year periods of returns for average equity mutual funds vs. the S&P 500 Index.  The annualized returns for each are given below:

Time Period Average Equity Fund S&P 500 Index
1945-1975 9.7% 11.3%
1985-2015 9.6% 11.2%

Bogle, yet again, makes his case for the average investor to simply index his retirement funds:  “With miniscule all-in costs, nominal portfolio turnover, tiny (if any) transaction costs, and high tax efficiency; and designed to be held “forever” – remains the optimal way for investors to earn their fair share of whatever returns, good or bad, our stock market delivers.”[2]

As if the case for index funds isn’t strong enough, just by looking at the numbers over a 60 year period, Bogle then brings in three heavy weights from the financial world—Samuelson, Swensen, and Buffett—and shows how each has embraced indexing as the strategy for success with average investors. [3]  (In reviewing this piece, Charley Ellis wrote, “Please include me with Warren and David as serious advocates of indexing for almost everyone.”)

So, what’s the problem?  Why have so few investors chosen indexing?[4]  Let me play with several analogies or “mentalities” that may offer insights.  All of them linked to willful blindness.

Casino Mentality.  Millions of tourists go to Las Vegas each year to gamble at the casinos.  Most of them realize they will not emerge as winners, but at least they will be entertained while losing.  And, who knows, maybe they will be one of the lucky few winners?  But, we all know who the consistent winners will be: the casinos.

If the tourists were seriously interested in winning money as a collective group—all of them together—then they would of course NOT bet at the casinos.  They would lose as a collective, each and every time. The house wins.

The investment profession operates with a “casino-like” mentality in that they know perfectly well that investors collectively will lose by giving all their money over to active managers.  These investment firms, like the casinos, will be the winners.  Of course, some of the investors will happen to choose the “right” investment firms that win big through active management and will celebrate their good fortune. (Like lottery winners.)  But overall investors will lose in this zero sum game, after fees.[5]

The major difference FCG sees between casinos and active managers is that tourists in Vegas understand the risks and are quite willing to “pay” for the entertainment value.  Fine.  But, there is no entertainment value in investing.  (Ok, you could argue it’s fun to watch stocks go up and down, and hear Jim Cramer rant about them.)  But retirement is a serious business.  It’s very different from a trip to Vegas.  The former should be a sober and thoughtful exercise which gives people the best shot at a decent retirement.  Vegas is just fun.

To restate, the failing is in the investment industry’s unwillingness to think collectively.  All the drama, glamor and—of course—profits drain out of the investment game once we think collectively.  Indexing which serves the collective because of the strong returns at a low cost is an extremely boring strategy.  When your neighbor tells you that a certain Hedge fund just earned him a 35% return compared to the S&P Index return of 9%, you feel like a loser.  The casino mentality is fed by greed and envy.  And hope.  So is speculative investing.  Maybe I will pick the right fund and make a fortune.  Again, in the aggregate this can never happen.  The collective always loses in the casino framework.

So, when does the collective win?  If they simply invest in index funds and then largely forget about them.[6]  In this scenario, they have hitched their wagon to the power of compound interest, which has a powerful effect over time.  The 11% return mentioned above would double your money in just under 7 years.  In two decades, you could see your money increase 8-fold.

Plantation Mentality.  Sometimes we use this analogy internally at FCG because we feel a bit like abolitionists visiting the Southern Plantations in the 1840’s.  Specifically, the message we are delivering to the plantation owners—in modern terms, the asset management owners—directly challenges their business practice.  The message threatens their livelihood.  Upton Sinclair put it so well when he wrote:

“It is difficult to get a man to understand something when his salary depends upon him not understanding it.”[7]

The moral infraction is of course different in each case.  The plantation owners were getting free labor by exploiting a whole race of people.  Some—not all—active asset managers are making huge profits at the expense of a different “race” of people:  the uninformed citizen. David Swensen, at Yale, put it this way:

“The fundamental market failure in the mutual-fund industry involves the interaction between sophisticated, profit-seeking providers of financial services and naïve, return-seeking consumers of investment products.  The drive for profits by Wall Street and the mutual-fund industry overwhelms the concept of fiduciary responsibility.  The powerful financial services industry exploits vulnerable individual investors.”

There you have it, two forms of exploitation.  Neither one ethical.  But one of them still legal in today’s world.  FCG occasionally sees this ethical breech up close and personal.  And it’s not pretty.  We’ve sat in rooms with Partners of asset management firms who have lost money for clients over ten year periods, never reduced their active fees, or offered discounts, and showed no signs of remorse.  Let’s be clear.  If an active manager can consistently produce excess returns, then FCG has no qualms about that person making a very good living.[8]  The real crime is that many active managers have not provided added value and have profited handsomely.  That’s just not right.  Most investment professionals believe in meritocracy:  top performance gets top pay.  And yet, many are complete hypocrites when it comes to their own underperformance.  Willful blindness and another point for Upton Sinclair…J

Friedman Mentality.  FCG believes much of the inappropriate mindset is the result of the “shareholder value maximizing” principle taught be business schools and advocated by Nobel Prize winner, Milton Friedman:  “there is one and only one social responsibility of business—to use its resources and engage in activities to increase its profits.”[9]  Oh, the damage this mindset has done.  James Montier calls it the “World’s Dumbest Idea” and writes, “Shareholder Value Maximization has pretty well laid the kingdom to waste.”  I have had several good chats with Paul Smith, CEO of the CFA Institute, on this topic, and he has similar views:  business schools have used game theory and other abstractions to obscure actual problems:  real people have real issues that should be addressed.  In the asset management world, there is a whole population of people who are unprepared for retirement.  And yet the industry that is responsible for designing retirement solutions is profiting mightily.  How is that fair?!  (Teetering on my soap box again…)  Jim Valentine, author of “Best Practices in Equity Research” says, “If the auto industry made a product that only worked about ¼ of the time, they’d be out of business.”  But when only a quarter of active managers outperform the index that is seen as acceptable.  Willful blindness.

Competitive Mentality.  Finally, the competitive mindset of most professional investors contributes to the willful blindness.  The investment industry is filled with Type A, ambitious personalities.[10]  In many ways competition serves the consumer in a free market.  Adam Smith’s invisible hand allows for healthy competition in which car makers battle it out to make a superior product.  The consumer wins.  The case is not so clear for the investment industry.  Yes, competition serves the public with regard to the original purpose of financial markets:  “to raise capital for companies that create jobs, build organizations, manufacture products, or provide services, with growing efficiency and lower costs to consumers.”[11]  But competition for price discovery among active managers has now reached the stage where it largely cancels itself out.  In his FAJ article called “The Rise and Fall of Performance Investing” Charley Ellis makes this point, citing various studies, including one from Vanguard that examined mutual fund returns:  “Results do not appear to be significantly different from random before costs.”[12]  In that same article, Ellis quotes Fama:  “Active management in aggregate is a zero-sum game—before costs…After costs, only the top 3% of managers produce a return that indicates they have sufficient skill to just cover their costs, which means that going forward, and despite extraordinary past returns, even the top performers are expected to be only about as good as a low-cost passive index fund.  The other 97% can be expected to do worse.”[13]  In this case, the competition does not serve the consumer.  He does not get superior returns from it.  The fierce competition does not contribute to a better product.  In fact, all the competition makes index funds even tougher to beat.

The competitive mentality—rampant in the investment industry—keeps the participants focused on the fierce battle of outperforming benchmarks, rather than stepping back and seeing the bigger goal:  client success.  A different mentality—call it a “service mentality” (think Four Seasons)—is better able to step back and ask, “How is the customer faring in all of this?”  And the answer is: not so well. In FCG’s view, the customers would be far better served by investment leaders who are service minded rather than competitive minded.  The notable exception would be a handful of exceptional active managers who are competing in price discovery to keep markets efficient.  Yes, there IS a role for active managers.  But Suzanne Duncan and others have written about the gross over-allocation of resources in the investment industry devoted to price discovery.[14]  Service-minded leaders see the world in a fundamentally different way from competitive-minded leaders.  Service-minded leaders see the world through collaborative-win/win lenses, as opposed to competitive-win/lose ones.  The service mindset continually asks, “How do I provide the biggest wins for my clients?  How do I partner with them?”  FCG witnessed a classic example of the competitive mindset, when the Partner of a well-known investment shop stated boldly, “We don’t care about the clients, we care about the partners.”  (Gasp.) When we challenged this statement, the partner only partially backed down.  Small wonder the financial industry ranks at the bottom of the Edelman Trust Barometer.  (I am taking a few deep breaths now…)

A Clear-eyed Solution

Heffernan writes that the only way to overcome willful blindness is by “challenging our biases, encouraging debate, discouraging conformity, and not backing away from difficult or complicated problems.  Then, we can be more mindful of what’s going on around us and be proactive instead of reactive.”  The purpose of this piece is to do just that:  encourage the debate.  Industry legends like Bogle and Ellis are writing and speaking on this topic, and we applaud their willingness to challenge the “blindness.”

Meantime, FCG will continue to challenge our clients with the basic question:  are you putting clients first?  And when we get the response, “Well, we put both owners and clients first” (which we did recently), we’ll push them:  Only one can come first.  Which is it?  Sometimes this challenge causes an awkward silence in the room…and makes us less than popular.  But that’s the nature of exposing willful blindness.  It’s a risk.  And it’s seldom comfortable.

Finally, the good news.  FCG works with hundreds of investment leaders who are decent and service-minded in their work.[15]  We’re not starting this crusade from ground level zero.  We have critical mass to apply sufficient peer pressure on the bad apples, so that they move beyond their blindness and reclaim their moral compasses.  So just as plantations died off in the South, we look forward to the day when the same will be true of exploitive investment firms.  And hopefully it won’t involve a civil war or “I have a dream” rallies at the Lincoln Memorial.  One CEO of a major publicly-traded investment firm recently said to his executive team, “We are experiencing a secular decline in the margins of this industry.”  FCG applauds his honesty.  And his courage in accepting the realities of the new era for investment professionals.  Clear-eyed vision is the antidote for willful blindness.

Curiously yours,


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[1] Willful Blindness, Margaret Heffernan

[2] The Index Mutual Fund: 40 years of Growth, Change, and Challenge, FAJ, Jan/Feb. 2016, pg. 9

[3] Of course, as our Michael Falk comments, active managers could choose to be much more competitive if they simply lowered their fees and held their winning positions longer; retirement funds are largely tax efficient already.

[4] “Note that industry flows make the “few” seem much more like the “many” in the last several years.” M. Falk.

[5] FCG has worked with and written about a number of excellent active managers, whom we call the “Focus Elite.” See our website for the white paper called, “Linking Culture to Success” for a detailed description. www.focuscgroup.com

[6] M. Falk: Rebalancing and shifting asset allocations over time based on needs requires some attention.

[7] The Investment Challenge by FCG, 2015, pg. 8

[8] One of our Focus Elite CEO’s wrote this feedback: “I think you have to be careful not to dump too much on we price discovery managers. While it is true that we generally think too highly of ourselves, we are front line soldiers. We are continually at odds with the prevailing orthodoxy; we can never allow ourselves to become arrogant or complacent.  We have to quell our envy when we see other investment firms expand too much and hose their clients while their owners become richer than we could ever dream.  So, throw a little love our way, please!”

[9] Wikipedia quote

[10] M. Falk: “The profits of the industry “seduced” all these smart people; the real puzzle is that the profits have remained similar even in the face of the increased competition.”

[11] Bogle, Putting Investors First, JPM, winter 2016, pg. 9

[12] Ellis, Rise and Fall of Performance, FAJ…pg. 17

[13] Ibid, pg. 18

[14] See Duncan’s piece, “the Influential Investor”

[15] Tossing a little love to the successful active mangers! J