Volume 5, Issue 4
ã 2003 Hopkins and Company, LLC
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One of our favorite phrases in Warren Buffett’s 2002 letter to Berkshire Hathaway shareholders (http://www.berkshirehathaway.com/letters/letters.html) was “deceptive nonsense,” That was the Oracle of Omaha’s summary judgment of companies that use pro forma descriptions of their earnings. According to Buffett, “In these presentations, the CEO tells his owners ‘don’t count this, don’t count that – just count what makes earnings fat.’ Often, a forget-all-this-bad-stuff message is delivered year after year without management so much as blushing.” Perhaps under the influence of Buffett’s letter, we began to see examples of deceptive nonsense all over the place in recent weeks. What we find amazing is that so many executives fail to understand that with increasing transparency, deceptive nonsense is more visible, and among all stakeholders, our “nonsense detectors” remain on full alert for lapses. In this month’s issue, we’ve selected a few examples of the forms of nonsense we’ve noticed in recent weeks. As you read about these individuals and organizations, think about the deceptions you encounter in your workplace, and how you deal with them. Are you attuned to how behavior is judged by others? Are there practices that have become common to you, that if you were starting over, you wouldn’t follow? What doesn’t make sense in your own area of control, and what are you doing to make changes?
Fifteen new books are
rated in this issue, beginning on page 5, including our first DNR (Do Not
Read) rating for this year. Three other books received a stingy one-star
rating. Perhaps now that Spring has arrived in Chicago, these grumpy ratings
will improve in upcoming issues. One sign of Spring is a four-star rating,
the first of those in a long while, for Elizabeth’s Buchan’s novel, Revenge
of the Middle-Aged Woman. You can also visit our 2003 bookshelf at http://www.hopkinsandcompany.com/bookshelf.html
and see the rating table explained as well as explore links to all 2003 book
Tote That Barge
How far is your organization willing to go to please your customers? If a customer needs your help in achieving one of its goals, and you’ll be rewarded for your help, what harm do you see in helping out? On whom do you rely to keep you away from practices that constitute “deceptive nonsense?”
Ludicrous as Usual
How do you go about assessing the impact of your decisions? What makes you confident that the approach you choose stands up to unexpected scrutiny? On whom do you rely for advice about impact on stakeholders with whom you’re unfamiliar? Do you hold others to standards that you fail to meet yourself? In what ways could someone describe your actions as “deceptive nonsense?”
Independent, in My Fashion
Accountability and stewardship withered in the last decade, becoming qualities deemed of little importance by those caught up in the Great Bubble. As stock prices went up, the behavioral norms of managers went down. By the late ’90s, as a result, CEOs who traveled the high road did not encounter heavy traffic.
Most CEOs, it should be noted, are men and women you would be happy to have as trustees for your children’s assets or as next-door neighbors. Too many of these people, however, have in recent years behaved badly at the office, fudging numbers and drawing obscene pay for mediocre business achievements.
These otherwise decent people simply followed the career path of Mae West: “I was Snow White but I drifted.”
In theory, corporate boards should have prevented this deterioration of conduct. I last wrote about the responsibilities of directors in the 1993 annual report. There, I said that directors “should behave as if there was a single absentee owner, whose long-term interest they should try to further in all proper ways.” This means that directors must get rid of a manager who is mediocre or worse, no matter how likable he may be. Directors must react as did the chorus-girl bride of an 85-year-old multimillionaire when he asked whether she would love him if he lost his money. “Of course,” the young beauty replied, “I would miss you, but I would still love you.”
In the 1993 annual report, I also said directors had another job: “If able but greedy managers over-reach and try to dip too deeply into the shareholders’ pockets, directors must slap their hands.” Since I wrote that, over-reaching has become common but few hands have been slapped.
Why have intelligent and decent directors failed so miserably? The answer lies not in inadequate laws – it’s always been clear that directors are obligated to represent the interests of shareholders – but rather in what I’d call “boardroom atmosphere.”
It’s almost impossible, for example, in a boardroom populated by well-mannered people, to raise the question of whether the CEO should be replaced. It’s equally awkward to question a proposed acquisition that has been endorsed by the CEO, particularly when his inside staff and outside advisors are present and unanimously support his decision. (They wouldn’t be in the room if they didn’t.) Finally, when the compensation committee – armed, as always, with support from a high-paid consultant – reports on a megagrant of options to the CEO, it would be like belching at the dinner table for a director to suggest that the committee reconsider.
These “social” difficulties argue for outside directors regularly meeting without the CEO – a reform that is being instituted and that I enthusiastically endorse. I doubt, however, that most of the other new governance rules and recommendations will provide benefits commensurate with the monetary and other costs they impose.
The current cry is for “independent” directors. It is certainly true that it is desirable to have directors who think and speak independently – but they must also be business-savvy, interested and shareholder-oriented.
In my 1993 commentary, those are the three qualities I described as essential. Over a span of 40 years, I have been on 19 public-company boards (excluding Berkshire’s) and have interacted with perhaps 250 directors. Most of them were “independent” as defined by today’s rules. But the great majority of these directors lacked at least one of the three qualities I value. As a result, their contribution to shareholder well-being was minimal at best and, too often, negative. These people, decent and intelligent though they were, simply did not know enough about business and/or care enough about shareholders to question foolish acquisitions or egregious compensation. My own behavior, I must ruefully add, frequently fell short as well: Too often I was silent when management made proposals that I judged to be counter to the interests of shareholders. In those cases, collegiality trumped independence.
Do you speak up within your organization when you see
actions that are counter to the interests of your stakeholders? When you observe
others who are silent, how do you try to solicit their independent ideas?
Does the atmosphere in your organization encourage the expression of
differences? How big a price does your organization pay for collegiality?
Here are selected updates on stories covered in prior issues of Executive Times:
Ø The March 2002 issue of Executive Times raised questions about whether Tyco would need to change its base from Bermuda if investors felt that being based offshore meant the company was trying to hide something. The company recently announced the results of a shareholder vote on the issue: three-quarters of the shares voted to stay in Bermuda. (http://www.tyco.com/tyco/press_release_detail.asp?prid=3)
Ø For those of you biting your fingernails since our February 2003 issue of Executive Times raised concerns about whether or not Sumner Redstone and Mel Karmazin would continue working together in their dysfunctional business relationship at Viacom, rest easy. The company announced (http://www.viacom.com/press.tin?ixPressRelease=80103964) new employment agreements signed by both men, and released statements about each other that were so sappy, we were reluctant to pass along the link.
Ø Just three weeks after we thought we killed the whole multitasking thing in our March 2003 issue of Executive Times when we referred to research that multitasking is less efficient than doing one thing at a time, and it makes you stupid, we were exasperated to read (while listening to NPR, sipping tea, and backing up the computer) in The Wall Street Journal (3/20/03) (http://online.wsj.com/article/0,,SB10481025081089600,00.html) that multitasking is the new battleground in the gender wars. Women assume they’re better than men at multitasking since they are expected to it all, and they do, while male rats appear more single-minded in navigating a maze. The battle is on. Pass us the remote, and a piece of cheese, and maybe a beer.
A Man in Full
Latest Books Read and Reviewed:
(Note: readers of the web version of Executive Times can click on the book covers to order copies directly from amazon.com. When you order through these links, Hopkins & Company receives a small payment from amazon.com. Click on the title to read the review or visit our 2003 bookshelf at http://www.hopkinsandcompany.com/bookshelf.html).
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