How A-ROD differs from Tiger

Yankees third baseman Alex Rodriguez opted out of the final three years on his 10-year, $252 million contract.

The announcement was made during the final game of the World Series, leading many to criticize A-ROD and his agent, Scott Boras for stealing the show from the Boston Red Sox. Boras apparently wants to score a $300 million contract for his super star client. The Wall Street Journal got into the act and suggested that A-ROD accept a form of deferred compensation convertible into a minority ownership position in the new team that signs him. Sam Zell, the new owner of the Chicago Cubs, would be a good candidate to do such an innovative deal. link

Now, let's turn to another superstar pro athlete -- Tiger Woods. ESPN once estimated that Tiger's earning potential over the course of his career is over $6 billion -- that's right, $6 billion from PGA and worldwide tournament winnings, appearance fees and endorsements. link

So, why is everyone up in arms about the auction of A-ROD's talent to the highest bidder, when someone like Tiger stands to earn even more? One of the reasons is the perception that A-ROD's demands are driven by his ego as much as his talent. And unfortunately, A-ROD selected a team sport like baseball rather than an indivudal sport like Tiger. When push comes to shove, an ego driven star might optimize his personal benefit over what is good for the team overall. And that is why many Yankees fans are saying, "Good riddance to Alex."

Ego gets in the way in many workplace situations beyond sports. Take the example of Stanley O'Neal, who recently was forced to retire from Merrill Lynch with an exit package worth around $160 million. The press reports indicate that O'Neal is the latest victim of the Wall Street mortgage crisis. Merrill Lynch incurred $8.4 billion in mortgage write-downs in the latest quarter and O'Neal also made unauthorized merger overtures to Wachovia. The write-downs and talks with Wachovia alone did not cost O'Neal his job. O'Neal is widely known as a ruthless, autocratic leader who frequently forced out subordinates and disregarded the need for building an effective team around him. In the world of Wall Street, O'Neal has more in common with A-ROD than Tiger. Look for his next job to be more of an individual sport like private equity.

Enhancing Shareholder Value Through Good Works

In case you missed the article in Saturday's Weekend Edition of The Wall Street Journal, Herb Greenberg did a nice story on how companies can enhance their shareholder value through good works.
link

Research on the subject is emerging yet still far from conclusive. One mutual fund company, Dover Management, studied the relationship between stock performance and philanthropy and demonstrated that companies with strong operating performance and a history of giving back, outperformed the broader S&P 500 index. PepsiCo, Johnson & Johnson and Kimberly Clark are Dover favorites.

However, solid operating performance is an essential ingredient in this mix as it provides the financial means to give back. Often, companies in trouble or unable to meet their financial targets, are the first to cut discretionary expenditures such as philanthropy.

While Dover's Responsibility Fund has delivered a healthy 22% gain since its inception in 2005, it has lagged the S&P 500 Index which is up 27%. You might want to consider giving up the extra 5 points -- a 22% gain is not too shabby -- for the peace of mind that your investment dollars are being directed to companies who share your interest in values, good works and philanthropy. To investigate setting up an account with Dover Management, go to link

Monthly Round Up

Here are a few notable updates from entries published earlier:

September 6 -- "Is Apple Evil?"

Apple continues to post blockbuster results across all of its product lines taking full advantage of back-to-school MAC sales and higher demand for the iPhone following the price cut. The stock is on a tear -- having more than doubled this year. This is great news for shareholders but it is still "buyers beware" on the consumer side. Like most "must have" fashion items, price, service and reliability should be secondary considerations if you shop at the Apple store. link

September 19 -- "L.L. Bean -- Guaranteed Good Karma"

I saluted L.L. Bean for its unconditional consumer guarantee. Return any item, at any time and for any reason. Now, just ahead of the holidays, the company announced free shipping with no minimum order. More good karma coming your way.
link

October 4 -- "If I were on the Comp Committee"

Using the example of Angelo Mozilo, CEO of Countrywide, I offered a solution to the problem of executives exercising stock options and reaping unwarranted profit ahead of bad news. The concept is to use a 3 year period to determine the exercise sale price for any exercised option. If the stock goes up, the executive shares the upside. But if the stock goes down, the executive is unable to profit ahead of the bad news. Right now, executives can buy and sell options instantaneously, locking-in their profit. This just doesn't seem right. The SEC has not adopted this rule but it is in fact conducting an informal investigation into Mozilo's stock sales. link

October 8 -- "Wired and Wonderful"

I offered an alternative to how cell phones could be marketed to take the sting out of consumer purchases -- separate the sale of phones from the sale of service contracts. The esteemed WSJ columnist Walter S. Mossberg offered up the same opinion in the October 22 edition of The Journal Report on Technology. Thank you Walter for echoing my point of view. link

Global Warming: Reality TV, Print and Radio

The national news media is awash with stories connected to the global warming phenomenon. Not just left-leaning New York Times -- even the venerable Wall Street Journal is getting into the act. In the last 7 days, I have watched, heard and read the following:

Out of control fires as large as 100,000 acres are now routine and threaten our national forests: CBS 60 minutes, October 21 link

Canadian agriculture adapts to warmer climates and begins to grow world class wines: Wall Street Journal, October 16 link

Georgia, threatened by a prolonged drought, declares state of emergency and is forced to choose between water for wildlife or for humans: NPR, October 22 link

The Great Lakes are shrinking and cargo ships are forced to carry less: New York Times, October 22 link

The West is running out of Water: New York Times, October 21 link

Meanwhile, in New York the late-October dress code remains t-shirts, shorts and flip-flops. Comfortable and scary...

Slow Down Before You Hurt Someone

As the father of three young adult men, I recall my anxiety when they started driving. If you have been through this you know what I am talking about.

Young male drivers tend to go too fast. On one occasion, after pleading with one of my sons to slow down, I finally raised my voice and said. "Slow down! Let me see you drive as if you are a senior citizen." It worked.

In business, there is the constant push to go faster. To accelerate market entry. To get ahead of the competition. To skip the test market and launch. To fix a problem. And so on. The need for speed is only magnified if you are facing a quarter to quarter performance mentality. Make the future come alive now -- why go 100 kilometers an hour when the car is built for 260?

But with speed comes risk. A business should not move faster than its ability to manage the associated risks. Or, it may be unprepared for an unexpected curve, to stick with the driving analogy.

Take the example of Pfizer, the world's largest drug maker. Its 3rd quarter profit fell 77 percent due to the expense of discontinuing its inhaled insulin treatment Exubera. The write-off for Exubera is $2.8 billion.

Pfizer faces slowing growth ahead due to competition from generic alternatives and a lack of blockbuster drugs in its pipeline. Pfizer CEO, Jeffrey Kindler, has said there are no silver bullets or quick fixes to this problem. But it appears that Exubera was intended to be just that.

Exubera, once expected to be a $1-2 billion drug, was rushed to market in early 2006. It failed to catch on with doctors or patients due to concerns about safety, inconvenience and cost. First year sales of Exubera were less than $15 million.

Of course, Pfizer must adopt a sense of urgency and take the steps to rebuild its pipeline. I am not suggesting that it operate with a business as usual mentality. But in the case of Exubera, Pfizer moved so fast that it was unable to fully assess both the opportunity AND and the risk. It finds itself in reverse rather than fifth gear.

Sometimes it pays to slow down.

Steinbrenner And Torre Are Both Stupid!

Now that I have gotten your attention, take a moment after your read this and post a comment. Let me know what you think of Karma Capitalist. Now, back to the Yankees.

It has been widely reported that Joe Torre turned down the offer of a one year contract to coach the Yankees for $5.0 million plus incentives -- a pay cut from his soon to expire 3 year $19.2 million contract.

There is much talk about how the Steinbrenner clan manages the Yankee franchise like a big business including their newly discovered "pay for performance" philosophy. However, they have forgotten one of the most important lessons of management -- effective succession planning. And on Torre's part, he may be making one of the biggest mistakes a "CEO" can make -- letting ego dictate his decisions and putting his interests ahead of the interests of the team and their customers (the fans).

There is way too much ego involved in running the Yankees these days. Torre's ego is the least of it. As Steinbrenner the dictator fades, his gang of "I want to be next in charge" lieutenants are angling for the throne. And based on the Torre situation, a similarly disruptive transition awaits Yankees' fans on this appointment as well.

It could have been managed better. Steinbrenner could have offered Torre a two year contract and appointed a deputy such as Don Mattingly as clear successor. Tyler Kepner and Ben Shpigel of the New York Times put forth this scenario in their SportsThursday column. link

This story is about money. The $1 billion valued Yankees' franchise. Their $200 million payroll. Joe Torre and the $7.5 million he made this year -- more than twice the amount paid to Lou Pinella, the second highest paid baseball coach.

One would hope that old men like Steinbrenner (77) and Torre (67) would be long past measuring their value in financial terms. Clearly they are not. How do you calculate Torre's near term, intangible value to the Yankeess within a pay for performance framework. You can't. You use judgment -- an asset Steinbrenner has never amassed in all that he owns.

The decision about who should coach the Yankees next year should have been about building on the Torre legacy and laying down a foundation for a new one. And mitigating the risks of such a transition.

Too bad it didn't work out that way. Too bad for Yankees fans.

A Tale of Two Mortgages

This is a tale of two mortgages or rather, two middle-aged men.

Let’s start with Carlos.

Carlos is a naturalized citizen of the United States who emigrated from Columbia. Well-educated, Carlos was a mid-level executive for a large company in his home country. With pride, he says that he once had excellent skills in business administration.

Carlos never duplicated his early career success in this country. For many years, he has earned a living driving for a local car service/limousine company. I have known him for at least a decade and have enjoyed our discussions during trips to airports and meetings in the city.

Without exception, Carlos dresses in a suit, crisp white shirt and tie. He is courteous, yet formally respectful to his clients. He arrives early and will do what it takes to make his clients feel comfortable -- and more important than they probably are.

Carlos divorced many years ago, then remarried and started a second family. Eager to provide for his wife and young son, he saved and searched to find a home for them. In his best years, Carlos never makes more than $60,000.

Unable to afford the sky-high housing prices in the New York area, Carlos took a big gamble and relocated his family to South Carolina. With a huge smile, he showed me photographs of the first Christmas in his new house.

Unfortunately, Carlos could not find work in South Carolina and ended up back in New Jersey driving for the car service. He settled into a routine of living with his oldest son, sending money to his wife and visiting for short stays every few months or so.

Like many families who struggled to find an affordable house, Carlos would not have been able to buy a home if it were not for the sub prime mortgage market. Now like many of those same families, Carlos is likely to lose his house – if not for economic reasons, then for the difficulties of a long distance marriage. The situation does not look good regardless of his deep-seated optimism.

Now, let’s turn to John. An established and successful sales executive, John rode the first tech boom and earned ample bonuses and stock options along the way. Having put his kids through college and paid off the mortgage on his home in Westchester County, he sold options and bought a vacation dream house along the Gulf Coast of Florida.

John watched the Florida real estate market take off, and heard plenty of stories of big financial gains from buying and flipping condos. Eager to profit, John decided to get into the act himself. While he never considered himself a speculator, he quickly acquired 2 additional condos and a single-family home – and carried almost $1 million in mortgages.

In the spring of 2007, John was let go – the latest victim of corporate restructuring. Now 55 and finding it difficult to find a job and replace the $300,000 he earned before, John is beginning to panic. The interest rates on his Florida mortgages are rising. John’s wife Susan sells real estate mostly to keep busy and cannot make up for the lost income on her own.

It is unlikely that John will make it through the mortgage crisis with his assets in tack. The values of his homes in Florida are now below the face value of his mortgages. John will likely sell all of his real estate to clean his slate of debts. While John will never be impoverished, this will be a set back he will likely never recover from. They are still too young to rationalize the sale of their Westchester home as the downsizing of empty nesters. For the first time in many years, John’s relationship with Mary is strained.

Perhaps you feel less sorry for John than Carlos. The speculators deserve to feel the pain on the downside, if they are going to make quick profits on the upside. And who can blame Carlos for taking bold steps to provide a nice home for his wife and young son.

Yet, John is inherently a good man too. He – and his friends -- viewed capital gains as an entitlement. He had worked hard and long hours to be in a position to invest in real estate on the side.

Both tried to provide for their families. Both failed. Should the government step in and help Carlos? John? Both or neither? Let me know what you think.

Youth Culture: The next workplace bias to overcome

I have been blessed to work for a number of companies noted for their excellence and leadership position. Talent was the most notable factor in the success of these companies. With a career that has spanned decades, I witnessed first hand how companies faced the opportunity and challenge of increasing the diversity of their work force.

In the mid-eighties, I recall during one diversity training workshop, a boss of mine remarking that our company consisted entirely of WASPs. When I replied that in fact I was an Italian-Irish Catholic, his reply was, "Having gone to Harvard Business School, you are in practice, a WASP..." Women, people of color, gays and the disabled all faced enormous obstacles to their advancement. While progress has been made, much more can still be done.

The next workplace bias in my view, which must be addressed is towards young people, particularly those in their twenties. Let's face it, these young adults have a very different sense of fashion, behavior and interest, which often clashes with the typical workplace norm. Does your company have a dress code? Then how is it applied to a tattoo, piercing or an unshaven face? Does your company have standard work hours? Then how will someone fit in who prefers to work from 10am to 3pm and then return to work after dinner? Does your Company expect everyone present at meetings? How about someone, who is a huge contributor but prefers to work remote and communicate via text message?

Take a test of your tolerance by making a hypothetical choice between two candidates who have the same credentials on paper -- one fits the typical company profile and the other is more Lower East Side. You may be like most companies who in my opinion, would choose the candidate with the more "acceptable" model of professionalism. This would not be to your advantage for the two reasons.

First, the U.S. workforce will soon face a major shortage as baby boomers begin to retire. You need more young workers. And second, the pierced or tattooed candidate may in fact be the more qualified person. If companies restrict their hiring practices to those who look "normal" or "safe" then they are arbitrarily reducing the pool of candidates. In the end, they will wind up being less competitive.

I am now helping run a start up. I an continually amazed by the talent available to us -- many of these contributors are under 30. They are bright, creative, entrepreneurial and productive. But, they do not come from central casting.

One of our potential partners, Lori Leven, just happens to also run a world famous tattoo and piercing parlor named New York Adorned. New York Adorned also sells antique and imported, high end jewelry from India. link

Our technology consultant (serving as our tech department) is run by a tattooed, Krishna devotee and young father of three -- who just happens to do outstanding web design and development. His award winning company is named Blue Fuse and does elegant and highly functional design for a wide range of clients. link

And, we recently produced a series of web videos with a film production company called Chop Wood Carry Water run by the award winning team of Eddie Boyce and Doug Karr. Eddie and Doug visit the office almost every day including Sundays but rarely show up before noon and leave long after midnight. They have produced documentaries, short films and commercial projects such as advertisements and video press releases. link

So, if you are looking for talent or are in need of a partner, expand your field of vision and include younger candidates whose talents may surprise you -- more than their looks distract you.

Very Long Distance Customer Care

The Penfolds wine making team travels over 10,000 miles from Australia to New York (and many cities in between) to provide the ultimate in customer care.

Every two years, Penfolds reached out to owners of their wines and offers a free inspection and re-corking procedure for any wine 15 years or older. Whether you have a single bottle or case... of their world renowned Grange or their everyday wine, Bin 347, they provide the same level of care and attention. link

Earlier this week, I had an appointment in mid-town New York with Peter Gago and the Penfolds staff to examine the 5 bottles of 1985 Grange I have stored in my cellar. Grange is a world-class wine noted for its considerable ageing potential -- which can be cut mercilessly short due to a flawed cork. Corks may dry out over time and may need to be replaced. I know of no other wine producer of ultra premium wines which offer this level of service.

My experience with Penfolds this week was remarkable. I had a specific appointment to make sure the team gave my their undevided attention. After examining my five bottles, it was determined that only one needed re-corking. The process was explained to me step by step and my wine never left my sight. I left not only with the wine I brought but with a gift bag from Penfolds including a 10 year old Shiraz, a Reidel handmade wine glass and a book listing all Penfolds wines and vintages with annually updated tasting notes.

Why does Penfolds go to this length? Already known for producing one of the greatest red wines on Earth, it makes sense for Penfolds to invest in protecting the customer experience, brand values and premium positioning associated with Grange. The re-corking service also allows Penfolds to establish a personal relationship with its end consumer - which is difficult if you make the wine in Australia, ship it around the world and sell through wholesalers and retailers. There is a limit to the amount of customer touch one can do over the Internet.

Short-term, the economics probably don't make sense. But the wine business at the high end is not about short term economics. It's about strengthening brand equity and preserving the value of its past vintages. This is measured in generations, not quarters.

Raise a glass to Penfolds and say, Cheers!

Wired and Wonderful

Ah, the good old days of telecommunications. Remember Ma Bell? Even after the historic break up of AT&T, everyday life was pretty simple for the phone consumer.

Your RBOC (Regional Bell Operating Company) provided local service and AT&T "long lines" provided long distance service. Sure, wired technology was basic. And, the monopoly structure meant you paid too much. But in the words of one tech guru, "every time you picked up the phone receiver, you heard a crystal clear dial tone." Telecommunications became the ultimate standard for tech reliability.

Deregulation of service brought more choice and keener price competition. You could shift from AT&T to MCI and buy your phones from Panasonic at Wal-Mart. And, wireless technology ushered in a whole new era of communication convenience and value added services. But life today is a lot more complex, confusing and downright frustrating from a consumer experience standpoint.

The rapid change of mobile technology coupled with the variety of service providers competing for your business should translate into great value and service. Yet, it is not. Instead, consumers are faced with an array of confusing monthly pricing plans, steep fees for value-added services and multi-year subscription commitments. It doesn't have to be this way.

I lived in London for several years and loved my BT service and my G3 Motorola phone, which worked without interruption almost everywhere in the world. I don't recall ever having a problem with service interruption. The pricing plan was relatively simple.

How do we make the wireless experience as satisfying in the U.S.? I have two recommendations. First, de-couple phone marketing from service plans. There is absolutely no economic benefit for consumers in packaging phones and service plans. The economics are entirely in favor of the wireless provider even after considering phone rebates. Consumers ought to be able to buy any phone when and where they choose. Second, offer month-to-month service contracts; add a reasonable cancellation fee such as one month notice. These two changes alone would revolutionize the U.S. wireless market. It might actually drive growth and reward those companies which provide the best phones and the best service.

Today, wireless companies act like they have the old AT&T monopoly behind them. Too bad, they don't offer the same value, service and reliability.

The Hippies Were Right!

Well, at the very least about a few things.

Joni MItchell wrote Big Yellow Taxi and put it out as a single in 1970. The release of this pop anthem for the green movement coincided with the first "Earth Day" and help popularize eco-awareness.

Green activists back then pushed Congress to pass the Wilderness Act and ban the use of the synthetic pesticide, DDT. Scientists cite the ban on DDT as a major contributing factor in the return of the American Bald Eagle --"You dont know what you've got... Till its (almost) gone."

Mitchell released an updated version of "Big Yellow Taxi" on her new CD, Shine, just in time for eco-activism part II.

Here are the lyrics --

They paved paradise
And put up a parking lot
With a pink hotel, a boutique
And a swinging hot spot
Dont it always seem to go
That you dont know what youve got
Till its gone
They paved paradise
And put up a parking lot

They took all the trees
Put em in a tree museum
And they charged the people
A dollar and a half just to see em
Dont it always seem to go
That you dont know what youve got
Till its gone
They paved paradise
And put up a parking lot

Hey farmer farmer
Put away that d.d.t. now
Give me spots on my apples
But leave me the birds and the bees
Please!
Dont it always seem to go
That you dont know what youve got
Till its gone
They paved paradise
And put up a parking lot

Late last night
I heard the screen door slam
And a big yellow taxi
Took away my old man
Dont it always seem to go
That you dont know what youve got
Till its gone
They paved paradise
And put up a parking lot

If I were on the Comp Committee...

Angelo Mozilo
Chairman of the Board, CEO
Countrywide Financial (CFC)

2006 Total compensation: $43.0 million


The story of Countrywide Financial and its CEO, Angelo Mozilo, illustrates the point I am about to make. Countrywide is a big force in home mortgage lending and over the years, Mr. Mozilo became one of the highest-paid executives in America. In 2006 alone, FORTUNE Magazine reports that he made $43 million. link

Other reports based on public filings indicate that he took home $160 million in 2005 and $120 million in 2006, when factoring in pay, profit on exercised stock options and stock gains.

As everyone knows, Countrywide's stock tanked in late summer as its sub-prime lending woes made the headlines. Thousands of employees lost their jobs and the Company was forced to seek an emergency investment from Bank America to stave off bankruptcy. CFC closed yesterday at $19.88 - way off its 52 week high of $45.26. Leave aside the moral issue of foreclosures and personal bankruptcies for those middle and lower income families who can no longer afford their variable rate mortgages. Let's focus exclusively on this mess as it relates to CEO compensation.

Is it appropriate that a CEO should make tens or hundreds of millions of dollars as he or she leads the Company right into disaster? Even if the board takes action and fires the CEO, employees and shareholders are left to feel the most financial pain in view of the huge sums of money already made by the CEO. This just doesn't seem fair. These CEO's should have more in the game than their pride and ego.

I have a solution. It is called variable value options (VVO for short). Here is how a VVO would work. Options have vesting periods; typically 3-4 years. Options have exercise periods; 5 or 10 years. Why then is the exercise value of an option determined by the price on a single day? Why not have an 18 or 36 month option value period initiated by the option exercise. An option's final value to the executive would be determined by the average price of an option over this extended period.

Under a VVO plan, the CEO would continue to participate in the performance of the Company's stock either way -- if performance gets better, stays the same or gets worse. This doesn't seem unreasonable given that CEO's are charged with building the long term value of the Company and they can make millions doing so.

The easiest way to implement this policy would be to eliminate the right to buy and sell an option immediately upon exercise. Force all executives to hold their shares upon exercise. This would truly align the top management with shareholder interests.

A Job is the best way to stop a gun

This is a favorite saying of Father Gregory J. Boyle, S.J., the founder of Homeboy Bakery; link provided if you would like to donate or get involved. For almost 20 years, Homeboy Bakery has trained gang members to become bakers using job training as a way to escape gang life.

Today, Homeboy Industries helps over 1,000 people a month and has expanded both its range of job opportunities and its support services such as tattoo removal and life skills training. Former gang members -- tattooed, with prison records and little employment skill -- find it extremely difficult to break free and start over. Without a job, this transition is impossible. A job truly is the best way to stop a gun.

Unemployment -- and the lack of economic and social mobility -- are key factors in crime and civil violence. Perhaps Father Boyle's lession can be applied beyond the streets of East L.A. Maybe job creation should guide our Dept. of Defense policy too.

ExxonMobil: Saving the world one shareholder at a time

The current ExxonMobil advertising features the tagline "Taking on the world's toughest energy challenges" as it should since the company is by far the industry leader.

How is ExxonMobil meeting this energy challenge? By pumping more oil.

I expected the ad body copy to speak to ExxonMobil's commitment to fuel innovation and investment in alternative fuels. But no, the ad's headline reads, "as our economy grows, Americans are demanding more gasoline.... and we're producing." This doesn't seem like hard work at all on the part of ExxonMobil.

In fact, I don't think anything is too difficult for ExxonMobil these days. 2006 was a record year in which the company generated $39 billion in net income and $52 billion in operating cash flow. How did ExxonMobil spend this money?

Not on innovation. $25 billion was spent on share repurchases -- making remaining shares more valuable. $8 billion was spent on shareholder dividends. And only $730 million was spent on technology R&D.

So how ExxonMobil is meeting the world's energy challenges is crystal clear. As demand for oil increases and oil reserves decline, ExxonMobil will continue to pump more oil and raise prices at the pump. Profits will be used to buy back shares.

What will happen first-- will we run out of oil or will ExxonMobil go private? Don't expect energy innovation to stand a chance in this race.

Skype Hype

Ebay, the online auction house, announced a $1.43 billion write down related to its acquisition of Internet phone company, Skype. Skype has not lived up to the commercial expectations associated with Ebay's purchase back in 2005.

While $1.43 billion is a lot of money, it will do little real harm to Ebay -- which has a $54 billion market cap and is trading near its 52 week high. Wall Street takes big write downs like this in stride; often having already reflected anticipated bad news into a company's share price. For example, yesterday Citigroup took a $5.9 billion charge related to write down of corporate loans and mortgages. Yet, Citigroup's shares actually rose by about a dollar.

In the M&A frenzy of Web 2.0, it is buyer beware. Skype now has over 220 million users worldwide. But since it doesn't charge for phone calls between Skype users, the company has had difficulty converting this user base into profitability. To gauge a company's true value, acquirers are once again looking at benchmarks such as revenue growth, profit margins and business models.

"How do you make money" is once again a fashionable question to ask. Otherwise, you might end up paying twice as much as you should for a company as Ebay did for Skype.