Volume 10, Issue 11
2008 Hopkins and Company, LLC
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There’s a new meaning for the term “national capital” in Washington, DC. In ancient days, say September 2008, the United States Treasury would receive tax receipts and disburse funds for government programs. In a new twist, the Treasury now exchanges cash, guarantees or some form of bailout for preferred stock, warrants or other forms of equity in what had been publicly held private companies. Taxpayers are participating in huge equity investments, with the anticipation that serious problems will be averted, and these taxpayer investments will someday pay off with healthy returns. This new form of “federal capitalism” has started with the banking sector, and there’s speculation that the auto sector will be next. While it’s early to anticipate how this will all turn out, this issue of Executive Times will explore some of the aspects of the new federalism and what it might mean for executives. Yesterday’s experts are explaining what they missed. Companies with federal aid are learning about expected changes in behavior. As you read the stories selected, think about the potential impact on you and your organization. Also, listen to the sounds of Halloween: is that Alexander Hamilton joyfully running from house to house, being treated by the largest expansion of federalism ever? Or do you hear Thomas Jefferson howling and moaning about where all this concentrated power has led? To what extent will federal capitalism be a trick or a treat for the economy and for taxpayers?
Fifteen new books are rated in this issue, beginning on page 5. Fourteen books are recommended with three-star reviews and one book is rated with a two-star recommendation. Visit our 2008 bookshelf and see the rating table explained at http://www.hopkinsandcompany.com/2008books.html as well as explore links to all 400 or so books read or those being considered this year, including 13 that were added to the list in October. If there’s something missing from the bookshelf that you think we should be considering or if there’s a book lingering on the Shelf of Possibility that you think we should read and review sooner rather than later, let us know by sending a message to email@example.com. You can also check out all the books we’ve ever listed at http://www.hopkinsandcompany.com/All Books.html.
One might be able to take the executive out of Goldman Sachs, but taking the Goldman Sachs out of the executive is another story. Goldman alumnus and United States Treasury Secretary Hank Paulson is managing newly authorized powers with Goldman-like processes. The Capital Purchase Program is aimed at injecting capital into healthy financial institutions to stimulate lending. In announcing the program, (http://www.ustreas.gov/press/releases/hp1207.htm) nine major companies had already signed up. The term sheet (http://www.ustreas.gov/press/releases/reports/document5hp1207.pdf) is public, and calls for companies to decide if they are in our out by November 14. One can almost picture the Goldman desk running a deal and keeping track of who’s in and who’s out. Here’s part of what Paulson had to say about this program, (http://www.ustreas.gov/press/releases/hp1223.htm): “As we have designed the program, Treasury will make $250 billion in capital available to U.S. financial institutions in the form of preferred stock. Institutions that sell shares to the government will accept restrictions on executive compensation, including a clawback provision and a ban on golden parachutes during the period that Treasury holds equity issued through this program. This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything. They will not only own shares that should be paid back with a reasonable return, but also will receive warrants for common shares in participating institutions. We expect all participating banks to continue to strengthen their efforts to help struggling homeowners who can afford their homes avoid foreclosure. Foreclosures not only hurt the families who lose their homes, they hurt neighborhoods, communities and our economy as a whole. While many banks have suffered significant losses during this period of market turmoil, many others have plenty of capital to get through this period, but are not positioned to lend as widely as is necessary to support our economy. This program is designed to attract broad participation by healthy institutions and to do so in a way that attracts private capital to them as well. Our purpose is to increase confidence in our banks and increase the confidence of our banks, so that they will deploy, not hoard, their capital. And we expect them to do so, as increased confidence will lead to increased lending. This increased lending will benefit the U.S. economy and the American people.” This quick experiment should yield interesting outcomes as we watch what the banks do with this new capital.
To what extent have your past experiences prepared you to deal with current challenges? How boldly are you willing to act? If given thirty days (or less) to embark on something new, how quickly are you able to come to terms and proceed or back away?
It took a few weeks after an $85 million federal bailout for American International Group (AIG) for the company to realize that their new owners wanted a say on pay and a say on play. Following media reports about lavish spending at resort locations after the bailout, New York Attorney General Andrew Cuomo called CEO Edward Liddy in for a little chat on October 16, and they released a joint statement (http://media.corporate-ir.net/media_files/irol/76/76115/releases/101608a.pdf) following the meeting, saying in part, “In a candid discussion, the Attorney General laid out his serious concerns regarding executive compensation issues and exorbitant expenses at AIG. … During the meeting, Mr. Liddy agreed to take several significant actions with respect to expenditures at AIG. First, AIG has agreed to provide the New York Attorney General’s Office with an accounting of all compensation paid to its senior executives and has agreed to assist the Attorney General’s Office in recovering any illegal expenditures. This includes all forms of compensation paid to former CEO Martin Sullivan and the former head of the Financial Products unit, Joseph Cassano. Second, AIG has agreed to establish a Special Governance Committee within AIG, which will institute new expense management controls. Also, AIG will be issuing today a new Expense Policy Guidebook. These controls and protections will be designed at the Board level to prevent any future unwarranted expenditures, such as salaries, bonuses, stock options, severance payments, gratuities, benefits, junkets and perks. The new controls will include direct supervision by AIG Chief Administrative Officer Richard Booth. Third, AIG has agreed to take several immediate actions. Effective today, AIG will not make any payments pursuant to the multi-million dollar employment agreement of Steven Bensinger, the company’s Chief Financial Officer, who will be leaving AIG. Attorney General Cuomo has specifically asked AIG not to make payments pursuant to that agreement in light of the Attorney General’s ongoing review of the propriety of such payments. AIG has also agreed to immediately cancel all junkets or perks which are not strictly justified by legitimate business needs. AIG will be cancelling more than 160 conferences and events, some exceeding more than $750,000 per event, for a total savings of more than $80 million. … ‘We’re very grateful for the guidance of Attorney General Cuomo,” said Edward Liddy, AIG’s Chairman and Chief Executive Officer. “We know that the Attorney General shares our commitment to rebuilding AIG’s business and paying back the U.S. taxpayer, and we will address the Attorney General’s concerns expeditiously.’ Attorney General Cuomo added, ‘These actions are not intended to jeopardize the hard-earned compensation of the vast majority of AIG’s employees, including retention and severance arrangements, who are essential to rebuilding AIG and the economy of New York.’ The Attorney General appreciates Mr. Liddy’s cooperation and acknowledgment that the old ways of doing business at AIG must end now.” It sounds as if greens fees and spa treatments will not be covered by the bailout funds.
When change hits your organization hard, how long does it take to filter throughout the company? How many of those who report to you will need to be told exactly what the change means? Can you rely on others to be sensitive to the impact of a big change on behavior and action?
He looked old and sad in testimony before Congress. The maestro of our economic boom, Alan Greenspan spoke clearly and plainly when he appeared before the House Committee on Oversight and Government Reform on October 23. Here’s part of what he said, according to the unofficial transcript, (http://oversight.house.gov/documents/20081024163819.pdf): “I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such is that they were best capable of protecting their own shareholders and their equity in the firms. And it's been my experience, having worked both as a regulator for 18 years and similar quantities, in the private sector, especially, 10 years at a major international bank, that the loan officers of those institutions knew far more about the risks involved and the people to whom they lent money, than I saw even our best regulators at the Fed capable of doing. So the problem here is something which looked to be a very solid edifice, and, indeed, a critical pillar to market competition and free markets, did break down. And I think that, as I said, shocked me. I still do not fully understand why it happened and, obviously, to the extent that I figure out where it happened and why, I will change my views. If the facts change, I will change.” In the meantime, he will exit from the stage with reviews of his performance that are not be as glowing as they were in the past.
How quickly will facts change your views? Is there a key assumption that leads you not to question whether or not your assessment of a situation is accurate? When does your experience limit your ability to see and understand what might be a new situation?
The cover story in the November 10 issue of Forbes is titled, “How Capitalism Will Save Us,” (http://www.forbes.com/forbes/2008/1110/018_print.html) and is written by Steve Forbes. The article provides succor for those readers who are alarmed by the amount of government intervention in markets and what it means for the future. Forbes explains why some current actions are necessary and offers a prescription for the future, including, “A formal strong-dollar policy is essential. … After the crisis, the Fed must undergo a dramatic downsizing and be given a focused mission. … The dollar must be a fixed measure of value. … Cutting tax rates is also a necessity. … Sensible, not punitive, regulations in the financial sector are needed, such as standardization of new financial products so that there is more transparency. Fannie and Freddie should be broken up into a number of new, recapitalized companies that have no ties to Uncle Sam. If we have the kind of policies that marked the 1980s and not the kind that marked the 1930s and 1970s, we will be in for a dazzling era of innovation and economic advances. Free-market capitalism will save us--if we let it.” Will we?
Do some ideas fall into and out of favor? Are there some approaches that should always be temporary? How can confidence be maintained?
Here’s an update on stories covered in a prior issue of Executive Times:
Ø The last time Executive Times called attention to Costco
was in the August
2003 issue when we noted
private label branding actions there and among competitors. The company’s
creativity in finding new ways to keep costs down is profiled in an article
in the 10/20 issue of Business Week
Here’s an excerpt, “At Costco, where more
than 29 million households pay $50 to $100 a year to shop, low prices aren't
just a nice-to-have. They're a way of life. Not only does Costco's famously
frugal CEO James D. Sinegal cap margins at a sacrosanct 14% on branded
goods, he's constantly pushing his buyers to find creative ways to lower
prices and add value while getting his managers to crank up their efficiency
efforts. … ‘The biggest concern to me is that we lose our way and start
thinking it doesn't matter if you charge another dime or another dollar or
another hundred dollars,’ he says. ‘Without those disciplines, we don't have
One path out of economic malaise involves the creative inventions that have been a hallmark of progress and the creation of wealth. A hotbed of invention for decades was Bell Labs and the inventions from that organization fueled hundreds of companies and created billions of dollars of wealth. Amos E. Joel, Jr. worked in Bell Labs for four decades and held seventy patents. When he was inducted in the National Inventors Hall of Fame earlier this year, he was recognized for one of those patents in which he “pioneered the system for cell phones of switching communication links from one cell region to another in response to movement, while maintaining continuity of service.” (http://www.invent.org/2008induction/1_3_08_induction_joel.asp). We can thank Joel for giving us all the opportunity to talk almost anywhere at any time. Joel may have given more thought to switching systems than any other person before or since. As a child, he tinkered with making switches that worked, and at MIT, he thrived under their approach to problem solving and design. At Bell Labs, he started a school to teach switching to others. In a 1992 interview with IEEE, (http://www.ieee.org/portal/cms_docs_iportals/iportals/aboutus/history_center/oral_history/pdfs/Joel137.pdf). Joel noted, “As you can see, my main interests, even then, were to invent things. To develop new ideas. To try to figure out new things to do with this new technology and, in fact, with whatever technology there was being used in switching. So I was full of ideas and got a lot of patents on things that never materialized into projects like the ones I've just described to you. But that was the things I liked to do. Unfortunately, day to day I did have to do a lot of personnel--you know, hiring (we didn't do any firing), moving people, classifying them. Worrying about budgets. You know, how much money could we get for the next year to do what we wanted to do? And all these other kinds of administrative things that come along. … I didn't want to continue worrying about budgets and personnel problems and all that kind of thing for the rest of my career there because I was still full of ideas and things I wanted to do. So I went to my boss--I went to the vice president, actually--and told them how I felt about it. And so he said, Well, all right, why don't you just, you know, we'll fill in behind you and get somebody else to take over your laboratory. And you just become a director without portfolio, so to speak. … I would not have to worry about any of these things, and I could do what I wanted. Of course I had no help, I was just on my own. … And so it was a great opportunity, and I was able then to start working on new ideas. And I had a lot of new things I worked on.” Joel’s work on new ideas led to new inventions and patents. Joel died in late October at age 90. The switches he invented are still working.
Latest Books Read and Reviewed:
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