Boards of Directors

April 1, 2013 //
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My long-time banking guy friend, Jerry, sent me a follow-up to my last post about Executive Compensation. He provided a link to a CNBC article called “Pay for Boards at Banks Soars Amid Cutbacks.” The full story can be seen at http://www.cnbc.com/id/100604933.

The key point is that since the financial crisis (which was not caused by, but certainly exaggerated by, banks), the compensation for the Boards of Directors of the largest U.S. banks keeps rising. This is occurring while the banks are receiving more governmental pressure on their banks’ officers pay and bonuses. The article cites one of my favorite banks, Goldman Sachs, where many of their 13 directors earn over $500,000 a year for a part-time job.

In defense, the article goes on,  some Board experts are saying that banks are trying to recruit directors with more financial expertise to provide better oversight and avoid some of their past problems.

Now, I am all for avoiding problems, especially those that can cripple our whole economy.  I also believe that historically many bank boards, like many general corporate boards, fall into what I call my One Third rule. That is that One Third of directors are not qualified to be on a given board.  One Third of directors may be qualified but do not have the time or interest to be on a given board. And, the final One Third of directors are qualified, spend the time and energy,  and do most all the work, on a given board.

In my book, The Business Zoo, we have a separate chapter that explains this director rule further. We also tell stories of Boards that do a good job and some where Boards do not. We also suggest Management or Advisory Boards for most smaller, private firms and explain their value.

But let’s go back to the article about bank boards and what sounds like their excessive and increasing pay.

Leadership, we are rightly told, starts at the top. The Board of Directors is as top as we get in the world of public companies or many private firms and even nonprofits.

Senior Management, serves at the pleasure of the Board. The company officers work for the Board. The Board each year elects or re-elects the senior officers and approves their pay.

So, Directors and Boards need to set an example and actually lead the firm. This should include being sensitive to the perception of their own pay by their shareholders and the public. Strong Board leadership can also occur by not agreeing to everything management proposes and learning to say No more often and, at times, to say goodbye! Goodbye to CEOs or other officers who do not work out. That is real Board leadership.

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Excessive Management Incentive Compensation

March 24, 2013 //
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The term “Management Incentive Compensation” is one I really dislike.

Company SEC filings are filled with this term or some version of it to describe endless Plans. The Annual Management Incentive Plan. The Long Term Management Incentive Plan. The Stock Option Plan etc.

It is humorous to me that these are called “Management Plans”. Within most corporations these various Plans are invented and sold to the Boards of Directors and then filtered out to the shareholders for the benefit of the executive or senior managers who receive the bulk of any Plan payout. But by calling them management vs. executive plans and by actually including, often in a very token way, middle managers, the Plans don’t sound as top heavy or biased in favor of the senior executives as they really are.

For example, in a typical, large public company Annual Incentive Plan, a mid level manager with a $100,000 salary has a bonus opportunity of say 10% or $10,000. The CFO with a salary of $400,000 has a bonus opportunity of 50% or $200,000. So the CFO starts off with a salary 4 times as large but can get a bonus which is actually 20 times as large! So is this really a Management Incentive Plan or an Executive Incentive Plan as far as the payout is concerned? Sadly in most firms, its all about the senior executives. Trust me on this one.

The same large public company probably has a Stock Option Management Incentive Plan. Here the mid level manager is lucky if they get a stock grant of 1,000 shares. The CFO gets 20,000 shares. Again 20 to 1. By the way, without a staff of these mid -level people doing most of the work to meet the various goals to earn the incentive, the executive Managers would rarely get theirs; incentives, that is.

Over the years, I tried to push my companies to level this out a bit. It is not a very popular subject with most of the other Senior Executives and especially with the Senior H.R. people who create these Plans. At one of my firms, to get more stock options for another Vice President who worked for me, I volunteered to give up some of my option allocation. This was, of course, never suggested before so no one knew what to do. Finally the Vice President was somehow granted more options, but I had to keep my allocation, or the whole executive team would have lost some of theirs, again not popular.

Generally, in most large companies, there is very little discussion about what the mid-level or junior officers should receive in these various Management Incentive Plans. But there is a lot of discussion about what executive managers believe they should get.

So be honest! Call them Executive Incentive Plans!

Newsflash! The government of Switzerland is considering a law which would limit executive salaries to 12 times those of the lowest-paid employee. They call this the 1:12 Initiative for Fair Pay. The idea being that no one executive should earn more in one month than the lowest-paid people earn in a full year. According to supporters of this proposed law today the top Swiss executive make 93 times more than the lowest workers. Fifteen years ago this ratio was only 14 times so the goal of 12 is at least possible. Industry groups are opposing the idea. Really?

Will this idea ever be considered in the U.S.? Based on my experience, I sadly doubt it. We seem to believe in getting the most you can get even if it is excessive, not in anything than seems to resemble fairness in pay.

In my book, The Business Zoo, we will talk a lot about Incentives versus Rewards versus Gifts. We will also discuss some incentive programs that I have found do make sense versus those which just increase that old misused term, Management Incentive Compensation.

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Asbestos and Lawyers

March 16, 2013 //
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The Wall Street Journal is running another series of articles on Asbestos, titled the Long Trial. I say another series because this subject has been written about in detail for the last forty years.

Asbestos is, like many good and bad things, a mineral combination from the earth that had been used for its fire retardant abilities back to the Romans. Historically, asbestos was used in various products or processes in manufacturing, construction, ship building and automotive brakes.

The fact that it can be a major contributor to lung cancer, mesothelioma and other illnesses took a lot longer to be understood. We now know that small asbestos fibers can be inhaled and lodged in your lungs. Two of my friends died who worked in these environments.

Because of this potential terrible toll on workers who were exposed to asbestos, most of the companies who used it in their products have gone bankrupt. Initially both individual and class action suits were brought by law firms representing these plaintiffs. The law firms received about one third of each settlement.

And it was not just workers who claimed a possible injury; it was office buildings, schools, or hospitals where products containing asbestos may have been installed. The plaintiffs’ bar, as these lawyers are called, filed suits on behalf of most states and named every solvent asbestos manufacturer they could find. The law firms received about one third of each of these court or jury awards.

One of the first firms involved in litigation was Johns-Manville who made building insulation. Manville was sued for over a decade and payed out hundreds of millions to billions in settlements and trials; with law firms receiving one third. To consolidate their lawsuits and put a limit on their exposure, Manville setup a trust fund and funded it twice. Today, over 40 firms, including my former employer USG Corp., have setup similar trusts funded initially with almost $40 billion to pay for these personal injury claims. The law firms who negotiated these trust fund settlements received about one third as fees.

The Journal notes that asbestos became  the source of  billions of dollars in fees for the plaintiffs’ lawyers.

So, what’s wrong with that if the purpose is to properly compensate someone who was made seriously ill by this toxic substance called asbestos?  Or to repair a building or school that might be unsafe to use?

In a strong word, Fraud. In a weaker word, Misrepresentation.

The Journal article cites a number of instances that could fall into one of these categories:

  • claims filed by workers who do not exist.
  • the lack of any oversight of the Trusts that are run by the very lawyers who benefit from the payments.
  • workers, who through their lawyers, claimed to have different illnesses depending on which firm’s trust they were filing a claim against.
  •  workers with different or conflicting work dates at various employers.
  • or my favorite, that 4,000 claimants were 12 years old when they presumably worked for one of these asbestos related firms. Hm.

As the one-time CFO of USG Corporation, before the firm setup its own trust, I can recall some similar episodes:

  • claimants, who upon being deposed before trial, were not sure which of the several gypsum companies they worked for, even though they were suing USG.
  • or which specific plant of USG they worked at or even when exactly it was they worked for us.
  • or my favorite story from the days of settling property damage suits; USG paid tens of millions of dollars to several different states to safely remove asbestos products in their office buildings and schools. Most of the asbestos was wrapped and actually safe if left alone. And that is exactly what these states did. They took the money, put it in their state coffers and never to this day, removed it from their buildings. Hm.
  • and, of course, in all these instances, lawyers received about one third of the payments.

So, in conclusion, the medical implications of asbestos exposure are terrible. And a number of sick or dying people have properly benefited from the payments that many building material, mining, auto or shipbuilding companies have paid over the years. But parts of the legal world have unfairly benefited from overzealous claims and suits or mismanagement of the claimants or their funds they were entrusted to protect.

In my forthcoming book, The Business Zoo, we will look at Lawyers as part of our study of Advisors. We will discuss what lawyers do well and what they do poorly. Sadly, these examples of the plaintiffs’ lawyers work on asbestos falls into the latter category. We will also examine numerous examples of Management Fraud, a popular subject these days. But don’t we have the right to expect a higher standard of behavior from the legal profession? Two of my personal Mentors and a number of close friends are lawyers and they would agree.

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Piling on Groupon

March 8, 2013 //
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Lessons from Groupon:

The Wall Street Journal just ran a comprehensive article on 3/1/13 “Struggling Groupon ousts its quirky CEO”. Being Chicago based, as I am, I have followed Groupon’s evolving story over the last few years.

Groupon’s premise is to issue daily coupons for mostly retail services to large groups. Thus the name.

A couple years ago, a lot of our Chicago friends, especially young ones, thought this was the greatest.

Some retail service and restaurant people we knew were not as excited to issue often hundreds of coupons at or below their cost to try to attract new customers.

But, for a while at least, Groupon became Wall Street’s latest darling. After turning down $6 billion from Google, it went public. Its initial stock offering (IPO) in November of 2011 was well received with the stock starting out over $25 and a total market capitalization or value of $16 billion.

Today, the stock is closer to $5 and the total market value below Google’s old offer. Not good.

In my book, The Business Zoo, we look at the critical factors that can lead to an individual or firm’s success or failure. Let’s look at a few of these using Groupon and see what lessons we can learn.

Strategy. Harvard’s Michael Porter stressed the need to understand your industry and have a significant advantage or barrier to entry versus your competitors. Although Groupon was one of the first to make group coupons big, it only took a short while for others to follow. You needed an office, a computer and a phone.

Groupon has recently stated they were reviewing and improving their business model. A little late.

Financial Integrity. Right after their IPO, Groupon had to revise/lower their financial results. They had used the novel approach of not expensing all their selling costs to obtain customers. The SEC also questioned their financial disclosures. Never good.

Culture. Groupon, like many startups and tech firms had a unique company style and approach. They acted aloof and private even after going public. This works for Apple, to a degree, but you must be growing and increasingly successful to do this. They are not.

Leadership. Groupon’s recently fired CEO was young and even described himself as a bit weird. He had an older partner who helped him start the firm. But recently the older partner was upset with the company’s performance and apparently its younger CEO. Issues at the top of a company must be resolved before they destroy the whole firm. But can a successor turn this ship around? We will see but it will not be easy.

Board of Directors. It took a year and a half before the Board decided to change leaders. Then it was reported that one Board member was contacting possible replacements for the last month. There are no secrets in most industries so this behavior seems hard to understand. But do not get me started on Boards of Directors, I spend a whole Section in my book on them.

So Groupon and its new leaders have their work cut out for them. But when there are issues with the Board, the Leadership and the company’s Culture, it may be too late. If you read that Groupon has hired some famous investment banker to “pursue strategic alternatives” that means the Board has figured it is time to exit.

Then its bye, bye Groupon and all those great deals!

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Planning (Strategic and Otherwise)

February 28, 2013 //
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Yesterday, we had our Annual Meeting. No, not of one of the large, public corporations I have been affiliated with but, with our Florida Homeowners Association. At this same time Pope Benedict decided to retire, so the Catholic  Cardinals are convening with the plan or objective to elect a new Pope. And, our U.S. government is about to have another fiscal issue with something called a sequester.  That’s why I decided to write this week’s post about one of my favorite topics–Planning.

I know you are thinking-homeowners associations or churches don’t plan or need to plan. And our  President and Congress don’t seem to want to Plan, at least not together.  But everyone needs to Plan.  Individuals, businesses, not for profits and, yes,  even governments.

A Plan provides you with a base case or a reference so you can judge when things get out of control. This is why smart, healthy people have their blood pressure checked regularly and have an annual physical exam with blood workup. Organizations need this type of baseline as well.

For example, most states require that a Homeowners or Condo group have an Annual Meeting and review their operating results and a budget for next year. Most states further require these groups to project their future common repairs such as painting or a new roof and provide cash reserves to buildup to deal with these items. By default, I am President of Two of these Condo type organizations and I can assure you, We Plan!

But what exactly do we mean by the term Planning?

Planning is everywhere and sometimes, everything. In our personal world, we plan our days, struggle to plan our careers and try in vain to plan our children’s choices and lives. In business, Planning may be even more critical and it is constant. Digital devices allow or force us to schedule our time in fifteen minute intervals. Software now easily accommodates almost ongoing forecasts of sales,  cash or departmental expenses that we used to struggle with.

Some people might wonder if, in our current age of unlimited, endless and often rapidly available data, we even need to plan. After all, our iPhone or even a new Lexus Enform system can give us an instant list of restaurants and make reservations for us with no required preplanning or thought. At work our laptop or tablet computer can keep us linked, to our business and to hundreds of emails on a 24/7 basis whether we want to be linked or not. So do we really need to plan?

OF COURSE, WE DO! In both the Planning  and  Mergers and Deals sections of my book, The Business Zoo, we will show what good Planning can help you accomplish and bad Planning can help you avoid.

And since a number of this blog’s readers have asked about the Book’s status, I will tell you that this week we have submitted a Business Proposal to a small number of the major publishers of business books. This took quite a bit of Planning and time. We will keep you informed. Meanwhile thanks for joining me on this journey through my blog, bradszootales!

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Management Fraud and the Dead Cat

February 19, 2013 //
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Fraud, like Grease and several other kinds of bad behavior, that we cover in The Business Zoo, goes back to the beginning of time. The word Fraud has century old roots in both England and France and basically means “to deceive or inflict a loss on others while seeking a personal gain.”

Fraud is a dirty daily business to some although it has often been made glamorous or even acceptable in movies like The Sting, with Newman and Redford deceiving the nasty and deserving Robert Shaw.

But the Fraud I focus on occurs in business and often by people who should know better and already are paid excellent money. This is called Management Fraud. It is so popular an activity that we dedicate a whole Section or Chapter about it in my book.

Big, public corporations like to think they can deal with and often prevent or quickly detect Fraud. To do this these firms put in place elaborate procedures and policies which employees must review and sign. And then to enforce all of this the big companies turn to their version of the police, their Internal Audit group.

There are a million stories about Management Fraud and many involve Internal Audit. Sometimes Internal Audit comes out as a hero and sometimes not.  Here is one short story which I hope you find to be both tender and amusing and yet informative.

Internal Audit and the Dead Cat:

Manufacturing plants are like small cities. They have Mayors (Plant Managers), Councils (Heads of H.R., Finance etc.), Citizens (hourly workers), and a Pest Control Department (A Feral Cat). The Cat is not a normal hire but a walk-in and not a pet but a worker which helps with the local pests (rats). Often the Cat becomes a beloved member of the plant community.

But when Cats age they do not have the same medical coverage or retirement plans as the Mayor, the Council or the Citizens.

At one plant, their beloved cat is old and dying so the Mayor asks his Human Resource person to deal with it. Human Resources people are often called in to deal with the dying of workers or their careers, so this was not unusual. The H.R. person does the humane thing and has the Humane society come out, trap and humanely dispose of the Cat, all for a small fixed fee of $25 which comes out of the Plant’s Petty Cash.

This is not the end of the story since, a few months later, this Petty Cash slip happened to get chosen in a random test conducted by the company’s Internal Auditors. They needed to speak with the H.R. person because in all the sorrow and the funeral that followed for the Cat, the Petty Cash slip was not properly filled out. For the week long Internal Audit at the Plant, the head Auditor kept trying to find the Human Resource person to get the paperwork in order. The meeting never occurred and it was listed as an Exception in the Plant’s Internal Audit report.

The H.R. person for this generous act and general good and humane conduct was later promoted to headquarters.

The moral of this story is that Internal Audit can help a business in many ways including Fraud but they need to focus on what is important and not pursue Dead Cats.

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Bad Weather, Holidays and Deals

February 11, 2013 //
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A Deal truism: Deals often occur in bad weather and over holidays.

As I was starting my  book section on Mergers and Deals, I had the following casual conversation with my wife:

Me: I think I will start the Deals part with Donn Corp. buying the access floor company, Liskey.

She: Was that the one you and Ted were caught in a snowstorm driving on the Ohio Turnpike to Toledo?

Me: No, that was another one we looked at called Floating Floors.

She: Was that the one you were caught in a blizzard in Buffalo for a week?

Me: No, that was the ceiling company we bought called Flangeklamp.

She: Was that one of the times that you delayed a Christmas visit with my family?

Me: That did happen a lot!

So it got me thinking about a couple truisms about Deals. Deals very often occur in bad or terrible winter weather. And Deals very often do mess up your personal life and cause you to delay or cancel a vacation or a family visit. Why is this?

The main culprit is that so many Deals want to be completed by a company’s year end which is often December 31. This lets you write off your old sins and start the New Year fresh. That also means you are often traveling, negotiating or completing Deals in bad weather and around the Holiday season. Learn to Deal with it.

The recent string of terrible storms at the end of 2012 and the start of this year, reminded me of this.

In my forthcoming book, you will learn other Deal truths. Like the critical importance 0f performing financial and operational due diligence on a company you want to buy. Or why it is so much easier and more fun for both management and their Boards of Directors to buy something than to sell something. Based on recent headlines, the shareholders of the old computer giant H-P should be asking these questions.

Or, one of my favorites truths about Deals, that there are no Mergers of equals, ever, period.

I look forward to sharing these Deal truisms and other lessons I have learned in The Business Zoo!

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Super Bowl Animals!

February 3, 2013 //
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No, this is not about the current year Ravens or the Broncos or Colts from previous years. There are a lot of animals in the National Football League even if some like the Detroit Lions have not appeared in the Super Bowl for a very long time. This seasonal note, however, is about the really famous Animals who appear in the famous Super Bowl commercials.

Commercials for the 2014 Super Bowl cost almost $4 million. In these ads, sex still sells going back to a younger Cindy Crawford drinking diet Pepsi to the race car driver Danica Patrick and her friends selling Go Daddy internet domain sites. But when this year’s big game network, CBS, ran a special this week on the Top Ten Super Bowl commercials of all time, the Animals were the real winners.

Of the top ten spots, Animals were in five of the most popular ads, as voted by the fans. These ranged from Career Builders’ classic of the young man working with a bunch of monkeys celebrating a declining sales chart they had turned upside down to a small pit bull getting revenge on a young man teasing it with Doritos from behind a glass door. But the beer commercials came out with the most top ads.

The Bud Light rescue dog, Wego, delivering timely cold beers to his owner and friends. And, of course, the Budweiser Clydesdales who captured two spots. One for the naked super fan sheep streaker and the #1 Winner about the Clydesdale rookie Hank being coached to success by the Team’s Dalmatian dog.

So, Animals sell. In writing my book, The Business Zoo, my Animals are not staged or are props like in some of these commercials. Rather, my Animals have been part of the stories I have told to my staff people for years. In the real world, Animals like difficult co-workers, bosses, problems or opportunities often just show up. The book’s goal is to provide you with some guideline and lessons and  rules and tools to deal with the human and wildlife all around us!

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Chile, it’s a country not just a food!

January 30, 2013 //
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An International State of Mind:

For those of us who are lucky enough to be born, live and work in the United States, thinking globally or Internationally does not come easy. There are a number of reasons for this. The U.S. is one of the largest, most populated and, in the last 100 years, most successful and dominating economic country in the world. There are surveys showing that most Americans believe Columbus’ discovery in 1492, is the most significant event in all of world history. Europeans list the birth of Christ.

We also, as a nation, can name Britain’s William and Kate in a photo but not that lady who currently runs Germany, one of the other major countries of the world. When offered a globe we would have better chance shooting it through a basketball hoop than finding the Indian ocean, Iceland or any country in Africa. The bulk of our news is local and national and only now, with cable, have people accidentally flipped to the UK’s BBC. We often learn about the outside world often because of the media’s endless coverage of natural disasters like Japan’s earthquake and tsunami. Or once upon a time, by watching Lance Armstrong ride a bike all over Europe.

And we are blessed with so many great travel choices in the U.S., that travel elsewhere is a distant second. Now many colleges are encouraging a session abroad, which helps. But our almost total use of English for everything, the lack of serious second language studies, and our unwillingness to move to metrics does not help us feel comfortable out there in, the  non-American version of civilization.

Having spent so much time with Europeans doing Lunches and Dinners and occasionally, real business, you learn that they, and probably most of developed Asia, view all this much differently. Most European countries mandate serious language studies. Schools in Sweden require English from first grade through high school. Young people in Europe and Asia all recognize our current and recent past Presidents’ names and pictures. Our athletes like Michael Jordan are known everywhere.

Families also vacation in other counties. Young people look for any excuse to travel outside their own nation and and everyone really wants to visit the U.S. which often means Disney World or New York City.

So how do U.S. business people and companies develop an International state of mind? A state of mind which, with the rapid growth in places like China, may be critical.

In my book, The Business Zoo, we will examine how the private Donn Corporation developed a very successful and wide ranging International business that grew to over 25% of the total company and was very profitable. We will also look at why many larger U.S. firms struggle to be more International. Along the way we will share specific recipes for success and cover some interesting failures as well. You can learn lessons from both.

Young people today going into almost any type of organization or business need to develop an International state of mind. Our world is only getting smaller. And I will guarantee you that young people in the rest of the world, including Chile, are already more global in their views and experiences. It’s a dog eat dog world out there and like in the wild, only the strong and Internationally focused will survive!

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I WON’T CHEAT! (not just about Lance)

January 18, 2013 //
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I Won’t Cheat!  is the official motto of the Little League, whose annual World Series is on TV each August, from Williamsport, PA. The words are on a patch on each uniform. If you’ve ever watched the Little League World Series, you might agree that it is far superior to watching the multi millionaire divas who play most of our professional sports. This past year, Uganda became the first African team to qualify even though most of the boys had only played baseball for two years- usually without shoes until they had to wear them in the tournament!  With no family able to afford to come with them, the Uganda team became the favorite of all the other players and fans. That’s sportsmanship. You can also sense how much all these kids just love playing the game. True they are only 10-12 (or 13 before May 1), but I really believe most of the Little Leaguers would never cheat.

Yet every few years, there is a major scandal at the LLWS, as its called, about the age of a player or something. Almost all of these scandals can be traced to the kid’s parents or coaches. The kids just love to play.

So when and how do we go from non cheating kids to adults with issues?

Especially adults in business (including sports) with issues on morality and ethics?

When I left the  corporate world for the second time, I had an interesting conversation with a very astute, retired guy in Florida. Upon asking what I had done, I replied “I was a Chief Financial Officer for two big public firms” then I playfully added, “and I am proud to say I was never investigated, charged or convicted of any crimes by the Securities Exchange Commission or any state Attorney Generals!”

The older, astute, long time business guy, then smiled and not as jokingly said, “ Then you must have gotten out in time.”  What a sad commentary. But ethics and morality should matter in business, sports and life and not just in the Little League.

So what about Lance. His “interview” with Oprah speaks for itself. He stated he did not feel he was cheating at the time. Yet he also sued or denounced many sources and fellow competitors who dared to suggest he had cheated.

In my forthcoming book, The Business Zoo, we look at ethics, morality and fraud using both actual stories from my career and today’s headlines. Then we summarize some lessons we can learn from them.

It’s never too late in business, sports or life to learn something!

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