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Renewing the Enterprise 2: Governance, Measurement & Performance

The fundamental messages we've been trying to drive home are that the next decade will be one of the most challenging in at least four, if not since the Great Depression, that the new realities have not sunk into investors, management and stakeholder consciousness and the single biggest challenge will be to improve enterprise performance. Performance improvement will either be led by the enterprises or imposed from the outside, less effectively, by a high level of distrust and justified anger at near-disasters brought on by malfeasance. And this is not just restricted to the Finance Industry. It is in enterprises own best interests to improve their governance, management systems and performance to make sure it's done well, adapted to their needs and, most importantly, they actually improve their performance.

Backing up those assertions you'll find an extensive readings collection on each of the major issues involved after the break; here we want to review the evidence and explore the core concepts of performance improvement and management systems. But start with the BNN clip of Don Coxe both laying out the situation and the level of reality denial currently prevalent in the markets. A reality, judging by the week's reactions to earnings in the markets, that might just be sinking in the general consciousness.

The Value Equation: Balancing Short vs. Long-term

If you look at the general cases, the industries or the specific companies there is one redcurrant symptom of failure. The sacrifice of long-term value creation for the appearance of short-term performance.

That difference, often thought to be mere words and arm-waving, actually makes a substantive difference in enterprise performance and in long-term stock values. In other words it makes a difference to every stakeholder.

And it actually turns out to be measurable using market data - though only after performance has resulted in changes in market valuation. The graphic lays it out nicely, both in general terms and using the specific example of MickeyD's. In their case the fundamental strategy was add more stores without changing the old value proposition and just grow, grow, grow. Well that kept up reported operating profits and earnings but the saturation led to a deterioration in total enterprise value because long-term value tanked.

Then they slowed growth, reinvented the menu and the stores and created both a new core proposition and translated that into execution. The result was a surge in future enterprise value driving a surge in total value. The trick is to spot the change in the value equation early but clearly you can also spot it while it's well underway and hop on the gravy train as it plays out.

To spot it early and to know whether or not it is sustainable you have to analyze the business as a business - think like an owner. Is the value creation sustainable, what is the strategy, can it be executed and, most importantly, are they walking the talk? That is, is what they say they intend to do what's built into plans, capabilities and compensation? If so value will be created.

Compensation vs. Performance Breakdowns

It's not just the Finance Industry but all enterprises that have lost trust thru, at best, non-performance or, at worst, malfesant behaviors.

The argument for exhorbitant executive compensation has been that it results in outperformance. As the result of the Financial crisis there have been several major studies of that proposition and the "startling" result confirms what common wisdom would suspect. Not only has it NOT resulted in out-performance but just the opposite. In fact the performance deficit is large and signficant.

This ought to cause major pressures from stockholders and stakeholders for performance-based compensation tied to long-term value creation. But, with all the sturm und drang in Washington the fundamental regulatory change has already happened. The SEC has put forth new regulations requiring executive compensation to be tied to long-term objectives. The saddest thing about this is that a regulatory agency is having to put controls in place that should have been common business practice and taken for granted. That it felt it had to act, on the basis of good evidence that it is not, is a major indictment of corporate governance. When the Auto Task Force went into Detroit what it found was not the bad situations it anticipated but abysmal conditions; Wagner should have been removed, years ago. When the government is forced by your private and social failures to re-engineer executives and the Board have let everyone down, including themselves.

Governance Breakdowns: As-Is vs. Should-Be

The question becomes what's broken and what should be done to fix it. Let's start with the way things are and go to the way things should be, and must be to cope with the New Normal, not to mention the SEC!

At best what you here from most companies is some rather vague strategic assessments of the state of the enterprise (and if you listen to conference calls, all the questions that get asked). For that strategy to be deliverable it must translate into operational capabilities that support each other and are aligned with the overall enterprise goals. What you get is a set of functional fiefdoms that grew up by accident and are defended politically on internal agendii, with the result that the realities of strategic implementation are dictated by inadvertent operational strategies. Thereby making what you hear all fantasy. And it's easy to judge - when Bartiromo interviewed Sue Decker at Davos a while back the answers were beyond vague. Immediately telling you that Yahoo hadn't a clue. The contrast with Bartz is astounding. Which is one early and easy tell!

What you want and need is a clear, simple, straight-forward and crisp definition of current strategy and objectives and evidence that it is operationally deliverable. WMT would be our example of best practices while Citi is a perfect example of an organization that, finally, articulated a clear strategy but doesn't have the management system or operational capabilities to make it happen. BAC and Dell may be suffering similar breakdowns in performance management. Ideally what you'd hear, less granularly and with more give in the boundaries, would be a clear articulation of future value and strategy as well as deep changes in operational capability. Again these are things you can dig into into in the analyst presentations.

Re-thinking Performance Management

 A favorite story is the Citi branch manager who confessed that the 30 corporate memos from HQ he saw a month went into the round file cabinet and he focused on montly branch performance. That's sad but telling because it tells you how broke the management system is, that any notion of long-term value was non-existent and that incentives were on the appearance of short-term performance. People will do what you incent them to do, period, though that takes more than money.

What you need is set of operational measurements and metrics that link the performance of the individual functions and organizations to the broader corporate goals. Fedex has been doing this for years and the heart of WMT's re-engineering was setting performance goals for return and operational performance at the store and department level.

Performance results from Efficiency (using what you've got given a level of economic activity), Utilization (using what you've got effectively as demand rises and falls in the cycle) and Capacity (increasing capabilities in line with the strategy). But what business units do is activities - they don't return profits per se. In other words the necessary, and now mandated, revolution in management systems requires decisions about the principal activities for each unit, the appropriate metrics, and what should they be in three time frames (matched against the Efficiency, Utilization and Capacity adjustments). For a Fedex station manager it might be packages per stop, for a WMT store manager it might be sales and profits per square foot, preferably by department.

Most importantly compensation of all sorts, including who gets promoted, should be based on these sorts of adjustmenable activity indicators. And you'll be able to tell that it's happening when you hear the executives talk about it (see UTX's analyst reports for example) and it starts showing up in results.

Speaking of Results: the New Normal Tsunami

To return to our point about the coming challenging decade take a look at this chart (PBS just put out an interactive graphic looking at job creation from BLS stats for the decade, anticipating 10% job growth over the decade. Less than breakeven - this is going to be a VERY tough decade indeed). This chart give us a start on the long-term market performance of four exemplary firms, all of whom are on our list of very well-run organizations.

Recently they've had major runups following the market but, on the whole, nobody has returned to '04 peaks. You can see the Enterprise Value pressures at work on WMT in the middle of the decade as their business model aged and withered, and the impacts of their re-invention, then and now. But INTC and BAC are indeed challenged (meant to include CSCO but...fat fingers).

If we're right about the decade profits and earnings will be challenged (not to mention the artificiality and poor quality of finance profits) and we're looking at a sideways market where PE's will compress. The bottomline of bottomlines here is that long-term performance, and therefore management systems, performance, governance and compensation practices, are really going to matter. More than ever! And it will be incumbent to find the enterprises walking the talk now and for the future.

The Adaptive Organization: Petraeus on Marines

One organization with astounding espirt de corp that manages to do more with less again and again, maintain discipline but always be resilient under extreme stress while also, simultaneously, adaptive to long-term requirements is the USMC. And nobody summarized it better than Gen. David Petraeus (in a Marine birthday speech where he took a lot of heat for his USAF jokes while everybody missed or ignored the substance).

If you find this overall topic of organizational performance interesting we strongly suggest that you listen to the address, though it admittedly runs about 30 min. or so. But in that time there's a lot of ground covered, besides the inside jokes of course.

Petraeus' fundamental theme is that what distinguishes Marines is their adherence to bedrock principles in the face of all opposition combined with a constant willingness to innovate and adapt. Examples in history include the invention of amphibious warfare and Counter-Insurgency but more recently the application of COIN to supporting the Anwar Awakening in Iraq.

We'd add that within the context of strategy, doctrine and operations every Marine corporal is empowered to make local decisions. Applied to business the lessons are that value is created on the frontline, not in the Boardroom. And what happens on the frontline needs to be decided based on the overall good of the enterprise, not on merely local conditions, narrow incentives or short-term gains. To get from where we're at to where we need to be will challenging but necessary and the heart of it lies in governance and performance.

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READINGS

 This is a rather large collection of readings that tries to set the stage for the challenges of the next decade, translate those into value-creation opportunities and challenges for business and look at the major governance and performance management issues. Including using GM as a perfect exemplar of a failure of management, measurement, leadership and governance. Each of those issues gets its own special section as well, including extensive discussions on executive compensation. The bottom line conclusion is that Boards, Executives and Companies are facing very challenging times, the lowest trust level in decades and major challenges to their management systems. They will either implement new approaches or have them implemented for them.

Facing the New Realities

Why Many Investors Keep Fooling Themselves What are we smoking, and when will we stop? A nationwide survey last year found that investors expect the U.S. stock market to return an annual average of 13.7% over the next 10 years. Robert Veres, editor of the Inside Information financial-planning newsletter, recently asked his subscribers to estimate long-term future stock returns after inflation, expenses and taxes, what I call a "net-net-net" return. Several dozen leading financial advisers responded. Although some didn't subtract taxes, the average answer was 6%. A few went as high as 9%. We all should be so lucky. Historically, inflation has eaten away three percentage points of return a year. Investment expenses and taxes each have cut returns by roughly one to two percentage points a year. All told, those costs reduce annual returns by five to seven points. So, in order to earn 6% for clients after inflation, fees and taxes, these financial planners will somehow have to pick investments that generate 11% or 13% a year before costs. Where will they find such huge gains? Since 1926, according to Ibbotson Associates, U.S. stocks have earned an annual average of 9.8%. Their long-term, net-net-net return is under 4%. All other major assets earned even less. If, like most people, you mix in some bonds and cash, your net-net-net is likely to be more like 2%.

Markets Not Facing 'Reality' Of Slow Economy: El-Erian Financial markets have failed to price in the remaining problems that bedevil a long-term economic recovery, Pimco's Mohamed El-Erian told CNBC. Inconsistencies that the market faces include the tax on bailed out banks that President Obama announced Thursday and its effects on their ability to lend; long-term unemployment issues and the difficulty in fixing them due to the federal budget deficit, and weaknesses with sovereign balance sheets, Pimco co-CEO El-Erian said in an interview. Despite these issues, stocks continue to climb, with the market about 60 percent above the March 2009 lows and posting mild gains so far in 2010. "You come to the conclusion that the market simply hasn't priced in the reality of what we talk about every single day," said El-Erian, who helps run the world's largest bond fund. El-Erian said the "serious, sequential contamination" of world balance sheets will be a larger issue in 2010 and require corrective measures. Yet he also said US gross domestic product gains are likely to be in the 4 to 5 percent range and will present the illusion that the economy is recovering more strongly than fundamentals would indicate. "What you're getting is a recovery phase, a healing phase that was artificially created," he said. "The history of crises is very clear. They expose structural problems and when you look at the structural problems you need a structural response, and so far we've only had a cyclical response." El-Erian's comments echoed those he made July 29, 2009 on CNBC in which he said the market was on a "sugar high" that was not reflective of economic slowness. Stocks have gained about 15 percent since those comments.A lasting recovery will only be built on real growth and not that which is stimulated by government, he said. "We want it to happen," he said. "But navigating our clients' assets through this very fluid market is not about what we want to happen but what is likely to happen."

  • Don Coxe  BNN's Pat Bolland and Jacquie McNish are joined by Don Coxe, chairman, Coxe Advisors LLC.

When the Fed Stops the Music The Federal Reserve has been very clear about the fact that they intend to stop the quantitative easing program at the end of March. What that means in practice is that they are going to stop buying mortgage securities. That does two things. As Bill Gross so aptly points out, those mortgage purchases helped keep mortgage rates low. But they also financed the US government fiscal deficit, albeit indirectly. It seems that funds and banks that sold the mortgage securities turned around and bought US government debt or put the cash right back at the Fed. But the currency I want the most if I am a central banker is that barbaric yellow relic, gold. Just as India has recently bought 200 tons of gold, I think central banks in other emerging nations will want to buy more, too. They all have relatively little gold as a percentage of their reserves. Look for that to change. I also like gold in terms of the euro, the pound, and the yen - more than I like it in terms of the US dollar, but even there I like gold long-term, at least until we get some fiscal sanity. The reason this recession is different is that it is a deleveraging recession. We borrowed too much (all over the developed world) and now are having to repair our balance sheets as the assets we bought have fallen in value (housing, bonds, securities, etc.). A new and very interesting (if somewhat long) study by the McKinsey Global Institute found that periods of overleveraging are often followed by 6-7 years of slow growth as the deleveraging process plays out. No quick fixes.

Mark Mobius on emerging market valuations “Nevertheless, on a relative basis, emerging market economies seem to have done much better than those in the developed world. I believe the kind of premium that the market is currently placing on these emerging market valuations is justified, to some extent. Unless there is certain monetary tightening in these emerging market economies, I think current valuation levels are sustainable.

Deleveraging out of the debt mire will be an unsavoury task Moreover, alongside the (limited) rise in broker borrowing in the past decade, there was also a far more startling increase in "real economy" debt, particularly in the household and real estate sector. Since the crisis started, this "real economy" debt has declined a tiny bit, while financial sector leverage has fallen considerably. But since public debt has spiralled, gross leverage levels for most large nations have not fallen. And that, in turn, has a crucial implication: namely that, insofar as deleveraging is inevitable, much of it is still to come. From a historical perspective, this challenge is not entirely unprecedented. The UK and US have, after all, slashed vast debt burdens before during the last two centuries, and McKinsey has identified four dozen smaller deleveraging episodes around the world since 1950. But while governments have sometimes softened this task before by creating rapid growth, often due to exports (via devaluation), or a peace dividend (after a war), those routes do not offer an easy escape this time. Growth, in other words, could be tough to achieve. So that leaves three unpalatable options, McKinsey suggests: outright default, inflation or belt-tightening. McKinsey's best guess - or hope - is that belt-tightening will predominate, and it consequently forecasts a grim climate of austerity for the next decade. It may be right. But to my mind, at least, it remains a very open bet whether western voters will accept austerity without a backlash; personally, I would thus put a higher emphasis on the other options too. Either way, the real moral is that the task now facing the western governments is monumental.

The lesson from two lemonade stands The first stand is run by two kids. They use Countrytime lemonade, paper cups and a bridge table. It's a decent lemonade stand, one in the long tradition of standard lemonade stands. It costs a dollar to buy a cup, which is a pretty good price, considering you get both the lemonade and the satisfaction of knowing you supported two kids. The other stand is different. The lemonade is free, but there's a big tip jar. When you pull up, the owner of the stand beams as only a proud eleven year old girl can beam. She takes her time and reaches into a pail filled with ice and lemons. She pulls out a lemon. Slices it. Then she squeezes it with a clever little hand juicer. The whole time that's she's squeezing, she's also talking to you, sharing her insights (and yes, her joy) about the power of lemonade to change your day. It's a beautiful day and she's in no real hurry. Lemonade doesn't hurry, she says. It gets made the right way or not at all. Then she urges you to take a bit less sugar, because it tastes better that way. While you're talking, a dozen people who might have become customers drive on by because it appears to take too long. You don't mind, though, because you're engaged, almost entranced. A few people pull over and wait in line behind you. Finally, once she's done, you put $5 in the jar, because your free lemonade was worth at least twice that. Well, maybe the lemonade itself was worth $3, but you'd happily pay again for the transaction. It touched you. In fact, it changed you. Which entrepreneur do you think has a brighter future?

  • Why you, why now? The goal is to create an offering that can answer these two questions. Why from you and why right now...Most businesses that struggle are unable to answer these two questions in a compelling fashion. They act as though they deserve that sale, or that they need to aggressively close so you'll buy today, instead of working to build in these very elements to the product itself.
  • What the industry wants If the industry can't make money selling what you're selling, why will they help you? You can view these things as ridiculous peccadilloes. Or you can see them as parts of the system as permanent and as important as the gatekeepers who rely on them. On the other hand, fall in love with the system and you might forget the end user. And we know how poorly that works.
  • Maneuverability We often talk about speed when describing certain kinds of businesses. Some companies are bureaucratic, slow, dysfunctional... others are fast... fast to market, fast to ship you something. Just like a car, though, there's an alternative to raw speed. Call it maneuverability.

New World of Business

In the aftermath of the Great Recession One insistent question at the start of a new decade involves the lingering effects of the old: What scars will the Great Recession leave? So the Great Recession's nastiest scar could be an era of economic frustration, characterized by slower growth and contentious competition for scarce resources. Stunned by huge wealth losses in stocks and real estate, Americans save more and spend less. Businesses suffer from weak demand. Hiring remains sluggish. Worse, the slowdown coincides with an aging population, which could compound the effect. The answer may hinge on two things: trade and entrepreneurship. Most economists see stronger exports as a substitute for weaker consumer spending. Unfortunately, that depends heavily on economic growth and trade policies abroad. By contrast, entrepreneurship is a sleeper issue that depends on what Americans do. If you doubt its importance, consider this: All net job creation from 1980 to 2005 came from firms that were five years old or less, according to a study by economists John Haltiwanger of the University of Maryland and Ron Jarmin and Javier Miranda of the Census Bureau. In any one year, that may not be true; but over time, mature firms lose more jobs than they create. "It's not small firms but young firms that count," says economist Robert Litan of the Kauffman Foundation, which sponsored the study. If Americans don't continue to create firms -- not just high-tech start-ups such as Facebook but construction companies, florists, restaurants, dry cleaners, engineering firms -- the economy may languish. Beginning a business is a risky, exhausting, chaotic process. Every year, there are roughly 500,000 to 600,000 company "births" and almost as many "deaths." Half of new firms don't make it to year five, says Litan.

Layoffs: Profits Now, Questions Later The millions of layoffs in the past year have been bad news for almost everyone—except, that is, for investors. Companies turned smaller payrolls and other expense cuts into better-than-expected profits, fueling a 31% advance in the Standard & Poor's 500-stock index in the past year. "It's been a cost-cutting rally," says Terry Morris, senior equity manager at National Penn Investors Trust Co. There are now more questions on Wall Street about the long-term impact of all this job-shedding. But, for a year, aggressive job cuts have improved investor perceptions of many stocks.

CEOs see light after a dismal 2009  It was a year many chief executives would like to forget. Sales plummeted, consumers disappeared and profits evaporated. But some corporate chiefs found a silver lining—or at least a new impetus to try things differently. Below, CEOs tell how they managed during the worst downturn in memory—and talk about signs of hope for 2010. One thing Jim Owens learned managing through a "horrific" 2009 is that the Boy Scouts are right. "Being prepared" was crucial to weathering the storm, said the Caterpillar Inc. CEO, echoing the scouts' motto. In 2005, Mr. Owens ordered each of his construction- and mining-equipment company's 28 business units to devise a detailed plan for what they would do if their individual markets hit a 25-year low. Mr. Owens, a 63-year-old Ph.D economist, knew the good times had to end eventually. And indeed, sales for 2009 are expected to fall almost 40% to between $32 billion and $33 billion. During the boom, Caterpillar expanded aggressively by hiring workers and enlarging factories—but it also built in greater flexibility by relying more on temporary and contract workers. As business slid, the Peoria, Ill., company slashed 37,000 workers—but only about half those were full-timers. In 2009, the machinery that powered Condé Nast's fabled magazine empire broke down, forcing Chief Executive Chuck Townsend to rethink some of the principles that had long helped distinguish the publisher of Vogue, GQ, Vanity Fair and other upscale titles. In the spring, Mr. Townsend directed his marketing executives to start listening more to advertisers and—within reason—give a little ground on rates. For decades, Condé Nast, a unit of closely held Advance Publications Inc., had thrived by pumping huge sums of money into creating the shiniest magazines on the rack and an aura of prosperity that justified the high ad rates paying for it all. But by about April it had become clear to Mr. Townsend that this recession was different from any he had seen. The conspicuous consumers who had fueled his core advertisers had gone into hibernation. Next year holds a huge market-share opportunity for publishers who didn't cheapen their products and opted for flexibility and collaboration with advertisers, Mr. Townsend said.The biggest risk, Mr. Townsend said, is a fragile recovery that fails to instill confidence in consumers. "If that occurs," he said, "we're going to be swept back in."

As the economy tentatively recovers, chief executives are trying to ramp up growth, but not hiring. The economy grew 2.2% in the third quarter and layoffs have slowed, but companies continue to shed jobs. And employers are hiring at their slowest pace since the Bureau of Labor Statistics began tracking in 2000. Managers can't rely on the traditional carrots of raises or promotions. Employers plan meager 2.8% raises in 2010, after 2% bumps in 2009, according to consulting firm Towers Watson. And the static job market, which includes Baby Boomers who have delayed retirement as well as younger employers unable to find better opportunities elsewhere, hasn't created many openings for managers to award promotions. At companies from Rockwell Collins to Ford Motor Co. and Sanofi-Aventis SA, managers are reaching deep into their toolbox to coax more productivity from salaried, nonovertime staffers. They're unleashing a bevy of cheap rewards, such as praise, thank-you notes and $25 gift cards. They're also scrutinizing employees' duties to nix unnecessary tasks, freeing staffers for higher-impact work.

Special Report: America’s route to recovery Youngstown is an extreme but by no means unique case in America. On a basic level, it represents some of the challenges facing the country today in the wake of the longest and deepest downturn since the 1930s. After two economic expansions based not on sustainable growth but on asset bubbles -- the dotcom boom of the 1990s then the far more damaging housing mania this decade -- longstanding problems have been brought into sharper focus. Even during the recent good times, the U.S. manufacturing sector, the muscle behind U.S. post-war economic might, was buffeted as corporations shipped low-cost production overseas. "The easy, blue-collar shot to the middle class is gone," said Mike Rollins, president of the Austin Chamber of Commerce. "It's going to take a lot more work to get there now." In short, the world's largest economy is at a crossroads. With a smaller manufacturing sector and a consumer base less able to keep leveraging future earnings, where will sustainable, long-term prosperity come from? And more immediately, where will jobs come from? This is a debate that is taking place at the local level around the country, from Youngstown to El Centro, California, and many places in between. But it is also a discussion that few see taking place at the national political level. "Washington just doesn't get it," said Shane Savage, a real estate agent in Pensacola, Florida, smoking a cigarette outside the home of a client who needs to sell fast in a down market. "It's going to take a long time to fix the mess that we're in and our politicians don't have a clue how bad it really is out here."

The Best Is Yet to Come The big idea behind "Sonic Boom" is that globalization—celebrated, reviled and analyzed for at least a decade now—has hardly begun. The world, Mr. Easterbrook believes, is on the verge of a period of pell-mell integration that will dwarf anything before now, and a good thing too: The coming age of global integration, he argues, will produce riches that none of us can imagine and scatter them more widely than ever before. But Mr. Easterbrook is not offering just another account of the shift in economic opportunity from the West to the East. Instead, he wants to show how a rapid reconfiguration of resources is benefiting all sorts of unexpected people and places. Erie may not be booming, but it is doing better than it has for decades, thanks to General Electric's willingness to ignore Wall Street analysts (who said that manufacturing was dead and the future lay in finance) and make a bet on renovating its locomotive plant. Today the plant is an important profit center, and trains are the apple of everybody's eye, including Warren Buffett's, while GE's financial-services division was the source of almost all the company's recent losses. But he is at his most interesting on a subject that he seems slightly reluctant to embrace—the creativity of the manufacturing sector. Manufacturing companies have done a much better job of improving their productivity than sexier service companies. The average car bought today costs 6% less than the average car bought a decade ago and is stuffed full of clever gadgets. America produces more steel today than it did 30 years ago, despite the shuttered plants and slimmed-down work force. Manufacturers have also been much better at responding to the pressures of globalization. Haier, a Chinese domestic-appliance maker that had such a bad record for quality a generation ago that the Chinese used its washing machines to store coal, is now a world-class company with its American headquarters in Camden, S.C. General Electric sells 40% of the locomotives that it makes in Erie to China.

Cheapest reliable alternative For most products and services, most of the time, people sign up for the Cheapest Reliable Alternative Plan. If everything appears to be the same, then of course they're going to pick the cheapest one that's good enough. In the face of this understandable strategy, you have a few choices: You can be cheapest (difficult to sustain). You can be more reliable (great if you can figure this out). You can redefine the playing the field to be the only one (most preferred). Buying a new microphone or lights for your DJ business doesn't do any of these three to your competitive status, it merely makes you feel good. Same with re-organizing your office, painting the parking spaces or buying a new laptop. They merely keep you where you were. The scalable, profitable strategy is to change the game, not to become the most average.

Governance Failures: GM as Exemplar

 

After Bankruptcy, G.M. Struggles to Shed a Legendary Bureaucracy When G.M. collapsed last year and turned to the government for an emergency bailout, its century-old way of conducting business was laid bare, with all its flaws in plain sight. Decisions were made, if at all, at a glacial pace, bogged down by endless committees, reports and reviews that astonished members of President Obama’s auto task force. “Everyone knew Detroit’s reputation for insular, slow-moving cultures,” Steven Rattner, head of the task force, wrote recently in Fortune magazine. “Even by that low standard, I was shocked by the stunningly poor management that we found.” G.M. will present its first postbankruptcy scorecard on Monday, when the company reports third-quarter earnings and its cash reserves. The company said on Nov. 3 that its financial health had “improved significantly” in recent months. Even as it labors to change its culture, G.M. must convince consumers that it is building better cars. One sign of its challenge: Fewer than a dozen of the company’s models were recommended in a recent Consumer Reports survey. But instead of playing down the survey, as G.M. might have in the past, its chief executive, Fritz Henderson, ordered it sent to every employee in the company.

Auto task force shocked by state of GM, Chrysler The shockingly poor financial management of General Motors and Chrysler weakened their case for a government bailout, but officials feared letting the automakers collapse would severely harm the U.S. economy, the former head of the Obama administration's auto task force says. In a first-person account posted on Fortune's Web site Wednesday, Steven Rattner said he was alarmed by the "stunningly poor management" at the Detroit companies and said GM had "perhaps the weakest finance operation any of us had ever seen in a major company." GM's board of directors was "utterly docile in the face of mounting evidence of a looming disaster" and former GM chairman and chief executive Rick Wagoner set a tone of "friendly arrogance" that permeated the company, Rattner wrote. "Certainly Rick and his team seemed to believe that virtually all of their problems could be laid at the feet of some combination of the financial crisis, oil prices, the yen-dollar exchange rate and the UAW," Rattner wrote. Rattner said the task force was divided on whether to save Chrysler. Chrysler was poorly run during its alignment with Daimler AG, and "larded up with debt, hollowed out by years of mismanagement, Chrysler under (private equity firm) Cerberus never had a chance."

A Lament for Saab, Quirky but Loved The ignition was in the floor. It had a rear hatchback, not a trunk. The hood was hinged at the front, so it opened away from the windshield. And many of its owners — including Jerry Seinfeld’s character on his long-running sitcom — were intensely loyal. Auto enthusiasts across the country were dismayed by the news Friday that General Motors was planning to shut down Saab, the Swedish carmaker it bought two decades ago, after a deal to sell it fell apart. Even with its modest and steadily declining sales, Saab long stood out as a powerful brand in spite of itself. “It wasn’t designed to be a fashion statement,” said Ron Pinelli, president of Autodata, which tracks industry statistics. “It was designed to provide transportation under miserable weather conditions.” But in the process, Saab became a statement of its own. The American competition had floaty rides and Japanese cars were tight on space. By contrast, a Saab had taut steering, requiring drivers to actively guide the car as it powered through ice and snow. Priced several thousand dollars above Japanese rivals, Saabs featured front-wheel drive and turbo-charged engines, and many were sold with manual transmissions. Saab sales were always strongest in the Northeast, home for a time to the company’s American headquarters in Connecticut. Many Saab owners consider the brand’s glory days to be the 1980s, when Americans began buying cars again after a recession and energy crisis. Mr. Pinelli, who was selling Volvos at the time, said he admired his Swedish rival. “The cars were communicative,” he said. “They didn’t try to numb the experience like cars do today.”

What GM Can Learn From Toyota's Humility Andy Grove, one of the founders of Intel, is famous for saying that "only the paranoid survive." The long-term success of his company suggests he's right. These days, Toyota is looking like one of the most paranoid companies on the planet. It's the world's biggest carmaker but certainly isn't coasting. The global recession has hammered sales and profitability, with Toyota losing $8.4 billion in the fiscal year that ended in March. Sales are likely to be down 18 percent more this year, with a turnaround next year looking modest at best. That weak performance isn't surprising to anybody who has followed the woes of the U.S. auto industry. But here's something that is surprising: Toyota's CEO, Akio Toyoda, said at a recent news conference that his company is "grasping for salvation" and is deep in the grip of long-term decline. "Toyota has become too big and distant from its customers," Toyoda said grimly. Then he apologized for losing money and letting down the motoring public. American car buyers have believed for a while that their homegrown automakers—especially the recently bankrupt Chrysler and General Motors—got too big and lost touch with their customers. But Toyota? Its products consistently rank near the top in quality and reliability. Sales in the United States are down about 29 percent so far this year, but that's roughly the same as the industry average; GM and Chrysler are down more, and BMW nearly as much. But Toyota is far more contrite than its rivals. Public apologies are traditional in Japan when a business loses its way, and for Toyota, losing billions in the Detroit tradition is a dramatic comedown. Besides, Toyota is very likely to get its act together, return to profitability, and continue its ascent. Projections by forecasting firm CSM Worldwide show Toyota gaining U.S. market share over the next several years and battling neck and neck with Ford and GM to be the top seller of cars. That would make Toyota the only foreign-based automaker ever to come close to the No. 1 spot in the world's biggest auto market. Apologizing for missteps helps explain Toyota's success—and Detroit's decline.

Short-termism vs. Performance

Wall Street's Mania for Short-Term Results Hurts Economy It's been a year since the onset of a financial crisis that wiped out $15 trillion of wealth from the balance sheet of American households, and more than two years since serious cracks in the financial system became apparent. Yet while the system has been stabilized and the worst of the crisis has passed, little has been done to keep another meltdown from happening. All of which makes it particularly disappointing that so little attention was paid this week to a report by a panel convened by the Aspen Institute on the "short-termism" that has now become hard-wired into the culture of Wall Street and corporate America. Their complaint is that the focus on short-term financial performance by investors, money managers and corporate executives has systematically robbed the economy of the patient capital it needs to produce sustained and vigorous economic growth.

SEC backs broader disclosure on executive pay Federal regulators voted Wednesday to require companies to reveal more information about how they pay their executives amid a public outcry over compensation. The Securities and Exchange Commission voted 4-to-1 to expand the disclosure requirements for public companies. Company policies that encouraged excessive risk-taking and rewarded executives for delivering short-term profits were blamed for fueling the financial crisis.

Put a name on it Here's a positive step to avoid the faceless bureaucracy that wants to take over your organization: Every new rule needs to be associated with one and only one person who is willing to stand up for it and explain it (to your people and to the public). "No swimming until 45 minutes after eating." Really? Why? Who made this rule up? Why? I think most international travelers would like to know who made the rule that bans wifi from international flights. Or the name of the other person who made the rule that you can't have a blanket covering your legs during the last hour of a flight. If we knew the bureaucrat's name, could we lobby to have them fired for being ridiculous actors in security theater? Organizations thrive on their ability to allow individuals to remain faceless. It permits them to act badly, not in the interest of their customers. One of the reasons I so enjoy buying from small companies is that you know exactly who has their name on each and every policy. It builds a more responsive organization and it's good marketing.

 

Leadership, Psychology and Social Performance

The Neuroscience of Leadership Success isn’t possible without changing the day-to-day behavior of people throughout the company. But changing behavior is hard, even for individuals, and even when new habits can mean the difference between life and death. In many studies of patients who have undergone coronary bypass surgery, only one in nine people, on average, adopts healthier day-to-day habits. During the last two decades, scientists have gained a new, far more accurate view of human nature and behavior change because of the integration of psychology (the study of the human mind and human behavior) and neuroscience (the study of the anatomy and physiology of the brain). The implications of this new research are particularly relevant for organizational leaders. It is now clear that human behavior in the workplace doesn’t work the way many executives think it does. That in turn helps explain why many leadership efforts and organizational change initiatives fall flat. And it also helps explain the success of companies like Toyota and Springfield Remanufacturing Corporation, whose shop-floor or meeting-room practices resonate deeply with the innate predispositions of the human brain. Managers who understand the recent breakthroughs in cognitive science can lead and influence mindful change: organizational transformation that takes into account the physiological nature of the brain, and the ways in which it predisposes people to resist some forms of leadership and accept others.

·          Change is pain. Organizational change is unexpectedly difficult because it provokes sensations of physiological discomfort.

·          Behaviorism doesn’t work. Change efforts based on incentive and threat (the carrot and the stick) rarely succeed in the long run.

·          Humanism is overrated. In practice, the conventional empathic approach of connection and persuasion doesn’t sufficiently engage people.

·          Focus is power. The act of paying attention creates chemical and physical changes in the brain.

·          Expectation shapes reality. People’s preconceptions have a significant impact on what they perceive.

·          Attention density shapes identity. Repeated, purposeful, and focused attention can lead to long-lasting personal evolution.

 

Are You a Tigger, or an Eeyore? This interview with Mindy Grossman, chief executive of HSN Inc., was conducted and condensed by Adam Bryant. Q. Tell me about your leadership style. A. I believe in accessibility. I believe in honesty and a culture that supports that. And you can’t have that if you’re not open to receiving feedback. I find out as much from the guy in backstage TV as I do from my C.F.O. Anybody can e-mail me. I do town halls with employees at least once every eight weeks. I’m out there and it makes a huge difference. Q. How do you make sure you’re getting honest feedback? A. I think the way you start sets the tone for your leadership style. For example, my first day, I went through orientation just like everyone else, because I wanted to see what everybody else feels when they come into this company for the first time. There were 15 people — a guy who is in backstage TV, somebody in production, somebody in planning, and I just came in and sat down. A. Fear is not a motivating factor. You might be able to get a little bit more out of someone in the short term, but you will completely erode your business and your culture in the long term. You’re going to lose all your good people. You’re not going to have people tell you the truth, and it becomes the tradition.

How to Survive A Disaster When a plane crashes or the earth shakes, we tend to view the survivors as the lucky ones. Had they been in the next seat or the apartment across the street, they would have perished. We marvel at the whimsy of the devastation.But survival is not just a product of luck. We can do far more than we think to improve our odds of preventing and surviving even the most horrendous of catastrophes. It's a matter of preparation--bolting down your water heater before an earthquake or actually reading the in-flight safety card before takeoff--but also of mental conditioning. Each of us has what I call a "disaster personality," a state of being that takes over in a crisis. It is at the core of who we are. The fact is, we can refine that personality and teach our brains to work more quickly, maybe even more wisely. When disaster strikes, a troubling human response can inflate the death toll: people freeze up. They shut down, becoming suddenly limp and still. Our brains search, under extreme stress, for an appropriate survival response and sometimes choose the wrong one, like deer that freeze in the headlights of a car. But the more encouraging point is that the brain is plastic. It can be trained to respond more appropriately. Less fear makes paralysis less likely. A rat with damage to the amygdala, the primitive part of the brain that handles fear, will not freeze at all--even if it encounters a cat. If we can reduce our own fear even a little bit, we might be able to do better. All of us, but especially people in charge--of a city, a theater, a business--should recognize that people can be trusted to do their best at the worst of times. They will do even better if they are encouraged to play a significant role in their own survival before anything goes wrong.

Good Boss vs. Bad Boss

Power Plus Incompetence Equals a Mean Boss So why are workplace tyrants so common? What's the psychological dynamic underlying such dysfunction at the top? It's not simply the power; there are many powerful bosses who are good and decent—or at least tolerable. Power corrupts only some—but which ones and why? Two psychologists recently decided to explore one possible explanation: perhaps it is power, but only power mixed with incompetence, that leads to aggression and abuse. It won't surprise a lot of workers to learn that their mean-spirited supervisor has secret feelings of inadequacy. But the researchers wanted to double-check these results, so they did a laboratory simulation of the workplace dynamic. They used what are called "primes" in the jargon of the field: they had some volunteers write about a time in the past when they felt particularly powerful, an exercise which is known to activate these internal feelings. Some of these empowered workers also recalled and wrote about a time when they performed admirably at some task, while others wrote about a past experience of inadequacy. As a laboratory measure of aggression, they created a ruse in which the volunteers had to choose how much noise to blast at a stranger, ranging from completely benign to head-rattling. Again they found that it's the interaction of power and inadequacy that engenders abuse. Fast and Chen believe that this dynamic reinforces itself in the workplace, because people who gain power pressure themselves to perform at a higher level, and thus are more apt to feel inadequate in their powerful role. This threatens their ego, and they become defensive. Defensiveness often comes out in the form of insults or worse. So what can be done to stop this cycle from escalating? In still another lab experiment, the psychologists again manipulated feelings of power and competence, and again measured workers' aggression—in this case their willingness to undermine another worker's performance. But in this version of the simulation, the researchers deliberately boosted some of the volunteers' feelings of self-worth by praising them for their leadership skills. Others got no such ego booster. And guess what? Power plus inadequacy still equaled aggression, except for those who got that simple shot of self-worth. As reported online this month in the journal Psychological Science, just a little praise was enough to wipe out the aggressive tendencies of the laboratory "bosses."

The Boss's Journey: The Path to Simplicity and Competence Being a great boss is a lot tougher than it looks.  I realized this a few months back when one of my former students came back to chat.  When he took my introduction to organizational behavior class, he routinely ripped apart his former bosses and many bosses we studied in class, calling them “lazy,” “idiotic,” and “incompetent.”  He sure changed his tune after getting his first job as a boss -- heading a small product development team.   During our conversation, he admitted that he needed “a little therapy” and confessed “This is really a tough job.  I am confused and keep screwing-up.” This new boss was in the second phase of the journey required to develop true expertise in any craft. As psychologist William Schutz explained, “Understanding evolves through three phases: simplistic, complex, and profoundly simple.”  (I have written about Schutz before, see this post). This process means, as my distraught student learned, being a great boss seems deceptively easy at first blush.  But no boss can master the craft without traveling through a purgatory of uncertainty and confusion.  The best bosses also realize that, although the stretches of confusion become shorter and less frequent over time, this quest for deep understanding never ends.  There is no magic cure or shortcut that will instantly transform youy into a skilled boss.  But I do believe – following Schutz’s model – that path becomes easier if you devote yourself to the relentless pursuit of simple competence (a theme I expand on in my BusinessWeek essay published earlier in the year). My view is that great bosses realize there will always be times when they are overwhelmed and baffled, that confronting and wallowing through excessive complexity is necessary for developing useful rather than useless simplifications.   Yet no matter how bewildered great bosses might be at a given moment, they strive to develop a simple mindset and master seemingly obvious moves.  The result is that, if you talk to the best bosses about their craft, they often make it seem so simple -- P&G’s AG Lafley being exhibit one here. After all, this clear thinking and elegant expression are the fruits of their labors.  This is why, when you ask great bosses about the “secrets” of their success, they usually answer there is no mystery; they are just doing their jobs.

The Art of Leading

The C.E.O. Must Decide Who Swims Q. When did you first learn how to lead people? I feel like I’m a judge, and I use that mental image a lot, which is that my job is not to make everybody happy. My job is to chart the right course and, at the end of the day, I leave this building and if I feel like I’ve done the right thing and people respect me, I’m happy. But on any day someone is probably unhappy with a decision that I made in the day, and that’s the best I can do. Q. You mentioned all the things you learned in the downturn. Any other broad take-aways? A. I reflected a lot on this when it came around this time, and I’ve talked a lot about this with fellow C.E.O.’s. So the first thing you learn is that it’s going to end. The sky is not falling. The sense of panic that starts to overtake people is overplayed. So you chart a course, and you plot out kind of a worst-case, middle-case, best-case plan. You’re probably going to have to do some cost-cutting, and get that plan laid out, and then stay on strategy. This is your reality, and that’s how it is. The sky isn’t falling, and you have to show calm confidence every day. Your employees are watching your behavior.

Planes, Cars and Cathedrals Q. What did you learn from that? A. It was a gem, because I really thought about why it happened. I realized very early that what I was really being asked to do was to help connect a set of talented people to a bigger goal, a bigger program and help them move forward to even bigger contributions. That was a different role than what was expected of me as an engineer. That experience stayed with me forever on what it really means to manage and lead. Q. Can you talk more about that? A. The more senior your management position is, the more important it is to connect the organization or the project to the outside world. You know, how does this fit in with what we’re doing? What is the real goal, the real mission? And it makes you also think about: What business are we in? And how do we pull together to have a comprehensive plan to create whatever we decided to do together? And then, how do you get everybody included, where everybody’s contributing and everybody knows what’s going on?  Q. How do you get everybody to contribute? A. I think the most important thing is coming to a shared view about what we’re trying to accomplish — whether you’re a nonprofit or a for-profit organization. What are we? What is our real purpose? And then, how do you include everybody so you know where you are on that plan, so you can work on areas that need special attention. And then everybody gets a chance to participate and feel that accomplishment of participating and contributing. Q. What have you learned to do less of over time?

I guess I’ve moved to a place where I’m really focused on four things. I pay attention to everything, but there are some things that are very unique to what I need to do as the leader. I have to really come through on these. And one of them is this process of connecting what we’re doing to the outside world. I mean, we’re here to create a business of serving customers with the best cars and trucks in the world, so where is the world going? Where is the technology going? Where are the customers going? Where is the competition going? A second focus for me is: What business are we in? What are we going to focus on? What’s going to be our business? The third one that I really focus on is balancing the near term with the longer term. And especially in the environment like we see today, where you absolutely want to keep investing for the future, even though you could invest less and make your business performance look better in the near term. Do we have a plan that works in the near term and also creates value for the long term?  And then I really focus on the values and the standards of the organization. What are the expected behaviors? How do we want to treat each other? How do we want to act?

In Risky Year, Buffett Looked 'Into the Abyss'  Warren Buffett believes his best deals during the economy's biggest belly flop since the Crash of 1929 may well turn out to be the ones he didn't do. Mr. Buffett slammed the door on one opportunity after another during the most harrowing stretch of his storied career. That impulse, he says, left him with the financial firepower he needed last month to strike the biggest deal he has ever done -- Berkshire Hathaway Inc.'s $26.3 billion purchase of railroad Burlington Northern Santa Fe Corp. In a series of interviews with The Wall Street Journal, Mr. Buffett gave his most complete account of his epic deal negotiations, including anxious phone calls he fielded from wounded companies such as Freddie Mac, Wachovia Corp. and Morgan Stanley. "I bought my first stock in 1942, and this roller coaster surpassed anything that I've seen," says the 79-year-old investor. "We didn't do all the smartest things. We didn't do anything really dumb." Shares of giant investment banks Morgan Stanley and Goldman Sachs were spiraling lower amid worries that they would be the next firms to fail. The commercial-paper market, which helps finance the day-to-day operations of businesses around the country, was seizing up. On Sept. 16, the Reserve Primary Fund, a big money-market fund, revealed huge losses, due in part to holdings of Lehman's commercial paper. If the commercial-paper market had frozen completely, more major financial institutions and possibly even household names such as GE would have failed, Mr. Buffett says, "because their checks would have failed to clear." That would have triggered panic in the nation's money-market funds, which held about $3.5 trillion in assets, because some of them held commercial paper. The resulting chaos, Mr. Buffett concluded, could have crashed global financial markets, threatening Berkshire. "I felt that this is something like I've never seen before, and the American public and Congress don't fully understand the gravity" of the problems, he recalls. "I thought, we are really looking into the abyss." As the government swung into action, Mr. Buffett recalls, he gained confidence that the crisis would be resolved. A government guarantee of assets in money-market funds, which came days after the Reserve fund's troubles emerged, was a big step forward, he says.

Citi’s Creator, Alone With His Regrets  On that day, April 18, 2006, Citi’s share price was $48.48. After studying the photo for a few moments, Mr. Weill says quietly, “I thought the company was impregnable.” He knows now, of course, that he was wrong. Over the last two years, Mr. Weill has watched Citi — a company he built brick by brick during the final act of a 50-year career — nearly fall apart. Although every taxpayer in the country has paid for Citi’s outsize mistakes, for Mr. Weill the bank’s myriad woes are a commentary on his life’s work. “Sandy will forever be identified with Citigroup,” says Michael Armstrong, a Citi board member and a former chief of AT&T. “He put everything he had into its creation.” Mr. Weill built his wealth, status and power by creating what was once the world’s largest bank. Now, as Citi struggles to regain its footing, Mr. Weill’s legacy has taken on a darker hue. Though he was once viewed as a brilliant dealmaker, some critics now cast him as the architect of a shoddily constructed, unmanageable financial supermarket whose troubles have sideswiped investors, employees and average citizens nationwide. “The dream, the mirage has always been the global supermarket, but the reality is that it was a shopping mall,” says Chris Whalen, editor of The Institutional Risk Analyst, of Citi’s evolution over the last decade. “You can talk about synergies all day long. It never happened.” Citi’s troubles are well chronicled: a failure to integrate its disparate parts worldwide or to keep tabs on risky investments and free-wheeling operations. These lapses led to billions of dollars in losses and multiple bailouts, and the government now owns a quarter of the company.

Whispering to Rottweilers, and to C.E.O.’s That Mr. Millan keeps a straight face in these situations says less about his manners and more about where his focus lies: with the hounds. Over the years, he has learned that in a country where pet lovers treat their animals like coddled children (making them unhappy, he believes), he must delve into the human realm to put things right. He’s the first to say, however, that communicating with humans didn’t come naturally. He grew up on a farm in Mexico, where from an early age he was known as El Perrero, or “the dog man.” Dogs made sense to him. They telegraphed their anxieties in predictable ways. They loved to be led. “They accept you as who you are — one leg, two legs, no eyes, no problem,” he says. “But they won’t be around unstable energy. That’s how much integrity they have.” Not so with humans. “One of Cesar’s favorite sayings,” says Jim Milio, a partner in MPH, which produces the show out of a mini-mall in Burbank, Calif., “is that humans are the only animals who will follow unstable pack leaders.” It would take years before Mr. Millan realized that to achieve his goal of being the world’s best dog trainer, he would need to understand not just pets, but also pet owners.

Compensation vs. Performance

Wiseguys part 2 Executive compensation, the climate conference in Copenhagen and sovereign debt are just some of the topics on the table when Headline host Howard Green speaks with BNN's regular panelists of "Wise Guys": Jim Gray, former chairman of Canadian Hunter Exploration, Bill Dimma, Chairman Emeritus at Home Capital and Jim Gillies, Professor Emeritus at the Schulich School of Business.

Fund Chief Snared by Taps, Turncoats Those recordings begat a wiretap on Mr. Rajaratnam's phone, and, prosecutors say, a dizzying picture of multiple insider-trading rings began to form. Like falling dominoes, one investor suspected of trading on insider tips led to another, each with a network of sources. Some overlapped; others spun out into separate orbits pulling in additional players with no ties to the other rings. "There is reason to fear that there is a culture -- not only at hedge funds but at large firms in the financial sector -- that thinks nothing of casually exchanging material nonpublic information," said Preet Bharara, the Manhattan U.S. attorney, who declined to talk specifically about the Galleon case. For two and a half years, a team of federal agents and prosecutors coaxed witnesses to turn on their friends, recorded thousands of phone calls and plowed through reams of documents. Then, in October, they arrested Mr. Rajaratnam. Soon, 20 other people were also charged. Insider-trading charges are notoriously difficult to prove. That's because Wall Street is awash in information, and every savvy investor tries to be the first to ferret out important tidbits. To gain a conviction, prosecutors have to persuade a jury that a person traded on information that they knew was not only confidential but was also important enough to move a company's stock price. A Wall Street Journal examination -- based on nearly 1,000 pages of court documents and dozens of interviews with lawyers, traders and others involved -- shows for the first time how prosecutors built the case of a generation, one that has stilled the easy chatter in the clubby world of hedge funds and reached into the ranks of some of America's biggest corporations.

 

Get Rid of Executive Bonuses. These days, it seems, there is no shortage of recommendations for fixing the way bonuses are paid to executives at big public companies. Well, I have my own recommendation: Scrap the whole thing. Don't pay any bonuses. Nothing.This may sound extreme. But when you look at the way the compensation game is played—and the assumptions that are made by those who want to reform it—you can come to no other conclusion. The system simply can't be fixed. Executive bonuses—especially in the form of stock and option grants—represent the most prominent form of legal corruption that has been undermining our large corporations and bringing down the global economy. Get rid of them and we will all be better off for it. The failings of the current system—and the executives who live by it—are painfully obvious. Although these executives like to think of themselves as leaders, when it comes to their pay practices, many of them haven't been demonstrating leadership at all. Instead they've been acting like gamblers—except that the games they play are hopelessly rigged in their favor. First, they play with other people's money—the stockholders', not to mention the livelihoods of their employees and the sustainability of their institutions. Second, they collect not when they win so much as when it appears that they are winning—because their company's stock price has gone up and their bonuses have kicked in. In such a game, you make sure to have your best cards on the table, while you keep the rest hidden in your hand. Third, they also collect when they lose—it's called a "golden parachute." Some gamblers. Fourth, some even collect just for drawing cards—for example, receiving a special bonus when they have signed a merger, before anyone can know if it will work out. Most mergers don't.And fifth, on top of all this, there are chief executives who collect merely for not leaving the table. This little trick is called a "retention bonus"—being paid for staying in the game!

Bonus Bashers Shouldn't Stop at Goldman Sachs: David Reilly Bonuses, lavish benefits and perks subsidized by taxpayers aren’t the sole preserve of bankers. You only need look in your own backyard for examples of excessive compensation that may contribute to future crises, just as skewed rewards on Wall Street fueled the current one. That’s what I discovered reading a New Jersey Commission of Investigation report issued this month on wasteful compensation in local governments. There were plenty of sweet deals that the vast majority of bank workers -- who don’t get seven-figure compensation -- might be happy to land. These range from $200,000-plus payouts for unused days to paid time-off to go Christmas shopping. As the report put it, “Startling amounts of taxpayer- funded booty continue to be dispensed across New Jersey without regard for the common good.” Then again, most folks on Wall Street or in big banks will never see that kind of bonanza either. The vast majority toiling on Wall Street and in big banks are worker bees who receive good, but not astronomical, pay. Consider that in 2008, eight of the country’s biggest financial institutions paid 4,311 individuals more than $1 million in bonuses, according to a report by New York State Attorney General Andrew Cuomo. Yet they represent just 0.3 percent of the 1.27 million workers at those firms. And even if they’re not in the ranks of top earners, many bank workers face the threat of getting swept up in the populist outrage over banker pay.

Does Golden Pay for CEOs Sink Stocks? Why does it seem that it's always Christmas in corporate boardrooms? And how can investors tell whether those glittering pay packages are worth the cost? The answer sounds obvious: Pay the boss more for good results now, and you should get even better results later. But the evidence for that is surprisingly weak, and two new studies even suggest that when chief executive officers get paid more, shareholders end up earning less. The first study, led by corporate-governance expert Lucian Bebchuk of Harvard Law School, looked at more than 2,000 companies to see what share of the total compensation earned by the top five executives went to the CEO. The researchers call this number—which averages about 35%—the "CEO pay slice." It turns out that the bigger the CEO's slice of the pie, the lower the company's future profitability and market valuation. "These CEOs," says Prof. Bebchuk, "seem to be trying to grab more than they should."  Finance professor Raghavendra Rau of Purdue University and two colleagues looked at CEO pay and stock returns for roughly 1,500 companies per year from 1994 through 2006. They found that the 10% of firms with the highest-paid CEOs produce stock returns that lag their industry peers by more than 12 percentage points, cumulatively, over the next five years. Companies at the top of the pay pile, Prof. Rau concluded, award their CEOs an annual average of $23 million—but leave their shareholders poorer (relative to other companies in the same industry) by an average of $2.4 billion per year. Each dollar that goes into the CEO's pocket takes $100 out of shareholders' pockets.

A Window Opens on Pay for Bosses There is still one area where companies could play games to make their bosses look less well paid than they really are. That is in the area of performance-based awards, where the payout will depend on how well the executive or the company performs relative to undisclosed goals. A company that wants to do so may be able to obscure just how likely a rich reward is for an executive. Still, the information will be better than ever before. A particularly important change will make it more likely for shareholders to learn when one executive is given a huge options award. In the past, it was sometimes possible for a company to leave that out of disclosures, since the impact of the grant was spread over several years. Companies could make someone the highest-paid executive in a company for a year but not disclose that to shareholders. Perhaps the most impressive fact is that the new information will be available this year. Mary L. Schapiro, the S.E.C. chairwoman, decided to fight her way through bureaucratic delays to get the new rule out just in time for this year’s proxy season. Under normal S.E.C. procedures, there is little doubt the changes would have been effective a year from now, not this year. In less than a year, Ms. Schapiro has established a reputation for careful but determined reform, of the commission itself and of the markets it regulates.

Governance, Performance & Attitudes

Taking away directors’ rubber stamps But “Money for Nothing” casts a much wider net, blaming the financial crisis on a systemic collapse of corporate democracy caused by the failure of many if not most corporate boards to simply do their jobs. “The boards were supposed to monitor risks, provide judgment and supervise managers on behalf of shareholders,” Mr. Gillespie and Mr. Zweig write. “Boards, at the very least, should have acted in the classic sense like a governor on an engine that measures and regulates the machine’s speed and, if necessary, turns it down to keep it from blowing up. Mr. Gillespie and Mr. Zweig do not believe that the solution to board laxity lies solely in more regulations. They complain that boards tend to be focused more on avoiding legal problems than on “formulating of company strategy, identifying risks, and evaluating executive performance.” THE authors conclude with a list of more than two dozen recommendations for comprehensive reform. These include creating a new class of “public directors” appointed to corporations by a special nonprofit organization, reform of voting procedures currently subject to manipulation by management and, simply but perhaps most important, a law prohibiting people from simultaneously holding the positions of chief executive and board chairman. But no amount or manner of structural change can ensure that directors will step up and take responsibility for their fiduciary duties to shareholders, the authors assert. Boards overwhelmed by the power and glory of corporate chieftains tend to commit sins of omission, like not asking probing questions and not challenging management presentations of “fact,” rather than sins of commission like active participation in securities fraud. Mr. Gillespie and Mr. Zweig drive this point home with a bit of black humor as they recount their jailhouse interview with L. Dennis Kozlowski, the former Tyco chairman and chief executive who was convicted of grand larceny and securities fraud. Asked to articulate the highest praise he could muster for his former board, Mr. Kozlowski replied, “They didn’t slow me down.” Talk about money for nothing.

Meanness and Greed Are Out, Immelt Says The United States stands at the end of a generation when greed drove leaders and “rewards became perverted,” General Electric’s chief executive, Jeffrey Immelt, said in a speech at West Point on Wednesday. “We are at the end of a difficult generation of business leadership, and maybe leadership in general. Tough-mindedness, a good trait, was replaced by meanness and greed, both terrible traits,” the head of the largest U.S. conglomerate said in prepared remarks to be delivered at the U.S. Military Academy, according to Reuters. “Rewards became perverted. The richest people made the most mistakes with the least accountability,” Mr. Immelt said. “In too many situations, leaders divided us instead of bringing us together.” “I decided that I needed to be a better listener coming out of the crisis,” Mr. Immelt said. “I felt like I should have done more to anticipate the radical changes that occurred.” Each Saturday, Mr. Immelt now invites one of the company’s top 25 executives to chat about the future of the company, an exercise intended to give him a greater insight into what is going on across its many divisions. In a speech that focused on leadership styles, he said that executives need to be ready to move quickly in times of crisis and need to trust that their subordinates will be able to carry out their orders quickly. “In the peak of the financial crisis, it seemed like the world was going to end every weekend,” Mr. Immelt said. “I am sure that my board and investors frequently wondered what in the heck I was doing. I had to act without perfect knowledge; I had to act faster than my ability to communicate or explain my actions. I could do this because we had built trust. And we kept G.E. safe because we moved fast.”

Tending to corporate integrity becomes key in wake of huge fraud When an estimated $2.5 billion fraud at India's Satyam Computer Services Ltd. rocked the country's corporate credibility last year, the government brought in an outsider, Deepak Parekh, to clean up the mess. Mr. Parekh, 65 years old, leads HDFC Group, a financial conglomerate his uncle founded in 1977 as India's first home-mortgage company. Mr. Parekh, a U.K.-educated accountant, joined his uncle's business after its first year. He became CEO in 1993, launching India's first private bank and expanding into life insurance, asset management and real estate to build an empire with assets of $92 billion. Mr. Parekh's rise has paralleled, and helped fuel, the growth of India's middle class during the past two decades. We had to do firefighting in a number of areas. One, we needed to give support, assurance [and] encouragement to the management, because an IT company is only as good as its people. We had to talk to them, support them, encourage them and ensure they [were] paid salaries. The clients of Satyam were top Fortune 100 companies. We had to comfort them, [give] assurance that their work will not suffer. In six weeks, we practically called all the clients. We had to see that the clients didn't disappear, we had to see that the people were there to do the job, we had to ensure that the salaries were paid on time so that they didn't go

5 CEOs Who Are Worth Their Fat Paychecks The average American can be excused for thinking that CEOs raid companies rather than running them. What was once the most august job title in working America has become a synonym for greed and chutzpah. In recent years, the chief executives of Bear Stearns, Lehman Brothers, AIG, Citigroup, Fannie Mae, and Freddie Mac ran their companies into the ground while collecting pay packages that totaled eight and sometimes even nine figures. Some CEO perks sound like the trappings of royalty: car and driver, family use of private jets, personal security, lavish death benefits for family members, free tax and retirement-planning services. While CEO pay has drifted down on account of the recession, it still averages about $1.7 million, and the gap between the pay of CEOs and average workers has been widening for years. But some CEOs are worth the trouble. A new report by the Corporate Library, a corporate-governance research group, highlights 12 CEOs who get "paid for success." In response to recent corporate abuses, reformers in Congress and elsewhere are pushing hard for companies to link pay, bonuses, and other incentives to long-term performance rather than awarding bonuses based on inflated quarterly numbers or unproven pump-and-dump deals. Many companies claim that they strictly enforce pay-for-success rules, but studies by the Corporate Library and others show that it's mostly lip service; most boards of directors and compensation committees tend to be captive bodies that rubber-stamp the CEO's pay package with little scrutiny. Corporate profits from current production rose 10.6% in the third quarter, following a revised 3.7% gain in the second quarter. From a year ago, corporate profits fell 6.7%, the first single-digit decline after three straight quarters of significantly weaker profits. Corporate profits of the financial sector advanced 36.4% in the third quarter and made up the larger share of corporate profits. Corporate profits of the non-financial sector increased only 2.0%. The financial sector’s performance is artificially boosted by the support programs in place.

Posted by dblwyo on January 18, 2010 08:18 AM |

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