American Society

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2
Sep 10

The Economy at Street Level

While we have examined macroeconomic issues extensively, rarely do we focus on the micro. We need to look at what is happening to real people.  Examining economics at street level is not as scientific or as mathematically precise as our econometric brethren would be.  We would probably fail the basic intro econ course at a prestigious academic institution.  Nevertheless, the timeless philosopher, Yogi Berra, says it well: “you can observe a lot by just watching.”

Walking

The best way to learn what is going on somewhere is to walk, not drive.  I live in a small city, a bedroom community for a larger city.  The median family income is $62,000 and the per capita income $35,000.  The city is racially diverse and attempts to cater to its upscale resident consumers.  Dropping my car for service at the local auto dealer (there are Porsche, Volvo, Mercedes, Lexus, Subaru and Buick dealers within walking distance),  I politely declined the courtesy shuttle and, to observe business conditions, walked home.   Covering about a mile through one part of our retail  and commercial district, I observed the following:

  • Ten retail establishments were vacant.
  • Each of several small office buildings had “space available” signs.
  • Each of the apartment buildings and garden apartment complexes I passed advertised one and two bedroom apartments for rent.
  • An office building which started construction six months ago has not progressed.
  • Almost every retail establishment had sales in progress, and restaurants advertised specials.
  • A major wind and rain storm hit our city in March.  Several damaged city trees have not been removed and badly buckled sidewalks have yet to be repaired.

Listening

The economy continues to impact friends, neighbors and family.  Here is what the Washington beltway political elites are not hearing:

  • One question, I regularly ask: on a percentage basis how much has your income declined from your most recent peak earnings year?  Other than one medical specialist who said his income has not declined, the response is a decline of 25-50%.
  • For an over-fifty executive, attorney, senior information technologist or finance specialist the job prospects are almost nil.   These are highly trained, experienced competent individuals who have been out of work from one to two years.  Unarticulated age discrimination is endemic in our system.  This type of candidate probably has a better chance of getting hit by a meteorite than getting a full time position with a firm.
  • Sending a high school senior to the state university has come back in vogue.  In the past, State U lacked the cache of the Ivy League or better private schools.  Suddenly this option has gained new luster.
  • Instead of the direct path to graduate school, new college graduates, even Ivy League grads, are scrambling for jobs.  Many new alumni of prestigious universities are interning with no pay or $10 per day stipends.  The entire economic value of graduate and even undergraduate degrees is under question.
  • Overseas vacations are out and domestic, and automobile vacations are in.  And we’ve all recently heard a new word:  staycation.
  • Since the banks have tightened lending requirements, the re-sale house market is virtually dead.  Sellers cannot find qualified buyers.
  • Small business owners and professionals have had their credit lines reduced, which de facto has cut back on business expansion.
  • Friends who are doctors and dentists are finding that they cannot fill their weekly schedules and are going to 3 and 4 day workweeks. Even in large firms, attorneys are having difficulty generating billable hours.
  • Home equity lines have been slashed, further undercutting spending plans.  I question why some of my high earning friends were using these lines for luxury expenditures in the first place.

It May Not Be Science but It Is Real Life

Again I have presented “street level” anecdotal information on the real economy.  I believe this anecdotal information more accurately presents the state of the economy, compared to the endless cheerleading from financial media and the Administration.

Perhaps some of the elite should bring their own cars in for service, avoid the courtesy shuttles, and walk home.    Rather than this cheerleading, what Yogi might say about our current recession is the real truth for many people: “it ain’t over until it’s over.”

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30
Aug 10

Memes of the Rich and Famous

Memes (as in “creams”) are cultural ideas that are transmitted through media.  Memes are the cultural analog of genes.  We have numerous transmitters: social networking sites, television, blogs, and print media.  Our focus on the rich and their separation from the rest of American society is a growing meme.  Recent articles have raised the question of whether or not America is becoming two societies, the rich and everyone else:

Voyeuristic focus on the rich has always been an American obsession.  “Lifestyles of the Rich and Famous” obsessively peered into the lifestyles of wealthy athletes, entertainers and business people.  The show ran for eleven years.   The rich are now objects of scorn: hedge fund managers making money from the housing collapse; bankers, on the brink of bankruptcy, awarding themselves huge bonuses thanks to government loans and guarantees; and corporate executives receiving gigantic severance packages after corporate wrongdoing. See, e.g. Following the Hurd

We have moved beyond voyeurism and scorn.  Our anger at the rich suggests economic and political upheaval.

The Rich Separate from Us

Michael Lind’s article in Salon, Are the American People Obsolete? appears to be the genesis of this meme:

Have the American people outlived their usefulness to the rich minority in the United States? A number of trends suggest that the answer may be yes.

In every industrial democracy since the end of World War II, there has been a social contract between the few and the many. In return for receiving a disproportionate amount of the gains from economic growth in a capitalist economy, the rich paid a disproportionate percentage of the taxes needed for public goods and a safety net for the majority. See Are the American People Obsolete?

We have always needed ordinary people as consumers and soldiers.  But now globalization has undercut the first part of this bargain at the nation-state level.  The middle classes in China and India are more intriguing customers than debt-ridden, unemployed Americans. They are also cheap and productive producers.  For the second part, a volunteer professional military undercuts the bargain even further.

Lind points out the economic and political consequences of this new social contract:

If the American rich increasingly do not depend for their wealth on American workers and American consumers or for their safety on American soldiers or police officers, then it is hardly surprising that so many of them should be so hostile to paying taxes to support the infrastructure and the social programs that help the majority of the American people. The rich don’t need the rest anymore.  See Are the American People Obsolete?

Bring Back the Robber Barons

Previously, we discussed the role of the nineteenth and twentieth century American entrepreneur in Bring Back the Robber Barons.   Lind focuses on the same point:

As bad as they were, the robber barons depended on the continental U.S. market for their incomes. The financier J.P. Morgan was not so much an international banker as a kind of industrial capitalist, organizing American industrial corporations that depended on predominantly domestic markets. He didn’t make most of his money from investing in other countries. See Are the American People Obsolete?

The robber barons were integrated into American society, not living in privileged enclaves like Greenwich, Princeton or Palo Alto or foreign equivalents of London, Hong Kong or Singapore.  Thus, it was natural for the robber barons to focus their philanthropy in America.  Our new citizens of the world have a different mindset:

…philanthropists may be inclined to devote most of their charity to the desperate and destitute of other countries rather than to their fellow Americans.  See Are the American People Obsolete?

Implications

Richistan, A Journey Through the New American Wealth Boom and the Lives of the New Rich, describes the rich becoming their own virtual country.  The new rich feel no civic obligation or shared sense of sacrifice.  They can default on mortgages and avoid military service for their children.  We have written about a different time in America where even the scions of the rich and powerful felt obligated to join the war effort to defend the nation. See e.g. A Reputation as Good as Goldman Part II.   Now we hear whining and threats: “if the Bush tax cuts are repealed we will leave the country.”

Unwittingly, the Obama Administration has enabled the petulance of the rich by supporting the banks and Wall Street to the detriment of Main Street.  Faced with threats of emigration, it remains to be seen whether the Administration has the gumption to let the Bush tax cuts expire.  Apparently, the rich are ready to depart the United States if marginal tax rates rise from 35% to 39.6%.  We are not exactly talking about conscientious objectors to the Vietnam War fleeing to Canada.

We have learned much about the new rich, and it is not all to the good. Paraphrasing Sir Winston Churchill, we have already established their virtue; we are only haggling about their price.

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19
Aug 10

Artificial Sweeteners

Artificial sweeteners have been the subject of health concerns.  Aspartame, for example, has been found to be a migraine headache trigger.  Products containing it carry a health warning for PKU, a rare hereditary disease.  Today we learn that diet sodas markedly increase the risk of pre-term deliveries.  See Add Diet Soda to the List of Things to Avoid While Pregnant.

Similarly, the Federal Reserve and the Administration have not trusted that the economy can heal through natural market forces.  Instead we have been served up the economic equivalent of artificial sweeteners.  Concerned by slow growth, not even negative growth, the government again is firing up the machinery for money printing and stimulus.

In each instance, the government is intervening, distorting, and artificially “sweetening”  the bond market, the housing market and, indirectly, the stock market.  What are the consequences?

There is No Free Lunch

Martin Hutchinson in The Peril of False Bottoms targets faulty government policy as the reason for our anemic economic recovery.  Excessive economic stimulus and a misguided zero interest rate policy has created false bottoms in the housing and stock markets.    A false bottom is defined as a stabilized “price far above the likely long-run price equilibrium of the assets concerned.”

Bernanke has precedent for providing excessive liquidity and holding interest rates too low for too long.  Greenspan reacted to the internet stock market crash by flooding the market with liquidity.  Doing this drove the market to over 14,000 on the Dow Jones Index and created a housing boom.   In the 2008-2009 real estate and stock market crash we learned  how flawed this policy was.

More on False Bottoms

Hutchinson points out federally inspired housing market distortions:

House prices are currently 47% above their level in January 2000, according to the S&P Case-Shiller 20-city index, compared to a 49% rise in prices since that time – in other words, they are in real terms at the same level as at the top of an immense speculative boom.During the recent contortions, the U.S. monetary and fiscal authorities have established false bottoms in two markets. The first is housing, where subsidies to first-time buyers, ultra-low mortgage rates, government guarantees on $700,000 home mortgages and foreclosure-avoidance schemes have prevented the housing market from falling even to its average level where the average house price is about 3.4 times average earnings. The Peril of False Bottoms

These misguided policies have consequences:

…with additional buyers having been sucked into the market, it is now likely that house prices will fall further than this. Indeed, if the appalling suggestion put forward last week that the government through Fannie Mae and Freddie Mac forgive $1 trillion of defaulted home mortgages is put into effect, they will undoubtedly do so. Nothing could be more designed to destroy confidence in the housing market than a massive subsidy to the most foolish and improvident home buyers, at the expense of the thrifty and careful renters who are the major source of potential new demand for housing.

If the buyer pool is attacked in this way, or forced into unnecessary losses by being made to buy too soon, house prices may not bottom out at the market-clearing level … but may continue falling.  The Peril of False Bottoms

Wither the Stock Market?

The stock market is the second false bottom:

Currently at 10,650 as I write, the market is 35% above its appropriate “middling” target. The “trailing” P/E ratio of 20.4 on the Standard and Poors 500 is also above its historic average, even though corporate and bank earnings are currently inflated by ultra-low financing costs and a steep yield curve. Thus at some point we can expect reality to intrude, and the market to drop to its likely cycle low in the region of 5,000 on the Dow Jones index.

Again market prices are too high for any intelligent buyer.  And worse, buyers will then be unavailable to buy stocks at the bottom. The Perils of a False Bottom

Politics v. Economics

Politicians are worried about the next election.  Thus, we see the desperation of the Administration to throw economic caution to the wind.   Zero interest rates, forgiveness of imprudent debt, subsidies to overpaid public sector workers (with no corollary “give backs”) are all hallmarks of erratic and misguided government policy.  They also sacrifice long-term prudence for the feel good of short term stimulus.

Who will pay this price?  Unfortunately, it will be stock market investors, pension plans, life insurance companies and homeowners.  Directly or indirectly, that is virtually all of us.  We need to beware politicians handing out artificially sweetened candy. Just like aspartame and our physical health, artificial economic sweeteners can be harmful to our financial health.

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16
Aug 10

Bring Back the Robber Barons

Bill Gates and Warren Buffet have encouraged wealthy families to give half their wealth to charities, and many have done so.  One year into the effort, Buffet announced that forty families have agreed to pledge more than half their wealth to charity.   Emblematic of our current age, most of these families have made their money in the finance industry.

A Different Time in America

Once upon a time in America there was an entrepreneurial class that did more than shuffle pieces of paper.  They produced real things.  Historians originally referred to this group as “Robber Barons” because the large fortunes they amassed involved ruthless and sometimes uncompetitive business practices.  While some made their fortunes in finance, the overwhelming majority laid the foundation for America’s 20th century industrial dominance:

  • John Jacob Astor  (real estate, fur)
  • Andrew Carnegie (steel)
  • Jay Cooke (finance)
  • Charles Crocker (railroads)
  • Daniel Drew (finance)
  • James Buchanan Duke (tobacco)
  • James Fisk (finance)
  • Henry Morrison Flagler (railroads, oil, the Standard Oil company)
  • Henry Clay Frick (steel)
  • John Warne Gates (steel)
  • Jay Gould (railroads)
  • Edward Henry Harriman (railroads)
  • Milton S. Hershey (chocolate)
  • Mark Hopkins (railroads)
  • J.P.Morgan (banking, finance, steel, industrial consolidation)
  • Henry B. Plant (railroads)
  • John D. Rockefeller (Standard Oil)
  • John D. Spreckels (San Diego transportation, water, media)
  • Leland Stanford (railroads)
  • Cornelius Vanderbilt (railroads)

These individuals were also the backbone of American philanthropy.  For example, think of:  Carnegie (libraries); Rockefeller (University of Chicago, the Rockefeller Foundation) and Leland Stanford (Stanford University).  The Robber Barons not only focused on industrial wealth creation.  They were equally concrete and focused in charitable giving that provided tangible benefit to American institutions and society.

In contrast, the Gates Foundation focuses on world health concerns, a worthy but certainly more amorphous goal.  As an aside, the Gates-funded vaccination and AIDS treatment programs have received criticism for singular focus on certain diseases to the derogation of comprehensive health care and diversion of important medical resources.  Few of the Gates Foundation initiatives benefit Americans.

The Over Financialized Economy

The wealthy donors signing on to the pledge are one more reminder of the over financialized American economy.   See The Mirage of a Financialized Economy; The People v. Wall Street.  Today’s fortunes were earned at the expense of the industrial economy, rather than in pursuit of its success.   Two recent commentaries support the deleterious effect of an economy over-focused on the financial:

Boston-based asset manager Jeremy Grantham in Summer Essays criticizes his own profession:

“In 1965, 3% of GDP that was made up of financial services [and that] was clearly sufficient to the task, the proof being that the decade was a strong candidate for the greatest economic decade of the 20th century. We should be suspicious, therefore, of the benefits derived from the extra 4.5% of the pie that went to pay for financial services by 2007, as the financial services share of GDP expanded to a remarkable 7.5%.

This extra 4.5% would seem to be without material value except to the recipients. Yet it is a form of tax on the remaining real economy and should reduce by 4.5% a year its ability to save and invest, both of which did slow down. This, in turn, should eventually reduce the growth rate of the non-financial sector, which it indeed did: from 3.5% a year before 1965, this growth rate slowed to 2.4% between 1980 and 2007, even before the crisis.”

Professor Steve Keen, an Australian economist and author of Debtwatch believes that the percentage of GDP going to the financial sector should be even lower:

Because of that debt level, bank profits have gone through the roof as a share of GDP. Back before we had a financial crisis—when debt levels were far lower than today—so too were bank profits as a share of GDP. A sustainable level of bank profits appears to be about 1% of GDP.  See Bank Profits a sign of economic weakness, not health

Bring Back the Robber Barons

We need a political and economic re-set button.  The Obama and Bush Administrations have attempted to uncritically favor the financial sector through loan guarantees, TARPs and other artifices.  No one has asked the critical question of why we are favoring this sector that has absorbed a disproportional share of GDP at the expense of a productive reality-based economy that makes real things and employs real people.

No wonder unemployment has remained stubbornly high, and the economy is poised to enter a “double dip” recession.  Perhaps we need a new class of wealthy people focused on creating real wealth and jobs in America.   Maybe it is time for some twenty-first century Robber Barons.

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12
Aug 10

Hurd Roundup

DS, a Human Resources Vice President and former colleague, is an expert on organizational behavior, leadership training and executive development.  After reading Following the Hurd,  he provided these comments:

Another aspect of these cases that still continues to amaze me – as a former leadership development guy – is that all of our efforts (and expense) to instill and develop in leaders the decisions, actions and behaviors associated with good and moral leadership is largely ineffective and neutralized in the presence of the self-affirming/aggrandizing bubble (as you describe) that surrounds characters such as Hurd.

The other element at play I believe has to do with emotional age when assuming the top position and tenure in the job.  Back in the day, executives didn’t get tapped for these jobs until they were pushing 60 or so and maybe they would have a run of five years.  Early in their tenure, the leader almost always navigated the first crisis (usually a business crisis, but sometimes personal).   Given their five year window, back then, they almost never had to deal with a second crisis of major magnitude – they went off into retirement, revered.  The next guy then came in and repeated the same process.

But today, executives are quite a bit younger at appointment, imbued with certainty, looking to prove their virility and more easily seduced by power.  Their anticipated tenure could easily exceed ten years.  Likewise, the top jobs are now of such staggering complexity (cognitive, physical and psychological), that few air-breathing humans can actually perform them well, by themselves – thus the trend toward Office of the Chairman, Executive Leader Council and other rickety power-sharing, “star-chamber” arrangements.  The business environment and the operational tempo today almost guarantees that they will experience a major crisis (business or personal) every 18-24 months.  Like their forebears, they’ll handle the first one just fine, for a variety of reasons they will be unable to navigate the second crisis.  The odds and time itself are against them and they are ill-equipped (on many levels) to prevail.

Add that to the dirty water they are swimming in inside the “bubble” and you have a predictable (maybe unavoidable, though I’d hate to concede that) outcome.

Surviving a Crisis

DS’ additional thoughts on CEO crisis management:

The reasons why they handle the first crisis well are at least twofold -

Early in their tenure their sense-making skills are at their peak – primarily because of the novelty of a new job/environment, they are listening to many sources of input, they are open to new ideas and haven’t wall themselves off in the star-chamber and surrounded themselves with sycophants.  Ironically, the fact that they are short on “experience” in the new situation works to their benefit because they avoid the traps that come with believing they are “familiar” with what is going on.  Big ears trump experience!

Second, they make quicker and more confident decisions early on vs. later when their decision-making slows and they become more risk averse.

With the passage of time on the job, the factors reverse themselves – they stop listening and their reaction and decision-making time slows down.  This is ironic since they have had the opportunity to accumulate helpful experience.

Voila!  Train wreck!

Unfortunately, the Mark Hurd saga is not an isolated instance.  American business has seen a spate of ethical lapses and high level departures. See Ethical Lapses Felled Long List of Company Executives.

Final Thoughts

Hurd’s departure has left a void and recriminations.   The acting CEO is desperately trying to reassure customers, Wall Street and employees that all is well and it is business as usual.   The Board is commencing a search for a new CEO.  Given the fast moving nature of the technology industry, Wall Street is openly worried about a delay in finding a successor.  Finally, the Board is miffed that Hurd did no depart quietly, but sought to vindicate his actions and preserve his reputation. See Digits Live Show: Mark Hurd Isn’t Leaving H-P Quietly

Perhaps the Board should spend less time searching for a cost cutting guru or the next creative Steve Job-like creative genius, and more time and thought on the moral character of Mr. Hurd’s successor.

If my colleague is correct, Mr. Hurd will not be the last CEO to exit in an ignominious fashion.

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11
Aug 10

Awash in Legacy Costs

Legacy costs have strangled many American iconic and venerable American industrial firms.  The automobile and steel companies are recent victims of this growing scenario:  diminishing work force and profits supporting large and growing pension and retiree medical costs.  In many instances bankruptcy has been the corporation’s only way out.

The Financial Dictionary defines legacy costs in the private sector as follows:

Ongoing costs to a company that come from funding activities that, by definition, do not increase revenue. Perhaps the most prominent example of legacy costs is the funding of pension plans. Legacy costs often accrue when a company takes on too many responsibilities in times of strong performance or when it takes on an appropriate level of responsibility and then its priorities change.

Legacy costs also include retiree medical, life insurance and other promised benefits.

The recent turmoil in the financial markets has revealed a potentially larger legacy problem.  Not only is private industry suffering this stranglehold; legacy costs are also drowning state budgets in red ink. Like private business, the public sector is also saddled with pension, retiree medical and life insurance benefits.   Completing the analogy, many of these costs were taken on when state tax revenues (think profits) were high.  Politicians avoided confronting public employees and unions and chose the path of least resistance; that is, they capitulated to exorbitant demands.  Then they compounded the problem:  instead of direct layoffs, states resorted to early retirement pension sweeteners, which depleted pension assets.

The Current Status of Public Pension Plans and Other Benefits

On August 6th, the New York Times reported the massive underfunding of public pensions.  See Battle Looms over Huge Cost of Public Pensions. The Times discovered a February Pew Center for States study showing a $1 trillion pension underfunding. (We could have a whole different post as to why it took until August for the Times to report a study published in February.)   Worse yet, the Pew study may have been overly optimistic.  In other words, their methodology understated the liability and the deficit.  In contrast, the National Center for Policy Analysis’ Unfunded Liabilities of State and Government Employee Retirement Benefit Plans found that states were using too high a discount rate to determine employee liabilities.  Under the National Center for Policy Analysis deficits are far more alarming:

  • Unfunded liabilities for health and other benefits are
    $558 billion, compared to the reported $537 billion.
  • Thus, total unfunded liabilities for all benefit plans are an
    estimated $
  • Unfunded pension liabilities are approximately $2.5
    trillion, compared to the reported amount of $493 billion.
  • 3.1 trillion — nearly three times higher than
    the plans report. See Reality Beckons (Government Pensions)

While pensions are funded, other benefits like retiree medical, vision and dental have no assets side aside to fund them.  Moreover, based on current trends, medical costs are growing exponentially.

The New Battle Ground

Colorado undertook modest changes to its pension plans to lower future pension payments. The state legislature reduced its cost of living adjustment cap from 3.5% to 2%. The result was an immediate lawsuit from public employees:

Earlier this year, in an act of rare political courage, a bipartisan coalition of state legislators passed a pension overhaul bill. Among other things, the bill reduced the raise that people who are already retired get in their pension checks each year.

This sort of thing just isn’t done. States have asked current workers to contribute more, tweaked the formula for future hires or banned them from the pension plan altogether. But this was apparently the first time that state legislators had forced current retirees to share the pain.

Sharing the burden seems to be the obvious solution so we don’t continue to kick the problem into the future. See Battle Looms over Huge Cost of Public Pensions

Employees view their pensions as inviolable contracts, while the state is invoking changes as actuarial necessities.

Who Thinks About the Taxpayers?

Taxpayers are facing unemployment, the risk of losing their jobs and increasing costs of education, medical and energy.   Public employees are well paid, largely insulated against layoffs, and receive top of the line current and retiree benefit packages.  Barron’s points out that: “[m]ost public employees, if they hang around to retirement, can count on pensions equal to 75% to 90% of their pay in their highest-earning years.”  The $2 Trillion Hole.  Frequently, supervisors and employees collude to inflate final pay with shift and overtime pay in the last year of work.  Current and retiree medical benefits require minimum or no contribution.

In contrast, private sector benefit plans pale in generosity to public benefit plans.  I worked for a company for 32 years and my pension is a little more than 40% of my last five years of pay.  Retiree medical requires a 20% contribution.   Our plans had no cost of living adjustments.   My company’s plans were probably in the top 5% of benefit plans in America.   Most companies offer little more than a basic medical plan and no retiree benefits.

The federal government will soon run out of borrowing capacity.  In addition, there are questions of federalism; that is, the states are supposed to be responsible for their own finances.   Federal and state legislators and public unions  have to be far more realistic than they have been.  If they are not,  some of our largest states (think New York, New Jersey, California, Illinois) will suffer as did  GM and  Greece:  drowning in legacy costs.

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9
Aug 10

Following the Hurd

On Friday, the stock market shook with the news of the announced resignation of Mark Hurd, CEO of Hewlett Packard. The man credited with reinvigorating Hewlett Packard resigned as chief executive of the technology giant after an investigation of his relationship with a female contractor.  That investigation revealed that he violated the company’s business standards.

On Friday, HP expanded that Mr. Hurd, 53 years old, didn’t violate the company’s policy regarding sexual harassment.  He  had however, submitted inaccurate expense reports intended to conceal what the company said was a “close personal relationship” with a female consultant.  See H-P Chief Quits in Scandal

In a memo to all HP employees, acting CEO Cathie Lesjak provided more detail:

“Mark had failed to disclose a close personal relationship he had with the contractor that constituted a conflict of interest, failed to maintain accurate expense reports, and misused company assets.” See H-P’s Hurd Reaches Settlement with Contractor

The Wall Street Journal later learned that Mr. Hurd and the contractor reached a settlement on the sex harassment claim.

Some Thoughts on Corporate Culture

A mystique surrounds CEOs of large, publicly traded corporations.  The CEO of such a corporation is as close to a feudal lord as one can get in 21st century America.  A CEO is surrounded by a myth making machine.   A VP of Public Affairs burnishes the image of the CEO as powerful and successful, minimizes setbacks and trumpets the smallest of victories.  The CEO can access airplanes and limousines, play golf at the best clubs, dine and stay where he or she chooses with little or no oversight.   Backed by corporate political action committee contribution funds, he or she has instant access to Senators, Congressmen and even the White House.   A fawning and largely uncritical cadre of financial media pundits and Wall Street analysts clamor for opportunities to meet and interview a CEO.

Since corporations are a hierarchy and a CEO sits atop the organizational pyramid, subordinates are generally fawning.  Fearing unemployment, few want to tell the CEO (the emperor?) he or she is wearing no clothes, or should be staying clothed at critical moments.

Absolute Power Corrupts

“Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men.”  Lord Acton

With few to hold up a critical mirror, CEOs eventually start to believe their own press clippings and may even succumb to believing in their own infallibility.   Forgetting that it is often the office and rank that is being saluted, not necessarily the occupant, the tendency is for the CEO to believe they can do no wrong.

Blind spots eventually develop.  As with CEO’s, we have seen it with our more notorious Congressmen who believe that the tax laws do not apply to them, it is alright to have sex with subordinates, or obtain below rate mortgages.  Eventually comes the belief that the “rules do not apply to me.”  To their dismay, they find out often publicly and harshly that rules do apply.

Some Final Thoughts

I am always amazed when stories like Mr. Hurd’s reach headline status:

-          Why do CEOs risk so much for so little?  Mr. Hurd made $24.2 million dollars in 2009 and was slated to make $100m over the next three years.   How much could the dinners and trips have cost Mr. Hurd if he had paid from his own pocket?

-          Companies have strict policies on sex harassment and expense reporting.  Numerous high level executives have been publicly disgraced and lost their positions for such violations.  Mr. Hurd is a very smart man. Why did he not learn from others’ experience?

-          I have lectured on the EEOC Sex Harassment Guidelines.  The best defense in the workplace is to avoid dating any subordinate or contractor.  Once any personal relationship develops and then breaks off, it is difficult to prove that no harassment occurred in this unequal power relationship.

-          Why did HP’s internal audit function not find the expense report abuses and report them? Why did it take the complaint of the contractor for the Board to order an investigation?

-          Why did Mr. Hurd receive over $12m in severance pay when the Board found expense reporting improprieties?  Isn’t that behavior a “for cause” termination? (Note –if Mr. Hurd had a contractual right to severance regardless of this behavior, that itself is problematic.)

Not all CEOs behave like Mr. Hurd.  Certainly, and in my experience, many are ethical and hardworking.  But unfortunately, Mr. Hurd’s tale occurs far too frequently in corporate America.

Outside corporate governance groups have mindlessly over focused on pay practices, staggered voting and other relatively minor issues.   Focus should be on close corporate Board of Director supervision of CEO and senior executive behavior.   Aside from all the logical and obvious reasons for eliminating this behavior is the other external one as well:  the market generally reacts swiftly to this chicanery.  On Friday, HP stock was down a significant 9.7 %.  Following the Hurd can be quite costly.

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3
Aug 10

The Two Americas

Taking a vacation is a great way to expand one’s perspective.   For the past several years our family has vacationed in the Berkshire mountains of western Massachusetts.   There is nothing better than to get away from the congestion of the New York metropolitan area, breathe the clean mountain air and experience cool nights with low humidity.  To expand business perspective, it is also an opportunity to take a break from the mindset of friends and colleagues in the financial industry and observe the other America.

A Look at the Other America

Anecdotal economic observations can be hazardous, but probably no worse than a day watching CNBC for what passes as economic wisdom.   While the folks at CNBC are constantly finding signs of economic recovery, I did not see such signs.  In fact, things in western Massachusetts seem a little worse than last year.  The area is interesting, with some contrasts and paradoxes.  Old industrial America is still in evidence, for example GE Plastics in Pittsfield, which is now SABIC Innovative Plastics, Saudi Arabian owned.  The vacationing financial elites from Boston and New York can enjoy fine restaurants, upscale galleries, museums and cultural events that are active in the summer there, while year-round residents shop for food, clothing and necessities in decidedly middle or lower class venues because there are few others to be found.

Some observations:

  • The Boston Symphony Orchestra performances at The Tanglewood Music Festival were sparsely attended.  In years past tickets had to be purchased months in advance and one would have to arrive hours before a concert to get a picnic spot on the lawn.  We were able to purchase seats and find a central picnicking location near the music shed 45 minutes before the concert.  The shed itself was about half full.
  • Lenox has a large, modern, Super Stop and Shop.  At 7 PM on a Monday night we counted exactly four customers in the store.  We made several food buying trips during the week and each time employees outnumbered customers.
  • Tickets for the summer theater festivals are usually nearly impossible to purchase, as most tickets are reserved for subscribers.  Just hours before curtain we purchased great orchestra seats for two well reviewed shows, Lombardi and After the Revolution.  Both shows are scheduled to open in major venues in New York in the fall.
  • It is back to school shopping season.  Despite large sale postings, WalMart had few customers in the store.  I noticed many of the shoppers using food stamps for grocery purchases.
  • I asked a local clergyman how his congregants were faring during the economic downturn.  His view is that if one is not a doctor attached to the regional medical center or an attorney, it is extremely difficult to earn a living.
  • Previously popular restaurants, that required reservations in advance, invited us to come virtually any time. When we arrived the restaurants were half full.
  • Everywhere we went, high end retail and commercial space was empty and available to lease.

Two Americas

The Bush and Obama administrations made a conscious decision to provide bailouts to Wall Street and the unionized auto industry.  Small business and the middle class have been left behind.   It is not just rumor:   there are two Americas and the other America is seeing no signs of recovery.

Today’s headlines emphasize the divide between these two Americas:

-          Wells Fargo/Gallup Small Business Index Hits Record Low, Future Expectations Dip Below Zero First Time Ever

-          Pending Home (Sales) Fall to Record Series Low in June

-          Personal Income, Spending Flat in June

If western Massachusetts is any indication, the November elections will be quite interesting.

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29
Jul 10

Silence and Mystery

I don’t usually read the Sunday New York Times Styles section.  This headline, however, caught my attention: Whatever Happened to Mystery? Author Ben Brantley’s thesis is that we live in an age of media over exposure.  He rhapsodizes about a simpler time when media constituted film, radio and television, and the occasional paparazzo in vain stalked Jackie Kennedy or Princess Diana.  With personal websites, Facebook, YouTube, Twitter, MySpace and other social media, we and celebrities are exposed to one another 24/7.  In a 2010 media world, Greta Garbo could not have burnished her mysterious, sphinx-like image.

Why do we even care about this issue?  Mr. Brantley hits on an important point:

“The problem is that, people being people, 24-hour visibility will ultimately breed if not contempt, then weary familiarity. That’s why the tabloids need a new generation of cover girls and boys every year or so, a breeding process facilitated by reality television.”

Media over-exposure leads to boredom, contempt and ultimately disengagement. While Mr. Brantley concentrates on celebrity culture, I worry less about that world and more about our overexposed political and economic culture. Whatever Happened to Mystery?

No Sense of Place

In 1986, Joshua Meyrowitz, now a Professor of Communication at the University of New Hampshire, wrote a profound book, No Sense of Place.  Observing the societal effects of television, he looked first at its effect upon children.  Television had the ability to expose children to the adult world of secrets.  The average soap opera offered a daily peek into sex, adultery, homosexuality, lying and other “secrets” sheltered from children of earlier generations. Second, television broke down gender barriers as women were exposed to sports, war, medicine and other male bastions, and men were exposed to the emotional, private sides of life generally associated with women.

Television, Mystery and Politics

Importantly, Meyrowitz discusses the de-mystification or our political leaders:

…prior to the saturation of television, our political leaders were treated as a “mystified presence,”  a status above the common citizen, as it was easier to control the flow of information that represented who they were and what they did.  Although television is a useful tool for our politicians in creating this status, it “tends to mute differences between levels of social class.” Meyrowitz terms this “a double-edge sword,” as over exposure of a political leader diminishes his power, with a continuous presence rendering the person more ordinary, with less mystique. Granted, over exposure is difficult to balance with under exposure:  without media presence a leader has minimal power, yet with exceeding presence he or she loses power.  See Wikipedia entry.

Because of the immediacy of information to all common citizens about all issues, we are now able to closely inspect our leaders’ images, demystifying them as we go.

The white hot intensity of television or film allowed for the presidential victory of a former actor, Ronald Reagan, and probably would have prevented the election of a wheel chair bound Franklin Roosevelt.  And who can forget the election of Arnold Schwarzenegger as governor of our most populous, most media-saturated state?  In his case, can we even separate political power as metaphor or physical reality?

Conversely, television has the power to destroy, as we come to devalue what is overly familiar. The country was ready for Reagan to depart the White House well before the end of his eight years in office.

Obama and the Media

My subjective view is that Obama over communicates.  Using a teleprompter, which lessens both spontaneity and credibility, Obama seems to be on television every morning opining about the economy, Afghanistan, the Gulf oil spill, unemployment or some other topic.  I also find in his speeches more heat than light, meaning we are getting a lot of verbiage, but not much insight.  That I think is the failing of this Administration, the inability to succinctly and candidly educate the public on the need for economic stimulus, health care or financial reform. When one has a torrent of communication from the White House, it is impossible to differentiate the mundane from the meaningful.  The public becomes either apathetic or cynical.

Silence is Golden and Effective Too

My father was a war veteran and a quiet man.  He always seemed to have many thoughts behind his enigmatic smile.  And when he had something to say those around him tended to listen.  In matters of discourse, he taught me that less is more.

Meyrowitz pointed out how today a celebrity, even one as beloved as Bill Cosby, could actually last only a short time on television.  Perhaps Obama and other celebrities should start ratcheting back their media exposure.  Would Roosevelt have discussed the New Deal on ABC’s “The View”?

I don’t need to hear about the latest adventures of the First Dog or the schedule of the First Family’s Acadian vacation, but I do need to know why we are spending trillions of dollars that we do not have,  and why the economy is headed for another recession.

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28
Jul 10

Age and Experience

Americans devalue age and experience.  We crave vigor, good looks, innovation, newness and energy.  Missing in our collective imagination is the elder statesman, the seasoned veteran and the battle scarred warrior.  If we translate the foregoing proposition to political or corporate settings, we see that most of these folks have been either booted out of elected office or given an early retirement package.  But right about now, their wise counsel would be invaluable.

Climbing the Corporate Ladder – Circa 1977

As a junior attorney in a large corporation, the presumption was that, like children, one should be seen and not heard.  Prove oneself worthy, and maybe one would be mentored, as older senior managers were expected to impart their wisdom to their younger and more promising charges.  A talented attorney or executive was “developed.” There were no instant promotions or large pay raises.  The expectation was to slowly work one’s way up and “pay dues.”  In my case, and I was typical, the dues were long nights of work, a   constant schedule of unanticipated crises and resolutions, and travel away from home 75% of the time.  If one demonstrated consistently good performance over an extended period, with luck one might be trusted to become a first level supervisor by age 40 or so.  No one succeeded overnight.

Youth and Experience – Mays and DiMaggio

Continuing legal education is usually deadly boring.  However, one of the best educators I ever came across was Irving Younger, who taught evidence and courtroom presentation.  Younger loved to use sports analogies to enliven his lectures.

To demonstrate the errors of youth, Younger related a story from his time as an inexperienced sportswriter at the now defunct NY Herald Tribune.  Returning from an afternoon game at the Polo Grounds he breathlessly described the Giants’ victory.  The older reporters asked who was a better outfielder: Mays or DiMaggio?   Younger replied that Mays had made the most amazing athletic catch, diving, tumbling head over heels, yet holding on to the ball.  The older reporters said DiMaggio was the superior ballplayer.  Younger was incredulous, again touting the superhuman athletic ability of Mays.  Younger said he saw the older DiMaggio play the previous night and he looked like he was hardly moving.  The reporters said, “kid, you don’t get it.  DiMaggio made it look effortless because he knew exactly where the ball was going to be hit and was able to glide to the ball.”  You can’t teach experience.

Youth has Outlived its Usefulness

In her Wall Street Journal article, Youth has Outlived its Usefulness, Peggy Noonan criticizes the Obama Administration for its failed economic policies and lack of bi-partisanship.  Her criticism centers on the over emphasis on youth in politics:

…what I think people miss when they look at Washington and our political leadership? They miss old and august. They miss wise and weathered. They miss the presence of bruised and battered veterans of life who’ve absorbed its facts and lived to tell the tale.

And the lack of elder statesmen is not confined to our country:

Mr. Obama is young, 48, as is British Prime Minister David Cameron (43), with whom he meets next week, and as were Bill Clinton (46 on Inauguration Day) and the somewhat older but still distressingly young George W. Bush, sworn in at 54. Mr. Cameron’s partner in governance, Nicholas Clegg, is also 43. Stephen Harper of Canada is 51, Nicolas Sarkozy of France a youthful 55.

Ms. Noonan lays out the problem of youth and her vision of the remedy:

Youth is supposed to bring vigor and vision. In general, however, I think we find in our modern political figures that what it really brings is need—for greatness, to be transformative, to leave a legacy. Such clamorous needs! How very boring they are, how puny and small, but how huge in their consequences.

What Mr. Obama needed the past 18 months was a wise man…to offer counsel and perspective, a guy who just by walking into the room brings historical context. See Youth has Outlived its Usefulness

Perhaps President Obama’s lack of experience is finally catching up with him.

Send in the Old Guys

Alas, many of the elder statesmen of politics and industry have resigned, been voted out of office or packaged off to early retirement.  When I was mid-career and actually designing some of these early out programs, I often wondered how much experience, perspective and corporate history were we letting walk out the door?  And to what end?  Would the corporation or government really run better without these older wiser voices?

 At the highest levels of government, problem solving requires a blend of both youth and experience.  The enthusiasm of youth needs to be tempered by caution and experience.   Looking at the last several tumultuous years, we could have used more Winston Churchills, Harold McMillans, Konrad Adenauers and Charles DeGaulles to guide the current group of novice leaders.

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