Wednesday, April 29, 2009

Musical Chairs with Ken Lewis and Bank of America

Bank of America CEO Ken Lewis was stripped of his Chairman title in a shareholder vote on Wednesday, a move that still leaves him as CEO thanks to his rubber-stamp board. Now what? Can he survive in the top spot?

There are essentially 4 ways to lose your job as CEO:

1. You resign… Well, yes, that’s possible, but I’m not holding my breath.

2. You lose a shareholder vote on a resolution to remove you as CEO… Been there, done that. He didn’t lose.

3. The board fires you… Perhaps I should be clearer, the Bank of America board fires you, and this is one board that loves Ken. They even appointed long-time pal and noted corporate governance “stickler” Walter Massey, President Emeritus of Morehouse College, as the new Chair. Now that’s a tough board for you! If you nasty shareholders are going to pull Ken’s Chair from under him, we’ll show you.

4. The government fires you… Ah, well, here we may have something. Read on.

If Bank of America is too “stressed” to keep going on its own, new capital must come from somewhere. Outsider investors? You’ve got to be kidding. Selling parts of the empire? Maybe. TARP, or son of TARP, or grandson of TARP? This is possible … but can Treasury sink another XX billions of dollars in BofA (or any bank) without doing a Wagoner? That is, as part of the deal, will Treasury make that pesky Ken Lewis walk the plank, the same guy who is all over the Wall Street Journal testifying to NY Attorney General Cuomo that Paulson and Bernanke made him do the Merrill Lynch deal? Now that’s a stress test I can see playing out.

Tuesday, April 28, 2009

The Curious Case of Bank of America's Ken Lewis

Tomorrow BofA CEO Ken Lewis goes on trial. The annual shareholder meeting has become a referendum on the decisions, and legacy, of Ken Lewis. Let’s parse the data.

Why He Should Stay as CEO

1. Who else is there?
2. Paulson and Bernanke came at him with a baseball bat in a dark alley – what choice did he have but to buy the much-maligned Merrill Lynch?
3. Up until September 2008, Lewis was a seen as a star of the banking industry, even winning the “Banker of the Year” honors from American Banker.

Why He Should Be Removed as CEO

1. Despite the Paulson-Bernanke takedown, Lewis did not have to make the Merrill deal. The simple truth is that he wanted this deal, badly, to demonstrate to the world that BofA was king of the hill, and just as importantly, that he could go one better than his mentor, former BofA CEO Hugh McColl. To Lewis, Merrill was a dream of a company, one that had an enormous emotional attachment for him personally. McColl never acquired Merrill; Ken Lewis did. Wow!
2. How many lives should one CEO have? Countrywide; Merrill; TARP lifelines; the John Thain debacle; testimony to Cuomo that may yet land Lewis in more trouble than even he could imagine; first quarter earnings chock full of one-time gains based on increasing the valuation of toxic assets on the book; characterizing these results as evidence of “a testament to the value and breadth of the franchise;” outraged shareholders and institutional investors who finally have had enough; news that Treasury stress tests indicate BofA needs more capital, yet again. By my count, that makes 9 lives…

The Bottom Line

I don’t know Ken Lewis personally, and I have no reason to believe he is not a good person. But, the evidence is now overwhelming that Ken Lewis is an incompetent CEO. What shareholders and the board cannot, or will not, do, Ken Lewis should do for himself. The one solution that will be best for Bank of America, and best for Ken Lewis and his personal dignity, is clear. He should resign.

You may say I'm a dreamer, but (perhaps) I'm not the only one.

Friday, April 24, 2009

Bernanke, Paulson, and Lewis: He Said, She Said

We are in for a fresh round of escalating recriminations.

Bank of America CEO Ken Lewis testified to New York Attorney General Andrew Cuomo that he was pressured to do the Merrill Lynch deal, and moreover, that he was told not to disclose the extent of ML damage to shareholders in advance of the vote authorizing the acquisition. Paulson, and the Fed, quickly followed with press releases indicating that they did no such thing.

Even in these early stages of this emerging scandal, the next steps are highly likely:

1. There will be a Congressional investigation, and it will be embarrassing to all concerned, including President Obama.
2. Ken Lewis will finally resign as CEO of Bank of America.
3. Americans will learn more about how Treasury sausage is made, and it will be an eye-opener.

There is no reason why government cannot play a constructive role in the development and growth of businesses. The history of business indicates that such a role can be highly valuable, but almost always in the earliest stages of an industry’s development. Mixing government and business in the intimate manner we are observing these last several months creates all sorts of complications, conflicts of interest, and collisions. The story of Bernanke, Paulson, and Lewis is about to spill out of the bedroom.

Tuesday, April 21, 2009

What Won’t Happen Today at Citi's Annual Meeting

1. The board won't get fired.
2. CEO Vikram Pandit won't get fired.
3. Citi won't announce a workable turnaround plan.

That's 0 for 3, Cody Ransom numbers.

Let's look at the board's track record. Enron, booted out of Japan, all you can eat sub-prime, Chuck Prince, Vikram Pandit. In baseball, it takes three strikes to be out; for the Citi board it looks like five strikes (and counting) won't be enough. The irony in all this is that on paper board members have great experience - Armstrong at AT&T, Belda at Alcoa, Mulcahy at Xerox, the list goes on. But, and this is the big but of corporate governance, just slapping down your resume on the boardroom table does not make an effective director. Actions speak much louder than resumes, and it's hard to imagine the Citi board did what great boards do - ask the tough question, probe top management, spend the time to really understand the company's business, and not defer to the "superstars" on the board (read: Robert Rubin). I really hope the new directors about to be officially seated get the principle that spectacular resumes (former CEO of US Bancorp, etc.) are not enough.

As for Vikram Pandit, the jury is in. It was not his fault that Citi made as many gigantic blunders as they did (he only started as CEO in December 2007), but he has got to bear responsibility for Citi's inability to come up with a viable turnaround strategy. More to the point, I find it hard to believe that he is the most qualified person to be CEO of Citi. Remember how he got the job? His hedge fund was acquired by Citi, and with all due respect to my friends in the hedge fund business, that is not the best training ground for the job of CEO in a complex, struggling company. That the hedge fund imploded not long after Citi bought it only adds to the ignominy.

Which brings us to the problem of creating a new strategy to fix the bank. Q1 earnings were driven by accounting changes, rumors of big paydays driven by AIG's winding down of credit-default protection, and the simple beauty of borrowing at 0% and lending (or investing) at 4%-12%. That is not sustainable, especially in light of the quickly melting commercial real estate market. Navigating around these curve balls is not easy for any management team and board; for Citi's, I fear it's just about impossible.

Hey, isn't Treasury all about good corporate governance? What's good enough for GM's board is surely good enough for Citi's.

Monday, April 20, 2009

Banks Making Money?

Both Citi and Bank of America have now announced much-improved earnings for Q1 2009. Are we out of the woods yet? Unfortunately, no.

Today's BofA report notes that changes in fair market value accounting created a $2.2 billion gain from Merrill Lynch. While most observers understand that this is a one-time, non-recurring gain, let's make sure we all understand just where the "gain" came from. By essentially increasing the value of certain ML structured assets held on the books, BofA is artificially inflating assets that no one wants to buy ("toxic assets"). Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won't be pretty. You can run, but you can't hide.

One other quick note: If the federal government let me borrow money at 0% interest, and then lend it out at 4-12% interest, even I could make a profit. And if a college professor can make money in banking in 2009, what should we expect from the highly-paid CEOs that populate corner offices? At least I'd have the humility not to claim these results were "a testament to the value and breadth of the franchise." (Yes, that's what Ken Lewis, CEO of BofA, said today.)

What the NY Times can Learn from Warner Bros.

I was watching Casablanca, again, over the weekend. Made me think about the old studio system and its demise, and made me wonder whether newspapers and magazines often resemble the old movie studios? Remember that era? Studios “owned” the talent, controlled the method of production, and dominated distribution channels. With the big three under control – content, production, and distribution – movie studios formed a classic oligopoly.

Today, movies don’t “own” hardly anything, and they need to contract with all sorts of talent, with various production companies that bring highly specialized know-how (e.g., Lucasfilm), and even with movie theatres that have consolidated and are independent of the studios. Further, every movie is an independent business of sorts, assembling a wide variety of independent components that are assembled and integrated into one (hopefully) seamless product. As jarring as this transition must have been, the movie studios did it.

What of our friends in the newspaper and magazine business? The experience of the movie studios offers the following lessons:

(1) Successful movie studios have become “systems integrators,” not that much different than Boeing when you come to think about it. Boeing doesn’t manufacture all the parts, software, and systems that make up a modern aircraft – in fact, Boeing partners make most of what goes into our 747s. They have thrived by becoming superior integrators. Why not newspapers and magazines?

(2) The mindset of movie studios has shifted from one of control and push to one of modular and pull. It is necessary to provide an incentive to the best talent to want to work with you (“pull”), and that talent is not taken from a list of employees but drawn from a wide pool of expertise (“modular”). Why not newspapers and magazines?

(3) There is one thing the movie studios have been doing for a long time that continues to work. They are absolute geniuses at creating and maintaining a star system that attracts customers not only because a movie is a “good” one in any objective sense, but also because customers need to see certain movies to develop or maintain their place in the popular culture. The studios use entertainment magazines to promote their products, create glamour that attracts interest, and mass produce awards shows like the Academy Awards and its brethren that cement their position in the popular culture. Why not newspapers and magazines?

Thursday, April 16, 2009

Why Newspapers and Magazines Fail

What’s wrong with the newspaper business? And the magazine business for that matter? The problem has been well-known for some time – newspapers and magazines have been swamped by free online content, much of their own making, driving down print circulation rates and advertising dollars alike. Young people don’t read newspapers any more. Aggregators (e.g., The Huffington Post) bundle free content, further cutting profit opportunities for content providers. It’s a real mess, isn’t it? In response, the industry turns to “micropayments” (tiny fees customers pay for content whether they like to or not) and “tip jars” (whereby customers donate money to content websites), if you can believe that.

I have two very big problems with all this.

First, where is it written that any business – even newspapers and magazines – has a right to make a profit? If I open a restaurant, and nobody wants my food, I lose money. That’s how it works. You publish a newspaper or magazine that customers don’t value, you lose money too.

Second, there’s the big excuse. That’s the one that goes: because people don’t read newspapers any more, what can we do? It’s the customers’ fault – they don’t read any more! Imagine another industry whose leaders say they can’t succeed because people don’t like their cell phones, or software, or shoes any more. People do not read newspapers because the industry no longer gives them a reason to do so. Don’t blame the customer for a failure to innovate and create something they want.

Why doesn’t any one talk about new ideas, new business models, to resuscitate the industry? There are no guarantees when you try something new, but the alternative is crystal clear – layoffs, downsizing, and bankruptcies.

Here’s one little idea to consider. Why do people go to the movies when there is television? Some may remember that in the earliest days of TV the movie studios fought tooth and nail to keep the TV barbarians away from customers. It didn’t work, and they were forced to come up with something else. People go to the movies because of the experience, the aesthetic, the community. The movie business is not without its struggles, but it’s still here six decades after TV came on the scene. Give people a reason to read a newspaper or magazine rather than go to ten different online sites. There is much to be learned from considering the experiences of other industries that went through similar traumatic transitions. Rather than invent new ways to force customers to pay for content, why not invent new ways to give customers something they care about and can’t get anywhere else? If that happens, they will pay, and be happy to do so. No guarantees, but a big step up from the embarrassing world of micropayments and tip jars.

Thursday, April 9, 2009

CEO Pay: Why Barney Frank and Congress Will Lose

There’s lots of talk about executive compensation these days. With the proxy reporting season in full swing, the media, academics, CEOs and boards, and many a laid-off person will be scrutinizing, and agonizing, over what are sure to be outlandish numbers in the midst of the most severe business meltdown in almost 80 years. But there is one group of onlookers that will be particularly attuned this season, our duly-elected members of Congress. And what will they say?

The opening gambit is now well-known. Let’s talk about 90% punitive taxes on the AIG scoundrels. Let’s be sure to look for other, perhaps less draconian, but perhaps not, methods to extract penalties on CEOs who continue to earn many millions seemingly oblivious to what is going on around them. It can no longer be business as usual. Barney Frank will talk tough, but if I were a betting man, I’d being selling him short.

Why? Not because Mr. Frank is not able, intelligent, and determined. He is all of these things, and more, but he is up against a guerilla army fighting to protect their home turf, and unafraid to engage in any counter-attacks they can dream up. The reality is that for Congress, CEO pay is just the latest outrage-de-jour, and like hummingbirds moving from one source of nectar to another, there will soon be other places to seek justice. It’s not that Congress has A.D.D., but rather that they have a lot to do, too much to stay focused for the time it will take (that is, forever) to rein in CEO pay.

And what of the insurgents? There is an army of able, intelligent, and even more determined tax attorneys, compensation consultants, and board advisors at work right now looking for new ways to ensure that CEOs continue to get what they get. They will not move off task to do something else for they are not hummingbirds by a long shot – pit bulls might be a better image to conjure up. They have all the incentive in the world to dig for loopholes, and they are very, very good at it. Executive pay will change in style – more stock grants and less stock options, more salary and less bonus, and there will be some short-term adjustments down – but at the end of the day a new equilibrium will be reached that will look remarkably similar to where we have been. And you can take that to the bank.

Tuesday, April 7, 2009

Sun and IBM, Yahoo and Microsoft: Learning From Mistakes?

Like Yahoo, like Sun. Yahoo rejects a tremendous buyout from Microsoft last summer, and the stock tumbles. Total drop in market cap: $30 billion. This week, Sun rejects a tremendous buyout from IBM and the stock tumbles. Total drop in market cap: $2 billion and counting. Aside from the mysterious fact that both companies, and both boards, have walked away from a huge premium, what else is going on here?

The answer is a nutshell is “attachments.” Attachments to people, places, and things are among the most powerful emotional drivers of action, sometimes leading reasonable people to make huge mistakes. Think Bernie Madoff and his unfortunately legion of followers who needed to know “the right people” to be given a chance to invest with the man that churned out 10-12% returns in good seasons and bad. No one (or hardly anyone among his investors) asked any questions – crazy Bernie was one of us, a man to be trusted.

Well, the attachments at Yahoo, and now Sun, are not of the same pedigree, but certainly of the same ilk. At Yahoo, founder and then CEO Jerry Yang built the company into a Silicon Valley legend, thumbing his nose at Microsoft’s hegemony in the process. To then turn around and sell your baby to “the evil empire” was just too much, regardless of price. Keep demanding more, and even a deep-pocketed Microsoft will take its chips and go home.

Enter Sun. Built by Scott McNealy, Sun was an original that prided itself on its independence. Relegated to the board while Jonathan Schwartz took the reins as CEO, Scott could do little harm, until now. Leading the boardroom revolt, McNealy and his faction of directors upped the ante on IBM (and CEO Schwartz in the process), driving the big bidder (close to $10 a share, a 100% premium when offered) away. Founder McNealy, like founder Yang, too attached to the companies they built to imagine selling to the industry winners. And shareholders lose, again.

Friday, April 3, 2009

Friday Musings: Bartiromo, “Corporate Governmance,” and the Final Four

I finally read Maria Bartiromo’s interview with Bob Nardelli, the CEO of Chrysler, that appeared in the April 6, 2009 Business Week. Maria asked Nardelli why taxpayers should be bailing out a private equity firm, namely, Cerberus, the majority owner of Chrysler. Good question. Unfortunately, Maria let him off the hook when Nardelli labeled Cerberus “no different than Fireman’s Fun, CalPERS, mutual funds, etc.” No, Cerberus is not the same as a mutual fund. Unless you know of many mutual funds that take controlling interests in companies they invest in, install their own CEOs, and line up for government money when their “investment” goes bad. Leaders in the press need to do a better job extracting honest responses from the titans of business they are interviewing. And “extract,” as in a decayed tooth, is almost certainly the right word. Let’s do better next time, Maria.

The Syd Blog word of the day is “corporate governmance,” defined as the set of policies and actions designated by the U.S. Treasury to ensure that private enterprises that depend on government assistance act in a manner consistent with the preferences of the Treasury.

The Final Four: GM, Ford, Chrysler, and Treasury. Who will win?

Thursday, April 2, 2009

GM’s New Board – Calling Gates, Gerstner, and Grove

There’s been lots of chatter about GM’s board of directors walking the plank, and the unprecedented role of the federal government in prodding reportedly six directors to find another country club to latch onto. The news stories have been about whether the board deserves this fate – of course they do! – and whether and how the Obama Administration is stepping far beyond the line any US government should go – I’m concerned, but see this as legitimate. The problem with this debate is that the first question is just plain silly given the track record of the company, and the second question quickly gets mired in ideological posturing.

Lost in all this is the real story, or at least the story that has the potential to make the biggest difference not just at GM but at many other companies as well. Erin White at the WSJ wrote a story after talking to me about this the other day, but I think the story is even bigger than GM. The new GM board has the potential to remake corporate governance in America. Think about it – who is going to accept a board position at GM with Treasury riding shotgun? The “been there, done that” crowd of ex-CEOs who make a living on the corporate governance trough will want no part of this assignment given the scrutiny they will be under. Better to lay low in boardrooms that value business as usual. Perhaps paradoxically, the most likely candidates for the GM board are business stars who don’t want to take on “yes-man” roles, and who would only jump into the GM fray if they had a big opportunity to make a difference.

And what a difference they could make. Imagine a proven business builder like Bill Gates, accomplished executives like Larry Bossidy, Jack Welch, and Lou Gerstner, or Silicon Valley iconoclasts like Andy Grove who would simply refuse to accept the status quo. Leaders who have demonstrated the vision and creativity to remake enterprises, and industries. A new board like this will insist on being hands-on, asking the difficult questions but also helping to generate some of the answers. The buzzwords on the board will go from illogical incrementalism, a fixation on pay packages, and a “we can’t do that at GM” mindset to one driven by creativity, innovation, and breaking the rules. And as the song goes, if they can do it here (at GM), they can do it anywhere.

A pipedream? Perhaps. But also an opportunity for real leaders to step up to a mega-challenge that can not only help turn around a once-great company like GM, but set a new standard and expectation for how corporate governance can, and should, work in America.