Executive Times

Volume 2, Issue 8

August, 2000


ă 2000 Hopkins and Company, LLC

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Three Envelopes

If we heard this joke twenty-five years ago, it may well have been from Professor Paul Nadler of Rutgers, a frequent speaker at banking conferences, so we’ll give him credit for it. When the new bank president arrived on his first day at work, the old president greeted him, and handed over three envelopes, marked 1,2 and 3. “Whenever you face a crisis or a difficult decision, open these envelopes in the order indicated.” The new CEO placed the envelopes in his desk drawer and forgot about them until three months later when an unexpected shortfall in earnings was about to be announced.  He remembered the envelopes, opened #1and found a single card with the words “blame your predecessor”. The earnings release came and went easily after following the direction from inside envelope #1. Six more months passed, and once again earnings were below expectations, and the bank president didn’t have a plausible reason to explain the downturn. He remembered the envelopes, opened #2, and read, “reorganize the bank”. The announcement about dramatic changes in people and structure was well received. When year-end results showed no performance improvement, the bank president opened his desk drawer and stared at envelope #3. He opened it and found the message, “prepare three envelopes.”

We recalled this story in recent weeks, especially after we read the quarterly reports coming out of various banks. Executives yesterday and today make hard decisions and act in ways that show they’ve learned lessons from the past. Executives form teams and create organizational structures and processes to succeed in the future. Some executives decide or are told that it’s time to turn the reins over to someone else. As you think about the situations faced by other executives, reflect on what you might have done the same or differently had you faced the same challenges.

It takes lotsa $$$ to close The Money Store

In March 1998, First Union Corporation announced an agreement to buy The Money Store for about $2.1 billion. “We are excited by the opportunity this partnership presents for us to fill an important gap in meeting the credit needs of a broader range of customers with expanded and very complementary products," said John Georgius, president of First Union Corporation. "The combination with The Money Store fits perfectly with our retail strategy of meeting the needs of all customers when, where and how they want."  Georgius retired a year later. His replacement, G. Kennedy Thompson, was tapped earlier this year to replace retiring CEO Edward Crutchfield, who resigned for health reasons. When he took the new job, Thompson said, “It is my honor to continue Ed's vision of the business model he has created for the 21st Century.” Three months later, at the end of June 2000, Thompson announced sweeping changes. The “bulk of the changes are related to a decision to discontinue lending activities at The Money Store.” The press release stated, “Following an extensive review of The Money Store, First Union has determined that its long-term profitability outlook and risk profile are inconsistent with First Union's strategic plan.” We would have thought an extensive review would have taken place just two years ago before the bank shelled our $2 billion to buy The Money Store. We assume First Union’s strategic plan has now changed, otherwise somebody would have found the inconsistency two short years ago. We’re guessing that even though Crutchfield and Georgius are board members, Thompson used envelope #1. Instead of a retail strategy of “meeting the needs of retail customers when, where and how they want”, it seems that from now on every operation will have to meet strict financial criteria.

Major decisions to merge or divest take place in a context and the messages relating to these decisions can come back to haunt a company. When you make important decisions, how carefully do you frame the messages conveyed about the decisions? The First Union turnabout on The Money Store took place in a short period of time, allowing memories to echo the corporate statements made in the context of two different scenarios. How consistent are your messages? What will cause you to make a sharp change in direction? Will you blame your predecessor? 


Bank One, Envelope Two

Maybe it was because his predecessor had been blamed already that Jamie Dimon, CEO of Bank One Corporation had to jump ahead to envelope #2. At a late July investor presentation, Dimon disclosed his actions to restructure the bank and set it in the right direction. Correcting the past mistakes will be expensive. Dimon implemented a new financial philosophy that cut the bank’s dividend in half, and the charge in the current quarter to clean up the balance sheet is almost $2 billion. That gives the Dimon management team breathing room to move ahead with their plans for future success. We found Dimon’s investor presentation crystal clear and a model for executive communication. Dimon used plain language, peppered with clear examples to explain what he’s done and what will be done. He said he’s examined the business of the bank since April, and has decided not to sell off assets like First Card or wingspanbank.com. The franchises are sound and growing; the challenge is to execute better. Dimon explained that this means integrating systems and improving customer service. Waste will be eliminated. A new management team is in place. We found it fascinating that part of the reorganization involves a change to new management philosophies involving these attributes: entrepreneurial; owners and partners; run lean and fast; open door policy; meritocracy; high standards; teamwork and personal character.

When you’ve made organizational changes, have you communicated the philosophy or principles behind the changes? When you’ve delivered messages about change, have your words and meaning been easy to understand by all audiences? The next time you’re ready to deploy the advice of envelope #2, how will you go about your reorganization?

Preparing three envelopes

We opened The New York Times on July 1 and learned that Larry Ellison’s number two at Oracle, President Raymond Lane “resigned abruptly.” Since Lane’s resignation came days after the company admitted it had conducted a surveillance campaign against Microsoft, some sources connected the resignation with the spy campaign. Oracle claimed no connection between the two events.

Will some event trigger your preparation of three envelopes? How do you plan to move on?

Sticks and Stones May Break My Bones

But name-calling may cost $3 million

We laughed out loud when we read in The Wall Street Journal (July 11, 2000) that a former employee of Value Line is being sued for $3 million because of calling a former boss names (specifically “old dodo”) in postings on Yahoo message boards. 48-year-old former Value Line employee Christopher Bischof said, "Of course I'm sorry for what I did. This hasn't exactly enhanced my career." Injured CEO, 65-year-old Jean Buttner, filed suit against 50 John Doe’s who posted messages about her on Yahoo. After Value Line fired Bischof, he spent part of his free time blowing off steam online about his former company and its CEO.

How do you blow off steam? What do you talk about? Who do you talk about? What do you say?

Take the Money and Sprint

Pay for performance windfall

Many companies encourage key personnel to remain with an organization involved in a merger through the use of financial incentives. In the case of top executives, their old stock options often become fully vested, and new options are granted to reward continuity and enthusiasm through the merger. We read in The New York Times (July 6, 2000) that Sprint executives who received these merger incentives when the deal with WorldCom was announced, can still cash them in and leave Sprint now that the merger has been called off. Executives have begun depart Sprint, quite a bit wealthier than they imagined.


Do the terms of incentive compensation in your organization motivate the behavior you desire? Are certain reasonable conditions included in your plans, such as revisions if regulatory approval isn’t obtained?


Lessons in Teacher Pay

NEA delegates reject pay for performance proposal

We read (NEA press release, 7/5/00) that the delegates at the National Education Association’s annual meeting rejected an alternative pay plan structure that would reward teachers for results. At first, we were surprised on hearing this story, and now think we understand the issues a little better. Current teacher pay structures reward experience (tenure) and knowledge (degrees). The best teachers can make less money than the worst teachers in today’s plans. Teachers seem wary that administrators or school boards could find ways to distinguish the differences between the best and worst teachers by using any criteria other than experience and knowledge. That resonates with our own experience. Our best teachers wouldn’t have been well rewarded if they had to follow someone else’s curriculum. Test results is a potential criterion fraught with land mines. For now, the teachers want more money, but under today’s structure.

How do you build confidence in workers that the criteria used to differentiate performance are fair and reasonable? Do workers play a role in setting the criteria for evaluation? How do you distinguish the best workers in your organization? Are they rewarded significantly more than average performers? Do others know who the best performers are, and what they did to be rated best?

Hard times ahead for EZ Squirt?

Makes us green with envy

You’ve probably heard about EZ Squirt by now, but may not recognize it by that name. In another brand extension, H.J. Heinz announced this new product, aimed at children: green ketchup. Is nothing sacred?  With the same taste as the red version, EZ Squirt will be on store shelves in October in a soft bottle and delivering a fine steam, handy for drawing on food and for increased accuracy during food fights.  Heinz spokesperson Deb Manguss referred to it as a ketchup kids “can call their own.” That’s probably because the rest of us will take a pass.

Can new ideas emerge inside your organization even if they turn existing thinking upside down? Are you willing to give target customers a product they “can call their own?”

Cutting through the Smoke

“A defective product and they knew it”

Most executives we’ve talked to since the Florida jury awarded smokers with a multi-billion settlement can’t believe what happened. One executive said, “What’s happened to personal responsibility?” Another said, “How long have the warnings been on cigarette packs? Didn’t you call them coffin nails when you were a kid?” Whatever surprise we experienced over the verdict went away when we read one juror’s quote, “Cigarettes are a defective product and they knew it.”

Are any of your organization’s products or services defective? Do you know it? What have you done, or what do you plan to do?

Follow Up

Here are selected updates on stories covered in prior issues of Executive Times:

Ř      The July 2000 issue of Executive Times called attention to the expensive consequences of past price discrimination by race at an insurance company acquired by American General. We were not surprised to read in The Wall Street Journal (July 13, 2000) that similar claims over alleged racist practices have been filed against Prudential and Met Life.

Ř      Both the May and June 2000 issues of Executive Times mentioned Conseco’s woes and changes at the top. We learned from The Wall Street Journal (July 11, 2000) that the Board found an expensive replacement for departed founder and CEO Stephen Hilbert. According to the Journal, in addition to paying Gary Wendt, former head of GE Capital, $45 million, Conseco issued 10.5 million shares of stock to GE Capital to release Wendt from his non-compete agreement.


While we vaguely remember seeing a small man on TV in 1964, we clearly remember hearing his keynote speech at the Democratic National Convention in Atlantic City. John Pastore, the first Italian-American elected governor and then Senator, delivered a moving partisan address, lashing out against Republican nominee Barry Goldwater, emotionally remembering John Kennedy, and preparing the delegates to nominate Lyndon Johnson. Short in stature, about 5’4” tall, Pastore’s eloquence and intelligence put him head and shoulders above most political colleagues. His dignity and integrity separated him from other politicians, and his career was scandal-free. His principles led him to oppose nuclear weapons and he led support for the Nuclear Test Ban Treaty. Pastore became a role model for aspiring immigrants; his photo hung in many living rooms around the Ocean State during the 1950s. We recall him leading the Senate floor debate through many controversial parts of the Civil Rights Act of 1964. Pastore served Rhode Island in the U.S. Senate from 1950 to 1976.  Pastore died in July, and during the August political conventions this year, we’re not likely to hear a single speech (if we hear any at all), that measure up to the one he delivered thirty six years ago.


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Buckle Up

Bill Vlasic and Bradley A. Stertz list almost one hundred primary sources they interviewed to write Taken For a Ride: How Daimler-Benz Drove Off With Chrysler.  The title certainly clues the reader to the bias these Detroit News reporters bring to the story.  Biased or not, this book discloses the behavior of key players including Bob Eaton, Jürgen Schrempp and Kirk Kerkorian, as events took place before and after the so-called “merger of equals”.  Any executive reading this book will wonder what different steps he or she might have taken as the story unfolds.  The authors help the reader understand the personality of the people involved, and how action and inaction led to the merger and the loss of Chrysler’s identity.  This books reads as quickly as a good mystery, and we recommend it.

Bozos or Bobos?

The recommendation on the book jacket from Chris Buckley caused us to pick up and read David Brooks’ Bobos in Paradise: The New Upper Class and How they Got There. Buckley called Brooks “the smart, fun-to-read social critic of his generation.” Since we’ve laughed through Buckley’s books, we figured we have the same experience here. Not quite. We admit that in the almost 300 hundred pages, we laughed out loud three, maybe four times. Perhaps thirty paragraphs were really funny. Here’s a sample from the chapter on Consumption, in the middle of a long description of Bobo kitchens:

“Presiding over the nearby quadrants of the kitchen will be the refrigeration complex. The central theme of this section is that freezing isn’t cold enough; the machinery should be able to reach temperatures approaching absolute zero, at which all molecular motion stops. The refrigerator itself should be the size of a minivan stood on end. It should have at least two doors, one for the freezer section and one for the in-law suite, in case you want to rent out rooms inside. In addition, there should be through-the-door delivery systems for water (carbon filtered), ice (cubes, crushed, or alphabet style to help the toddlers with their letter recognition), and perhaps assorted microbrews. There should be gallon door bins, spillproof split shelves, sealed snack pans, full extension slides, and scratchproof bin windows, and the front doors should not be white, like those regular refrigerators they sell at Sears, but stainless steel---the texture of culinary machismo.”

That’s about as good as it gets. Too much of the book goes on and on with a more serious tone which we found far less enjoyable to read. Take a pass.

Enjoying Dr. Doom

We were delighted to read Henry Kaufman’s new book On Money and Markets: A Wall Street Memoir. If you’re searching for the intimate disclosures found in other memoirs, search elsewhere; we found but two in this book, so we’ll disclose them here. First, Dr. Kaufman wishes that he told his parents how much he loved them, but in those days, such words were unspoken. Second, if you’ve really made an impact on his life, he’s already funded a university chair in your name. The joy in this book comes from Kaufman’s careful and clear writing. One favorite is, “Today’s financial community is suffering from a bad case of amnesia.” Pow! The impact of Germany’s hyperinflation in Kaufman’s youth makes it easy to understand why he’s remained an inflation fighter throughout his life. More than a memoir, this is economic history at its best, along with predictions for the future, in typical Kaufman style, such as, “…financial intermediaries will need to be ever-more diligent to balance their entrepreneurial impulses with their fiduciary responsibilities.” We highly recommend this book.

Winner’s Circle

Jane Smiley unfolds characters in Horse Heaven, like a Las Vegas blackjack dealer presents cards: one at a time, with precision and professionalism. In the first third of the novel, we’re introduced to four dozen people and horses, chapter after enjoyable chapter. By the middle of the book, we’ve come to understand certain characters more deeply, from multiple dimensions. While Horse Heaven won’t win the literary awards Smiley achieved for A Thousand Acres, this is a well-written novel that’s a joy to read.  Here’s a sample from Chapter 51:

“She looked at her watch. It was almost noon. Maybe it had been a decade or two since she had spent an afternoon in a park. In the first place, she was a culture girl, not a nature girl, and in the second place, walking in the park was for people who had nothing else to do and no money to do it with. In the third place, it was the third of January, which was, perhaps, why the place was deserted. And so she walked in the park.

What exactly her mood was, she could not say.  Normally, she would be feeling a certain impatience, a certain fear of boredom at the prospect of an afternoon alone with trees and grass.  She was fifty years old now.  For the last thirty years, with a machinelike implacability, she had planned her days, her weeks, her years.  She traveled with guidebooks and systems.  When she came away from the new place, she had an excellent overview of historic sites, fine-art and decorative-arts museums, better shopping, restaurants, and musical venues.  When she came back to these places later, she always knew what she had missed and wanted to see this time.  Her friends called her all the time and asked her what they should see and where they should eat in any given spot, and she always had a brilliant suggestion.  In retrospect, it was as if she had been mapping the world.  But what for?  Perhaps, she was willing to admit, it was because she didn’t have anything better to do.”

If there’s one more pleasure book you want to read this summer, try this one.



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