The CEO vs. the Bankers: Death by Transactions

I spoke to the (non-American) former CEO of a large company—the profitability leader in its capital-intensive global industry.

“Why do American CEOs listen to 30-year old investment bankers?” he asked me. “They don’t know anything.”

“I used to get calls from them—Morgan Sachs, Goldman Stanley, you know—the supposed crème de la crème of MBAs. Here’s how they went:

Bankers: Why do you keep so much cash? Your leverage ratio is half that of your industry. You’re earning nothing on it, like keeping it under a mattress. You’re destroying shareholder value. If you have opportunities, you should invest. If not, you should return it to the shareholders.

CEO: Let me ask you—who’s the global market leader in software?

Bankers: Microsoft, of course.

CEO: And how much cash do they have on hand?

Bankers: Way more than the industry average; too much; they should return it to the shareholders.

CEO: Uh huh. And who’s the global market leader in semiconductors?

Bankers: Intel, of course.

CEO: How much cash on hand?

Bankers: Again, way too much, more than industry average, they’re destroying shareholder value.

CEO: Uh huh. I too am the market leader, and the profitability leader. I don’t focus on your options pricing models and portfolio theory and risk hedging. I focus on “buy low sell high,” “keep your powder dry,” “bide your time,” “strike when the iron is hot,” “find your niche,” “beat your competitor don’t copy him."

My industry—like every capital-intensive industry—has cycles. I buy my expensive assets at a huge discount—when the market is cold and my suppliers have no backlog. I get what I want, when I want it, pay less, and have grateful suppliers. My competitors buy when their profits are high—they overpay, wait years for delivery, and irritate their suppliers—as do their competitors.

I make strategic moves when I’m the only one who can do it. My competitors make their moves along with everyone else.

I can do all this because I have cash. My competitors all listened to your advice about copying the average. Not only am I the only one with funds to execute my strategy—I’m the only thinking of a unique strategy.

The CEO continued, “they often didn’t even get it. They couldn’t recognize a bad model when it slapped them in the face like a dead fish.”

Q. Who’s right?

A. The CEO—hands down, a no-brainer.

Q. How could the bankers so spectacularly miss something so obvious?

A. The blinding power of an unchallenged paradigm.

Q. And what paradigm would that be?

A. Ah, that’s the big question. Is it:

  1. Youth is arrogant
  2. Business has become overly quantitative and analytical
  3. Finance has triumphed over marketing and production
  4. Paris Hilton was somehow involved
  5. We are killing off strategies and relationships for the sake of transactions.

I vote #5—death by transactions.

The history of capitalism is one of scale economies, enabled by parceling out pieces of work to others. Every time you do that, you gain scale—and you create a transaction.

This trend has accelerated: more chunks of business are being chopped up and parcelled out—both in space and in time.


  • Modular software
  • Mortgage (and other asset) collateralization
  • HR competency models
  • Outsourcing
  • Globalized sourcing

This habit is reflected even in meta-patterns of business thinking—how to tackle a problem? Break it up, break it down. Analyze it. Measure it. Parcel it out. Track it. Install rewards. Repeat at one level of detail lower.

Every time you break up a function and parcel it out to more people over less time, two things happen. Greater efficiencies—and less relationships.

Repeat infinitely, and you get people who think about business like tinker-toys—models to be constantly assembled and re-assembled.

That way of thinking fosters neither strategic or relationship thinking.

It is also impossible to think ethically when there are no relationships to be harmed, and no timeframe in which to be held accountable.

But the biggest irony is: it doesn’t work anymore. The chop and parcel game has been played out. The returns are beyond diminishing; the cost of the transactional mindset is exceeding the savings of scale. The game has turned dysfunctional.

Death by transactions.

Software Programming and the Economics of Trust vs. Transactions

In a charming blogpost, Paul Duval says that developers should “Fire your best people and reward the lazy ones.”

As he explains, developer shops often consider “troubleshooters” to be among the best employees. They know where all the hard-coded quick fixes are, and they can spot them like lightning. Trouble is—those hard-coded fixes are impenetrable to other programmers.

Troubleshooters perpetuate impenetrable coding—because it’s faster, and perhaps because they are the beneficiaries of continued arcane language.
“Lazy” developers, by contrast, are those who can’t stand repetition. Every time they encounter a hard-coded arcane fix, they take the time to craft a generic solution that any future developer can understand.

One key fact: Duvals says that for every time a method is written, it’s read (and maintained) ten times—a 10:1 ratio. Suddenly, the “lazy” developer is the one reaping relationship-based economics for the employer; and it’s the “troubleshooter” who is perpetuating a repetitive, transaction-based high cost structure.

So it is that the world of software development is a microcosm of the broader world of business relationships—rewarding transactional behaviors in a non-transactional world.

We live in a world of incredible inter-dependence, connections, networks—and it’s moving ever-faster toward more, not less, of those connections. Yet we live by ideologies that focus on and reward transactions, not relationships.

• In software development, it’s a focus on how fast the problem can be solved—rather than on the systemic cost of solving the same problem over and over.

• In sales, it’s the dominance of linear “models” that begin with a lead and end with a close—rather than on lifetime and network-based models of business development in a sustained relationship environment.

• In investment banking, over the years it’s become about how to get the deal, rather than nurture the relationship.

• In commercial banking, it’s about transaction fees (e.g. overdraft charges), rather than about earnings based on assets under management.

• In mortgage banking and credit cards, it’s become about penalties charges (prepayment penalties and late penalties) rather than underlying economics.

• A major aspect of the subprime mortgage debacle has been the “transactionalization” of what used to be a relationship business. Mortgages have been on the ownership dimension—being sold repeatedly; on the risk dimension—stripping principle from interest; and on the time dimension—dealers in mortgage “products” increasingly get paid from transaction fees for moving on to the next step in the chain, rather than on the underlying interest paid.

• Private equity in its entirety is arguably an example of transactionalization of the corporation, though at the outset it introduced a needed jolt to stodgy bureaucracies. Of late, however, PE firms are increasingly finding earnings based on—you guessed it—transaction fees.

In all these arenas of business, we are seeing a structural challenge to trust. If you disrupt the relationship aspect of business in favor of approaches that are one-off, transactional, short-term in nature, you destroy the natural economics of trust.

Ironically, the long-term economics of trust far outweigh those of short-term transactionalism. But an ideology of get-in-get-out-fast has overwhelmed commonsense. The result is not only housing bubbles, but a paucity of social trust in business.