Tuesday, December 30, 2008

So Last Century

The news stories about Time Warner CEO Jeffrey Bewkes being named chairman of the board, effective Jan. 1, strike an odd note. It's as if this news is lifted right out of the pages of business history — from the 1970s or '80s.

These days, with the inexorable progress of governance best practices, one of which is splitting the chairman and CEO positions, you would more likely expect to be reading news stories that companies like Time Warner have separated the two top roles — not trumpeting that the CEO has added the chairman's title.

This news from Time Warner is not a surprise. It was baked in the contract when Jeff Bewkes was named CEO in January 2008. And he may make a fine chairman and CEO, so this is not meant as a personal criticism. 

As a matter of full disclosure, I have been in and out of Time Warner stock since the mid-1980s. I was lucky to be out of it at the time of the AOL deal, but I've been back in it for the past several years and it has been one of the doggiest stocks in my portfolio. I have fond memories of being a Warner Communications shareholder under the late great Steve Ross (pictured), who had his flaws but he knew how to put money in the shareholders' pockets, something his successors have not done well at. Hopes run high that Bewkes will reverse the shambling market performance of this media giant.

If combining the chairman and CEO roles helps Bewkes get this company back on the winning track, then the tactic will have been proved right. But on the eve of his ascent to the combined offices, it looks more like a page out of a dusty old board playbook. So last century. 

Tuesday, December 16, 2008


The Bernard Madoff investment scandal is being called one of the biggest Ponzi schemes ever or the biggest Ponzi scheme of all time. Naturally enough, since the shocking revelation of massive losses the names Madoff and Ponzi are linked at the hip.

I first became acquainted with Charles Ponzi (pictured) when I wrote a review of Famous Financial Fiascos, a book by investment counselor John Train, for the Philadelphia Inquirer in 1985. The Ponzi scheme — the pyramiding technique in which early investors get paid off with funds from succeeding waves of gullible latecomers — had a starring role in the book that recounted 20 of history's massive financial debacles. 

What few people know is that Ponzi's original scam rested on a simple arbitrage proposition: Buy an International Postal Reply Coupon in a country with a devalued currency, redeem it in a strong-currency country, and pocket an immediate profit.

As I wrote in my review: "Why hadn't this foreign-currency play occurred to someone other than this small-time con man?" With the inimitable wit and style that marked not only this book on investment calamity as well as his other classic examinations of investment genius, Train answered, "Many of us have been struck by falling apples, but only Newton, rubbing the spot and glaring upward, derived the law of gravity."

Ponzi rode his scheme for big money for about a year until it, like all his namesake schemes since, collapsed of its own duplicity in 1920. But his name has lived on in infamy — and, like a ghost from the grave, has been again summoned forth in the horror wreaked by Madoff.

This year has been a ferocious bear market ... for trust. In so many boardrooms over the past 12 months, the trust factor has taken a huge hit. Does the board trust the management? Does management trust the board? Do directors or managers trust the investors? Do the investors trust the board and management team?

The Madoff affair is sure to feed more raw meat to that bear market in trust among men and women of business. That's the follow-on tragedy after the missing dollars are accounted for.

Friday, December 12, 2008

Two Joes Talkin' about Risk

Arithmetic was never my strong suit in school, but here is some math that even I can understand: "At 30 to 1 leverage, a 3% or 4% drop in asset prices means you're wiped out."

I thank Joseph Rizzi for the simple yet profound clarity of that equation. Mr. Rizzi is senior investment strategist at CapGen Financial. He was the guest speaker last month at a program on the lending crisis put on by the Center for Corporate Governance at Drexel University's LeBow College of Business. His presentation was the best I've heard all year in identifying the roots of the crisis and what needs to be fixed, from a governance standpoint. I'll be wanting to get more of his keenly observed analysis into the pages of Directors & Boards in the year ahead. 

I thought of his comment when something else just came across my desk: "Risk managers will emerge as heroes from the financial crisis." That's a powerful statement, put out by Joe Plumeri (pictured here), chairman and CEO of global insurance broker Willis Group Holdings. Speaking at the annual dinner of the Association of Insurance and Risk Managers on Dec. 10, Mr. Plumeri said that risk managers have never been more important than they are today in helping their companies evaluate risk and access capital.

I had the pleasure of interviewing Mr. Plumeri for a Directors & Boards cover story a few years ago. He calls it like he sees it, and this is picture-perfect vision.

I'm not sure how heroic it is to stare at a 30 to 1 leverage ratio and not recognize that there is, in the lyrics of my favorite movie musical, "trouble in River City." According to reports, Lehman Brothers was levered 32 to 1. Lehman is among the wiped out. 

But directors should appreciate the implications of Mr. Rizzi's risk equation and Mr. Plumeri's shining the spotlight on the role that risk managers can and should play in their deliberations on risk. The heroic nature of risk managers should come from keeping the leadership in a risk-aware state — note that I didn't say risk-averse state — and not from having to push back against a culture that, through ignorance or denial, could cause the board to preside over a wipe out.

Wednesday, December 10, 2008

Madam Chairman

Speaking of former U.S. Secretary of Commerce Barbara Franklin, which I did in my post of Thursday, Dec. 4, I couldn't be more pleased to see that the National Association of Corporate Directors has elected her to be the organization's vice chairman, and that she will assume the chairmanship on March 31, 2009.

She has been a prominent member of the NACD for nearly 15 years, often speaking at its annual conferences — and always being a voice of reason and sound thinking on governance at these confabs, as well as in the pages of Directors & Boards. She was presented the NACD Director of the Year Award in 2000.

You can't get more well-credentialed for this chairmanship. She has been a director of 14 public companies over her career, including current directorships at Aetna Inc. and Dow Chemical Co. She joined her first corporate board in 1979, fresh from six years as a commissioner of the U.S. Consumer Product Safety Commission. That was early days for women on boards. 

I can't resist sharing this story she told me when I interviewed her for the "Oral History of Corporate Governance" special 25th anniversary edition of Directors & Boards in 2001. Remembering those early days, she recalled going on the Westinghouse board, and promptly running into this buzz saw (or maybe I should say buzzard):

"I raised a question about something at the very end of a [board] meeting. One guy looked at me and said, 'Barbara, why don't you leave these things to more experienced directors.' I was real unhappy about that! I collared him afterwards and told him I didn't think that was an appropriate comment for him to make. He apologized."

The chairmanship of the NACD is going to be a hot seat in 2009, what with a change in Administration and a Congress on the warpath looking for culprits — some to be found sitting in director seats, for sure — who drove the economy into a deep and dank ditch. The new powers that be may tee up legislation that will take board service into a distinctly unfamiliar and unwelcome territory. 

"In such uncertain economic times," she says, "more is expected of us as corporate directors. We must work to restore trust in the governance of our companies." The world of corporate governance will be fortunate to have Barbara Franklin in this leadership position. Talk about leaving things to an experienced director.

Monday, December 8, 2008

'Awash in Liquidity' — Not!

The Tribune Co. bankruptcy filing prompts a haunting flashback.

It is late 1988, and I am in a hotel conference room in New York listening to a presentation by a hotshot financier from still-existent Bankers Trust Co. Out of his mouth comes the first time I hear this expression: "The world is awash in liquidity." Well ... within a year the world begins its sickening plunge into the devastation of the early '90s. That excess liquidity did a vanishing act.

The flashback now fast forwards to early 2007. I open up the Wall Street Journal one morning to read real estate mogul Sam Zell (pictured), in an article by Alan Murray, saying that the world is experiencing "a massive excess of capital." 

I start breathing hard. Did I just again hear a hotshot financier say that the world was awash in liquidity? My next move, of course, should have been to add to that excess capital by liquidating my equity portfolio.

Zell did it. He acted on his stated unease by unloading his Equity Office Properties Trust portfolio of commercial read estate holdings to Blackstone Group. For a big number: $39 billion. A brilliantly timed move. Promptly followed by a colossal blunder — buying Tribune Co., on the eve of the evisceration of the newspaper industry.

Alert to boards: The next time you hear the expression "The world is awash in liquidity," or any variation thereof, tell your CFO to run for cover. With the way things are going, it may be a long while before you hear it, but keep your ears tuned. 

And I implore somebody to kick me if I don't do the same. No one wants to take a third called strike at this phantom fastball called "massive excess liquidity." 

Thursday, December 4, 2008

Carry a Big Stick

It's always interesting and instructive to see who a CEO picks to be a member of his or her team. As such, I suspect business leaders are riveted even more closely than the average citizen on a President-elect's choices for his Cabinet.

Barack Obama's economic team took shape first, with New York Federal Reserve Bank President Timothy Geithner spearheading as nominee for Secretary of the Treasury, followed by the foreign policy team, headed by nominee Sen. Hillary Clinton for Secretary of State. Yesterday, Obama introduced New Mexico Gov. Bill Richardson as nominee for Commerce Secretary.

The Richardson appointment reminds me of a letter I sent to Barbara Hackman Franklin upon her nomination to be Commerce Secretary in the George H.W. Bush administration. Barbara is a longtime colleague who has authored several important articles on corporate governance for Directors & Boards. On the eve of her Senate confirmation in early 1992, I penned her a good wishes note, reminding her of the observation put forth by Henry Adams (pictured here), noted author and historian and great grandson of second President John Adams and grandson of sixth President John Quincy Adams:

"You can't use tact with a Congressman. A Congressman is like a hog. You must take a stick and hit him on the snout."

With the job at hand, I hope the country's new CEO and his team are coming to Washington with sticks in hand.

Wednesday, December 3, 2008

The Rule of Athithi Devo Bhava — Guest of God

The terrorist attack on Mumbai is an awful event. Here is an inspiring message coming from that shattered corner ... and it may be something that gives comfort to boards of companies doing business in India or contemplating entering the Indian market (India's Prime Minister Manmohan Singh pictured here). 

This is from Sunil Singhania, president of IAIP, the CFA India Society. I am a longtime member of the CFA Institute, the global association of investment professionals, and this message from the Indian unit head was circulated through the association. These are edited excerpts of the message:

"There is no doubt that the intention of the terrorists was to destabilize the commercial city of India and thus cause financial setback to one of the fastest growing and most resilient economies of the world ... However, the terrorists don't know the resolve of the Mumbaikars and Indians. We have bounced back immediately earlier and we will bounce back even faster this time.

"We Indians will rise from this temporary setback and work all the more harder to defeat the intentions of our enemies to weaken us in any way. We saw most of Mumbai return to work on Friday itself, while our brave soldiers were still fighting with the militants. The stock markets rose, almost yelling that do whatever one can, India will continue to shine.

"The events must have surely shaken the confidence of people who have visited India and, more so, stayed in one of the two hotels targeted. The spontaneous reaction would be to cancel all travel plans to India. By doing this, you will only be making the endeavors of the terrorists more successful.

"We Indians follow the rule of Athithi Devo Bhava or Guest of God. We assure all our international brethern that Indians will lay down their life to protect those of our guests."

Come to think of it, that kind of steely resolve is just what is needed to surmount the economic assault we're all facing — now that, ahem (see my post below), a recession has been officially declared. 

Tuesday, December 2, 2008

By Golly, It's a Recession

Ouch. That 680 point decline in the market yesterday was a kick in the gut. Lots of continuing bad news — including the "dog bites man" announcement by the National Bureau of Economic Research that, yes, can you believe it, we're officially in a recession.

In times of market duress, I suggest that boards retreat for guidance to "Conventional Wisdom Codification" — a brilliant, and often sardonically witty, collection of some 250 principles of surviving and thriving in the credit markets. 

Here is the kind of advice that might keep your personal balance sheet as well as your company's solvent as we work through this historic credit and business contraction:

• The bottom is always 10% below your worst-case expectation.

• When everyone likes a stock, it must go down; when nobody likes a stock, it may go up.

• Price wars get worse than you think.

• If you can figure out who will get the cash inflow in a cycle, you've got that cycle beaten.

• Risk is what's left over after the bad news hits. 

The codification was originally published in the Financial Analysts Journal in 1978. With the exception of a few outdated entries, it holds up remarkably well as a survival guide. I first recommended the codification back in the September 2007 e-Briefing, right after the first big crack in the market the previous month. My original citation included a few additional investment principles and an offer, with permission of the CFA Society, to share a copy of the entire codification (page 1 pictured here). 

I well remember that first downdraft in August of last year, as I was on vacation in Boston and spent way too much time glued to CNBC in the hotel room tracking the initial carnage.

Perhaps you too can point to a moment of crystal clarity that your company and your investments might be threatened in a seriously destructive way. Let's hope we have the prospect of experiencing a similar moment that tells us that all the bombs have been dropped and we can come out of the foxholes to start rebuilding wealth in the reshaped global economy.