Fall 2005: Finance

The stereotypical view of the Finance industry as a cut-and-dried by-the-numbers discipline couldn’t be farther from the truth.

In this issue, we reveal how professionals in the financial services, real estate and insurance industries are providing creative solutions to problems and opportunities that they encounter. We even take the liberty of having a little fun with the language of finance, ala Grimm’s fairy tales.

As usual, we aren’t afraid to bring you some controversy on our pages. We’ve given the U.S. Treasury Secretary and the president of the AARP equal time to present their very different viewpoints on a topic that has been hotly debated in the national media, the Congress and around water coolers all over the United States: Social Security. Go online to the magazine’s Web site to vote for the side of the issue on which you stand and voice your opinions.

I’m happy to report to those of you with a Baylor BBA that your degree is now more valuable than ever, regardless of what year you received it. This is because the U.S. News & World Report’s new rankings for undergraduate colleges were just released and the Hankamer School of Business has climbed in the rankings. We are now ranked 12th among business schools without a doctorate program, 24th among business schools at private universities and 66th among all business schools. Compared to our ranking in 77th place last year, this is a great achievement.

Enjoy reading this issue of the Baylor Business Review.

Best regards,

Dean Terry S. Maness

Baylor Business Review, Fall 2005

by Melanie Merrifield

Capital solutions to today’s pressing business issues.

Back in the 1800’s Ralph Waldo Emerson observed, “A creative economy is the fuel of magnificence.” He could hardly have imagined the dozens of creative ways modern finance and risk management would evolve. Still, his words are a prophetic description of the myriad ways finance powers American business and today’s global economy.

From the birth of the index fund, to the creation of specialty business brokerages, catastrophe bonds, and hedge funds developed to serve the very rich, finance proves time and again to be a deft chameleon, adapting gracefully to solve business problems with natural ease.

The last thirty years have witnessed the birth of startling innovations and no small dose of financial wizardry. Sadly, the outcome hasn’t always been as magnificent as Emerson might have hoped.

Think Creative Solutions, Not Creative Accounting

Sarbanes-Oxley and the mutual fund controversy of 2003 are sharp reminders that while in skilled, honorable hands, finance can be applied in fresh ways to solve problems, there remains a distinction between financial innovation and “creative accounting.”

Problem-solving finance that fuels true magnificence first and foremost must serve the needs of investors without resorting to misrepresentation or distorting performance. Its delicate balance of risk and reward must further the goals of those with capital at stake, while affording managers a level of profit as well.

It’s a tall order. Yet not surprisingly, Hankamer graduates and friends number among the creative innovators proving up to the challenge in corporate and institutional finance, insurance and risk management and mergers and acquisitions.

Problem: Realizing Superior Returns With Palatable Risk for the Ultra-Wealthy and Institutional Investors

Solution: Liongate Capital Management’s Multi-Strategy Fund of Hedge Funds

Innovator: Jeff Holland, Fund Founder, (Baylor University, 1996), summa cum laude finance and accounting graduate, C.P.A., Master’s studies in finance at the London Business School.

Traditionally, hedge funds have served the unique investment needs of high net worth, individuals, typically with savings of $1 million or more. The first one was started back on the heels of the 1929 stock market crash.

They’re instruments distinguished by strong returns, performance-based management fees, and often a personal investment by the manager that ensures his interests mirror those of his clients. The funds utilize a variety of instruments, not equities alone, and are not constrained against investing in foreign markets.

Assets Under Management On The Rise

Since about 2002, hedge funds have become viewed increasingly as mainstream instruments and have seen tremendous investor inflows, with the number of active funds increasing to an estimated 8,000. Assets under management are estimated to have swelled from more than $500 Billion in assets two or three years ago to over $1 Trillion today.

“Most of this growth came on the back of the tech crash in the equity markets,” offers Baylor Graduate Jeff Holland, who with Partner Randall Dillard, founded London-based Liongate Capital Management.

“Investors who lost money in equities realized things weren’t always going to go up and there was a lot of risk in the equity market. Many experienced sleepless nights during the 3-year slump in the equity markets. A lot of investors lost years of savings. Even the Baylor endowment lost significant value in those years. That’s a problem hedge funds can help solve,” Holland observes.

“At that point both high net worth investors and institutions became interested in hedging strategies as a way to protect themselves from the volatility they had experienced in equities in 2001 and 2002.”

A Paradigm Shift In Acceptance

Many consider the wider acceptance of hedge funds a paradigm shift in investing. Holland concurs. “Perhaps fifty years in the future, people will look back and say ‘Gosh, can you believe people used to buy stocks and not hedge their downside risk. It was so crude.’”

Liongate, which manages $250 Million for investors, operates a ‘fund of hedge funds’, an approach that is not unusual among hedge funds. Holland explains: “The general investment idea is that we’ll perform due diligence on hedge funds and then put them into a basket so others can come and invest. By selecting 25-35 hedge funds, each of which is pursuing a distinct investment strategy, we achieve a stable, diversified return.”

Problem: Mid-Sized Oil Field Service Companies Underserved by Wall Street

Solution: Rockbrook Capital, LLP

Innovator: John W. Howton, Founder and Partner, (Baylor University, 1997, Finance and Accounting Major.)

For a man whose career includes stints in the Investment Banking Division of Bear Sterns Natural Resources Group and the Principal Investment Group of Enron North America, a firm specializing in mergers and acquisitions might seem a natural next step.

But the firm John Howton founded has a surprising twist. Rather than courting behemoth transactions, it caters to small to mid-sized oil field service companies.

“This is a market that’s been historically neglected by the large Wall Street firms,” says Howton. “We saw an opportunity to meet their unique needs and maximize the value of their businesses by providing strategic M&A advice by representing them through the process of selling their businesses or helping them to achieve a recapitalization – whether that means raising debt or equity capital.

An Underserved Market With Unique Needs

“Major players like Bear Stearns aren’t focused on this size company. In their mergers and acquisitions divisions, you have a group of investment bankers that spend their time calling on large public companies,” Howton explains. “They’re simply not interested in or well suited to execute $30 million size deals. This left a noticeable gap in the smaller size market, and presented a problem for owners seeking to maximize value through the sale of their companies.”

Rockbrook Capital specializes on the sell side of mergers and acquisitions. Firm principals advise and represent clients throughout the process, so owners can achieve liquidity and maximize value.

Fueling Financial Goals of Owners

“In some cases an owner, for whatever reason, will never go public and has no successor such as a family member or other trusted leader in the wings to assume management responsibility,” notes Howton. “We help him achieve his financial goals by merging or selling to a larger company. Many times this begins by clearly explaining how the firm will be viewed by acquirers and providing an accurate measure of the company’s worth.”

Once a company is valued, Rockbrook begins the delicate process of approaching prospective acquirers at the CEO level and presenting the company, with clearly understandable financial information, as a potential target for acquisition.

“Particularly in the oil service business, you see a lot of self-made men. They know a great deal about the energy business, and about running a strong company,” Howton reflects. “They may be millionaires many times over. But when it comes time to retire, they’re not in a position where they can sell or continue the company. Our efforts facilitate and can significantly influence the sale or recapitalization of these mid-sized companies. That’s how we solve their problems.”

Problem: Traditional insurance markets provide relatively limited financial protection from natural and man-made catastrophes

Solution: Catastrophe bonds (or “Cat” bonds)

Academic Expert: James R. Garven, Ph.D., Professor of Finance and Insurance, Frank S. Groner Memorial Chair of Finance and R.M.I. Program Director – Finance, Insurance and Real Estate

The very concept of insurance is based on risk. So it’s no surprise that important innovations in risk management and finance often come from the insurance industry. One such innovation that is growing in popularity is the so-called catastrophe bond, or “cat bond.”

“Common sense as well as theory suggests that proper diversification of any risk involving a remote possibility of enormous loss makes such a risk more manageable,” explains Dr. James R. Garven, Baylor Professor of Finance and Insurance. Traditionally, catastrophe, or ‘cat’ risk was transferred and shared through the insurance and reinsurance markets.

However, in spite of the dramatic growth in the magnitude of human and economic losses from natural and man-made catastrophes in recent years, it is surprising how little cat risk transfer actually occurs. “Property owners often fail to insure catastrophe risk, and even when they purchase insurance, their insurers tend to retain most of this risk rather than distribute it more broadly through the reinsurance market. The reason why cat reinsurance is so limited is due to inadequate global capacity and correspondingly high reinsurance premiums,” notes Garven.

Cat bonds came into existence due to this lack of capacity in the reinsurance market. Although they have been used primarily as an alternative to cat reinsurance, there are examples of corporations and other non-insurance entities issuing cat bonds. “For instance, during the summer of 1999, Tokyo Disneyland issued cat bonds because management found at the time that it was cheaper to have the capital markets insure its earthquake exposure than the insurance markets,” explains Garven. “More recently, the Fédération Internationale de Football Association (FIFA) issued a $260 million cat bond to protect itself against a terrorism-related cancellation of the 2006 World Cup in Germany.”

Cat bonds represent a form of insurance securitization in which risk is transferred to investors rather than insurers or reinsurers. Typically, an insurer or reinsurer will issue a cat bond to investors such as life insurers, hedge funds and pension funds. The bonds are structured similarly to traditional bonds, with an important exception: if a pre-specified event such as a terrorist attack or hurricane occurs prior to the maturity of the bonds, then investors risk losing accrued interest and/or the principal value of the bonds.

Although the cat bond market is still relatively small compared with the traditional insurance and reinsurance market, it is already having a particularly important effect on reinsurers. Since the cat bond market provides insureds with a credible alternative to traditional reinsurance, the cat bond market has forced reinsurers to become more competitive in their pricing and underwriting practices.

“Furthermore, investors value cat bonds in part because returns on these securities tend not to be very highly correlated with returns on other asset classes such as stocks, conventional bonds, commodities and real estate,” Garven offers.

Given the benefits that cat bonds offer both insureds and investors, the market for cat bonds is expected to continue to grow and exert an important check and balance upon pricing and underwriting practices in conventional insurance and reinsurance markets. “Ironically, the growth of the cat bond market is in turn fueling the growth prospects of the reinsurance industry, as a number of hedge funds that were early cat bond investors are now starting to launch their own reinsurance firms,” says Garven.

Problem: Mutual Fund Managers Profiting At Small Investor’s Expense

Solution: Low-expense Index Funds and Stewardship, Not Salesmanship

Innovator: Financial John C. Bogle, founder and former CEO of the Vanguard mutual funds.

If the small investor has a champion, his name is John Bogle. The President of the Bogle Financial Markets Research Center, and Former Chairman of The Vanguard Group, is a prolific author, life-long student of mutual funds, and a staunch believer that high investment costs exact an unforgiveable toll on investor returns.

It’s a theme Mr. Bogle has been proclaiming since the early 1970’s, even before he founded (read invented) the first index mutual fund, the Vanguard 500. He’s spent a lifetime expounding the virtues of maximize returns through low fees, strong performance and deferring taxes on principal invested. Even his senior undergraduate thesis at Princeton was entitled “The Economic Role of the Investment Company.”

According to Bogle, and it might seem to anyone with a lick of common sense, exorbitant intermediation expenses are more than just bad investing: they’re an ethical disservice to investors. These costs take a serious bite out of capital invested. And, compounded over time, represent a frightening loss for investors. To help correct this injustice, Bogle believes much stronger oversight is needed.

“It is time to abandon the managers’ capitalism that has shaken our society’s belief in the fairness of the system and return to the owners’ capitalism that built our nation,” Bogle challenges. “We need to build independent boards of directors who will provide prudent stewardship.

“We need controlling stockholders of corporate America – the mutual and pension funds – to act responsibly and solely in the interest of investors. . . .We need to form an independent federal commission to evaluate our new agency society, with a view toward restoring fiduciary duty and trust as its objective.”

“Mutual Funds Have Moved From Stewardship to Salesmanship.”

Follow Bogle’s eye-opening estimates of intermediation costs associated with the today’s investment system, and his position becomes easily understood.

In a February, 2005 speech sardonically titled “The Relentless Rules of Humble Arithmetic” Bogle estimates: “During 2004, revenues of investment bankers and brokers came to an estimated $220 billion; direct mutual fund costs came to about $70 billion; pension management fees to $15 billion; annuity commissions to some $15 billion; hedge fund fees to about $25 billion; fees paid to personal financial advisers, maybe another $5 billion. Even without including the investment services provided by banks and insurance companies, these financial intermediation costs came to approximately $350 billion, all directly deducted from the returns that the financial markets generated for investors before those croupiers’ costs were deducted.”

Most remarkably, these fees all detract from the return realized by investors, thus supporting another “Bogle’ism: ‘In investing, all of us together get precisely what we don’t pay for’.”

In the final analysis, expenses, not just gross returns, play a significant role in the investor’s actual return on investment. That’s one of the “relentless rules of humble arithmetic.” And unless these expenses are considered – and curtailed – investors will continue to pocket far less than they deserve.

Baylor Business Review, Fall 2005

What do Gnomes, Elephants, Gunslingers and Obi-Wan Have to Do with the World of Finance?

by Nancy Godson

Sleeping Beauty went about her daily business, serenely unaware that lurking within the busy market was the stealthy Black Knight who, frustrated with his unproductive foray into bottom fishing, was intently tracking her every move.

Suddenly, just as the sly raider had gathered the necessary resources to stage a hostile takeover of Beauty, the White Knight (a welcome suitor intent on protecting her assets from the threat of possession), appeared on the scene. Beauty watched uneasily as the two warring knights ignored the speculative whispers coursing throughout the hectic room and focused their attention solely upon battling one another.

It was then, while everyone was distracted, that a third knight appeared—the Gray Knight, who swiftly seized the appealing Sleeping Beauty (fresh out of shark repellent, unfortunately) in a dawn raid, surprising them all.

The preceding may read like a bad romance novel, but persons of finance will recognize it as the language of corporate mergers and acquisitions.

“More than most disciplines, the world of finance operates using a core of colorful and playful language,” says Allen Seward, Ph.D., an associate professor of Finance and Insurance at Baylor. “By ‘colorful,’ I mean that we take words or phrases recognized in a specific context and attach an entirely different, yet equally logical, meaning to them.”

Who knew that financial analysts, bankers, stockbrokers, pension planners and insurance adjusters were such whimsical folk?

For example, a raider (one who buys controlling interest of a company’s stock, then installs new management) stages a dawn raidby gaining substantial shares of a Sleeping Beauty (a potential target company with appealing assets that has not been approached by an acquirer) without the company realizing it. A company has shark repellent when its charter is amended to protect the company against such surprise takeovers.

An investor is bottom fishing when he or she buys a falling or low-priced stock in the hope that it will experience a dramatic rebound and, consequently, yield a healthy profit. Martha Stewart’s Omnimedia is an example of a stock which suffered severe losses at the time of Stewart’s arrest and trial, but rebounded significantly during her imprisonment. The financial lesson? If a favorite stock is down, it may be time to consider purchasing additional shares.

“Financial language is as creative as the discipline itself,” says Dr. Seward. “Our terminology conveys the imagination required to address the financial challenges of daily life.”

A prime example of how financial experts implement creative problem solving is CATs (no, not Andrew Lloyd Webber’s long-running Broadway musical). Technically, CATS is an acronym for Certificate of Accrual on Treasury Securities—a zero coupon treasury security. The industry considers the stylized version with the lower-case ‘s’ to be cuter, however.

“CATs were developed in 1996 as a financial instrument to save USAA Insurance Company from a bankruptcy potential that became evident after Hurricane Andrew slammed into south Florida, says Dr. Seward.

“The insurance industry’s estimated capacity at the time was $50 billion,” he said. “Had Andrew advanced just 40 miles north to Miami, the insured losses would have exceeded $50 billion and USAA would have been bankrupted, along with most companies in the state.”

Rather than withdraw from the market, USAA sought a creative solution to future catastrophic claims.

“CATs are higher yielding, short-term corporate bonds capable of pouring an additional $400 million into USAA in the event of an insured, major catastrophe,” explains Dr. Seward. “It’s a playful name for an extremely sophisticated solution to a serious financial situation.”

The financial industry is filled with a variety of metaphors that help lend familiarity to unfamiliar, complex concepts. At the same time, some linguists might argue that by its very quirkiness financial terminology is designed to discern the true insider from au poseurs.

For instance, ankle biters may describe your neighbor’s rowdy children, but in the world of finance it is a stock issued with a market capitalization of $500 million. If you knew that, you are probably an insider.

To be fair, many financial catchphrases are familiar. Most laypersons understand the concept of a hostile takeover or, if given the choice between golden handcuffs or a golden parachute, grab the parachute and jump.

We know that a cafeteria plan has nothing to do with what you’re eating for lunch, and that a turkey isn’t just a loser on holidays.

Other phrases, however, can be downright obtuse.

If the phrase death play is ever mentioned in regard to the company you happen to manage, see your doctor immediately.

A bear spread does not necessarily describe Baylor’s athletic points system; however, it is a strategy geared to profit from an opponent’s fall.

A Fill-or-Kill order comes with ready-made cement shoes. If a broker is unable to fill the transaction immediately, then fuhgedaboutit.

Tender offers may or may not lead to a happy marriage, and death spiral convertibles rarely pass inspection—financial or otherwise.

Some corporate entities are inspired to create a financial language all their own—or cavalierly adopt an existing one. Not too long ago in a galaxy far, far away resided the fallen energy company Enron, which freely (and without the permission of LucasFilm, Ltd.) attached Star Wars-related names to several of its financial vehicles. Remember Obi-1 Holdings LLC and the mysterious Chewco?

But let us avoid the Dark Side.

According to Dr. Seward, financial language is also quite specific to one’s particular area of expertise. In other words, an investment expert may not necessarily understand the quirky vocabulary of a pension planner, even though they both operate under the umbrella of financial services.

“The field of mergers and acquisitions uses fairy-tale imagery and mythological terms to define its processes,” says Dr. Seward. “Whereas those working in investments and pensions more often use gangster terminology and animal references.”

Enter the castrated ram, or, in proper zoological terms, a wether. The wether serves the important role of walking at the head of a shepherd’s flock with a bell around its neck to constantly signal its position to the shepherd.

It stands to reason then, that a market bellwether is a select financial security used as a signal to indicate that the market may be changing direction.

And that should make cents in any language.

 

Baylor Business Review, Fall 2005

by Eric Krell

The gold watch often symbolizes the retirement that employees enjoyed in the past. The symbol now carries a disconcerting implication: today’s employees can no longer expect the same security that characterized their predecessors’ golden years.

There is little doubt that the gold watch no longer suffices as a retirement symbol, but those who understand the forces bearing down on U.S. retirement would argue that the representation never really worked as a symbol. It is far too simple to capture the multifaceted, interlocking, political and ever-shifting dynamics of retirement funding, which typically relies on a mix of pensions, personal savings and Social Security.

That complexity is causing problems: a reduction in pension payments promised to retirees of  a growing number of companies, soaring healthcare costs, and serious concerns about the solvency of the federal pension insurance fund and the future of the Social Security system. Those problems have sparked some alarming headlines (“The Looming Retirement Disaster,” “Pension Tension,” “How Retirees Blow Their Nest Eggs”).

But the forecast for U.S. retirement funding is not all gloom and doom. “There are many things that are going well with retirement plans,” points out Baylor University Professor of Finance and Insurance Allen Seward. “As a nation we’re wealthier than we’ve ever been. More people are retiring at a comfortable standard of living than has ever been the case. And more people are using retirement plans to build up wealth for future generations.” Like most other retirement and pension experts, Seward also notes that broad problems require attention.

“Given the way we’ve structured things over in the past 40 years, to continue to do what we’ve been doing will cost a lot more than it has in the past,” says Sylvester Schieber, director of U.S. benefits consulting for Watson Wyatt Worldwide and the co-author of “The Economic Implications of Aging Societies: The Cost of Living Happily Every After” (Cambridge University Press, 2005). “That represents the best circumstances of continuing to do what we’ve been doing.”

A more troubling scenario is already playing out for retirees of U.S. Air and other bankrupt companies who are receiving lower pension payments than they expected to based on their former companies’ agreements. These sorts of problems have sparked contentious debates about the severity of current retirement challenges and potential remedies.

Despite these differences of opinion, there is agreement that major changes are necessary to solve some formidable challenges.

Traditional Plans on Ice?

Traditional pensions are referred to as defined benefit plans. They use a mathematical formula, one based on length of tenure, annual salary levels and related factors, to determine how much a company will pay retirees each month in retirement until death.

Defined benefit plans have been giving way to defined contribution plans, under which a company gives employees a set amount of money each paycheck. The employees typically allocate that money among mutual funds and other investment options selected by the organization. Highly popular 401(k) plans are frequently lumped in with defined contribution plans. Through 401(k)s, employees can select to contribute portions of their own paychecks, often pre-tax dollars, to investment vehicles selected by the company, which typically (but not always) matches a portion of the employees contribution.

In the past five years a growing number of companies have terminated or frozen their defined benefit pension plans. When companies do so, they typically replace the traditional pensions with defined contribution plans – and they are obligated to fulfill their existing defined benefit commitments to current employees, but are given some latitude in exactly how they do so.

The shift in pension plan preference has several causes. First, many employees expressed a preference for defined contribution plans, and their companies listened. The robust bull market of the 1990s fattened up many 401(k) balances, which spurred demand. Second, macroeconomic factors have in many ways de-valued career longevity and employee loyalty, qualities that defined contribution pension plans were designed to encourage and reward.

“Traditional manufacturing firms were dependent on workers who cultivated over time a deep knowledge of a production facility’s processes,” Schieber explains. “The companies needed to hire workers for a long time and structure benefits in a way that rewarded longevity and that did not reward, or even penalized, employees who do not come and stay.” As the U.S. has evolved toward a more services-based economy, much of the need for long-tenured employees has subsided. Defined contribution plans generally are much better suited to employees who work for different companies throughout their careers.

Regulatory factors represent a third factor that has nudged many companies away from defined benefit to defined contribution plans. In fact, a law passed 31 years ago has caused a stir on Capitol Hill and in corporate executive offices this year.

The Rising Price of Pension Insurance

In 1974, the Employee Retirement Income Security Act was signed into law. The sweeping legislation was designed, imperfectly it is now evident, to provide insurance for defined benefit pension plans in the private sector. To fulfill that role and to enforce other aspects of the new law, the legislation established the Pension Benefits Guaranty Corporation (PBGC).

Companies with defined benefit plans were required to pay insurance premiums to the PBGC of $1 per employee per year. The growing fund is used to fulfill pension payments to retirees of companies that filed for bankruptcy or cannot otherwise meet their responsibilities. The PBGC insures pension benefits worth roughly $2 trillion for some 44 million pension plan participants. As of January of this year, the premium has risen to $19 per employee per year.

However, the PBGC does not necessarily cover 100 percent of the promised payments. Most United Airlines retirees, for example, can expect to receive, on average, about 80 percent of their accrued benefits through the PBGC; some employees, as PBGC Executive Director Bradley Belt recently told a Senate committee in June, may see their promised pension benefits reduced by more than 50 percent.

But premium increases have not kept pace with the demand. The PBCG reported a $23.3 billion deficit in its insurance program for the past fiscal year. The organization has about $40 billion in assets, but more than $60 billion in liabilities. As a result, it “will be unable to meet its long-term commitments without additional revenues beyond those currently mandated by law,” according to Belt.

This represents a major concern for many retirees, current employees, federal legislators and corporate executives. A June survey by Financial Executives International (FEI) found that CFOs were more pessimistic about the U.S. economy than they had been in more than 12 months. The finance executive who responded to the survey cited concerns about the PBGC’s future solvency as one of their major concerns. Further, if PBGC premiums rose high enough, a third of those CFOs whose companies provide defined benefit plans indicated that they would consider a reduction in benefits or an outright termination of the program. The majority of CFOs also indicated that they believe a taxpayer bailout, which would require a new law, is the most likely outcome of the PBGC’s problems.

A key component of the draft legislation to reform pension rules working its way through U.S. Congress this summer was a sizeable hike in pension premiums for all companies with defined benefit plans – and not just those whose plans are dangerously under-funded (many companies have managed their defined benefit pension funds perfectly well).

That sort of fix does address the fundamental flaw of defined benefit pension funding rules under ERISA, which is that companies are allowed to manage their funds on a significantly under-funded basis. “Companies with high-risk funds have had no incentive to become fully funded or to avoid risks,” notes Seward.

In 2004, all of the defined benefit pension funds in the U.S. were under-funded by a combined $450 billion. About one-quarter of that shortfall exists at financially weak companies, according to the PBGC. Not all pension funds need to be 100 percent funded every year (the cyclical nature of equity markets and other investments make that impossible), but most should be close. That has not been the case.

“This has nothing to do with financial market shifts,” Schieber asserts. “The recent shifts simply made it worse and brought it to our attention. Many [defined benefit plans] have been chronically under-funded for years.”

Social Security: Pay Now or Pay Later

As Congress has wrestled with the ways to address the PBGC’s shortcomings, the national debate over two other retirement-related issues, the soaring cost of health care and Social Security management, seemed to subside.

In truth, both issues continue to simmer and will reach a boiling point within the next decade. Schieber ticks off a short list when asked why these issue will not go away: the shift away from traditional pension, the need for Social Security reform and the demise of retiree health insurance for people who are not eligible for Medicare. He also points out that American retirement has changed in the past 40 years. In the 1960s, the typical worker retired at about 65. Today, the same worker retires at 62. Americans have added three to four years to their average life expectancy in that same time. We’re also entering the workforce later than we did 40 years ago, thanks to that extra semester in college.

As a result, Americans are trying to finance a retirement period that is about six years longer from a career whose length has shrunk. “The arithmetic,” Schieber adds, “just doesn’t balance out after a while.”

Nowhere is that imbalance more noticeable than in the Social Security fund. But there are solutions.

“One of the things you can do to make Social Security completely solvent instantly is to cut benefits back to 95 percent for current and projected levels,” Seward explains. “A 5 percent reduction in benefits puts the Social Security system is back in balance.”

He admits that is more drastic than the small figure might sound, particularly for retirees who live entirely off of their Social Security checks, without the benefit of pensions or personal savings. Yet, that solution is still much less severe than the recent adjustments to similar programs in Germany and Japan, which are each about 10 years to 25 years ahead of the U.S. in dealing with the effects of a baby boom generation. In both countries, benefits were reduced, across the board, by about 15 percent.

“Social Security is not going to go away,” notes Seward. “It is going to exist … The question is at what level of generosity will the benefits exist in the future?”

The longer the country takes to respond to that question, the more disconcerting the answer is likely to be – and the clock is ticking…

Baylor Business Review, Fall 2005

by Lyndon Olson

People who try to live their lives by a book of rigid rules may find pages missing when crucial events come up. Unexpected occurrences happen. Plans go awry. Life can be a benevolent teacher at times and a harsh taskmaster at others.

People who pay attention to life’s lessons along their personal journeys derive great benefits. The lessons I’ve learned have served me well and I list some of them below.

Work that appeals to your sense of curiosity and desire to serve makes you grow. Scientists who are involved in discovery know this as a matter of course. I began learning the lesson as a state representative in the Texas Legislature and later, when I served on the Texas State Board of Insurance. I went to the House of Representative soon after finishing at Baylor and stayed there until I was about 30, then went to the insurance commission, where I served as chairman and member. There I spent eight years under three governors — Dolph Briscoe, Mark White, and Bill Clements two separate times.

During that time I saw a great opportunity to grow and I learned about making policy that fits public needs. But when I reached the point that I’d stopped growing, I knew I must do something else. It’s important to understand what makes you feel enriched and nourished and challenged, and to be willing to opt for the sometimes difficult changes necessary to keep growing personally and professionally.

When I left Austin, I knew I would not return to public life, if ever, until I gained the financial freedom to make the decisions I needed to for my family and myself. I decided that my destinations were more time with my family, financial security, and travel. So I made the necessary break. People often will advise you, “Don’t look back.” I think we all must look back to see what we did well and what we need to work on. This is what experience is all about.

Stay connected to and involved in the work you do. After spending eight fascinating years as chairman and member of the insurance board, I was ready to tackle a new challenge and I knew more about my own strengths and interests. The work of that commission taught me about the fundamentals and complexities of the international insurance and reinsurance markets. Then Clifton Robinson of Waco asked me to be the CEO of his company. This gave me the opportunity to lead and govern and make money in a dynamic business. It was a medium-sized company, small enough so that the chief executive officer could be really involved in the day-to-day workings.

Many others who have excelled in the business world have learned well the lesson of staying connected. They’ve discovered that detachment not only breeds boredom and ignorance but inefficiency and chaos. Ray Kroc, McDonald’s chief, used to cook fries, order supplies and clean his restaurants. Later in life, he’d surprise workers in his restaurants with impromptu visits just to see how they were operating. Being an involved leader teaches you what it takes to do a job and it’s something you are unlikely to forget.

In addition to learning the business, staying connected educated me about people and their needs.

Use all of your experience and ability and see how far it takes you. No one uses everything every day, but those of us fortunate enough to have a variety of experiences must exercise our knowledge as regularly as we exercise our muscles. We forget what we don’t use, and that part of us atrophies.

I was president of the National Association of Insurance Commissioners during the 1980s, and participated in numerous negotiations for trade agreements and regulatory matters as well as drafting of treaties, and I took part in the resolving of major insurance insolvencies. So the next step I took seemed logical. I moved into the CEO position of a large national insurance company.

With this company I participated in a lot of facets of the insurance business on a bigger scale. I ended up staying in Waco but working all over the United States. I commuted often to New York as we made acquisitions. I spent eight rich years doing this work on Wall Street, in Georgia, Texas, Illinois and Canada, and soon discovered that the work would reward me for years to come.

I realized some of those rewards when President Clinton appointed me as the United States ambassador to Sweden. This position was a culmination of all the other work I had done in my life. The role taught me about the importance of diplomacy on an international scale. I also expanded my knowledge of politics, business, and interpreting and enforcing laws. I found great blessing in the knowledge that Sweden is the country from which my grandfather emigrated years ago.

Remember life’s most basic lessons. Some of these we glean from our parents and other elders. Some we learn from what happens to us along our personal journey. Early on, my parents taught my brother Charles and me the importance of being respectful and of caring about those who are less fortunate. A guiding principle in my family was that determination, spirit, courage and hopefulness all lead to a sense of personal responsibility. My father, an attorney who has been compared to the character of Atticus Finch (To Kill a Mockingbird) because of his beliefs about the law and justice, required his children to have high expectations of themselves. Out of that demand, our strengths evolved.

Broken down to its most basic form, treating others with respect and having high expectations for self make getting along with other people a simpler task. I enjoy being around all kinds of people, from the average person on the street to the exotic to the intelligent.

I have learned that when working with diverse groups of people to accomplish an end, whether for creating public policy, making money or running a corporation, you should care about those who are less fortunate. I am not referring only to economic fortune, but to physical and spiritual fortune, too. My parents taught me the first chapters of this lesson, but people I have met along the way have reinforced it and broadened it.

Cherish your roots. For the 58 years of my life I’ve chosen to call Waco my home. I’ve learned that home is where the important people and things are. My family is in Waco. The people who supported me my whole life, who encouraged me and nurtured me and stayed next to me when I stumbled, are here. I have lots of friends in the state and around the country, and the world for that matter, but Waco, Texas, is my home because the blessings of my life began in this community. So it’s natural that it’s been my choice and my wife’s choice to live here.

I like Waco’s native flavor so much that I asked Dan Henderson of Uncle Dan’s restaurant to come to Sweden and feed July Fourth revelers at the embassy two times, in 1998 and 2001. He did so with his trademark good humor, shipping almost 2,000 pounds of meat and all the extras that go with it, as well as a two-ton barbecue pit, from Waco. Photographs on the walls of his restaurant tell the story.

Waco gets little credit for the wealth it nurtures, which I will talk about in more detail. But I believe it’s true of most communities that its residents don’t realize what their hometown looks like from the outside until they go out into the world and see what else is there. Waco surpasses similar-sized cities in education, health, business, and culture. This is not by accident, but by hard work of citizens and community leaders, people of vision. I choose to live in Waco not only because my heart is here, but also because I enjoy what goes on here.

Life is richer if lived broadly. Another way to say this is that there’s more to life than work. I indulge this other-than-work part of my life by supporting the arts. Although I do that in many ways, one of the boards that I am most proud of is serving is that of the Byrd Hoffman Foundation of New York, established by Robert Wilson of Waco.

Bob was a protege of the Hoffman sisters, Byrd and Faye. Their young dancing students were known as the Dancing Hoffmanettes. This duo taught elocution and drama as well as dancing, and Byrd Hoffman taught young Robert to slow down when speaking.

Robert Wilson is a playwright and famous in the area of experimental theater but he’s also devoted to sculpture and fine art. His work has been featured in showings and won awards worldwide. He was born right here and educated at the University of Texas before going to Pratt Institute in Brooklyn. He and his Byrd Hoffman School of Byrds — a group of artists he founded — worked and performed in lower Manhattan in the ’60s.

Each summer Bob develops new theater work at his Water Mill Center, a multidisciplinary arts laboratory in Long Island. This is where he teaches an international group of artists.

I am pleased to say I am on the Byrd Hoffman Foundation board. Of all the personages who came out of Waco, Bob Wilson is huge internationally even though he is little known here.

When people ask me which of my roles so far has been the greatest or most pleasing or important to me, I find picking just one is difficult. It’s a delicious dilemma. I’ve instead found it easier to focus on living my life one step at a time, and getting up when I stumbled. We all stumble, although we often think we are the only ones. But we are never alone in our failures, whether we fall physically, emotionally, financially. We need to focus not on the act of falling, but the act of getting up. And getting up again and again, no matter how many times we fall.

One of the most important lessons I learned as a child revolved around treating people the way I wanted to be treated. While the “do unto others” rule sounds quite trite from repetition, I cannot say the actual practice of treating others the way we wish to be treated has been overused. The quality of life worldwide, and our fortunes, could grow vastly if only the most fortunate among us regularly practiced the lessons we’ve learned.

——————

In addition to his distinguished career in the insurance industry, Lyndon L. Olson has demonstrated his commitment to public, civic and cultural life.

The former United States ambassador to Sweden is a consultant to the senior management of Citigroup Inc. on insurance and reinsurance issues, international trade, regulatory issues, and government affairs. He’s been a senior adviser to the global financial services company since 2002.

He served as the U.S. ambassador to Sweden from 1998 to 2001 and received the Swedish-American of the Year Award from King Carl XVI Gustaf. He also received an honorary doctorate from Sweden’s Umea University and maintains his relationship with the country by serving on the board of directors of the Swedish American Chamber of Commerce and the American Scandinavian Foundation, both in New York City.

A member of the Philosophical Society of Texas, he is on the Board of the Lyndon B. Johnson Foundation, a member of the Rapoport Foundation and is Vice Chairman and Trustee of the Scottish Rite Hospital for Children in Dallas. He is on the Board of Trustees of the Baylor College of Medicine. Baylor gave him its Distinguished Alumni Award in 1999, and the Waco Independent School District gave him the same award in 1998.

A native of Waco and a representative in the Texas House from 1973 to 1978, Olson graduated from Baylor University and attended Baylor Law School. He is a past president of the university’s alumni association. He chaired the Texas State Board of Insurance from 1979 until August 1987 and was president of the National Association of Insurance Commissioners in 1982. He resides in Waco, Texas with his wife, Kay Woodward Olson.

Baylor Business Review, Fall 2005

by Kristin Todd

Money may not buy happiness, but one can certainly build a successful career out of it. Several Baylor business school alumni have proven they are worth their weight in gold by launching reputable careers in financial services. While they chose different paths, they all share the common denominator of possessing a sixth sense for how the dollar bill works.

Bernay Box

Donald and Craig Hodges

Kenneth Zschappel

Tom Powers

Baylor Business Review, Fall 2005