On its 40th anniversary, Institutional Investor magazine highlighted the 40 most influential people in finance since the magazine’s founding. At the magazine’s request, Mike wrote an article explaining how he has tried to integrate the three main passions of his professional life – finance, education and medical research – to create value.
When I went off to college at Berkeley in 1964, I planned to major in math and science. But the Watts riot the following summer in my hometown of Los Angeles changed my view of the world and my choice of a major. I came to realize that civil rights wasn’t just about where you could sit on a bus; it also meant equal opportunity to pursue a dream, to own and build a business – the right to succeed (as well as the right to fail and try again). Many of the people in Watts felt excluded from this dream.
That got me thinking about what it takes to start a business and make it grow. I changed my major to business and began to develop a concept that would later be called the democratization of capital. It provides access to funding for small-to-medium-sized companies – the companies that create almost all employment – in much the same way that Wall Street had served the needs of the few hundred big “investment-grade” companies.
Even before going to Wharton and then joining a Wall Street firm in 1969, I’d developed a formula that says prosperity in any society depends on the leveraging effect of financial technology on the sum of human capital, social capital and real assets. Real assets are typical balance sheet items: cash, receivables land, buildings, etc. Social capital includes educational, cultural, religious and medical institutions and such intangibles as the rule of law and enforceable property rights. Human capital – the largest, most-important asset – is the ability and productivity of people. As for financial technology, much of it would be developed and expanded over the next two decades: things like collateralized loan and bond obligations, securitized mortgages and credit cards, and derivatives.
The deployment of these financial innovations in the U.S. over the last quarter of the 20th century created unprecedented prosperity, not to mention 62 million new jobs in small and medium-sized businesses. These innovations helped America address such needs as housing and transportation infrastructure. Today they can be part of the solution for environmental and energy challenges. They can even create incentives for crucial medical research. As financial technology is deployed around the world, it has the potential to reduce poverty and the kinds of tensions that breed terrorism. But in order to create prosperity, financial technology has to act on the other factors in the equation; and none of these is more important than human capital.
In financing growing companies, we always looked for human value that didn’t appear on the balance sheet – the quality of management, especially its entrepreneurial drive. I saw that quality in executives like Bill McGowan of MCI, Bob Toll of Toll Brothers Homebuilders, cell-phone pioneer Craig McCaw and hundreds of others including Steve Wynn, Reg Lewis, Ted Turner, Steve Ross, Rupert Murdoch and John Malone. These talented leaders had both passion and vision. Once they were given access to capital, they built businesses that became amazing engines of job creation and wealth.
Taking this principle to the national level, there are only three ways for a country to build human capital: increase knowledge and skills, improve the quality and length of life so people are more productive, or import people with specific abilities. Some countries have done this better than others. Consider the two former British colonies of Jamaica and Singapore. Back when I was in school in 1960, their economies were similar with a gross domestic product of about $1,900 per person (in current dollars). But they chose different paths to development. Jamaica centered its economy on agriculture and tourism and today has a per-capita GDP of about $3,900. Singapore, which developed its human and social capital and created a knowledge infrastructure, is a modern technology powerhouse with a GDP of more than $30,000 per person.
Human capital is just as important in the non-profit sector as it is to businesses and nations. In the four decades of philanthropy that have paralleled my business career, I’ve found that the same principles apply whether you’re providing access to capital to grow a business, creating a new paradigm for medical research, or pioneering innovative approaches to education: Empower the most talented people in each field and encourage them to pursue their passions. An example from our initiatives in education is the recognition of America’s most outstanding educators with the “Oscars of Teaching” and with financial incentives. In medical research, one of our most successful efforts has searched out brilliant young physician-scientists and provided them with the wherewithal to stay in their laboratories despite the financial pressures of raising families and paying mortgages. We’ve also created an environment that has brought people in disparate organizations and disciplines together – industry, academic and government researchers, for example – to accelerate the process of discovery.
The goal in every case is to create value whether measured in lives saved, students inspired or jobs created. It always involves more than just writing checks. It takes an entrepreneurial approach that seeks out best practices and empowers people to change the world.
