Latest / Bloomberg Intelligence / Stock Buying Opportunity Isn't Here Yet: Hugh Johnson

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Stock Buying Opportunity Isn't Here Yet: Hugh Johnson · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penl Podcast. I'm Paul swing you.
• 0:05
  Speaker 1: Along with my co host Lisa Brahma Wicks. Each day
• 0:07
  Speaker 1: we bring you the most noteworthy and useful interviews for
• 0:10
  Speaker 1: you and your money. Whether at the grocery store or
• 0:12
  Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
• 0:15
  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: at Bloomberg dot com. Well, in days like today, when
• 0:21
  Speaker 1: you have a big sell off in the equity markets,
• 0:23
  Speaker 1: it's good to speak to a season grizzled veteran, and
• 0:26
  Speaker 1: we have that in Hugh Johnson, Chairman and chief investment
• 0:29
  Speaker 1: officer of Hugh Johnson Associates with about a billion and
• 0:32
  Speaker 1: a half dollars under management. Hugh, it's great to chat
• 0:35
  Speaker 1: with you today. Help us just to put what we're
• 0:38
  Speaker 1: seeing today on the tape into some context for us. Well,
• 0:41
  Speaker 1: first of all, nobody knows, including myself, what's going to
• 0:45
  Speaker 1: be the outcome out comfort the economy of China, the
• 0:48
  Speaker 1: economy of the US, and of course the financial markets.
• 0:51
  Speaker 1: We have some things that can reasonably serve as as
• 0:55
  Speaker 1: a guide. We of course had the stars epidemic or
• 0:58
  Speaker 1: problem that we had in two thousands three. In two
• 1:00
  Speaker 1: thousand fourteen, we had a bowl of notes. We've had
• 1:03
  Speaker 1: this kind of thing before, and it's told us to
• 1:06
  Speaker 1: kind of, you know, don't get caught up in the panic.
• 1:09
  Speaker 1: I think that's always a mistake. So I think, don't
• 1:12
  Speaker 1: get caught up in the panic. Maybe step back from
• 1:15
  Speaker 1: what's going on and let them dost settle or let
• 1:18
  Speaker 1: the markets settle down before you start making any investment decisions.
• 1:22
  Speaker 1: There is a somewhat bright side of this, if you
• 1:24
  Speaker 1: can see anything bright in this, and that is we've
• 1:27
  Speaker 1: gone from a level at least as I do the
• 1:30
  Speaker 1: numbers of being meaningfully overvalued, to being let's say a
• 1:34
  Speaker 1: little bit overvalued but not as much overvalued. In other words,
• 1:38
  Speaker 1: this could have an opportunity, but it's it's not here yet.
• 1:42
  Speaker 1: So the main thing is don't get caught up in it,
• 1:45
  Speaker 1: and don't panic. It's not here yet. When do you
• 1:48
  Speaker 1: decide to buy the dip? That's really a good question.
• 1:52
  Speaker 1: I I think you buy the dip when the valuations
• 1:55
  Speaker 1: look a little bit better. You know, we started the
• 1:58
  Speaker 1: day to put some numbers on a Lisa. As I
• 2:01
  Speaker 1: do the numbers five percent overvalued or above the level
• 2:05
  Speaker 1: we should average in the current quarter. You know, this
• 2:08
  Speaker 1: is kind of fun with numbers. We've come down to
• 2:11
  Speaker 1: where we're still a little bit over value three point
• 2:13
  Speaker 1: six percent. Um I think you wait a couple more days.
• 2:17
  Speaker 1: If we got down to our level of say even
• 2:19
  Speaker 1: being fairly valued or one percent one percent overvalued, I
• 2:24
  Speaker 1: start to buy, start to buy, maybe buy some some things.
• 2:28
  Speaker 1: Keep in mind, little just just how much further do
• 2:30
  Speaker 1: we have to go to get to that point? Well,
• 2:33
  Speaker 1: you know, and as I say, you've got to go
• 2:34
  Speaker 1: down another three three to five percent in my view,
• 2:38
  Speaker 1: three to five in in the either you can measure
• 2:41
  Speaker 1: it by the SMP or the down. If you went
• 2:43
  Speaker 1: down that much, I think then you could probably start
• 2:46
  Speaker 1: to start to buy. Well, what are some areas that
• 2:49
  Speaker 1: you would be buying? Uh, you know, when this market
• 2:53
  Speaker 1: does set it out, or if we do get that pullback,
• 2:55
  Speaker 1: you're suggesting, well, that's great, that that's a great question.
• 2:58
  Speaker 1: Because um, I haven't been very constructive or positive on
• 3:01
  Speaker 1: the markets. I've been saying, you know, the markets are
• 3:04
  Speaker 1: not going to have a particularly good year, especially after
• 3:06
  Speaker 1: what we had in two thousand and nineteen. So I've
• 3:09
  Speaker 1: been trying to tell investors of what we've been doing
• 3:12
  Speaker 1: is to add a little defense to portfolios and doing
• 3:15
  Speaker 1: things like making sure you buy large capitalization stocks, add
• 3:18
  Speaker 1: some defense by buying utilities and and consumer staples. Make
• 3:22
  Speaker 1: sure you buy some value stocks. I'm not saying load up.
• 3:24
  Speaker 1: I'm not saying reduce your allocation to equities. But I'm
• 3:28
  Speaker 1: saying in two thousand twenties going to be a lot
• 3:30
  Speaker 1: more difficult a year. You can see that very clearly
• 3:34
  Speaker 1: than two thousand nineteen. So I'm saying, add a little
• 3:37
  Speaker 1: defense to portfolios. Remember, this has been an extraordinarily long cycle,
• 3:41
  Speaker 1: the longest ball market in history, the longest expansion in history.
• 3:45
  Speaker 1: Common sense alone says, look at trees, don't grow to
• 3:48
  Speaker 1: the sky. You might add a little defense to portfolios.
• 3:52
  Speaker 1: Is it's not time to go into the bunkers. It's
• 3:55
  Speaker 1: not not time to take too much risk off the table.
• 3:58
  Speaker 1: But you have to watch very closely when when you're
• 4:01
  Speaker 1: you're a record, When you've got these records staring you
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  Speaker 1: in the face. On the flip side, what would you
• 4:06
  Speaker 1: have to see with respect to the spread of the
• 4:08
  Speaker 1: coronavirus and the subsequence slow down on the Chinese and
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  Speaker 1: other related economies To change your view and become even
• 4:16
  Speaker 1: more pessimistic. Yeah, that's a great question. I'm not sure
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  Speaker 1: what it would take, but I think it would probably
• 4:21
  Speaker 1: be you have to watch the news, and it's gonna
• 4:23
  Speaker 1: be it's not going to be something you can easily quantify,
• 4:26
  Speaker 1: and the news that you really want to watch is
• 4:29
  Speaker 1: what's going on to China. You know, the Chinese economy
• 4:32
  Speaker 1: is going to slow this year six point one percent
• 4:34
  Speaker 1: down to five point eight percent. If we've got numbers
• 4:38
  Speaker 1: or forecasts, shall we say from sensible plate people, that
• 4:41
  Speaker 1: looks like five and a half percent. Uh, then we're
• 4:44
  Speaker 1: talking about the impact of this, uh, the coronavirus being
• 4:48
  Speaker 1: a lot more significant than we had previously estimated our forecasts.
• 4:52
  Speaker 1: And then we've got to reduce our forecast for the
• 4:55
  Speaker 1: global economy or forecasts or not only China, our forecast
• 4:58
  Speaker 1: for the US. Remember China's an important export desition, that
• 5:01
  Speaker 1: destination for the U S. And and then we're gonna
• 5:04
  Speaker 1: bring earnings estimates for the SMP down, and that's when
• 5:07
  Speaker 1: that's when we're gonna have some real problems I think
• 5:09
  Speaker 1: in the markets. I'm hoping that doesn't happen, but nevertheless,
• 5:12
  Speaker 1: that's what you gotta watch. You gotta watch what's going
• 5:14
  Speaker 1: to be the impact on China, an important export destination
• 5:17
  Speaker 1: for the U S. You you mentioned earnings were maybe
• 5:20
  Speaker 1: a third of the way through this earning season. Any
• 5:22
  Speaker 1: takeaways for you so far. Yeah, it's a puzzling thing.
• 5:26
  Speaker 1: And it's been puzzling for every earning season we've seen
• 5:29
  Speaker 1: for the last four or five earning season. And that
• 5:31
  Speaker 1: is companies are coming in with better than expected earnings
• 5:34
  Speaker 1: that's not as good as we sail for the third
• 5:36
  Speaker 1: quarter that we saw in the fourth quarter, were still
• 5:38
  Speaker 1: have seventy percent of the companies of giving US earnings
• 5:42
  Speaker 1: that are above expectations. But at the same time that
• 5:44
  Speaker 1: we're getting that for the fourth quarter of two thousand
• 5:47
  Speaker 1: and nineteen, earnings expectations are forecasts by myself and others
• 5:52
  Speaker 1: for two thousand and twenty keep coming down. We worried
• 5:55
  Speaker 1: about ten percent at the start of the fourth quarter.
• 5:58
  Speaker 1: We're now down pretty close to eight percent eight point three.
• 6:02
  Speaker 1: So estimates for two thousand twenty keep coming down. And
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  Speaker 1: and so I'm happy about what we saw for to
• 6:08
  Speaker 1: to the fourth quarter. I'm not really happy about what
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  Speaker 1: I'm seeing lying ahead for two thousand and twenty, and
• 6:14
  Speaker 1: that makes my concerns are worries about valuation even deeper.
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  Speaker 1: Hugh Johnson, thank you so much for being with us.
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  Speaker 1: Hugh Johnson, Chairman and Chief Investment Officer of Hugh Johnson Advisors,
• 6:24
  Speaker 1: over say one and a half billion dollars from Albany,
• 6:27
  Speaker 1: New York. Of course, what's driving the risk off field
• 6:39
  Speaker 1: as the coronavirus which has been spreading and some of
• 6:42
  Speaker 1: the measures that China has taken to prevent further spread.
• 6:45
  Speaker 1: Joining us who has been weighing in all more day
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  Speaker 1: and all week last week, Drew Armstrong, team leader for
• 6:51
  Speaker 1: you as healthcare Bloomberg. Drew, can you just bring us
• 6:53
  Speaker 1: up to date? What is the latest in terms of
• 6:55
  Speaker 1: the spread and the efforts to contain the virus at
• 6:58
  Speaker 1: this point? Well, I mean, I think the biggest things
• 7:00
  Speaker 1: we're watching right now are kind of looking out for
• 7:03
  Speaker 1: new global cases. We do know CDC is going to
• 7:06
  Speaker 1: brief reporters a little bit later this morning, and we
• 7:09
  Speaker 1: may get some updates on exactly what the situation is
• 7:11
  Speaker 1: in the U S where we have five confirmed cases
• 7:13
  Speaker 1: but several dozen people who have been under observation or
• 7:17
  Speaker 1: in isolation. You know, approaching three thousand cases in China.
• 7:21
  Speaker 1: Accounts there continue to rise. I mean, we've seen several
• 7:23
  Speaker 1: hundred more cases at it each day. And I think
• 7:26
  Speaker 1: the biggest thing everybody is looking at is do things
• 7:28
  Speaker 1: in China accelerate, um and continue to grow in a
• 7:32
  Speaker 1: meaningful way. Meaning you've got kind of sustained ongoing transmission
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  Speaker 1: and a lot of the lockdowns that they've been doing
• 7:37
  Speaker 1: there aren't working, which is a possibility. Um. And do
• 7:40
  Speaker 1: we see kind of ongoing or sorry, do we see
• 7:43
  Speaker 1: new transmission happening outside of China which would really put
• 7:47
  Speaker 1: this in a new phase. So Drew, just give us
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  Speaker 1: some sense of context maybe relative to say the stars
• 7:54
  Speaker 1: of virus that of many years of several years ago, um,
• 7:58
  Speaker 1: where we in scope related to that? You know, I
• 8:00
  Speaker 1: think there's a lot of similarities, and people do make
• 8:02
  Speaker 1: that comparison. I mean, there's similar types of viruses. Both
• 8:05
  Speaker 1: are coronaviruses. They appear to come from some kind of
• 8:08
  Speaker 1: animal reservoir um in China, and both are respiratory illnesses
• 8:13
  Speaker 1: that can be deadly in the wrong type of patient.
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  Speaker 1: You're looking at people who are maybe a little bit older,
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  Speaker 1: maybe a little bit sicker, Uh, those folks are in
• 8:22
  Speaker 1: general more vulnerable to to any type of illness, whether
• 8:25
  Speaker 1: it be the flu um or one of these more
• 8:28
  Speaker 1: novel novel pathogens that we've been seeing. And so you know,
• 8:32
  Speaker 1: you're seeing the same types of restrictions on trade, the
• 8:34
  Speaker 1: same same types of economic worries that we're having here.
• 8:37
  Speaker 1: Stars was a lot bigger than this was, but it's
• 8:39
  Speaker 1: very early days. I mean, that was a long running epidemic.
• 8:42
  Speaker 1: I think one of the things you've seen that is
• 8:44
  Speaker 1: different from Stars is that public health authorities around the
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  Speaker 1: globe are increasingly sophisticated about how they respond as China
• 8:51
  Speaker 1: in particulars increasingly sophisticated. China is a very different place
• 8:54
  Speaker 1: in two thousand two, two thousand three from where it
• 8:57
  Speaker 1: is now. Some of the same practices, um, you know,
• 9:00
  Speaker 1: we were talking about these wet markets and things like that,
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  Speaker 1: or you know, it's coming from an animal reservoir, maybe
• 9:04
  Speaker 1: in baths or something. Those are still the type of
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  Speaker 1: things you you worry about. The doocey is similar, but
• 9:09
  Speaker 1: China is a really different country than you know, fifteen
• 9:12
  Speaker 1: or twenty years ago. Yeah, although there are issues in
• 9:15
  Speaker 1: terms of not having the right hospital beds, enough hospitals.
• 9:18
  Speaker 1: They're building hospitals currently as we speak to try to
• 9:20
  Speaker 1: meet the demand. Also just some basic supplies, the idea
• 9:24
  Speaker 1: of gowns and protective equipment for the medical workers to
• 9:29
  Speaker 1: take care of the patients. How is that kind of
• 9:33
  Speaker 1: I guess illuminating issues within China that are going to
• 9:36
  Speaker 1: make this harder to to sort of stave off, even
• 9:39
  Speaker 1: with the quarantine that's currently in place. Yeah, anytime you
• 9:42
  Speaker 1: have a widespread outbreak, one of the big things that
• 9:45
  Speaker 1: you worry about is isolation and containment. This is something
• 9:47
  Speaker 1: that public health or experts are going to talk. If
• 9:49
  Speaker 1: you have people who are contagious, you don't want them
• 9:51
  Speaker 1: around other people, And especially when you've got a virus
• 9:54
  Speaker 1: that is this new and has some of these scary
• 9:57
  Speaker 1: potential uh consequences to it, you need the hospital beds
• 10:00
  Speaker 1: and you need isolation units. When you're dealing with thousands
• 10:04
  Speaker 1: of new cases, No city around the globe is going
• 10:06
  Speaker 1: to have the capacity to say, hey, we need to
• 10:08
  Speaker 1: put three thousand people in isolation, and we need to
• 10:10
  Speaker 1: do it tomorrow. So you've got to build. And that's
• 10:12
  Speaker 1: why they're putting together a hospital to deal with this.
• 10:15
  Speaker 1: They did the same thing with Stars during that outbreak.
• 10:18
  Speaker 1: So some of this is saying we just need to
• 10:20
  Speaker 1: get the facilities in place where we can do the
• 10:22
  Speaker 1: basic fundamental public health medical work to get these cases
• 10:26
  Speaker 1: out of the population and stop them from potentially transmitting.
• 10:29
  Speaker 1: That is going to be made tricky by this thing
• 10:31
  Speaker 1: because it has a long incubation period. We don't know
• 10:33
  Speaker 1: are people with really mild symptoms spreading it around without
• 10:37
  Speaker 1: necessarily knowing they get sick. There's some complicating factors here
• 10:40
  Speaker 1: that I think the experts dealing with that are really
• 10:42
  Speaker 1: still trying to get their hands on it real quickly.
• 10:44
  Speaker 1: How did the Stars issue kind of take care of
• 10:47
  Speaker 1: itself or how did that play out? Every almost every
• 10:51
  Speaker 1: single outbreak like this, it comes down to good public
• 10:53
  Speaker 1: health practices. I mean, you get like a vaccine that
• 10:56
  Speaker 1: came out for Stars. Vaccines tend to take you know
• 10:59
  Speaker 1: when when when you talk about drugs you need months
• 11:01
  Speaker 1: or years. Often they get developed well after an outbreak
• 11:04
  Speaker 1: has ended. You know, we have a we have a
• 11:06
  Speaker 1: bowl of vaccine now, but we also started developing it
• 11:10
  Speaker 1: um in the beginning of the first outbreak in the
• 11:12
  Speaker 1: two thousand tents, and we only just now have it Okay,
• 11:16
  Speaker 1: Drew Armstrong, thanks so much for that update. We'll look
• 11:18
  Speaker 1: for the CDC briefing the reporters eleven thirty Wall Street Time,
• 11:22
  Speaker 1: Drew Armstrong, team leader for US Healthcare busy reporter as
• 11:26
  Speaker 1: the Healthcare team is as a track this coronavirus. Drew Armstrong,
• 11:30
  Speaker 1: Bloomberg News. Joinings here on a Bloomberg Interactive broker studio.
• 11:43
  Speaker 1: But we often hear the phrase think outside the box.
• 11:46
  Speaker 1: But how about thinking outside the building. That's what our
• 11:48
  Speaker 1: next guest suggests that we do. Roosevelt Moss Cantor. She's
• 11:51
  Speaker 1: the R. Bacal Professor of Business Administration at the Harvard
• 11:55
  Speaker 1: Business School, also Chair and director of Harvard's Advanced Leadership Initiative.
• 11:58
  Speaker 1: She joins us here on our bloom Interactive broker studios.
• 12:01
  Speaker 1: But thanks so much for joining us. We appreciate you
• 12:03
  Speaker 1: coming here. Talk to us about your book, Think Outside
• 12:06
  Speaker 1: the Building. How advanced leaders can change the world one
• 12:09
  Speaker 1: smart innovation at a time. That's the title of your book.
• 12:13
  Speaker 1: What do you what's the key takeaway there? So, if
• 12:15
  Speaker 1: you want innovation, you can't stay stuck within today's structures,
• 12:21
  Speaker 1: today's assumptions, today's thinking. And if you think about it.
• 12:25
  Speaker 1: I mean, here we are, we're in a highly digital
• 12:29
  Speaker 1: radio program. Um how I mean the news is no
• 12:33
  Speaker 1: longer the newspaper. Education isn't the school of the classroom.
• 12:38
  Speaker 1: Health is not the hospital. It's a lot of stuff
• 12:40
  Speaker 1: that goes on outside and around it. And we're fixing
• 12:44
  Speaker 1: health by fixing nutrition for example. UM. So, if you're
• 12:48
  Speaker 1: constrained by your job, the particular company you work for,
• 12:54
  Speaker 1: if you're constrained by conventional thinking, you never can do
• 12:58
  Speaker 1: anything novel or innovative. So have to get out. Can
• 13:01
  Speaker 1: you give us an example of somebody who did this
• 13:05
  Speaker 1: and took a risk and became incredibly successful in in
• 13:09
  Speaker 1: their sort of innovations. Well, in many ways, many most
• 13:12
  Speaker 1: entrepreneurs do some of that. I mean they see that
• 13:15
  Speaker 1: there's something totally different possible because they see the gaps
• 13:20
  Speaker 1: they um so Uber, even though it had a very
• 13:23
  Speaker 1: checkered history in the beginning in terms of of regulators
• 13:27
  Speaker 1: and lots of other things. I mean, that was seeing
• 13:30
  Speaker 1: that the conventional taxi industry was not meeting all the
• 13:34
  Speaker 1: needs of people. You you're out there watching on the streets,
• 13:37
  Speaker 1: it's not hard to see. But if you're stuck within um,
• 13:41
  Speaker 1: an existing corporation, you might not see that. And in
• 13:44
  Speaker 1: my book, I tell the example the former president of
• 13:47
  Speaker 1: Trader Joe's who has an entirely new retail concept now
• 13:51
  Speaker 1: to feed people in food deserts and inner cities by
• 13:56
  Speaker 1: um using food that would otherwise be wasted. And that
• 14:01
  Speaker 1: wasn't his first idea. Took him a long time to
• 14:04
  Speaker 1: get out of thinking traditional grocery store UM supply chains,
• 14:09
  Speaker 1: and now he has something that's doing very well in
• 14:12
  Speaker 1: Boston and is going to spread around the country. I'm
• 14:15
  Speaker 1: struck by the timing of your book. It comes at
• 14:19
  Speaker 1: a time of incredible money going into venture capital funds,
• 14:22
  Speaker 1: incredible amounts of money going into Silicon Valley, in particular,
• 14:26
  Speaker 1: with unicorns being created with their valuations above a billion
• 14:30
  Speaker 1: dollars regularly. I'm wondering, when companies get big quick, does
• 14:37
  Speaker 1: that stifle innovation because people have to stay within the
• 14:41
  Speaker 1: building and keep it going and try to generate profits
• 14:45
  Speaker 1: rather than foresee the next sort of disruptive trend to
• 14:49
  Speaker 1: innovate around it. Certainly makes it easier for people to
• 14:53
  Speaker 1: get stuck. If you're growing fast with one formula, and
• 14:56
  Speaker 1: if you depart from it, you might undercut that formula.
• 15:00
  Speaker 1: But then look at Amazon, which started out with books
• 15:04
  Speaker 1: and has managed to expand to practically everything else, including
• 15:08
  Speaker 1: selling its own computer system. That's amazing that Amazon Web
• 15:12
  Speaker 1: Services is the biggest deal going on the cloud. What
• 15:16
  Speaker 1: does that have to do with selling books online? How
• 15:20
  Speaker 1: about some more traditional industries, whether it's automni automobiles, are
• 15:25
  Speaker 1: just manufacturing or you know kind of how are some
• 15:28
  Speaker 1: of those companies doing as it relates to innovation. Well, so,
• 15:32
  Speaker 1: first of all, I had there was a very interesting
• 15:34
  Speaker 1: comment at a conference UM that I had pulled together
• 15:37
  Speaker 1: a few years ago and had invited Mary Barra from
• 15:40
  Speaker 1: General Motors to talk, and we were talking about the
• 15:44
  Speaker 1: future of transportation and she said, you know, when she
• 15:48
  Speaker 1: was starting out in marketing that UM, the cell phone
• 15:52
  Speaker 1: was first called the car phone because that was the
• 15:55
  Speaker 1: only place people had carverone. She said, boy, did they
• 15:58
  Speaker 1: miss a bet. And now the car itself is a computer.
• 16:03
  Speaker 1: The metal is the least value added part of the car.
• 16:07
  Speaker 1: And that's interesting. We don't even know yet how all
• 16:11
  Speaker 1: of that's going to play out, and how that car
• 16:14
  Speaker 1: is going to talk to other cars, to the billboards,
• 16:16
  Speaker 1: to the streets. Amazon, I want to go back to
• 16:19
  Speaker 1: what you were saying, this idea that they've managed to
• 16:22
  Speaker 1: innovate repeatedly to dominate a whole host of different industries.
• 16:27
  Speaker 1: How does a company create a culture of innovation? I
• 16:33
  Speaker 1: think in the Amazon case, there are two different kinds
• 16:35
  Speaker 1: of cultures of innovation. One is you have a founder
• 16:38
  Speaker 1: that wants to dominate the world. And there was a
• 16:40
  Speaker 1: time in Silicon Value where they all said total world domination.
• 16:45
  Speaker 1: Jeff Bezos said Amazon meant it because he was he
• 16:51
  Speaker 1: was always envisioning things bigger um. And so partly the
• 16:55
  Speaker 1: culture of innovation comes from a founder who has a
• 16:58
  Speaker 1: big dream and is not going to let go of
• 17:00
  Speaker 1: that big dream for the trivia of operations and turn
• 17:04
  Speaker 1: operations over to other people. Ellen Musk is much the
• 17:07
  Speaker 1: same way. UM. So there's another kind of culture of innovation,
• 17:12
  Speaker 1: and I talked more about that in my book, which
• 17:14
  Speaker 1: is a bottom's up culture of innovation, where you give
• 17:18
  Speaker 1: people the sense of importance, the freedom to actually leave
• 17:22
  Speaker 1: the building and come back with ideas. I mean, I
• 17:25
  Speaker 1: have an example of a law firm where there was
• 17:28
  Speaker 1: a young man in the law firm who got the
• 17:31
  Speaker 1: law firm to take seats in a tech incubator a
• 17:34
  Speaker 1: law firm, and they weren't there to sell legal services.
• 17:37
  Speaker 1: They were there to soak up a culture of innovation,
• 17:40
  Speaker 1: and that law firm is one of the first with
• 17:43
  Speaker 1: digital wills and other ways to use technology on routine services.
• 17:50
  Speaker 1: So I think that if you empower the workforce and
• 17:55
  Speaker 1: also again get them outside of the conventional, there's only
• 17:58
  Speaker 1: one answer, Rosabeth, what's the role of government in terms
• 18:02
  Speaker 1: of fostering innovation? You could say Silicon Valley, the U. S.
• 18:05
  Speaker 1: Tech business has been so successful because the government has
• 18:08
  Speaker 1: taken a very light hand to regulation. That was after
• 18:11
  Speaker 1: they were successful. I mean, you know, they like to
• 18:14
  Speaker 1: say government had nothing to do with it, They shouldn't
• 18:16
  Speaker 1: have anything to do with it. Go away, And that
• 18:18
  Speaker 1: was the uberstance for a long time that got them
• 18:21
  Speaker 1: banned in many countries around the world. But in fact
• 18:25
  Speaker 1: government has a big role because Silicon Valley was the
• 18:27
  Speaker 1: result of the defense industry and defense spending, and so
• 18:32
  Speaker 1: was um Boston's High Tech Corridor in Austin, Texas. Defense.
• 18:36
  Speaker 1: That's government. Then there is healthcare, which has so much
• 18:40
  Speaker 1: government spending. Boston is now the one the healthcare life
• 18:44
  Speaker 1: science as capital of the world. A lot of that
• 18:46
  Speaker 1: was federal brands, So we don't write off government. It's
• 18:50
  Speaker 1: the regulation later I think we might worry about, But
• 18:54
  Speaker 1: initially government is a great seed fund. Professor, thank you
• 18:57
  Speaker 1: so much, really really interesting insights and terrific book. Think
• 19:01
  Speaker 1: Outside the Building, How Advanced leaders Can change the world,
• 19:04
  Speaker 1: one smart innovation at a time. Professor Roosabet Moss Cantor
• 19:08
  Speaker 1: of Harvard, the Artbical Professor of Business Administration at Harvard
• 19:12
  Speaker 1: Business School and also the Chair and director of Harvard's
• 19:14
  Speaker 1: Advanced Leadership Initiative. Joining us here in our interactive Broker
• 19:18
  Speaker 1: studio is a really important discussion at a time of
• 19:21
  Speaker 1: unprecedented amount of money going into venture capital, and a
• 19:24
  Speaker 1: question about how to sort of get to the next
• 19:27
  Speaker 1: level when it comes to tech advancement, when it comes
• 19:30
  Speaker 1: to countering UH climate change, a whole host of other things.
• 19:33
  Speaker 1: How do you set the stage to even understand what
• 19:37
  Speaker 1: might be the needed things going forward. Paul, we've talked
• 19:50
  Speaker 1: a lot about the Everything rally and how that just
• 19:52
  Speaker 1: has been a melt up. Well, there hasn't been a
• 19:54
  Speaker 1: melt up when it comes to the shares of Wells,
• 19:56
  Speaker 1: Fargo and Boeing Boeing in particular, absolutely slammed the past
• 20:00
  Speaker 1: twelve months, shares down more than ten percent, kind of shocking.
• 20:03
  Speaker 1: It's not more. Wells Fargo shares a completely little twelve
• 20:06
  Speaker 1: month trailing period at two point four percent of a
• 20:09
  Speaker 1: decline including dividends. And the question that's emerging is how
• 20:13
  Speaker 1: much is this a failure of corporate governance and what
• 20:17
  Speaker 1: does that say going forward about what will it take
• 20:19
  Speaker 1: to change both some of the issues and these companies
• 20:21
  Speaker 1: as well as others that might be facing similar issues.
• 20:24
  Speaker 1: Richard Chambers joining us now President chief executive Officer of
• 20:26
  Speaker 1: the Institute for Internal Auditors the I I A uh,
• 20:31
  Speaker 1: and really I want to give a sense how much
• 20:34
  Speaker 1: was a failure and corporate governance the main driver behind
• 20:37
  Speaker 1: both of the scandals that we saw at Boeing and
• 20:40
  Speaker 1: Wells Fargo. Well, first of all, thank you for having me,
• 20:43
  Speaker 1: and it's great to be back. Uh. You know, corporate
• 20:45
  Speaker 1: governance is is an ongoing challenge we have. The i A,
• 20:51
  Speaker 1: the Insued Internal Auditors has been surveying around this and
• 20:54
  Speaker 1: doing a good bit of analysis over the last few months.
• 20:57
  Speaker 1: And the issues that we see oath that Wells Fargo
• 21:02
  Speaker 1: and it Boeing are not surprising given the kind of
• 21:06
  Speaker 1: results that our analysis has has disclosed. In fact, the
• 21:10
  Speaker 1: eight guiding principles of corporate governance that we have identified
• 21:14
  Speaker 1: jointly with our with our partner at the Neil Center
• 21:17
  Speaker 1: of Corporate Governance at Tennessee University of Tennessee. Those eight
• 21:20
  Speaker 1: guiding principles we surveyed around those and and corporate governance
• 21:25
  Speaker 1: overall came out in this country at a at a
• 21:28
  Speaker 1: barely a passing grade at a C plus um. We
• 21:31
  Speaker 1: think there is so much yet to be done. But
• 21:34
  Speaker 1: when you start to look at these two companies in particular,
• 21:37
  Speaker 1: there there's certainly are a lot of questions about culture
• 21:40
  Speaker 1: in the companies, and yet boards have on an overly
• 21:46
  Speaker 1: optimistic assessment of the culture and their organizations. Another survey
• 21:50
  Speaker 1: we did said that boards think that the company is
• 21:53
  Speaker 1: better managing that risk culture than any other risk. So
• 21:58
  Speaker 1: boards are often uh surprised when these things happened because
• 22:01
  Speaker 1: they just haven't been focused on them. It's interesting at
• 22:04
  Speaker 1: Davos last week we were Bloomberg News was reporting a
• 22:07
  Speaker 1: lot of discussion and commentary around sustainability governance, some of
• 22:11
  Speaker 1: these issues taking you know, more Center stage. We even
• 22:15
  Speaker 1: had the Business Roundtable talk a little bit. I guess
• 22:18
  Speaker 1: the announced last year the companies should focus more on
• 22:21
  Speaker 1: sustainability than stock price, and as an old Wall Street guy,
• 22:25
  Speaker 1: it just sounded silly to me. I mean, where do
• 22:28
  Speaker 1: you think corporate America is in terms of balancing you know,
• 22:32
  Speaker 1: shareholder returns, which have always been kind of the responsibility
• 22:35
  Speaker 1: of boards and management to maybe some of the you know,
• 22:38
  Speaker 1: e s G type metrics as well. Well. I can
• 22:41
  Speaker 1: tell you that our study that we did, the American
• 22:44
  Speaker 1: and Corporate Governance Index study that are referred to a
• 22:46
  Speaker 1: minute ago, sustainability was the lowest grade of all areas
• 22:52
  Speaker 1: as far as board oversight, UH mirror mirror C as
• 22:55
  Speaker 1: an overall grade. UM. I think boards are are maybe
• 23:00
  Speaker 1: appropriately reacting to shareholder expectation. Shareholders are anxious to see
• 23:06
  Speaker 1: immediate returns. There's some you know, instant gratification if you're
• 23:10
  Speaker 1: trading in the market by a lot of people, and
• 23:12
  Speaker 1: so boards try to be responsive to that. But I
• 23:15
  Speaker 1: think they fail their shareholders by not doing anything long
• 23:19
  Speaker 1: term about taking any kind of view and sustainability. The
• 23:22
  Speaker 1: implication in your results that basically there were some serious
• 23:26
  Speaker 1: problems with corporate governance both at Boeing and Wells Fargo
• 23:29
  Speaker 1: that should have left some of the issues as not
• 23:32
  Speaker 1: a huge surprise. Leads to another question, which is are
• 23:36
  Speaker 1: we going to see more surprises like this? Based on
• 23:38
  Speaker 1: the fact that on average, companies in the US are
• 23:42
  Speaker 1: barely a passing grade and there probably are others that
• 23:45
  Speaker 1: have severe failures and corporate governance out there, I think
• 23:48
  Speaker 1: it's inevitable. I think it's inevitable unless unless boards began
• 23:53
  Speaker 1: to anticipate risks that aren't clearly on the radar, risks
• 23:59
  Speaker 1: like culture. Unless they begin to anticipate it, I think
• 24:02
  Speaker 1: we're in for a lot more than okay. So give
• 24:03
  Speaker 1: us a specific example of something that a corporate board
• 24:06
  Speaker 1: should be doing that you often see a failure to
• 24:09
  Speaker 1: do well. I think the corporate board at a minimum
• 24:11
  Speaker 1: should be looking and having conversations with more than just
• 24:16
  Speaker 1: the CEO and the C suite. Corporate boards should be
• 24:19
  Speaker 1: talking to the head of internal audit, the head of
• 24:23
  Speaker 1: HRU too, corporate compliance executives to get a sense of
• 24:29
  Speaker 1: what lies beneath the surface. Because what we often see
• 24:33
  Speaker 1: is when these culture debacles explode, is the boards are
• 24:37
  Speaker 1: are completely amazed they're surprised because in many cases they
• 24:40
  Speaker 1: either hired the CEO or the CEO got them appointed,
• 24:44
  Speaker 1: and so there's this natural level of trust there and
• 24:47
  Speaker 1: they just can't anticipate or don't don't foresee the kind
• 24:50
  Speaker 1: of problems that the company finally gets itself into. Well
• 24:53
  Speaker 1: maybe you know it's interesting. Black Rock recently said that
• 24:56
  Speaker 1: sustainabilities can become a much bigger part of their investment process. Um,
• 25:01
  Speaker 1: do you think that might kick start some boards to say, hey,
• 25:03
  Speaker 1: if I want to support of a black Rock or
• 25:05
  Speaker 1: some of these other big investors, I gotta take this
• 25:07
  Speaker 1: thing more seriously. I think it's a good, good indication
• 25:11
  Speaker 1: of maybe a trend that will emerge. Black Rock I think,
• 25:16
  Speaker 1: if I'm not mistaken, said uh that even where they
• 25:19
  Speaker 1: have indexed funds, they intend to get more activists or
• 25:23
  Speaker 1: more active in uh in voting their shares around these
• 25:27
  Speaker 1: issues of sustainability and and kind of the strength and
• 25:30
  Speaker 1: effectiveness of corporate governance. So I do think it's a
• 25:33
  Speaker 1: good start, but I think we have a ways to go.
• 25:35
  Speaker 1: There's sort of a popular belief that during times of
• 25:40
  Speaker 1: froth or rallies, and I don't know if you will
• 25:42
  Speaker 1: define this is a time of froth. But certainly there's
• 25:44
  Speaker 1: been a very long standing rally that shareholders overlook problems
• 25:49
  Speaker 1: more easily because they just want the gains. Do you
• 25:53
  Speaker 1: feel like corporate governance has deteriorated and that just in
• 25:57
  Speaker 1: general internal auditing standards have to perated as shareholder has
• 26:02
  Speaker 1: become more forgiving in light of the gains that we've seen.
• 26:05
  Speaker 1: I do think that when everything is going well, there's
• 26:09
  Speaker 1: a tendency not to look below the surface. You see
• 26:12
  Speaker 1: the water is calm, but you may not see the
• 26:14
  Speaker 1: currents underneath um. And unfortunately a lot of these things
• 26:17
  Speaker 1: tend to build up over time. I think I saw
• 26:20
  Speaker 1: where somebody observed recently. It was Hemingway who said, um,
• 26:24
  Speaker 1: everything is calm until it isn't um. And no, I
• 26:29
  Speaker 1: think it was everything is is subtle until it becomes
• 26:34
  Speaker 1: very jumps out absolutely right. So just real quickly, external
• 26:39
  Speaker 1: auditors what how much responsibility should they bear for some
• 26:43
  Speaker 1: of these issues? Well, the external auditors have a have
• 26:47
  Speaker 1: a tough job to do. I think they're doing probably
• 26:49
  Speaker 1: a lot better job than they were twenty years ago.
• 26:52
  Speaker 1: In the wake of uh in Ron world calm and
• 26:54
  Speaker 1: all the accounting reforms I think they're doing a better job. Again,
• 26:59
  Speaker 1: if you look, many of the of the big corporate
• 27:01
  Speaker 1: scandals we're talking about, even the ones you referred to
• 27:04
  Speaker 1: earlier today, weren't financial reporting frauds. They're not uh, misstatements
• 27:09
  Speaker 1: that the external auditors overlooked and until external auditing regulations
• 27:15
  Speaker 1: or standards require them to look beneath the surface at
• 27:19
  Speaker 1: things like culture, at what kind of compliance culture, for example,
• 27:23
  Speaker 1: a company has. Until those are required, I don't think
• 27:26
  Speaker 1: that they're going to be the ones who identify these things.
• 27:29
  Speaker 1: These are the things that the internal uditors can find.
• 27:32
  Speaker 1: Richard Chambers, thanks so much for joining us. Richard Chambers,
• 27:35
  Speaker 1: President and chief executive Officer of the Institute of Internal Auditors,
• 27:39
  Speaker 1: based down in Altamont Springs, Florida. Thanks for listening to
• 27:43
  Speaker 1: the Bloomberg P and L podcast. You can subscribe and
• 27:46
  Speaker 1: listen to interviews at Apple Podcasts or whatever podcast platform
• 27:49
  Speaker 1: you prefer. Paul Sweeney I'm on Twitter at pt Sweeney
• 27:52
  Speaker 1: and Lisa Abram Woyd's I'm on Twitter at Lisa Abram
• 27:55
  Speaker 1: Woyds One. Before the podcast, you can always catch us worldwide.
• 27:58
  Speaker 1: I'm Bloomberg Radio