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Executive Times |
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Volume
10, Issue 11 |
November 2008 |
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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. Federalism
There’s a new meaning for the
term “national capital” in Washington, DC. In ancient days, say September
2008, the United States Treasury
would receive tax receipts and disburse funds for government programs. In a
new twist, the Treasury now exchanges cash, guarantees or some form of
bailout for preferred stock, warrants or other forms of equity in what had
been publicly held private companies. Taxpayers are participating in huge
equity investments, with the anticipation that serious problems will be
averted, and these taxpayer investments will someday pay off with healthy
returns. This new form of “federal capitalism” has started with the banking
sector, and there’s speculation that the auto sector will be next. While it’s
early to anticipate how this will all turn out, this issue of Executive Times will explore some of the
aspects of the new federalism and what it might mean for executives.
Yesterday’s experts are explaining what they missed. Companies with federal
aid are learning about expected changes in behavior. As you read the stories
selected, think about the potential impact on you and your organization.
Also, listen to the sounds of Halloween: is that Alexander Hamilton joyfully running from house to house, being
treated by the largest expansion of federalism ever? Or do you hear Thomas Jefferson howling and moaning
about where all this concentrated power has led? To what extent will federal
capitalism be a trick or a treat for the economy and for taxpayers? Fifteen
new books are rated in this issue, beginning on page 5. Fourteen books are
recommended with three-star reviews and one book is rated with a two-star
recommendation. Visit our 2008 bookshelf and see the rating table explained
at http://www.hopkinsandcompany.com/2008books.html as well as explore links to all
400 or so books read or those being considered this year, including 13 that
were added to the list in October. If there’s something missing from the
bookshelf that you think we should be considering or if there’s a book
lingering on the Shelf of Possibility that you think we should read and
review sooner rather than later, let us know by sending a message to books@hopkinsandcompany.com.
You can also check out all the books we’ve ever listed at http://www.hopkinsandcompany.com/All
Books.html. Dealing One
might be able to take the executive out of Goldman Sachs, but taking the Goldman Sachs out of the executive
is another story. Goldman alumnus and United States Treasury Secretary Hank Paulson is managing newly
authorized powers with Goldman-like processes. The Capital Purchase Program
is aimed at injecting capital into healthy financial institutions to
stimulate lending. In announcing the program, (http://www.ustreas.gov/press/releases/hp1207.htm)
nine major companies had already signed up. The term sheet (http://www.ustreas.gov/press/releases/reports/document5hp1207.pdf)
is public, and calls for companies to decide if they are in our out by
November 14. One can almost picture the Goldman desk running a deal and
keeping track of who’s in and who’s out. Here’s part of what Paulson had to
say about this program, (http://www.ustreas.gov/press/releases/hp1223.htm):
“As
we have designed the program, Treasury will make $250 billion in capital
available to U.S. financial institutions in the form of preferred stock.
Institutions that sell shares to the government will accept restrictions on
executive compensation, including a clawback provision and a ban on golden
parachutes during the period that Treasury holds equity issued through this
program. This is an investment, not an expenditure, and there is no reason to
expect this program will cost taxpayers anything. They will not only own
shares that should be paid back with a reasonable return, but also will
receive warrants for common shares in participating institutions. We expect
all participating banks to continue to strengthen their efforts to help
struggling homeowners who can afford their homes avoid foreclosure.
Foreclosures not only hurt the families who lose their homes, they hurt
neighborhoods, communities and our economy as a whole. While many banks have
suffered significant losses during this period of market turmoil, many others
have plenty of capital to get through this period, but are not positioned to
lend as widely as is necessary to support our economy. This program is
designed to attract broad participation by healthy institutions and to do so
in a way that attracts private capital to them as well. Our purpose is to
increase confidence in our banks and increase the confidence of our banks, so
that they will deploy, not hoard, their capital. And we expect them to do so,
as increased confidence will lead to increased lending. This increased
lending will benefit the U.S. economy and the American people.” This quick experiment should
yield interesting outcomes as we watch what the banks do with this new
capital. To what extent have your past
experiences prepared you to deal with current challenges? How boldly are you
willing to act? If given thirty days (or less) to embark on something new,
how quickly are you able to come to terms and proceed or back away? Bogey It
took a few weeks after an $85 million federal bailout for American International Group (AIG)
for the company to realize that their new owners wanted a say on pay and a
say on play. Following media reports about lavish spending at resort
locations after the bailout, New York Attorney General Andrew Cuomo called CEO Edward
Liddy in for a little chat on October 16, and they released a joint
statement (http://media.corporate-ir.net/media_files/irol/76/76115/releases/101608a.pdf)
following the meeting, saying in part, “In a candid discussion, the Attorney
General laid out his serious concerns regarding executive compensation issues
and exorbitant expenses at AIG. … During the meeting, Mr. Liddy agreed to take
several significant actions with respect to expenditures at AIG. First, AIG
has agreed to provide the New York Attorney General’s Office with an
accounting of all compensation paid to its senior executives and has agreed
to assist the Attorney General’s Office in recovering any illegal
expenditures. This includes all forms of compensation paid to former CEO
Martin Sullivan and the former head of the Financial Products unit, Joseph
Cassano. Second, AIG has agreed to establish a Special Governance Committee
within AIG, which will institute new expense management controls. Also, AIG
will be issuing today a new Expense Policy Guidebook. These controls and
protections will be designed at the Board level to prevent any future
unwarranted expenditures, such as salaries, bonuses, stock options, severance
payments, gratuities, benefits, junkets and perks. The new controls will
include direct supervision by AIG Chief Administrative Officer Richard Booth.
Third, AIG has agreed to take several immediate actions. Effective today, AIG
will not make any payments pursuant to the multi-million dollar employment
agreement of Steven Bensinger, the company’s Chief Financial Officer, who
will be leaving AIG. Attorney General Cuomo has specifically asked AIG not to
make payments pursuant to that agreement in light of the Attorney General’s
ongoing review of the propriety of such payments. AIG has also agreed to
immediately cancel all junkets or perks which are not strictly justified by
legitimate business needs. AIG will be cancelling more than 160 conferences
and events, some exceeding more than $750,000 per event, for a total savings
of more than $80 million. … ‘We’re very grateful for the guidance of Attorney
General Cuomo,” said Edward Liddy, AIG’s Chairman and Chief Executive Officer.
“We know that the Attorney General shares our commitment to rebuilding AIG’s
business and paying back the U.S. taxpayer, and we will address the Attorney
General’s concerns expeditiously.’ Attorney General Cuomo added, ‘These
actions are not intended to jeopardize the hard-earned compensation of the
vast majority of AIG’s employees, including retention and severance
arrangements, who are essential to rebuilding AIG and the economy of New
York.’ The Attorney General appreciates Mr. Liddy’s cooperation and
acknowledgment that the old ways of doing business at AIG must end now.” It sounds as if greens fees and
spa treatments will not be covered by the bailout funds. When change hits your
organization hard, how long does it take to filter throughout the company?
How many of those who report to you will need to be told exactly what the
change means? Can you rely on others to be sensitive to the impact of a big
change on behavior and action? Maestro He looked
old and sad in testimony before Congress. The maestro of our economic boom, Alan Greenspan spoke clearly and
plainly when he appeared before the House
Committee on Oversight and Government Reform on October 23. Here’s part
of what he said, according to the unofficial transcript, (http://oversight.house.gov/documents/20081024163819.pdf):
“I
made a mistake in presuming that the self-interest of organizations,
specifically banks and others, were such is that they were best capable of
protecting their own shareholders and their equity in the firms. And it's
been my experience, having worked both as a regulator for 18 years and
similar quantities, in the private sector, especially, 10 years at a major
international bank, that the loan officers of those institutions knew far
more about the risks involved and the people to whom they lent money, than I
saw even our best regulators at the Fed capable of doing. So the problem here
is something which looked to be a very solid edifice, and, indeed, a critical
pillar to market competition and free markets, did break down. And I think
that, as I said, shocked me. I still do not fully understand why it happened
and, obviously, to the extent that I figure out where it happened and why, I
will change my views. If the facts change, I will change.” In the meantime, he will exit
from the stage with reviews of his performance that are not be as glowing as
they were in the past. How quickly will facts change your views? Is there
a key assumption that leads you not to question whether or not your
assessment of a situation is accurate? When does your experience limit your
ability to see and understand what might be a new situation? Restoration The cover story in the November 10 issue of Forbes is titled,
“How Capitalism Will Save Us,” (http://www.forbes.com/forbes/2008/1110/018_print.html)
and is written by Steve Forbes.
The article provides succor for those readers who are alarmed by the amount
of government intervention in markets and what it means for the future.
Forbes explains why some current actions are necessary and offers a
prescription for the future, including, “A formal
strong-dollar policy is essential. … After the crisis, the Fed must undergo a
dramatic downsizing and be given a focused mission. … The dollar must be a
fixed measure of value. … Cutting tax rates is also a necessity. … Sensible,
not punitive, regulations in the financial sector are needed, such as
standardization of new financial products so that there is more transparency.
Fannie and Freddie should be broken up into a number of new, recapitalized
companies that have no ties to Uncle Sam. If we have the kind of policies
that marked the 1980s and not the kind that marked the 1930s and 1970s, we
will be in for a dazzling era of innovation and economic advances.
Free-market capitalism will save us--if we let it.” Will we? Do
some ideas fall into and out of favor? Are there some approaches that should
always be temporary? How can confidence be maintained? Follow-up Here’s
an update on stories covered in a prior issue of Executive
Times: Ø The last time Executive Times called attention to Costco
was in the August
2003 issue when we noted
private label branding actions there and among competitors. The company’s
creativity in finding new ways to keep costs down is profiled in an article
in the 10/20 issue of Business Week
at http://www.businessweek.com/magazine/content/08_42/b4104058856320.htm.
Here’s an excerpt, “At Costco, where more
than 29 million households pay $50 to $100 a year to shop, low prices aren't
just a nice-to-have. They're a way of life. Not only does Costco's famously
frugal CEO James D. Sinegal cap margins at a sacrosanct 14% on branded
goods, he's constantly pushing his buyers to find creative ways to lower
prices and add value while getting his managers to crank up their efficiency
efforts. … ‘The biggest concern to me is that we lose our way and start
thinking it doesn't matter if you charge another dime or another dollar or
another hundred dollars,’ he says. ‘Without those disciplines, we don't have
anything.’” Legacy
Inventive One
path out of economic malaise involves the creative inventions that have been
a hallmark of progress and the creation of wealth. A hotbed of invention for
decades was Bell Labs and the
inventions from that organization fueled hundreds of companies and created
billions of dollars of wealth. Amos E.
Joel, Jr. worked in Bell Labs for four decades and held seventy patents.
When he was inducted in the National
Inventors Hall of Fame earlier this year, he was recognized for one of
those patents in which he “pioneered the system for cell phones of switching
communication links from one cell region to another in response to movement,
while maintaining continuity of service.” (http://www.invent.org/2008induction/1_3_08_induction_joel.asp).
We can thank Joel for giving us all the opportunity to talk almost anywhere
at any time. Joel may have given more thought to switching systems than any
other person before or since. As a child, he tinkered with making switches
that worked, and at MIT, he
thrived under their approach to problem solving and design. At Bell Labs, he
started a school to teach switching to others. In a 1992 interview with IEEE, (http://www.ieee.org/portal/cms_docs_iportals/iportals/aboutus/history_center/oral_history/pdfs/Joel137.pdf).
Joel noted, “As
you can see, my main interests, even then, were to invent things. To develop
new ideas. To try to figure out new things to do with this new technology
and, in fact, with whatever technology there was being used in switching. So
I was full of ideas and got a lot of patents on things that never
materialized into projects like the ones I've just described to you. But that
was the things I liked to do. Unfortunately, day to day I did have to do a
lot of personnel--you know, hiring (we didn't do any firing), moving people,
classifying them. Worrying about budgets. You know, how much money could we
get for the next year to do what we wanted to do? And all these other kinds
of administrative things that come along. … I didn't want to continue
worrying about budgets and personnel problems and all that kind of thing for
the rest of my career there because I was still full of ideas and things I
wanted to do. So I went to my boss--I went to the vice president,
actually--and told them how I felt about it. And so he said, Well, all right,
why don't you just, you know, we'll fill in behind you and get somebody else
to take over your laboratory. And you just become a director without
portfolio, so to speak. … I would not have to worry about any of these
things, and I could do what I wanted. Of course I had no help, I was just on
my own. … And so it was a great opportunity, and I was able then to start
working on new ideas. And I had a lot of new things I worked on.” Joel’s work on new ideas led
to new inventions and patents. Joel died in late October at age 90. The
switches he invented are still working. Latest
Books Read and Reviewed: (Note: readers of the web version of Executive Times can click on the book covers to
order copies directly from amazon.com.
When you order through these links, Hopkins & Company receives a
small payment from amazon.com. Click
on the title to read the review or visit our 2008 bookshelf at http://www.hopkinsandcompany.com/2008books.html).
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Hopkins & Company, call Steve Hopkins at 708-466-4650 or visit www.hopkinsandcompany.com. |
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