HP Gets It Almost Right Compensating Meg Whitman as Its New CEO

I recently wrote about the effect on the mass of unemployed managers seeing Meg Whitman, an HP board member and ex-eBay CEO, become the new CEO of HP. Specifically, I claimed that it was painful for those unemployed former corporate executives to,

"see Whitman asked to take a lushly-compensated job for which even pundits on the business cable networks this morning assert she has no serious credentials to qualify."

So I was partially pleased to read in this morning's Wall Street Journal that Whitman is working as a dollar a year CEO.

Good for her, and good for HP's board.

Here's the rest of her compensation deal, as reported in the Online Journal today,

"Whitman also was granted options to buy 1.9 million H-P shares over eight years. She can’t cash out most of the options until H-P stock’s price reaches 120% or more of the company’s current share price. Whitman’s target bonus for fiscal 2012 is $2.4 million, H-P says."

The print version is slightly different. It says that HP stock has to rise by 40% to fully pay out. It also says the "maximum opportunity equal to 2.5 times the target, subject to performance criteria."

Well, it's close, but no cigar.

You see, were there to be an unexpected upsurge in the S&P, HP's equity price will be lifted, regardless of Whitman's accomplishments, along with the index.

What HP's board should do is condition Whitman's payout on HP's equity gaining 40% above the S&P over the period, and no more than, say, 2 out of the 8 years having a total return less than that of the S&P.

That way, Whitman is conditioned against both rises and declines in the S&P which would make the 40% target meaningless.

I don't frankly understand why boards full of allegedly smart members fail to insulate CEO performance from the obvious correlation of the firm's equity price with the broader market.

If Whitman can keep HP from declining as much as the S&P in a severe downdraft, or propel it 40% above a rising S&P, then that's worth the bonus she is being offered.

But it has to be flexibly conditioned to account for the S&P's performance, not simply fixed over time.

Fortune's Most Powerful Businesswomen

Yesterday morning, I caught a few minutes of CNBC's typical shallow business reporting. The segment featured Fortune's 2011 edition of their annual 'most powerful women in business' rankings.

Kraft's Irene Rosenfeld (CEO since June 2006) has, according to the magazine, replaced Pepsi's Indra Nooyi (CEO since 2007) at number one. Nooyi slipped to second place.

Nearby is a two-year price chart for Rosenfeld's Kraft, Nooyi's Pepsi and the S&P500 Index.

Kraft isn't such a bad call over the recent period. It's up 30% over the period, although I think the Cadbury acquisition, which fueled it (late 2009-early 2010), was largely unnecessary. After all, as I wrote in this post, all Rosenfeld did was buy it, then combine the two firms' confectionery businesses and announce a spin-off. It's not too much of a stretch to suggest that much of Kraft's/Rosenfeld's recent outperformance was from Cadbury, not her own organic businesses.


In effect, she overpaid for Cadbury's growth, then added Kraft's similar units for a spinoff. Which could have been done separately, as I originally suggested. Now she's spinning off the part which appears to have driven the combined firms' outperformance of the S&P.

Pepsi's Nooyi, though, is clearly struggling. How does such failure make her a powerful business woman?

The second chart shows the same three price series over the past five years, since Rosenfeld owns that track record entirely, and Nooyi owns most of Pepsi's for the period.

While Nooyi's performance is relatively less-worse than the other two, Rosenfeld's is, not surprisingly, less good. The Cadbury acquisition turned things around for Kraft, which means, in effect, that if you held the shares when Rosenfeld took over Kraft, you saw a loss nearly the same as the S&P.

So from a longer, more accurate historical perspective, neither of Fortune's top two most powerful businesswomen have managed to significantly outperform the S&P. They barely beat the index, and destroyed value for their shareholders.

And Fortune celebrates these two women CEOs? What- as role models?

Why?

About Meg Whitman As HP's New CEO

We've all heard and read more than we probably wanted to since yesterday morning concerning HP's firing of 11-month old CEO Leo Apotheker, in favor of board member and former eBay CEO and failed California gubernatorial candidate Meg Whitman.

So I'm not going to opine on HP's board, valuation, or checkered history of so many CEOs in so few years.

Here's what struck me this morning.

How frustrating must it be for the millions of unemployed, formerly middle- and/or senior-managers in America who can't get replies to inquiries, or interviews, or jobs, because those hiring consider them unqualified or insufficiently qualified.

Now they see Meg Whitman, who has never run a hardware or software company, simply given the job of CEO of a large one which does both.

It must be very galling to be seeking a job in some function in which you have experience, perhaps even in an industry you know, and get nowhere, only to see Whitman asked to take a lushly-compensated job for which even pundits on the business cable networks this morning assert she has no serious credentials to qualify.

Talk about luck and serendipity.

As my first boss, at AT&T, John Tyson, used to tell me about the manyfrustrating situations he encountered in his job at the company,

'Sometimes I don't know whether to laugh, or cry. I laugh, because it hurts less.'

More CEO Idiocy On CNBC This Morning

Probably because BofA announced earnings yesterday or this morning, its CEO, Brian Moynihan, had a lengthy interview on CNBC this morning.

After reading about Moynihan's checkered corporate past, about which I wrote here, I have zero interest in anything the guy would say. I'm guessing I'm not alone.

So why is Becky Quick breathlessly asking Moynihan about the state of the American consumer, after stating that BofA has relationships with some large percentage of them?

C'mon, Becky, you're smarter than that. That so-called "relationship," is, for many of the bank's customers, a checking account.

And why would Moynihan, a lawyer with a now-publicly highlighted spotty record of mediocre management at several banks, know anything more about American consumers than, say, someone who has actually conducted market research? Or a qualified economist?

Even Joe Kernen's pointed question about BofA being whipsawed by the feds to both lend more money, but make no bad loans, got a punt from Moynihan. Obviously, given the predatory regulatory environment in Washington these days, the BofA CEO wasn't going to utter a single word that could be viewed as combative by the federal government.

So much for honesty and candor from CEOs. Anywhere. Which is sort of the topic of this morning's prior post.

Anyway, I suppose this morning's puff session with Moynihan is CNBC's attempt to deify anyone in a CEO suite, no matter how unqualified or lacking in experience. Which is really just plain stupid.

Mediocrity At The Top: BofA's Brian Moynihan

Yesterday's Wall Street Journal's Money & Investing section carried a feature article discussing how BofA's CEO Brian Moynihan got his current job.

The details should bring shame and humiliation to everyone involved, but most especially the board.

That Moynihan should have joined the ranks of overpaid, mediocre large US bank CEOs is not, by itself, all that surprising. At least not to me. None of the CEOs of the few remaining large, authentic commercial banks are at all noteworthy for their outstanding skills or accomplishments. Moynihan is no exception to that.

But the details of Moynihan's career left me shaking my head. The guy literally hopscotched luckily from a general counsel job at Fleet through various unremarkable stints in business units at BofA. Soon after the Merrill acquisition, he refused a transfer to a credit card unit, and was told he was finished.

Little more than a year later, he was named CEO to replace Ken Lewis, the guy who promised to sack him for refusing the earlier job offer.

Go figure.

If this story, just by itself, doesn't tell you why there is so much ineptitude and mediocrity among US commercial banks, nothing else will.

But wait, as they say in the infomercials....there's more!

One BofA board member held out against Moynihan, encouraging fellow board members to seek an outside replacement. Nothing doing. The rest of the incompetent firm's board railroaded the improbably named William Boardman by forcing a vote on a unanimous decision. Boardman was reported as believing that his dissent on Moynihan's election would hurt the bank, so he caved.

He must be so proud.

Moynihan, too, I suppose.

Together, Lewis, Moynihan and BofA's board all contributed to the naming as CEO a rather unaccomplished, generic businessman with no outstanding instance of ingenuity, creativity or other quality involving unusual excellence.

Instead, Moynihan is a return to banking's Organization Man era. Very much according to this post, which I wrote upon Moynihan's being named CEO at BofA last December.

It took a while, but the Journal's piece yesterday, which filled in the blanks on Moynihan's career and the BofA board's actions, have pretty much validated my initial sentiments.

The nearby five-year price chart for the S&P500 Index, BofA and its major large US commercial bank competitors does, as well. BofA is still the worse than all but Citigroup.

Way to go, Ken and Brian...and your board.

Ed Whitacre Anoints Himself GM CEO

You certainly can't fault Ed Whitacre for lacking chutzpah, can you?

On this basis,

"I like the people, I made some management changes and I just felt comfortable with the team,"

Whitacre decided he will be GM's long term CEO. Never mind the board- it's been a useless rubber stamp for decades. Whitacre was appointed by the current administration, so any notionally publicly-held company would be asking for a fight with the thugs in Washington if they were to contest the federal government's wishes.

After all, consider AIG's fate.

So Whitacre crowned himself king of GM.

Unfortunately, Whitacre's experience has been in a sector more or less defined by government intervention- telecommunications. Sure, he cobbled together SBC, now named ATT, from the remnants of various Bell System operating companies and, finally, the remains of the one-time parent company. But as I noted in an earlier post, the most important task in that sector was managing the regulatory environment, and perhaps cost-cutting.

GM needs an entirely different set of skills in its CEO. To sanction Whitacre's self-promotion to CEO is to admit that GM will continue to be a ward of the US taxpayer. The new CEO's most prominent management changes were to bring in two old regulatory affairs specialists who worked for him at SBC.

Does that tell you something? It ought to.

Whitacre sees GM's most important task as managing Washington. Beyond that, I don't think Ed Whitacre has any idea how to run a competitive company, the business of which is to sell big ticket products to consumers.

Anybody stupid enough to still be a voluntary GM shareholder deserves what happens next.

Oh, right. That would be mostly union members, wouldn't it?

Gerald Levin & Steve Case on CNBC This Morning: TimeWarner-AOL Merger Failure

CNBC had former AOL CEO Steve Case as guest host this morning for several hours. As his guest, Case invited his former co-CEO, TimeWarner's Gerald Levin, to appear and discuss the merger which is now generally regarded as the worst of that decade, or the past ten years, if it's not a formally-demarcated decade.

The exchanges among Case, Levin, and the CNBC co-anchors, as well as Levin's own soliloquy, were amazing. And not in a good way.

First, let me remark on Levin's performance.

If memory serves, Levin's son was murdered in a highway robbery-and-murder case sometime during the aftermath of the TimeWarner-AOL merger. Even back then, I believe Levin gave the event some weight in his decision to leave the company. It's fair to say that it had a profound effect on him.

That said, Levin's new persona is, to be blunt, stomach-churning. He now sports a goatee/beard and moustache, jacket and open-collared dress shirt, and a whole new, evidently therapist-supplied vocabulary of kindness and gentility.

Levin took total responsibility for the merger's failure, absolving Case, who sat only a few feet away, as well as the TimeWarner board.

This is ridiculous. As I said to colleagues at the hedge fund with which I worked at the time, the TimeWarner board should have engaged an investment bank, economist and valuation consultant to build a case that TW's shareholders would be harmed in the long term by being forced to buy a temporarily overvalued AOL with TW equity. It wouldn't have taken too much to construct a reasonable defense that would have allowed Levin and his board to contest the merger bid from Case's AOL.

In any event, Levin's statements merely add to the view that corporate boards are meaningless. Not to mention that he implied that he would have, or did, simply ignore whatever his board, as shareholder trustees, wanted, and forged ahead regardless.

Thus, I think Levin marked himself this morning as simply a poor, inept CEO.

However, Levin then took questions and pontificated on large mergers, TimeWarner-AOL's subsequent inept merger implementation, and various other managerial topics.

His comments were peppered with soft, touchy-feely phrases which really do suggest he's spent a lot of time and money on therapy. The phrases, which I can't recall exactly, truly sounded like a well-rehearsed mantra which emanated from his therapist's mouth.

Essentially, Levin alleged that the post-merger challenges were all about people, expectations, fears, etc., and that he and Case were required to satisfy "Wall Street" expectations. Thus, Wall Street was the villain, and poor Levin and Case were just babes in the woods as they tried to merge and then manage the two companies.

Case chimed in similarly, which isn't surprising. He has taken his winnings and moved on to another web-based business. It's easy for him to now declare that it was really always about people, not technology.

That's not what he said at the time of the merger.

Further, Levin now confesses that the performance that he and Case promised in the first merged year was, in reality, unrealistic.

Sounds like fraud and incredibly naive management, doesn't it? I mean, Levin didn't stop the deal because he couldn't commit to the performance he believed was required by shareholders or analysts. Neither did Case. Neither resigned or said they really wouldn't be up to the task.

No, they both took lavish compensation and then, much later, declare that it was never really possible to meet investors' expectations anyway.

Pardon me, but who exactly set those expectations in the first place? Wasn't it Case and Levin, to justify a merger that few thought was really worthwhile?

Let's be really frank here. In 1999, nobody wrote blogs, and I didn't write this one. But at the time, I verbally declared to all who would listen that the TimeWarner-AOL merger was simply a case of the latter cashing in on its temporary valuation surge, at the expense of the former. Nothing more, nothing less.

There was zero business reason for the merger. I immediately sold the shares I held by virtue of my AOL position when the merger closed.

To see Levin now denounce GE, Citigroup, and a host of other companies as lacking in focus and managerial sensitivity, or whatever it was he babbled about, was almost embarrassing.

Equally embarrassing was that nobody on CNBC even pretended to question, challenge or otherwise call Levin, and, for that matter, Case to account for the mess they created.

It was shameful. Instead of grilling the two in front of business viewers, they just lobbed softball comments and occasional helpful, nearly adulatory questions.

From what I saw, Levin is just one of at least two lawyers who inherited large, unwieldy companies and mismanaged them into disaster. The other, of course, is Citi's Chuck Prince.

To suggest that Levin has anything worthwhile to tell anyone else, or any other CEO, except,

'Don't be a lawyer and try to pretend to be CEO at a large, complex, already-undperforming company,'

is just plain silly.

Levin isn't some accomplished graybeard former CEO. He is a failed wannabe-CEO. Steve Case induced Levin to snooker his own board and rob his own shareholders' wealth to give it to investors in AOL.

CNBC does a great disservice to business and investors everywhere by giving Levin and Case this platform, sans critical questioning. Levin and Case then proceeded to compound the mistake by behaving like they were somehow victims, themselves.

All in all, a disgusting, nauseating performance this morning on CNBC.

Brian Moynihan New CEO of BofA- Who Cares?

Late last week's business news was abuzz with BofA's selection of Brian Moynihan to replace Ken Lewis.

Really, who cares?

Look at the nearby chart of major surviving US bank equities since the late 1980s versus the S&P500 Index.

For all of Hugh McColl's acquisitions, and Ken Lewis' continuation of that approach, the average investor would have been much better off simply holding the index.

This isn't an isolated phenomenon. Chase and Citigroup are in the same boat. Only Wells Fargo, for years truly primarily a consumer and asset management bank, broke with the pattern.

Even since 2005, almost a full four years ago, the pattern holds. Wells about equalled the index, while the other three fell by more.

Moynihan made some forgettable comments about leaving the vaunted BofA business model intact.

Again, who cares? The bank has been stuck in underperformance mode for decades. Moynihan is just the latest caretaker of a bank so large as to impede its own ability to offer reasons to own it, instead of the S&P.

It's very unlikely Moynihan will do anything to change BofA's historic equity price trajectory. Especially when he's announced he doesn't plan to do anything significantly different.

Unless these large bank CEOs do something horrendously bad, such as, oh, buying a failing mortgage bank or retail brokerage, the best they can tend to do is tread water below the S&P's performance level.

I doubt Moynihan will be any different during his term as CEO of BofA.

Changing of the Guard at Xerox: Who Cares?

Ann Mulcahy, CEO of Xerox, is retiring. Replacing her will be Ursula Burns.

Who cares?

As the nearby price chart of Xerox and the S&P500 Index displays, and a Wall Street Journal article on the subject noted, Mulcahy's tenure has been undistinguished.

Yes, I'm sure there will be those who assert that Mulcahy fended off bankruptcy and a difficult situation she inherited from her predecessor.

But that's not the measure of a successful CEO. Consistent outperformance of the always-and inexpensively available S&P500 is.

If an investor had bought Xerox stock upon Mulcahy's appointment as CEO in 2001, s/he would have been rewarded with a stagnant equity price, a performance only marginally better than the index, and not in a consistent manner.

Despite accolades for righting Xerox's financial condition and fostering printer technologies, her management of the company didn't really deliver any form of outsized returns to shareholders. It's not clear that Xerox shouldn't have died in 2001, its better-performing units sold to better-managed competitors or private equity shops.

Mulcahy's replacement, Ursula Burns has received publicity because of her gender and race. Again, so what? Noting those only propagates gender and racial bias. If she's qualified to be CEO of Xerox, why trumpet them? If not, do those attributes serve as special qualifiers?

It doesn't take a genius to see that a company that mainly focuses on print technology in an increasingly virtual, online technology world is probably not going to become a consistently superior performer again. If it did, it would be a true exception.

As the price chart shows, Xerox hasn't had a sustained period of market outperformance in the period from 1978 to the present. This is a company whose 'go-go' years were the 1960s. That's 40 years ago.

When I think of Xerox, I think of the company that punted away truly promising technologies in its once-famed Palo Alto Research Center. You know, those ideas which Apple's Steve Jobs incorporated into his firm's breakthrough personal computers.

Why anyone would pay special attention to a changing of stewards of a once-dynamic, now merely-average, backwater technology firm, is unclear to me.

Yahoo Gets An Adult CEO: Carol Bartz

Finally, after years of mistakes, the board of Yahoo did something right. They've attracted veteran technology CEO Carol Bartz to replace hapless Jerry Wang as the CEO of Yahoo.

I have written two posts involving Bartz, here and here. The second linked post, from October of 2006, lauded Bartz as an unheralded, effective CEO. I wrote,

"In my opinion, however, Carol Bartz is the class of the class. She has created value consistently at Autodesk for 14 years, with the exception of some rough years in the late '90s. Even then, however, the company tended to tread water, and not lose substantial value for long time periods.

I think it does seem unfair that Bartz is not accorded the type of press that GE's Jack Welch received for his long-term performance. Blogger is not cooperating with the uploading of a price chart comparing GE and Autodesk over many years, but suffice to say, Bartz looks as good as Welch, when the two companies' performances are compared for the years in which they both were CEOs of their respective companies.

If Bartz is being ignored because of her gender, then that's even more bad news to add to Alan Murray's contentions. Not only do poorly performing female CEOs, like Jill Barad, get spotlighted, but the rare excellent performers, like Bartz, are conveniently forgotten."

The nearby price chart of Yahoo for today indicates that there was initial disappointment by Yahoo investors at the news, even allowing for the S&P500's down opening.

Additionally, the Wall Street Journal ran at least one piece critical or questioning of Bartz' ability to sort the Yahoo mess out.

I disagree. Emphatically.

I don't know what Carol Bartz will decide to do to create or extract maximum value from Yahoo for its shareholders. But I am confident that, whatever it is, it will be as good as, or better than others would have done.

To her credit, Bartz was quoted as saying she had,"a lot of ideas " regarding what to do at Yahoo, but "It would be very presumptuous for me to do so on my first day on the job and I am not going to do so."

How very adult and professional! Yahoo shareholders must be shocked at the new quality of management at the firm. If I were one, I'd feel very comfortable with the image of Bartz across a table from the hulking Steve Ballmer in any upcoming discussions regarding search businesses, joint ventures, et. al.

At the same time, the firm is finally rid of Susan Decker. It didn't seem that she ever made a significant difference at Yahoo. Of the two, there's no question Bartz is the better choice to salvage whatever value can be at Yahoo at this very, very late date.

More Trouble at Howard Schultz' Starbucks

Monday's Wall Street Journal provided some additional information regarding Howard Schultz's attempt to revive the firm he founded, Starbucks.

In this recent post addressing returning CEOs, I wrote,

"In Dell's and Starbuck's cases, I question if they ever will (return to consistently superior total return performance). I believe, for reasons I've discussed in labeled posts on both CEOs and their companies, that competition, growth and simple Schumpeterian dynamics have worked to end their time of consistent outperformance."

I still feel that way. The nearby Yahoo-sourced price chart of the coffee seller and the S&P500 Index for the past five years portrays a brand that has run its course.

Typically, a firm once successful at earning consistently superior total returns will fade from either: lack of growth opportunities; competition; regulation, or; investor expectations finally catching up with performance.

Ironically, as I noted in this post, Schultz had been alleging competition had nothing to do with the firm's slumping fortunes,

Perhaps the most amazing comment Schultz uttered in the rather surreal interview this morning on CNBC was, in response to Bartiromo's question about McDonald's,

'Competition- they're just noise,'or words very close to those.

Well, as I noted in this post, regarding Schultz's recent, hand-picked strategist, Michelle Gass, contended,

"She says she hasn't been focused on competitors in developing the new plans. "I think we'd all readily admit that a lot of the situation we're in is self-induced." Sounds familiar, right? At least Gass and Schultz are reading from the same page in the same playbook.

But in that prior post, I went on to note,

"Thus, I find Ms. Gass' comment to be dangerously short-sighted and internally-focused.

Instead, she might wake up to the reality of Schumpeterian dynamics. Between Starbucks' own prior expansion into lower-income segments, and McDonalds' search for growth in kindred products, the former's market dominance was almost certainly going to come to an end, one way or another.

As it is, Starbucks is being bracketed by another coffee retailer on one side, and a fast-food giant on the other. This has less to do with Starbucks' 'self-induced' troubles than it does with recent targeting of the coffee giant's business by two very large, savvy food retailers.

I hope, for Howard Schultz' and Starbucks' sake, that Ms. Gass begins to become aware of this reality."

In this week's Journal piece, however, it reported,

"Reflecting his urgency, Mr. Schultz told workers he no longer wanted to hear about projects that would take as long as 18 months. "We have to defend our position," he said to a few hundred employees shortly after the March annual meeting. "We have lots of companies small and large who want to take a piece of our business away."

Wow. That's some fast reversal of strategic diagnosis, isn't it?

But what is truly disturbing is how personally Schultz is taking Starbuck's natural decline. As the Journal article describes,

But early last year, Starbucks seemed to be losing its edge, a complaint Mr. Schultz himself voiced in a leaked memo. It wasn't setting the agenda with new products but just adding drink flavors and ordinary items like breakfast sandwiches. Stores had grown cluttered with stuffed animals and other noncoffee items. Price boosts were starting to annoy customers.

"I was just depressed," Mr. Schultz says. He launched a personal turnaround routine, consisting of what are now six gym workouts a week and a daily health shake of fruit and cottage cheese.

In public, he appeared humbled. At the annual meeting in March, Mr. Schultz told the crowd to stop applauding when he walked on stage. "I thought I could start crying," he says.

Schultz is so personally invested in the attempt to reverse the age-old forces of Schumpeterian dynamics that he seems to simply deny their existence.

The article cites, through the recounting of many examples, how Schultz has gathered to himself the power to make even the most trivial decisions. It's reminiscent of Steve Jobs, with one big difference.

Jobs' Apple is in a business which creates new products. The best Schultz can now do, having already created a modern version of the old, original Dutch coffee house, is to introduce some marginal new beverage flavors each year.

Hardly the same thing.

It seems to me that people spend a certain amount of money on coffee and beverage purchases at places like Starbucks. Once the firm has penetrated sufficient markets, as I noted in this post, it really has little room for growth. Perhaps growing economies such as India and China provide some opportunities. But if that were all that was needed, the company would have already been growing with those countries' own growth rates.

No, it seems the problems for Starbucks lie more in the realm of simply having been successful long enough to have attracted competition while saturating its primary and secondary market segments.

I doubt Schultz' micromanagement of the firm he created will really change those facts.

But, as always, time will tell.

Commercial Bank Problems, CEO Firings, & Total Returns

Earlier this week, in Monday's Wall Street Journal, the paper's minority-owned analytic shop, breakingviews.com, made a big deal out of how Chuck Prince, Stan O'Neal and Marcel Ospel were kicked out of Citi, Merrill and UBS, respectively.


But the CEOs of badly performing WaMu, Countrywide, National City and RBS, the authors complained, remain in power.


What gives?

The article's authors say that the composition of these banks' boards tends to be local, and such familiarity breeds an unwillingness to fire the CEO.


Instead, I would opine that local business figures' presences on these boards explains the appalling lack of oversight and inability to feel sufficiently powerful to oust these CEOs. I would guess it's a case of the CEOs recruiting local businesspeople whom they can intimidate, influence and control. That is, it's much less a sense of social discomfort than feelings of inferiority and insecurity on the part of the carefully-chosen local business lapdogs.


But something else has already happened, and breakingviews, and we, should not overlook what it is.


Stock prices at these institutions are off big time. Some by more than 60% in a year, others by as much as 80%.


The important phenomenon, if you are like me, is already evident. Shareholders who finally had had enough simply sold the stock. Enough of them, relative to buyers, it appears, to push prices down so low as to create the large negative total returns over the last year.


Isn't this in itself a statement of capital markets efficiency? Sure, it doesn't speak well for 'corporate governance,' but I don't believe in that anyway. That's for Congress to legislate and some accounting firm to audit compliance thereto. It doesn't really affect the operations of these banks. And it never will.


The CEOs and senior management of these smaller, but well-known financial service firms still made bad risk decisions, lost tons of money and have therefore seen shareholders vote with their feet/dollars.


As to the CEOs? I don't think you're ever going to see the perfect corporate world where failing CEOs get axed, with loss of tremendous amounts of compensation, when their decisions go wrong.


That's fantasy. Not reality.

Congressional Witch Hunt On Financial Services CEO Pay

The March 11 edition of the Wall Street Journal carried an article by the Journal's minority-owned unit, breakingviews.com, regarding the recent Congressional hearings on financial service company CEOs' compensation. I also happened to have caught some of the witch hunt live.

One satisfying aspect of the breakingviews column is that they recommend a set of fixes, all of which echo my own ideas from prior posts. They include: paying large incentive compensation in company equity; lagging incentive compensation to match long term corporate performance, and; provision for effectively escrowing such compensation, in order to recapture it, should performance reverse.

That said, however, I don't believe any of this should be regulated. It ought to be the responsibility of boards of directors to do this, or face shareholder lawsuits. In this day and age, it is a simple task for a board to hire a reputable external compensation consultant to design a 'best practices' suite of senior executive compensation guidelines.

Why the US Congress should meddle in how publicly-held, private enterprises choose to compensate their executives is unclear to me.

Returning CEOs: Buying Opportunity, or More Trouble?

Herb Greenberg wrote a fascinating piece in the weekend Wall Street Journal entitled "Why Investors Should Applaud A CEO's Encore Performance."

Drawing on the work of an Ohio State University assistant professor of finance named Rudi Fahlenbrach, Greenberg wrote

"Here is some good news for Howard Schultz and Michael Dell, both of whom have boomeranged back to become chief executives of their respective companies, Starbucks and Dell: History is on their side. It is for their investors, too.

This doesn't guarantee a happy ending, but a study of encore performances led by Rudi Fahlenbrach, an assistant finance professor at Ohio State University, shows that, on average, the stocks of companies run by CEOs on a second tour of duty outperform the market by 6% annually during their comebacks."

I like Herb Greenberg's work and am typically interested in his opinions. So when I read these opening paragraphs to his article, I took notice. My own proprietary research, while not confined to turnarounds involving returning CEOs, found them to be rarely profitable for shareholders. So I was, and am, very interested in Greenberg's and Fahlenbrach's views on this. Greenberg further wrote,

"According to Mr. Fahlenbrach, from 1995 through 2004 at least 75 CEOs at the country's 1,500 largest companies were called back to active duty from either retirement (especially if they still have a large financial stake in the company) or having been relegated to the chairman's outpost.

"One of the most significant predictors of someone coming back is poor stock-market performance of the current CEO," he said.

On average, before the ex-CEO gets the call, the stock has fallen 40% over two years. Starbucks -- a broken stock, not yet a broken brand -- had skidded by a greater amount in a shorter amount of time. Ditto for Dell. When that happens, Mr. Fahlenbrach said, "They're in need of a quick turnaround."

Not that all former bosses are better than their successors. Notable failures the second time around include Gateway's Ted Waitt, Lucent's Henry Schacht and Xerox's Paul Allaire. And don't forget the late Ken Lay, whose return as CEO of Enron coincided with the final stages of the company's downfall."

Greenberg quotes Jeff Sonnenfeld of Yale, who speaks highly of Houghton, thusly,

"Mr. Sonnenfeld says those who succeed in coming back have three qualities. The first is they came back with great reluctance; they weren't trying to undermine their successor. Second is they aren't coming back for some unmet ego need. Many had better things to do with their time, and came back "because they were being drafted by all of their key constituencies -- because of relationships, knowledge and a cultural aura they can do things nobody else can do to fix the problem." Third, and perhaps most important, he said, is "they recognize what they had built isn't a religion. At Corning, Mr. Houghton had to revisit all kinds of decisions he may have been part of making." "

Stepping back, Greenberg lists Jamie Houghton of Corning, Michael Dell of Dell, Howard Schultz of Starbucks, William Stavropoulos of Dow Chemical, and Chuck Schwab of Schwab among those who either have been successful at returning to turn their old company around, or are expected to do so.

Let's have a closer look at these, dispensing with those even Greenberg cited as ineffective- Schacht of Lucent, Waitt of Gateway, and Allaire of Xerox.

Nearby is a long term price chart for Dell, Starbucks, Corning (GLW), and Dow Chemical. Have any of them returned to a consistent path of outperformance of the S&P? Because the 6% per annum mentioned by Fahlenbrach wouldn't be all that spectacular if it only lasts one or two, perhaps even three years.

It's easy to see Dell's slide and Starbucks slowly running out of gas before failing in 2006. Of course, Schultz didn't actually leave the company, just the CEO position. I think Michael Dell was further removed and out of Dell when it finally began to actually decline.

According to Greenberg's piece, Houghton and Stavropoulos returned to their respective firms in 2002, the former for three years, the latter for two.

I can't honestly see a difference in Dow from 2000 until now. Corning fell after Houghton returned, and seems to have only clawed back to even by the time he left. Since then, it's climbed a bit, but has only matched the S&P for the past two years.

This next chart displays recent price activity more clearly. Corning is definitely still wandering aimlessly since early 2006. That's a two-year stint of inferior performance. So much for Sonnenfeld's admiration for Houghton. In fact, if he left in 2005, it seems that things actually took off, briefly, for a year after his departure, before running out of steam again.

Dow, too, clearly has not been giving shareholders consistently superior returns, either, since 2004.

How about Chuck Schwab? He returned in mid-2004, making him CEO for the past 3 1/2 years. The nearby chart seems to show he's done better than the other examples in Greenberg's article.

Even so, he has yet to get Schwab back to consistent outperformance. But he may be close. If he can continue the firm's total return performance path in 2008, he'll have done it. And it looks as if he is the only one of those mentioned by Greenberg and Fahlenbrach who actually has done so.

Why do you suppose that Fahlenbrach, and Greenberg, are so enamored of a few short-run CEO return successes, and a few who didn't even manage that?

Personally, I think it demonstrates how low most analysts and observers set the bar for 'excellent' performance. To paraphrase Fahlenbrach and, by inference, Greenberg, a two or three years of besting the S&P by only 6 percentage points draws notice.

My own research shows this is actually well within the range of pretty average performance. Many companies can do that, and don't need to be turning around while they do it.

Why do you suppose that these CEOs, as a group, mostly failed to move their firms to consistently superior total return performance?

In Dell's and Starbuck's cases, I question if they ever will. I believe, for reasons I've discussed in labeled posts on both CEOs and their companies, that competition, growth and simple Schumpeterian dynamics have worked to end their time of consistent outperformance.

Dow and Corning represent, I think, business models which have been uneven at best for a long time. They don't tend to have even been consistently superior growth firms to begin with. Given their stock price paths, it's clear that holding the S&P instead of ever holding the those companies' shares would have been a safer and more profitable choice for over twenty-five years.

In the final analysis, while I enjoyed reading Herb Greenberg's piece on Fahlenbrach's work, I found the conclusions to be largely unsustained. I guess my expectations of outstanding CEO and investment performance are higher than those of either of those two guys.

Citigroup's Search For A New CEO: Vikram Pandit???!!!!!!

This morning's Wall Street Journal features an article on the front page of the Money & Investing section focusing on Vikram Pandit as the lead internal CEO candidate for Citigroup.

To say the piece is laughable is being charitable. Some of the quotes and information about Pandit makes you wonder if, in any other organization, the guy would even still have a job. At Citi, appropriately dysfunctionally, instead, he's a leading candidate for the CEO job.

The board at Citigroup must be so proud!

Consider the information reported in the article,

"Vikram Pandit's stature has been rising ever since he joined Citigroup Inc. in July. But Old Lane Partners, the hedge fund that he co-founded and that was sold to the financial-services firm earlier this year, hasn't enjoyed the same kind of success.

Now, with Mr. Pandit among the finalists to succeed Charles Prince as Citigroup's chief executive, Old Lane is getting fresh attention from investors. While the past few months have been tough on many hedge funds, Old Lane's performance has fallen short of the high expectations that Citigroup had when it shelled out more than $800 million to buy the fund.

Citigroup's goal was to use Old Lane and its well-regarded management team to jump-start the New York bank's small alternative-investments business. Mr. Pandit and Old Lane's other founders, meanwhile, said that being part of a giant bank would help them attract fresh capital.

It hasn't worked out that way.

Old Lane lost money in November, falling about 1%, according to people familiar with the matter. That stacks up well against other funds, which lost an average of about 2.4% last month, according to Hedge Fund Research Inc. But it weighed down Old Lane's returns for the year, which now are about 3%, lagging behind the average hedge fund's roughly 10% gain."

So, to summarize, Citigroup paid Pandit a small- well, pretty hefty, actually- fortune for his nascent, less-than-a-year-old hedge fund. Since then, it's underperformed its peer group.

As a related, confirming data point, I ran into an old money management acquaintance, D, this fall in a local restaurant. I had, as it happened, seen him at my squash club at midday several times in the prior two weeks. So I had already figured he was no longer with Citi's alternative investments group.

I was correct. When I innocently inquired how things at Citigroup were, he confirmed that his boss had been tossed out a few months earlier by Pandit's crew. Now, D was gone, too. It turns out that his particular hedge fund overlapped with Pandit's own Old Lane product. D's fund had a good August, while Pandit's cratered badly. For the year, D's fund outpaced Pandit's Old Lane product as well.

Too bad for D. He and his fund were tossed, while Vikram concentrated on managing the whole enchilada of the alternative investments group.

This anecdote tells me two things. First, Pandit is as much a political operator as he is an effective executive, clearing out competing internal interests as he extended his authority throughout Citi's alternative investments group. Second, he has no confirmed record of success in his latest chosen career.

With that as background, let's consider more from the Journal piece,

"Mr. Pandit, who ran Morgan Stanley's powerful institutional securities before leaving after a management shakeup in 2005, is one of four remaining candidates for the CEO position that Mr. Prince vacated last month as the bank warned of billions of dollars in mortgage-related losses.

While other Citigroup executives -- including Ajay Banga, who runs the bank's international consumer group, and Chief Financial Officer Gary Crittenden -- have been interviewed for the CEO job, Mr. Pandit is the leading internal candidate, according to people familiar with the matter.

In its first year since launching in April 2006, Old Lane generated a roughly 6.5% return, which is respectable for a newly launched fund. This year, the fund was headed for a roughly 16% annual gain before a credit storm hit in August, roiling global markets and leading Old Lane to a 5.9% loss for the month, according to a person close to the fund. That was one of only four months in which Old Lane has lost money, this person said.

Some Old Lane investors say the performance wasn't as good as expected this year in part because Mr. Pandit has been distracted by his Citigroup duties and tumult at the top of the bank.

Old Lane's performance doesn't necessarily undercut Mr. Pandit's qualifications to run one of the world's biggest banks. Some bankers say that managing a hedge fund and running a $170 billion bank require different skills.

Old Lane's lackluster showing shouldn't be a strike against Mr. Pandit, says Joe McCabe, vice chairman of executive-search firm CTPartners in Boston.

Old Lane was "a warm-up act compared to being the CEO of Citigroup," he says. "I wouldn't hold it against him."

Old Lane's track record also raises questions about the amount that Citigroup paid for the fund in April, when it had been operating for barely a year. The acquisition was the brainchild of Robert Rubin, Citigroup's current chairman and a former Treasury secretary who is now the main advocate of Mr. Pandit becoming CEO.

The $800 million-plus price tag represented at least 18% of Old Lane's roughly $4.5 billion in assets under management at the time. That was a generous premium. Publicly traded alternative-investment firms such as Blackstone Group, Fortress Investment Group and Och-Ziff Capital Management command market values that are 3%-6% of assets.

But since joining Citigroup, Old Lane hasn't bulked up its assets under management. As of early September, the fund was overseeing nearly $4.25 billion, compared to about $4.5 billion in April. Old Lane today manages more than $4 billion, say people familiar with the matter."

Now, let's think about Pandit's track record at this point. According to the Journal article, he "ran Morgan Stanley's powerful institutional securities before leaving after a management shakeup in 2005."

So he hadn't apparently actually been in asset management, or an asset manager, at Morgan Stanley. Yet he forms Old Lane, attracts investors, then gets bought out by Citigroup within a year. But the hedge fund actually loses assets while under Pandit's management at Citi, as its performance trails its peer group.

You can imagine how a hypothetical interview of Pandit by Citi's board might go.....

Board Members: Vikram, when Bob Rubin offered to buy your Old Lane hedge fund firm for about 3x the going rate, and make you head of our alternative investments division, what was your reaction?

Pandit: Well, I thought about his offer for, oh, maybe 5 or six 6 seconds, and then accepted.

Board: OK. Now, you launched Old Lane after bailing out at Morgan Stanley, during that unpleasantness between Purcell, the old bulls, Zoe Cruz, etc. You didn't have any particular equity management experience?

Pandit: No, not really.

Board: You attracted slightly more than $4B, and proceeded to underperform your peer group, even after arriving here?

Pandit, Yes, that's about right.

Board: So you left one job. Started a new career and are underperforming in that?

Pandit: Yes, again, that would be about the size of it.

Board: Well, we see no reason why you shouldn't be the lead internal candidate for CEO of our nearly-impossible-to-manage-or-understand money center bank.

Pandti: Great. That's terrific news. I'll look forward to your decision.

How many of us believe prior failure in one's chosen line of work makes you ideally qualified for a new, unrelated, much more difficult job?

How many people, having done what Pandit has for the past 18 months, would even still have their job?

Reading this piece in the Journal this morning, especially the hilarious quote from the executive search firm VP, McCabe, only confirms my sense that Citigroup remains totally dysfunctional. Rubin not only fiddled while Citigroup faltered, he then compounded his bad judgment by overpaying an unqualified executive to become head of all Citi's alternative investments. Now, he wants to promote him another level up beyond his demonstrated competency, to CEO of the entire firm.

As I wrote here and here recently, it should really just be broken up into its understandable components, each being either spun off independently, or sold to a logical buyer.

Maybe, though, Rubin has to be forced off the board first, before any sensible next steps can occur at the seriously damaged bank.

Nice job, Bob.

CEOs, Corporate Performance, and Houses

Yesterday's Wall Street Journal featured, as one of its three front page articles, a piece by Mark Maremont describing academic research into the relationship between various events and actions in the private lives of CEOs, and the stock price performances of the companies they headed.

The fact that this article was given such prominence tells you that the editors of the Journal feel it is important and reputable. Perhaps the most interesting and methodologically valid piece of research presented in the article was one by Yermack (Penn State) and Crocker (Arizona State) relating CEO home building and subsequent stock price performance of their companies. While it's worth reading the Journal article in its entirety, the short version of this particular research effort's result is to find that those CEOs who built/purchased large homes ( >10,000 sq ft) saw their companies' stock prices, on average, decline 25% in three years, while those with 'other' homes saw, on average, increased stock prices of roughly 20% by year three.

No measures of statistical significance were provided in the Journal article, although one surmises that one is available in Yermack's and Crocker's paper. Their approach was novel and inventive. They chose a single point in time, the end of 2004, and secured housing data on 488 of the S&P500 CEOs.

The basic premise being described, of course, is that of a CEO engaged in building or buying a large home is taking his mind and attention off of shareholders' welfare, and concentrating, instead, on spending his compensation on luxurious trappings of power. Among the CEOs mentioned in this manner, by name were: Leslie Wexner (The Limited), Stephen Bollenback (Hilton), and Trevor Fetter (Tenet Healthcare).

So far, so good...and simple-minded.

You see, there is another possible, and reasonable explanation for this phenomenon. But you'd have to be open-minded about observing and measuring corporate performance in order to see it.

My proprietary research has indicated that once companies have consistently outperformed the S&P500 Index on a total return basis for five or more years, the chances of this performance continuing falls precipitously.

Thus, a CEO building a large house with the fruits of her/his successful efforts at outperforming the S&P in the prior years would make sense. And the probabilities of continued outperformance would be slim, anyway.

Thus, Yermack and Crocker may have simply validated that succesful CEOs reap the rewards of their efforts for shareholders, and the game is over for a few years.

As I look at the nearby, Yahoo-sourced stock price chart of The Limited (Brands), Hilton Hotels, and Tenet Healthcare, all mentioned by name in the research piece, I draw a different conclusion than the study's authors.

To me, up through 2004, while the Limited struggled from 2000 onward, staying roughly even with the S&P, Hilton outperformed the index, and Tenet outperformed for about 4 years, then fell sharply.

Thus, I find Hilton and Limited to not be examples of the behaviors suggested in the Yermack and Crocker research. Tenet may be. It's declined has persisted since 2003.

The frame of reference you use, and what you know about potential corporate total return performance, matters in how you evaluate subsequent CEO behaviors after a period of good or great performance versus the index. I don't find the study that the Journal article spotlighted to be so bullet proof now as I did when I initially read of it.

Now, I would be very interested to know how their results would differ if they applied my knowledge of the probabilities of corporate consistently superior performance over time, versus the S&P, to their existing work.

More Blind CEO Devotion: An Interview with Ford's Mulally

Yesterday's Wall Street Journal carried an interview with Ford's new(ish) CEO, Alan Mulally.

I cannot help but feel that this is one of those "happy talk" sessions, where the interviewer fawns over the CEO, tossing softballs and avoiding embarrassing questions.

The Journal interviewer largely focused on the process by which Mulally became acquainted with Ford, upon his arrival, and how he had managed since then. Scrupulously avoided were realities such as: Ford's dismal recent and forecasted profit performance; Ford's insufficient size to compete with giant Toyota in the years ahead; the reality that realizing Ford has the wrong mix of cars during a time of high gasoline prices has nothing to do with quickly creating the right mix.

Mulally seems like a sincere, hard-working, dedicated guy who may have jumped into a lethal fire. Despite his apparent success in rescuing Boeing a few years ago, he didn't get the top job. That being the case, he jumped at Bill Ford's offer of the Ford CEO position.

No matter how well Mullaly builds his executive team, or learns about auto production and marketing, he is still CEO of an ailing, smallish producer of largely commodity products. His five "tips" for "taking on a new company in an unfamiliar industry" read, in part, as follows:

1. Deal with reality, and restructure accordingly.
2. Talk to everybody.....
3. Fine-tune the business plan every week- not once a year.
4. Get all the players at the table.
5. Encourage subordinates to disclose problems.

Honestly, I don't think we need Mulally to know these things. But, what's missing is number 0:

"Admit when you simply do not have a winning hand, and need to seek a merger, or dissolution, rather than simply exhaust assets in a futile attempt to survive."

I don't think Mulally is being totally candid- with Ford, or the Journal. He said he spoke to dealers at length, asking them what they thought. Trouble is, for every major auto maker, but especially ailing titans GM and Ford, the dealership network is killing them. Consolidation is required, but not really an option, due to existing laws in most states.

Further, Mulally is silent on just how much time investors will give a company which plans to lose money for the next two years, has racked up large losses recently, and faces further uncertainties and difficulties in its competitive, regulatory and customer arenas.

As I have written previously, Ford, partly due to its family's concern with the company that bears its name, has roused itself several times before to affect a self-rescue. This time, however, I believe it has waited too long, become too small, and run the odds of success to a new, potentially fatal low point.

Maybe Mulally can dress Ford up for a merger or sale to another auto maker. I seriously doubt, given his glib responses in the Journal interview, and his focus on process, rather than results, that Ford will ever, independently, earn consistently superior total returns for shareholders over several years.

Blogging & Chatting CEOs

This month is surely becoming a weird one in terms of CEOs and their use of new media to express themselves.

First, we have John Mackey, CEO of Whole Foods, admitting that he frequented a Yahoo chat room, frequently trash talking his competitor, now acquisition candidate, Wild Oats.

Yesterday's Wall Street Journal editorial defended Mr. Mackey's right to express himself, and chided the FTC and SEC for witch hunting. In a rare parting of the ways with the Journal's editorial page, I beg to differ.

Mackey purposefully disguised his identity, then made accusations about his competitor, and eventual acquisition target, in a Yahoo stock discussion chat room. Because he hid his identity, one is led to believe Mackey had ulterior motives. Further, since his actions can easily be seen by even a disinterested observer, like me, to be attempting to cause people to sell Wild Oats and, thus, perhaps lower Whole Foods' acquisition price of Wild Oats, they may be in violation of laws regarding manipulation of stock price.

The Journal editors downplay this, suggesting that Mackey just wanted to "sample the mood of his customers." Really? Aren't market research studies the way most companies do that? See my recent piece on Tesco for more details.

While Mackey may not, in fact, be able to be prosecuted for a securities law violation, I think most business people would find his behavior to be, at best, questionable, unethical and undesirable and, at worst, completely reprehensible, wrong and illegal. The use of a false identity when dealing with public opinion and statements involving his own company and a competitor, just smacks of something seriously wrong.

In a sort of related vein, the Journal published an article last Friday spotlighting CEOs who blog. Among these are: Jonathan Schwartz of Sun Microsystems, Bill Marriott of Marriott International, Michael Critelli of Pitney Bowes, and Bob Lutz of GM (not actually a CEO, but a Vice-Chairman of the struggling auto maker).

I've pasted a Yahoo-sourced, five-year price chart of these companies and the S&P500 Index. From what I can see, I'd skip reading Lutz' and Critelli's blogs, if you are looking for business insights. The Journal article's mentioning that most of the blogs are business-oriented in some form or another, but that they also mix personal items.

If these CEOs hope to somehow impress the business world, wouldn't they be better off first demonstrating that they can operate their company in a manner that consistently outperforms the S&P, so they can actually claim to have some basis on which to opine from a position of useful knowledge?

Even Sun's performance is questionable, in my opinion. IT's had a few up periods, relative to the S&P, but significant down periods, as well. Only Bill Marriott looks like whatever he wishes to impart about his business acumen might be useful to read.

Maybe the inferior-performing CEOs/senior executives should focus on improving the performance of the companies at which they work, first, before being so presumptuous as to begin blogging for the business world at large from such a position of demonstrable ineptitude.