new dog old trick

Managerial Ethics (an oxymoron?)

Bernie Ebber's conviction on all counts is the latest shoe to drop in the unending fallout from the bubble of the late 90s.  It seems like it is never going to stop  - just today the SEC announced civil action against several former executives of Qwest including the former CEO.  Last Sunday Ken Lay took to the airwaves on 60 Minutes to try to defend himself or at least get his spin on events into wider circulation.  (Did anyone besides me think it was weird that we went through that entire 60 Minutes interview with essentially no discussion of Jeff Skilling and his role in events?) 

It's downright depressing if you fundamentally believe in our economic system to keep getting pounded with this news.  There is no doubt at all that it's good to see the system work to catch and punish the perpetrators of at least some of the more egregious actions of that period.  But am I the only person around who is tired of using the C section of the Wall Street Journal like the police report in the back of the local paper?  In the past I rarely read much beyond the headlines of section C of the WSJ - my meat is in the other sections.  But with all the trials and investigations of CEOs and other business leaders - all of which are summarized in section C - this section has become required morning reading.  I'd love to be able to go back to ignoring section C. 

I guess part of what prompts me to ramble on about this topic are some things that I've read lately calling for a code of ethics for managers/executives or calling for codification of an enforceable code of professional behavior for managers.  For example of some of the musings on this subject, see the Harvard Business Review piece that Slacker Manager (one of my favorite manager weblogs) points to in his submission to last week's (that's the week of 7 March) Carnival of the Capitalists.

Link: Slacker Manager: Management as profession.

There are aspects of this that I like conceptually, but I'm afraid that the reality of the current state of maturity of management makes such ideas effectively impractical. 

Qualities of a good independent director

A very good post on the qualities that make a good independent director from Jim LeJeal's weblog (thanks to Feld Thoughts for the pointer).

Link: Concrete Covina: On becoming an Independent Director / Member of the Board.

Jim lists six qualities that he thinks make for a good independent director.  They are:

1. aware of the legal fundamentals
2. motivated
3. proactive
4. value add for the "stage"
5. committee capable
6. skilled at questioning

He adds a short explanation of each item.  His thoughts are very interesting and in my experience right on point.

Just as interesting (at least to me) was Jim description of what he did in order to master the subject of becoming a good board member.  It's clear that he dedicated a lot of time and energy into learning what it took to have a good Board and what it takes to be a good director.  Here's his list:

• buying a number of Corporate Governance oriented books on Amazon,
• meeting more than a few existing Directors and talking with them about what it was in their opinion to be a Director,
• taking a Corporate Governance course at Stanford (very fun – got to hear Charlie Munger be cantankerous)
• becoming a member of the NACD (excellent monthly newsletters)
• actively soliciting and then joining a Board of Directors (thanks for helping me here – you know who you are)
• and co-founding (along with Mike Platt) and forming a group we called the CDG or Colorado Director’s Guild. (we could not have done this without a lot of people’s help – who actually did the work to make it all happen)

I wonder how many board members have worked this hard to master their jobs?   

By the way, I love the name of Jim's weblog, particularly after reading where the name comes from.  For a little mini lesson in what drives entrepreneurs, read about Jim. 

Google Governance - the other side of the story

Well, one day after I tee off on Google's corporate governance along comes a column in the WSJ with "the other side of the story" (thank you, Paul Harvey). WSJ.com - Betting on Google's Future.

The article defends Google's dual-class equity structure as appropriate for Google, given Google's need to make expensive, high risk bets over the next few years in order to ensure its ability to continue to grow and survive against powerful competitors and in the face of changing technology. As the author (a professor from Harvard Business School) says:

Dual-class equity will help Google's executives place big, risky bets without fear of losing their jobs or falling prey to a hostile takeover.

The article points out that companies with dual-class structures have, on average, performed well on the stock market:

On average, however, firms with dual-class stock have earned higher long-term returns than single class peers. Research by Valentin Dimitrov and Prem Jain tracks all U.S. companies that switched from single to dual-class equity since 1979. Over the four years following restructuring, shareholder returns for these companies exceeded control group gains by 18%.

What explains these results? With single class stock, management may be less inclined to gamble. If management cannot sell investors on their strategy, they may choose to forfeit opportunities rather than make investments that would drive down their stock price. Furthermore, since top executives don't control enough votes to ensure a friendly board, they can be fired if a risky project fails. Better to choose a safe strategy that yields lower returns but avoids career-wrecking failure.

The cable TV industry is cited as an example of an industry where dual-class structures have been used effectively:

These dynamics have been evident in the cable TV industry. In the face of enormous technological and regulatory uncertainty, cable companies had to decide whether to expand or sell the firm. Compared to cable companies led by professional CEOs who held few shares, my research shows that firms led by owner-managers who employed dual-class stock were four times more likely to expand.

Dual-class stock helped the Roberts family create considerable value for long-term investors in Comcast. The same is true for Rupert Murdoch's News Corporation, John Malone's Liberty Media, and Sumner Redstone's Viacom. All these CEOs embraced risky strategies that were initially greeted with skepticism by investors but ultimately proved successful.

The article also concedes that dual-class arrangements have their problems:

With this concentration of voting power, it's clear why dual-class stock drives governance watchdogs crazy. They fear that entrenched management -- like Adelphia's -- will reap private benefits at shareholders' expense. This can take many forms, including excessive perquisites or siphoning profits to management-owned affiliates. As evidenced by Enron, Tyco, and WorldCom, such abuses may occur in firms that do not use dual-class stock. However, shareholders with inferior voting rights cede their last line of defense against incompetent or avaricious management: a change of control. Reflecting this sacrifice, shares with inferior voting rights historically have sold at a 4% discount, compared to counterparts with superior rights.

Well, now I feel good knowing that I have provided equal time to the defenders of dual-class stock structures and Google management. But I haven't changed my mind. I agree with the article at a conceptual level but in the reality where I live, I think that other things are going on at Google above and beyond those outlined in the article. I do agree wholeheartedly with the author's closing line:

An investment in Google is a long-term bet on its management. Are you feeling lucky?

Nope. I ain't feeling that lucky. I've been wrong before, but I'm comfortable sitting this one out.