Category Archives: Corporate Strategy

Mark’s thoughts on developing and articulating winning strategies. Bringing you over 25 years experience and a track record of creating high performing teams, Mark shares his insight on the best ways to identify hidden opportunities, craft convincing strategic documents, translate the ivory tower thinking into actionable and energizing story lines, and get the entire organization behind the goals.

Some Holiday Gifts

Leadership thoughts, retirement planning tips, fun for the holiday break

Some leadership ideas to consider while you’re away from the grind:
Having been on the leading edge of the quality push at GE, and taken to heart the GE values of integrity and candor, I loved this short piece: Integrity is Free
Interesting, quick tips on successful presenting skills, and an interesting blog to poke around in afterward. The 9 Biggest Mistakes When Presenting to Executives
Insightful piece on the interaction between culture and strategy. Culture Can Make or Break Strategy
You know what they say, actions speak louder than words Is It Time to Stop Saying Thank You

Timely thoughts for your retirement planning:
Great, you’ve saved a bundle in your 401(k), now what? A 401(k) Conundrum: Can You Make Your Cash Pile Last for Life?
A so called deep dive on the benefits of longevity annuities in retirement plans. A growing chorus is recognizing the value of longevity annuities
There will be a million opinions on this, here’s Morningstar’s: Now that annuities are OK in retirement plans, what strategy is best?
One of those periodic wake-up calls for you. Americans Are Not Remotely Financially Ready for Retirement

Since I hope you will have time to play around some, try these tidbits:
If you’re of a certain age, this will bring back a flood of memories. How fun that it isn’t as messy as it used to be! Nathan Friend’s Browser-Based Spirograph Emulator
I’ve harped a lot on the 100th anniversary of the Christmas Truce, but did you realize this Christmas Eve is the 200th anniversary of the last fighting between the US and Canada? Let’s Celebrate 200 Years of Peace Across the Border
There’s some pretty funny stuff in here … the longer you have been married, the more they will ring true. 30 Hilariously True Differences Between Men and Women
Bet you never heard one of these. A Guide to the Strange, Little-Known, Hard-to-Find Beatles Christmas Recordings

Questioning Shareholder Value

James Montier delivers a lengthy takedown of shareholder value in his piece. It is interesting because it gets into so many other areas like income inequality, CEO pay, business investment rates, and more. So many companies place credence in shareholder value that it is worth understanding the implications. I focus your attention on this one piece because I wonder what your reaction will be to this. So, please take a minute to share your thoughts.

The World’s Dumbest Idea

The Fallacy of Cost of Capital continued

Friday I teed up the frequent breakdown in implementation of cost of capital constructs. Today I will give an example illustrating the downstream cost of this oversight. While this is, by no means, limited to the life & annuity space – the lessons are broadly applicable; I will continue the life & annuity company example, assuming a few things:

  • Indexed annuity product with a target/expected 12% ROE
  • $3 billion of annual production
  • 10% total compensation paid at issuance
  • Nominal cost of capital of 8%
  • 10 year amortization schedule (straight line for simplicity sake)

Today, with generally flush capital structures, there is little concern about layering in new business in this product. The horns of the dilemma are that in leaner times, say 2009, it would be difficult to authorize more volume despite returns beating corporate targets. A fully executed cost of capital construct would ‘charge’ the business 8% for invested capital, incentivizing the business to find a more efficient capital structure, releasing capital for redeployment (business development, shareholder returns, capital investment, etc.) and easing capital strain.

Here is a comparison of acquisition costs with and without the cost of capital (CoC) charge:

with CoC without CoC Variance V%
Required Capital/Cash (Issue Year) $300.0 $300.0 $0.0 0.0%
Est. GAAP Expense (Issue Year) 43.0 30.0 (13.0) (43.3%)
Total Capital Cost (Over 10 Years) 410.2 300.0 (110.2) (36.7%)

Not applying an explicit cost of capital charge obscures the true cost of running this business, by understating issue year GAAP expense by 43% and total cost by 37%. This is true for any business, not just life & annuity, for any capital cost.

Since alternative solutions do have a cost, not explicitly applying the cost of capital stymies business unit motivation to be more capital efficient. Since we embed our program costs, there is little difference, with or without the cost of capital charge:

with CoC without CoC Variance V%
Required Capital and Cash (Issue Year) $26.4 $26.4 $0.0 0.0%
Est. GAAP Expense (Issue Year) 27.5 26.4 (1.1) (4.2%)
Total Capital Cost 397.2 390.1 (7.1) (1.8%)

Viewed together, you see the economic value of an explicit cost of capital charge:

with CoC without CoC
with Program without Program Variance V% with Program without Program Variance V%
Required Capital and Cash (Issue Year) $26.4 $300.0 ($273.6) (91.2%) $26.4 $300.0 ($273.6) (91.2%)
Est. GAAP Expense (Issue Year) 27.5 43.0 ($15.5) (36.0%) 26.4 20.0 $6.4 32.0%
Total Capital Cost 397.2 410.2 ($13.0) (3.2%) 390.1 300.0 $90.1 30.0%

Only inception costs remain constant, as others, which play out over time, rise. Failing to account for carrying cost masks parent level benefits obtained by seeking alternative capital structures. Here you see that the parent gets the most efficient use of capital by reflecting the cost of capital in business unit financials and incentivizing innovation. The business unit sees lower cash and capital demand in the issue year, lower GAAP expense in the issue year and lower total GAAP expense over the amortization period, all likely forgone without that explicit recognition of the cost of capital.

Call or email me to discuss this interesting insight, learn how it may inadvertently hamstring your growth and to talk about our innovative solutions.

Improve your retirement and leadership

Improve your retirement and leadership
Then, learn some cool stuff, too

Some overdue looks at great reads on leadership:
It’s easy to forget, but you never should: successful strategy is all about execution. Strategy Execution: A Short Checklist That Helps
You never can be a good enough negotiator. Here are some more tips from Wharton:
13 negotiating techniques taught at the Wharton School of Business
Speed up your decision-making process, and improve it. Too much to expect, well, at least read the ideas, they may ring true. 5 ways to make better, faster leadership decisions

A weekly dose of retirement guidance:
A noted economics professor and prize winning author on why people don’t buy more annuities … even though they should Jeff Brown: Retirement Researcher, Model & Mentor
A really interesting article on how to market time, without the risk of market timing. It’s worth the free sign-up to a great site. Simple and Effective Market Timing with Tactical Asset Allocation
Another reason to sign up for Seeking Alpha, a great tool for picking ETFs. Plus, they’ve got a great iPad app, too! ETF Hub
An interesting review of actual 401(k) balances vs. theoretical ones Why aren’t 401(k) and IRA balances bigger?

Better than average weekly diversions:
Despite having read the book Krakatoa, and visited Indonesia on several occasions, this slipped from my radar. It’s astonishing. The Sound So Loud That It Circled the Earth Four Times
This was not the first, and won’t be the last, article I have read about how the developing world holds the key to arresting climate change – in fact dig around on The Week site, they have a couple more. Why India is the key to the world’s climate future
You won’ learn anything from this, but you’ll be amazed. Photo of Earth from the Curiosity Rover on Mars

The Fallacy of Cost of Capital

The Fallacy of Cost of Capital in the Life & Annuity Industry


As a longtime business leader with GE, American Express and Ameriprise Financial, I came to expect the inevitability of cost of capital in annual planning and product development conversations. While the number generally had little discernible relationship with the true borrowing cost for the corporate parent, the construct made perfect sense: each P&L bears a reasonable cost for the invested capital carried on its balance sheet. As an independent advisor, I have come to realize that often times this cost is more implicit than explicit. Cost of capital appears most often in the guise of a hurdle rate. Whether considering new product design or a major technology investment, running a spreadsheet against the hurdle rate is a prerequisite. Once implemented, though, how does the cost of capital manifest itself in business unit financials? In an annuity or life business level P&L, for example, where significant issuance costs are capitalized and amortized; is the business charged a carrying cost at the cost of capital? Is there a journal entry from the parent, ultimately eliminated, mind you, reflecting the opportunity cost of this investment? Often not, which stifles creativity and confounds analysis of alternative capital structures. The parent is happy with a nominal 10% or 12% or 15% return. Have they accounted for the true cost? As businesses firm up the 2015 planning cycle, perhaps it is time to reflect on the efficacy of cost of capital execution and the downside risk of not fully accounting for the true cost of investment in business units. This recalibration may yield better corporate results by incentivizing scrutiny of invested capital, freeing up capital for long deferred investment projects. Call or email me to discuss this interesting insight and learn how it may inadvertently hamstring your growth.

Improve your leadership skills

Improve your leadership skills to deliver superior results
Plus: some weekly guidance on your retirement planning

Leadership tips and insights along with an interesting, emerging trend:
Talk about hot topics, so much written recently about purpose driven organizations, this one puts it into an interesting context, worth a fast read as I have always said feeling good about what you do helps you to do it better Your Company’s Purpose is not it’s Vision, Mission or Values
This is a fun, while still insightful, piece about the big influence the little things can have 10 Ways to Say the Right Thing Every Time
Yes, there has been a lot written about this, too, servant leadership, but here again, there’s a gem in this one about showing gratitude, it is hard to remember, but do it The One Attribute All ‘Servant Leaders’ Have in Common
This is a great article if you seem to be stumped for growth Eight Ways to Rethink Your Business Model
This is a really interesting, emerging trend, may work in your favor, if you are flexible Surge pricing is the next wave of digital ordering

Live a better retirement by planning now:
Of course an actuary created a tool to figure your retirement income needs, good thing is he’s shared it A simple tool for figuring retirement income
No rocket science here, but always good to be reminded, especially after this sustained bull run 2 Things You Have to do with Your Retirement Investments

Living in the time of the sound bite

Living in the time of the sound bite

It always amazes me how our politicians, in particular, seek refuge in the sound bite. With the magnitude of issues and depth of discord in Washington, the citizenry should hope for meaningful dialogue. Yet all we see is the perpetual distillation of issues into easily digestible, meaningless prattle. The examples are seemingly limitless, but the latest one to irk me is “economic patriotism” and its cohort “tax inversion.” The problem, of course, is the intersection of an endlessly complex corporate tax code and the wholly appropriate incentive systems designed by public and private corporate boards. Yes, corporate boards will incentivize their leadership to optimize shareholder returns, and yes, corporate leaders will find and leverage tax provisions as one of the ways to deliver those optimized shareholder returns. That is our basic economic construct. Doing so generates shareholder wealth, and, presumably, conflicts with no laws.

It all gets back to the notion of treating the symptom or the cause. While most accept that the nominal US corporate tax is among the highest in the world, critics are quick to point out that the real corporate tax is far more in line. Both statements are true, but how Congress has chosen to bridge the two, with a series of incentives, artificially manipulates corporate behavior and, in turn, markets. Whether it is energy or farming or any other incentive, Congress pushes (helps, if you will) corporations in a certain direction, introducing bias into the system. One can dispute whether this system, arguably far too manipulated by so-called special interests, is good or bad, but one cannot deny that it is what it is. Consequently, corporations, especially those not benefiting from the incentives and ‘in line’ real tax rates, find it beneficial to redomicile outside the US – tax inversion. Sure, at a sound bite level that seems economically unpatriotic, but then we ask shareholders to forgo higher returns for this notion of “economic patriotism.” Surely, some would willingly pay that price; others would not, presumably shifting their investments accordingly. This movement from a company’s stock is a steep price for corporate leaders and boards to pay because Congress and the White House are unwilling to address the underlying issue, an overly complex, burdensome and biased corporate tax code.

Some Commentary on Tax Inversions:
Interesting British perspective, you may notice that Boots, beneath the Walgreens angle on this topic, already abandoned Britain for Switzerland … something the Brit’s don’t seem to have liked, either Obama doubles down on threat to act against ‘tax inversions’ by US firms
Superseding the US-Africa Leaders Summit to identify the villains behind tax inversions: accountants Obama Joins Blame Game as Companies Flee US for Lower Tax Rates

Some thoughts on leadership and its antithesis

Some thoughts on leadership and its antithesis
Plus: the challenge facing broker/dealers…how to attract Millenials

Leadership, or not:
How CEOs can use personal and corporate values to drive revenue, seemingly counter intuitively 4 ways purpose-driven CEOs can align purpose with revenue
A cheat sheet to being ‘exceptional.’ Think about it, it’s what you wanted. 10 Things Only Exceptional Bosses Give Their Employees
Does salty language really help? A telling infographic on how stress changed CEO behavior F-Bombs Tolerated in Recession Cause CEOs Trouble Later
I could not resist, can someone explain how this makes sense, even remotely? Report: Chelsea Clinton earns up to $75K per speech NY Times Columnist Slams Chelsea’s Buckraking for ‘The Rapacious, Gaping Maw of Clinton, Inc.’

The Millenial Challenge:
Decipher their needs and wants, then adapt US financial advisers try to win over wary Millenials
Leverage what works with them to get their attention The Science Behind Reaching Millenials (Infographic)

Some Weekly Diversions:
How to optimize your next shopping spree 16 Tips Every Amazon Addict Should Know
Beware the headbanging rock of your youth (perhaps?) 5 most incredible discoveries of the week
Seems there is an infinite supply of crazy, old picture sites, but still they always have something interesting in them Curiosities: Amazing Historical Pictures

Free Growth Assessment

Tired of slow growth? Simply keeping pace with the market? or Holding off on plans to launch new products, enter new markets or new channels? Call or email us to receive a complimentary growth assessment to show how Independence Associates can help energize your business, drive growth, excite your team and your customers. We are happy to dig in and show you ways to break out of the post downturn doldrums, and fast. Do it now, you can’t beat free: or (612) 326-6407.

Best leadership reading from the web February 28, 2014

Your weekly chance to take a few minutes and get some interesting perspective on leadership, financial services, and just fun diversions.

Business Leadership:

NATO Commanding General talks leadership, change, and agility (ZDNet)

Miami Dolphins: Leadership, Organizational Culture and Empty Words (Forbes)

Target Utility or Curiosity for More Enticing Email Subject Lines (LifeHacker)

Retirement Insight:

What Do People Have Against Retirement Income? (Harvard Business Review)

SEC says investors need to know more about fees (Investment News)

Retirement Spectrum Has 50 Shades of Gray (

This Week’s Diversions:

The True Story of the Monuments Men (Smithsonian)

14 Images that Explain the World if it Were Only 100 People (Twisted Sifter)

“They’re Coming Right Into Your Arms to Cut the Throats of Your Sons and Women!” (Slate)