Sunday, November 16, 2008

No car industry bailout ... unless they do it my way

On October 13th I gave my remedy for the car industry, ("GM and Chrysler: How the U.S. Chose to Fail"). My plan was probably over the top, but nothing I have heard or read since sounds even close to right. In fact, what I read and hear is so wrong-headed that I want to up the ante on my original plan. Here it goes.

In exchange for the taxpayers bailing out Detroit, we the people propose:

1. GM and Ford will promise even better fuel efficiency than we asked for before. 40 MPG by 2011 and 50 MPG by 2015. All models including SUVs. No nonsense about fleet averages!

2. Chrysler will be spared and be rechristened, Phoenix Motors. Phoenix will not make cars, rather the bailout money will go to developing technology for clean energy engines and systems. One big project ought to be refitting cars and buses for fuel efficiency and reduced CO2. Another ought to be developing high speed trains (target 300 MPG) as we spend billions on transportation. The train unit will be headquartered in New York City and staffed by hedge fund billionaires who agree to take 0 pay in service to their country.

3. No executive will make more than $500.000/yr., including performance-based pay. Designers and engineers who come up with real innovations will be rewarded accordingly -- as if they were the athletes who win the world championships in the big three sports.

I have lots more hare-brained ideas that could save the industry. I think them up as I type. And in the meantime, Washington and Detroit get nowhere because they refuse to accept that Detroit makes lousy cars and management stinks. To reinvent this business we need to kill it and then fumigate.

And one final key measure: Any and all ideas proposed (or supported) by Henry "Hank" Paulsen will be rejected out of hand.

Tuesday, October 07, 2008

CEOs and greed: tell me something new

As the U.S. Congress rakes former Lehman CEO,  Richard Fuld, over the coals for taking $350 million in salary over 5 years but giving back 0 in responsibility, "normal" people ask themselves several obvious questions:

1. Why do we have to pay so much money to someone to run a big company?

2. Why would someone run a company into the ground and then vote himself a multi-million dollar severance package?

3. Why do corporate boards vote in favor of the huge CEO salaries?

4. Is there any relationship between how much CEO's of big companies get paid and firm performance?

Fortunately, there are pretty simple answers to these questions.

1. CEO's get paid huge salaries not because they make money for shareholders, but as a reward for becoming the CEO of a huge company. Think about how hard it must be to get to be the biggest S.O.B. in a company 20,000 people. How about 100,000 person firm with operations in 60 countries?

2. CEO's negotiate great contracts that are "standard industry practice". CEO's believe they deserve what they receive -- don't forget how hard they fought to become CEO. Only a few are smart enough or modest enough to believe otherwise.

3. Corporate boards vote for the huge salaries, perks, etc., for several reasons. Some of the board members are CEO's themselves who enjoy the same emoluments. Corporate boards members get off on being part of the big money scene; it makes them feel important and powerful. Unfortunately, corporate board members don't actually do very much. (See my November 4, 2007 post "Why corporate boards are mostly useless")

4. There is no relationship between the amount of CEO and performance. There may be some relationship between how CEO pay is structured and firm performance, but this is different from tying performance to the total amound received. Quite simply, no one has demonstrated that CEO's who make $1 million work less or are less talented than those who make $5 million.

Bottom line: CEO salaries are a social constructed phenomenon that has little to do with economic rationality and a lot to do with a very screwed up value system in the United States, the U.K., and even in mainland Europe.

Now you would like me to tell you something you don't know already. Then try this one on for size. Don't expect the crisis to change anything.

Sunday, March 09, 2008

Why PP loses today; Spain's real challenges

Politicians and an election campaign is the stuff Petrie dishes were invented for. Like diligent laboratory slogs, we heartless strategists zoom in on the colors of failure. Today, our subject is Spain's Partido Popular destined to lose handily today's Presidential election despite running against an ineffective Rodríguez Zapatero government.

Rodrígeuz Zapatero and the ruling PSOE was vulnerable for: 1) running a zigzag economic policy that now simply looks ridiculous as the economy tanks; 2) inventing an incoherent immigration policy that is coming part with rising unemployment; 3) demonstrating that it was thoroughly informed and confused in its failed negotiations with ETA, culminating in a terrorist attack just days before the elections; 4) nuzzling up to Chavez and Castro and getting dumped on by Merkel and Zarkozy; etc., etc. During four years, PSOE proposed and undid policy after policy, passed into law programs it could not fund, and in general demostrated a level of incompetenence that ought to send a ruling party into exile.

And yet, PP's candidate, Mariano Rajoy, was incapable of making inroads on a single issue. On the economy he had no real proposals despite growing inflation and unemployment. On the negotiations with ETA, PP whined and protested to the point that it seemed that they were undermining a government when the government was screwing up all on its own.

PP did an ever worse job with regional national demands. For decades, PP has presented a vision of Spain as a social club for Spanish speakers. This was always a bad strategy. Which leads to a good question: Why would PP pursue a losing strategy year after year?

A story might help to provide an answer. Three and a half years ago, not long after PP lost the last elections by making a mess of its response to the horrifying terrorist attack of March 11th, I taught a strategy class to members of Spain National and Madrid Autonomous Community Parliaments. It gave me a chance to challenge the strategy skills of politicians from PP, PSOE and Izquierda Unida.

During one class break, I suggested to several PP class participants that they propose an education bill offering parents the opportunity to send their kids to school in any of the four national languages anywhere in Spain. I told them to put on their strategists' hats and ask themselves, "How many parents will sign up their kids for the Madrid Ikastola?" I said, "Do what I say and you will look like the avatars of tolerance while you fight back against the nationalists." I said, "This is a no-brainer for you guys."

My idea was rejected out of hand. And so the idea sat dormant until this election season when PSOE, smelling an opportunity, came forward in Andalucia with their own language proposal. As befits PSOE, the plan was a mess, with the utopian goal of trilingual Andalusians conversing in Spanish, English and `pidgin Catalan without spending money to do it. PP, of course, rejected the idea as "insane".

But this seemed to open up saner minds, so that in the last minute of the campaign, the President of the Autonomous Community of Madrid, Esperanza Aguirre, figured this out and offered Catalan schooling in Madrid. Way too little, and way too late. PP had already secured its rightful place with the electorate as the anti-Basque and anti-Catalan party.

[I might add here that Aguirre was the only candidate PP could have fielded with a chance to defeat Rodríguez Zapatero.]

In large part, PP will lose this election due to its failed strategy for managing regional nationalism. PP should have realized that following the devolution of power to the local autonomous governments, the only real issue left is language. This was, of course, always the most emotionally charged issue. Culture, as we know, is rooted in language and religion.

Accordingly, PP loyalists do everything they can to defend the Spanish language. But it does so by fighting against the use of the minority languages and position themselves as the big ugly oppressor. This is as stupid as telling a teenage child to listen to Mom and Dad and not his friends. The right strategy, as we know now, was cooptation via offering the regional nationalists the opportunity to use their languages in the rest of Spain.

PP's strategic inability to reflect and change is evidenced in its other failures as well. On immigration, PP did almost as bad as it has on regional nationalism. Spain's immigration mess was an opportunity PP could not afford to flub, but as they had never come to terms with the failures of the Aznar government, they were stuck defending old failed policies. As a result, they came off as racists, when in fact their proposals were similar, or even less restrictive, than those proposed by many other European governments.

This is not to say that getting the strategy on immigration is easy. PP needed to demonstrate that they had learned from the mistakes made during their eight years in power. The had to make the case that as the first Spanish government to face immigration that had to go up the learning curve ... and it so doing that they had turned a dangerous corner on immigration only to have PSOE then drive the country off the cliff. Instead, once again, just as they had on Iraq and the terrorist attacks of March 11th, PP decided to stand its ground. This was bad strategy.

And so on the economy, on regional nationalism and on immigration, PP shot itself it the foot. But even after getting all this wrong, they might still have won the elections if they had been able to field a solid candidate.

However, Mr. Rajoy is a terrible candidate. He is an  awful public speaker. He mumbles and modulates his voice in a way that makes the trivial important and the important incomprehensible. Numbers seem beyond him; each time he inserts a statistic he stumbles around looking for an idea to which he can connect the number. On occasion, he projects passion and interest, but this is precisely when he most looses connection with his arguments. I have been told that in private Mr. Rajoy is intelligent and warm. Unfortunately, In public, he is clumsy, cloying and needy. If possible, he is an even worse candidate than John Kerry.

After such virulent criticism of Mr. Rajoy, I will be accused of being a Rodríguez Zapatero supporter. This is not true, though I am a social democrat. In this election, we are faced sadly with a choice between an incompetent party in power and an opposition party with outdated ideas, no discernable program, and a bad candidate.

Among Spaniards with an interest in politics, the read on the four years of the Rodríguez Zapatero government is that the best thing that happened was that mostly nothing happened. The standard line is the following: Lame schemes were proposed and then shot down by the Minister of Economy, Pedro Solbes, or when they were passed into law there was no money to fund them.

Unfortunately, benign confusion will no longer do. Rising unemployment and inflation will be accompanied by rising crime and social unrest. We face hard times. Hopefully, the Zapatero Rodríguez government will awaken from its dogmatic slumber and behave like a professional government and not just a bunch of weekend aviation enthusiasts proud of having gotten their model airplane off the ground. We have run into foul weather and need a steady hand.   

Saturday, May 19, 2007

Executive Compensation: Is This the Beginning of a New Era?

At Verizon, shareholders won by a narrow margin, with 50,16% of the vote, a direct voice in determining top management pay. The Verizon vote is part of a movement by shareholders, led by corporate governance reformers, to bring executive pay under control.

But for those of you who believe top management is paid too much, don't get your hopes up too high. While we may see fewer outrages, such as $140 million severance package Richard Grasso garnered on leaving the NYSE, it will do little to change executive pay.

What few people remember is that Richard Grasso's pay and severance package (a.k.a "deferred compensation") was based on "benchmarking" against the pay of other CEO's at large companies.

The Verizon shareholders, led by the 100,000 strong Association of Belltel Retirees Inc., have really asked for little more than tying pay to performance. In other words, they think it is fine for Ivan G. Seidenberg, Verizon’s chief executive, to enjoy a package worth $20 million just so long as he creates value.

This is nonsense. Measuring who is responsible for creating value in an large company like Verizon is at best an uncertain task. Verizon was the result of the merger of Bell Atlantic and GTE. In other words, Verizon is a descendent of the old AT&T, the former telecommunications monopoly. If Seidenberg had started the company, he could have become rich on his investment, but he took over the top position at a company with a 100 year plus history. He was not required to bring put up his fortune. He is a hired hand who works for the shareholders, at their pleasure. In order for him to be worth $20 million a year, they shareholders ought to be convinced that hiring someone for a $1 million a year would mean that the company would make at least $19 million less. The problem is that they don't know how to measure Seidenberg's contribution or compare it to what the contribution of a substitute would have been. Seidenberg's worth is, excuse the term, a matter of faith.

My argument, I realize, may strike you as even bigger nonsense. But in order for me to be wrong, then there must be a market for executives that requires multi-million dollar payouts. But if you believe, as I do, that there are probably hundreds of qualified executives who could run Verizon, and who would be willing to do it at a lot less money, then we have a classic case of market failure.

Figure out who creates value in cases of complex causality, e.g., financial performance at large companies, is not easy. As regards CEO's at these companies, there is significant human resource asset substitutability. In other words, value creation is not dependent on a specific someone holding the top post; what matters is that one of a large number of qualified someones is CEO.

In the quarter-century, CEO's have worked with their boards and executive pay consultants to create an imperial CEO who receives a treatment akin to that of a head of state and compensation that sets him apart from masses. Like the kings and priests of antiquity, his pay has instantiated within the social institution of the giant firm and, hence, decoupled from economic value creation.

If I were a shareholder of Verizon, I would limit CEO pay to $1 million a year, plus a modest pay-for-performance package that was part of company-wide profit sharing. But before anyone jumps on the bandwagon, a word of caution. My idea would surely fail. Verizon would be taken private in no time, thanks in part to favorable tax legislation; former Verizon executives would get rich on fees; and middle and lower level workers would get screwed.

Unfortunately the current system, with its institutionally legitimated inequalities, will endure. The imperial, super-rich CEO is an accepted social fact by the players who make the rules. In response to corporate governance reformers, the worst excesses will be rooted out, but the fundamental dynamics of corporate power and pay will not change. The reward for making it to the top of a huge corporation will continue to be incalculable wealth, warranted or not.

Subscribe

Colleagues and Guest Writers

November 2008

Sun Mon Tue Wed Thu Fri Sat
            1
2 3 4 5 6 7 8
9 10 11 12 13 14 15
16 17 18 19 20 21 22
23 24 25 26 27 28 29
30