Howard Marks of Oaktree on Ethics

Howard, the head of Oaktree Capital, came to my Leadership and Ethics class (run by former Mayor Riordan) as the first guest speaker.

He began his presentation with a quote from Hillel: "If I am not for myself, then who will be for me? And if I am only for myself, then what am I? And if not now, when?"

Howard explained that ethics is all about finding the right balance between being "for me" and being "for them." This balance is found along the following spectrum:

<-- For Me -- Laws -- Contracts -- Guilt -- U-Chicago -- For Them -->

On the left side are the legal limits of being for yourself. On the right is pure altruism (Mother Teresa). (University of Chicago, he said, suggests only seeking profit because it's a measure of your value to others/"them.")

In applying this question to his own business as a fund manager (Oaktree Capital has about $80 billion under management), he drew the distinction between investment managers and asset gatherers. Because managers are compensated in part by asset-based management fees, there is an incentive that some fall prey to for simply inflating fund sizes and earning large fees doing nothing.
Howard took quite a different approach. He caused Oaktree to give back capital when it was not needed and couldn't generate their target return (even though he could've made easy fees worth hundreds of millions of dollars by doing nothing). Oaktree further changed its fee basis to charge management fees only on committed capital (not full assets).

Howard takes a long-term view on his business and his reputation; he wants to make money, but not at the expense of his principles. He relates to what Goldman Sachs calls, "long-term greedy." By treating people right, Oaktree was able to get its investors to commit even more capital thereafter.

Howard explained that in some cases, ethics is a luxury if you can afford not to take short-term profits. In some situations, people are so poor they have to be more on the left side of the above spectrum in order to survive (Is it wrong for a starving boy to steal an apple from a bazaar that will get thrown away that evening?).

Howard also mentioned his upcoming book, The Most Important Thing. In it, he focuses on the human factors of investing.

Howard says he does not believe in forecasts. It's important to know what you don't know (reminds me of Taleb and Black Swan!). Instead, he focuses on knowing where we are and what's going on around him. When others act unworried, we should worry. Thus, he takes a generally contrarian viewpoint.

In analyzing the investment marketplace, he looks for dangerous behaviors (leverage, high debt, etc.) and constantly assesses the risk aversion of people around him.

Howard said that your business is never over, and you can never pat yourself on the back. Investing is like basketball with an infinite number of quarters. (That's intimidating!)

In order to overcome psychology (fear, conformity), Howard focuses on skepticism, which is different than pessimism. When everyone thinks nothing will go right, you need to buy.

Oaktree's goal is "excellence in investing," and they publish their business principles (reminds me of Zappos's core values!). Howard also writes frequent memos to investors and his staff about these topics and his viewpoints on the economy.

In terms of making difficult ethical decisions, Howard's recommendation was simple: never do something if you hope no one finds out. If you're forced to go anywhere near the edge of your moral compass, tell everyone around you, and ask for advice.

I liked how much Howard has thought about this, and how well formed his recommendations seemed to be. I like that amidst all the financial scandals of the past few years there are examples of leaders like Howard who have had success while remaining true to their principles and ethics.