Archives for posts with tag: Advisors

Nonstandard Accounting and Management Compensation

March 14, 2014 //
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Wall Street Journal 2/27/14: Firms Alter Bonus Playbook and Use Nonstandard Accounting Measures to figure (Management) Payouts

Public company earnings are reported in quarterly and annual reports using what accountants, auditors, and the Security and Exchange Commission call ” generally accepted accounting principles.” These GAAP earnings or a multiple of them, based on how the firm is viewed in the stock market, creates the market price of the stock. Shareholders make money when the stock price increases.

But nowadays some 28% of the largest U.S. public firms calculate Management Compensation using different measures. These firms may start with the reported GAAP earnings but then add back various expenses to make the earnings higher. Some of these add back items can be the cost of stock options (usually to the same group), the write-off of an acquisition premium (or goodwill) even when those same executives may have overpaid to buy another company, and so on.

You are thinking, this is absurd! And very unfair and inappropriate! Well, get used to it. The number of large firms doing this has more than doubled in the last few years and I doubt it will decrease unless the public makes such a stink that the SEC or Boards of Directors force companies to change. One large, public firm in the article, medical products company McKesson’s shareholders voted 3 to 1 to stop this practice, and to require shareholder approval of executive compensation. But their Board of Directors (who are elected by the same shareholders) declined to adopt this measure. The Board cited that they “exercise great discipline” in deciding upon pay. Last year’s McKesson’s calculation started with the reported GAAP earnings of $.75 a share and some how added back enough to get them to $7.21 a share. Now I was the CFO of two large public companies, but even I was impressed with that story of financial artistry!

As discussed several times in my blogs, Shareholders elect the Board of Directors who in turn elect the Senior Executives. Boards rely on the company’s Human Resource people and outside Advisors to decide these matters. In over a decade of Board meetings I attended, only once did a Director get so upset that he convinced the others to throw out an obviously flawed Management Compensation plan. This needs to happen much more often.

In my book, The Business Zoo, I have written that in Board Meetings, the firm’s CEO should explain a new Management Compensation plan and its impact on pay. Not the Senior HR person or the CFO (yes HR often asks us to do controversial things) and certainly not an outside Consultant. If the Board has trouble understanding this new plan, they should hire their own Consultant to explain it or reject the plan until they do understand it and its implications.

And Shareholders, who have the ultimate power, should vote out Boards of Directors who allow practices or compensation plans that enrich Senior Management in ways that are not consistent with Shareholder’s value.

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Breaking up Pepsi and Management Compensation

February 28, 2014 //
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Wall St. Journal article: Activist shareholder Nelson Peltz threatens to break up Pepsi. Their Board says, no thanks.

Facts: The term “activist shareholder” is a Wall Street polite term for a firm that buys a small percent of a company’s stock and then threatens them with either a takeover or demands seats on their Board or something. Many people do this these days. Carl Icahn buys some Apple shares and demands stock buybacks. The activist shareholder does this for a couple reasons: the firm’s stock price seems low to them and they can make a lot of money on re-selling the shares if the price moves up. Corporate Boards really dislike these people.

Facts: Pepsi sales are $66 billion (a Fortune 500 top 50 firm). Half are beverages and half are snacks and cereals. The snacks business is growing well in sales and profits. The original core beverage business much less so, even though this includes Gatorade and Aquafina water. Apparently, selling sugared drinks and old soda pop is not what it was years ago. Pepsi is resisting Mr. Peltz’s suggestions, but said they would increase dividends and buy back more common stock to make him happy (and hopefully go away!) Just don’t mess with our Doritos!

This article reminded me of two related conversations I had recently: First, a friend and I were wondering how very large firms like General Electric are able to manage themselves. Our agreed answer was that they are not. GE sales are $150 billion which ranks it the 8th largest U.S. firm. It is truly a very mixed conglomerate with appliances, energy (nuclear power equipment) , transportation (trains),  aviation (engines) and finance. Very few of these products, industries or markets have anything to do with each other. But GE’s senior management are some of the highest paid corporate people.

Second, a couple friends asked why some giant companies keep buying other businesses trying to get even bigger. One asked if it was due to the egos of the senior people. A very appropriate and partially true comment. But there is another much more basic reason. And it goes back to my old friends in Human Resources and one of my favorite topics, Management Compensation.

You see, most companies set their salaries and bonus levels in large degree based on the size, usually in sales, of a business. When I was at USG Corporation, the headquarters people were paid the most. Then those who ran the largest business, Gypsum Wallboard,  the next most and so on down the line. And this is not just the President or CEO of a given business, it included all the senior management and on down to managers. For in Management Compensation, size does matter. You might ask, isn’t it harder to manage a bigger business? Answer, no; it’s harder to manage a more multi-faceted or troubled business. Or to manage an international firm with many different country locations, laws, and taxes than one giant U.S. based business. You might also ask, shouldn’t a firm’s Board of Directors figure this out and pay what is right? Well, the Board usually relies on outside Compensation Advisors who are hired by….. you guessed it the company’s Senior H.R. person! Not much help there.

So why do people like Nelson Peltz or Carl Icahn go around and threaten these giant firms? To make a fortune off the money they invest in these companies’ common stock, of course! But how do they know that nine times out of ten they will make money doing this? Because they know the following secrets. First, giant firms really do not maximize shareholder value over the long run by buying (often at huge premiums) and then trying to manage very different businesses. Most of these bolted together giant firms would be more successful and worth more as a smaller  firm or as a part of a similar business. Peltz wants Pepsi’s snacks to merge with Mondelez International which used to be Kraft’s snack business before he and some of his activist friends got involved. The second and most important secret is that the Senior Management of most of these giant firms will do anything in their power to get rid of these activist investors so they can continue to collect large salaries and bonuses based on the fact that they are a Fortune 10 or 50 giant firm. It takes a unique CEO and team to decide to breakup this game and take a chance on actually trying to run a smaller company versus a conglomerate. And remember it is tough being a CEO since their average tenure (or corporate life) is 5 years. They may need that money someday.

So good luck to Pepsi and their Senior Management. As an aside, I have not drunk a Pepsi in years (Vitaminwater instead) but I do love their Doritos and Lay’s chips!

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Mockingbirds, Crows and Advisors

December 19, 2012 //
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The Mockingbirds and The Crows:

The state bird of Florida is the Mockingbird. It is a medium size, 9 inch bird which eats all kinds of insects. Mockingbirds are aptly named because they can mimic over 40 different bird calls. They can also fly like a helicopter either in one place or darting around at seemingly impossible angles. They are also very bright birds that can recognize people who have caused them trouble after only one encounter. I know that because I am on the Florida Mockingbird trouble list.

They mate in the spring often in bougainvillea bushes which have thorns to protect their nests. They will dive bomb anyone within 25 feet of that nest and aim for your head and other vital parts. A Florida friend and I, dressed in bike helmets and carrying a protective broom were viciously attacked one day trying to see if we could peacefully relocate them away from outside our front door to a more high end neighborhood. We lost that battle but three days later a baby mockingbird left the nest and the neighborhood was safe once more. This episode explains the true meaning of the famous Harper Lee story, To Kill a Mockingbird. These birds, while trying to protect their nests and offspring, are not meek or innocent like the accused Southerner in the story. I gained tremendous respect for these small birds. Mockingbirds work together, using their bird calls, to guard their nest and babies from the occasional, well-meaning Florida guys but mostly from the ever present and hungry Crows.

Crows are considered one of the most intelligent animals on earth. Like Rats, they have been on the planet forever. Like Rats, they thrive near humans.

Like Rats, Crows Eat Anything! A special treat is the offspring of other birds, like our friends, the Mockingbirds.   Crows have been trained to use tools and build tools to get what they want.  My friend, with the bicycle helmet, and I even watched as Crows managed to unzip a bike seat bag to steal a sandwich. They even zipped it back up so no one would notice. And Crows fly in a distinct, methodical, slow flapping style because they are not in a hurry. Crows, you see, are very comfortable in their own feathers.

Crows are also very social. They can imitate the human voice like parrots. They travel and hunt in flocks.

A flock of Crows is also called a Murder. And the way Crows attack in a group is called Mobbing. Baby Crows stay in the nest a month longer than the young hard-working Mockingbirds. Crows grow to well over a foot long, weigh over a pound and live much longer than most birds. And Crows know they are bigger, stronger and smarter than all other birds. They are the masters of the bird world.

Which brings us to our point. Company hired outside Advisors. Advisors all believe they are far smarter and have better educations and backgrounds than their slower, simple clients. Advisors, like a mobbing of Crows, want to feed on or collect fees endlessly from their clients. Advisors come in groups, have their own secret language and forms of communications. How can a mere client stand a chance? By acting like the Mockingbirds. Aggressively protect your company by openly working together with your own team. Learn to move quickly like the Mockingbirds to outmaneuver the slower Crows. And remember you have what they want and crave, Money for Fees! Learn to manage, be in control of and benefit from using Advisors, not the other way around.

You will learn to manage and deal with Advisors and more in my new book, The Business Zoo.

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