Roger W. Ferguson, Jr. - International Executive MBA Commencement Address April 25, 2009

May 28, 2009 roger_ferguson

Roger W. Ferguson delivered the commencement address

Dean Daly, distinguished faculty, honored guests, I am pleased to join you today and to congratulate these outstanding graduates.

TIAA-CREF has been privileged to serve Georgetown since 1969. We know that earning an advanced degree from this institution is a significant achievement. You and your loved ones should be very proud. It is also fortunate that your studies -- at least for the moment -- are complete. The economy needs your full attention.

I would like to share some thoughts on the economic situation and outlook. Then I will discuss five lessons we can draw from our circumstances -- lessons that may represent opportunities for the organizations you will now go on to lead.

The economy of the United States is mired in the deepest recession we have seen in two generations. This recession started with the housing sector -- which continues to search for stability. We have seen a significant destruction of wealth. Last month, the Federal Reserve reported that the net worth of U.S. households fell $11 trillion in 2008 -- a decline of nearly 18 percent from the prior year. In March, unemployment reached its highest level in more than 25 years. The U.S. economy has lost over 5 million jobs since the recession began in December 2007. These developments are clearly weighing upon business leaders.

According to last month's Business Roundtable poll, which measures confidence among chief executives, seven out of 10 CEOs forecast their company will cut payrolls this quarter and next; two-thirds expect their company sales to decrease; and two-thirds expect U.S. capital spending will continue to slump.

Our "Great Recession" is in fact global. The World Bank expects global GDP to decline in 2009 -- the first time since World War II -- with growth at least five percentage points below potential. World trade is expected to register its largest decline in 80 years. This week, the International Monetary Fund stated that by the end of 2010, worldwide losses tied to distressed loans and securitized assets may reach $4.1 trillion. While the IMF also predicts a modest recovery in 2010, they expect that it will be "sluggish relative to past recoveries" -- and that global unemployment levels will rise through next year before receding.

On a more positive note, equity markets are attempting to rally, which has an impact on both household wealth and consumer confidence. Many ask, "When will we know that the economy is turning?" There are certain signs of recovery that we hope to see, including: fully liquid credit markets, stabilized housing prices, renewed corporate earnings growth, and rising consumption. These will help usher in another sign of recovery -- renewed investor confidence.

There are many lessons one can draw from our current economic situation. For the moment, I will focus on five of them. The first three have to do with corporate social responsibility. They are opportunities for businesses to pursue, safeguard, and better serve the interests of their customers and shareholders.

The first lesson speaks to the need for more effective and proactive corporate governance, particularly with respect to executive compensation. It's now clear that many executives were incentivized to take risks that ultimately did not serve their customers or shareholders. Management did not lead effectively. But we must also ask: Where were the boards? Where were the shareholders?

As an institutional investor, we at TIAA-CREF believe companies should implement compensation programs that are performance-based, drive business strategy, promote prudent risk management, and create long-term value for shareholders. One way to manage the structure and the nature of executive compensation is to give shareholders a "say on pay" -- an advisory vote. We practice what we preach. In 2007, TIAA became the first U.S. company to provide its policyholders with an annual advisory vote on executive compensation. Nearly 82 percent of policyholders who voted approved the quality of our executive compensation plan and disclosure.

Last year, we voted our proxy against the audit and risk committees at a number of companies, including Bank of America, Washington Mutual, Morgan Stanley, Citigroup, Wachovia, and Capital One. We also voted against the Lehman Brothers compensation plan. We were often in the minority -- a 10 percent minority in some instances. But we were able to use the power of the vote to send a message.

Management, board members, and shareholders must all take responsibility for restoring confidence in companies and maintaining the integrity of our financial system. Let me be clear, I am not calling for shareholders to be micro-managers. That would not be prudent or helpful. But shareholders must have a mechanism to provide feedback to boards on the structure of the executive compensation program. It's very important for boards to give shareholders that opportunity, and it is equally important for shareholders to use that mechanism responsibly. That's the first lesson.

The second lesson speaks to the need for more sophisticated risk management methodologies and the importance of ensuring from a cultural and a structural standpoint that risk management programs will succeed. A robust risk analytics system is needed to enable a company to make informed decisions about risks across the organization. But systems and tools alone are not sufficient. In addition, the corporate culture should advocate and support risk-based decisionmaking in every area of the business. Finally, the risk management function should exist under an independent reporting structure. It should report directly to the CEO, rather than to a division head, so that it is fully independent of other functional areas. It needs to be staffed with professionals who understand and can explain the risks the firm is taking. In this way, risk managers can be true business partners.

Risk management is an evolutionary process, and there is always room for improvement. I believe that structural and cultural approaches to risk management will emerge as more pressing needs at financial services firms and in business generally. The third lesson comes under the very broad heading of customer service. Outstanding service is generally seen as a luxury. But in this environment, we are going to see businesses in every industry sharpen their customer focus. They're going to work harder to maintain trust and strengthen relationships. Financial services firms in particular will need to work hard, especially in the near future, to rebuild and reestablish the trust of their shareholders and counterparties.

Let me now focus on two more lessons -- investments we must make over the long term.

Lesson number four is financial security -- a critical issue for the workforces you will manage, and for the broader economy. I spoke a moment ago about the destruction of wealth. The economic downturn has had a significant impact on retirees, and those who are close to retiring. A new study found that it will take older employees at least two to five years to recover the retirement savings they lost in 2008. That calculation assumes employees continue to hold stocks, earn returns of at least five percent annually, and continue to contribute to their plans.

Unfortunately, some trends run counter to these assumptions. One concern is that investors will try to time the market in an effort to catch up. But you have to be right twice in order to time the market successfully -- and there is very little room for error. For example, if you had invested $100 in the Dow Jones Industrial Average in 1900, you would have accumulated about $25,000 by the end of 2007. If you had missed the 10 best days in the market during that period, you would have accumulated only about $9,000. If you had missed the 100 best days -- out of 107 years -- you would have ended up with less than you started with -- $78. Pursuing an ill-advised investment strategy in an attempt to recoup losses can jeopardize financial security.

Another trend that is cause for concern is related to retirement savings. Since January 2008, 20 percent of workers have cut the amount they contribute to their retirement savings plans, and another five percent say they plan to do so over the next 12 months. More than a third of U.S. employers have reduced or eliminated matching contributions, and nearly a third plan to do so over the next 12 months. These short-term cost-cutting measures may have serious long-term consequences.

We have an opportunity to think anew about the steps we must take to help all Americans achieve lifetime financial security. Dr. William Greenough, who developed the variable annuity -- the foundation of CREF -- and who chaired our organization for many years, once said: "We should try to design a retirement plan to work well in times of peace and war, inflation and deflation, depression and prosperity, and all of the other words used to describe and explain the volatile nature of the American economy..." It sounds very current, but Dr. Greenough said that in 1954.

America needs a retirement system that combines the best of traditional pensions, today's defined contribution plans, and new savings vehicles. Such a system would offer automatic enrollment and savings features; broad diversification across a range of asset classes; objective, personalized investment advice; opportunities to save for retirement health care expenses; and income guarantees.

At the same time, we must do more to improve overall financial literacy, promoting greater understanding among the general public regarding financial systems and the risks and benefits associated with financial instruments. Consumers need to be better equipped to make informed investment decisions, whether independently or with the assistance of professional investment advisors. The fifth lesson is that we need to invest in higher education more than ever before. In my position, I have the opportunity to speak with faculty and administrators across the country. Many of our clients have had to contend with budget gaps, hiring freezes, and suspended infrastructure projects. Endowment managers have struggled to support ongoing operations while preserving future purchasing power. That is not easy even when markets are strong. A new survey by the Council for Aid to Education shows that gifts to colleges and universities will most likely decline for the next two years. (The survey does forecast a rebound in donations by 2011.)

The challenges we face in higher education are formidable. And yet our economic future depends upon a vibrant higher education community. You are living proof of that. As President Obama has said, "The source of America's prosperity has never been merely how ably we accumulate wealth, but how well we educate our people." Looking ahead, we at TIAA-CREF are optimistic -- about the economy and about higher education.

In a new Fortune magazine story, Ron Liebowitz, president of Middlebury College, notes that the higher education community has faced difficult situations before, and has responded boldly. Over 100 years ago, when Middlebury's enrollment declined, funds diminished, and facilities fell into disrepair, their embattled trustees took a "drastic" step. They voted to admit women.

I've spoken today about the unprecedented nature of our economic situation, and some of the lessons we can draw from it. These lessons include: short-term opportunities for businesses to improve their executive compensation programs, risk management practices and customer service; and long-term opportunities to help individuals maintain their financial security and to make a renewed commitment to higher education as a path to economic growth.

Let me close by once again offering my congratulations. Your achievement is a tribute to your own talents and ambitions, to the McDonough School of Business, and to the entire Georgetown University community. Your studies and dedication have more than prepared you for the challenges you are about to face. As you go forward -- to lead organizations, to shape policy, to drive the economy -- may your experience at Georgetown sustain you.

I wish you continued success.


TIAA-CREF Asset Management is a division of Teachers Advisors, Inc., a registered investment advisor and wholly owned subsidiary of Teachers Insurance and Annuity Association (TIAA).