The CEO Fallacy

The CEO as a unique corporate asset fallacy ignores the contributions and talents of all the other professional administrators in a large organization. These are the people who operate and maintain the functions of the day to day SG&A (selling, general and administrative) operations.

You know who they are - the people that actually cut the checks, create and execute the contracts, order the raw materials, manage the nuts and bolts of production, coordinate the temporary storage in-house of the finished products, and arrange for their delivery to the customers who pay for these goods when they require them.

This is how Bob Nardelli can go from being a CEO apprentice at GE, a financial conglomerate, to CEO of Home Depot, a hardware retailer, to CEO of Chrysler, an auto manufacturer, without missing a beat.

Ironically, the last CEO of Merrill Lynch, Stanley O'Neal, got his original executive suite experience in the finance side of the auto manufacturing business before coming over to the investment business to count beans.

Believing that there are only a few uniquely qualified individuals that can helm these companies defies all available logic.

The deal to merge Merrill Lynch could only have happened if Merrill survived long enough to consummate it, and if the purchaser had enough cash to tender at closing. Thain didn't raise the the 10 billion from his Rolodex to keep the doors at Merrill open - the U.S. taxpayers, vis a vis Henry Paulson, were the only people willing to risk this kind of scratch on a company that was selling its assets at an 80% discount to face value to try and stay liquid.

Bank of America didn't have the billions on hand it needed to hold up its end of the merger - there was no place on the open market at that time, or even now, that was going to give them the 15 billion they got, other than the TARP fund at the Treasury department.

I don't know if you remember that weekend (in all honesty, I had to refresh my memory of the details by looking it up myself) but Merrill Lynch CEO John Thain went into the weekend thinking he was going to BUY Lehman Brothers at a discount. But Merrill's financial position turned out to be so weak that Paulson had to twist Bank of America's arm to take Merrill before the markets opened the next Monday.

Bank of America could have gotten the same assets for a lot less a week or two later, because the markets were already gearing up to pound Merrill. The $29 a share they paid was a premium over market by $9 a share - something else that looked like it had Paulson's fingerprints on it.

The reason why I am taking the time to write about this is because what I am seeing out here are people who are beginning to do a very human thing - have sympathy for a man who may have a family, who may have committed to obligations that he now can't pay without getting that money. This is a fundamental problem in our society right now, this notion of the CEO as a "super administrator" who doesn't have to have any skin in the game.

Bad decision making and poor performance by their companies should result in harsh outcomes for these guys. When Delta Airlines here in Atlanta went bankrupt, the executives made more money while the company was in bankruptcy than they did when the company was making money.

Mr. Thain might have to sell his home or investment property at a steep discount because nobody is paying full price right now for real estate. His kids may have to go to public schools. He might not be able to meet the margin calls on his portfolio. He might find himself looking at a severely decimated retirement account.

My mother will tell you, "I really can't have a whole lot of sympathy for you if you're down to your last million."

When you face those kinds of real life risks, it sharpens your vision. It also makes you negotiate more salary upfront, and forces you to adopt a less expensive lifestyle or less extensive investment portfolio.

It is unconscionable for me to worry about the problems of this rich man or his buddies. If he doesn't work another day in his life, enough money has gone through his hands to assure him of a lifetime of decent food, shelter, and clothing. If his entire existence has been predicated on never hitting a bump in the road, well, then maybe he shouldn't have been a CEO in the first place.

For what Thain accomplished last year, you or I could have sat at his desk and done the same thing. Reducing headcount or figuring which asset to sell next doesn't really require an MBA. The people who report to CEO's not only do the grunt work - they will recommend a course of action for him to take at no extra charge.

So we ought to get us one of these CEO gigs. I bet we could get through a whole year with only a few stock phrases.

"So run those options by me again?"

"Let HR have a look before we go any further with this."

"Is legal on board?"

"Shoot that to the CFO so he can scrub the numbers."

"So the statement I'm going with on the conference call lines up with the press release, right?"

"I like the way you're thinking here, but we're going to have to review it to see if its headed in the direction we're trying to take the company."

"I thought I told you I needed to see a 20% cut in operating expenses?"

"And if I can get the entire board behind this, the adoption of these new policies will strengthen our customer relationships by aligning our core competencies with our mission statement."

"I'll have to get back to you on that one."

"We're looking into it."

"Our initial timeline on this particular milestone may have been a little aggressive, so we're going adjust our forecast on getting this completed from first quarter to third quarter."

"Due to recent challenges and unforeseen market events, we are going to readjust our earnings expectation for the year slightly downward, but expect to rebound by the second quarter."

Hell - I look good in suit, and can contort my face to whatever level of gravitas is needed to convey the right amount of earnestness for a photo shoot or an interview. Maybe I'll give this CEO thing a whirl.

The worst that can happen is...well, I guess the worst that can happen is if they keep me on, because if they fire me...


...I think I'll take my golden parachute money in small bills.

Why Big Three Push $70 Per Hour Wage Fallacy

I was watching the news the other night when I heard Brian Williams read off of his teleprompter "retailers fear lower consumer spending will translate into sharply reduced 4th quarter earnings." This led into a two minute report from a mall somewhere about how sluggish holiday sales have been after Black Friday. Then a couple of commercials came on.

After the break, Williams then proceeded to read this tidbit off of his teleprompter, without a trace of irony - "reports indicate that the savings rate of the average American is lower than it has been at any time in the last thirty years" - nor a change in tone or cadence from his earlier pronouncement that consumers had to "start spending more" if retailers had any hope of staying in the black this year.

"Damn," I said to S., "looks like we just can't win - we should be saving and spending at the same time. No wonder people are losing their minds."

I was about to leave the room, reminded by these back to back statements why I didn't watch the news, when they switched to a story about the bailout talks on Capitol Hill between Congress and the Big Three automakers. The story was led by a snapshot of an assembly line overlaid with graphics that read "U.S. Autoworkers - $70/hour average wages".

I had to clench my teeth to keep from howling manically in outrage. After a couple of deep breaths, I said to S. "it's this kind of blatant bullshit reporting that gets me hot. Over $25 of that figure are costs that the corporations agreed to pay for benefits to old employees, costs that do not benefit the person who is working at all. Moreover, these companies have already set aside enough money to cover most of this cost. Do the news people just take the press packets and regurgitate them these days?"

EXCERPT from "Assembly Line" by Jonathan Cohn in The New Republic

According to Kristin Dziczek of the Center for Automative Research--who was my primary source for the figures you are about to read--average wages for workers at Chrysler, Ford, and General Motors were just $28 per hour as of 2007. That works out to a little less than $60,000 a year in gross income--hardly outrageous, particularly when you consider the physical demands of automobile assembly work and the skills most workers must acquire over the course of their careers.

More important, and contrary to what you may have heard, the wages aren't that much bigger than what Honda, Toyota, and other foreign manufacturers pay employees in their U.S. factories. While we can't be sure precisely how much those workers make, because the companies don't make the information public, the best estimates suggests the corresponding 2007 figure for these "transplants"--as the foreign-owned factories are known--was somewhere between $20 and $26 per hour, and most likely around $24 or $25. That would put average worker's annual salary at $52,000 a year.

I couldn't watch anymore.

Why are the corporate spin doctors pushing this $70 an hour narrative so hard? Because they know what I know - that if they don't get the airwaves filled with half truths first, someone might decide to start delving into the really juicy stories, the ones that involve the details of executive compensation packages.

Think about it - you've got the three CEO's from the automakers on TV all week - doesn't it strike you as odd that not one in-depth report on the details of their compensation arrangements has been broadcast by the major news outlets? That not one executive compensation specialist has been featured, with accompanying graphics that show U.S. auto execs incomes as compared to, say, the Japanese auto execs?

These are the real legacy costs, the ones that will get paid even if the ship sinks.

A few tidbits, gleaned from the Too Much Online, the website of the Council on International and Public Affairs, might give you a better sense of perspective on all this.

In the fiscal year that ended in March 2007, Toyota’s top 32 executives — a group that included CEO Katsuaki Watanabe — together pulled in $7.8 million in bonuses on top of salaries of $12.1 million. For the comparable period, one single GM exec, CEO Rick Wagoner, raked in $10.2 million.

Then again, it probably takes a lot more effort, ingenuity and know how to consistently lose market share, reduce profitability, and ignore consumer desire than it does to run a company successfully.

Back in 1984, to discourage the then-emerging golden parachute phenomenon, Congress stuck executives with a 20 percent tax penalty on any “change of control” termination pay that exceeded over three times an executive’s average pay for the previous five years.

These taxes can mount up quickly.

The really “gross” part: Most of these executives, explains this new RiskMetrics report, will not have to pay a penny of income tax on their severance windfalls. Their companies will pay the taxes for them.

I don't know if the same definition of wealth redistribution applies to the kind of free market capitalism to which the American captains of industry subscribe. But if my math serves me correctly, when a collective like a corporation, that is owned by millions of shareholders, including many of the people it employs, reduces the earnings of the collective to pay for the tax burden of an individual executive, that is an example of the redistribution of wealth that is so clear cut it could be used to illustrate a high school economics textbook.

The bailout legislation that Congress passed earlier this fall barely puts a dent into any of this. Under the bailout, execs whose companies get gobbled can still collect up to three times their recent average annual pay in severance — and, if their company “grosses up,” not have to worry about paying taxes on any of it.

Can you recall, just off the top of your head, anybody bailout executives other than the Big Three CEO's who have been asked to alter in any way their employment agreements with their "on the brink of failure" companies, the ones that couldn't go on another month without a quick multibillion dollar rescue?

I couldn't think of any either.

Corporate boards are rushing this fall to change how they measure executive “performance” — and the new yardsticks they’re adopting let execs claim they’re “performing” fine even if a company’s share price and profits are shrinking.
“With the stock market in tatters,” reports Financial Week, companies are “shunning such traditional incentive-pay factors as earnings per share.”
Among the new CEO performance yardsticks: easily manipulable measures like “customer satisfaction” or progress on meeting “environmental” standards.

I joked yesterday that "peeing straight" must be one of the new corporate metrics, because that's the only target these guys could possibly have been hitting. With performance yardsticks like "customer satisfaction" being considered, I guess "accurate waste elimination" can't be too far down on the list.