Executive Times |
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Volume 2, Issue 4 |
April, 2000 |
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ã 2000 Hopkins and Company, LLC Note re: links---certain
hyperlinks assume that you are registered as a subscriber to the site. If you
are not a subscriber to certain sites, the links will fail. If you register, the
links should work. Also, certain hyperlinks expire and may not be available
when you try to go to the site. Dirty Dealing Someone asked us not long ago why company
executives are often portrayed negatively in the media. We paused and offered
a few ideas, but the question nagged us for several days. The latest round of
press reports about questionable corporate practices and the beginning of the
proxy season brought us a single, crisp reason: there are plenty of bad
stories to tell. In the same way that local television news programs report
crime and tragedy with enthusiasm, business media gravitate toward bad news
and controversy. We generally prefer the attention and visibility drawn to
questionable practices, because that attention leads to reform. With
consistent and clear disclosure, the best companies and executives thrive,
and the market punishes those executives and companies whose practices are
smarmy. How proud or embarrassed are you when the bright light of day shines
on you and your organization? What do you do to support standards and
practices that reduce your organization’s vulnerability to dirty
dealing? Spoiled fruit We’ve never liked William Farley.
The basis of our dislike goes back to the 1980s when his leadership of both West
Point-Pepperell and Condec led those companies to bankruptcy, and
deepened when he appeared in Fruit of the Loom’s
underwear ads. We grimaced at the sight of photos of his smiling face while
Fruit lost money and jobs under his leadership. We also didn’t like his
hubris in assuming that citizens would view him as a viable candidate for
President of the United States. Happily, reality set in, and he never
actually ran for office. Most of all, we disliked his corporate governance
practices, and what appeared as self-serving inside dealing to the detriment
of other shareholders. The
New York Times (3/19/00) presented
a lengthy profile of the woes facing Fruit of the Loom and points directly to
Farley as the source of the company’s problems. The Board, of which he
continues as a member, fired him as CEO last August. We’re amazed that he was
hired in the first place given his prior bankruptcy record. The
Wall Street Journal (3/17/00)
reported that in the company’s latest earnings results, it disclosed a $20
million charge relating to a company loan to Farley that has not been paid.
Meanwhile, one of the best-recognized brands ever created tries to recover
from a decade of mismanagement. Fruit of the Loom entered bankruptcy at the
end of 1999. How vulnerable is your organization to
the whims of a single individual? When an individual lets you down
repeatedly, how patient are you with promises of future performance? Are your
executive perks visible and appropriate? Could any of your personal terms of
business cause embarrassment to your organization if disclosed? When you hire
someone, how well do you check references? Can you expect past performance to
be repeated? “I know, let’s raise prices” What were the heads of Sotheby’s and Christie’s thinking when they seem
to have agreed to raise commissions? Over the past few months, many business
media stories continue to explore the reasons behind the departures of the
CEOs of the two leading auction houses. What seems clear so far is that the U.S.
Department of Justice issued subpoenas to explore possible anti-trust
violations at the two companies. Christie’s received amnesty for their
cooperation with Justice. Both companies are facing criminal and civil
exposure. How similar is
your pricing to that of your closest competitors? How frequent are the
contacts between your staff and their counterparts at competing firms? How
vulnerable is your company to claims of price collusion? What do you mean by “revenue”? Some Internet companies are reporting
revenues with the same innovation they’ve brought to business models. For
example, online airline ticket companies serve as intermediaries between
consumers and airlines. Instead of booking their commissions as revenue, they
are booking the full ticket price. Since the Securities
and Exchange Commission called attention to these practices last
December in Staff
Accounting Bulletin 101, at least 32 companies have changed their
accounting practices, according to a March report from Baer, Stearns (The
Washington Post 3/19/00). FASB now has
a task force trying to clarify the revenue rules, but has not yet reached a
decision on when companies should report gross revenues and when to report
net revenues. Barter deals for advertising have value that appears in the
revenue calculations at some companies, but not others. The Post
speculates that management holders of stock options gain the most by high top
line revenue growth, since that measure is often used as a proxy for profits
in valuing Internet companies. “Cooking the books,” whether using new methods
or old ones, adds to perceptions that executives are untrustworthy. In late March, MicroStrategy
announced that they were changing their methods for booking revenue. Following that announcement, their market
capitalization dropped by 70%. Billionaire CEO Michael Saylor suffered
a personal paper loss of around $10 billion. The initial reason given when announcing
the change involved emerging SEC concerns. A day or so later, the reason was revised
to clarify that the reason was to comply with a 1997 AICPA statement. We’re
glad that we weren’t the CPA at PricewaterhouseCoopers
who signed off on the MicroStrategy statements. If you want to read more about the
accounting and ethical challenges faced, especially by Internet companies,
check out the March
20 issue of Fortune. How clear, visible and consistent are
your financial reports? Do those reports tell a complete story about your
business to investors? Are you and your shareholders likely to experience
volatility in the value of your holdings if accounting treatment
changes? Warren’s woes Red ink from the Pink Panther Our favorite annual report arrived online
in March from Chairman Warren Buffett, and given Berkshire Hathaway’s poor
1999 results, the humor brought less joy than usual. Here’s a quote from
Buffett’s letter
to shareholders: “We had the worst absolute performance of my
tenure, and compared to the S&P, the worst relative performance as well.
Relative results are what concern us:
Over time, bad relative numbers will produce unsatisfactory absolute
returns. Even Inspector Clouseau could find last year’s
guilty party: your Chairman. My performance reminds me of the quarterback
whose report card showed four Fs and a D but who nonetheless had an
understanding coach. ‘Son,’ he drawled, ‘I think you’re spending too much
time on that one subject.’ My ‘one subject’ is capital allocation, and my
grade for 1999 most assuredly is a D.” We can always count on Buffett to make
suggestions about how to improve financial accounting and reporting.
Following a long discussion in his letter about purchase and pooling methods
for acquisitions, Buffett says: “Charlie (Munger, Vice Chairman) and I believe
there’s a reality-based approach that should both satisfy the FASB, which
correctly wishes to record a purchase, and meet the objections of managements
to nonsensical charges for diminution of goodwill. We would first have the
acquiring company record its purchase price---whether paid in stock or
cash---at fair value. In most cases, this procedure would create a large
asset representing economic goodwill. We would then leave this asset on the
books, not requiring its amortization.
Later, if the economic goodwill became impaired, as it sometimes
would, it would be written down just as would any other asset judged to be
impaired. If our proposed rule were to be adopted, it should
be applied retroactively so that acquisition accounting would be consistent
throughout America---a far cry from what exists today. One prediction: If
this plan were to take effect, managements would structure acquisitions more
sensibly, deciding whether to use cash or stock based on the real
consequences for their shareholders rather than on the unreal consequences
for their reported earnings.” We’re skeptical that FASB will accept
Buffett’s proposal, but, as always, he presents a good case. He also used this year’s report to disclose
that Berkshire Hathaway will repurchase shares whenever its stock price “is
selling well below intrinsic value.” Stay tuned for the revenge of the value
investor. How easily do you grade your own good
and poor performance? Are you as candid as Buffett in accepting
responsibility for results? Are you more inclined toward going along with the
rules that exist, or are you willing to spend the time and energy proposing
better rules? “No nerds, no birds” Listening in Seattle Striking engineers and Boeing came to terms
recently, following a six-week strike during which the picketers wore
t-shirts proclaiming a slogan that caught media attention: “No nerds, no
birds.” Management’s attention was also caught with the walkout, causing a
plunge in the stock price and a further backlog in plane deliveries. Our
favorite quote from Boeing CEO Phil Condit appeared in The New York Times (3/18/00):
"One day I hope we can all look back on this as a turning point, a time
when we more clearly recognized the importance of listening to and seeking to
understand one another." The company appears to have yielded on all
major union demands, and given the shortage of professional workers at many
companies, unions representing such workers are likely to increase their
power and voice around the country. Stay tuned. How do you assess your organization’s
skills in listening to and understanding employees and their needs? Does a
union represent your white-collar workers? If so, how well do you listen to
and understand the issues and concerns of such workers? What’s the impact of
a job action by them on your organization and its customers? If a union
doesn’t represent your workers, what mechanisms are in place to ensure that
workers feel that management listens to their issues and concerns? How do you
continue to ensure that workers feel they get a good deal by working for your
organization? That number is not in service $5 billion fireworks The Iridium
satellites should begin to flame out any day now. Service shut down on March
17. It sounded like a great idea:
provide global wireless access through a network of satellites. In
retrospect, this was a product without a market. Motorola’s phones
were larger and heavier than cell phones, and tended not to work from inside
buildings. Global business travelers were selected as the target market, one
far too small to support the high costs of the network, and the needs of
those travelers were not well understood prior to product and satellite
launch. The market balked at prices and equipment, while cell phone
improvements came close enough to meeting the needs of business travelers at
a much lower cost. Motorola, the major backer of Iridium, refused to throw
good money after bad, and no new investors were found, so Iridium will go
away after it cleans up its mess by steering the satellites on a course to
burn up safely in Earth’s atmosphere. Where have you been throwing good money
after bad? What will it take for you to cut your losses? Are your mistakes on
the scale of Iridium’s $5 billion mishap? What are you waiting for? When
developing products, are your customer’s needs the most important component,
or do you focus on technology and assume that customers will follow? United we stand Is this “co-opetition”? We want to call attention to three recent
examples of competitors working together for their mutual benefit and that of
suppliers and customers. The big-three auto companies have gotten together to
create a single parts network, which will streamline the order and delivery
of parts between suppliers and the auto manufacturers. (See The
Wall Street Journal, 2/28/00).
Ford and General Motors had competing exchanges which they will
merge, and DaimlerChrysler will join the new Internet exchange rather
than start up a third proprietary exchange.
Securities dealers seem to have banded
together trying to lead a reform effort to improve trading processes that’s
long overdue. What surprised us is that executives who testified at the Senate
Banking Committee asked the government to force competing stock markets
to work more closely together. "I never thought I'd see the day I was
arguing for regulation," Henry M. Paulson, the chairman of the Goldman
Sachs Group, told Phil Gramm, the Texas Republican who heads the
committee. (The New York Times, 3/1/00). The five largest homebuilders banded
together to create a common, non-exclusive website that will list new homes.
(See The
New York Times, 3/23/00).
Having realized that their individual sites generate some traffic, a common
site might attract even more customer interest. We think the homebuilders
“get” the Internet: give consumers choices; don’t act in a proprietary
manner; and create reasons for customers to visit your site. In what areas are you struggling to go
it alone? Would open networks make a difference for your company, its
suppliers, and your customers? What are the barriers in your field to
creating and maintaining such a network?
Follow Up Here are selected updates on stories
covered in prior issues of Executive Times: Ø The Coca-Cola proxy statement came out recently
and contains two items of surprising news about ousted CEO, Doug Ivester:
he gets to keep his company car, a 1996 Mercury Marquis (why would he want
it?), and the generous special terms of separation cause readers to conclude
that his departure was not voluntary. The August 1999
Executive Times noted that given
trouble at Coke, Ivester had a great opportunity to turn adversity into
success. It turns out he acquired personal success (including his $18 million
severance package) and it’s up to his replacement, Doug Daft, to lead
Coke to recovery. Ø The November
1999 Executive Times called
attention to Aetna CEO
Richard Huber’s fight against the Patient’s Bill of Rights and his view
that Aetna’s role is that of an administrator, carrying out the wishes of its
customers (employers). In late February, Aetna’s board ousted Huber at a
cost of around $3.2 million based on the numbers we uncovered in their late March
SEC filing. Aetna’s new CEO, William
Donaldson (of Donaldson, Lufkin, &
Jenrette fame) leads the exploration of ways to increase Aetna’s
value. Let’s hope he reserves a place for meeting the needs of consumers in
that vision. Legacies Many business
leaders work hard to communicate the components of the business cycle to
stakeholders. The work of one individual, Geoffrey Moore, made the job
easier. Moore spent around 30 years at the National
Bureau of Economic Research, and is considered by some as the father
of leading indicators as we know them today. His work at the Bureau of Labor Statistics generated the
right information for economists to note turning points in economic
patterns. Moore died in mid-March at
age 86. Reading (Note:
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Times. Check out other book selections on our bookshelf at http://www.hopkinsandcompany.com/bookshelf.html).
Everywhere you want to be You may never have heard the name Dee Hock,
but chances are you carry in your pocket a card that he put there. Hock
founded VISA International, a
quirky worldwide alliance of banks, merchants and consumers. Hock’s new book,
Birth
of the Chaordic Age, tells the story of VISA and challenges institutions to
reinvent themselves along similar lines. “Chaordic” is Hock’s created word
that attempts to convey a blending of chaos and order, which Hock proposes is
critical for organizations to succeed. We loved this book, and recommend it
highly. Hock structured three parts that flow within one book: one typeface
conveys the story of VISA; another typeface discloses Hock’s thinking behind
the events and actions that took place; and the final part contains themes
and lessons in briefly worded, highlighted boxes. We found the story
compelling and fast-paced; the introspection helpful in gaining understanding
of what happened and what didn’t, and the highlighted boxes helpful at times.
Here’s a sampling from Hock’s disclosure:
“We were extremely good at some things, we were very good at many
things, but we were not good at everything, and at some things, we were
pathetic. It is one of the principal acts of leadership to make that
distinction. I did not.” You can find our more about how organizations can
adopt chaordic principles at www.chaordic.org. We vote “no” We wasted a good hour or so the other evening when
we read a copy of Dick Morris’ new book, Vote.com,
out of curiosity. We expected this savvy political advisor to present a
cogent case for online voting and direct democracy. Instead, we endured 230
pages of promotion for Morris’ website, www.vote.com,
funded by two lawyers with plenty of cash leftover from suing the tobacco
companies successfully. The kind of voting that takes place on the website
involves self-selecting polls and that’s what the book is about. We already
know that the Internet changes a lot of things, politics included. Morris
doesn’t understand the Internet well enough to present his viewpoints with
clarity and consistency. We kept reading in a search for facts and some way
to agree with any of his glib assertions. We were glad the text was
double-spaced. By the end of the book, we still found nothing substantial. We
suggest you take a pass. Not about physics When we first heard the title of Gary
Krist’s book, Chaos
Theory, we thought it was about physics, and kept an eye open for it because we always like
to learn more physics. Happily, when we found the book, we learned that it’s
a thriller, so we were even more enthusiastic to read it. Krist delivers a
well-written, fast paced novel with great character development and
exposition. If you’re tired of Grisham, Turow and others, give Krist a try.
We found the plot to be well developed, and recommend this fun page-turner. Show me the money The Reverend Jesse Jackson’s Wall Street Project
called attention among financial institutions to ways in which they needed to
close the gap between their companies and minorities. We just read It’s
About the Money, a book written by Reverend Jackson with his son,
Congressman Jesse L. Jackson, Jr., with Mary Gotschall, a journalist whose
work appears on Bloomberg regularly. This is a clearly written book that
describes financial concepts basically, but without condescension, and
provides ample reference material on credit, insurance, investment, financial
planning and educating others on financial matters. You may want to make this
resource book available to employees or customers. ã 2000 Hopkins and Company, LLC. Executive Times is published monthly by Hopkins and Company,
LLC at the company’s office at 100 Forest Place # P2, Oak Park, Illinois
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