Friday, November 6, 2009

GM's Board Says No to Magna et al.

GM’s board’s U-turn on strategy was a jolt to many, not the least the apparently unhappy German government that thought they had a different deal in place. After further consideration, the board flexed its muscles and said no, a gutsy and controversial move to be sure. What does this episode tell us about boards and strategy?

Perhaps the most important lesson is this: boards have a fiduciary responsibility (in America) to do what they deem necessary to protect and grow shareholder value. Signs of economic recovery, the waning of panic in the boardroom and executive suite that dominated thinking in GM’s darkest hours, and a deeper analysis of what strategy this company needs to execute a turnaround all played a role.

While the circumstances were different, one can contrast GM’s decision to renege on a deal with Bank of America’s experience with Merrill Lynch. The B of A board also felt tremendous pressure to move forward on a deal – the acquisition of Merrill Lynch – that was damaging to shareholders, yet they didn’t muster the courage to take on the US Treasury. So what’s the right thing to do?

Boards and management teams absolutely have the right to change their minds – how could they not? However, under “normal” business conditions, such dramatic policy shifts might signal turmoil among executive decision-makers and a house that can’t figure out what to do. The price such a board or management team will pay may be high. Just a few years ago then-CEO of Tyco, Dennis Kozlowski, announced a breakup of the company only to quickly revoke the move, triggering a pivotal downward shift in the market’s perception of his credibility.

What’s different here is that GM’s board is newly empowered, has the implicit support of the US government, and as a result has adopted an almost “devil may care” attitude. Save GM, and nothing else matters. Of course, there will be a price to pay down the line for this cavalier approach to important stakeholders, but that is the long-term and right now GM is focused on survival and not worrying too much about collateral damage. And they’re right.

Thursday, October 1, 2009

Ken Lewis and CEO Succession at Bank of America

Ken Lewis leaves Bank of America with one last present – a CEO succession mess. But like Ken Lewis himself, it won’t last for long.

In notifying the board of his “plan” to retire by year-end, Lewis ensures a succession process that will not be smooth. Each of the top candidates – Moynihan, Montag, and Krawcheck – is now thrust into a quick sprint to the CEO job. This horse race ensures that the person who doesn’t get the big job will be seen as a “loser,” meaning they will certainly leave the bank.

More well-thought-out horse races give the leading candidates plenty of time to prove they have the right stuff, to interact with the board on numerous occasions, and to reinforce their positions at the top. Three months just doesn’t allow any of this to happen at a measured pace, creating a free-for-all in the corner offices. Complicating matters is a board made up talented people who just started their own jobs as directors, and cannot possibly have the insight they need to select among these leading candidates in this short time window.

What to do? First, there is little reason to keep Lewis in the CEO slot for three more months. He is as lame a duck as there ever has been, and the three months he might stay on hardly makes for a textbook transition.

Second, the board of directors needs to quickly take charge of the succession process. It’s time for experienced board members like William Boardman (Banc One; Visa International) and Robert Scully (Morgan Stanley), among others, to show the world that the new Bank of America board is active, attuned to the marketplace, and talented enough to work this out.

Third, and this is less certain, but I can imagine the board deciding to elect one of their own as the Interim CEO, with a clearly defined tenure that will be more than 3 months but less that 15 months. During this transition stage, the board can do what effective boards always do when it comes to CEO succession – spend time with the top candidates, gauge their capabilities and weaknesses, and come to a determination on the best person to be the next CEO of Bank of America. This is not a job that can, or should, be rushed into the timetable that Ken Lewis has thrust onto the board. At the same time that this evaluation of internal candidates is going on, the board should look outside as well to make sure that full due diligence is done. The board may well decide that there is more than enough talent among the leading inside contenders, but to not look outside, at least at first, is to unnecessarily cut down on viable options.

All considered, Bank of America may yet be better off with Ken Lewis leaving, than staying on for an orderly transition. He’s had his nine lives already, and it looks like Judge Jed (Rakoff)’s decision to question a settlement (on Merrill Lynch bonuses) that punishes the innocent (shareholders) while protecting the guilty (executives, and perhaps the board) is finally the straw that broke the camel’s back.

Note: A version of this post can be found today in the WSJ Online

Monday, June 8, 2009

Lessons on Leadership: Obama’s Health Care Strategy

The New York Times magazine had a terrific article by Matt Bai yesterday on how President Obama and his team are building momentum toward a new health care plan that he sees as the #1 priority for the Administration. Reading the piece I couldn’t help but be struck at the tactical steps being taken that are nothing short of brilliant. These same tactics are essential ingredients to effective implementation of complex strategies, in politics, in business, and in everyday life. Here’s a quick summary:

1. Understand, and Co-opt, Dominant Power Structures.

Organizations are not boxes on a chart. They are made of people who have power, like power, and use power. Outsiders, change agents, even CEOs, will almost certainly fail if they don’t appreciate this reality. From President Bush’s social security plan to President Clinton’s own health care tsunami, a strategy of imposing a solution on upper-level managers, or members of Congress, does not work.

2. Relationships Win.

President Obama and Chief of Staff Rahm Emmanuel have brought on board the Administration team a wide selection of talent with tremendous personal and professional connections to key members of Congress. Former chiefs of staff and long-time aides to key legislators come with long relationships, trust, and inside information on how things really work, skill-sets that are replaceable.

3. Symbolic Gestures Help.

President Obama would just “happen” to drop by when a Senator was meeting with one of his staff. Invites to the White House theatre, dinners, and other social occasions for members of Congress is standard practice (as is a careful accounting of who goes and how often).

4. Involving Key Players Builds Buy-In.

Rather than show up with a fait accompli, President Obama’s strategy is to lay out the vision for health care reform, and work directly with Congress in defining the specific parameters of what the reform will look like. By involving Congress in the details, they gain ownership, and are more likely to move forward with actual implementation.

5. Sell the Strategy.

One of the toughest lessons of management is that the best ideas don’t win. The “right” answer does not win. What wins is what can be passed, and implemented. Getting there means the CEO must sell the strategy to key constituencies. This is often one of the hardest lessons for MBA students to get. They are used to being right (that’s how you get into b-school to start with), but being right is not enough. You have to convince others that you are right. As Matt Bai of the New York Times points out, expect Obama to be very active in not only selling whatever health care reform plan emerges, but the very idea that some type of universal health care plan is a good thing.

Thursday, June 4, 2009

The Power of Perceptions

Spring is in the air, even in the northern reaches of New England where I call home. Summer is almost here. The stock market is up, a lot. GM has been “fixed,” Fiat is buying Chrysler, buyers are lining up to bid on foreclosed homes in Phoenix, and even newspapers are less dead than they were a few months ago. It seems rather easy, doesn’t it?

Call it the power of perceptions. Sentiment has turned from utter disaster to great hope, and I like it. My tennis game is getting better, my weight is terrific, my cooking better than ever, and I like it. If we feel something is, then it is. The power of perceptions. If reality intrudes on this pretty picture, and it turns out that GM is not fixed, that nobody is reading newspapers, and that my tennis game isn’t all the good after all, we’re in deep trouble. So I prefer to believe that all is good with the world, we are getting better, and summer is just around the corner. Right?

Friday, May 15, 2009

Feds Teach Corporate Governance to Bank of America

So, the Feds are pressuring Bank of America to reconfigure their board so someone actually knows what they are doing. OK, they didn't say that exactly, but the point remains. The BofA board is lacking in financial talent. While there is room for improvement, I think the key is for the board - regardless of who sits in the seats - to actually do their jobs. They've sat by for far too long, especially in their continuous support for CEO Ken Lewis after each major multi-billion dollar gaffe. If it takes the Feds to bring better corporate governance to Bank of America, so be it. We can't be happy with this unprecedented involvement of the federal government in how companies are run, but what does it say about corporate governance in America if boards won't fix themselves?

One final point - if the board can't move off of Ken Lewis, perhaps the Feds can help there too...

Thursday, May 14, 2009

Will Fiat be the New GM?

Let’s hope Fiat CEO Sergio Marchionne is a student of history. His apparent strategy of combining Fiat and Chrysler with whatever GM assets he can find around the world, including Germany and South America, will create a global behemoth. With such diverse operations and assets, it seems like a classic generalist strategy, trying to win on the basis of scale and scope. Of course the modern architect of this very same strategy is none other than General Motors! Takeaway lesson: you can’t win on size alone.

But the jury is still very much out on this one, especially given that no crime has yet to be committed. And, if Sergio can actually take advantage of the massive assets he is hoping to assemble to create a series of world cars that rely on the same basic skeleton in different markets, perhaps there is something good that can come out of it. Unfortunately, the automobile industry has not been good to empire builders in the past …

Monday, May 11, 2009

Monday Morning Stress Test Update

While the fundamentals of many banks are still open to question, the Treasury has provided nothing short of a government guarantee that the top 19 banks are going to be just fine. These banks will survive; the financial system will not collapse. This is a big public service to be sure. And unremarkably, investors have taken up their cues and bid up even Bank of America and Citi, let along JP Morgan Chase and Goldman Sachs. I have three quick observations to make:

1. People evaluate their worlds on a relative, and not an absolute, scale. Compared to where we were, life is good. It may not be all that good, but relative to the recent past, we’re flying. This is a reality of how people think in many walks of life. Are you happy with your pay? Depends on what your coworkers and friends are getting. People who are generally happy with their lives have managed to create a comparison group of others that give them a chance to stand out. Are you a good tennis player? Well, you wouldn’t win a point from Rafael Nadal, or probably Chris Evert for that matter, but if you can beat some of your regular playing partners, you’re happy. So it is with the banks. Compared to where we were, we’re doing fine, just fine.

2. The race is on to return TARP money and return to some semblance of the “open market” days that enabled huge compensation packages and unfettered innovation. Sounds a little like where we’ve been again, but isn’t that how things work? From LTCM to Enron to Bear Stearns, we have an incredible ability to forget the past as soon as possible. And then repeat it.

3. There are thousands of banks in this country, but only 19 have had stress tests. The commercial real estate market is hemorrhaging, new regulations on credit cards that are sure to put a crimp in that long-time bank cash cow are on the way, and of course those bad mortgages everyone used to talk about may be forgotten, but they are not gone. There will be blood.

Wednesday, May 6, 2009

Memo to the Obama Administration: Has Bank of America CEO Ken Lewis Stressed You Out Enough Already? There’s an Easy, and Long Overdue, Solution.

Stress test results are about to be released. The Wall Street Journal is reporting that as many as ten banks will fail the test, and will need to raise more capital. One of these banks is Bank of America, and this morning's reports indicate that BAC will need an incredible $35 billion to shape up. CEO Ken Lewis has been saying for more than two months that the firm he leads will not need any more government money. Oops.

If today's reports are correct, Ken Lewis will have been wrong, very wrong, once again. While shareholders couldn’t muster the votes needed to push Ken to Pebble Beach full-time, what are we to make of a CEO who has a remarkable record of being wrong? It’s actually worse than that. Ken seems to think that he is absolutely right (to buy Countrywide, to buy Merrill Lynch, to fire John Thain) when in fact he is terribly wrong. And now yet another insult to shareholders. Bank of America is still in trouble, BAC is failing the Fed’s stress test, BAC is unlikely to soon pay back the money it has already received from the government, and BAC will need more capital to weather the financial storm. Capital that almost certainly will need to come from the government, again, whether in the form of a preferred-to-common stock swap, or new money entirely.

The big question is whether the Treasury will insist that Ken Lewis must go if the bank is to move forward. There can be no fathomable reason to keep him in the top job at this point. Even Vikram Pandit at Citi has done a better job than Ken Lewis. Or at least it wasn’t Pandit that put Citi into the mess it’s in. But it was Ken that put BAC into the mess that it is in. If Rick Wagoner had to walk the plank, how in the world can the Feds keep Ken Lewis in the corner office? It’s time.

Tuesday, May 5, 2009

Stress Tests: Raising Capital at Citi, BofA, et al. the New-Fashioned Way

Have you ever had a real stress test? You get wired with electrodes that monitor your heart, and then start moving on a treadmill to see how much you can stand. Hopefully, you make it (there's a doc in the room in case you have trouble). Stress tests are a standard diagnostic device to assess our cardiovascular health.

Stress tests from the Treasury, however, seem to be of a somewhat different ilk. Yes, there is a test of your financial health, and there are doctors in the room (mostly Ph.D.s in economics from Harvard). But that's where the similarity ends. While a clean bill of (physical) health lets you live longer, stress tests that demonstrate you are in trouble only lead to more money from the government.

Treasury stress tests will require failing banks to raise money, but where is this going to come from? Independent investors are not exactly rushing in. Banks will need to sell assets to raise capital, but there are only so many Japanese businesses for Citi to sell before they come up against those toxic assets that nobody wants. So that leaves the federal government. For banks that are already in hock to the government, there's not much more downside to taking a little more cash. So, we have the topsy-turvy world of modern finance. Banks are better off if they fail their stress tests than if they don't! You fail the stress test on your heart, you die. You fail the bank stress test on your finances, you get to live longer.

Perhaps a slight exaggeration, but perhaps not.

Wednesday, April 29, 2009

Musical Chairs with Ken Lewis and Bank of America

Bank of America CEO Ken Lewis was stripped of his Chairman title in a shareholder vote on Wednesday, a move that still leaves him as CEO thanks to his rubber-stamp board. Now what? Can he survive in the top spot?

There are essentially 4 ways to lose your job as CEO:

1. You resign… Well, yes, that’s possible, but I’m not holding my breath.

2. You lose a shareholder vote on a resolution to remove you as CEO… Been there, done that. He didn’t lose.

3. The board fires you… Perhaps I should be clearer, the Bank of America board fires you, and this is one board that loves Ken. They even appointed long-time pal and noted corporate governance “stickler” Walter Massey, President Emeritus of Morehouse College, as the new Chair. Now that’s a tough board for you! If you nasty shareholders are going to pull Ken’s Chair from under him, we’ll show you.

4. The government fires you… Ah, well, here we may have something. Read on.

If Bank of America is too “stressed” to keep going on its own, new capital must come from somewhere. Outsider investors? You’ve got to be kidding. Selling parts of the empire? Maybe. TARP, or son of TARP, or grandson of TARP? This is possible … but can Treasury sink another XX billions of dollars in BofA (or any bank) without doing a Wagoner? That is, as part of the deal, will Treasury make that pesky Ken Lewis walk the plank, the same guy who is all over the Wall Street Journal testifying to NY Attorney General Cuomo that Paulson and Bernanke made him do the Merrill Lynch deal? Now that’s a stress test I can see playing out.

Tuesday, April 28, 2009

The Curious Case of Bank of America's Ken Lewis

Tomorrow BofA CEO Ken Lewis goes on trial. The annual shareholder meeting has become a referendum on the decisions, and legacy, of Ken Lewis. Let’s parse the data.

Why He Should Stay as CEO

1. Who else is there?
2. Paulson and Bernanke came at him with a baseball bat in a dark alley – what choice did he have but to buy the much-maligned Merrill Lynch?
3. Up until September 2008, Lewis was a seen as a star of the banking industry, even winning the “Banker of the Year” honors from American Banker.

Why He Should Be Removed as CEO

1. Despite the Paulson-Bernanke takedown, Lewis did not have to make the Merrill deal. The simple truth is that he wanted this deal, badly, to demonstrate to the world that BofA was king of the hill, and just as importantly, that he could go one better than his mentor, former BofA CEO Hugh McColl. To Lewis, Merrill was a dream of a company, one that had an enormous emotional attachment for him personally. McColl never acquired Merrill; Ken Lewis did. Wow!
2. How many lives should one CEO have? Countrywide; Merrill; TARP lifelines; the John Thain debacle; testimony to Cuomo that may yet land Lewis in more trouble than even he could imagine; first quarter earnings chock full of one-time gains based on increasing the valuation of toxic assets on the book; characterizing these results as evidence of “a testament to the value and breadth of the franchise;” outraged shareholders and institutional investors who finally have had enough; news that Treasury stress tests indicate BofA needs more capital, yet again. By my count, that makes 9 lives…

The Bottom Line

I don’t know Ken Lewis personally, and I have no reason to believe he is not a good person. But, the evidence is now overwhelming that Ken Lewis is an incompetent CEO. What shareholders and the board cannot, or will not, do, Ken Lewis should do for himself. The one solution that will be best for Bank of America, and best for Ken Lewis and his personal dignity, is clear. He should resign.

You may say I'm a dreamer, but (perhaps) I'm not the only one.

Friday, April 24, 2009

Bernanke, Paulson, and Lewis: He Said, She Said

We are in for a fresh round of escalating recriminations.

Bank of America CEO Ken Lewis testified to New York Attorney General Andrew Cuomo that he was pressured to do the Merrill Lynch deal, and moreover, that he was told not to disclose the extent of ML damage to shareholders in advance of the vote authorizing the acquisition. Paulson, and the Fed, quickly followed with press releases indicating that they did no such thing.

Even in these early stages of this emerging scandal, the next steps are highly likely:

1. There will be a Congressional investigation, and it will be embarrassing to all concerned, including President Obama.
2. Ken Lewis will finally resign as CEO of Bank of America.
3. Americans will learn more about how Treasury sausage is made, and it will be an eye-opener.

There is no reason why government cannot play a constructive role in the development and growth of businesses. The history of business indicates that such a role can be highly valuable, but almost always in the earliest stages of an industry’s development. Mixing government and business in the intimate manner we are observing these last several months creates all sorts of complications, conflicts of interest, and collisions. The story of Bernanke, Paulson, and Lewis is about to spill out of the bedroom.

Tuesday, April 21, 2009

What Won’t Happen Today at Citi's Annual Meeting

1. The board won't get fired.
2. CEO Vikram Pandit won't get fired.
3. Citi won't announce a workable turnaround plan.

That's 0 for 3, Cody Ransom numbers.

Let's look at the board's track record. Enron, booted out of Japan, all you can eat sub-prime, Chuck Prince, Vikram Pandit. In baseball, it takes three strikes to be out; for the Citi board it looks like five strikes (and counting) won't be enough. The irony in all this is that on paper board members have great experience - Armstrong at AT&T, Belda at Alcoa, Mulcahy at Xerox, the list goes on. But, and this is the big but of corporate governance, just slapping down your resume on the boardroom table does not make an effective director. Actions speak much louder than resumes, and it's hard to imagine the Citi board did what great boards do - ask the tough question, probe top management, spend the time to really understand the company's business, and not defer to the "superstars" on the board (read: Robert Rubin). I really hope the new directors about to be officially seated get the principle that spectacular resumes (former CEO of US Bancorp, etc.) are not enough.

As for Vikram Pandit, the jury is in. It was not his fault that Citi made as many gigantic blunders as they did (he only started as CEO in December 2007), but he has got to bear responsibility for Citi's inability to come up with a viable turnaround strategy. More to the point, I find it hard to believe that he is the most qualified person to be CEO of Citi. Remember how he got the job? His hedge fund was acquired by Citi, and with all due respect to my friends in the hedge fund business, that is not the best training ground for the job of CEO in a complex, struggling company. That the hedge fund imploded not long after Citi bought it only adds to the ignominy.

Which brings us to the problem of creating a new strategy to fix the bank. Q1 earnings were driven by accounting changes, rumors of big paydays driven by AIG's winding down of credit-default protection, and the simple beauty of borrowing at 0% and lending (or investing) at 4%-12%. That is not sustainable, especially in light of the quickly melting commercial real estate market. Navigating around these curve balls is not easy for any management team and board; for Citi's, I fear it's just about impossible.

Hey, isn't Treasury all about good corporate governance? What's good enough for GM's board is surely good enough for Citi's.

Monday, April 20, 2009

Banks Making Money?

Both Citi and Bank of America have now announced much-improved earnings for Q1 2009. Are we out of the woods yet? Unfortunately, no.

Today's BofA report notes that changes in fair market value accounting created a $2.2 billion gain from Merrill Lynch. While most observers understand that this is a one-time, non-recurring gain, let's make sure we all understand just where the "gain" came from. By essentially increasing the value of certain ML structured assets held on the books, BofA is artificially inflating assets that no one wants to buy ("toxic assets"). Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won't be pretty. You can run, but you can't hide.

One other quick note: If the federal government let me borrow money at 0% interest, and then lend it out at 4-12% interest, even I could make a profit. And if a college professor can make money in banking in 2009, what should we expect from the highly-paid CEOs that populate corner offices? At least I'd have the humility not to claim these results were "a testament to the value and breadth of the franchise." (Yes, that's what Ken Lewis, CEO of BofA, said today.)

What the NY Times can Learn from Warner Bros.

I was watching Casablanca, again, over the weekend. Made me think about the old studio system and its demise, and made me wonder whether newspapers and magazines often resemble the old movie studios? Remember that era? Studios “owned” the talent, controlled the method of production, and dominated distribution channels. With the big three under control – content, production, and distribution – movie studios formed a classic oligopoly.

Today, movies don’t “own” hardly anything, and they need to contract with all sorts of talent, with various production companies that bring highly specialized know-how (e.g., Lucasfilm), and even with movie theatres that have consolidated and are independent of the studios. Further, every movie is an independent business of sorts, assembling a wide variety of independent components that are assembled and integrated into one (hopefully) seamless product. As jarring as this transition must have been, the movie studios did it.

What of our friends in the newspaper and magazine business? The experience of the movie studios offers the following lessons:

(1) Successful movie studios have become “systems integrators,” not that much different than Boeing when you come to think about it. Boeing doesn’t manufacture all the parts, software, and systems that make up a modern aircraft – in fact, Boeing partners make most of what goes into our 747s. They have thrived by becoming superior integrators. Why not newspapers and magazines?

(2) The mindset of movie studios has shifted from one of control and push to one of modular and pull. It is necessary to provide an incentive to the best talent to want to work with you (“pull”), and that talent is not taken from a list of employees but drawn from a wide pool of expertise (“modular”). Why not newspapers and magazines?

(3) There is one thing the movie studios have been doing for a long time that continues to work. They are absolute geniuses at creating and maintaining a star system that attracts customers not only because a movie is a “good” one in any objective sense, but also because customers need to see certain movies to develop or maintain their place in the popular culture. The studios use entertainment magazines to promote their products, create glamour that attracts interest, and mass produce awards shows like the Academy Awards and its brethren that cement their position in the popular culture. Why not newspapers and magazines?

Thursday, April 16, 2009

Why Newspapers and Magazines Fail

What’s wrong with the newspaper business? And the magazine business for that matter? The problem has been well-known for some time – newspapers and magazines have been swamped by free online content, much of their own making, driving down print circulation rates and advertising dollars alike. Young people don’t read newspapers any more. Aggregators (e.g., The Huffington Post) bundle free content, further cutting profit opportunities for content providers. It’s a real mess, isn’t it? In response, the industry turns to “micropayments” (tiny fees customers pay for content whether they like to or not) and “tip jars” (whereby customers donate money to content websites), if you can believe that.

I have two very big problems with all this.

First, where is it written that any business – even newspapers and magazines – has a right to make a profit? If I open a restaurant, and nobody wants my food, I lose money. That’s how it works. You publish a newspaper or magazine that customers don’t value, you lose money too.

Second, there’s the big excuse. That’s the one that goes: because people don’t read newspapers any more, what can we do? It’s the customers’ fault – they don’t read any more! Imagine another industry whose leaders say they can’t succeed because people don’t like their cell phones, or software, or shoes any more. People do not read newspapers because the industry no longer gives them a reason to do so. Don’t blame the customer for a failure to innovate and create something they want.

Why doesn’t any one talk about new ideas, new business models, to resuscitate the industry? There are no guarantees when you try something new, but the alternative is crystal clear – layoffs, downsizing, and bankruptcies.

Here’s one little idea to consider. Why do people go to the movies when there is television? Some may remember that in the earliest days of TV the movie studios fought tooth and nail to keep the TV barbarians away from customers. It didn’t work, and they were forced to come up with something else. People go to the movies because of the experience, the aesthetic, the community. The movie business is not without its struggles, but it’s still here six decades after TV came on the scene. Give people a reason to read a newspaper or magazine rather than go to ten different online sites. There is much to be learned from considering the experiences of other industries that went through similar traumatic transitions. Rather than invent new ways to force customers to pay for content, why not invent new ways to give customers something they care about and can’t get anywhere else? If that happens, they will pay, and be happy to do so. No guarantees, but a big step up from the embarrassing world of micropayments and tip jars.

Thursday, April 9, 2009

CEO Pay: Why Barney Frank and Congress Will Lose

There’s lots of talk about executive compensation these days. With the proxy reporting season in full swing, the media, academics, CEOs and boards, and many a laid-off person will be scrutinizing, and agonizing, over what are sure to be outlandish numbers in the midst of the most severe business meltdown in almost 80 years. But there is one group of onlookers that will be particularly attuned this season, our duly-elected members of Congress. And what will they say?

The opening gambit is now well-known. Let’s talk about 90% punitive taxes on the AIG scoundrels. Let’s be sure to look for other, perhaps less draconian, but perhaps not, methods to extract penalties on CEOs who continue to earn many millions seemingly oblivious to what is going on around them. It can no longer be business as usual. Barney Frank will talk tough, but if I were a betting man, I’d being selling him short.

Why? Not because Mr. Frank is not able, intelligent, and determined. He is all of these things, and more, but he is up against a guerilla army fighting to protect their home turf, and unafraid to engage in any counter-attacks they can dream up. The reality is that for Congress, CEO pay is just the latest outrage-de-jour, and like hummingbirds moving from one source of nectar to another, there will soon be other places to seek justice. It’s not that Congress has A.D.D., but rather that they have a lot to do, too much to stay focused for the time it will take (that is, forever) to rein in CEO pay.

And what of the insurgents? There is an army of able, intelligent, and even more determined tax attorneys, compensation consultants, and board advisors at work right now looking for new ways to ensure that CEOs continue to get what they get. They will not move off task to do something else for they are not hummingbirds by a long shot – pit bulls might be a better image to conjure up. They have all the incentive in the world to dig for loopholes, and they are very, very good at it. Executive pay will change in style – more stock grants and less stock options, more salary and less bonus, and there will be some short-term adjustments down – but at the end of the day a new equilibrium will be reached that will look remarkably similar to where we have been. And you can take that to the bank.

Tuesday, April 7, 2009

Sun and IBM, Yahoo and Microsoft: Learning From Mistakes?

Like Yahoo, like Sun. Yahoo rejects a tremendous buyout from Microsoft last summer, and the stock tumbles. Total drop in market cap: $30 billion. This week, Sun rejects a tremendous buyout from IBM and the stock tumbles. Total drop in market cap: $2 billion and counting. Aside from the mysterious fact that both companies, and both boards, have walked away from a huge premium, what else is going on here?

The answer is a nutshell is “attachments.” Attachments to people, places, and things are among the most powerful emotional drivers of action, sometimes leading reasonable people to make huge mistakes. Think Bernie Madoff and his unfortunately legion of followers who needed to know “the right people” to be given a chance to invest with the man that churned out 10-12% returns in good seasons and bad. No one (or hardly anyone among his investors) asked any questions – crazy Bernie was one of us, a man to be trusted.

Well, the attachments at Yahoo, and now Sun, are not of the same pedigree, but certainly of the same ilk. At Yahoo, founder and then CEO Jerry Yang built the company into a Silicon Valley legend, thumbing his nose at Microsoft’s hegemony in the process. To then turn around and sell your baby to “the evil empire” was just too much, regardless of price. Keep demanding more, and even a deep-pocketed Microsoft will take its chips and go home.

Enter Sun. Built by Scott McNealy, Sun was an original that prided itself on its independence. Relegated to the board while Jonathan Schwartz took the reins as CEO, Scott could do little harm, until now. Leading the boardroom revolt, McNealy and his faction of directors upped the ante on IBM (and CEO Schwartz in the process), driving the big bidder (close to $10 a share, a 100% premium when offered) away. Founder McNealy, like founder Yang, too attached to the companies they built to imagine selling to the industry winners. And shareholders lose, again.

Friday, April 3, 2009

Friday Musings: Bartiromo, “Corporate Governmance,” and the Final Four

I finally read Maria Bartiromo’s interview with Bob Nardelli, the CEO of Chrysler, that appeared in the April 6, 2009 Business Week. Maria asked Nardelli why taxpayers should be bailing out a private equity firm, namely, Cerberus, the majority owner of Chrysler. Good question. Unfortunately, Maria let him off the hook when Nardelli labeled Cerberus “no different than Fireman’s Fun, CalPERS, mutual funds, etc.” No, Cerberus is not the same as a mutual fund. Unless you know of many mutual funds that take controlling interests in companies they invest in, install their own CEOs, and line up for government money when their “investment” goes bad. Leaders in the press need to do a better job extracting honest responses from the titans of business they are interviewing. And “extract,” as in a decayed tooth, is almost certainly the right word. Let’s do better next time, Maria.

The Syd Blog word of the day is “corporate governmance,” defined as the set of policies and actions designated by the U.S. Treasury to ensure that private enterprises that depend on government assistance act in a manner consistent with the preferences of the Treasury.

The Final Four: GM, Ford, Chrysler, and Treasury. Who will win?

Thursday, April 2, 2009

GM’s New Board – Calling Gates, Gerstner, and Grove

There’s been lots of chatter about GM’s board of directors walking the plank, and the unprecedented role of the federal government in prodding reportedly six directors to find another country club to latch onto. The news stories have been about whether the board deserves this fate – of course they do! – and whether and how the Obama Administration is stepping far beyond the line any US government should go – I’m concerned, but see this as legitimate. The problem with this debate is that the first question is just plain silly given the track record of the company, and the second question quickly gets mired in ideological posturing.

Lost in all this is the real story, or at least the story that has the potential to make the biggest difference not just at GM but at many other companies as well. Erin White at the WSJ wrote a story after talking to me about this the other day, but I think the story is even bigger than GM. The new GM board has the potential to remake corporate governance in America. Think about it – who is going to accept a board position at GM with Treasury riding shotgun? The “been there, done that” crowd of ex-CEOs who make a living on the corporate governance trough will want no part of this assignment given the scrutiny they will be under. Better to lay low in boardrooms that value business as usual. Perhaps paradoxically, the most likely candidates for the GM board are business stars who don’t want to take on “yes-man” roles, and who would only jump into the GM fray if they had a big opportunity to make a difference.

And what a difference they could make. Imagine a proven business builder like Bill Gates, accomplished executives like Larry Bossidy, Jack Welch, and Lou Gerstner, or Silicon Valley iconoclasts like Andy Grove who would simply refuse to accept the status quo. Leaders who have demonstrated the vision and creativity to remake enterprises, and industries. A new board like this will insist on being hands-on, asking the difficult questions but also helping to generate some of the answers. The buzzwords on the board will go from illogical incrementalism, a fixation on pay packages, and a “we can’t do that at GM” mindset to one driven by creativity, innovation, and breaking the rules. And as the song goes, if they can do it here (at GM), they can do it anywhere.

A pipedream? Perhaps. But also an opportunity for real leaders to step up to a mega-challenge that can not only help turn around a once-great company like GM, but set a new standard and expectation for how corporate governance can, and should, work in America.

Tuesday, March 31, 2009

Obama Administration Protecting Taxpayers on GM

I read William Holstein's opinion piece in the New York Times today. Mr. Holstein makes several good points about the turnaround to date at GM. Progress has been made, and Rick Wagoner deserves credit for that. However, the real track record of GM over Wagoner's nine year tenure, and especially the company's slow-moving turnaround, suggest quite a different conclusion.

I reviewed the task force critique on a previous post and it's clear that GM will not meet its own, recent, turnaround targets. Something needed to be done, and it was.

What has everyone up in arms is the role of the government. However, in principle there is nothing different here than has happened many times before - a powerful stakeholder on whom a company is dependent flexes its muscles and removes the CEO. Ordinarily, we call stakeholders that act in this way "private equity investors," or "activist investors," or even a good old fashioned effective "board of directors." None of these catalysts for change are available today, so in comes the government.

I too worry about the government running GM, but in this case they are not. They are simply fulfilling their fiduciary responsibility to their own shareholders (read taxpayers and citizens). It's too bad GM's own board couldn't have done the job themselves.

Bankers 1, GM 0. Countdown with Olbermann on MSNBC Has It Right

Last night on Countdown with Keith Olbermann he asked the same question I’ve been wondering about as well (see my post) – why are the bank CEOs staying in their executive suites while GM’s Rick Wagoner is forced to walk the plank? This is not a defense of Wagoner – GM is broken and needs fixing. But what should we say about Bank of America and Citi, the two paragons of fiduciary responsibility in the banking industry? Both Ken Lewis (BAC) and Vikram Pandit (Citi) are past due. So, why?

Keith had Dan Gross, Senior Editor on Newsweek magazine and the author of Dumb Money on his show, and he made a great point. Dan reminded us that top Obama advisors are in the same inner circle as many Wall Street titans, BBM-ing on the beach in the Hamptons and Martha’s Vineyard, and digging into the double porterhouse at Delmonico’s Restaurant.

Visit for Breaking News, World News, and News about the Economy

Dan is right. In Think Again: Why Good Leaders Make Bad Decisions, I wanted to know why people think they are right when they are really wrong! One of the primary ways this happens is when we let our attachments to people (and sometimes places and things) cloud our thinking. This is natural after all – who doesn’t feel comfortable with the people they know? The problem is that these attachments influence how we make decisions, and not in a good way. Why are Wall Street CEOs being spared, while GM’s Rick Wagoner is pushed out? As the old saying goes, it’s not always what you know, but who you know, that counts.

Why GM's Rick Wagoner, and not Ken Lewis at Bank of America or Vikram Pandit at Citi?

Does it strike you as odd that Rick Wagoner has been forced to walk the plank for his failures as CEO at General Motors, while Ken Lewis continues to hold court at Bank of America, and Vikram Pandit just holds on at Citigroup? The Obama Administration’s approach to the freefall in financial services has always been different than their response to the mayhem in the automobile industry:

· Billions in bailouts for Wall Street; not quite so much for Detroit.
· No questions asked early on about corporate jets on Wall Street; embarrassing the Detroit CEOs into actually riding in their own cars on the way to Congress.
· And now, pushing GM CEO Rick Wagoner out while leaving in place Lewis, Pandit, and Company.

What gives? It may be that the government sees the solution to the financial services disaster as considerably more complex than what is needed for automobiles. And certainly it appears that the consequences of Armageddon on Wall Street are much more severe to the global economy than bankruptcies in Detroit.

But the different approaches by the Feds to these two industries may also speak volumes about their mindset and assumptions. If financial services can’t be “figured out” by a task force working for a month to find solutions (as they did in automobiles), then surely we’ve got to keep the people that got us into the mess in the first place! But, is this really true? I believe this logic is fundamentally flawed, for at least two reasons:

(1) Justice must be done, and seen to be done. For the big banks, this just has not happened. Every week brings new revelations of incredible bonuses to bankers to “retain” their talents despite a track record comparable to the Montreal Expos. Why do we keep shoveling money into their companies when the very leaders who brought this calamity on themselves remain in their jobs? I don’t get that.

(2) Are the Obama economists too attached to Wall Street? The party line from Wall Street is that the housing-fueled, subprime-exacerbated, leverage-over-the-top credit crisis could not have been predicted; ergo, it’s not our fault. Others have pointed out in fine detail how faulty this argument, so why are the Obama economists buying it? I believe it is because of an inherent belief and attachment to the people who make their living on Wall Street, an attachment that biases their ability to be clear-eyed in their assessment of the leadership talent in place.

If Rick Wagoner is being held responsible for “leadership mistakes” at GM, why not Ken Lewis and Vikram Pandit?

Monday, March 30, 2009

Meet GM's New Board of Directors – The Government

With the news that President Obama’s task force is sending (very) tough love out to GM and Chrysler, taking down GM CEO Rick Wagoner and the board of directors in the process, the parallels (or lack thereof) with GM’s own board of directors is stunning. Look what the task force has said about GM’s turnaround plan:

(1) Projections of slowing market share declines are way too optimistic given past history and plans to shutter more brands;

(2) Expectations on the profitability of GM cars is overstated given market conditions, quality image problems, and plans to make smaller and hybrid vehicles (which generate lower profits);

(3) GM’s European business has been losing money for a decade, yet the company wants to invest more capital there;

(4) The company is far behind in manufacturing fuel-efficient cars, and their hail-Mary (my words, not the task force) known as the Chevy Volt is a sure loser given its uncompetitive cost structure;

(5) Despite all this, to meet its legacy obligations GM will need to sell almost one million more vehicles.

The upshot of all this is that GM is almost certainly not going to return to profitability following the content, and pace, of their current turnaround efforts. And so the $64 billion question is this: Why did GM’s board of directors not deliver these harsh, but probably realistic, assessments to the management team? Why did the board allow GM to make a series of disastrous decisions for years? Why did the board stand by while one of the greatest names in American business fell apart?

The answer is that GM’s board did not take it upon themselves to set the highest of standards, did not carefully question and challenge the management team’s turnaround strategy and progress toward their goals, and did not behave in the highly vigilant manner required to fulfill their fiduciary responsibility to shareholders. Elsewhere I have suggested specific actions vigilant boards must take, and I have written about the types of biases that can push smart leaders to make bad decisions, and all are in evidence here.

This is a scandal of the highest order, but alas, it is a story repeated at Bank of America, Citigroup, AIG, and many other companies. So, while free market economists wring their hands in disgust at the extraordinary interventions of the Obama Administration, I for one say, it’s about time somebody paid attention. It’s about time there was effective vigilance and oversight of GM. And I hope other boards pay attention – what is our state of corporate governance such that the government does a better job of providing advice and oversight to managers than a so-called independent board of directors?