Tuesday, March 13, 2007

Halo Effects & US Corporate "Leadership"

This morning, as I write this, one of the more air-headed co-anchors of CNBC, Liz Claman, is breathlessly interviewing Warren Buffett, amidst more breathless and incredulous reports on the statements made by various corporate luminaries at Treasury Secretary Hank Paulsen's Georgetown University offsite conference on securities markets regulation.

The Paulsen conference is a good idea. It is pretty obvious to any intelligent business and markets observer that the ill-considered Sarbanes-Oxley regulation has significantly contributed to recent phenomena such as; increasing percentages of IPOs are listed on overseas exchanges, and the increasing involvement of large-cap senior management in the private-equity-backed buyouts of their companies.

However, it's hard for me to understand what, aside from appearances, Paulsen gains by having such corporate "leaders" as Jeff Immelt, CEO of GE, or Jamie Dimon, CEO of Chase, add their two cents worth. Or, for that matter, even Warren Buffett. John Thain, the NYSE CEO, would seem to be the most relevant contributor of the bunch. Of course, if he only talked with Thain, then Paulsen would be accused of simply running a reconstituted Goldman Sachs cabal in the public sector.

All joking aside, really, what can Immelt or Dimon add? Immelt's been an overpaid, non-performing CEO going on six years now. Dimon is essentially an untested, itinerant cost-cutter who now heads up one of several faceless, nearly-identical, mediocre US financial services utilities. He has yet to demonstrate the ability, at any company, to do more than cut costs.

Why does anyone care what those two executives think about Sarbanes-Oxley, or regulation in general?

And then Buffett. The great "sage of Omaha." Well, here are a few nuggets from the sage's own background to ponder. He bought into Salomon Brothers years ago, then had to go rescue it when the boys on the Treasuries desk engaged in collusive bid-rigging. Ooops!

Then there was the disastrous foray into airline equities.

Finally, back in 2000, I vividly recall sitting in my then-father-in-law's home, reading a Fortune (or Forbes) piece featuring Buffett's predictions for index returns for the coming decade. Now, as a little background, the long-run return to the S&P500 is roughly 11%. A recent 50th anniversary editorial in the Wall Street Journal by Jeremy Siegel noted that the S&P's return since its inception has been..... 11%. So, most people would predict to the mean for any longish term estimate of the index.

Buffett predicted a decade of S&P returns averaging in the 5-8% range. So far this decade, with the market collapse of 2001-02, the actual annual average return through the end of 2006 is 2%. Just a little forecasting error, there, Warren. Of, oh....about 300% of the actual value, and nearly 33% off of his own mean value.

So why does anyone want to hear Buffett's opinions on things other than his two key business strengths- investing cash as an institutional portfolio investor, and buying businesses for Berkshire Hathaway's portfolio of operating units?

And, similarly, why do we care about the opinions of CEOs of the more staid, anemically-performing large-cap companies? What is the source of this halo effect? That, having demonstrated no ability to actually create consistently superior returns for their shareholders, they are the preferred group from which to hear opinions about government regulations?


If they don't object to too much regulation, you should suspect them of simply showing a compliant face to Washington, in order to preserve their image for subsequent political maneuvering. If they do complain, it's going to be suspect as blaming government regulation for their own failings.

It seems to me that the guys Paulsen should be talking with, on the record, are Henry Kravis and his ilk. The guys who run Silverlake Partners, Blackrock, TexasPacific, et. al. It's the heads of the private equity firms who can really shed light for Paulsen on what has driven the volume of deals involving public firms willingly going private. Or the top-performing large-cap companies by total return over the past five years. These CEOs would have no need to use regulation to excuse their own performances. I'd be more interested to hear what those guys have to say about Sarbanes-Oxley than I would a bunch of mediocre CEOs.

Of course, you won't hear this on CNBC. That's because they assign Liz Claman, a mere talking head, to cover Paulsen's conference, rather than invite someone with sharp business mind and a knack for asking the unasked question, like Herb Greenberg, Joe Kernen, or Erin Burnett. And that's a shame.


Another wasted opportunity for excellent business news coverage by CNBC. Let's hope Roger Ailes, of Fox News, is watching this and taking notes.

No comments: