After four years in development, Porsche has begun production of what could be the first credible threat to the Tesla Model S in the luxury electric vehicle space: the Taycan.
But the first models of this sleek, four door sports sedan come in at a considerably higher price—$153,310 for Taycan Turbo and $187,610 for the higher performance Taycan Turbo S. Porsche plans to build about 20,000 Taycans during the first year, eventually introducing less expensive versions.
About half of the customers who have expressed interest in buying a Taycan are Tesla owners, according to Porsche North America CEO Klaus Zellmer. But the cars are not direct competitors, he said.
“Personally, I think Tesla has done a great job preparing the automotive world for battery-electric vehicles that we have respect for,” Zellmer told Fortune at the Frankfurt Motor Show. “But for us, as a sports car brand, there are different attributes that we look at when developing a car.”
“Our car needs to accelerate multiple times without any feel of decrease in power,” he added. “We come from the racetrack. It’s not about comparing ourselves to Tesla. It’s about having respect for what they established, and then finding our own path.”
Even if the company is remaining diplomatic, the state of Baden-Württemberg, where the factory is located, is ready to challenge the electric vehicle-maker from California.
“To Elon Musk,” Winfried Kretschmann, the state premier of Baden-Württemberg, said through a translator at the factory’s grand opening. “With green ideas, you can be in the black, not the red.”
The Taycan will deliver between 240 and 280 miles on a full battery charge—less than the Model S—but it will replenish faster, adding more than 60 miles of range in four minutes. When the Taycan reaches U.S. roads in December, its 800-volt system will be the fastest on the market.
The $770 million Porsche spent to develop the factory where the Taycan is built is part of the company’s $6.6 billion investment in electric mobility through 2022. The automaker plans to electrify half of its lineup by 2025, with the iconic 911 slated to be the last model to make the transition to a hybrid or battery-electric powertrain.
The Taycan is an important debut for Porsche’s parent company Volkswagen Group, which is spending more than $33 billion to electrify dozens of models across its portfolio in the wake of its diesel emissions scandal. At the Frankfurt Auto Show, Volkswagen introduced a compact EV, the ID.3, to challenge the entry-level Tesla Model 3.
The Taycan, however, will prove that Porsche EVs can keep their performance chops despite the extra weight of the battery pack. The automaker ensured the electric car would still clock track times and round corners like a Porsche. The flagship Taycan Turbo S can generate up to 750 horsepower and zip from 0 to 60 mph in 2.6 seconds, according to Porsche. The 617-horsepower Turbo model takes 3 seconds. Both can hit a top speed of 161 mph.
Despite Porsche’s relative late entry to the electric vehicle market, the Taycan is hitting a sweet spot, according to Jessica Caldwell, executive director of insights at Edmunds. Sales of battery-powered vehicles lifted 51% in the first half of 2019 compared with the same period last year, according to Edmunds data. That rise was driven largely by the introduction of the Model 3.
“The kind of person who buys high-end EVs is always after the latest thing, and Taycan makes the Model S seem ancient in comparison,” Caldwell said. “Ten years ago, no one could have ever guessed that two-thirds of Porsche’s sales would be SUVs, so the brand has proven that it can find success by stretching into new territory without cannibalizing its brand.”
On Tuesday, House Speaker Nancy Pelosi announced that the House would open an official impeachment inquiry against President Donald Trump.
While the primary focus may be on the impeachment inquiry itself, a number of 2020 presidential candidates are using it as an opportunity to run ads and raise money—including Trump himself.
Minutes after Pelosi began speaking on Tuesday, Trump’s campaign team sent out a text message to supporters, asking them to join his “Impeachment Defense Team.”
This effort was bolstered by emails, tweets, Facebook ads, and a video Trump shared on Twitter. Trump reportedly raised $1 million within three hours, and he and the RNC raised $5 million in the 24 hours following Pelosi’s announcement.
But that’s not all.
Former Vice President Joe Biden, Sen. Kamala Harris, and Sen. Elizabeth Warren all began running Facebook ads seeking to monetize the impeachment inquiry.
Biden has run several ads against Trump, including one that refers specifically to Trump’s call with Ukrainian President Zelensky. It reads: “Donald Trump sat in the Oval Office asking a foreign leader to investigate Joe Biden’s family because he knows Joe Biden will make sure he’s a one-term president. Don’t let the President get away with this gross abuse of power. Show your support for Joe Biden today.”
Warren, meanwhile, called for the impeachment inquiry to “move forward with the efficiency and seriousness this crisis requires.” The ad calls for the House to “vote on articles of impeachment—and when it comes to the Senate, I will do what the Constitution requires.”
“Sign up now if you’re with me,” it concludes.
In an ad run by Harris’ campaign, she writes that “Donald Trump has abused his power, obstructed justice, and violated his oath of office. He puts his political interests over our national interest. No one is above the law. He must be impeached.”
It should come as no surprise that billionaire philanthropist Tom Steyer, who is perhaps best known for the Need to Impeach campaign that he started prior to launching his own bid for the presidency, has run numerous ads referring to Trump’s impeachment.
Among others is one that reads: “Impeachment is happening. If we can build a grassroots army of Americans to impeach a lawless president, we can build an army to kick corporations out of politics. I’m a candidate who knows how to organize – and win. Join my campaign.”
Other top-polling candidates, including Sen. Bernie Sanders and Mayor Pete Buttigieg did not appear to run any Facebook ads leveraging the impeachment inquiry. All of the aforementioned candidates have expressed explicit support for impeachment, with the exception of Buttigieg.
Launching rockets into space may not seem like an obvious use of Dropbox, but with an ambitious remake to the service’s online storage product, the file sharing company is hoping to at least play a part in the next giant leap for mankind—or, more accurately, the mundane employee workflow related to it.
On Wednesday, the San Francisco-based firm announced an evolution of its core product, now called Dropbox Spaces. Previewed earlier this summer, Spaces is an interlinking between the folders that Dropbox users have become long familiar with. And more importantly, it aims to grow the company beyond the little online folder on where people stuff their bottomless collections of corporate proposals and PowerPoint slides.
But the bigger change to Dropbox may be its new desktop app, which functions as a digital hub where workers can collaborate with colleagues on projects that require access to digital files. Dropbox wants this app to become the be-all and end-all corporate service where workers spend their waking, productive day.
The launch of Dropbox Spaces and its accompanying app marks a significant change for the company, a former Silicon Valley unicorn startup that gained prominence for its simple and free service that let people store digital files in the “cloud,” thus saving space on their hard drives. Since its debut in 2007, Dropbox has turned its attention to businesses instead of consumers. In 2016 it migrated the bulk of its corporate infrastructure off of Amazon Web Services to its own data centers. And in 2018 the company went public.
Yet since it began trading on Wall Street, Dropbox’s shares have tumbled more than 30%. Investors are concerned that while Dropbox is still growing, it isn’t booming like it once did. Recently, slower-than expected growth in the service’s number of paid users caused its share price to drop nearly 14% the day after its numbers were reported.
Dropbox clearly needs a jolt to excite concerned investors weary that the company may have lost its spark. Not coincidentally, the Dropbox Spaces product announcement coincides with Work In Progress, the company’s first conference about the future of work, being held on Sept. 25 at San Francisco’s Pier 48. The event marks one of Dropbox’s first steps in publicly detailing its heightened focus on workplace productivity, and it includes an appearance by former First Lady Michelle Obama.
Facing increased competition from giants like Microsoft and Google, as well as upstarts including Wall Street newcomer Slack, Dropbox co-founder and CEO Drew Houston believes that the company’s overhauled offerings, intended to help employees deal with the every-growing number of corporate apps they use each day, will give the company a competitive edge.
“Everyone needs a more sane working environment,” Houston tells Fortune. “Our job is to make it more obvious.”
Drop in to the new Dropbox
Although Dropbox is not shedding its classic shared folders that users can access via their computers or smartphones, the company is emphasizing its new desktop app as the cornerstone of its service—which is free to Dropbox’s existing customers.
Keeping track of all of users’ shared folders, the desktop app also displays information like who accessed a certain and file and when, comments on files, and extra features including letting people sign off on tasks related to the content—like signifying when a business proposal is ready to be sent to a prospective client. In this way, Dropbox’s new app acts like a project management tracker similar to Atlassian’s popular Trello app, except all of the employee’s activity is centered around the actual files related to a project.
Perhaps the most noteworthy feature is that Dropbox’s app is being wired to work with other popular products like Slack, Google Docs, and the video conferencing tool Zoom. Dropbox users can now create Google and Microsoft Office documents directly within the app and share them with the appropriate teammates, who can then leave comments. By the end of this year, Trello users will be able to connect their files stored in Dropbox to their Trello cards. And later next year, a Slack integration will let people connect their Dropbox folders to Slack channels, so they can chat about projects in real-time. A Zoom integration is also in the works, allowing users to start video conferencing calls directly inside the Dropbox app.
Tethering everything together is a custom-built search engine that can help Dropbox users find their Dropbox files. According to CTO Quentin Clark, Dropbox also built its own artificial intelligence-powered image-recognition technology, so that users can search for documents and files containing certain images.
Dropbox decided to develop its own A.I. tools instead of using the services from cloud providers like Google and Amazon because it believes it can save money—especially since the company now operates its own data centers, which is necessary for powering the data-crunching tools. The machine learning tools will also presumably show users the most relevant documents they need to access, based on the projects they’ve been working on.
Ultimately the goal of the new Dropbox and its desktop app is to help the company “move from the background to the forefront” of people’s computers and work life, says Sequoia Capital Bryan Schreier, a long-time Dropbox board member who invested in the company’s initial funding.
“It’s only natural for Dropbox to evolve to bring all the cloud services, files, and intelligence to help you find things more easily,” Schreier says.
Wall Street wants skyrocketing growth
To hear Dropbox’s Houston tell it, the company is making this big change to help deal with all of the “noise” that comes from the ever-increasing number corporate apps that people deal with each day. It also helps the company position itself as more than just a cloud storage company—or more formally, a file-sync-and-share player.
Houston remembers a conversation he had with an engineering director for Elon Musk’s SpaceX, in which he asked what workplace tools the aerospace company used.
Houston says the engineer looked at him “like I had three heads” and replied with a joke: “What will it take to put someone on Mars? A lot of emails and a lot of files.”
That resonated with Houston, who says he realized that “the struggle of the rocket scientist is the struggle of the knowledge worker.”
And in that gap lies opportunity, the likes of which Wall Street investors are constantly pushing for in technology companies, to maintain their skyrocketing growth. After all, claiming that your company is the king of cloud storage limits your total addressable market, especially as giants like Microsoft and Google can undercut those businesses on price.
Dropbox’s closest competitor, Box, is facing a similar challenge. Activist investor Starboard Value recently bought a 7.5% stake in the company and said that it believes Box’s shares are undervalued, and that it needs to make some changes. Box CEO Aaron Levie, recently told an audience at a TechCrunch conference that Box has “to do a much better job at educating the market” about what the company does.
As Morgan Stanley analyst Keith Weiss tells Fortune regarding the dilemma facing enterprise software companies, “You have to expand your vision to be able to consolidate a broader portion of demand in the marketplace.”
Additionally, as Dropbox repositions itself to be the core way people spend their days working, it will have to muscle in on other companies, like Slack, that aim to be the nucleus of work. Although Dropbox and Slack are partners, they also compete with one another, making them so-called “frenemies” in enterprise software.
“We differentiate ourselves by having a more focused, less noisy experience,” Houston says. “We are giving you workplace primarily for your content.”
As for the tech giants like Google and Microsoft that dwarf both Dropbox, Slack, and all other upstarts, Houston claims Dropbox’s ability to work with their products makes it more attractive for customers who typically use their tools.
“You are not going to see the Google Docs support in Office anytime soon,” Houston says.
Economists are in near-complete agreement that a “hard Brexit”—in which the United Kingdom crashes out of the European Union with no withdrawal agreement in place—would wreak havoc on the British economy. Estimates from German think tank Bertelsmann Stiftung suggest that the aggregate damage to the U.K. from a hard Brexit would be more than that of every other EU member combined—hardly a strong position for Prime Minister Boris Johnson to be negotiating from. But some countries could come out ahead. If the U.K. has no trade deal in place with the EU, it will be forced to rely on hastily signed trade agreements with partners outside the single market, such as the United States. With the U.K. in a weakened position, those terms could be quite favorable.
Sources: Bertelsmann Stiftung, calculated with conversion rate of 1 euro = $1.12 USD.
A version of this article appears in the October 2019 issue of Fortune with the headline “Brexit: A Handful of Winners.”
About a year ago, Shannon Sullivan started hearing that male leaders in her organization were anxious about mentoring female colleagues in the wake of the #MeToo movement.
It was just one or two casual conversations.
But Sullivan, the senior vice president of talent and organization at entertainment streaming service Hulu, took the signal seriously. She figured those exchanges might be the tip of the iceberg at her company of more than 2,000 employees, especially in light of broader evidence that men in organizations were worried about being accused of sexual misconduct in private meetings with female colleagues. So at a gathering of the company’s top 75 or so leaders this March, Sullivan arranged for a guest speaker to address that men-mentoring-women issue as well as other diversity and inclusion topics.
“We tried to head it off before it became an issue,” Sullivan says.
Sullivan’s speaker pointed out that male leaders know what bad behavior is, and that excluding women from opportunities like mentoring is discriminatory behavior in and of itself.
“There were a lot of heads nodding in the audience,” Sullivan recalls—both men and women.
There’s other evidence Hulu’s proactive approach was a hit. The company has a mentorship program dedicated to supporting women in particular. It is led by an employee affinity group—dubbed Hula—focused on women and their allies, and this quarter 42 percent of the Hulu employees who volunteered to participate in it as mentors are men.
With its commitment to gender fairness and women’s development, it’s not surprising Hulu has earned a place on this year’s ranking of the Best Workplaces for Women, which was compiled by the workplace culture experts at Great Place to Work in partnership with Fortune. The list is divided into 75 large organizations—with 1,000 or more employees—and 25 small and medium-sized companies. Hospitality giant Hilton topped the list of the best large workplaces for women, followed by business application maker Ultimate Software and grocery store chain Wegmans Food Markets. Technology security training firm KnowBe4 ranked first in the smaller company category.
To determine the Best Workplaces for Women, Great Place to Work analyzed anonymous survey feedback representing more than 4.6 million US employees. The majority of the ranking is based on what women themselves report in Great Place to Work’s 60-question Trust Index survey about their workplace, and how those experiences compare to men’s reports of the same workplaces.
The survey measures the extent to which women report their organizations create a Great Place to Work For All—that is, a workplace where people trust each other and employees are able to reach their full human potential, no matter who they are or what they do.
In addition to producing the Best Workplaces for Women list, Great Place to Work also conducted a study of roughly 700,000 employee surveys—representing those 4.6 million employees—regarding gender fairness. A striking finding is that men were almost twice as likely to believe people are treated fairly, regardless of gender, as compared to women.
What’s more, Great Place to Work’s research shows that as women rise in organizations, the fairness goes down. The gender gap in perceptions of fair treatment grows larger with increasing managerial level. The latest research shows that male executives are 2.6 times more likely to perceive fair treatment regardless of gender, compared to women executives.
Great Place to Work also saw that African American women are the least likely to feel included in their workplaces, even when they join the executive ranks.
The study found hopeful signs among the Best Workplaces for Women, though. Those companies have more employees who feel included, and are creating a more equitable experience across race, ethnicity and gender lines, compared to the other organizations.
“I’ve been given multiple opportunities and career paths, which has allowed me to build a significant amount of institutional knowledge and experience,” a female employee at Hilton said in Great Place to Work’s survey. “I’ve been afforded the opportunity to learn, grow, advance, and show what I can do.”
Women at Hulu also feel they have ample opportunities to develop. Eighty-five percent of female employees at the company say they are offered training to further themselves professionally—the same percentage of male employees responding that way.
Sullivan and her team also have built programs that support women as they seek to build families. Hulu offers a variety of fertility benefits, including counseling, prescriptions, and surgical treatment such as in-vitro fertilization. These benefits are available to both opposite- and same-sex partners and single women and cover all testing and treatment.
Julie Morris took advantage of Hulu’s fertility benefits to become pregnant about a year and a half ago. Morris, who oversees delivery of Hulu’s original content as director of show leads in the company’s Santa Monica, Calif. office, now has twin 7-month-olds. Not only did Morris and her wife appreciate the fertility treatments covered by Hulu, they also have been helped by company maternity benefits including services for testing and shipping breast milk and free use of a “smart sleeper” crib that helps infants—and their parents—sleep better.
Hulu even stepped up to help Morris in a pinch when it came to child care. Not long after she returned to work this year from maternity leave, Morris’ child care arrangements fell through. She and her wife do not have immediate family in the Los Angeles area, leaving her anxious about how to resolve the problem. But Morris’ manager—a man who is a native of Los Angeles—put her in touch with a child care agency and she quickly found a nanny.
It’s another sign that women and men are teaming up at Hulu uluto create a workplace that’s great for everyone.
“Some managers could say, ‘Deal with this on your own time. You need to be dedicated,’” Morris says. “He went above and beyond.”
See the full 2019 list of the 100 Best Workplaces for women, broken down by size:
Things did not look right to Rep. Al Green (D‑Texas).
It was April of this year, three hours into a grilling of the CEOs of seven of the largest U.S. banks before the House Financial Services Committee. The hearing was to focus on the accountability of the banks, 10 years after the financial crisis.
But Green, an eight-term congressman representing parts of Houston, had decided to discard his prepared questions and pursue a different line entirely. Looking across the row of CEOs—Michael Corbat of Citigroup, Jamie Dimon of JPMorgan Chase, James Gorman of Morgan Stanley, Brian Moynihan of Bank of America, Ronald O’Hanley of State Street Corp., Charles Scharf of Bank of New York Mellon, and David Solomon of Goldman Sachs—he put it bluntly.
“The eye would perceive that the seven of you have something in common,” Green said, slouching over his microphone. “You appear to be white men. You’ve all sermonized to a certain extent about diversity,” he continued. “If you believe that your likely successor will be a woman or a person of color, would you kindly extend a hand into the air.” Taking a physical tally is a common exercise for Green—he likes the optics of it.
No CEO raised his hand; in fact, the panelists flinched a little, like schoolboys caught misbehaving. “I know it’s hard to go on the record sometimes,” Green said. “But the record has to be made. All white men and not one of you appears to believe your successor will be a female or person of color.”
Even as diversity initiatives and the #MeToo movement work to recalibrate corporate power dynamics across a range of industries and workplaces, Wall Street has remained terra incognita for women trying to reach the highest rung. “In theory, this is an analytical business, and what should matter here is performance. And yet in the most analytical of industries it hasn’t mattered,” says Sallie Krawcheck, cofounder and CEO of Ellevest and once one of the highest-ranking women on Wall Street. The question of why a woman has never run a Wall Street bank is “not a new question,” adds Wendy Cai-Lee, now CEO of Piermont Bank, who worked at both JPMorgan Chase and Citi. It’s one “we constantly ask ourselves.”
It’s especially striking given that industry after industry has seen the ascension of a female CEO: BAE Systems’ Linda Hudson in defense in 2009 (to be followed by many others), General Motors’ Mary Barra in autos in 2014, Occidental Petroleum’s Vicki Hollub in oil in 2016, and GlaxoSmithKline’s Emma Walmsley in pharma in 2017. Women have ascended to the top ranks of banks overseas; indeed Ana Botín is the chairman of Banco Santander. Fortune started tracking female CEOs on the Fortune 500, which ranks firms by gross revenue, in 1998. Since then it has identified only two female bank CEOs. The first was the late Marion Sandler of Golden West Financial, which she founded with her husband and was bought by Wachovia in 2006. The second is Beth Mooney, CEO of KeyCorp, a regional bank based in Cleveland, which ranked No. 413 on this year’s Fortune 500.
It’s not all bad news. Outright sexual harassment, the type that turned mostly male trading floors into petri dishes of misogyny decades ago, is less commonplace. Leaders have avowed the need to be inclusive and have tweaked recruiting machinery to nearly achieve gender parity among starting classes. The obstacles that remain are the smaller, more subtle barriers that range from “microaggressions” to “over-mentoring” and “under-sponsoring.” Fortune interviewed more than a dozen women who are veterans of banking and finance for this story. Some didn’t want their names used because they wanted to speak candidly about former employers. But their stories shared common threads of the cultural factors that are keeping the boys’ club in place.
What they told us? Women want to be CEOs but are deemed not quite ready. Boards and shareholders say they want diverse leadership, but just can’t quite seem to find the right candidates once the top job opens up. All told, Wall Street finds itself at a standoff.
The irony is, this particular glass ceiling looked as if it might soon be broken—over a decade ago. Back in the mid-2000s, Zoe Cruz was copresident of Morgan Stanley and was seen as a possible successor to CEO John Mack. In late 2007, Erin Callan had ascended to CFO of Lehman Brothers at age 41. And Krawcheck had a stellar string of successes at smaller firms—even landing on the cover of Fortune—before being named CFO of Citigroup.
“The Sallie, Zoe, Erin trifecta,” Krawcheck recalls. “We were the three senior ones.”
The financial crisis, however, upended the careers of all three women. Cruz left in November 2007, shortly after Morgan Stanley’s write-downs related to the subprime mortgage crisis. Callan resigned in June 2008 after Lehman posted a $2.8 billion quarterly loss; the firm filed for bankruptcy three months later. Krawcheck, meanwhile, departed Citi in 2008 over disagreements with the CEO; the next year she took a job running Merrill Lynch’s global wealth management unit, but she left that position two years later.
It’s logical to think, says Krawcheck, that the global reshuffling precipitated by the crisis would have caused the industry “that’s been white, male, and middle-age” to reconsider the demographics of its leadership. Instead, as Krawcheck puts it, “it became whiter, maler, and middle-age-er.” And the fact that the crisis itself seemed to have been precipitated by a particularly, ahem, testosterone-driven style of risk-taking and decision-making did not necessarily sink in in some circles. As Christine Lagarde, the former managing director of the International Monetary Fund, has famously opined: If Lehman Brothers had been “Lehman Sisters,” the economic crisis “clearly would look quite different.”
Indeed, there’s a case to be made that Wall Street needs more women at the top.
A 2018 IMF study identified the benefits of female leadership of banks worldwide, at least at the board level. It found that institutions with larger shares of women directors had higher capital buffers, a lower proportion of nonperforming loans, and greater resistance to stress. The same relationship exists between bank stability and the presence of women on banking regulatory boards. “We find that the observed higher stability is most likely due to the beneficial effects of greater diversity of views on boards,” the authors write. They also note that due to discriminatory hiring practices, women who reach the board level tend to be “better qualified or more experienced” than their male peers. All told, the evidence “strengthens the case for closing the gender gaps in leadership positions in finance.”
That argument seems to have registered with megabanks’ current CEOs, or at least they indicate so publicly. All seven who attended the April congressional hearing submitted prepared remarks mentioning their bank’s diversity efforts, with some acknowledging that progress is still needed. Diversity is “essential to … driving responsible growth,” said Bank of America’s Moynihan. Bank of New York Mellon holds “executive committee members and hiring managers accountable” for achieving workforce representation goals, said CEO Scharf.
State Street CEO O’Hanley’s remarks on the matter were by far the sharpest. He said the firm stepped up its diversity efforts, in part, because the financial crisis “cast a bright light on the dangers of groupthink in corporate leadership.”
But as women well know, what happens to a decades-long career inside an institution isn’t the result of big proclamations. It’s the result of a thousand tiny interactions and decisions. Some her choice, some not. Some assignments not offered, some cocktail parties not attended, some business trips not booked.
We know this. Out of college, women start—at least on paper—on equal footing on Wall Street. (For the purposes of this article we looked at the problems of gender parity; our sources stressed that other kinds of diversity—of ethnicity, economic background, sexuality, among others—are equally important to address.) Women now account for 51% of entry-level jobs in banking and consumer finance, according to 2018 research by McKinsey that surveyed more than 14,000 employees at 39 financial services firms. By the time you get to the C-suite that number is 20%.
“I think we’ve been okay at bringing women and minorities into the firm,” Citi CEO Michael Corbat said at a Fortune event in June. But “as fast as you can bring in these talented people, you’re losing them,” he said.
Some industrywide data, however, contradict this. “Often people [think] that the pipeline is leaky, that we lose women at every stage because they take on roles in the home or leave for part-time opportunities,” says Marie-Claude Nadeau, a coauthor of the McKinsey study. In fact, the rates at which female employees leave banking and consumer finance is lower than attrition among their male counterparts. For instance, 18% of male entry-level employees are lost to attrition versus 16% of women in such roles; at the senior VP role, it’s 10% compared with 9%.
Interestingly, one of the few places in finance where male vs. female performance can be measured with some degree of accuracy is in mutual fund performance. A fascinating study by Morningstar looking at data over 15 years had a surprising finding: Fixed-income mutual funds run by women have outperformed those run by men since 2003. Such findings led Morningstar to conclude that “the low participation rate of women in the industry is not justified by performance.”
But elsewhere in the industry, where gains can’t be quantified to the percentage point, gauging performance is not so clear-cut. Many women I spoke to said it was the experiences not offered, the assurances not given, that, in the end, landed women just shy of the C-suite.
The first obstacle many women face is their first promotion. Eight percent of women in early-tenure jobs, according to the McKinsey study, are promoted, while 10% of men are. “Women are half of hires,” says Alexis Krivkovich, another coauthor of the study. By the time they get to the C-suite, the one-fifth of occupants tend to hold “functional” roles (head of HR, general counsel), with a smaller share holding business-line jobs that typically feed into CEO-candidate slates.
McKinsey found several reasons for the lack of interest some entry-level women had in pursuing leadership positions, including lacking passion for the work itself, the challenges of work/life balance, the “perceived” stress of such jobs, and the politics at play. Even if women do aim high, “they often lack the support needed to rise to the top,” according to McKinsey. The underrepresentation of women in firm leadership means there are few role models to serve as counterpoints.
“That first promotion gap is really critical,” says Krivkovich; it shrinks the female talent pool from which leaders are plucked. But for the women who do get promoted, soon another factor starts to come into play. Women in mid-level management often exist just outside the inner circle. Their male peers, for instance, might accumulate critical information more easily. That, in turn, helps determine who gets the best accounts or assignments the next year; it’s Joe instead of Jane. “Nobody at the moment feels we’re doing anything wrong, but that’ll be the biggest deal for the group, and it means Joe’s gonna get paid more than Jane,” says a 20-year veteran of Wall Street. “That little microissue that disadvantages women becomes emphasized over time.” Donna Milrod, head of State Street’s global clients division, previously spent 20 years at Deutsche Bank and has witnessed a similar dynamic at work. “Microaggressions is too negative; I’d call them microdecisions.” She adds, “It’s the small things, like men going out for a drink or men taking a business trip together.”
And, to be sure, there are still pockets of sexism in the industry broadly—the rampant kind as well as subtler versions. A female banker in early September won a gender discrimination case against BNP Paribas. She had claimed her boss often dismissed her by saying, “Not now, Stacey,” a phrase her other colleagues picked up. In one instance, she says, someone left a witch’s hat on her desk. The Wall Street veteran who spoke to Fortune remembers arriving to meet the CEO of a multinational who asked, “Who’s the guy running this meeting?” “I said, ‘I’m running this meeting, and I’m here to talk about taking your company public.’ He looked at me like I was from Mars,” she recalls. She also encountered surprise from a male coworker when she returned from maternity leave; he had thought she would stay home given her warm, motherly vibe.
So, about that “mom” thing.
Almost all the women I spoke to recoiled at the rationale that women leave work because they want to be stay-at-home moms; that’s too simplistic an explanation. It’s more about the calculus involved. It’s that they have the perception that they have less opportunity, says the Wall Street veteran, and “on average it’s true.”
“It’s not that they’re going home because they have kids; they go because of the tradeoff,” she says. “If a woman with kids is told, ‘You’re a star, you’re compensated fairly, you’re the future of the firm, you’ll be CEO,’ there’s no way she’s leaving even if she has kids at home. The point is, women are not being told that at all. Instead, they’re [thinking], ‘I have three other guys promoted ahead of me, I’m getting paid well but not at the top of the class, I’m muddling along, but I’m not the favorite child.’ ”
This is backed up by a 2016 report on financial services firms globally by Oliver Wyman, which flags a “mid-career conflict” as especially problematic for women in the field. Women start out with the same ambition level as men. They retain that ambition for the first few years of their careers, and they have similar ambition later in their careers. It’s the middle that’s troublesome. At that stage, women “vote with their feet,” the study says, pointing to labor market data that shows women in that stage are more likely to leave their financial industry jobs than their male colleagues and are more likely—by some 20% to 30%—to exit versus women in other industries. That trend emerges at a time when women ages 30 to 50 are less willing to sacrifice their private lives for the sake of their jobs, a shift in attitude that doesn’t show up nearly as strongly among men.
Firms tend to hire “overachieving women” who’ve “always gotten good grades and been terrific at what they do,” says a former managing director in investment banking at a Wall Street firm. As their careers progress, the laws of attrition mean things get tougher—“they get the first C in their lives”—and it comes “right at the time when they’ve established a partnership or married a spouse and maybe had a child,” she says. “The cost of being [at work] is going up.”
While some women do end up leaving finance for other industries, for those who continue to climb, it’s vital these days to rack up tons of exposure to different parts of the business. Operational—versus functional—experience is especially crucial. “Running a division as a general manager or president or CEO with P&L responsibility is important to prove leadership and accountability for an entire organization,” says Jeanne Branthover, head of global financial services at executive search firm DHR International. Often leaders “will have worked in different cities and countries to learn firsthand the inner makings of the organization.”
Several women mentioned being overlooked for such stretch assignments or relocations. There’s perhaps not outright discrimination, but there’s an assumption that women, especially those with families, won’t want to take on a giant project or, say, move to San Francisco. Finally, for the women in finance who manage to stay in the game, take the tough assignments, get to the inner circle, a crucial piece of the puzzle is mentoring.
Interestingly, women are actually more likely than men to have mentors, yet, as a report from researchers at Insead and Catalyst bluntly puts it: “All mentoring is not created equal.” Women have a tendency to form relationships with mentors with too little organizational clout, meaning they’re less able to sponsor or go to bat for women aiming for the next level. “That’s a real disadvantage,” the study says, “because the more senior the mentor, the faster the mentee’s career advancement.”
The McKinsey research adds further nuance, calling out the gender makeup of women’s networks specifically. Some 81% of entry-level women in financial services cultivate networks that are largely female or evenly split between men and women, meaning their networks will have fewer and fewer women who can serve as advocates as their careers advance since the upper echelons of management are mostly men. Meanwhile, men don’t have this problem since they are far more likely to cultivate networks that are mostly male.
“What I saw time and time again, around key [managing director and partner] promotions is if you have a strong woman and you have a strong guy—two people up for that next job—unless you have someone pushing for the female candidate, they’ll say, ‘She can wait another year,’ ” says the former managing director. A woman is perceived to be more loyal to the firm, she says, meaning there’s less incentive to ensure she’s satisfied. “Banks won’t do anything that they don’t have to do,” she says.
Beth Hammack, global treasurer of Goldman Sachs who was named to the firm’s management committee in May, identifies two important mentors: CEO David Solomon and CFO Stephen Scherr. She says the firm has a “long history of women pulling up other women,” but the reality is she’s had to have men “looking out” for her.
One of the few women with perspective on what it takes to overcome all these obstacles? KeyCorp’s Mooney, who started her career in the late ’70s and held positions at Bank One, Citicorp Real Estate, Hall Financial Group, Republic Bank of Texas/First Republic, and Alabama-based AmSouth Bancorporation before joining her current firm. “I [took] on any opportunity that came my way,” she says. “I had people who gave me the chance and allowed me to prove myself.” In practice that meant she moved nine times in 16 years. She volunteers that her status as a single woman allowed for such flexibility. “My path is not everybody’s path,” she notes.
Which brings us back to the question: Who will be the first woman to run a major American bank?
Earlier this year there was some thought that troubled Wells Fargo, which is on its third CEO—an interim appointment—since its fake-account scandal came to light in 2016, would be a candidate. More recently, there have been noises that the bank will instead appoint a retired CEO (a group that is by definition male) as its leader.
State Street, for one, admits that women are not “matriculating” up the organizational ladder at the same rate as men. In response, the bank has lowered some barriers that might keep employees—women especially—from pursuing new opportunities within the company, like tenure requirements for applying for internal openings. This is important, as “rigidity” is something that came up again and again as a factor that sets Wall Street apart. The industry is old. Several women cited a hierarchy and system of advancement that doesn’t allow for the flexibility that some women might seek. Others, specifically in investment banking, pointed to the fact that Wall Street has been slow to adapt given that their customers are CEOs of other companies, who are—by and large—also male, meaning there has historically been little pressure to add women to key teams.
But that too is changing. State Street introduced a practice in 2017 that incorporates diversity targets into executives’ performance reviews and compensation. “It’s definitely the case that what gets measured gets focused on and gets managed,” says Kathy Horgan, chief human resources officer. Goldman Sachs now requires managers to interview at least two qualified “diverse” candidates for each job at more experienced levels.
Among those interviewed for this article, there was consensus that there is at least a chance a woman will be tapped to take over the top job under the leadership of Jamie Dimon at JPMorgan Chase. There, a new trifecta of female execs have emerged as possible successors: consumer lending CEO Marianne Lake, CFO Jennifer Piepszak, and asset and Wealth Management CEO Mary Erdoes.
Two days after the congressional grilling in April, JPMorgan reported earnings, and Dimon was asked about his testimony—and his successor.
“[We] don’t comment on succession plans. That’s a board-level issue,” he said. “[We] have exceptional women. And my successor may very well be a woman, and it may not. And it really depends on the circumstance.”
The circumstance is that this milestone is long overdue.
So, Michael Corbat. Jamie Dimon. James Gorman. Brian Moynihan. Ronald O’Hanley. Charles Scharf. David Solomon.
Who’s going to raise his hand first?
A version of this article appears in the October 2019 issue of Fortune with the headline “The Last Boys’ Club.”
The manufacturing and production sectors are composed of companies from many different industries. One only must look at the recently published rankings of the Best Workplaces in Manufacturing and Production, compiled by the global workplace culture experts at Great Place to Work in partnership with Fortune, to see the diverse array of industries represented.
But despite the many differences across this group of companies, there’s a singular refrain that top executives recite when asked about some of their biggest concerns: “How can I drive innovation across my entire organization?”
What separates these companies from those that have not earned a spot on this year’s list is that they approach innovation differently than their competitors. These companies have a commitment to creating a “For All” culture, where everyone is treated equally, regardless of their experience, background, title, or job function. And most importantly, a “For All” culture is one where every worker feels welcome and supported in creating new ideas for processes, products, or services. In other words, where Innovation can be achieved “By All.”
After compiling this year’s ranking, we reached out to a few Best Workplaces—organizations from the food and beverage, medical devices, and automotive industries, specifically—to learn more about how they are achieving greater success by applying the “Innovation By All” approach to business. Here’s what we discovered.
(No. 1 on the Best Workplaces in Manufacturing and Production)
At Stryker, one of the world’s leading medical technology companies, innovation is everyone’s business, according to Katy Fink, Vice President and Chief Human Resources Officer. “Having a truly innovative organization is about getting everybody’s voice at the table,” Fink says.
One of the company’s divisions regularly hosts an innovation challenge for employees that is based on the popular start-up TV show Shark Tank. Anyone in the organization can volunteer to present a new idea to Stryker’s leaders and have it potentially selected to receive support and funding.
One recent idea that became a blockbuster success was an innovation called Pulse Ox for the Planet. The pulse oximeter, a device that regularly checks a patient’s heart rate and blood oxygen levels, is a disposable single-use device that usually ends up in a land fill. “A team of workers at Stryker came up with the idea to encourage customers to send their used pulse oximeters back to Stryker so they could be reprocessed for future use,” Fink says. In exchange, the company donates trees to the National Forest Foundation and areas that have been severely damaged by wildfires.
To date, Stryker says that nearly 2,700 customers are enrolled in its program to reprocess Stryker products, which has saved $340 million in supply costs and diverted 13.2 million pounds of waste from landfills in 2018. This year, the company plans to expand the program to include more products that can be reprocessed and rename it Products for the Planet. “All of that came out of this idea of listening to the voices of others,” Fink said.
JM Family Enterprises
(No. 2 on the Best Workplaces in Manufacturing and Production)
Diversified automotive company JM Family Enterprises, based in Deerfield Beach, Florida, is a longtime winner on Fortune’s annual list of the 100 Best Companies to Work For, and is no stranger to innovation. One of its subsidiaries, Southeast Toyota Distributors, has associates who tailor vehicles with accessory packages (available only in its region) and are often working with new innovations coming from Toyota corporate. But they’re also coming up with new ideas for accessories and processes to satisfy its dealer partners and their customers and help the business grow.
Last year, CEO Brent Burns launched a new program called the Doing It Better Showcase (DIBS). Every year, JM Family’s executive management team travels to each location to host a lunch with associates and show appreciation for their dedication and hard work. This past year, DIBS was added to the agenda, which invites associates to present their latest innovations and newest developments to executives.
“We have seen some DIBS presentations from the team that are just pretty phenomenal, and its great to give recognition to associates who are taking the initiative to do some work and take ownership of work that we normally wouldn’t get to,” says Carmen Johnson, EVP of HR and Legal at JM Family Enterprises.
At a recent visit to JM Family’s parts warehouse, executives learned from an associate presentation that they often received damaged parts.
“They were having to return many parts, causing a delay in the work to be done to a customer’s car,” Johnson said. The associates decided they would identify the parts that were most troubled and conduct intensive studies and make suggestions to improve the packaging.
“We don’t control the packaging,” Johnson said. “That’s Toyota. But they invited Toyota to come visit our facility to see the work that our team has done. And with some very novel packaging changes that they had designed, they were able to propose new packaging that now keeps those parts safe and secure while they’re being transported and eliminate the damage that was being done for the customer.”
“The DIBS program is great because the people presenting are the same folks that do the work. It’s been a terrific way to highlight some of the practices that they were already doing in these facilities, but it just kind of upped it a notch and really shows how these folks are engaged and how important it is to the overall success of the company. They continue to innovate in big ways but also in small ways,” she said.
Sharon Ruiz, the company’s director of operations for Southeast Toyota Distributors, adds: “What’s super cool from the associate perspective is the recognition at those high levels of the work that they’re doing because many of our improvements are these very small continuous improvements. They’re not quantum leap improvements that are changing the world by millions of dollars, but they’re making people’s lives easier, safer, and better. The value of the recognition is huge, but also it allows us to help them build their tool kits around other skills that they might not have otherwise pursued, like public speaking, and how to present your ideas to a group, and how to use problem solving in different ways than they have before. So, it’s really helping us across the company to get people excited about building their own capacity for growing and for the future.”
(No. 3 on the Best Workplaces in Manufacturing and Production)
“Innovation often is thought about as creating new products, but it’s so much broader than that,” says Caroline Sherman, the Vice President for Corporate Affairs for Mars Food North America, a division of food, confectionery, and pet care giant Mars Inc. “The way that the world is changing you must innovate across how you think, across your products, across supply chain, across your approach to sustainability in order to stay relevant. And it does take the brain power of everybody in an organization to participate in that process to get the most and best out of it,” she said.
One recent development at Mars is the creation of its Seeds of Change Accelerator, which launched earlier this year to fund startups in the food and beverage industry with revolutionary ideas that could potentially disrupt or change the future of food.
The Seeds of Change Accelerator is the first time that Mars Food, a division of one of the world’s largest private companies, has ventured to invest in startups. “We know that the food ecosystem is rapidly evolving. In order to stay relevant and close to trends on the ground, we created this accelerator program where we’re opening our doors for the first time to six startup companies that are purpose-driven on creating the meals of tomorrow and where the future of food is going so that we can learn from them, and likewise help them with business challenges that Mars might have more experience with. It’s a perfect combination of mutual learning,” Sherman says.
In July, Mars hosted a selection day event in Chicago where it narrowed a group of 10 finalists down to six winners. All of the company’s associates in Chicago attended, and Sherman says, were inspired by the way the new companies were operating. “Getting associates in the frame of mind, that perspective to help us stay hungry has been really helpful,” Sherman says. The six winners will be mentored by and advised by teams of Mars associates, and vice versa. “They’re helping our team learn about news ways of operating, marketing, distributing, as well as new ways of communicating with consumers.”
Mars believes that the sharing of new ideas encourages all associates to approach things in new ways and to be open and to push each other to innovate. “We’re constantly evolving as a 100-year old company and you can imagine in order to be where we are today, we’ve had to have that as a part of our DNA,” Sherman says.
At Great Place to Work, we determine how successful a company is at achieving “Innovation By All” by looking at its Innovation Velocity Ratio (IVR), a comparison of the number of workers who feel able and inspired to innovate versus those who feel they are not able to participate in the process. Companies can determine their own IVR by having their workforce take the Trust Index Survey. To learn more about how to calculate your company’s IVR and how it can realize Innovation By All, download the first part of Great Place to Work’s Innovation Insights series.
See the full 2019 list of the 20 Best Workplaces in Manufacturing and Production, broken down by size:
Christopher Tkaczyk is the chief content officer at Great Place to Work, the global authority on workplace culture, and is a former editor at Fortune and Travel + Leisure.
As the Chinese Century nears its third decade, Fortune’s Global 500 shows how profoundly the world’s balance of power is shifting. American companies account for 121 of the world’s largest corporations by revenue. Chinese companies account for 129 (including 10 Taiwanese companies). For the first time since the debut of the Global 500 in 1990, and arguably for the first time since World War II, a nation other than the U.S. is at the top of the ranks of global big business.
That shift is transforming not just the business world but the whole world. As China seeks to succeed the U.S. as the preeminent superpower, business is playing an even larger role in international affairs than usual. Nations have always competed economically, but the U.S. and China are engaged in direct battle over the world’s economic life force: technology. As former Treasury Secretary Henry Paulson has written, “The battle is about whose economy will drive the technology of the future and set the standards for it.” For an example of corporate China pushing technology’s frontiers, see our story on insurance giant Ping An.
The battle is not just metaphorical; it involves life-and-death issues of national security. That’s why, most prominently, the U.S. has partially banned American companies from buying products made by telecom-equipment giant Huawei (No. 61 on our list), saying the company is state-directed and could sabotage 5G infrastructure or use it to steal data. (Huawei says none of those things are true.) China has set explicit goals of dominating such fields as artificial intelligence, quantum computing, robotics, and autonomous vehicles. As these fights escalate, other nations may feel they must commit to either Chinese or U.S. technology, raising the stakes even higher.
It’s true that Chinese companies’ revenues account for only 25.6% of the Global 500 total, well behind America’s 28.8%. But that’s to be expected. China is the rising power, economically smaller but growing much faster. The No. 1 nationality among the top 50 companies in this year’s Global 500 is American; among the bottom 50, it’s Chinese. Those companies near the bottom are rising quickly, and like their country, they’re burning with ambition.
President Xi Jinping has said that by 2049, the communist revolution’s centennial, China will be “fully developed, rich, and powerful,” a goal that China expert Graham Allison of Harvard says includes being “unambiguously No. 1,” with a military “that can take on and defeat all adversaries.” With that in mind, be sure to read “Boxed In at the Docks,” which depicts China’s takeover of Greece’s largest port, and how it fits in China’s vast Belt and Road Initiative. The article describes the crucial role of China’s state-owned enterprises—82 of the Chinese firms in the Global 500 are “SOEs”—which receive generous subsidies that advantage them over the West’s private sector.
Fortune’s founder, Henry Luce, famously declared in 1941 that the 20th century was the American Century. His argument was largely right and often prescient. Whether the 21st century becomes the Chinese Century in the full sense—with China dominating culture, ideals, and concepts of human rights and human nature—remains to be seen. But at least in business, the Chinese Century is growing intensely more Chinese, and faster every day.
A version of this article appears in the August 2019 issue of Fortune with the headline “China’s World.”
The CV and resume writing service ResumeGo found that applicants who included a link to a “comprehensive” LinkedIn profile on their resume were 71% more likely to get a job interview than applicants who didn’t have a LinkedIn profile at all.
Resumes featuring a “bare bones” LinkedIn—which ResumeGo CEO Peter Yang qualified to Fortune as a “profile summary of under 500 characters, less than or equal to 5 connections, and no descriptions completed for any of the work experiences listed”—were even less likely to nab a job callback.
“A lot of people believe that the primary benefit of LinkedIn is to network and build connections, which is indeed an awesome benefit of the website,” Yang said. “The result of this is that people who choose to find jobs through other avenues (e.g. job boards, recruitment agencies, etc…) tend to have either a poorly written LinkedIn profile or no LinkedIn profile at all. They don’t realize that having a comprehensive LinkedIn profile included on the resume itself is a huge plus in terms of landing more interviews.”
In the end, ResumeGo came to this conclusion after creating and submitting 24,570 fictitious resumes to jobs listed on various career search websites (including Glassdoor, ZipRecruiter, and Indeed) between October 8, 2018, and March 8, 2019.
These resumes fell into three different categories: Group 1 “applicants” didn’t have a LinkedIn profile, Group 2 had a “bare bones” LinkedIn, and Group 3 had a “comprehensive” LinkedIn profiles with 1000 character plus profile summaries, over 300 connections, and either paragraph or bullet-point descriptions of past jobs.
“For every resume we created for Group 1, we included an exactly identical resume in Group 2 (except with a bare-bones LinkedIn profile) and an exactly identical resume in Group 3 (except with a comprehensive LinkedIn profile),” Yang told Fortune. And the resumes differed to appropriately reflect the job posting’s industry and level.
Each group submitted resumes to 8,190 jobs, and Yang said that “for each job posting, we only ever submitted one resume from either Group 1, 2, or 3.”
At the conclusion of the five-month field experiment, ResumeGo found that applicants with “comprehensive” LinkedIn profiles had a 13.5% callback rate, applicants without LinkedIn profiles had a 7.9% callback rate, and applicants with “bare bones” LinkedIn profiles had a 7.2% callback rate.
However, Yang notes, as the job level increased (from entry-level to mid-level to managerial-level), the importance of the LinkedIn profile decreased.
So if you’re on the lower end of the corporate ladder, updating your online resume could be an important step in your rise to the top.
The tidal wave of money pouring into index funds and ETFs has always been a concern to the asset management industry. Sporting rock bottom fees and yielding often superior returns, these fund vehicles have become something of an existential threat to asset managers.
Now those concerns are morphing from career risk to market risk. Michael Burry, the hedge fund manager who became famous from the Michael Lewis book The Big Short (and was later played by Christian Bale in the movie version), recently compared index funds to the toxic CDOs he made so much money shorting when the real estate bubble blew up. Burry claims the flows into index funds are distorting stock and bond markets, and when those flows reverse “it will be ugly.”
As long ago as 1991, legendary hedge fund manager Seth Klarman dismissed indexing as just another Wall Street fad. “When it passes,” he said, “the prices of securities included in popular indexes will almost certainly decline relative to those that have been excluded. When the market trend reverses, matching the market will not seem so attractive. The selling will then adversely affect the performance of the indexers and further exacerbate the rush for the exits.”
So these comparisons are nothing new from big-name traders. Still, individual investors ought to pay close attention when they read headlines about famous investors calling for a crash coming—especially when it involves funds so many people are now invested in. But the concerns about a bubble in passive investing are overblown. Here’s why:
No rip-off fees, no problem
It’s odd that some people think it’s somehow a bad thing investors are shifting money into funds that:
save them money in fees
are more tax-efficient
have lower turnover and trading costs
beat the majority of actively managed funds over the long-term
are simpler and easier to understand than most investment strategies
It’s also bizarre to classify as a bubble the idea that more investors are actively avoiding the search for alpha by thinking and acting in a long-term perspective. It’s like worrying about McDonald’s sales if we were all to swear off junk food.
Wouldn’t it be more worrisome if investors were piling into the opposite scenario—into funds with high fees that are tax inefficient and routinely underperform simple market averages over time?
The tail is not wagging the dog
There’s a lot of fuss around mutual funds and ETFs. But, truth be told, ownership of the stock market goes far beyond these two vehicles. Vanguard founder John Bogle provided a breakdown on index ownership in his latest book:
Yes, U.S. index funds have grown to huge size, with their holdings of U.S. stocks doubling from 3.3% of their total market value in 2002, to 6.8% in 2009, and then doubling again to an estimated 14% in 2018. Other mutual funds now hold an estimated 20% of corporate shares, bringing the mutual fund total to almost 35%, the nation’s most dominant single holder of common stocks.
So, index funds represent less than 15% of share ownership in public companies. And, according to former Vanguard CEO Bill McNabb, indexing in stocks and bonds globally represents less than 5% of global assets.
Given that, it’s not at all provocative to wonder: Why aren’t people more worried about active managers then? Surely, they’re just as likely—if not more—to torpedo the markets. No?
Vanguard and iShares have experienced massive growth over the past two decades, seeing trillions of dollars worth of inflows. But this doesn’t mean indexing is a brand new phenomenon. It’s just being packaged in a cheaper wrapper now.
Professional money managers have been closely tracking their benchmarks for decades now. The upshot? These index funds and ETFs are quickly becoming benchmarks of their own for active fund managers. Furthermore, very few actively managed funds deviate much from those benchmarks because being different eventually leads to under-performance. And that’s what gets you fired in the asset management business.
Career risk may be one of the greatest market inefficiencies, one people seldom talk about. And because career risk is an enduring reality, closet indexing will be with us for some time.
Pensions and other large institutional investors add to the phenomenon. They have been creating their own index funds in-house for years. We’re just seeing a shift from the institutional practice of closet-indexing to a brimming marketplace for ETFs and other index funds as investors have wisened up.
Isn’t it a good thing investors are shifting away from expensive closet index funds?
Active funds literally own the market
When you buy an index fund of the total stock market, you are literally buying the stock market in proportion to the shares held by all active investors. If you sum up the collective holdings of active managers, what you essentially get is a market-cap-weighted index. Index fund investors are simply buying what the active investors have laid out for them.
Plus, we have to remember that not every cent flowing into index funds is going directly to the S&P 500 or a total market fund. Most of the money is going there but there are also index funds for small caps, mid caps, value, growth, sectors, themes, and everything in-between.
Many of the worries about indexing really boil down to career risk in the asset management space. By taking themselves out of the game through the direct purchase of index funds, there are now fewer suckers at the poker table for the pros to take advantage of.
Isn’t it a good thing then that most small investors have decided not to bother competing with the professional active managers who, it turns out, largely trade with one another?
Price discovery is a cop-out
Don’t feel sorry for the active management community. It will never completely go out of business. It’s far too lucrative and tempting for type-A personalities to prove themselves.
But people worry that as index funds continue to gain market share, the price-discovery mechanism could become fragile. This is nonsense. There’s plenty of price-discovery going on in the markets. In fact, you could probably make the case there’s too much of it these days.
Fifty years ago or so, for example, the entire trading volume of listed stocks on the New York Stock Exchange was 3 million shares. Today, Apple has an average trading volume of roughly 26 million shares a day. Facebook turns over more than 16 million shares a day, on average. The biggest stock market ETF (SPY) averages nearly 70 million trades a day.
Active managers will always set the prices, no matter how many there are. Charley Ellis wrote in his book, The Index Revolution, that indexing accounts for less than 5% of trading, with the remaining 95% or so done by active investors. This will always be the case, no matter the amount of money flowing into index funds.
Mind you, I’m not complaining about the increase in volume. This is a good thing because it lowers trading costs and decreases bid/ask spreads.
But what’s a more worrisome trend for individual investors—people who have decided to trade less, or people who have decided to trade more?
Yes, index funds are free-riders, but so what?
Cliff Asness wrote a wonderful piece for Bloomberg a few years ago about the idea of index investors being free riders:
The use of price signals by those who played no role in setting them may be capitalism’s most important feature. That most of us and most of our dollars don’t have to pick stocks, or to price air conditioners, is a great benefit and taking advantage of it makes us honest smart capitalists, not commissars.”
Yes, index investors are free riders, but this is the way most markets work. We don’t go to the grocery store to bid on prices of oranges against one another to set an equilibrium. The market does that for us.
It’s also worth pointing out the success of indexing doesn’t mean all active management is inherently useless or bad. In fact, Vanguard itself still a ton of money in active funds. Here’s the breakdown of assets in index funds for the firm (also from Bogle’s book):
The trend is easy to spot, but the firm still has more than $1 trillion in actively managed funds. They just happen to manage their active funds using strategies that employ low turnover, long holding periods, and lower than average fees.
Wouldn’t it be a net positive then for the end investor should the surge in indexing force the asset management industry to adapt?
Liquidity is not a problem for index funds
One of the big worries is what happens if everyone who has piled into these funds in recent years decides to reverse course and rush to the exits all at once? There will always be investors that panic when markets fall, regardless of the type of fund they’re invested in.
When an index fund investor sells, they’re technically selling their holdings in direct proportion to their weighting in the index. So the market impact is muffled. It’s worth repeating: index fund investors are simply owning stocks in the proportion that all active investors own stocks.
Plus, index funds never lever up your holdings. They never receive a margin call. They don’t put 30% of your holdings in Valeant Pharmaceuticals. And no index fund has ever closed up shop to spend more time with the family.
Why then would index funds or ETFs be any different than any other fund type or security in that respect?
People love attaching a narrative to ups and downs of the markets. Index funds have been the perfect scapegoat in a market that has gone up for 10 years, and pretty much outperformed every other strategy. This won’t last forever. But the next time the market tanks, it will have more to do with investors than index funds.
Do you know what did not cause the Great Depression, or the Japan stock market crash ,or the 1987 crash, or the 1973-74 bear market? Index funds. Index funds also weren’t around for the South Sea Bubble on the 1700s.
Do you know what did cause these historic bubbles and crashes? Human nature.
Could the stock market itself become a bubble yet again? Of course. There will always be bubbles.
Are index funds perfect? No. They give you all of the upside of the stock market. And all of the downside. And, indexes can go nowhere for years on end just like individual stocks. They can become overpriced and underpriced. They own the good stocks and the bad stocks.
But that’s nothing new. That’s the stock market for you.
This passive bubble talk is silly. Wake me up when index funds control 90% of the stock market.
Ben Carlson, CFA is the Director of Institutional Asset Management at Ritholtz Wealth Management.