• November 15, 2021
  • Chuck Osborne

Suffering Fools

It could be said of every mentor I have ever had that “he did not suffer fools.” This didn’t mean that one could not disagree with them, but one had better have his facts straight and a logical argument or he was going to be put in his place. 

One of my bosses in particular had a gruesome reputation. One time I was talking with a member of the senior management team at a company party, and when I told him who I reported to, and he said something to the order of, “Good luck. People say I am jerk, but your boss really is a jerk.” (He didn’t use the word jerk, but this is a family blog.) In reality, my boss was extremely fair. He was extremely demanding, but I found if I did my job he rewarded me, and if I made a mistake, all he wanted was for me to own it and fix it without excuses. The people who got into trouble were the ones who tried to hide their mistakes. 

Said boss was also open to new ideas, as long as they were truly thought out. The skill of critical thinking is no longer taught, because somewhere along the way on the dumbing down of America we got the notion that to be critical is to be hateful. Nothing is further from the truth: critical thinking means when one has an idea or hears one, she then critiques the idea herself to measure its merit. In science one tests ideas by stating a hypothesis and then testing it rigorously to prove it is true or at least not false. This is the basis for critical thinking: one has to be able to be his own critic, and only then take his idea to other critics. 

A fool does no such thing. A fool has an idea and then just starts running with it. Further, he will simply ignore facts that are counter to his idea. I will admit, that like my mentors, I do not suffer fools well. I want to be clear: I have had many great conversations with people who disagree with me on many topics. I don’t mind that at all, in fact it is essential to critical thinking. Intelligent debate between two people who disagree sharpens both of them. It is mutually beneficial. However, when someone presents an idea to me which is based on lazy fantasy, it is like fingernails on a chalkboard. 

This happened recently. In writing a recent Insight I used a quote form Milton Friedman. I knew the quote but wanted it to be accurate, so I went to “the Google machine” to look it up. First thing I noticed is that what came up were negative articles about Milton Friedman. There is no economist who does not have critics, but this takes some doing, because Friedman’s supporters outnumber his critics tremendously. Curious, I read a couple of the articles. I disagreed with all of them, but most were well-written and thoughtful. All of them, interestingly, were written after Friedman passed away – these critics were not interested in a debate which they would almost certainly lose. 

However, one article stood out. It was published by Forbes and written by Steve Denning. Denning was arguing against the notion that the purpose of a corporation is to make a profit for the shareholders, and he referenced an article that Friedman had published in The New York Times on September 13, 1970. Friedman’s article, like most of his writing, would make a good read today as many of the trends we are seeing now were the same as we saw then. 

Denning’s critique was as follows, “…[T]he article states flatly at the outset as an obvious truth requiring no justification or proof, ‘a corporate executive is an employee of the owners of the business,’ namely the shareholders.” Denning goes on, “Come again? If anyone familiar with even the rudiments of the law were to be asked whether a corporate executive is an employee of the shareholders, the answer would be: clearly not.” 

Fingernails across the chalkboard, I do not suffer fools gladly. I am even sympathetic to Denning’s larger argument, which I’ll address in a second, but the reason Friedman stated “as an obvious truth” that each one of us ultimately works for the person or people who own the business is because it is an obvious fact. Perhaps this is not entirely obvious when looking at large publicly traded companies with thousands of shareholders, but those organizations represent a fraction of the corporations that are out there. 

Iron Capital is a corporation. I am currently the sole shareholder. Do you think an executive here has ever thought to say to me, “I work for Iron Capital, not you.” Sure, that is technically correct. When asked on a form for employer, one would write Iron Capital, but that is a distinction without difference. This is grotesque lazy foolishness and we as a society should not tolerate it. Facts are facts and cannot be dismissed. 

Denning went on to say that while almost everyone recognized that Friedman was correct, he claimed that it was they who “just wanted it to be true.” This can’t be made up. He then goes on to claim that business guru Peter Drucker, in his 1973 book Management, argued against Friedman. Drucker and Friedman were the super stars when I was a student of business and economics, so I have read them both extensively. Never in all of that have I come across a contradiction between those two. However, Denning says that Drucker’s claim that the purpose of the corporation is to serve customers is a rejection of the idea that maximizing shareholder value is the goal. 

I can understand how a third grader might get confused. Is the purpose taking care of the customers or taking care of the shareholders? Adult conversations should not be held at a third-grade level. In what universe does a manager maximize shareholder value by not taking care of the customer? That universe does not exist. These are not only not mutually exclusive ideas, they are also the same idea. To see this more clearly, perhaps one should add the phrase “in the long term” to the end. I would argue that in the early 1970’s, long term was a given. It certainly was for both Drucker and Friedman. 

Once again we will use Iron Capital as our example. Everything that happens here is for the benefit of our clients, and we do it in order to make a living. If we fail our clients then they will leave, and the shareholder value leaves with them. If we serve them well, they will grow their relationship with us and introduce their friends to us, and shareholder value will grow. There is no contradiction there. Friedman was an economist and he spoke like an economist, which is often cold. Drucker was a businessman and he spoke like a businessman, which is warmer than an economist. A visionary entrepreneur would be loftier and warmer yet, but in the end if one actually listens and seeks to understand she would recognize that they are saying the same thing. There is no real disagreement here. 

Unfortunately, this is the world we live in today. People make up their own facts and have bitter arguments over things that are not mutually exclusive. The examples are too numerous to list. It needs to stop, and it starts with having the courage to stop suffering the fools. At least that is my perspective. 

Warm regards,

Chuck Osborne, CFA
Managing Director