Archives for category: Uncategorized
« Older Entries
Newer Entries »

Chess vs. Checkers: Trump, Financial Restructuring and Life

October 8, 2018 //
2

A The Wall Street Journal editorial a while back,  made an interesting observation about our President and his style of leadership and negotiating. The article was primarily focused  on how Mr. Trump is approaching trade issues with China, and the rest of the world and specifically his emphasis on protecting domestic car production. But, I believe this can be applied to much of how our President approaches issues from foreign policy to healthcare etc. The article, by Holman Jenkins, Jr., states that President Trump is playing checkers while the rest of the world is playing chess. He relies on his gut and ignores briefing materials, etc..

Long time readers may guess that I have my own story about this type of game theory.  I learned about chess vs. checkers during my work on USG Corporation’s financial restructuring.

It was early in USG’s three year financial crisis, I was alone in New York having lunch with our newest financial advisor, Lazard. I was with David Supino, one of Lazard’s senior Partners and the head of their debt/bankruptcy advisory practice. An appropriate title as USG Corporation had accumulated massive debt in fighting a hostile takeover and was struggling to stay out of bankruptcy!   

We were at the famous Sea Grill restaurant in Lazard’s office building at 30 Rock (called that before the Tina Fey TV show). As USG’s newly named CFO, I was trying to understand this bizarre restructuring process from David who had done this for decades. USG, you see, had all these multiple groups and levels of creditors we had to satisfy to avoid a forced in-court bankruptcy. I was explaining, to David, my thoughts about how to negotiate with all these parties at the same time. 

My approach was this. On Star Trek’s Enterprise they had a three dimensional Chess set; when you moved a piece at one level it affected pieces at the other two levels. I asked David if this was a good way to look at our situation, like a Three D Chess game.

David stopped eating, spit out a piece of food, and started to shake, laugh and cry all at once. At first I thought it might be a heart attack until David screamed at me, “James, This is your problem! You think you are playing Chess! It’s more like Checkers but half the pieces are missing or broken! There is no Board and no Rules! Now do you understand what it means to be in Financial Restructuring!”

And, as our three year journey continued, I realized that my friendly advisor, David, was exactly correct. As detailed in the Crisis Management chapter of my book, The Business Zoo, any major crisis brings its own terminology, its own rules (or lack of them) and an often unclear path and timetable to ever get out of the crisis. This can apply not only to a financial or business crisis but a personal one as well.

So, what I learned then, and perhaps what leaders around the world need to learn about dealing with President Trump, is that you really need to understand what game you and your opponent think you are playing. And maybe the condition of the pieces and the shape of the board!

Usually business, life and even politics can be pretty straight forward. So, I would choose a really good checker player over a weak chess player any day!

 

Tags , , , , , , , ,
Categories Uncategorized

Firing CEOs for Cause with No Severance!

August 12, 2018 //
3

Barnes and Noble, the bookstore chain, has experienced more than its share of trouble. They are hurt by Amazon, by the rise of e-books, the lack of book reading by younger people, too much debt, and excessive turnover in the management ranks, to name a few. Now, their third CEO, in two years was just fired by the Board. According to the Wall Street Journal, here are some of the details: the CEO violated Company policy (not specifically named), this was not due to any SEC type financial reporting or potential fraud, he was removed from the Board immediately, and he will receive No Severance!

This is what should happen but rarely does. If you Google severance pay, the stories never end. From media people like Harvey Weinstein collecting $25 million to Fox’s Roger Ailes receiving $40 million both leaving in sexual harassment scandals. United’s former CEO left in a corruption scandal and received $29 million. All this makes the misconduct departure of Lululemon’s CEO, who only received about $5 million, sound like a real bargain.

The only other recent and well-known example I could find of a CEO leaving for cause and getting no severance was the Vegas mogul, Steve Wynn and his ex-wife was a still a major shareholder in his company.

Why don’t more companies and their Board of Directors do the proper thing and not pay severance for executives who were fired for cause?  One obvious issue is the legal definition of  “cause”. When it involves violation of a company’s policies or code of ethics, this should not be an issue, but it is still usually not followed. If it involves a legal action, such as a lawsuit to establish “cause”, public firms usually run or at least look the other way!

Why? The real reason is that large public firms are afraid. Afraid of having to give depositions; afraid to go to court and mostly afraid the company will look stupid or mean or bad or worst yet, wrong! I know this because, as a CFO, I have been in more than one meeting that involved terminating another senior executive for cause and I am the only one suggesting no severance and that our company should pursue legal action.

In the case of a fallen CEO, it is the responsibility of the Board of Directors to take action whether that is to pursue criminal or civil actions and/or to withhold any severance. Too many Boards are weak. They take the easy way out, pay some hush money, sign a nondisclosure agreement and find a new CEO.

So let’s congratulate the Boards of Barnes and Noble and even Wynn Casinos for taking the first hard step and not further enriching a discredited CEO with any severance package! Most people distrust large firms and their executives. When people read about these undeserved and unexplainable severance payoffs, it only adds to that distrust.

Tags , , , , ,
Categories Uncategorized

Washington DC and the Women’s Memorial

July 11, 2018 //
2

My mother, Dorothea Gagliardi James, enlisted in one of the first groups of WACs in the Army Air Corp. in WWII. She travelled from her home in Philadelphia to military bases in five different states and taught young men aircraft identification before they were sent to fight in Europe. At the end of the war, in Fresno California, she met and married my father, Jake. She left the service as a Staff Sergeant and was always proud of her time in the military serving her country.

About twenty years ago I found out about a drive to raise funds for a memorial in Washington D.C. to honor women who had participated in any war, from the American Revolution to today, and in any capacity-nurse, soldier etc. I volunteered and helped raise money in the Chicago area and made a significant personal gift with help my old firm, USG Corporation.

At the entrance to Arlington Cemetery, is the Women’s Memorial. It is a short subway ride from downtown DC and a short walk from the Kennedy Memorial and the Tomb of the Unknown Soldier. Behind it are what seem to be, miles of, endless white headstones which make up the bulk of Arlington Cemetery. Any trip to our nation’s capital should include a visit to this area.

The Women’s Memorial has a computer registry where you can view a photo and a brief history of some of the three million women who have served our country. They also have exhibits that show military uniforms over the decades and highlight different stories or themes. When we visited, there was a tribute to the 7,000 fallen warriors who have given their lives in our more recent wars.

They also were premiering a documentary film called The Hello Girls. It tells the story of  two hundred female AT&T operators who volunteered to move to France when the U.S. entered World War I. They served as phone operators in the front lines and at military headquarters. Our head commander, General Pershing, said they helped win that war. Some died for their country. One more example of the often, untold role of women in our nation’s history.

Recently, my wife and I took my son, Mike and grandson, Connor to DC. Even a seventeen year old was impressed with everything we saw in Arlington and Washington DC. From printing money at the Bureau of Engraving to the huge Air and Space Museum near Dulles Airport to the Supreme Court and Congress, DC is great and every government building and museum is Free!

So add Washington DC to your vacation list especially for teenagers. It is far more valuable for a life learning lesson or two than Disney World!

And while in DC, check out the Women’s Memorial. It is amazing what you can learn.

Tags , , , , , ,
Categories Uncategorized

Reported “Earnings” in Today’s World

July 6, 2018 //
1

As an accountant and CPA, I always thought I understood basic financial concepts. Net Earnings was computed by deducting all your expenses from Sales. And Cash Flow was, well, cash flow, or your Net Earnings plus Depreciation. These were defined by generally accepted accounting principles or GAAP and used to publish a firm’s financial results.

Well, guess what? That is not the way it is anymore. I started to discover this when some of the young people I advise go to work for firms like Salesforce. For many high growth technology firms, like this one, there really aren’t much Net Earnings anyhow and they even report Sales in ways I was never taught!

So recently the Wall Street Journal had an article called “Fanciful Measures of Profit.” This trend does go back to my days in the 1990’s at USG Corporation. USG had borrowed huge sums of money and due to the interest expense (and a slump in the construction markets) we had no earnings. So we reported EBITDA, Earnings before Interest, Taxes and Depreciation. As their CFO, I would joke to investors that when you have no earnings, you report EBITDA instead. My old friend, Warren Buffet’s partner, Charlie Munger, called these “bullshit earnings”, and he was not far off. But the fun did not end there!

The Journal reported that this year alone, companies have filed 450 documents with the Security Exchange Commission, SEC, with variations of my old EBITDA. A popular one is EBITDAO which adds back the cost of stock options issued to management. There is also ones that add back pension cost, leasing cost, exploration costs and almost anything else you can dream up. Technically, all these so-called financial measures must be shown with the traditional GAAP reported earnings. But in quarterly earnings calls and meetings with investors, firms primarily stress these adjusted earnings calculations because it makes them look better. And stock analysts have adapted and now use many of these new earnings measures when they review a firm and recommend their stock.

I am having a hard time with all this. I was taught that, in the end, all firms need to make real net earnings and to generate cash flow to survive and grow. But today companies get around this by borrowing money and issuing more stock. And if the firm, like Salesforce, is in a trendy field like software platforms on the cloud and is growing rapidly, no one seems to care if they have GAAP profits or not. Salesforce stock has climbed over 80% in three years without much real Net Income at all. This was also the story of high sales and stock growth without earnings for years for companies like Amazon and Facebook.

So what to do? Every investor needs to decide for themselves. For every Amazon, Facebook or Salesforce that soars and succeeds, there are dozens of firms that fail. Or, heaven forbid, the next great idea comes along and wipes out the competitive advantage, market share and quickly the value of their stock!

But I have decided that even an old CPA needs to be open to the way this new economy of ours is working and to make some investments in firms that may not have met my conservative old standards. After all, my wife, Tricia, is the one who insisted in 2004 we buy stock in some small computer firm called Apple! (We should have bought more!)

Only time will tell if this new investment approach works!

Tags , , , , , , , , ,
Categories Uncategorized

Business Ethics, Morality and Leaning on Trade Creditors

June 6, 2018 //
2

Crain’s Chicago Business wrote several months ago about how big companies are putting increased pressure on their much smaller trade creditors to extend their payment terms. A small Chicago stamping plant with $10 million in annual revenue, makes parts for Honeywell whose revenues are $39 billion and whose free cash flow is about $5 billion. Until recently Honeywell paid this firm slowly, by most manufacturing measures, at 60 days. Now they have asked for 120 days. This makes the smaller firm their Banker.

Chicago based Boeing, whose sales are even larger at $100 billion last year, recently asked suppliers for 120 day terms as well, according to the same article.

Both Boeing and Honeywell have an “A” credit rating, the best in corporate America.   This means they can borrow money pretty much whenever and from whoever they want and, in today’s financial world, very cheaply. So why do these giant companies penalize  very small suppliers by not paying their bills in a timely fashion? Because they can. Today there are plenty of small suppliers willing to accept these credit terms just for the chance to sell to a giant customer. At least for awhile or until it crushes the small firm’s own credit situation.

Is this a new phenomenon you might ask? Of course not. This has gone on forever in business. What is new is who is doing this and why.

Years ago, my wife Tricia sold office furniture to the then giant telecommunication firm MCI which became Worldcom which became Verizon. Standard terms from small furniture distribution firms were 30 days. One day MCI just decided to take 60 days. As a commissioned sales person, Tricia was charged a financing charge by her own firm which reduced her, already small, commission. At the time, MCI was just starting to have  financial problems, a falling stock price and eventually declared bankruptcy.  So, in the past, large firms often leaned on trade creditors to try to buy time to restructure their business.

My old firm USG Corporation went through its own financial restructuring due to excess debt taken on to avoid a hostile takeover. One of the many things we did to survive was to maximize our days outstanding with our trade creditors. But we did this after talking to the creditors and sometimes making special accommodations with them.

But what is going on today is totally different. Honeywell, Boeing and I am sure a host of other very large and very financially solid firms are unilaterally and without much communication or rationale just stretching out their credit terms to the severe detriment of a lot of small and struggling suppliers. A former USG Corporation financial colleague of mine was concerned that by not paying our bills according to their standard terms we were being “immoral and unethical”.  I never agreed with that characterization at the time or in our circumstances.  But what is going on today I do consider bad business practices that border on unethical.

Business like life relies on relationships. This credit practice is very bad for relationships and karma. And it will likely lead to more failures of small firms which are so critical for our economy.

Tags , , , , , , ,
Categories Uncategorized

Older Workers in CPA Firms

May 20, 2018 //
2

Just when I thought I had heard almost everything, a group of over 40 year olds are suing Price Waterhouse Coppers for not hiring older workers! The lawsuit alleges that PWC discriminates against older applicants by focusing on college campus recruiting and trying to create a workplace “where youth is highly valued”, according to news articles.

Having grown up in business in what we now call a Big 4 CPA firm, I do have a couple thoughts to offer these disadvantaged older workers:

Although you may be attracted to the initial starting salary of up to $60,000, you better be prepared to work your behind off! CPA firms still average 70 to 80 hours a week, especially in the “busy” season from late fall until spring. Some CPA consultants work these long hours year round depending on the client and projects to which they are assigned. If you take the $60,000 and divide it by sixty plus hours a week you are really earning closer to $35-40,000 a year. And you have very little personal time! It is common to work late at night and six day weeks.

Starting jobs in the professions such as accounting and law have always been like this. There has been some effort, in recent years, to make them less exhausting and more family friendly, but based on the chat sites I reviewed, things have not improved much. This is why these starting positions are a young person’s game. Right out of college, with no spouse, and no family, this makes sense.

CPA and law firms also have very strict hiring criteria. The better firms only hire the best  people from the best colleges. And, yes, they are mostly all young, recent college or MBA graduates. And they all report to young, bright people who may be in their mid 20’s who report to young, bright people who are in their late 20’s. This is the age old formula and it works. By the time a young professional hits age 30, most have left public accounting for a more stable, and family friendly job. The few that remain into their 30s and 40s have been well indoctrinated into the firm’s culture, which is also very hard to do with an older worker starting out.

So, believe me when I tell the older workers, you do not want a starting job with a CPA firm! The money may sound good but it is not a lifestyle that works for those over age 40!

 

Tags , , , , , ,
Categories Uncategorized

Warren Buffett, USG and Me, Part II

April 23, 2018 //
2

Warren Buffett began buying USG Corporation stock in 2000 right before its second bankruptcy, not great timing. But USG seemed to fit his investment profile: an industry leader in a basic industry-building materials.

Warren and Berkshire Hathaway stayed in during USG’s bankruptcy, loaned the Company money at 10% and then converted it into more stock. Today, Buffett is USG’s largest shareholder with just over 30% of its common stock. For most of the last twenty years, this was good for USG. A friendly stockholder of that size makes any company almost bullet-proof to any unfriendly takeover attempt. And Warren Buffett is usually a very friendly shareholder; until he isn’t.

Recently, a private German building material firm named Knauf made a hostile take-over bid for USG. Knauf has owned about 10% of USG also for the last twenty years. Normally a take-over bid by someone owning only 10% would not be a sure thing, but there was a unique wrinkle in this offer. Warren Buffett joined the proposal by offering Knauf an option to use his shares in getting the deal done. So now USG faces a take-over bid backed by 40% of its shares. And four other funds like Vanguard own, in total, another 20% of the shares. So, it is very likely that USG Corporation will be acquired. It may just be a matter of time and final price.

Since I left USG Corporation before Warren Buffett bought his first shares in 2000, one could ask what does this have to do with me? On many levels, nothing. Most of the people I worked with there are retired or dead. I was USG’s CFO during their first restructuring not the second one that Mr. Buffett waited patiently to end. But even though I was only at USG a dozen years, the experience and the people meant something to me. We fought to save USG in its first major financial restructuring. It took a toll on me, but it also left a mark and feelings of respect and admiration for the place. USG is a very proud and independent company with a lot of history and a unique culture.

So, this event got me thinking!

All the firms I worked for in my business career may be gone. Arthur Andersen by government decree; Donn Corporation sold to USG; IMC Global which merged with part of Cargill to become Mosaic; and now the 100 year USG Corporation. I outlasted them all.

In the generations before me, people worked their whole life for one firm and then retired there. Some of my wife’s grandparents did that in the tire industry in Akron, Ohio. And at least one of those firms, Goodyear, is still around!

But for the millennials of today, my experience probably seems quaint. Only four companies over an entire work career? Nowadays young people will have a dozen or more employers and no reason to wonder what happened to their previous ones. We change jobs as often as we change our cell phones.

So, best of luck and success to the people and culture of old USG Corporation whatever happens to it!

And Warren Buffett showed up twice: early in my working career and after I retired.

 

Tags , , , , , , , ,
Categories Uncategorized

Warren Buffett and Me, Part I

April 10, 2018 //
2

Whenever a blogger references really important people or companies, the number of hits on their website goes up. I have found this occurs when I mention my wife’s favorite company, Apple, or the infamous, to me, Tesla. But I actually have had two connections to the famous and well-regarded, Warren Buffett. Let’s start with a story I will call:

Leaving Donn Corporation for Warren Buffet!

I believe that everything in life and business is a cycle. There is a beginning, middle and an end that occur over some variable but predictable timeframe. Daniel Levinson’s book, Seasons of a Man’s Life, talks about this in detail and gives creditability to the notion of a seven-to-ten-year cycle or itch both in one’s personal and professional life.

For me, it was about twelve years after I started with the private Donn Corporation that I almost left. At the time, my old boss had retired and I was the Chief Financial Officer.

The Donn companies had grown ten times in that time period. We had gone through several financial and organization crises. I had finally been able to build a small but great corporate headquarters staff that was working well with both the owner’s family and Donn’s unique business people. The large Donn domestic business had an excellent Controller who was gladly taking on some my work.

I was bored to death! I had never experienced that feeling in public accounting or at Donn. And, I was about 38 years old, prime for what Daniel Levinson would call the Age 40 Transition. He wrote that, at all of these critical times in our life, we all consciously or subconsciously reflect and re-evaluate both our personal and work lives. Sometimes we make big changes and sometimes we don’t.

At exactly that moment I received a call from an executive search firm. As CFO of a very private mid-sized firm I did not get a lot of these calls, but when I had in the past, I would say thanks but no thanks. This time I actually listened. This time I even agreed to meet the headhunter for lunch. And what I heard was fascinating:

-a much larger, well known public firm was the client

-they wanted someone with my diverse background

-they were growing worldwide through acquisitions

-the CFO role involved a large pay package with stock options (not available at private Donn)

And here was the strangest thing. They were located literally down the street from Donn! It seemed too good to be true. But it also seemed like the perfect next step for me. The bigger size and the public company status were both appealing.  I love doing deals and the stock was a way to build-up my own net worth. I even really liked the search person. So, I agreed to interview. We were closing in on an offer when the headhunter called to say the search has been put on hold. Hmm. Okay.

A few months later he called and told me that his client has just been acquired by Warren Buffett’s Berkshire Hathaway, and it will become one of their portfolio companies. But they still want a CFO.

I said no thanks. The CFO role in a subsidiary of a private company is not the same as a public firm. This is true even if the owner of the private firm is Warren Buffett.  By then, Donn seemed more fun. And, unbeknownst to me, within a short time I would be involved in the sale of the company to USG Corporation. I never regretted my decision to stay with Donn even though I missed the opportunity to work with a legend.

There is a valuable lesson here that I often explain to people I advise. Sometimes, in your personal and business life, you need to take a long, hard look at where you are and explore your alternatives.  You may decide to make a move or you may decide you are better off staying where you are. But the internal review process is critical whether you are in your Age 40 Transition or not!

Next time, I will tell you about my second connection to Mr. Buffett.

 

Tags , , , , , , , , ,
Categories Uncategorized

SoftBank and Modular Construction

March 27, 2018 //
1

The Wall Street Journal wrote that the giant Japanese tech firm, SoftBank and some others, are investing  a billion dollars in a three year old Silicon Valley firm. That part does not sound unusual. What is unusual is that the firm receiving the funds is Katerra who is in the factory produced construction business. Katerra describes themselves as a “technology company” who believes they can revolutionize housing and commercial buildings by using an assembly line to design and control everything. They have stated that by the end of 2018, they can build a house in 30 days versus a year conventionally.  Wow!

And Tesla, some year, will be selling tens of thousands of their cars once they learn how to make them! Sorry, that’s another ongoing blog.

So far, Katerra does not report actual financial results but it claims over a billion dollars in “bookings” (not sales) to date but much of that has been with an affiliated developer. Hmm.

As readers may recall, we have seen and written about this circus before. My old company Donn lost a lot of money on this approach decades ago. I also wrote last year how Marriott Corporation is focusing on this as a way to lower construction costs and speed up the timetable to open new properties.

The article does point out some of the issues to making factory produced construction a reality. The construction industry is still very, very local in nature. Construction building codes vary, state by state, county by county and even city by city. Unions are a very complex factor as they are potentially losing work for their people. And although there are more national builders today, there are still a lot of small, local builders.  And that doesn’t cover the cyclical nature or interest rate sensitivity of construction, etc.

Having been in the building materials/construction industry most of my career, I would remind SoftBank that this is a very tough business that doesn’t change much or very quickly. But, then again, so was the taxi cab business. I am just not sure that “technology” is going to change construction in the same way or in the near term future.

Tags , , , , , ,
Categories Uncategorized

Quality Issues with CPA Firms Audits

January 30, 2018 //
1

The Wall Street Journal recently ran a story about the government’s watchdog, the SEC, having concerns about the quality of audit reports issued by one of the Big Four CPA firms, KPMG. This resulted in an indictment of several people. What the government noted was poor audit quality based on their review. Big 4 CPA firms have also been charged with fraud in other high-profile cases. In fact, government test audits of all the Big Four firm’s work show that about 25% of all audits were what they call, “deficient”.

The issue is that investors rely on the outside auditors to check the accuracy of a firm’s financial reports. The SEC and the federal government has focused on this since the bankruptcies and accounting scandals involving Enron and World-Com in the early 2000s. And the Big Four CPA firms audit almost all the public firms in the Standard and Poor’s 500. So, this is not a good thing, no matter how you look at it.

As a former CPA in public accounting and a former CFO who worked with auditors for  decades, I have some thoughts for the Big Four CPA firms.

Training is first. Accounting firms send their new staff to a couple week training program. This is nowhere near enough. When I was an entry level staff person, I understood very little about internal controls, proper procedures, and really the whole auditing process. It took into my third or fourth year before I felt comfortable. More hands on training ever few months would have helped even though this is expensive.

Supervision is next. CPA firms have a very clear hierarchy of command where each layer above supervises and reviews the work of those below. The Senior on an audit might have a handful of staff reporting to them which does not sound unreasonable. But the Senior auditor also has work only they can do, like taxes, and rarely has enough time to supervise and help train their staff. Managers supervise Seniors but a bunch of them at once on often very different types of audits. More time needs to be allocated for review and supervision so that audit quality can improve.

Finally, we need a clear and mutually agreed understanding of what an audit is and what it is not. Audits are not meant to detect fraud yet many people believe they are. If fraud is found, however, it must be reported. As the government completes all these test audits perhaps the expectations versus the deliverables of an audit can become less fuzzy.  We also have whole new issues these days with technology,  cyber crimes and data security that did not exist that long ago. The responsibility of the auditor needs to be re-defined.

All of these items will take more audit time and thus audits will cost more. That will  become a reality. Historically, audit clients put constant pressure on their auditors to lower their fee. Going forward, if we want to improve audit quality and significantly reduce deficient work, audits will cost more. The investing public deserves it.

Tags , , , , , ,
Categories Uncategorized
« Older Entries
Newer Entries »