Executive Times

Volume 5, Issue 4

April 2003


ã 2003 Hopkins and Company, LLC

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“Deceptive Nonsense”

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 reviews.

Tote That Barge
One can’t think about “deceptive nonsense” without recalling Enron. In mid-March the SEC announced (http://www.sec.gov/news/press/2003-32.htm) that it charged Merrill Lynch and four former senior executives with “aiding and abetting Enron Corp.'s securities fraud” on two transactions in 1999. “…the first transaction was an asset-parking arrangement whereby on Dec. 29, 1999, Merrill Lynch bought an interest in certain Nigerian barges from Enron with an express understanding that Enron would arrange for the sale of this interest by Merrill Lynch within six months at a specified rate of return. In substance, this transaction was, at best, a bridge loan because the risks and rewards of ownership of the interest in the barges did not pass to Merrill Lynch. As further alleged in the complaint, Merrill Lynch and the named executives knew that Enron would record $28 million in revenue and $12 million in pre-tax income in connection with this transaction. The Commission alleges that Merrill Lynch and the named executives entered into this transaction solely to accommodate Enron, despite express concerns that Merrill Lynch could appear to be aiding and abetting Enron's earnings manipulation. In 2000, Enron arranged to take Merrill Lynch out of the barge deal on the agreed time frame at the agreed rate of return.” Merrill Lynch said (http://www.ml.com/about/press_release/03172003-2_ml_finalizes_pr.htm), “it entered into the settlement without admitting or denying wrongdoing to resolve the inquiry and put the matter behind it. The resolution concludes the SEC's investigation into Enron-related matters with respect to the company. In this matter, Merrill Lynch, as always, has cooperated fully with regulators and required all of its employees to cooperate as well. Those who did not were terminated.” The settlement cost Merrill Lynch $80 million. SEC chairman William Donaldson said, “I want to take this opportunity to reaffirm that one of our highest priorities — one of my highest priorities — is to punish all those who would subvert the financial reporting process. Our commitment to protect investors demands nothing less.”

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
What was the nominating committee of the board of the New York Stock Exchange thinking when it proposed Citigroup’s Sandy Weill as a director to fill one of the slots for representatives of the public? Within less than a nanosecond, New York State Attorney General Eliot Spitzer cried foul in the form of a perfect sound bite, saying of Weill, “His company is paying one of the largest fines in history for perpetrating one of the largest frauds on the investing public. To imagine he should be the voice of the small investor is ludicrous.” (From The Wall Street Journal, 3/24/03) (http://online.wsj.com/article/0,,SB104845786858103000,00.html). In what seemed like a nanosecond later, Weill quietly removed his name from consideration. Usually, members of the securities industry are barred from being public representatives on the NYSE board. In Weill’s case, since Citigroup doesn’t receive the majority of its revenue from the securities industry, he’s eligible, as is current board member, William Harrison, chair of J.P. Morgan Chase. Once the media’s attention focused on the NYSE, more stories emerged, including the need for the NYSE to replace three public directors, including Martha Stewart, who has resigned. We can be sure the NYSE loved this opening paragraph from The Wall Street Journal (3/25/03) (http://online.wsj.com/article/0,,SB104855977651963200,00.html): “The New York Stock Exchange, which has long prided itself for promoting good corporate governance, recently trumpeted its proposal to ensure that outside directors who sit on corporate boards are truly independent. Now, the Big Board itself is under fire for possible corporate-governance shortcomings.” As we went to press, SEC Commissioner William Donaldson weighed in on the issue in a letter to all exchanges saying, “Basically, if you're going to set standards for other people, you've got to set a standard for yourself.” Donaldson gave the exchanges six weeks to review their governance practices and get back to the SEC about how their boards are constituted to protect the public.


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
Whatever you may think about the rules for director independence, you’re likely to agree that independence alone is “deceptive nonsense.” Corporations need directors with business savvy, time and interest to devote to the corporation, and an outlook that frames issues from the perspective of shareholders. In this year’s longer quote from Warren Buffett’s annual letter to shareholders, (http://www.berkshirehathaway.com/letters/letters.html) he describes corporate governance far better than we ever could:
Both the ability and fidelity of managers have long needed monitoring. Indeed, nearly 2,000 years ago, Jesus Christ addressed this subject, speaking (Luke 16:2) approvingly of “a certain rich man” who told his manager, “Give an account of thy stewardship; for thou mayest no longer be steward.”

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
Executives looking for creative solutions to the challenges facing their organizations can learn a heap from the rich, full life of the late Daniel Patrick Moynihan. Thanks to the clarity of his forward-looking thinking, and the action that followed his thoughts, Americans have benefited from improved auto safety; preservation of historic places; strengthening of Social Security; family-centered social welfare; and increased transparency of government operations. A thinker, but not an ideologue, Moynihan made friends and enemies among members of all political parties. A liberal Democrat, he served in senior positions for Presidents Kennedy, Johnson, Nixon and Ford, including U.S. Ambassador first to India and later to the United Nations. After teaching at Harvard, he went on to serve four terms in the United States Senate. Some pundits have said Moynihan wrote more books (18) than some of his Senate colleagues have read. When an area of life caught his attention, Moynihan gathered facts, analyzed the data, and sought practical solutions. He threw his 6 foot 5 inch frame behind his ideas. Thanks to Moynihan’s ideas and actions, Washington’s Pennsylvania Avenue has become a showplace for America. In addition to getting changes made to accomplish this renewal, he moved there himself. His tongue was as sharp as his mind, and his wit often charmed his opponents. Considering the number of brain cells he may have killed in creating the drinking stories legendary among Washington politicians and journalists, the cells he was left with were more than most of us start with. Moynihan spent a half-century using his mind for the public good. All executives can learn from Moynihan the valuable lesson that one thinking person can make all the difference.

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).


Title (Link to Review)



Review Summary


Revenge of the Middle-Aged Woman

Buchan, Elizabeth

Sweet. Rose’s assistant takes her husband and her job in the same week. Through Buchan’s wit, grace, charm, poignancy, and very fine writing, readers enjoy Rose’s gradual transformation through the stages of grief and into a new life.


Eco, Umberto

Liar’s lair. Hard to figure out when Baudolino is lying, or what he’s saying in the first place. Read the full review to find out why we abandoned the text and listened to an audio version instead.

Sisters: Catholic Nuns and the Making of America

Fialka, John J.

Yes, Sister. Fialka traces the arrival of small groups of nuns in America in the 19th century through their 1965 apex of 179,000 sisters, to today’s situation where half the remaining sisters are aged seventy and older.

The New Rabbi

Fried, Stephen

Fathers. Three books in one: Temple Har Zion’s search for a new rabbi; Fried’s deepening religious observance; and the ways that fathers and sons relate. Readers from any religious tradition, or none, will find this book fascinating to read.

The Politics of Fortune: A New Agenda for Business Leaders

Garten, Jeffrey E.

Manifesto for CEO Action. 22 “shoulds” for executive involvement in public policy that may raise your blood pressure and stimulate your thinking.

Leading Geeks: How to Manage and Lead People Who Deliver Through Technology

Glen, Paul


All Geek to Him. Geeks aren’t as different from the rest of us as Glen proposes. There may be worse books on the business shelves this season, but we haven’t read them (yet).

Isn’t It Romantic

Hansen, Ron

Franco-American Treats. French tourists find Nebraska, love, fine wine from the magic waters of Frenchman’s Creek. Given Hansen’s versatile writing skills, readers will laugh out loud. 

Pigs at the Trough: How Corporate Greed and Political Corruption Are Undermining America

Huffington, Arianna

Sharply Pointed. Witty, sometimes tiresome, cleverly written smorgasbord of corporate scandals and proposals for reform. Enjoy her irreverent writing style and pointed judgments.

Goodnight, Nobody

Knight, Michael

Mesmerizing. Nine well-written short stories full of imaginative plots, and enough character development to please readers.

Starving to Death on $200 Million: The Short, Absurd Life of The Industry Standard

Ledbetter, James

Let it Die. Unless you’re in the publishing business, enjoy Ledbetter’s good writing, or miss the days of the Internet bubble, there’s little reason to spend any time reading this book.

The King in the Tree

Millhauser, Steven

Betrayal. Three novels plumb the dimensions of love and betrayal through fine writing, imaginative settings, and characters that reveal themselves with many of the complexities of human nature. Millhauser at his best.

Eleanor and Harry: The Correspondence of Eleanor Roosevelt and Harry S. Truman

Neal, Steve

New Friends. Following FDR’s death, Harry Truman and Eleanor Roosevelt needed each other, and through their letters, and Neal’s light commentary, we see how they used each other, got to know each other, and eventually became friends.

The Boy in the Box

Nelson, Lee J.

Welcome Back Kafka. Schemes and schemers, alienation and strangeness, in a New York City apartment, told with all the charm that Franz Kafka would have used. Read if you’re up for a downer.

Back Story

Parker, Robert B.

Spenser Vintage 2003. Master detective Spenser accepts six Krispy Kremes as payment to work on solving a decades-old murder. Memorable characters, interesting plot and realistic dialogue.

Absolute Trust in the Goodness of the Earth

Walker, Alice

Comforting. New poems, many of which reveal the meanings of house and home, creating a special place for readers to spend some time in refuge and in pleasure.


ã 2003 Hopkins and Company, LLC.  Executive Times is published monthly by Hopkins and Company, LLC at the company’s office at 723 North Kenilworth Avenue, Oak Park, Illinois 60302. Subscription rate for first class mail delivery of the print version is $60.00 per year (12 issues). Web version subscriptions are $30.00 per year. Single issues: $10.00 print; $5.00 web. To subscribe, sign up at www.hopkinsandcompany.com/subscribe.html, send an e-mail to executivetimes@hopkinsandcompany.com, call (708) 466-4650, or fax to (708) 386-8687. For permission to photocopy or e-mail Executive Times, call (708) 466-4650 or e-mail to reprints@hopkinsandcompany.com. We will send sample copies if requested. The company’s website at http://www.hopkinsandcompany.com/archives.html contains the archives of back issues beginning in the month after the issue date. 

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