Volume 2, Issue 4
ã 2000 Hopkins and Company, LLC
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Someone asked us not long ago why company executives are often portrayed negatively in the media. We paused and offered a few ideas, but the question nagged us for several days. The latest round of press reports about questionable corporate practices and the beginning of the proxy season brought us a single, crisp reason: there are plenty of bad stories to tell. In the same way that local television news programs report crime and tragedy with enthusiasm, business media gravitate toward bad news and controversy. We generally prefer the attention and visibility drawn to questionable practices, because that attention leads to reform. With consistent and clear disclosure, the best companies and executives thrive, and the market punishes those executives and companies whose practices are smarmy. How proud or embarrassed are you when the bright light of day shines on you and your organization? What do you do to support standards and practices that reduce your organization’s vulnerability to dirty dealing?
We’ve never liked William Farley. The basis of our dislike goes back to the 1980s when his leadership of both West Point-Pepperell and Condec led those companies to bankruptcy, and deepened when he appeared in Fruit of the Loom’s underwear ads. We grimaced at the sight of photos of his smiling face while Fruit lost money and jobs under his leadership. We also didn’t like his hubris in assuming that citizens would view him as a viable candidate for President of the United States. Happily, reality set in, and he never actually ran for office. Most of all, we disliked his corporate governance practices, and what appeared as self-serving inside dealing to the detriment of other shareholders. The New York Times (3/19/00) presented a lengthy profile of the woes facing Fruit of the Loom and points directly to Farley as the source of the company’s problems. The Board, of which he continues as a member, fired him as CEO last August. We’re amazed that he was hired in the first place given his prior bankruptcy record. The Wall Street Journal (3/17/00) reported that in the company’s latest earnings results, it disclosed a $20 million charge relating to a company loan to Farley that has not been paid. Meanwhile, one of the best-recognized brands ever created tries to recover from a decade of mismanagement. Fruit of the Loom entered bankruptcy at the end of 1999.
How vulnerable is your organization to the whims of a single individual? When an individual lets you down repeatedly, how patient are you with promises of future performance? Are your executive perks visible and appropriate? Could any of your personal terms of business cause embarrassment to your organization if disclosed? When you hire someone, how well do you check references? Can you expect past performance to be repeated?
“I know, let’s raise prices”
What were the heads of Sotheby’s and Christie’s thinking when they seem to have agreed to raise commissions? Over the past few months, many business media stories continue to explore the reasons behind the departures of the CEOs of the two leading auction houses. What seems clear so far is that the U.S. Department of Justice issued subpoenas to explore possible anti-trust violations at the two companies. Christie’s received amnesty for their cooperation with Justice. Both companies are facing criminal and civil exposure.
How similar is your pricing to that of your closest competitors? How frequent are the contacts between your staff and their counterparts at competing firms? How vulnerable is your company to claims of price collusion?
What do you mean by “revenue”?
Some Internet companies are reporting revenues with the same innovation they’ve brought to business models. For example, online airline ticket companies serve as intermediaries between consumers and airlines. Instead of booking their commissions as revenue, they are booking the full ticket price. Since the Securities and Exchange Commission called attention to these practices last December in Staff Accounting Bulletin 101, at least 32 companies have changed their accounting practices, according to a March report from Baer, Stearns (The Washington Post 3/19/00). FASB now has a task force trying to clarify the revenue rules, but has not yet reached a decision on when companies should report gross revenues and when to report net revenues. Barter deals for advertising have value that appears in the revenue calculations at some companies, but not others. The Post speculates that management holders of stock options gain the most by high top line revenue growth, since that measure is often used as a proxy for profits in valuing Internet companies. “Cooking the books,” whether using new methods or old ones, adds to perceptions that executives are untrustworthy.
In late March, MicroStrategy announced that they were changing their methods for booking revenue. Following that announcement, their market capitalization dropped by 70%. Billionaire CEO Michael Saylor suffered a personal paper loss of around $10 billion. The initial reason given when announcing the change involved emerging SEC concerns. A day or so later, the reason was revised to clarify that the reason was to comply with a 1997 AICPA statement. We’re glad that we weren’t the CPA at PricewaterhouseCoopers who signed off on the MicroStrategy statements.
If you want to read more about the accounting and ethical challenges faced, especially by Internet companies, check out the March 20 issue of Fortune.
How clear, visible and consistent are your financial reports? Do those reports tell a complete story about your business to investors? Are you and your shareholders likely to experience volatility in the value of your holdings if accounting treatment changes?
Red ink from the Pink Panther
Our favorite annual report arrived online in March from Chairman Warren Buffett, and given Berkshire Hathaway’s poor 1999 results, the humor brought less joy than usual. Here’s a quote from Buffett’s letter to shareholders:
“We had the worst absolute performance of my tenure, and compared to the S&P, the worst relative performance as well. Relative results are what concern us: Over time, bad relative numbers will produce unsatisfactory absolute returns.
Even Inspector Clouseau could find last year’s guilty party: your Chairman. My performance reminds me of the quarterback whose report card showed four Fs and a D but who nonetheless had an understanding coach. ‘Son,’ he drawled, ‘I think you’re spending too much time on that one subject.’
My ‘one subject’ is capital allocation, and my grade for 1999 most assuredly is a D.”
We can always count on Buffett to make suggestions about how to improve financial accounting and reporting. Following a long discussion in his letter about purchase and pooling methods for acquisitions, Buffett says:
“Charlie (Munger, Vice Chairman) and I believe there’s a reality-based approach that should both satisfy the FASB, which correctly wishes to record a purchase, and meet the objections of managements to nonsensical charges for diminution of goodwill. We would first have the acquiring company record its purchase price---whether paid in stock or cash---at fair value. In most cases, this procedure would create a large asset representing economic goodwill. We would then leave this asset on the books, not requiring its amortization. Later, if the economic goodwill became impaired, as it sometimes would, it would be written down just as would any other asset judged to be impaired.
If our proposed rule were to be adopted, it should be applied retroactively so that acquisition accounting would be consistent throughout America---a far cry from what exists today. One prediction: If this plan were to take effect, managements would structure acquisitions more sensibly, deciding whether to use cash or stock based on the real consequences for their shareholders rather than on the unreal consequences for their reported earnings.”
We’re skeptical that FASB will accept Buffett’s proposal, but, as always, he presents a good case. He also used this year’s report to disclose that Berkshire Hathaway will repurchase shares whenever its stock price “is selling well below intrinsic value.” Stay tuned for the revenge of the value investor.
How easily do you grade your own good and poor performance? Are you as candid as Buffett in accepting responsibility for results? Are you more inclined toward going along with the rules that exist, or are you willing to spend the time and energy proposing better rules?
“No nerds, no birds”
Listening in Seattle
Striking engineers and Boeing came to terms recently, following a six-week strike during which the picketers wore t-shirts proclaiming a slogan that caught media attention: “No nerds, no birds.” Management’s attention was also caught with the walkout, causing a plunge in the stock price and a further backlog in plane deliveries. Our favorite quote from Boeing CEO Phil Condit appeared in The New York Times (3/18/00): "One day I hope we can all look back on this as a turning point, a time when we more clearly recognized the importance of listening to and seeking to understand one another." The company appears to have yielded on all major union demands, and given the shortage of professional workers at many companies, unions representing such workers are likely to increase their power and voice around the country. Stay tuned.
How do you assess your organization’s skills in listening to and understanding employees and their needs? Does a union represent your white-collar workers? If so, how well do you listen to and understand the issues and concerns of such workers? What’s the impact of a job action by them on your organization and its customers? If a union doesn’t represent your workers, what mechanisms are in place to ensure that workers feel that management listens to their issues and concerns? How do you continue to ensure that workers feel they get a good deal by working for your organization?
That number is not in service
$5 billion fireworks
The Iridium satellites should begin to flame out any day now. Service shut down on March 17. It sounded like a great idea: provide global wireless access through a network of satellites. In retrospect, this was a product without a market. Motorola’s phones were larger and heavier than cell phones, and tended not to work from inside buildings. Global business travelers were selected as the target market, one far too small to support the high costs of the network, and the needs of those travelers were not well understood prior to product and satellite launch. The market balked at prices and equipment, while cell phone improvements came close enough to meeting the needs of business travelers at a much lower cost. Motorola, the major backer of Iridium, refused to throw good money after bad, and no new investors were found, so Iridium will go away after it cleans up its mess by steering the satellites on a course to burn up safely in Earth’s atmosphere.
Where have you been throwing good money after bad? What will it take for you to cut your losses? Are your mistakes on the scale of Iridium’s $5 billion mishap? What are you waiting for? When developing products, are your customer’s needs the most important component, or do you focus on technology and assume that customers will follow?
United we stand
Is this “co-opetition”?
We want to call attention to three recent examples of competitors working together for their mutual benefit and that of suppliers and customers. The big-three auto companies have gotten together to create a single parts network, which will streamline the order and delivery of parts between suppliers and the auto manufacturers. (See The Wall Street Journal, 2/28/00). Ford and General Motors had competing exchanges which they will merge, and DaimlerChrysler will join the new Internet exchange rather than start up a third proprietary exchange.
Securities dealers seem to have banded together trying to lead a reform effort to improve trading processes that’s long overdue. What surprised us is that executives who testified at the Senate Banking Committee asked the government to force competing stock markets to work more closely together. "I never thought I'd see the day I was arguing for regulation," Henry M. Paulson, the chairman of the Goldman Sachs Group, told Phil Gramm, the Texas Republican who heads the committee. (The New York Times, 3/1/00).
The five largest homebuilders banded together to create a common, non-exclusive website that will list new homes. (See The New York Times, 3/23/00). Having realized that their individual sites generate some traffic, a common site might attract even more customer interest. We think the homebuilders “get” the Internet: give consumers choices; don’t act in a proprietary manner; and create reasons for customers to visit your site.
In what areas are you struggling to go it alone? Would open networks make a difference for your company, its suppliers, and your customers? What are the barriers in your field to creating and maintaining such a network?
Here are selected updates on stories covered in prior issues of Executive Times:
Ø The Coca-Cola proxy statement came out recently and contains two items of surprising news about ousted CEO, Doug Ivester: he gets to keep his company car, a 1996 Mercury Marquis (why would he want it?), and the generous special terms of separation cause readers to conclude that his departure was not voluntary. The August 1999 Executive Times noted that given trouble at Coke, Ivester had a great opportunity to turn adversity into success. It turns out he acquired personal success (including his $18 million severance package) and it’s up to his replacement, Doug Daft, to lead Coke to recovery.
Ø The November 1999 Executive Times called attention to Aetna CEO Richard Huber’s fight against the Patient’s Bill of Rights and his view that Aetna’s role is that of an administrator, carrying out the wishes of its customers (employers). In late February, Aetna’s board ousted Huber at a cost of around $3.2 million based on the numbers we uncovered in their late March SEC filing. Aetna’s new CEO, William Donaldson (of Donaldson, Lufkin, & Jenrette fame) leads the exploration of ways to increase Aetna’s value. Let’s hope he reserves a place for meeting the needs of consumers in that vision.
Many business leaders work hard to communicate the components of the business cycle to stakeholders. The work of one individual, Geoffrey Moore, made the job easier. Moore spent around 30 years at the National Bureau of Economic Research, and is considered by some as the father of leading indicators as we know them today. His work at the Bureau of Labor Statistics generated the right information for economists to note turning points in economic patterns. Moore died in mid-March at age 86.
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Everywhere you want to be
You may never have heard the name Dee Hock, but chances are you carry in your pocket a card that he put there. Hock founded VISA International, a quirky worldwide alliance of banks, merchants and consumers. Hock’s new book, Birth of the Chaordic Age, tells the story of VISA and challenges institutions to reinvent themselves along similar lines. “Chaordic” is Hock’s created word that attempts to convey a blending of chaos and order, which Hock proposes is critical for organizations to succeed. We loved this book, and recommend it highly. Hock structured three parts that flow within one book: one typeface conveys the story of VISA; another typeface discloses Hock’s thinking behind the events and actions that took place; and the final part contains themes and lessons in briefly worded, highlighted boxes. We found the story compelling and fast-paced; the introspection helpful in gaining understanding of what happened and what didn’t, and the highlighted boxes helpful at times. Here’s a sampling from Hock’s disclosure: “We were extremely good at some things, we were very good at many things, but we were not good at everything, and at some things, we were pathetic. It is one of the principal acts of leadership to make that distinction. I did not.” You can find our more about how organizations can adopt chaordic principles at www.chaordic.org.
We vote “no”
We wasted a good hour or so the other evening when we read a copy of Dick Morris’ new book, Vote.com, out of curiosity. We expected this savvy political advisor to present a cogent case for online voting and direct democracy. Instead, we endured 230 pages of promotion for Morris’ website, www.vote.com, funded by two lawyers with plenty of cash leftover from suing the tobacco companies successfully. The kind of voting that takes place on the website involves self-selecting polls and that’s what the book is about. We already know that the Internet changes a lot of things, politics included. Morris doesn’t understand the Internet well enough to present his viewpoints with clarity and consistency. We kept reading in a search for facts and some way to agree with any of his glib assertions. We were glad the text was double-spaced. By the end of the book, we still found nothing substantial. We suggest you take a pass.
Not about physics
When we first heard the title of Gary Krist’s book, Chaos Theory, we thought it was about physics, and kept an eye open for it because we always like to learn more physics. Happily, when we found the book, we learned that it’s a thriller, so we were even more enthusiastic to read it. Krist delivers a well-written, fast paced novel with great character development and exposition. If you’re tired of Grisham, Turow and others, give Krist a try. We found the plot to be well developed, and recommend this fun page-turner.
Show me the money
The Reverend Jesse Jackson’s Wall Street Project called attention among financial institutions to ways in which they needed to close the gap between their companies and minorities. We just read It’s About the Money, a book written by Reverend Jackson with his son, Congressman Jesse L. Jackson, Jr., with Mary Gotschall, a journalist whose work appears on Bloomberg regularly. This is a clearly written book that describes financial concepts basically, but without condescension, and provides ample reference material on credit, insurance, investment, financial planning and educating others on financial matters. You may want to make this resource book available to employees or customers.
ã 2000 Hopkins and Company, LLC. Executive Times is published monthly by Hopkins and Company, LLC at the company’s office at 100 Forest Place # P2, Oak Park, Illinois 60301. Subscription rates for first class mail delivery of the print version are $60.00 per year (12 issues). E-mail subscriptions are $30.00 per year. Single issues: $10.00 print; $5.00 electronic. To subscribe, sign up at www.hopkinsandcompany.com/subscribe.html, send an e-mail to , call (708) 466-4650, or fax to (202) 338-0065. For permission to photocopy or e-mail Executive Times, call (202) 486-3816 or e-mail to . We will send sample copies if requested. The company’s website at contains the archives of back issues beginning in the month after the issue date.
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