Letters #248/249: Jack McDonald and Mike Shanahan (2009)
Stanford Investing Professor and Capital Group President | Arbuckle Award Intro and Acceptance Speeches
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Jack McDonald was The Stanford Investors Professor in the Graduate School of Business at Stanford University, where he taught over 10,000 MBA and Executive Education students over 50 years, including Andreas Halvorsen, Tim Bliss, Jim Coulter, Bill Oberndorf, Tom Russo, Frank Quattrone, and many more.
*Special Request: If you’ve taken Jack’s class in the last 60 years and would be willing to share your experience in it, please send me an email (you can respond to this newsletter or email me at kevin@12mv2.com). I’m working on an essay on Jack’s methods + impact, and would love to speak (email) with you (and happy to do it confidentially/on background only)! (I’m happy to share the essay with you once it’s done—TBD if I will share it more widely or keep it as a private essay.)
Mike Shanahan was an investor and executive at Capital Group, where he started as an analyst, became the firm’s youngest-ever Director of Research, and then served as Portfolio Manager for The Investment Company of America and AMCAP mutual funds, as well as held leadership roles including President of The Capital Group, Chairman of Capital Research and Management Company, President of Capital Bank and Trust Company, Director of American Funds Distributors and Capital Strategy Research, and Chairman of the Capital Group Companies executive committee. In all, he spent 47 years at Capital. Prior to joining Capital, he started his career as a Navy cryptologic officer.
Today’s letter is two transcripts: 1) the transcript of Jack McDonald’s speech introducing Mike Shanahan for the Arbuckle Award, and 2) Mike’s speech accepting the Arbuckle Award.
In Jack’s speech, Jack starts by sharing his history with Mike and thanking the Stanford leadership, before reviewing three aspects of Mike’s experience, his career, and their friendship together to talk about his connections to Stanford, his service to others, and his investing career at Capital. He ends his speech by introducing Mike to make his.
In Mike’s speech, Mike first thanks the GSB Alumni Association, his family, and his friends and business associates. He then shares his story, starting with his time in the Navy, applying to business schools, arriving at Stanford, and then his time at Stanford, including researching how effective an enterprise can be, falling in love with business analysis, and joining Capital Group. He then shares two business insights, and cautions, that GSB gave him: 1) Use quantitative methods to develop insights, not to substitute for them, and 2) Pay attention to the details and don’t just blindly trust models—“Risk” is a four letter word. He ends by recognizing the faculty and staff and thanking them for the award, and his career.
This was a particularly fun set of speeches for several reasons. My favorite reason though, relates to the relationship between Jack and Mike. Jack was known as the Stanford Investments Professor, and taught over 10,000 students over 50 years at Stanford. Feedback from students ranging from the 60s to the 2010s all shared similar feedback: “Sure, Jack taught us the fundamentals of analyzing businesses, but what he really taught us, was how to be a good person.” And while Jack’s teaching method was to guide the students rather than explicitly give them answers, in this speech, Jack is explicitly sharing what he admires in a person—and not just any person, but a person he’s chosen to be a close personal, family, and business friend of, a person that he has seen up close in both personal and professional settings, for decades, a person that he admires.
[Transcript and any errors are mine. I’d especially appreciate if anybody knows the proper names of those thanked in Mike’s speech.]
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Transcript
Jack’s Intro Speech
Dean Joss, ladies and gentlemen, good evening. It is a great pleasure for me to introduce the Arbuckle Award honoree for 2009, R. Michael Shanahan. I must tell you that I've known Mike Shanahan--he's been a good friend of mine--for more than 50 years. We arrived here at Stanford on the same day, we were undergraduate friends together in engineering, and he's been a pal and a colleague for every one of those five decades. At the outset, both Mike and I would like to recognize the great job that Bob Joss has done as Dean over the last 10 years.
We--I think it's--we'd like to thank Dean Joss, a particular thanks to Senior Associate Dean David Kreps, for their for their wonderful leadership over this period of time. I think it's been a--for all of us who work here and who love this school, it's been a golden age for the school. And it's not to say that the current time is without challenges--it is--but we've been blessed to have them here. I think it's very significant that in the 10th year of Dean Joss's leadership, that we would give this honor, the Arbuckle Award, to an individual who, like Bob and Dave, embodies qualities of honesty and integrity, indeed humility, generosity of spirit, and a real love for the school as my friend Mike Shanahan does.
So what I'd like to do is I'd just very briefly like to review three aspects of Mike's experience, his career, and our friendship together, to talk a little bit about his Stanford connections, which Bob alluded to, his service to others, which he has been extremely generous in, and then his career at Capital Group--truly a remarkable organization that is represented by so many friends and former students here in this room tonight. We're most grateful to you for joining us.
First, Mike has a long relationship with Stanford. The university--Mike came to the campus as Bob said, in the fall of '56, as a EE student, electrical engineering here. I had the pleasure of taking classes with Mike at that time. As a sophomore, Mike was a two handicap golfer and made the varsity golf team that represented Stanford in the national championships. And I've been reflecting--I just thought I might ask you, as I often wonder--how many college varsity athletes who compete competitively at the national level here are able to compete at the same level 50 years later, in whatever sport they choose? And Mike, I ought to disclose to you, is still a two handicap golfer today. And so I'd say that with a smile and a kind of, Watch out for a scratch golfer who masquerades as a two and who is still as competitive as he was in 1958 on the golf team here at Stanford. Quite, quite remarkable. Mike returned after the service to the Business School here in the Fall of 1963, and as Bob said, graduated in 1965 with his MBA.
Second, I'd like to say a few words about Mike's service to others. After graduation, he served for three years in the US Navy--we're blessed to have a number of naval officers and veterans here in the room tonight. And Mike served as a regular Navy officer, which is usually restricted to graduates of the academies, or to a select few. I know most of us were reserve officers. But Mike was a regular officer, and he served on a number of kinds of ships, including a destroyer escort. Mike has been a trustee of Harvey Mudd College, a wonderful institution in Southern California. He has served as the Chairman of the Board of Trustees for eight years. He has been a key person in the Harvey Mudd College fundraising effort. And not too long ago, he made a wonderful gift of $25mn to Harvey Mudd. In terms of this--[audience claps].
Mike is, as many of the people in this room, and including John, who was of course our Chairman, and many others, has been a member of the Dean's Advisory Council. He has talked with students in my investment classes for many, many years, been very generous with his time with our students.
Most recently, just last fall--last fall quarter. Mike and I wrote a case together. Mike is always recommending to me great companies. And I remember a number of years ago, he said I've got a software company. It's only a couple hundred million dollars in market cap and I think it's got very high potential. So we wrote up the case and we taught it with the students--most of the students thought it might be a buy in investment class. That company is Oracle, which is now a $90bn market cap company. So Mike, I want you to keep choosing those little companies for us here. We appreciate that.
As you all know, and you've heard Bob speak so eloquently, the new MBA program, which we started in the fall of '07 is very important to all the members of the faculty and to the student body. We're all working very hard to make this a success. And I should tell you that Mike supported this program with a major gift to Stanford working with my good colleague Garth and others, to support the development of this program. And Mike, we very much appreciate that as well. Mike, and a lot of other people from Capital in the room were donors of the Jonathan V. Lovelace Chair to the Stanford Business School, an Endowed Chair honoring the founder of the Capital Group in the early 1930s. Also, Mike and others were donors to the Stanford Investor's Chair, which I'm honored to hold myself. And so they've been absolutely central in fundraising, both our alums and the great friends of the school who are alums of some of our sister schools as well.
Third, I wanted to say that Mike is one of the most successful investors, I think, in the Stanford Business School alumni body. He's among a very large group of outstanding investors--I just said hello to Reid Dennis and others who are here tonight. We're very proud of all of our alumni and alumnae who have have made the school so proud as investors and many of whom I've been honored to have in my classes. But I should tell you that in 1965, after he received his MBA from Stanford, Mike took a job with Capitol Research and Management Company as an analyst in the Los Angeles office. Capital at that time had less than $1bn under management--$1bn was not a small amount in 1965, but it was kind of medium size then, and the largest fund that they managed was ICA--the Investment Company of America, which is, as you know, is one of the oldest mutual funds in the United States. Mike was given the responsibility of covering steel and machinery companies, and in his first year as he made hundreds of calls on companies, I think he developed some of his great skills with people. He's so well in that. But by calling on managements and top management and getting to know them, in companies, just to name a few grand oldies that you all know: US Steel and Armco steel and Bethlehem Steel and Inland Steel, when we had more steel companies than perhaps we do today. And machinery companies as well.
Short time after that, Mike was an asked to add electronic companies to his coverage responsibilities as an analyst. And among those companies were some of the semiconductor pioneers in the 1960s such as Fairchild. And in calling on friends at Fairchild, he got to know Gordon Moore and Bob Noyce, who later, as you all know, founded Intel. Jerry Sanders, who I'll mention in a minute. Jim Martin, Don Valentine, our great friend at Sequoia, and others.
In 1968, Mike became a research director at Capital. And a short time after that he recruited Jimmy Martin, who was a salesman at Fairchild, to come to work for Capital as a technology analyst. And in those years, in the late 1960s, Mike and Jim started making venture capital investments as well as following their public companies. I should tell you--it's not very well known, but it's known to all the Capital Group people in the audience--that Capital, in its early years, the founder of Capital had been a venture capital investor to help support the firm that he founded as a mutual fund management company. And so the original Mr. Lovelace had provided the venture capital to start companies that you all will recognize, like the Walt Disney Company, Lockheed Aircraft, Capitol Records, which--they were the great venture backed startups of those days before there was a venture community like we have today. Mr. Lovelace had done that. So Mike was operating in that spirit. One of the first companies that Mike backed as a venture capitalist at Capital was AMD, Advanced Micro Devices.
And I think everyone today will have heard--among the great venture capital firms that are represented in this room--heard of Sequoia Capital. But I think it's interesting to note--it's not so well known that Sequoia Capital was incubated at the Capital Group by Mike and his colleagues. They hired Don Valentine, the great Don Valentine out of--who had been at Fairchild, was then out of National Semiconductor. And Don went on the Capital payroll. And so they started making venture capital investments together, and pretty soon, Sequoia Capital was taken on as the name and Don became the general partner and the great history of Sequoia has grown out of that. And of course, Mike has stayed very close to a lot of these companies. Mike was a director from the very early stage with AMD and served that company as a director for many years. And 30 years after the startup of Sequoia, within Capital, Don Valentine, our great friend and investor said, and I quote, Without Capital's introductions and guidance and help in pitching institutional investors, there would be no Sequoia Capital. And perhaps, no Cisco, no Yahoo, or hundreds of other companies that Sequoia has backed.
So Mike, we salute you, end of quote, for your part in all of that. Mike is such a modest gentleman, and he would say it was always the team, it was never Mike. But that's part of Mike's humility. I think in the next 35 years, Mike would spend 15 of those years as the leader of the Capital Guardian Trust Company, the institutional investment side now they call it the Global Institutional Group of Capital that, for many years, ran such an important part of Stanford's endowment. And those of endowments of many other foundations and institutions such as our own, and as well the pension funds of many companies. And that company, of course, still exists today, as you all know.
For the majority of the time, he has been a leader on the mutual fund side. He became, notably, and very significantly for all of us at Capital, the successor to John Lovelace as the leader within The Capital Group. Mike also followed John Lovelace as the chair of ICA, the Investment Company of America, our flagship mutual fund, which was founded in 1932, and served as the chairman of that, following Mr. Lovelace--and Mr. Lovelace's wonderful career of over 40 years at Capital. And Mike became Chair of the Executive Committee of the Capital Group companies.
The Capital Group, which is owned by Mike and many of the members of this room, is a private company which owns the institutional investment business, the mutual fund management business, the international business, and of course, all those offices that are located around the world. Capital has become one of the big three companies in the mutual fund management business in the United States under Mike and John's leadership, along with Fidelity and Vanguard, which of course you've all heard of as well. As of this evening, of the 25 largest equity mutual funds in the United States, 10 of them are managed by Mike and his colleagues. And I think there are, as you know, there are more than 10,000 mutual funds in the United States, but Capital, with just 29 or 30 mutual funds, has about a 15% share of the assets under management in the industry, in the United States, as one of the big three players. Since Mike joined, and he would once again say it was the team and--but it was certainly Mike's leadership was terribly important in all of this. Capital has grown 1000 fold in terms of assets under management--I'm not sure it's a number that we disclose or talk about very much, but it certainly is. If it was 900mn when he joined, it's probably closer to 900bn of assets under management today, which is pretty great for a company, private company, run by some some excellent friends.
Charley Ellis, who's a friend of many of the people in this room, wrote a wonderful book just a few years ago, four or five years ago, called Capital. Charley set out to pick three service organizations that he had enormous respect for--he picked Goldman Sachs, McKinsey and Company, and the Capital Group. And he started on the Capital Group. And instead of becoming a third of the book, it became a book on its own, and I commend it to you, but it's called Capital: The Story of Long-Term Investment Excellence. And I think it's--that book is, which was not written with Capital's invitation--it was written by Charley as a very independent and outstanding member of our industry, is a tribute to Mike, and to his predecessors, and all the people in this room who have built Capital up to be what it is.
It's been my privilege to observe all this through board service at Capital with Mike since 1975, so I can attest to the great respect in which Mike is held by all of his colleagues. And I'm very pleased to welcome so many of those of you who made the trip tonight from from Capital. Melody and I regard Mary and Mike Shanahan as two of our best friends. And we're delighted to have you here, Mary, as well this evening. So ladies and gentlemen, it's a great privilege and a pleasure for me to introduce to you this year's honoree: Mike Shanahan.
*Special Request: If you’ve taken Jack’s class in the last 50 years and would be willing to share your experience in it, please send me an email (you can respond to this newsletter or email me at kevin@12mv2.com). I’m working on an essay on Jack’s methods + impact, and would love to speak (email) with you! (I’m happy to share the essay with you once it’s done—TBD if I will share it more widely or keep it as a private essay.)
Mike’s Speech
I think after that very flattering introduction, I shall be mercifully brief. Dean Joss, Professor McDonald, Selection Committee of the Stanford Graduate School of Business Alumni Association, you have my sincere gratitude for selecting me for the honor of receiving the Association's 2009 Arbuckle Award, which recognizes excellence in the field of management leadership.
In reviewing the list of the other 38 Arbuckle award winners, I am doubly honored to be included in such a distinguished list of business leaders. Before I get started, I'd like to recognize some of the people that are here with me, especially I'd like to recognize my children: Kathleen, my daughter, a PhD from Stanford, her husband Bob and my granddaughter Elaine. My sons and their wife, Rob Shanahan and Julie, and Kevin and Julianne. Also with me, of course, is my wife, Mary, here at the table, her father, Dr. Owens, her brother Mike, and his wife, Amy. Additionally joining me tonight is my brother Tom, a Stanford graduate, his wife Robin, and their daughter Kelly who is a Stanford Junior. So, we have a lot of Stanford people.
As Jack mentioned, there are a number of my friends and business associates here tonight who have really made the career and made me look a hell of a lot better than I really am. So you Capital guys, thanks for being here. Especially one of my oldest friends who's semi-retired but here, [Vic Farakaney] and his wife Ann. I really appreciate Vic taking the time to come. So thanks, Vic.
As you may know, the class of 1965 was among the first to truly benefit from the faculty recruiting efforts, the revised curriculum, the intensive staff support, and the student recruiting efforts organized and led by the then Dean Arnie Arbuckle himself.
And I needed all the help he devised. As a Stanford freshman in 1956 with a Navy scholarship and an appointment as an officer in the regular Navy upon graduation, the one thing that mattered was that I graduate. After discovering my freshman year that I could probably do that with modest effort, I proceeded to invest the near minimum, and missed a tremendous opportunity.
Early in my Navy career, I discovered that many of my fellow junior officers had distinguished themselves more by what they had learned, and the effort that they expended, than by the name or the status of the college they came from. It didn't take me long to see my mistake.
In late 1962, several years later, because of Vietnam, and I was an operations officer and a crypto officer, I decoded a message from the Bureau of Naval Personnel suggesting that the naval officers like myself, who should have had the option to go to the reserves after three years were to be denied that option unless they went to a graduate school and were admitted and went, or a defense contractor.
So you guessed it--I applied to 10 business schools and 10 defense contractors. And I was--[definitely important]. Doubly lucky to get Stanford to admit me. I worked for three months for [Earl J. General]--it was really covering my bases, as you could guess, and decided that Stanford would be a better opportunity.
Thanks to an energetic and very involved faculty, the new curriculum, the educational focus was on business enterprises. The faculty's objectives were for us, the students, to achieve a in-depth understanding, not only the parts of a business, such as marketing or manufacturing or accounting, but also the integration of people, and how the people interact with each other and with the company to achieve its objectives.
In today's world, it sounds kind of funny to say that people matter in a company--in many cases, they are the asset. But in those days, they did things more by function, and the addition that Ernie had put in, to really consider how people work together and how they contribute, was a revelation, and not overwhelmingly popular, but overwhelmingly successful.
Spending two years contemplating how effective an enterprise could be, with appropriate objectives and when all the parts contribute to the whole, was a very intellectually and immensely satisfying thought process and endeavor. It was very productive for me in a career sense.
Without the GSB experience, I never would have considered employment at Capital Research, where the business is evaluating companies for possible investment, a process which also includes adjustments to how effective the enterprise is, how much is it worth, and what are the nature of the included risks?
The thought of joining a company where the analytic service was similar to what I was doing at the GSB had enormous appeal. And I liked the people very much. It was very intriguing. I received several offers to work for industrial companies--but in all candor, I chose Capital because it was the easiest one to leave. After all--Jack pointed out--my job was to go out and interview a bunch of companies and get to know their managers real well. And I figured if I was any good, one of them at least would be willing to hire me if it didn't work out at Capital. Fortunately, they weren't required, as I spent 44 years there.
Two other business insights, and cautions that GSB gave me have been really helpful.
The first relates to studies with quantitative methods Dean Arbuckle and the faculty were introducing then. While emphasizing the benefits of organizing your thoughts about relationships or mathematical models, they pointed out that some of the variables are difficult to quantify. And many desired statistics are not available, and hence not included. Many events are binary; they happen or they don't. Sometimes they're statistically predictable, and sometimes there's no known precedence. As one professor said, Use quantitative methods to develop insights, not to substitute for them. And that's held me in good stead for a long time. We would all be better off if Wall Street remembered the data and the risks they hadn't quantified instead of focusing on the models and data they did do. Recently, the financial engineers knew and quantified default risks associated with rising housing prices and mortgages and so forth, and each participant protected themselves through what was created as derivatives called credit default swaps. The system, however, couldn't protect itself. And eventually, the magnitude of the overnight collateral required to fund the expected risks caused the system to crash. And the failure is, and effects of that failure, are still unfolding. And we've had many discussions in the last few days, how that's gonna work out. As one insurance company told us, we know our models are not complete and there are other factors, but we haven't been hurt--yet, as it turned out.
A second insight I remember from the GSB, also related to business and numbers--our second year, we used to have business policy in the second year--we used to call it a capstone class. We were all assigned to write a paper to maximize a company's revenue. In our class, raised your hand, and when you got the assignment, and said, Wouldn't it be better to expand the assignment to say to define a business strategy which would optimize the return on equity? Because one was, after all, if you just look at the math, you just reduced the denominator, pay a big dividend--and not obviously anybody benefits, but those who get the dividend, but it's the way to make the number go high. We thought there was a better way to do it. They didn't like our suggestions very much, so the paper stayed the same. But we all learned a lot. And I don't think they had the same assignment the next year. Again, over the past five years, many business managers, especially in the financial business, but also others, would have benefited immensely, maybe even saved their companies, if they'd have paid attention to all the details, and not just trusted the models, and the aggregations, and the superficial, in this sense, models. Risk is, after all, a four letter word.
In conclusion, I want to thank again, all those concerned for this award, but also to recognize the faculty and the staff at the Stanford Graduate School of Business for their significant contribution to the business management progress in general, and to my career in Pacific. Thank you all.
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Wrap-up
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