Posted by Marc Hodak on October 3, 2010 under Governance, Reporting on pay | 
You have to wonder what the HP board has been doing for the last five years while Mark Hurd was their CEO. One of the board’s main jobs is to hire a CEO, which supposedly includes succession planning, which supposedly includes the “hit by a bus” scenario where your CEO is suddenly gone as happened with Hurd in August. The board is supposed to insure that the CEO is developing his or her bench as part of their job. It has long been shown that CEOs hired from within tend to outperform CEOs hired from outside, especially at firms whose competitive advantage arises, in part, from their corporate culture. One can argue that the HP Way has long since gone the way of the K-Mart blue light special, but you’d think that in five years the board would have pressed for and gotten Hurd to develop a potential replacement or two.
No. They went outside, again, and they literally paid for it. The MSM said they paid to the tune of $51 million, but that’s because that was the biggest number they could wring out of Leo Apotheker’s contract. That amount may reflect multiple years or maximum amounts based on future performance–it’s not clear which from the story–but my calculation is about half that amount per year in each of the next two years if he achieves target performance. Alas, $24 million per year is still about $10 million per year more than one might expect for an internally promoted CEO who, if he or she were well prepared, would likely have performed better than Mr. Apotheker, and not created a retention problem with every ambitious HP executive whose path to the top has suddenly gotten more rutted and overgrown.
I understand that sometimes one must go outside of the firm when it’s in trouble or otherwise in need of major change. I don’t think too many people considered HP under Hurd to be troubled, until Hurd left. I don’t work with HP’s board, so I don’t know if it was the board’s failure or Hurd’s failure that they couldn’t groom at least one internal replacement, or if none of their EVPs who will now be heavily recruited for CEO positions elsewhere were simply not good enough for the company in which they have performed so well.
Posted by Marc Hodak on May 10, 2010 under Governance, Scandal |
No, I’m not referring to TARP. The bailout of America’s banks was counteracting what could credibly be considered a liquidity crisis. The Europeans are providing the same medicine for a very different ailment:
The European Union agreed on an audacious €750 billion ($955 billion) bailout plan in an effort to stanch a burgeoning sovereign debt crisis that began in Greece but now threatens the stability of financial markets world-wide…
Immediately after the announcement, the European Central Bank said it is ready to buy euro-zone government and private bonds “to ensure depth and liquidity” in markets.
A liquidity crisis is when private banks generally refuse to lend money to anyone regardless of credit because they’re afraid that they might get caught short on their own cash needs. When private banks refuse to give more money to a spendthrift borrower, that’s prudent lending practice. When a collection of sovereign nations backs the loans of a spendthrift nation (especially knowing that they are inviting other spendthrift nations to continue their indulgence), they are simply shifting risk from private banks onto taxpayers. In this context, the soaring stock market we’re seeing in response to this shift is entirely understandable. But it would be paralleled by a similar decline in the value of taxpaying households, if that were being tracked in any kind of transparent market, since that is where this value is unarguably coming from.
That’s bad enough. The real problem is with how the EU is proposing to execute this massive value shift:
The money would be available to rescue euro-zone economies that get into financial troubles. The plan would consist of €440 billion of loans from euro-zone governments, €60 billion from an EU emergency fund and €250 billion from the International Monetary Fund.
Those €440 billion of loans would be borrowed through a debt facility guaranteed by the euro states via a special purpose vehicle (SPV). That’s like a company borrowing enough money to bet the whole firm via an SPV backed by its own shares. Where have we seen this before? If you’ve taken my History of Scandal course, would have guessed it. It’s like having the house double-down on failure.
Posted by Marc Hodak on March 6, 2010 under Governance, Politics |
The main reason that the USPS will never make any money is that it can’t get rid of its infrastructure. It must have a post office in every district and letter carriers visiting every house six (soon to be five?) days a week. They can’t get rid of their post offices because Congress pays the bills, and no congressman is willing to let their post office get shut down. They won’t give up universal delivery because their unions, who help elect those congressmen, don’t want to give up those jobs with, say, requiring rural people to come into town to pick up their mail, like they do their groceries and sundries.
I know there are all sorts of other arguments out there about why we need a postal service in the age of the internet, with UPS, FedEx and a whole industry of couriers and delivery services, etc., but they’re all irrelevant against the political considerations. With congressional support, the USPS exists in its present form. Without congressional support, it doesn’t.
Now that Congress has similar control over Government Motors, are we seeing the same political pressure take hold in that firm?
GM would not offer any details on Friday about which dealerships it was reinstating and where they are located. It said it chose the 661 based on a variety of criteria, including sales and other business factors.
For you, my loyal readers, I have obtained the criteria and their weighting from an unimpeachable source. Here they are:
1) Is the dealership in the district of a congressman or woman on a key house committee? (40%)
2) Is the dealer’s owner a major contributor to the political campaign of a key congressman or woman? (30%)
3) Will our losses from keeping this dealership open be less than the congressionally imposed costs of arbitration required to shut them down? (25%)
4) Is there anything else about this dealership’s sales or other business factors that we didn’t consider when we originally decided they weren’t worth keeping around that might have gotten us to change our minds? (5%)
What I don’t understand is why the media that reported this are pretending that these factors are being weighted any other way.
Posted by Marc Hodak on November 8, 2009 under Governance, Politics |
Well, Treasury blocked the sale of Fannie Mae tax credits to Goldman Sachs and Warren Buffet:
Treasury Department officials blocked the deal after concluding that it would have resulted in a loss of tax revenues greater than the savings to the federal government had it allowed the sale. “In short, withholding approval of the proposed sale affords more protection of the taxpayers than does providing approval,” an administration official said in a statement.
As noted earlier, this sale would have helped Fannie and Freddie improve their financial positions while promoting the public policy intent of these tax breaks, i.e., spurring low-income housing. The Administration’s objection no doubt centered on the idea that Goldman might have also benefited, a politically difficult fact that Saint Warren’s involvement could not overcome.
So Treasury, which appoints the board of Fannie and Freddie is breaching its duty of loyalty as the conservator of those wounded institutions, making it more likely that they will end up going to Treasury for another bailout, while undermining the public policy intent of Congress in creating those tax credits.
On the other hand, if Treasury can get away with arguing in favor of taxpayers on this tax credit, why don’t they overturn every tax credit in the name of helping taxpayers with something resembling a fair and flat tax? Why should taxpaying renters be penalized by the existence of a mortgage interest tax credit? Why should taxpaying singles and childless couples be penalized by a child care tax credit? ….
Posted by Marc Hodak on November 4, 2009 under Governance |
Fannie Mae has tax credits that are worthless to them. As the value of these credits have declined, Fannie has had to write them down, hurting its earnings. The government created these tax credits to spur the creation of low-income housing, so it has a public policy interest in seeing these credits utilized. Along comes Goldman Sachs with an valuable offer to buy these credits. Fannie is willing, but their government masters say “No, thanks,” and veto the deal.
Why would the government stop a transaction that would be good for Fannie and for low-income families? Because it would also be good for Goldman Sachs. And, the logic goes, it might be bad for the government because it would reduce the taxes that Goldman pays to the government over time, which is of course what the government intended when it created the tax credit. The government wields this veto in its capacity as Fannie’s conservator, which appoints the board members.
One of the fundamental tenets of corporate governance is the duty of loyalty. This duty states that a member of the board must place the interests of the company ahead of his or her personal interests. In Fannie’s case, selling these tax credits to a willing buyer would be good for the company. The fact that the board, at the behest of a politically-motivated conservator, is blocking this transaction suggests that the interests of the conservator are being placed ahead of the interests of the company. In other words, Fannie’s government masters would rather avoid a deal with Goldman in which the bank might (gasp) make a profit, than to actually do what is best for the company they are overseeing, one they presumably wish to see back on its own feet some day. This move makes the government as lousy fiduciary. But we knew that already.
