MIT Sloan Alumna Judy Lewent on the future of finance

MIT Sloan Alumna Judy Lewent

Recently MIT Sloan alumna Judy Lewent was inducted into the Financial Executives International Hall of Fame. A former executive vice president and chief financial officer of Merck, Lewent was recognized for her performance, leadership and integrity as a financial professional who has made significant contributions to the betterment of her organization and profession. The following is an excerpt of her remarks at the event:

“It is a momentous time for finance. As the global economy teeters on the brink, much of the world stands by holding its collective breath. This is, no doubt, a time of great anxiety. That anxiety is shared, not just by 50% of the public or 75% or even 99%. Everyone shares it.

“Confidence and stability cannot, of course, be built on a foundation of shifting sand. It must be built on solid rock that is composed of research, rigorous analytics, and sufficient empirical data. And it must reflect reality as it actually exists, not in one’s hopes and dreams, but in black and white.

“We saw too much wishful thinking in the run-up to the current economic situation. Now, however, we must guard against this kind of thinking that says the free market system is inherently corrupt and irretrievably broken.

“Certainly, the events of the past several years point to the need to correct the mistakes in judgment and in practice that helped undermine markets and confidence. But correcting those errors doesn’t mean we should eradicate the system in which they took place. In times of trouble, however, the finger of blame is quick to point – and it’s often pointed in the wrong direction.

“There are some, for example, who blame the analytical tools that finance uses for the problems the global economy finds itself in. I disagree. It wasn’t the tools that were the problem. It was the people who used them. Any tool — whether it’s in the hands of a carpenter or a finance professional – is only as good as the person using it.

“And there are those who believe that the best way to prevent further damage to the global economy is to get rid of all the finance people. We don’t need fewer people in finance. We need more people who are well educated, highly ethical, and willing to provide prudent advice even when it’s not welcome.

“Recently, the MIT Sloan Management Review and the IBM Institute for Business Value issued a  report finding that 58% of organizations that apply analytics ‘are more than twice as likely to substantially outperform their peers.’

“This isn’t a big surprise. After all, business enterprises need financial acumen to succeed. And acquiring that acumen today requires meeting a higher standard. What did surprise me is that more than 40% of those surveyed are not using analytics to gain a competitive advantage. Clearly, as the economy grows ever more complex, the ability to make good judgments requires a deeper knowledge and understanding than ever before of sophisticated analytics, financial theory and accounting.

“Of course, to be effective, you have to understand the industry you are in. You must know its particular risks and its opportunities. Only then can you structure your balance sheet in ways that avoid adding additional risk while preserving the flexibility to seize opportunities when they present themselves. It also helps guard against the temptation to pursue short-term boosts that could undermine the long-term health of the business.

“This is certainly true in the research pharmaceutical industry, which carries by definition significant risk. And when the risks become real and not just theoretical, that’s when the value of a prudent capital structure becomes evident. A capital structure that enables the company to continue to pay dividends and fund R&D can mean the difference between weathering the storm or sinking into oblivion.

“In receiving this honor from FEI, I cannot help but reflect on the lifetime of learning I’ve received from teachers, mentors and colleagues over the years. I was fortunate to be taught by people such as Robert Merton, Myron Scholes and Stewart Myers at MIT Sloan. While many academics consider themselves to be researchers, they saw themselves as searchers – searching in places never before explored for answers to questions most had not yet even thought to ask. …

“So in recognizing me, FEI also is recognizing all those who have, over the course of my career, helped to teach me, guide me and inspire me.”

Judy Lewent earned her MS from MIT Sloan in 1972. To read more about her career and support of MIT Sloan, click here.

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