Monty Python, and John Cleese in particular, often bit the hand of their benefactor, the BBC, in their sketches. At the end of a rude sketch, they would then run a B&W written apology for the offensive sketch, gravely intoned by Cleese. Immediately afterwards, they would issue an apology for the previous apology, retracting some of the statements read by Cleese. It's a classic Python device, and I laugh every time.
However, the recent flap over GE CEO Jeff Imelt's comments at a Rome business meeting reminds me of the Monty Python bit. GE's PR department spokesperson first said that Imelt's comments were taken out of context, the evergreen apology phrase. Then, the spokesperson apologized for that apology and said that Imelt's views were not those of the company! Have some courage--he's the CEO, that's what he and other company leaders believe, and that's what the American Chamber of Commerce in China has been saying for years.
Here's the quote from the Financial Times, "I'm not sure that in the end they (the Chinese government) want any of us to win or any of us to be successful." The European Chamber of Commerce has echoed these sentiments, along with the American Chamber.
What's the problem, you say? The FT says that lots of companies are making money selling consumer products, like soft drinks. The problem is that GE is producing and selling engineered products like wind turbines and highly engineered systems like avionics, where the interests of GE and the Chinese state enterprises will eventually diverge.
The Chinese can easily mix sugar, water and caramel coloring to shut out foreign soft drinks, but they don't care enough about it to do so. They do care deeply about technology, about technology transfer and about being a global player and exporter, which is in line with their "beggar thy neighbor" trade and currency policies.
GE has been a model citizen in how they have approached the Chinese markets, and their actions are fodder for lots of business school case studies. However, the unfortunate truth is that the discounted present value calculations for some of their investments will have a shorter horizon and a lower terminal value than GE and other industrial conglomerates are used to seeing.
No amount of jawboning or complaining is going to change this. The question is: "How to live with the new reality?" There's nothing wrong with politely speaking one's mind and putting the cards on the table. No apology needed.
Tuesday, July 13, 2010
Monday, July 12, 2010
Not Being True to Your Self
I have always felt aggrieved for the Dutch football teams, especially the 1974 World Cup squad led by Johan Cruyff. In the final against Germany, Cruff made a dazzling run into the box where he was viciously hacked down by Uli Hoeness, after which Neeskens buried a penalty to take the Dutch into the lead. They lost the game to a brutal and negative German side.
The Dutch have always combined strong technical skills on the ball, with a desire to go forward and physical muscularity. Watch Clarence Seedorf of AC Milan, and you will see someone built like Ray Lewis of the Ravens with the silkiest of touches in traffic and a thunderous shot. He grew up in the Dutch system. On Sunday, they abandoned their footballing natures to become like the hated Germans of 1974 in order to slow the down Spain and to destroy their playmakers. They should have played with nine men, as DeJong and Van Bommel should have been sent off but weren't.
Had the Dutch been true to themselves and tried to be positive, it would have been a beautiful game and provided glorious football for the spectators. I believe that the Dutch might have had a chance to win, even if the score were 5-4.
Instead, they played a style that was unfamiliar to them and which was not true to their footballing nature. The coach clearly had to direct this tactical shift, as it was no coincidence that the fouls were focused on the Spanish midfield maestros: Iniesta, Xavi, and Alonso.
On a different front, BP will likely never recover from the disaster in the Gulf of its own making. It is a company that papered over a long-term drift and deterioration of its corporate culture and values. Industry people joke that BP stands for "broken pipelines." Instead of focusing on a culture of operational excellence and safety, the previous CEO focused on empty PR, stating that BP stood for "Beyond Petroleum." Both the CEO and board Chair have been permanently damaged by their incoherent and ineffective strategies for responding to technical, environmental, legal, and stakeholder concerns. One would wonder why most board members would want to stick around for the aftermath of the Gulf situation. A parallel with asbestos seems apt, as capping future liabilities, given the interests of the Gulf states and the Federal government, seems extremely difficult. The company has built up no goodwill to take the pressure off itself.
BP has not been true to its core self as an entity that extracts, transports and refines hydrocarbons in physically challenging onshore and offshore environments. No responsible or successful organization can dodge risk over the long-term by skimping on the construction and maintenance of their physical capital. The Libyans have made some public pronouncements about looking at BP shares as an investment--the trouble will be finding the bottom.
The Dutch have always combined strong technical skills on the ball, with a desire to go forward and physical muscularity. Watch Clarence Seedorf of AC Milan, and you will see someone built like Ray Lewis of the Ravens with the silkiest of touches in traffic and a thunderous shot. He grew up in the Dutch system. On Sunday, they abandoned their footballing natures to become like the hated Germans of 1974 in order to slow the down Spain and to destroy their playmakers. They should have played with nine men, as DeJong and Van Bommel should have been sent off but weren't.
Had the Dutch been true to themselves and tried to be positive, it would have been a beautiful game and provided glorious football for the spectators. I believe that the Dutch might have had a chance to win, even if the score were 5-4.
Instead, they played a style that was unfamiliar to them and which was not true to their footballing nature. The coach clearly had to direct this tactical shift, as it was no coincidence that the fouls were focused on the Spanish midfield maestros: Iniesta, Xavi, and Alonso.
On a different front, BP will likely never recover from the disaster in the Gulf of its own making. It is a company that papered over a long-term drift and deterioration of its corporate culture and values. Industry people joke that BP stands for "broken pipelines." Instead of focusing on a culture of operational excellence and safety, the previous CEO focused on empty PR, stating that BP stood for "Beyond Petroleum." Both the CEO and board Chair have been permanently damaged by their incoherent and ineffective strategies for responding to technical, environmental, legal, and stakeholder concerns. One would wonder why most board members would want to stick around for the aftermath of the Gulf situation. A parallel with asbestos seems apt, as capping future liabilities, given the interests of the Gulf states and the Federal government, seems extremely difficult. The company has built up no goodwill to take the pressure off itself.
BP has not been true to its core self as an entity that extracts, transports and refines hydrocarbons in physically challenging onshore and offshore environments. No responsible or successful organization can dodge risk over the long-term by skimping on the construction and maintenance of their physical capital. The Libyans have made some public pronouncements about looking at BP shares as an investment--the trouble will be finding the bottom.
Tuesday, July 6, 2010
US Soccer and South Africa
As Sunil Gulati, the CEO of the United States Soccer Federation, mulls over the future of the USA team coach Bob Bradley, I've thought about the performance of the team in South Africa. Of all the US teams I've watched over the years, this was the team that had the best team spirit and concept, no question. Previous teams were built on a star concept, driven by the needs of the product marketers.
The current team was certainly centered around Landon Donovan. However, Coach Bradley created a team that played together, sacrificed for each other, gave 100 percent at all times, and refused to point fingers at each other on the field when things didn't go well. Thinking back to the days of Eric Wynalda, John Harkes, Alexei Lalas, Coby Jones, Casey Keller and other luminaries, this was never really the case.
The current team had players like defenders Jay Demerit and Jonathan Borenstein who were not even MLS stars, but who played with skill, passion, and fearless commitment. Kudos to them and to the coach for generating this kind of proud, fan pleasing performance. It's a real credit to this team-building skills. Newer players like Maurice Edu showed their potential at the tournament, and Edu in particular looked very comfortable in the holding position in front of the back four. So, Coach Bradley has an astute eye for talent also. His own son, Michael Bradley, has just begun to tap his own potential in the Bundesliga.
So, our discussion post-tournament is whether or not the coach should be replaced. He deserves another stint as coach. However, everything else in the U.S. Soccer infrastructure needs to change in order for him to succeed. This would force us to look at some uncomfortable truths about our soccer selves.
Aside from our goal keepers--Howard and Friedel--we don't have elite players who can compete at the highest levels of international professional soccer. Despite Landon Donovan's good few weeks at Everton, he is a solid, club level player, but not on the elite level. Our player development system is woefully inadequate, and we have no real out-and-out attacking players with ball skills to threaten a defense--like Ozil, Podolski, and Klose(Germany); Villa and Torres (Spain); Robben and Van Persie (Netherlands); Suarez and Forlan (Uruguay). Our youth coaching is woeful and focuses on producing players who can run all day, with poor technical skills.
Most of our players have been produced from organized soccer programs, may of which are in the suburbs. Potential stars, including those from minority communities in the inner cities, don't have street soccer venues to develop their skills and to enjoy the game. If we developed basketball players like we develop soccer players, the NBA would be a six team league. We need to think differently about growing players.
Jurgen Klinsmann, who was offered the US coaching job a few years back, was smart enough to realize that taking the position without reforming the entire apparatus of youth coaching and player development would lead to failure. In fact, he noted on ESPN that the German FA decided ten years ago that in order to become a World Cup winner again their entire system had to be re-invented. The current team is a product of that long-term, strategic and systemic effort.
We can learn a lot from the German retooling of their model. I don't know if it fits our short attention span or our fractured model of soccer governance, which consists of powerful, independent fiefdoms like the USSF, US Youth Soccer, the ODP, and the state associations. Here's hoping that we look down the road beyond the next tournament and keep improving ourselves in the truly global game of football.
The current team was certainly centered around Landon Donovan. However, Coach Bradley created a team that played together, sacrificed for each other, gave 100 percent at all times, and refused to point fingers at each other on the field when things didn't go well. Thinking back to the days of Eric Wynalda, John Harkes, Alexei Lalas, Coby Jones, Casey Keller and other luminaries, this was never really the case.
The current team had players like defenders Jay Demerit and Jonathan Borenstein who were not even MLS stars, but who played with skill, passion, and fearless commitment. Kudos to them and to the coach for generating this kind of proud, fan pleasing performance. It's a real credit to this team-building skills. Newer players like Maurice Edu showed their potential at the tournament, and Edu in particular looked very comfortable in the holding position in front of the back four. So, Coach Bradley has an astute eye for talent also. His own son, Michael Bradley, has just begun to tap his own potential in the Bundesliga.
So, our discussion post-tournament is whether or not the coach should be replaced. He deserves another stint as coach. However, everything else in the U.S. Soccer infrastructure needs to change in order for him to succeed. This would force us to look at some uncomfortable truths about our soccer selves.
Aside from our goal keepers--Howard and Friedel--we don't have elite players who can compete at the highest levels of international professional soccer. Despite Landon Donovan's good few weeks at Everton, he is a solid, club level player, but not on the elite level. Our player development system is woefully inadequate, and we have no real out-and-out attacking players with ball skills to threaten a defense--like Ozil, Podolski, and Klose(Germany); Villa and Torres (Spain); Robben and Van Persie (Netherlands); Suarez and Forlan (Uruguay). Our youth coaching is woeful and focuses on producing players who can run all day, with poor technical skills.
Most of our players have been produced from organized soccer programs, may of which are in the suburbs. Potential stars, including those from minority communities in the inner cities, don't have street soccer venues to develop their skills and to enjoy the game. If we developed basketball players like we develop soccer players, the NBA would be a six team league. We need to think differently about growing players.
Jurgen Klinsmann, who was offered the US coaching job a few years back, was smart enough to realize that taking the position without reforming the entire apparatus of youth coaching and player development would lead to failure. In fact, he noted on ESPN that the German FA decided ten years ago that in order to become a World Cup winner again their entire system had to be re-invented. The current team is a product of that long-term, strategic and systemic effort.
We can learn a lot from the German retooling of their model. I don't know if it fits our short attention span or our fractured model of soccer governance, which consists of powerful, independent fiefdoms like the USSF, US Youth Soccer, the ODP, and the state associations. Here's hoping that we look down the road beyond the next tournament and keep improving ourselves in the truly global game of football.
Thursday, July 1, 2010
Coopting Good Governance
Professor Lucian Bebchuk and his co-authors at the Harvard Law School have produced an interesting paper concluding that while there may have been some excess returns to investing in a "good governance" portfolio in 1991-1999, no such excess return existed 2004-2008, just when the "good governance" investment thesis should have been paying off maximally.
Why? In a sense, "good governance" has been co-opted as a term. A good analogy is the term "organic" in the food business. The term was coined for small farmers using sensible land-use, water and pesticide practices and selling their products in farmers' markets to a narrow market segment. Now, that term has been co-opted by corporations of every size, and the consumer's Good Housekeeping Seal (remember that?) is certification by some body that no one knows about. We have organic Oreos (Paul Newman), organic coffee (Starbucks, Caribous) and organic vinegar. Quite often, in the case of chicken, the real practices used to meet the seal of approval are completely antithetical to the real meaning of the original label.
So it is with good governance. Enter businesses that label governance, like ISS, and public companies have learned how to game the system to get their seal of approval. But, it is almost impossible for an equity investor to truly know how well a portfolio company is governed without having tape transcripts of board meetings over a period of time. Since we get Fed transcripts five years later, we can forget this notion.
As academic research has pointed out, most corporate performance can be explained by the interaction of cyclical factors, random events, and intra-industry shifts in short-term market share.
Now that proxies are full of full of uninformative and non-measurable disclosures about processes, the focus on good governance and on aligning management's interest with those of stakeholders is abating. In fact, the article shows that publications in academic and NBER journals on governance peaked a few years ago.
Investors should continue more than ever to ferret out how a portfolio company is being run on a long-term basis but it can't be done by looking at proxies and governance ratings, as these have been stripped of meaningful value.
Why? In a sense, "good governance" has been co-opted as a term. A good analogy is the term "organic" in the food business. The term was coined for small farmers using sensible land-use, water and pesticide practices and selling their products in farmers' markets to a narrow market segment. Now, that term has been co-opted by corporations of every size, and the consumer's Good Housekeeping Seal (remember that?) is certification by some body that no one knows about. We have organic Oreos (Paul Newman), organic coffee (Starbucks, Caribous) and organic vinegar. Quite often, in the case of chicken, the real practices used to meet the seal of approval are completely antithetical to the real meaning of the original label.
So it is with good governance. Enter businesses that label governance, like ISS, and public companies have learned how to game the system to get their seal of approval. But, it is almost impossible for an equity investor to truly know how well a portfolio company is governed without having tape transcripts of board meetings over a period of time. Since we get Fed transcripts five years later, we can forget this notion.
As academic research has pointed out, most corporate performance can be explained by the interaction of cyclical factors, random events, and intra-industry shifts in short-term market share.
Now that proxies are full of full of uninformative and non-measurable disclosures about processes, the focus on good governance and on aligning management's interest with those of stakeholders is abating. In fact, the article shows that publications in academic and NBER journals on governance peaked a few years ago.
Investors should continue more than ever to ferret out how a portfolio company is being run on a long-term basis but it can't be done by looking at proxies and governance ratings, as these have been stripped of meaningful value.
Tuesday, June 29, 2010
Fallout From Financial Reform
I recently met with an executive of a larger credit union, and I've been contemplating some of what I heard about the impact of the financial reforms being enacted by Congress on his core business of community lending.
In today's Wall Street Journal, Sarah Wallace, the CEO of First Federal Savings & Loan in Ohio has this story about a loan application:
"Recently, a couple came to us wanting to refinance their home. They were paying a relatively high interest rate (by today's standards) to a competing institution. They had reasonably good equity in their residence and owned a couple of rental properties, also with good equity. One borrower worked in the construction field and had experienced a reduction in income over the past couple of years, causing some recent slow payments on their credit report. After verifying the income and assets of the borrowers, an idea not new to us, we decided to deny the loan."
Making this kind of loan, given the equity cushions and their overall credit history, is foursquare in the charter of community banks and credit unions. The CEO characterizes declining this loan NOT as a credit decision, but as a compliance decision! Meaning, that she felt in the post-reform, process and compliance oriented environment her bank would have been criticized or called to task for making what might be a fundamentally sound loan. This is a perfect example of how what's going in the Capitol hurts Main Street and the ordinary citizen.
Through the heavy lobbying of the ABA, community banks and credit unions will be cast into the same regulatory net as the money center banks that were co-partners in creating the global financial meltdown. The compliance staffing and consultant costs for credit unions and community banks will increase post-legislation, for no fundamental reason. At the same time, the government will take a share of some of their profit streams, like interchange payments from the payment networks for their private label credit cards.
What will be the results? Probably the end of free checking and free debit cards (to access your own money), an increase in fees, a decline in profitability, and reduced levels of financial services access to new earners and families. It's another in what will be one long Excedrin headache for the beleaguered consumer.
In today's Wall Street Journal, Sarah Wallace, the CEO of First Federal Savings & Loan in Ohio has this story about a loan application:
"Recently, a couple came to us wanting to refinance their home. They were paying a relatively high interest rate (by today's standards) to a competing institution. They had reasonably good equity in their residence and owned a couple of rental properties, also with good equity. One borrower worked in the construction field and had experienced a reduction in income over the past couple of years, causing some recent slow payments on their credit report. After verifying the income and assets of the borrowers, an idea not new to us, we decided to deny the loan."
Making this kind of loan, given the equity cushions and their overall credit history, is foursquare in the charter of community banks and credit unions. The CEO characterizes declining this loan NOT as a credit decision, but as a compliance decision! Meaning, that she felt in the post-reform, process and compliance oriented environment her bank would have been criticized or called to task for making what might be a fundamentally sound loan. This is a perfect example of how what's going in the Capitol hurts Main Street and the ordinary citizen.
Through the heavy lobbying of the ABA, community banks and credit unions will be cast into the same regulatory net as the money center banks that were co-partners in creating the global financial meltdown. The compliance staffing and consultant costs for credit unions and community banks will increase post-legislation, for no fundamental reason. At the same time, the government will take a share of some of their profit streams, like interchange payments from the payment networks for their private label credit cards.
What will be the results? Probably the end of free checking and free debit cards (to access your own money), an increase in fees, a decline in profitability, and reduced levels of financial services access to new earners and families. It's another in what will be one long Excedrin headache for the beleaguered consumer.
Three Yards and A Cloud of Dust
I sincerely hope against hope that the Dodd-Frank "financial reform" bill dies without a signature. The financial industry has not become smaller, but more concentrated, and the big players, like JP Morgan and Citicorp, are still "too big to fail." The mortgage markets are now dominated more than ever, by Fannie and Freddie, the two culprits that led us into this mess, spurred on by legislators like Barney Frank.
Derivatives trading may become marginally more transparent in its smaller segments, but nothing of significance has changed here either, since this lucrative activity has not been separated from commercial and traditional investment banking.
So, where is the next crisis likely to emerge? The 1970's saw the old U.S. Bank almost brought to its knees by developing country debt, from countries like Argentina if I recall. The next boom in asset prices is and will likely continue to be in emerging markets. China has been dealing quietly with its real estate issues, and Indian properties have long been in a gold rush mode. Properties in Central and Latin America are drawing corporate and individual speculators. There is lots of money to be made, and lots of systemic risk to be generated in these emerging markets.
Interbank lending still seems to be frozen, and small businesses cannot get traditional C&I loans from banks or larger credit unions. If these businesses are the ones that generate employment growth, then this is not a good sign going forward.
There is an economic argument which says the demand for monetary assets will outstrip the demand for goods and services, and so the near-term risk is deflationary. That is what some of the markets are signalling. However, the longer-term response to the sovereign debt issue is on the inflationary side. Again, this is a trader's dream, but a nightmare for the citizen, small investor, and policy maker.
Derivatives trading may become marginally more transparent in its smaller segments, but nothing of significance has changed here either, since this lucrative activity has not been separated from commercial and traditional investment banking.
So, where is the next crisis likely to emerge? The 1970's saw the old U.S. Bank almost brought to its knees by developing country debt, from countries like Argentina if I recall. The next boom in asset prices is and will likely continue to be in emerging markets. China has been dealing quietly with its real estate issues, and Indian properties have long been in a gold rush mode. Properties in Central and Latin America are drawing corporate and individual speculators. There is lots of money to be made, and lots of systemic risk to be generated in these emerging markets.
Interbank lending still seems to be frozen, and small businesses cannot get traditional C&I loans from banks or larger credit unions. If these businesses are the ones that generate employment growth, then this is not a good sign going forward.
There is an economic argument which says the demand for monetary assets will outstrip the demand for goods and services, and so the near-term risk is deflationary. That is what some of the markets are signalling. However, the longer-term response to the sovereign debt issue is on the inflationary side. Again, this is a trader's dream, but a nightmare for the citizen, small investor, and policy maker.
Monday, June 7, 2010
Adieu to a Master
John Wooden was a great basketball coach and a great teacher. His life was authentic, that is, led unfailingly in concert with his morals, ethics and professed beliefs. Don't chuckle, but I've heard from many people that everyone's favorite neighbor, Mr. Rogers, was the same kind of individual.
Wooden's teams won ten NCAA men's basketball championships, and six in a row from 1968-1973, which included my college years. I have to say that I hated the teams from the consecutive win era, because they always took out teams that I supported. One clue that he was an extraordinary coach is the diversity of players and personalities that thrived under his tutelage: Kareem Abdul-Jabbar, Gail Goodrich, Walt Hazzard, Sven Nater, Sidney Wicks, Curtis Rowe, Marques Johnson, and, of course, Bill Walton. That's quite a group of personalities, which doesn't include the number of backups and bench warmers who thrived even without pounding the rock as a starter.
I heard from coaches who attended his clinics that his manuals included details that might sound silly today. Coach Wooden required cotton socks over synthetics (boy was he right!) because they breathed better and were less likely to lead to blisters. Double socking has a very precise algorithm before you laced up the Chuck Taylor Converse All-Stars. Lacing was also specified in detail.
A good friend of mine was manager of the basketball team during part of Coach Wooden's tenure, and Wooden's interactions with Bill Walton and the sullen Abdul-Jabbar were memorable. Despite its political incorrectness, he insisted on addressing Kareem as "Lewis," his birth name. Despite Walton's immaturity and questionable hygiene, it seemed as if Wooden realized that there burned a competitive flame and dedication to improve that was essential to his core concept. Apparently, Coach Wooden rarely talked to his team about winning or losing. His questions were always about whether or not his teams could say to themselves, "Were we prepared, and did we give 100% to the team and did we apply what we learned?" Quite extraordinary.
The smothering press, the back doors, the squeaking sneakers during the layup drills---they were all part what created belief and relaxation in his teams. There was never any reason to be nervous, because they were well prepared, individually and collectively. Everyone knew his role. Sven Nater carried the bags of the starting center for years, but he made his contributions, and everyone knew that many of them came in practice.
Bill Walton is quite a success story in his own right, and not just for basketball or for his winning the NBA Championship either; he is exceptionally open in his gratitude to his teacher. I like that. There's a lot to learn from a leader, teacher and good man like John Wooden.
Wooden's teams won ten NCAA men's basketball championships, and six in a row from 1968-1973, which included my college years. I have to say that I hated the teams from the consecutive win era, because they always took out teams that I supported. One clue that he was an extraordinary coach is the diversity of players and personalities that thrived under his tutelage: Kareem Abdul-Jabbar, Gail Goodrich, Walt Hazzard, Sven Nater, Sidney Wicks, Curtis Rowe, Marques Johnson, and, of course, Bill Walton. That's quite a group of personalities, which doesn't include the number of backups and bench warmers who thrived even without pounding the rock as a starter.
I heard from coaches who attended his clinics that his manuals included details that might sound silly today. Coach Wooden required cotton socks over synthetics (boy was he right!) because they breathed better and were less likely to lead to blisters. Double socking has a very precise algorithm before you laced up the Chuck Taylor Converse All-Stars. Lacing was also specified in detail.
A good friend of mine was manager of the basketball team during part of Coach Wooden's tenure, and Wooden's interactions with Bill Walton and the sullen Abdul-Jabbar were memorable. Despite its political incorrectness, he insisted on addressing Kareem as "Lewis," his birth name. Despite Walton's immaturity and questionable hygiene, it seemed as if Wooden realized that there burned a competitive flame and dedication to improve that was essential to his core concept. Apparently, Coach Wooden rarely talked to his team about winning or losing. His questions were always about whether or not his teams could say to themselves, "Were we prepared, and did we give 100% to the team and did we apply what we learned?" Quite extraordinary.
The smothering press, the back doors, the squeaking sneakers during the layup drills---they were all part what created belief and relaxation in his teams. There was never any reason to be nervous, because they were well prepared, individually and collectively. Everyone knew his role. Sven Nater carried the bags of the starting center for years, but he made his contributions, and everyone knew that many of them came in practice.
Bill Walton is quite a success story in his own right, and not just for basketball or for his winning the NBA Championship either; he is exceptionally open in his gratitude to his teacher. I like that. There's a lot to learn from a leader, teacher and good man like John Wooden.
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