Karma Capitalist

What's next -- the company pays for the CEO's home utility bills too?

2008-03-30T11:46:00.004-04:00

Boeing Company, the leading maker of commercial and military aircraft, released the Proxy Statement for its upcoming shareholders' meeting in April. The proxy includes disclosures regarding compensation to executive officers for the year ended December 31, 2007

Boeing paid its Chairman and Chief Executive, W. James McNerney, Jr., just about $19 million last year. Mr. McNerney will need the cargo capacity of a 747 airliner to carry home his pay. Here are the highlights:

* Salary of $1.8 million
* Cash bonus of $4.3 million
* Restricted stock awards valued at $4.8 million
* Stock options worth $3.7 million
* An increase in his pension valued at $3.5 million
* And, about $1 million in "other" compensation

No matter what you think about Boeing, its performance last year or McNerney's contribution to this performance, what is most striking is the $1 million in other compensation. The SEC now requires companies to disclose far more details about the perks provided to the CEO and other executives. The "other" category includes personal benefits, life insurance premiums, tax reimbursement and company contributions to retirement plans.

Most of McNerney's personal benefits are standard CEO issue. $556,000 for the use of Company aircraft, a car and driver, home security service, country club memberships, financial counseling advice, and this last item that caught my attention -- about $90,000 to install a back up generator at McNerney's home to restore power should the electricity be lost. The reason Boeing paid for the generator is to ensure "business continuity." In other words, so McNerny can work during a power outage.

Anyone who makes $19 million in any one year, should be able to afford a generator --even the top of the line model -- on their own. The McNerney family will get as much if not more benefit from it than Boeing -- unless of course, the generator will be used to only power McNerney's PC and fax machine and the electricity in his study.

The logic of "business continuity" could easily extend to many other items. Why not just go ahead and pay all of McNerney's utility bills? And to be really safe, Boeing should put some shelf stable food in the pantry in case McNerney gets hungry while doing all that work during the natural catastrophe he's expecting.

The Seven Deadly Sins

2008-03-15T09:24:00.003-04:00

Three big names were dragged into the legal spotlight this week.

Soon to be ex-Governor of New York, Eliot Spitzer, fell from defender of the moral high ground to "Client Number 9."

Richard Scruggs -- the lawyer behind the 1998 $206 billion tobacco company settlement -- pleaded guilty to conspiring to bribe a judge.

Media mogul Barry Diller, who is wrestling in court with financial backer John Malone for full control of his media empire, took the stand.

So, what brings these three and many others like them to their judgement day? Governor Spitzer risked everything -- his political ambition and his family -- to spend a couple of hours with a hooker. Scruggs, who made over $200 million from the tobacco settlement, bribed a judge to avoid paying a fair share to an attorney who worked with him on the settlement. Despite mega wealth, a jet setting life and a secure place in the media hall of fame, Diller lacks what he most covets -full control over his own media empire.

It's easy to say that Spitzer suffered from lust. Or, Scruggs from greed. Or, Diller from envy (of Rubert Murdoch). But often the root cause appears more complex. To illustrate, take the Sptizer poll adjacent to this post -- How many of the deadly sins did Eliot Spitzer commit? One, three or all? As a reminder, here is the complete list:

1. Lust involves obsessive or excessive thoughts or desires of a sexual nature.
2. Gluttony is the over-indulgence of anything to the point of waste.
3. Greed is a sin of excess applied to the acquisition of wealth in particular.
4. Sloth represents the failure to utilize one's talents and gifts.
5. Wrath is an inordinate and uncontrolled feelings of hatred and anger.
6. Envy is an insatiable desire for something that someone else has.
7. Pride, is the self-loving desire to be more important or attractive than others.

And now, for the less rational side of executive compensation....

2008-03-09T13:52:00.001-04:00

General Motors Chief, Richard Wagoner, is receiving a 33% raise for 2008. His base salary is jumping from $1.65 million to $2.2 million and he is also receiving another $1.68 million in equity compensation for his performance in 2007. To refresh your memory, GM lost $38.7 billion in 2007 -- the largest annual loss ever recorded by an American company. And in early February, in an effort to trim ongoing losses, the company offered buyouts to 74,000 employees - its entire US hourly workforce.

I wonder if the GM Board authorized the employee buyouts in the same meeting during which it approved the Compensation Committee recommendation to increase Wagoner's pay. Let's hope there was at the very least a coffee break between these two Board agenda items.

In other compensation news, the Boards of home builders KB and Toll Brothers are inventing new methods to richly reward their CEOs, even as their operating profits and stock price drop amidst an industry slump.

In direct contrast to General Electric -- which ties CEO pay to shareholder returns, Toll has decided to replace a similar performance plan with a bonus method based entirely on subjective criteria. This kind of bonus plan can be summarized as, "Our company performance sucks but we like you and don't want to penalize you...."

The same lack of pay-for-performance rigor is occurring at KB. Its Board awarded KB CEO, Jeffrey Mezger, a "discretionary" bonus of $6,000,000 for 2007. Under the Company's official bonus plan, which is tied to operating performance, he would have not received any bonus for last year. KB stock fell almost 60% in 2007.

I Can't Quit You Babe!

2008-03-07T07:30:00.003-05:00

The price of oil hit a new high this week -- over $104 per barrel. What did our leaders have to say?

President Bush responded, "It should be obvious to all that the demand is outstripping supply... We've got to get off oil." What is obvious to many is not always obvious to all... like a 3rd grader "discovering" gravity.

And, Exxon Mobil Chief Executive, Rex Tillerson, offered, "It's pretty crazy, isn't it?" I believe Jed Clempett of the Beverly Hillbillies uttered a similar remark when he unexpectedly struck oil while hunting opossum on his farm in the Ozarks.

There is a lot of finger pointing going on. What's driving up the price? The weak dollar. OPEC production controls. Commodity speculators. Developing countries like China and India.

Like gravity, the underlying principle is very simple. As demand increases and supply dwindles, the price of oil will go up. And up. When it hits $150/barrel, I will offer my own pithy insight, "I told you so."

A Bargain for $14.2 Million!

2008-03-05T11:11:00.006-05:00

The huge, global conglomerate – General Electric - reported this week that it paid its CEO, Jeffrey Immelt, $14.2 million in total compensation for the year just ended. In an extraordinary move, GE also cancelled $7.3 million in previously awarded stock incentives because the company failed to meet internal benchmarks for total shareholder returns. So, in effect, Mr. Immelt's take home pay was cut in half to $6.9 million.

In exchange for Immelt’s services, GE is getting a bargain. While Immelt does not have the public profile of his predecessor, Jack Welch, he generally receives high reviews from analysts, stockholders and business professors.

To put this in perspective, the median CEO compensation for S&P 500 companies was $8.5 million in 2006 (the most recent year results are available). How does GE compare to the typical S&P 500 company? It is bigger ($170 billion in revenues). It is more successful ($22.5 billion in net income and 20% return on equity). And, GE is far more complex – 327,000 employees across the globe operating in a wide spectrum of businesses. GE is a technology, media, and financial services company -- producing everything from jet engines and light bulbs to the NBC Nightly News.

Experts point to market forces (CEO pay is linked to the availability of suitable talent to assume the role) and pay for performance schemes (As the company performs, so goes the pay of the CEO). But by these measures, Immelt’s compensation should be significantly higher. It appears that the compensation committee of GE has another principle at work in setting Immelt’s pay – a “fair and reasonable” principle that often is missing in the boardroom as deliberations unfold about executive compensation.

How may CEO candidates could actually run GE as well as Immelt? Not many. The question is not how many think they can but how many actually can.

What is extraordinary is how little Immelt makes compared to the celebrity CEOs – who usually lead smaller, less complicated and diverse businesses. Steve Jobs of Apple made $647 million in 2006. Terry Semel, who failed to transform Yahoo, still made $174 million in his final year as the CEO of Yahoo. And, the CEO of AT&T made $49 million. It is hard to understand why Ed Whitacre of AT&T is worth seven times more than Immelt.

The critics have good reason to complain about CEO compensation, which often defies the logic of long-term success, company scale or operating complexity. The same critics should argue for a pay raise for Jeffrey Immelt.

Little Italy's Last Barber

2008-02-28T21:52:00.003-05:00

At the turn of the 20th century, a growing tide of Italians, largely from the south, immigrated to the United States. Out of a population of 14 million southern Italians, an estimated five million left by the outbreak of World War I. Those who left Italy apprenticed stereotypically as tailors, bakers, masons and barbers.

A man named Sal came to the United States during the next immigration wave just before the second world war. He was born in Sicily and became a barber after settling in New York. Today, according to his own census, he is the very last working Italian barber in Manhattan's Little Italy.

A few months ago, needing a haircut, I reasoned that there had to be a good barber in Little Italy. After walking just a few blocks from my office, I happened on Sal's barber shop. When I arrived Sal was giving a haircut to an older gentleman as they conversed in Italian. When it was my turn to take the chair, Sal introduced himself and then explained that the gentleman before me was Arturo Di Modica, the noted sculpture of the 7,000 lb. Charging Bull on Wall Street. When I asked if he cut the hair of other celebrities, he said no because of the distraction of the paparazzi. He cut Robert DeNiro's hair once and that was all it took to establish the shop's rule.

Sal's Sicilian accent is still very thick and it takes all of my powers of concentration to keep track of the meaning and direction of our dialogue. While I struggle with his speaking, he has no difficulties at all with mine. I learned that his grandfather lived to be 105 and died of a heart attack after an argument with his 93 year old wife, who had complained about him coming home drunk! His 85 year old aunt just came over for a two week vacation and insisted on seeing all of the New York sights on foot, despite the January cold. Sal apparently has very good gene stock.

After my first haircut, Sal charged me $15 even though the sign in the shop indicated that the price of a gentleman's haircut was $20. The next time I visited the shop, I asked Sal for a restaurant recommendation -- someplace with great food off of the tourist grid. I figured who better to ask than the man who has cut hair at the same location for over 50 years. Two days later, I visited the restaurant and mentioned that Sal had sent me. Within minutes, Sal was at my table -- having walked over from his shop to say hello to the friend (me) having his lunch.

I now give Sal $20 for my haircut plus a $5 tip. But the money I give him doesn't last long in his pocket. After cutting my hair, Sal insists that I join him for a quick espresso and pastry at Ferraro's down the street. He refuses to allow me to pay.

If you are in New York and need a classic haircut, stop by Sal's Shop located on Grand Street just off of Mulberry. The shop is located directly opposite the Italian Food Center identified in the photograph above. He just might buy you an espresso as well. Fluency in Italian is not a requirement.

Pay the fine already!

2008-02-27T13:17:00.004-05:00

Believe it or not, Exxon Mobil is still contesting the $2.5 billion punitive fine it was levied for the Valdez oil spill -- almost twenty years after the event! Exxon Mobil will argue in front of the Supreme Court today that under maritime law it owes nothing to the fisherman, residents and Native Alaskans harmed by the massive oil spill. Exxon states that it has already been punished enough by paying $3.4 billion in clean up costs. For more on the story see link

If you find this hard to believe, let me illustrate it with a hypothetical anecdote. Suppose you have a party in your home. One of your guests has a bit too much to drink and backs his car into your above ground heating oil tank, which is adjacent the garage. Luckily no one is hurt. Your neighbor witnesses the accident and immediately calls the local police. The municipal services unit of your town, in cooperation with the EPA, arrives on the scene the day after to clean up the oil -- which has seeped beyond your backyard and into a stream about 100 feet from your house. Two days later, the oil spill is cleaned up and you have a new oil tank installed by your heating oil company. It's hard to gauge the environmental impact of the accident and you hope for the best.

Your guest receives a six month license suspension and pays a $500 fine. A month later, you receive a summons to appear in court and after a brief hearing are ordered to pay the town $6,800 in clean up costs and a fine of $5,000. Since you earn about $80,000, the fines will sting but not bankrupt you. Your attorney successfully files a motion allowing you to pay for the clean up costs but appeal the fine. 20 years later, through appeals and legal maneuvers, you still haven't paid the fine. Most of your neighbors no longer speak to you out of principle.

This is exactly what Exxon Mobil has done. The numbers are proportionate. The company made $40 billion in profits last year. A $2.5 billion fine would sting but not bankrupt. Exxon Mobil doesn't seem to care what most people think of it.

Trix is good for you... really!

2008-02-25T13:23:00.006-05:00

The brand manager of Trix is on the hot seat these days. Parent company, General Mills, is attempting to remake itself by revamping its product line to be healthier and more nutritious. It's one thing to promote the nutritional value of Cheerios, which is made of whole grains and has only a gram of sugar per serving. It's a lot harder for Trix with 13 grams of sugar -- sweeteners are its top ingredients after whole grain corn cereal.

Putting teeth into the company's wellness objectives seems like the right thing to do -- the thinking behind this compensation philosophy is that executives rarely take difficult steps to meet qualitative goals unless they have monetary incentives to do so. The flaw in this compensation philosophy, however, is that it may lead to incremental thinking. Why take big steps to transform a business or brand if it will put at risk the ability to also meet short-term financial metrics. If you are the brand manager of Trix, you won't make big changes to the brand to boost its nutritional value, if the result is that kids are less likely to grab the box for a second, heaping helping.

It's a different story if mothers stop buying Trix because of its high sugar content and the brand incurs a significant loss of market share or profit. Dramatic steps will be the order of the day. But this is more accurately described as a turnaround, not a strategic transformation. Strategic transformation -- ahead of market share or profit declines -- is driven by leadership, not bonus plans.

General Mills realizes this and is hedging its bets. In addition to motivating managers to make healthy changes to its current brands, the company is also making acquisitions to change the composition of the businesses. Next to Cheerios and Trix now sits Cascade, a leading brand of organic, high nutritional value cereals. The brand manager of Trix may fail but General Mills can still succeed in its mission by buying brands like Cascade. For more on the story, see the Wall Street Journal link

What is it about bread?

2008-02-24T20:09:00.006-05:00

Exhibit II in the bread with a higher calling category is Ezekiel 4:9 by the Food for Life Baking Company link

The key proposition of Ezekial 4:9 is that it is 100% flourless. Made from "freshly sprouted, organically grown grains," this bread is inspired by the Holy Scripture verse: "Take also unto thee Wheat, and Barley, and beans, and lentils, and millet, and Spelt, and put them in one vessel, and make bread of it..."

According to Food for life, this bread is a miracle of nutrition -- a bread made completely from vegetable sources which matches the protein quality of animal products such as milk or eggs. Praise the lord!

Food for Life also makes Genesis 1:29. What Food for Life does not make is a bread named after Revelation 16:8,9 which speaks to the earth's destruction due to global warming. “And the fourth angel poured out his vial upon the sun; and power was given unto him to scorch men with fire. And men were scorched with great heat...”

Food for Life ships all of its products frozen from its bakery in California across its international distribution chain.

What the heck is yoga bread?

2008-02-19T05:26:00.001-05:00

Wandering the aisles of a New Jersey supermarket yesterday, I came across a new product -- "Yoga Bread" by a local bakery (The Baker of Milford, New Jersey). Being a long time practitioner of yoga, I was both intrigued and put off by the name.

These days, yoga is being used to sell just about any and everything -- from Chrysler Town & Country minivans to Chopard limited edition "om" jewelry. It's almost bad enough to push me off the mat and back into the gym.

It's too bad The Baker doesn't have the confidence to sell the bread without a marketing label. "Yoga Bread" is actually pretty good to taste and contains nutritious ingredients such as organic whole wheat and rye, dried unsweetened cranberries, sesame, sunflower, poppy and pumpkin seeds, sea salt, flax seeds and olive oil.

My personal view (more as a consumer than a media and marketing professional) is that The Baker has it wrong. The company would be far better off positioning the bread as nutritious and good tasting -- better for you than say, Pepperidge Farm Raisin Bread, -- while not sacrifing any of the pleasure of eating it.

To top it off, Yoga Bread is described in the context of "five yogic principles" -- proper exercise, proper breathing, proper relaxation, proper diet, positive thinking and meditation. To come up with this, The Baker took the easy route and simply ripped off the Sivananda Yoga website which lists these same five yoga "points." link .

While Sivananda is a respected organization, they have simplified the yoga principles for the American and Western markets. In truth, there are actually eight yoga principles or "limbs" -- not five -- according to the classic text of The Yoga Sutras of Patanjali, the ancient, foundational text from which all forms of Yoga are derived. To learn more about the eight limbs of yoga, here is a quick read on the subject courtesy of Yoga Journal link .

If The Baker insists on using yoga as a marketing prop, then the company should at least credit sources -- and perhaps even make the marketing message accurate!

A Hockey Pro with Teeth, Brains & Values

2008-02-16T11:46:00.003-05:00

There are not many professional athletes who would choose to spend their retirement years this way -- particularly if they are as young, talented and smart as Joe Juneau. In this week's Sports Illustrated, Michael Farber writes about the inspiring path Juneau has taken since leaving the NHL after the 2003-2004 season. link

The setting is the town of Kuujjua in the Nunavik region of the Canadian sub-artic. The town's 2,100 residents -- mostly Inuit -- live in drab pre-fab housing. Temperatures drop to -58 degress Fahrenheit in winter. Suicide is the leading cause of death. The life span of an Inuit is almost 15 years less than the Canadian average. Drug and alcohol abuse is rampant among all ages. As Farber reports, many children are "physically, psychologically and sexually abused".

Why would any sane person with a bright future move to Nunavik by choice?

Joe Juneau is both sane and accomplished. He could probably accomplish almost anything he set out to. When he arrived on campus at Rennsselaer Polytechnic Institute in Upstate New York, he did not speak a word of English (RPI is not located so far north that French is the second language). Juneau graduated in three years with a 4.0 grade point average with a degree in aeronautical engineering. He made almost $3 million a year when he was a pro hockey player. Before his pro career, he was an Olympic silver medalist.

Now, this most famous resident of Kuujjua is the head of the Nunavik Youth Hockey League. Juneau is devoting this portion of his retirement life to 180 children who participate in the youth hockey program. Juneau's not scouting young talent for the Montreal Canadiens. His partner of 10 years and mother to their two children, Elsa Moreau, says that Juneau's "investing in a mission, something bigger than himself. This is a grand projet humain."

Juneau's mission is about the education, health and welfare of these kids. To learn more about the Nunavik Youth Hockey League and lend support to Juneau's mission visit their website link

Clinton's Golden Voice Part II

2008-02-13T14:07:00.004-05:00

Searching the Washington Post archives, I discovered a complete listing of speeches that Clinton made during the 2001 - 2005 period.
link Over these five years, Clinton gave over 175 speeches (that's 35 a year) at an average rate of about $175,000 each. He gave 9 speeches for $300,000 or more.

Clinton commands a significant premium versus other retired politicians on the speaking tour. Even George H.W. Bush, the 41st president of the United States and friend of corporations and oil nations alike, only receives $50,000 to $75,000 per speech -- about the same rate as Jimmy Carter, ex-president, philanthropist, peace negotiator and peanut farmer. Then again, former vice presidents and presidential candidates don't do nearly as well -- Bob Dole commands $30,000-$50,000 while Walter Mondale's rate is around $25,000. Ed Koch, New York's colorful former mayor, gets only $10,000 per speech despite the high cost of living in New York City.

If you have the money and want to hear someone other than a politician, you can invite legendary basketball coach, Phil Jackson, for $75,000 or former Yankees manager Joe Torre for about the same. Don't want to listen to a coach either? Even egomaniac Donald Trump gets only receives $75,000 per speech -- less than half of Clinton's rate.

The Newark Star Ledger had an article today about the impact of the steroid controversy on the sports collectible market. Unlike Clinton whose fees seem immune to controversy -- Barry Bonds, Mark McGuire and Sammy Sosa have all seen the value of their collectibles (such as bats and game jerseys) drop to about a third of the value they once had before the steroid scandal struck. link

The nexus of the steroids controversy and speaking fees, has not proven to be a bonanza for former U.S. senator George Mitchell, who authored the Major League Baseball Commission report on steroids. You can get him to speak for the bargain rate of only $50,000. Perhaps his rate would be higher if he actually used steroids rather than simply write about them.

The Clinton Money Machine

2008-02-09T09:40:00.000-05:00

The disclosure this week that Hillary Clinton recently loaned her presidential campaign $5 million prompted me to give further thought to the Clintons and their current state of affairs. I am not thinking about the presidential campaign, politics or the health of their relationship. I am thinking about their money – they have lots of it!

Since leaving office in early 2001, Bill and Hillary have created an extraordinary process of personal wealth creation. Very few Americans will ever match this rate or level of wealth creation particularly if you consider the age in which they initiated it.

For perspective, the median household net worth for someone in their mid-fifties earning at least $200,000 is just over $800,000. When they left the White House in early 2001, Bill and Hillary were in their mid-fifties. At the time, they owed upwards of $12-15 million – mostly due to outstanding legal bills related to Whitewater, Paula Jones, campaign fundraising investigations and the Monica Lewinsky scandal. They also purchased a house in Chappaqua, New York and took on a mortgage of $1,360,000. Seven years later, their net worth is now approximately $25 million, a +$40 million swing. We should all be as lucky in the run up to our golden years…

The $186,600 Bill receives from his presidential pension and Hillary’s senate salary of $169,300 are probably sufficient to cover the annual Clinton household expenses – enough to cover their overhead but nowhere near enough to pay down debt. That’s where the Clinton money machine kicks in.

Since leaving office, President Clinton has earned up to $50 million from giving speeches around the world at a rate as high as $350,000 a speech. He earned a $12 million book advance for his autobiography, “My Life.” Hillary also earned $8 million from her book advance on “Living History.” In sum, the Clinton’s together probably generated at least $70 million in earnings in the last 7 years. After paying Federal and New York State taxes and other withholdings, their take home pay was probably close to $40 million or roughly $5.7 million annually.

The math is pretty straightforward. The Clintons’ left office owing close to $15 million. They earned at least $40 million since, resulting in a household net worth of $25 million. This is before Bill receives his $20 million buy-out from Ron Burkle. Hillary can easily afford to lend her campaign $5 million.

This significant wealth creation on the part of the Clintons is extraordinary given how much controversy and scandal surrounded them. President Clinton's affair with Monica Lewinsky on its own is enough to end the money-making abilities of most executives. The increased spotlight on sexual harassment in the workplace has quickly ended the careers and earnings power of many.

How did Clinton manage to avoid this dead-end trap?

Well, it helps to be a worldwide celebrity. Celebrities have an unfair advantage over ordinary citizens when overcoming scandal or crime. It also helps to be hugely talented (Roman Polansky the academy award winning director, not Polansky the fugitive). If you have ever witnessed the Clinton charisma or the power of his speech making, you can't help but agree that Mr. Clinton is talented.

If you are a celebrity and are going to commit a crime or be involved in scandal, illicit sex is probably the easiest to overcome relative to your future earning power. Here's is my celebrity rule of thumb on the topic:

1. Illicit sex is the easiest to overcome (Hugh Grant, Eddie Murphy)
2. Drugs and alcohol are usually forgiven (Eric Clapton, Kate Moss)
3. Crimes of the mouth are unfortunately tolerated (Don Imus)
4. If you are going to cheat, do it on a technicality (Martha Stewart)
5. But never cheat the public of its trust (Pete Rose, Pee Wee Herman)
6. Murder is hardest on the pocket book (OJ Simpson)
7. But hurting animals can be just as bad (Michael Vick)
8. There are limits to just how much you can get away with (Michael Jackson)
9. If all else fails, make them feel sorry for you (Britney Spears)
10. Or, thank God you come from a rich and powerful family (Ted Kennedy)

$40 Billion can't buy innovation

2008-02-03T15:03:00.000-05:00

Values such as innovation, open-mindedness and collaboration can't be bought -- no matter how much money a company has. Not even $40 billion.

ExxonMobil reported that it earned $40.6 billion in profits in 2007 --its highest level ever. This isn't all that difficult to do with the help of a near doubling of oil prices to about $100/barrel. But for all of this profit, ExxonMobil is standing still as a business.

Last year, it replaced the oil and natural gas that it produced with as many new reserves. But this accomplishment will be difficult to repeat in the years ahead. ExxonMobil is competing for energy reserves with producing nations such as Saudi Arabia and Venezuela as well as national energy concerns in developing countries such as PetroChina, Petrobras (Brazil) and Gazprom (Russia).

Today ExxonMobil and the three other western oil majors -- Chevron, Shell and BP -- have an ever decreasing share of the global oil market. Today they control just 6% of this market and ultimately their share will drop to near zero as producing countries protect their economic interests first.

The demand for energy -- and the worldwide chorus for new, non-fossil fuel sources --should be a bonanza for a company of ExxonMobil's size and financial strength. Unfortunately, ExxonMobil lacks the confidence and core competency to invest, innovate and capitalize on this demand. Instead, it acts more like a bank -- paying shareholders $40 billion last year through a rich mix of dividends and buybacks. Based on how ExxonMobil spends the money it makes, the energy problems of tomorrow appear to be bigger than its balance sheet today.

Like ExxonMobil, Microsoft has the money but not the skill to innovate. Microsoft made headlines last week by setting in motion a $44.6 billion hostile takeover of Yahoo. While this is a bold step financially, it will not strengthen the software giant's position over the long term. Bulking up its advertising audience will do very little to protect Microsoft's desktop dominance against Google or new technological threats.

Innovation costs a lot more than $40 billion... particularly if the legacy of your values has more to do with Goliath than David.

Odds & Ends...

2008-01-29T07:37:00.000-05:00

Driving to the office today, I made a quick choice on the radio dial. First option was a NPR segment on the purchase of Countrywide Financial by Bank America and CEO Mozilo's decision to forgo close to $40 million in severance benefits. My second option was the classic, Miles Davis recording, Bitches Brew, featuring an all-star line-up. Easy decision -- enough already about Countrywide.

A couple of weeks back, new Merrill Lynch CEO, John Thain, was quoted saying, "I didn't cause this problem" referencing the investment bank's sub-prime financial woes and balance sheet write-offs. It appears that Thain has already lost the team-oriented, consensus building culture of the Goldman Sachs' partnership. Much better to say, "We will solve these problems" then to say "They caused it...."

Sears is a mess. Once referred to as the next Warren Buffet, Edward Lampert has certainly dispelled any likeness to the "Sage of Omaha" with his Sears Holdings investment. Financial performance, competitive strength and customer satisfaction are all way down since Lampert made his investment. The latest "plan" calls for a re-structuring of Sears into separate operating units such as Craftsman tools and Kenmore appliances. Current CEO Aylwin Lewis is out. Even before Lewis departed, Lampert had the heads of strategy, merchandising and marketing reporting to him. Lampert may be a great hedge fund manager but he is no merchant. Warren Buffet would never make a menu decision at Dairy Queen or advise Coke on its formula.

Celeb Media Frenzy

2008-01-27T06:25:00.000-05:00

My youngest son just completed the college application process with all of the typical family tensions. Each evening for the past six weeks, he would be up late finishing his homework first and then composing crafty answers to essay questions. To the question, "What outrages you most" he wrote about the public fascination with celebrities and the media's eager willingness to feed this fascination -- like Burger King serving triple Whoppers to the obese. In his view, what was once a healthy escape in moderation has now become an obsession at the expense of dealing with weightier societal issues.

Having been the General Manager of PEOPLE magazine in the mid-eighties, I read his essay with added interest. PEOPLE was launched by Time Inc. in 1976; its genesis being the two-page "people" spread in TIME magazine. PEOPLE invented celebrity journalism and remains today -- more than 30 years after its launch -- the most commercially successful and profitable magazine in the world.

The idea behind PEOPLE was to apply TIME magazine's successful editorial formula -- quality reporting and writing backed by double fact checking -- to the subject of people. The editorial premise was "ordinary people doing extraordinary things and extraordinary people doing ordinary things." The reader might be inspired by a small town hero and then, turn the page and get satisfaction from knowing that even celebrities had their share of problems and issues. In its early years, the tabloid voltage was kept in check and balance with a mix of human interest stories.

PEOPLE not only created a magazine category now filled with titles such as US, OK!, HELLO, STAR and IN TOUCH -- but also instigated the endless rise of celebrity coverage on TV and the Internet -- including ENTERTAINMENT TONIGHT, THE HOLLYWOOD INSIDER, TMZ, E!, CELEBRITY APPRENTICE and countless other reality shows. As the competition grew and spread across media, so did the level of sensationalism. Any person in the public domain was fair game to be profiled -- and no subject was off limits -- privacy barriers were virtually eliminated.

The obsession with celebrity was at its peak this week with the death of Heath Ledger. The building where Ledger lived is just around the block from my office in SOHO. For over 48 continuous hours, news trucks -- equipped with digital video production equipment and transmission antennas two stories high -- lined the blocks at the intersection of Broome and Lafayette. The morning after the death -- at the early hour of 6am -- I counted 15 of these trucks each staffed with a team of many including on camera reporters, producers, writers, editors and technicians.

After the announcement and before the autopsy report, what more was there to say about the death? The cost of this on-site operation must have been enormous. And there was little journalistic pay-off to justify the expense. I watched a variety of entertainment and "news" shows which featured segments about Ledger and would hardly call the coverage journalism -- speculation, rumor and tid-bits were the means to differentiate the story as opposed to in-depth reporting, research and fact checking.

The coverage was way overboard and made no sense at all -- on editorial, economic or marketing levels. Nothing much more was said yet at a significant cost premium. This is the flaw of modern media -- particularly old media such as television and print --spending considerable money in the hopes of creating a huge audience to generate sufficient advertising dollars to pay for the cost. It's hard to believe that this business formula is sustainable.

And, did the viewing and reading public actually want continuous coverage of Heath Ledger's death? I doubt it. At some point, reason must set in and attention spans must fade.

But perhaps I am wrong. Maybe the "Quadruple Whopper" would be a huge marketing hit. No wonder my son is outraged by the obsession with celebrities.

Redemption of Sorts

2008-01-24T19:16:00.000-05:00

William Jefferson Clinton, the forty-second President of the United States, left office in early 2002 impoverished morally and financially. Despite a 65% approval rating -- the highest for any president since World War II -- the Clinton presidency was marred by his affair with Monica Lewinsky and the subsequent impeachment for perjury and obstruction of justice (although he was later acquitted.) Clinton faced huge legal bills accumulated to defend against investigations during his presidency.

Leaving office, Clinton went right to work earning six figure payments for speeches made around the world. For example, Fortune Magazine paid him approximately $125,000 to speak at the Fortune Global CEO Forum in Hong Kong in 2002. These speeches and public appearances earned the former president tens of millions of dollars.

Now, Clinton is poised to reap his biggest payday yet. The Wall Street Journal reported this week that Clinton is severing ties with billionaire Ron Burkle and is redeeming his share in Yucaipa, Burkle's investment firm, for an estimated $20 million. It is not clear what exactly Clinton has done to earn this huge payout. Clinton is redeeming his shares in an effort to protect Hillary's presidential aspirations by steering clear of potential conflicts of interest and politically sensitive issues surrounding Burkle's business interests.

Most certainly, the Clinton's are impoverished financially no more.

Refilling the coffers is easy for a former world leader of Clinton's stature. Much easier than moral redemption.

America's Pastime is Making Money

2008-01-21T05:56:00.000-05:00

At Major League Baseball, economics triumphs over morality and legality. Or, more precisely over personal accountability. As a reward for boosting revenues by 400% and setting league attendance records, Baseball commissioner Bud Selig was recently awarded a contract extension through 2012. Mr. Selig is almost guaranteed to make at least what he made last year -- $14.5 million.

That's right, about $15 million a year is going to the man who failed to provide quick and decisive leadership when professional baseball needed it most -- at the earliest stages of the steroids and performance-enhancing drug controversy. Today, Major League Baseball has tough substance abuse policies. The sport banned steroids in 2002 and established testing and penalties in 2004. But nothing was done during the home run boom of the nineties when the realities of player substance abuse moved beyond mere suspicion.

The Mitchell Report, which was conducted at the request of Commissioner Selig, concluded that the MLB Commissioners, club officials, the Players Association, and the players all share responsibility for uncontrolled, illegal use of steroids in professional baseball.

Selig has now vowed to rid baseball of performance enhancing substance abuse and holds himself personally responsible for what was not done earlier. We should all be so lucky as to accept responsibility without corresponding consequences -- which is the implication of Selig's contract extension.

Barry Bonds' home run record deserves an asterisk. So does the revenue line item in MLB's accounting statements.

Good Clean Fun!

2008-01-19T14:33:00.000-05:00

The company name -- Wham-O Manufacturing and this photo of its founders -- Richard Knerr and Arthur Melin -- says it all. With a corporate mission based soley on having fun, Wham-O launched such childhood favorites as the Frisbee, Hula Hoops, Super Balls and Silly String. Long before (and continuing after) sex, drugs, rock-n-roll and the digital age permanently shifted pre-adolescent attention, the premise of Wham-O was about active, outdoor fun. Never consistent in its financial or commercial success, Messrs. Knerr and Melin produced sufficient smiles and giggles to earn a spot in the good karma hall of fame. Mr. Knerr passed away this week at the age of 83.

"I am a lucky man..."

2008-01-12T08:27:00.000-05:00

Sir Edmund Hillary, shown here with his climbing partner, Tenzing Norgay, passed away this week at his home in Auckland, New Zealand. He was 88.

Hillary and Norgay were the first to scale the 29,036-foot summit of Mount Everest, the world's largest peak. At the top, Hillary left a crucifix on behalf of the expedition leader and Norgay, a Buddhist, buried biscuits and chocolates as an offering to the gods of Everest. Queen Elizabeth II appointed Hillary a Knight Commander of the Order of the British Empire and Norgay was awarded the George Medal of Britain.

Later, Hillary travelled to the North and South Poles, becoming the first person to ever visit the highest peak and both ends of the Earth. In an interview, Hillary once remarked, "I am a lucky man. I had a dream and it has come true, and that is not a thing that happens often to men."

As his long life of accomplishment progressed, Hillary needed less and gave away even more. He preferred to be called Ed rather than Sir Edmund. For many years after the Everest expedition, he listed his occupation as beekeeper. And not until long after Norgay's death did Hillary reveal that he was the first to reach the summit. While both men were alive, Hillary would state that he and Norgay were a team and reached the summit together.

Sir Edmund created the Sir Edmund Hillary Himalayan Trust and raised millions for schools, clinics and other infrastructure projects for Sherpa villages in Nepal. He was also the president of the New Zealand Peace Corps. For a complete obituary, visit the New York Times website. link

Hillary's life is in sharp contrast to the life of another man frequently in the news these days -- Angelo Mozilo, the founder and CEO of Countrywide Financial, the embattled sub-prime mortgage lender. Unlike Sir Edmund, Mozilo wants more for himself even as he accomplishes less. In an earlier post, I commented on the hundreds of millions Mozilo has earned, even as his company has slipped into near bankruptcy. link

Now, Bank of America is set to acquire Countrywide for $4 billion after having already infused the company with $2 billion in emergency funding. Following the acquisition, Mr. Mozilo's exit package is estimated to be more than $70 million before considering perks such as country club memberships and the use of private aircraft.

With all of this money, Mozilo could easily afford to create the Mozilo Homeowners Trust to assist mortgagees in default. A two hundred million donation to fund the trust would still leave Mozilo with plenty of cash to lead a life of luxury.

But don't hold your breadth for Mr. Mozilo to follow Hillary's lead. So far, he has not been seen anywhere near Good Karma base camp.

2008-01-09T12:14:00.000-05:00

Rick Wagoner, the CEO of General Motors gave a keynote speech at this year's Consumer Electronics Show, marking the first time ever a leader from the automotive industry joined the likes of Bill Gates, Steve Jobs and other tech luminaries to address this audience.
link

The modern automobile is a technology and electronics marvel. The electronics content of the typical car has increased by almost 50 percent over just the last five years. Cars now incorporate such dashboard standards as radios, DVD and CD players, GPS devices, navigation systems and ready-to-deploy airbags. Your car won't start, accelerate or stop without the aid of electronics.

In his remarks, Mr. Wagoner made note of one particular GM innovation which offers unprecedented consumer benefit. OnStar is the most comprehensive in-vehicle security, communications, and diagnostics system — available on more than 50 GM models. The transponder provides 24/7 connectivity to a live advisor, offering such services as vehicle diagnostics, navigation, automatic accident notification, emergency roadside services, stolen vehicle location assistance and remote door unlock.

The next step for OnStar is to use the transponder technology to connect cars with other cars... "to keep them from connecting physically." Today there are sensors and cameras to help keep drivers alert and avoid accidents when backing up, changing lanes or using cruise control. The transponder would do this and more --not only reducing accidents but also better managing traffic flow as your car would automatically communicate with a line of cars (transponder to transponder or V2V) a half mile ahead stuck in traffic.

From the almost here and now, Mr Wagoner then took a big leap into the future imagining a time when electronics and technology would allow for "autonomous" driving -- meaning the car would essentially drive itself. Wouldn't it be great, Wagoner proclaimed, if you could do your email, eat breakfast, apply make-up, read the newspaper or watch a video while commuting to work. Unfortunately, most of this occurs right now in cars unaided by technology, usually between the weekday hours of 6-9. And a low-tech alternative already exists. It has assisted commuters for about a century. It's called mass transit or commuter rail and bus lines...

Back to the here and now, GM is in sad shape today. The once proud industrial giant is about to lose market share leadership to Toyota and due to continuous red ink, its market cap has shrunk to under $13 billion. Will consumers really trust GM to provide the innovation necessary for "autonomous" driving? While OnStar is without a doubt a winner, the evidence is weak that GM could reliably and cost effectively provide the kind of next generation technology Wagoner invisioned.

Too Risky Even In God's Hands....

2008-01-08T10:55:00.000-05:00

The Wall Street Journal reports that The West Adrian United Church of Christ (UCC) in Adrian, Michigan was denied a property insurance quote by Brotherhood Mutual Insurance Company because of the church's pro-gay stance. The insurer refused to provide even a quote when it learned that the church supports same-gender marriage and the ordination of gay clergy. Brotherhood felt that the church's pro-gay policy presented too high of a risk for property and liability coverage.

The pastor of the church, Rev. John W. Kottke, was simply trying to shop around among insurance carriers for better pricing and coverage. Fortunately, the church is already insured by another carrier, who has not yet decided to drop coverage or raise the church's premiums.

The Brotherhood Mutual Insurance Company was founded in 1917 and focuses exclusively on providing insurance to churches and related ministries. It claims to be one of the nation's leading insurers of churches, providing insurance to 30,000 congregations in 29 states. In an announcement related to the denial of the insurance quote, a representative of the insurer said that it avoids "knowingly insuring organizations that are at higher risk of loss based on the controversial positions that they have taken."

Was Brotherhood motivated by actuarial analysis or more deeply seated emotional prejudice? Its hard to imagine how to determine the relative risk of insuring one church versus another. How high is the risk of insuring this small church in Southern Michigan? Is the risk higher than insuring an African American Church in the deep South, where racism still persists and churches burn? Or, is the risk higher than any catholic church, given the wide spread sexual abuse by priests? How about an inner city church subject to regular vandalism? Hopefully, you get the point.

Despite its pro-gay stance, West Adrian UCC poses little risk to insurers. The church was founded in 1836 and has about 100 members. It is located among the farmlands of Southern Michigan, about an hour drive from Toledo or Battle Creek. The church's stated mission is to offer "...a safe and welcoming place of worship, where new ideas may flourish and take root in the rich soil fed by tradition."

One of the more popular congregational activities is the blue grass jam held once a month on weekends. The lively folk event features an extensive array of acoustic instruments including: banjo fiddle, guitar, mandolin,accordion, auto harp, dulcimer, harmonica, resonator guitar, saw and ukulele.

All are welcome to play along or listen. At your own risk of course. link

Pepper...and Salt

2008-01-08T10:29:00.000-05:00

Courtesy of the Wall Street Journal

A Smart Choice?

2008-01-07T15:39:00.000-05:00

I admit to having a sweet tooth and was happy to receive a jumbo bag of Raisinets from Santa in my stocking. I have opened the bag judiciously over the last couple of weeks being careful not to consume the entire contents in one sitting. I now know the promotional copy on the bag very well. My reaction -- Nestlé is one smart marketing company!

Raisinets are billed by Nestlé as a "Deliciously Smart Choice". In other words, if you can't position Raisinets as a healthy food, then you can do the next best thing -- position the chocolate-covered-raisins as the best choice among a poor set of choices. Clever!

The packaging describes Raisinets as being made from raisins "happily raised in the lush vineyards of California. Nurtured with lots of sunshine...." And, Nestlé reminds you that "The USDA Dietary Guidelines recommend eating 2 cups of fruit everyday... and each serving of Raisinets comes from 1/2 cup of grapes... Raisinets are also a natural source of antioxidants which help maintain body health."

What Nestlé doesn't promote are the mandatory nutritional facts, which require much closer inspection of the packaging. Each serving of Raisinets contains 5 grams of artery clogging saturated fat (25% of the daily limit), 27 grams of sugar and 190 calories. The high saturated fat content in Raisinets comes from the milk chocolate. Raisins are about 60% fructose sugar because they are dried grapes. If you are hungry enough to eat the whole bag (which doesn't seem too outlandish since the bag only contains 11 ounces) you are eating 7 servings which provides 35 grams of fat, 189 grams of sugar and 1,330 calories. Just to put this in context, the average recommended daily calorie intake is only 2000 calories!

Raisinets may be a "smart choice" versus M&M's or Skittles. But the smartest choice would be to skip the candy altogether and grab a bunch of grapes instead. With grapes, you'll get an equivalent boost of antioxidants, but only half the sugar content, none of the saturated fat and about 150 calories. But, don't look to Nestlé to tell you this.

It shouldn't surprise you that Nestlé believes, "as a general rule, legislation is the most effective safeguard of responsible conduct". It says so right on their corporate website. This means that the company will push marketing to the limits of the law even if they extend beyond nutritional common sense. I'm all for life's simple pleasures -- including junk food now and then. But I don't need a savvy marketing team to try and convince me that I am making a healthy choice, when in fact I am not.

Join him in prayer or RUN FOR THE HILLS!

2008-01-03T06:35:00.001-05:00

If you think or say bad things, will they come true? In the case of ultra-conservative, religious broadcaster Pat Robertson, it depends. It depends first on whether God planted these thoughts in his head and second, on whether God intervenes sometime later on.

As part of an annual tradition on his "700 Club" broadcast, Robertson said that based on what God personally told him, 2008 will be a year of violence worldwide and a recession in the United States, followed by a major stock-market crash by 2010. Given the state of affairs in Iraq, Pakistan and the rough start the US stock market got off to, even a mere mortal of average intelligence could safely make these same predictions. The likelihood of a stock-market crash in 2010 is harder to gauge given that it is 24-36 months away. But of course, all of this can be averted if sufficient numbers pray to Robertson's one and only true God.

Just a year ago, Robertson predicted that a terrorist act, possibly involving a nuclear weapon, would result in mass killing in the United States. Noting that it hadn't come to pass, Robertson said, "All I can think is that somehow the people of God prayed and God in his mercy spared us."

Since God will not confirm or deny any of this, Robertson is off the hook. If this year's prediction comes true, he's right. If the prediction doesn't come true, then God must have intervened. Accountability has never been a strong suit for Mr. Robertson. Here is one of the many offensive remarks he has gotten away with:

"Just like what Nazi Germany did to the Jews, so liberal America is now doing to the evangelical Christians. It's no different. It is the same thing. It is happening all over again. It is the Democratic Congress, the liberal-based media and the homosexuals who want to destroy the Christians. Wholesale abuse and discrimination and the worst bigotry directed toward any group in America today. More terrible than anything suffered by any minority in history."

After having been fired by CBS Radio for comments about the Rutgers women's basketball team, at least Don Imus had the courage to admit he made a mistake and apologize before returning to the air. Even Howard Stern had the decency to retreat to Sirius Radio so has to put a media boundary around his offensive behavior. But not Pat Robertson -- his broadcast airwaves are protected by God no matter what he says.

The 700 Club is a live television program that airs weekdays on The Christian Broadcasting Network. On the air continuously since 1966, it is one of the longest-running programs in history. Hosted by Robertson, The 700 Club is a mix of news and commentary, interviews, feature stories, and Christian ministry. Seen in 95 percent of the television markets across the United States, the program is carried on ABC Family Channel cable network and is seen daily by approximately one million viewers.

The international reach of Robertson's broadcast is frightening. The international editions of The 700 Club have been viewed in more than 70 foreign languages, can be seen in more than 200 countries, and are accessible throughout the year by more than 1.5 billion people around the world. Imagine what all of these people are thinking after hearing one of Robertson's more controversial broadcasts.

While Robertson's broadcasts lack the action-oriented, call to arms of the typical terrorist broadcast, they are harmful nonetheless. Pat Robertson speaks as if he represents the majority of Americans. But he does not. Depending on how far right they lean, the Religious Right makes up anywhere between 15 and 25% of the voting population. Thankfully, most Americans are moderate, sensible and tolerant. Unfortunately, this voice of moderation is lost on the airwaves. Through razor sharp organizational skills and finely tuned marketing messages, the religious right dominates like the bully that it is.

Why is it easier to restrict the words of Howard Stern or Don Imus when Robertson's words are just as offensive? His broadcasts also hold the potential to harm especially those remarks that help inflame anti-American sentiment around the globe.

This year, I predict that Pat Robertson will be taken off the air. Now, join with me in prayer to the God of your choice and just maybe this will happen.

H is for Hedge Fund

2008-01-02T10:18:00.000-05:00

These days, Harvard University looks more like a sophisticated hedge fund than it does an institution for higher education. Its massive endowment, which is now close to $35 billion, earned a 23.0 percent return during the fiscal year ending June 30, 2007. The size of the Crimson endowment puts Harvard in a class by itself. Number two ranked Yale has an endowment of $22 billion -- more than a third less than its Ivy rival.

There are many points of view about what Harvard should do with all of this money. The most popular choices appear to be: 1) eliminate tuition for all students; 2) raise the hourly wage for employees of the Harvard Corporation; and 3) self-fund more faculty research. These are rather obvious and uninspired ideas. Here is a big idea with a bit more impact and creativity.

Harvard should acquire one of the top rated, but chronically underfunded, historically black colleges. Most of these black colleges are in desperate need of additional resources to fulfill their academic and social commitment. Spelman and Morehouse -- two well known, resource rich and highly rated colleges whose student population is predominantly African American -- are the exceptions to this rule. Spelman and Morehouse have sizable endowments and the support of well-heeled celebrities such as Oprah Winfrey, Bill Cosby and Spike Lee. The same cannot be said for other historically black colleges such as Clark Atlanta University.

Clark Atlanta faces the more typical financial challenges associated with these small colleges. Its endowment is tiny -- only $40 million. The college itself is small -- 235 faculty members and 4275 enrolled students. With an endowment less than one-tenth of a percent of Harvard's, Clark Atlanta lacks the scale, resources and momentum to ever propel itself into financial prosperity.

Despite these challenges, Clark Atlanta is a good school with committed students, faculty and administration. I saw this first hand when I served as an advisor to the business school. Imagine what a school like Clark Atlanta could do if it benefited from the Harvard resource base.

Clark Atlanta could thrive as a "tuck-in" acquisition for Harvard. Why not imagine Clark Atlanta as another Radcliffe -- uniquely focused on its mission of educating African Americans, while taking advantage of Harvard's vast resources, infrastructure and best practices. If the term acquisition scares you, then how about a strategic alliance or an outright gift from Harvard to Clark Atlanta.

Such an acquisition or alliance is not as outlandish as it seems. Schools like Clark Atlanta serve an important and unique societal purpose that Harvard on its own would never be able to fulfill. In partnership, just imagine what Clark Atlanta could do with say a $1-2 billion investment from Harvard. Clark Atlanta could do what Harvard is considering doing -- eliminate tuition, pay staff more and fund more research -- but with a far greater societal impact than anything that might happen up north in Cambridge.

There is a big difference between Berkshire Hathaway (the investment company controlled by investor Warren Buffet) and the Harvard endowment. Both are professionally managed investment portfolios with public company holdings, emerging-market equities, commodities, stocks, real estate, high yield assets and so on. The big difference is that Berkshire Hathaway exists to create value for its shareholders, while Harvard exists to serves a much higher calling. Unlike Berkshire Hathaway, the financial value of the Harvard endowment is a means not an end.

The H in Harvard should stand for higher education, not hedge fund investing.

Silly Coke

2007-12-31T10:41:00.000-05:00

The Coca-Cola Company has a new version of Diet Coke called "Diet Coke Plus" loaded with vitamins and minerals. Never mind that this version of Diet Coke is sweetened with a blend of aspartame and acesulfame potassium, each 12-ounce serving provides 25% of the daily value for niacin and vitamins B6 and B12, and 15% for zinc and magnesium.

The Coca-Cola Company is on a tear lately with its stock up almost 30% from its 52 week low. New leadership has shaken the company from its doldrums, expanding beyond its core carbonated soft drinks. The company now produces and markets a wide variety of beverages including energy drinks (Full Throttle), juices (Minute Maid and Odwalla), sports drinks ( Powerade), tea and coffee (Haru Green Tea) and bottled water (Dasani and vitaminwater).

The "re-formulation" of the parent company to the flagship Coke brand is being driven by market forces. While carbonated soft drinks still dominate the overall market, the big growth gains are being made by water and energy drinks. In the last year, total carbonated volume dropped by about 1% percent whereas bottled water volume increased by 10% and energy drinks grew by about 50%. Like most everything else in the packaged goods and food/beverage categories these days, growth is being driven by the health and wellness trend. For more on the US beverage market, visit Beverage Daily -- link

Positioning Diet Coke as a "wellness" product is hardly a crime -- certainly less of a stretch than if Absolut Vodka claimed that a screwdriver cocktail is healthy because it is made with orange juice. Positioning Diet Coke Plus as a wellness product though is superfluous if not downright silly. Most Americans eat a nutrient-rich diet and do not risk malnutrition or serious vitamin deficiencies. If you have any doubts about your vitamin B intake, eat more whole grains, avocados, corn, bananas, nuts and dairy. And, if you're not vegetarian, eat lean meat and fish.

While Diet Coke Plus will unlikely cause you harm, it probably won't do you much good either. Next time you want a quick vitamin B boost, leave aside the silly marketing and have a banana with peanut butter and a tall glass of milk.

Trust me, you'll be fine.

Goldman Should Join This Exclusive Club

2007-12-23T08:44:00.000-05:00

Goldman Sachs announced last week that its Chief Executive, Lloyd Blankfein, received about $69 million in compensation in 2007 -- the highest compensation ever received by a Wall Street CEO. Mr. Blankfein received $26.8 million in cash and $41.1million in stock and options awards. The Goldman CEO also donated $200,000 of his pay (as a firm requirement) to the newly formed charitable organization, Goldman Sachs Gives.

What should strike you most about the Goldman Sachs announcement is not the size of Mr. Blankfein's pay package but how little he gave to Goldman Sachs Gives. True, Mr. Blankfein undoubtedly gives voluntarily and substantially to other causes in need. But, $200,000 is not a lot of money when one is making $69 million. To be specific, it is less than 3 tenths of a percent of his total pay.

Far from Wall Street are the Twin Cities of Minneapolis and St. Paul. Joe Nocera, in his Saturday New York Times column, reports on the strong legacy of corporate giving in this solidly Midwestern, metropolitan area. link While a number of the Twin Cities' corporate citizens are long gone (Great Northern Railroad and Pillsbury are two that were acquired), others within its corporate ranks continue to flourish. One in particular, Dayton Hudson, successfully re-made itself from a stodgy department store chain into a style-driven, trend-setting retailer, now named Target. Fortunately for the community, when Pillsbury was acquired it was by a local competitor named General Mills.

Target and General Mills are early members of a corporate association entitled the Five Percent Club that was formed back in the 1970's. Members of the "club" agreed to donate five percent of their net operating profits to charity. Today, the association is now known as The Keystone Club and its 214 members agree to donate at least 2% of their net profits to charities and non-profit causes. Amazingly, over half of the companies -- including Target and General Mills -- still donate at the 5 percent level.

The contrast between Target and General Mills on the one hand and Goldman Sachs on the other is striking. Goldman is a financial services juggernaut whose earnings are multiple times higher than Target (a discount retailer) or General Mills (primarily a maker of cereals and packaged foods). In 2006, Goldman earned $9.5 billion in profits versus $2.8 billion for Target and $1.1 billion for General Mills. Yet, Goldman gave away only $20 million through its foundation while Target and General Mills gave $150 million and $82 million, respectively. Goldman gave away less than 1% while Target and General Mills each maintained its 5% commitment.

All three of these companies face significant pressures to perform. While they are each leaders in their industry, intense competitive threats and macro-economic forces can play havoc on their balance sheets and income statements. And as public companies, they must meet the demands from shareholders, Wall Street analysts and investor activists who want profits to grow consistently from quarter to quarter. Yet, the Twin Cities' companies have chosen to meet these threats and demands while maintaining a heavier philanthropic commitment.

Goldman Sachs' commitment to public service and social responsibility is noteworthy and the pride of its culture. Yet, when it comes to ranking corporate philanthropy, the investment firm is nowhere near the top. Here is one final comparison to prove the point. The Goldman Sachs Foundation with over $275 million in net assets gave away about $18 million last year. In contrast, the General Mills Foundation gave slightly more away but with foundation assets of only $57 million. The $20 million it gave away was replenished with an equivalent amount by the company -- on top of the $41 million it gave away in corporate contributions and the $21 million in product donations.

For inspiration to give more, perhaps Mr. Blankfein and his colleagues at Goldman Sachs should look west of its Wall Street competitors – north by northwest to be more precise.

Charity As Gimmick

2007-12-16T16:48:00.000-05:00

During December, BMW North America will help make wishes come true with a donation to the Make-A-Wish Foundation for every new vehicle leased or sold at participating dealers. A contribution of $25 will be made to the Make-A-Wish Foundation for every new BMW sold at participating locations from Dec. 1-31.

Wow... how generous of BMW considering that the lowest priced car in their line-up, the 328i Sedan, carries a $32,400 MSRP. BMW is donating less than 1/10 of a percent of the car's MSRP. If you consider the top of the line 760Li sedan and its $122,600 MSRP, then the $25 donation is embarrassingly tiny. If BMW was serious about making a high impact contribution to Make-A-Wish, the company would at least scale its donation to the value of the vehicle. How about $100 for the 328i and $1000 for the 760Li?

BMW is putting to use what is referred to within the marketing trade as an embedded-giving program. The basic idea is that when a consumer buys a product during the promotion period, the company makes an automatic donation in his/her name to a designated charitable organization. While it sounds like a noble idea, rest assured that the promotion is based first and foremost on a marketing premise and less about social responsibility.

Case in point is the Barneys "Have a Green Holiday" catalog I referenced in an earlier post. In the catalog, the World Wildlife Fund is mentioned as a participating charity in the Barneys' holiday promotion. It turns out, as reported by The New York Times, that the World Wildlife Fund was unaware of their participation in the promotion -- oops! link

Mixing charity and commerce is problematic. My suggestion is to take the high road and keep them separate. If you can afford a six figure car, then you shouldn't need prodding from BMW to make a donation to those in need. And if you lead a company as successful as BMW, then you should not have to rely on promotion results to justify making a high impact, charitable donation.

Charity is best felt from the heart rather than analyzed by the brain.

Attack Of The Killer Santa

2007-12-15T07:57:00.000-05:00

Beware of the 12 foot high inflatable Santas tethered on the front lawn of your neighbors home. Not just the Santa -- in many neighborhoods you will also find the inflatable reindeer, snowman, Christmas tree, manger or snow globe. I just don't get it. They are billboard ugly. Why would anyone showcase their house in this way?

Don't get me wrong. I'm all for stringing lights on a house or decorations here and there. I also enjoy the hobbyists who spend all fall constructing their Christmas light extravaganzas. But these inflatable displays are all wrong. They have nothing to do with tradition, an eye for display or effort -- it's simply plug in, tie down and inflate. Instant Christmas!

These inflatable decorations are not defined by economic strata. My suburban New Jersey town is blessed with a diverse make-up and these inflatables are on front lawns all across town -- gracing the homes of the rich as well as the working class.

Last night, I saw a giant Santa in front of a multi-million dollar, center hall colonial mansion. The inflatable seemed to be a story and a half high. The scale of the house and the size of the inflatable only made matters worse. More "Attack Of The Killer Santa" than "Deck The Halls..."

I can only imagine what will be under this family's Christmas tree on December 25th. Right now, I'd guess a $12,735 crocodile leather Dopp Kit from Dolce & Gabbana?

What Me Worry?

2007-12-12T06:25:00.001-05:00

It looks like Madison Square Garden and the New York Nicks are being run by Alfred E. Neuman.

Stay on top of the news these days and you are likely to encounter stories of fallen idols, dethroned chieftains and corporate big wigs that have lost their job. Michael Vicks of The Atlanta Falcons -- sentenced to 23 months and required to return $20 million in payments for his involvement in in a dog fighting ring. Conrad Black -- who once presided over the 3rd largest newspaper chain -- sentenced to 6 1/2 years in prison for his convictions on fraud and obstruction of justice charges. On Wall Street, Charles Prince of Citigroup and Stanley O'Neal of Merrill Lynch both lost their CEO positions due to huge losses related to the subprime mortgage meltdown.

But life goes on at the Knicks. The team is securely in last place in their NBA conference with a 6 and 14 win-loss record. And, the team has dragged its fans through the mud with its recent conviction on charges of sexual harassment. The Garden settles charges this week -- just ahead of a judge's ruling on compensatory damages -- paying $11.5 million to the victim, a former marketing executive.

One NY radio DJ remarked yesterday -- if I cost my company $11.5 million and my ratings were in last place, I would be off the air in a matter of days if not hours. But this logic does not apply to the leadership of Madison Square Garden -- the Knicks' parent organization. Coach Isiah Thomas seems secure in his job due to the continued support and patronage of James Dolan, Chairman of the Garden.

Mr. Dolan lacks the business acumen of his father, legendary cable television pioneer, Chuck Dolan. And its clear that moral fortitude is not Junior's strong suit. It doesn't look like the embarrassment caused to his family will prompt him to take a new leadership direction either. With a tight ownership grip on The Garden, James Dolan puts his interests way ahead of any other constituency.

Answering To A Higher Authority...

2007-12-10T06:30:00.000-05:00

Like the classic tag line for Hebrew National hot dogs, more and more consumers today are expecting the brands they purchase to “answer to a higher authority.”

For these values-driven consumers, quality, design and price are still important but no longer sufficient criteria for purchase. They expect product ingredients to pose no potential harm to humans, animals or the environment. They also want to know how the Company behind the product treats its workers; and whether a portion of its profits are directed to doing social good.

Not all brands for sale meet these criteria. The very best of these brands might be referred to as “good karma” brands. A “good karma” brand should satisfy consumer needs in a manner that promotes the wellness of people, the environment, the business community and society at large.

To assess a brand's karma, here are five general factors to consider:

• Safety of product ingredients
• Equity, fairness and safety of the supply chain
• Integrity of product and marketing claims
• Service and overall customer experience
• Price and value relative to profit
• Corporate citizenship and social responsibility

Now comes the challenging part. Don't expect a "Good Karma" label on the packaging just yet. And as you stand in the aisle evaluating your purchase, do not expect a binary outcome as you weigh these factors. Products will most likely fall within a range of acceptability. Unfortunately, the factors often interplay with one another compounding the confusion.

For example, nutritionists suggest eating a variety of fresh fruits and vegetables to maintain a healthy diet. But, how do you accomplish this if you are also trying to eat local? Only the fortunate few live in tropical paradise with a diverse mix of fresh produce available all year long.

Or take the example of eating organic foods. How do you evaluate the net karma impact of organic, fair trade bananas from Central America, given the CO2 emissions of long haul air freight? It is a better choice than less expensive, the non-organic/non-fair trade bananas, but the carbon footprint is likely the same.

My advice is to keep these criteria in mind, do your own informal research and make comparisons across products. The more informed you are, the better the chance that you will make purchases that you feel good about. And if you make a mistake and buy the wrong product, don't beat yourself up. Instead, use the experience to make a more informed choice next time. Over time, more and more of the products and services you use will satisfy your broader concerns for life, your community and the planet.

Why Is This Man Smiling?

2007-12-07T14:19:00.000-05:00

In one of the largest executive-pay givebacks in history, former UnitedHealth Group Inc. Chief Executive William McGuire has agreed to forfeit about $620 million in stock-option gains and retirement pay to settle civil and federal-government claims related to stock-option backdating. Stock-option backdating refers to the illegal practice of "backdating" stock option agreements so that options are priced at a historical low price rather than the current price, generating higher profits for the option holder.

Under the agreement, other key executives agreed to return ill gotten stock option gains as well bringing the total value of the settlement to almost $890 million. McGuire's payment dwarfs the $500 million junk bond king Michael Milken returned in the 1980's. McGuire still faces criminal charges.

So, why is he smiling? He still retains about 24 million stock options that currently could be cashed in for a gain of roughly $800 million, on top of about $530 million in pay he pocketed while running UnitedHealth from 1991 to 2006 -- obviously, the public defender will not be called upon to handle his criminal case.

Why would McGuire cheat the system to make $600 million, when he already was making more than a billion dollars?

This level of greed is in a whole different league than the six-figure executive who cheats on his expenses by taking his wife out to dinner and pretending she is a client. Or, the $50,000 bookkeeper who embezzles a $1,000 a month to cover her mortgage expense. I find McGuire's case disturbing. A billion dollars should be enough to keep anyone on the right side of the law. Obviously not.

Ho Ho Ho! Holier And Richer Than Thou!

2007-12-05T18:50:00.001-05:00

Ultra-exclusive, fashion retailer Barney's New York released its "Have A Green Holiday" catalog this week. link Naturally, the papers and printers used in the catalog are all certified to Forest Stewardship Council standards! Here are my favorite picks.

First up -- A Goyard "St. Louis" shoppers tote at the lofty price of $1065 for those of you for whom the LL Bean extra large canvas tote @ $30 is a bit too pedestrian. The Goyard bag is made of unique 100% recyclable canvas and is made of all natural ingredients without plastic or petroleum. And while you are at it, you might as well spring for the $310 custom monogramming!

Second -- a very special collection of women's accessories including an alligator skin wallet and card case, assuming your Humane Society membership does not extend to those farm raised Florida gators...

Third -- Salvatore Ferragamo neck ties. Sorry, the silk worms are not free range. Do buy a tie anyway and a donation will be made to the Natural Resources Defense Council.

And my favorite. A "billionaire's boys club" made-to-order bike @ $3950. The perfect gift for those who want to reduce their carbon footprint but dread the thought of taking public transportation...

This holiday season, spend your green to be green!

How long should a consumer product last?

2007-12-02T15:06:00.000-05:00

Yesterday, I purchased my third HP printer in just over 36 months. Buying the first new printer was my choice based on an upgrade in technology. I decided to rid my home office of a separate printer and fax machine and consolidate into a single unit that prints, copies, faxes and scans. This printer lasted just about two years until it died a quick death after an electrical storm (so much for my surge protector). The replacement printer died after a year when the ink cartridge mechanism jammed and broke off.

In both cases, my manufacturer's warranty had expired and I was told that I would be better off buying a new printer rather than fixing the old one. This recommendation considered the cost of shipping, handling, service and parts; and the time I would be without a printer. On my trip back from Staples yesterday, I got to thinking about the expected life of a consumer product. Certainly, I had hoped that a printer would last a number of years rather than months.

Often, expectations about the useful life of a product are built into the customer mindset only to be reinforced by marketing messages. Price is largely an irrelevant matter. For example, single use products range from the inexpensive -- Gillette disposal razors (@ $3.50 for a pack of 3) to the absurdly expensive -- a bottle of 1996 Dom Perignon Rose for $349.99. Likewise, there are inexpensive products that last almost forever -- a Kitchen Aid can opener for $9.99. And, there are many expensive products with long, useful lives -- the 2008 S600 sedan from Mercedes Benz, which has a base price of $144,975. For a more utilitarian, automotive example, remember the Volvo ads showcasing owners who had driven their cars for hundred of thousands of miles?

Let's leave aside the factor of technological obsolescence -- consumers have learned this will happen particularly with technology gadgets. In this case, manufacturers argue that consumers are getting direct benefits from upgrading to new models -- so at least there is a payoff. Also leave aside fashion items. Those who purchase a $2,000 suit from Armani Collezioni recognize that the appeal of the suit's design is short lived.

How long should a printer realistically last? Or, an iPod? Or, a cell phone? Products that cost between $100 and $1,000 are a no man's land for consumers especially if the life expectancy is hard to guage or the product is prone to break or fail. In essense, products like this are not expensive enough to repair but still cost a sufficient amount to make you say ouch!

In this $100 - $1,000 price range, consumers are often told that the expense and hassle of repairing s product are just not worth it -- you are better off buying a new one. For my money, this is an unacceptable consumer experience and appears to be built into the manufacturer's business model. Once or twice burned, you are convinced to buy the extended warranty. You actually pay more for the printer up front for the peace of mind that if it dies a premature death, you can have it easily replaced.

But buying the extended service policy is optional and many customers worry that they are being ripped off if they buy it. Are we really equipped analytically to calculate the risk of forgoing the extended warranty especially if we are prone to suspicions about the manufacturer? In my case, I bought the 3 year extended warranty on the new HP printer for about $95. A far simpler model in my view would be to simply raise the price of all HP printers by half this amount -- say $50 -- and then offer a LL Bean like service policy to all -- if for any reason, your printer stops working, we will fix it for free, no questions asked.

This works to every one's benefit. The consumer saves money in the long run and has a happier customer experience. And the model benefits HP as well -- not only is consumer loyalty enhanced but this approach provides the discipline to develop and produce high quality, low maintenance products. And that's what HP should be all about.

Everything just might be bad for you!

2007-11-26T15:56:00.000-05:00

My recent posts have suggested a certain optimism for the greening of the American consumer products business. Smart marketers such as Toyota, Target and even bleach maker Clorox are transforming their product lines to meet the expectations of health conscious consumers.

These companies are demonstrating a genuine concern for the health of living things and the planet. They are also motivated by fear -- a fear of losing market share if they do not meet the more demanding needs of health conscious consumers. Whatever the motivation, I predict continued progress towards a healthier set of products lining our supermarket shelves and mass market displays. Be on the watch for product reformulations, new product introductions, acquisitions and in limited cases, discontinued or divested products that don't make the grade.

This optimism is now challenged by a new book by Mark Schapiro, the Editorial Director of the Center for Investigating reporting. The book is called "Exposed: The Toxic Chemistry of Everyday Products and What's at Stake for American Power" (Chelsea Green, $22.95). link

In the book, Schapiro contends that the American public comes in daily contact with countless toxic chemicals and harmful substances used widely in our everyday products. Carcinogenic, gene mutating and birth-defect causing substances can be found in everything from cosmetics and personal care products to consumer electronics and computers. And there are plenty of toxins in toys, particularly plastic toys. If Mr. Schapiro is correct, the cynic may be right after all -- these days just about everything is bad for you...

Schapiro's further argues that European consumers have less to worry about in this regard. That is because the European Union has more stringent legislation and tougher regulations for consumer products manufacturers than the U.S. And, the EU is quicker to ban potentially bad substances even if the evidence is still forthcoming. How could this be? Are EU countries in fact environmentally safer than the U.S.?

The answer according to Schapiro is yes and for two solid reasons. First, political contributions are banned in Europe so the lobbying effort against legislation is completely non-effective (unlike the U.S. where lawmakers accept donations from lobbyists and companies and are then beholden to them). So, the EU regulators feel little need to protect company interests if consumer safety is in question. Second, European governments pay for health care for its citizens and are therefore more far sighted about potentially harmful factors in the environment. The governments have a vested interest in reducing the cost of health care and mitigating environmental factors in illness.

Interestingly, because the EU as a whole is a collectively larger economy than the U.S., companies (including U.S. based multinationals) have no choice but to follow the EU regulations for fear of having their products banned from the market. It is hard to believe this but some companies opt to produce two sets of products according to Schapiro -- the original formulation for U.S. consumers and a healthier version for EU consumers! This happens regularly in the case of toys (by the way, China produces 85% of the world's toy supply). Author Schapiro did an enlightening interview with NPR if you would like to listen to it or read the transcript. link

Makes you feel comfortable doesn't it? Well, here are a two thoughts to make you feel a little better.

First, even if government regulation is weaker in the U.S., companies will continue to innovate in an effort to strengthen the wellness claims of their product lines -- the U.S. market moves faster on market competition and consumer demand curves than it does on regulation.

And second, having two versions of the same product is not a recipe for long-term success. Large multi-nationals such as P&G standardize product, packaging and manufacturing process on a global basis -- because it makes economic sense to. And maybe I am a bit naive, but I believe companies would choose the healthier version of a product every time -- why risk damage to the brand?

And in the meantime, hold your breath when you are riding in your car. It turns out that a toxic chemical in the dashboard degrades over time and diffuses into the circulating air...

Values In Aisle Six

2007-11-26T10:33:00.000-05:00

I reached under the kitchen sink on Friday to grab dishwashing liquid to take care of a couple of leftover wine glasses from Thanksgiving. I was a surprised to find a bottle of Seventh Generation rather than Palmolive or Dawn.

Seventh Generation, Inc. is a company, which makes household and personal care products that are healthy and safe for the environment. It was founded in Vermont almost 20 years ago -- way before environmental sustainability was fashionable in the suburbs. The name of the company comes from an Iroquois belief that "in our every deliberation, we must consider the impact of our decisions on the next seven generations".

I wasn’t surprised that my wife embeds values in her household shopping habits – she is a karma capitalist at heart too. Rather, my surprise had more to do with Seventh Generation's limited distribution. Historically, the brand was only available by mail order or in health food stores and Whole Foods. Now, it seems that Seventh Generation brands are available at Target (where my wife found the dishwashing liquid) and supermarkets such as Shoprite.

Do you know what the biggest threat to Whole Foods is? It is certainly not a slow down in the general wellness/earth-friendly marketplace – especially with categories such as organic foods growing at 15% a year. The biggest threat to Whole Foods is that it loses its point of differentiation versus the supermarkets and chains, which are more conveniently located in your town.

Mass retailers such as Wal-Mart, Target, Kroger and so on are eyeing Whole Foods’ success and hoping to copy key components of its business model. That’s what happened to Starbucks when McDonalds, Dunkin Donuts and just about every neighborhood café improved its coffee service to compete. Keeping abreast of key growth segments and copying successful competitors is a matter of staying in business.

Let's get back to Seventh Generation. Here is a company that quietly built its franchise over the last 20 years. Visit their website to find our more about the company, their focus on sustainability and full range of their products. link

This is a quiet company no more. Last year, revenues grow by 28% and it moved into a fancy new headquarters – good for them. Like most commercial enterprises, the owners of Seventh Generation want and need to grow – which expanding their product line and broadening their distribution are essential moves. This is not only about growth – it is about survival. Just as Target and Kroger’s are watching Whole Foods, Procter & Gamble, Colgate and Unilever are watching Seventh Generation. And if these packaged good giants can’t reinvent their product lines fast enough, they’ll transform them through acquisition. This is why Colgate purchased Tom's of Maine -- a natural ingredients, personal care products company.

Don’t be put off if large companies are hitching a ride on the latest trend – the LOHAS Market, which stands for Lifestyles of Health And Sustainability and represents 50 million adult consumers and close to $300 billion in spending. This is great news for the values-oriented consumer. The net result for you will be more wellness and earth friendly brands to choose from at lower prices and available in more places.

And, you need not be concerned about the prospects for Seventh Generation. The company seems to be superbly managed and may look to go public to raise expansion funds (why not, if Lululemon is worth billions!) or be acquired like Tom’s of Maine or Burt’s Bees. In any scenario, this will no longer be a sleepy Vermont based company.

That’s good news for the earth and all of us inhabiting it too.

Word!

2007-11-23T13:46:00.000-05:00

No, not the hipsters' phrase.... I mean your word.

Do you want to conduct business in an ethical manner? Start with this -- never go back on your word. And, in today's world of changing environments and conflicting demands, consistently keeping your word will be a remarkable achievement. Not only will it enable people to trust and rely on you, it will help build unshakable team loyalty that holds together through up and down business cycles.

Just keep in mind that this takes considerable effort -- easier said than done.

The best boss I ever worked for never went back on his word. In the ten years I worked for him, his word was a guarantee. This particular boss also had an unusual method of saying “no” -- he would simply not say "yes", rather than vocalizing "no". While in some organizations this might breed frustration, in this case it actually created a high level of motivation, focused on developing new ideas and ventures. If you didn't hear "no", you kept coming back with stronger arguments and answers to his objections. The process was also a good test of your commitment to an idea. If you didn't come back at least two or three times how committed to the new idea were you? And, once you heard "yes" you knew you had his backing all the way.

This gentleman was an accidental business executive. Trained as a computer scientist, he turned around a small, money losing division and then steadily rose up the ladder. He catapulted over more polished and "sophisticated" executives surprising many with his unassuming and publicity shy manner. During his tenure, he delivered more than 40 consecutive quarters of record earnings.

In contrast, the worst boss I ever worked for kept his word only when conditions made it easy for him to do so. For him, going against his word was a strategy for dealing with tough times. Once, when we recognized that we had too much manufacturing capacity in Chicago, he ordered me to stop making lease payments on a rental facility. His logic was, "After a couple of months, the landlord might threaten to sue but eventually he’ll settle to avoid the legal expense. In the meantime, we will improve our cash flow and reduce our space commitments."

I just couldn't do it. I continued to pay the landlord at the risk of being fired. I had given the landlord my word.

After a few years, our company continued to be in dire straits financially. I offered to resign as a way of reducing overhead. He replied that this would not be good for the company in the long run as he viewed me as his choice to succeed him as CEO. Only a month later, he fired me, adding that he too was being forced out by the board. This turned out not to be true -- it was simply an easier way for him to break the news to me. Ultimately, getting fired was the best thing that could have ever happened to me.

In contrast to the high-integrity leader I mentioned first, this boss ran his company into the ground. Once publicly traded on the New York Stock Exchange, it repeatedly recorded losses for close to twenty years. Eventually, it was taken private and the new owners fired him. And, to top it off, he was later convicted of securities fraud and served time in a Federal prison. Word!

Give Thanks...

2007-11-20T19:23:00.000-05:00

Be grateful if you have what you need.
And, be generous if you have more.
For others with far less than you,
live without what they desperately need.

Happy Thanksgiving from the Karma Capitalist.

WAL-MART: Great White Shark or T-Rex?

2007-11-18T17:17:00.001-05:00

"There is a creature alive today who has survived millions of years of evolution without change, without passion, and without logic. It lives to kill. A mindless eating machine, it will attack and devour anything. It is as though God created the devil and gave him jaws."

- From the preview for 'JAWS' - 1975

For many people, Wal-Mart tops the list of feared and hated corporate giants. The retailer swept across the country during the last 50 years, devouring countless main street merchants and leaving in its wake a list of corporate offenses related to unfair labor policies, poor environmental practices, and ruthless tactics against competitors and suppliers alike.

Starting with one location -- a franchised Ben Franklin variety store in Arkansas, Sam Walton and his successors built what is today the largest retailing operation in the world. There are 5,000 Wal-Mart stores (in a variety of formats) and the company has 1.9 million full time employees -- that's right, 1.9 million employees.

With revenues of just over $300 billion, Wal-Mart is one and a half times larger than its next biggest 13 competitors combined. This list includes storied retailers such as Sears as well as trend setting newcomers like Target. In fact, Wal-Mart is six times larger than Target. Today, Wal-Mart stands at number two on the FORTUNE 500 list just behind Exxon Mobil.

There is a well organized and financed activist movement against Wal-Mart. One example is the organization -- "Wake Up Wal-Mart" -- which is backed by The United Food and Commercial Workers International Union. Wake Up Wal-Mart claims over 500,000 members (union card carriers perhaps?) and has a well-designed, multi-functional website prompting you to sign up, spread the word, adopt a Wal-Mart, donate and take action. link

Or, check out Wall-Mart Watch, which is a joint project of The Center for Community & Corporate Ethics and its advocacy arm, Five Stones. The Center is devoted to studying the impact of large corporations on society. link

Wal-Mart is clearly not invincible. The effort against Wal-Mart includes economic research, academic studies, film projects and other union movements. A growing number of communities have successfully rallied and prohibited Wal-Mart from opening. The company has repeatedly failed, attempting to expand internationally. While the company has long been noted for its extremely efficient supply chain model, 70% of its products are sourced in China, creating a new level of vulnerability.

Wal-Mart is a remarkable retailing achievement. Its low prices and breadth of inventory provide a measure of consumer value without competitive parity. And as such, it has many loyal consumers and business advocates. However, to grow -- which all public companies must do -- the Wal-Mart model must adapt. The social environment companies operate in today will not allow Wal-Mart to operate like it has in the past.

Will Wal-Mart face extinction like the once feared T-Rex? Or, will the retailer be destroyed like the man-eating Great White in Jaws? I doubt it. Rather, watch for Wal-Mart to strengthen its ethical values voluntarily and integrate these into its business model. Imagine low prices, a wide selection of merchandise AND a values driven approach to people, society and the planet -- that's an unbeatable business model for Wal-Mart over the next 50 years.

Lulu-lied!

2007-11-15T16:19:00.000-05:00

The stock of Lululemon, the yoga-inspired, apparel company, has been on a tear since its summer IPO. While shares of the Canadian company have traded as high as $60, they have since settled to the low $40's. Lululemon still sports a $2.8 billion market capitalization -- not bad for a company with revenues of only $150 million and profits of just $7.7 million.

Enthusiasm for its brand imagery, unique fabrics and apparel design has been the key driver behind the company's rapid rise. An aggressive retail strategy is set to capitalize on the young company's loyal consumer following -- an expansion plan reminiscent of Starbucks in its early years.

Now, management is facing its first PR crisis and showing the strains of getting too much too soon. The focal point is a popular Lululemon clothing line called VitaSea, made from a cotton fabric with a one-quarter seaweed composition. Earlier this week, the New York Times reported that tests performed by an independent laboratory could find no trace of seaweed in the fabric. Founder and Chairman, Dennis Wilson, did not dispute the laboratory findings. link

Let's presume Lululemon did not intentionally mislead the public. Rather, this is most likely a case of sloppy management. A company spokesman admitted as much offering the excuse that Lululemon relied on its German fabric supplier, Smartfiber, to verify the VitaSea fabric composition and associated claims. This would be acceptable if it was not for the fact that VitaSea promotes revolutionary wellness benefits; "VitaSea reduces stress and provides anti-inflammatory, anti-bacterial, hydrating and detoxifying benefits". That's too much promotional copy to accept without demanding substantiation.

Don't short Lululemon stock just yet. Consumers seem unfazed by the controversy and the stock faced little downward pressure since the Times article. On the other hand, I would not load up your 401K with the stock either. Any company with a P/E ratio of 265 ought to have substance behind the hype to sustain its financial momentum. In comparison, public stocks trade at a P/E ratio of about 20 on average, indicating that the market supports a share price of 20 times its earnings. The fact that Lululemon trades at about 13 times greater than the average shows just how much Lululemon hype you need to believe before you should buy the stock.

Lululemon should pay close attention to its cultural "manifesto" to use its own words -- "That which matters the least should never give way to that which matters the most." Right now, growth and expansion matter the least and integrity matters the most.

Email Service Now Available

2007-11-15T14:20:00.000-05:00

Good news! A number of readers have asked me about subscribing to Karma Capitalist so that it is automatically emailed to them. I am pleased to announce that this feature has been added -- please see the FeedBlitz box in the top right corner. Subscribing is as easy as 1-2-3.

In developments of a grander scale, I am pleased to report that the parent company of The Karma Capitalist -- Moon Day Media -- has completed its initial round of financing. If you would like to learn more about our company, you will find a presentation and a sampling of our development work: link

The files are large and take a while to load, but they are well worth the wait (in my opinion). Thank you!

Reinventing Bleach

2007-11-14T18:25:00.000-05:00

The Clorox Company says it wants to transform itself into a company focused on health, wellness and environmental sustainability. My first impression was scepticism believing this is another attempt by a major company to latch onto a marketing trend. It turns out I was wrong to be sceptical.

Chief Executive Don Knauss plans a major push towards personal products with the first step being the purchase of lip balm and lotion maker Burt's Bees for $925 million. Knauss is also launching a line of natural cleaners under the label Green Works. Green Works cleaners are made from 99 percent natural plant-based ingredients and perform as well as conventional cleaners. And Green Works bottles are 100 percent recyclable.

These are exciting developments for a company that has not launched a new brand in 20 years. But how does Clorox intend on transforming its current product line up to fit this new image? How will Knauss make such major revenue producers as Clorox Bleach and Glad plastic trash bags environmentally friendly?

Regarding Clorox bleach, it turns out that the brand's least earth-friendly aspect is not the liquid in the bottle but the bottle itself. Much to my surprise, Clorox liquid bleach breaks down quickly once down the drain, primarily into salt and water. The same cannot be said for plastic trash bags -- which will never break down no matter how long they sit in the landfill. To credit Clorox though, Glad bags have been re-engineered to use less plastic and the plastic that is used in manufacturing is entirely recycled. The ultimate environmental solution for plastic trash bags has more to do with consumers (who should use less or none of them) than Clorox.

While no company is perfect, Clorox has a solid track record in environmental practices. Maybe transforming this 100 year old company will not be so difficult after all. link

Gratuitous Philanthropy

2007-11-12T17:13:00.000-05:00

Al Gore made news today by joining forces with noted Silicon Valley venture capital firm, Kleiner Perkins link to spearhead investments in environmentally friendly energy sources and clean technology. link

The 45th Vice President of The United States is teaming with one of the most successful venture capitalist firms as a partner with the likes of John Doerr, who was behind Netscape and Google to name a few of his stellar hits.

Never shy about making headlines and leveraging the press to tell his story, Gore also announced that he would be donating his salary to the Alliance for Climate Protection -- the non-partisan foundation he chairs that focuses on the climate crisis. Unfortunately for the foundation, however, Gore will be keeping for himself the options and equity stakes he receives from his venture investments -- and this is where the real money is made in venture capital.

Don't get me wrong. I love what Al Gore has done to promote the dangers of global warming and I certainly wish he and not George W was in the White House. And I am all for making money AND doing good. But this donation is more about making headlines than making a difference.

Running And Spiritual Growth -- Part II

2007-11-08T06:58:00.001-05:00

My friend Tom read my recent post about A-ROD and suggested I do a follow up piece on A-ROD's meditation practice, which has apparently turbocharged his baseball talents even further. Unfortunately, despite visiting the superstar's web page and doing a variety of Google searches, I could find nothing on the subject. My searches did reveal though that on the same day that A-ROD opted out of his Yankees' contract, 1960's legend, Donovan, announced the creation of a meditation center in Scotland. A-ROD is linked to meditation after all.

Google also led me to a wonderful interview with the recently departed Sri Chimnoy who built an entire spiritual following based on the dual tenets of meditation and endurance sports such as long distance running. Sri Chimnoy believed that physical feats such as marathons or power lifting were conduits to spiritual development -- somewhat contradicting the premise of my last post. Unfortunately, since Sri Chimnoy is no longer with us in the physical form, I am unable to ask him this question directly.

In that earlier post, I commented that working hard and running long distance were doing very little for my spiritual growth. I'll leave it to you to decide if my views coincide or conflict with those of Sri Chimnoy. link

And for more on the death of Sri Chimnoy, please visit the October 17Th entry of the hugely popular weblog -- Souljerky, produced by my dear partner, Spiros. link

Raise Your Arms and Bend Backwards

2007-11-07T17:50:00.000-05:00

Yoga took me off the traditional career track. For me, the daily practice of yoga muted my raw ambition and gave me a broader sense of what I really wanted to accomplish in life.

For decades, I focused on "achievement" -- nothing unusual for a Harvard MBA. During this time, I was also an avid runner. And my running paralleled by career. Just as I pushed myself to run marathons at a faster pace, I pushed myself higher up the corporate ladder. Until I realized I could not sustain this pace over a lifetime. And that's when I discovered yoga.

The frame of reference for most business people is onward and upward. And over time you become less flexible both physically and emotionally. And this is not helped by long hours at work behind a desk. Business people are not geared to bend in all directions. And, this is damaging in the long run.

I am not suggesting you quit your job or derail your career aspirations. I continue to explore new growth opportunities and recently joined a new media start up. I am suggesting though that you find an activity that complements this mad rush forward. You'll find that twisting and bending backwards (even if only figuratively) provides many benefits, especially when everyone else around you seems to be racing forward with blinders on.

A little bending and twisting will make you more reflective and thoughtful. And, the added flexibility will enable you to adapt to the changing demands placed on you. At the very least, you will reduce your risk of back injury, the next time you bend over to pick up something. That's what a little yoga can do for you. And just maybe, it can do a whole lot more.

Sequential Philanthrophy

2007-11-06T06:49:00.000-05:00

About 18 months ago, Warren Buffet made big news with the announcement of his $30.7 billion pledge to the Bill and Melinda Gates Foundation. At the time, this was estimated to be about 85% of his fortune.

In the event you have been living on Mars, Bill Gates (with $56 billion) and Warren Buffet (with $52 billion) are the 3rd and 4th richest people in the world. The Bill and Melinda Gates Foundation was started by the Microsoft founder with his wife in 2000 and now has an endowment of $34.6 billion.

Bill Gates and Warren Buffet each made an enormous sum of money over the course of their careers and now are beginning to give most of it away. This is a generous, noble and rational approach to philanthropy -- wait until you are older and have more money than you and your heirs can spend, and then give most of it away. And if you are Bill Gates, who for most of his life was viewed as the ruthless brain power behind the Microsoft monopoly, it is a wonderful way to redefine his legacy.

Gates and Buffet are engaging in what I will refer to as sequential philanthropy. First make a significant amount of money, and then give it away – in such a way as to not cause much personal hardship to you during your lifetime. There are other ways to give -- ways which involve much more personal sacrifice.

Let me give you an example. Over the weekend, I met a man in his 50’s who has volunteered for the Special Olympics for thirty years. He has been a year-round volunteer for most of those years and has worked on a daily basis for extended periods of time. He coordinates regional training activities and officiates at competitive events. His wife is a volunteer too and now that their children are grown, married and out on their own, they can travel together to Special Olympic events and meetings around the world.

I asked this gentleman if he had a special needs child or loved one, who instigated his volunteerism with the Special Olympics. He said he did not. I asked him if he had made his money very early in his career and chose to spend most of his adulthood “giving back.” He said he had not and that even today he holds down a full time job to pay the bills. I asked him if Special Olympics ever employed him during that 30-year period. He answered that he has given time and energy freely and has never been on the organization’s payroll.

This man has given an Olympic-sized donation of time and energy to an organization that serves people in need. He gave up opportunities to spend time with his family and perhaps make his own millions (or billions) had he channeled his energies in an entrepreneurial direction. His donation was not sequential – it has been continuous. While he may not make headlines or cure world hunger, this man has made a far bigger philanthropic sacrifice than either Gates or Buffet. There are many others like him who contribute in a quiet, sustained way.

If you want to support this gentleman, who asked to remain anonymous, you can visit the Special Olympics website and get involved yourself – or give a donation. link In any event, don’t wait until you’ve made your money or are too old to spend it—start helping others right now.

The Soul of Capitalism

2007-11-02T12:24:00.000-04:00

Our good friend, Shreedevi Thacker, brought to our attention this incredible interview with John Bogle conducted by Bill Moyers for PBS. And if for some reason, you cannot watch the video, do take the time to read the transcript. link

As Shreedevi notes, Bogle does not mince words when speaking about what is driving capitalism today and the impact that this is having on society. In Bogle's view, the productive system (which makes things) adds value whereas the financial system (which provides the money to help companies makes things) subtracts it. In Bogle's view this is not inherently wrong -- just way out of balance.

Today, the economy is driven largely by the financial system and the bankers, mutual fund managers, hedge funds and CEO's who profit from it. Financial companies now make more money than agricultural companies; and energy companies; and technology companies; and manufacturing companies; and so on. The 25 highest paid hedge fund managers each made more than $129 million last year.

Bogle, the author of "The Soul of Capitalism" is no mere social critic or academician. He is the founder and retired CEO of The Vanguard Group. Under his leadership, the company grew to be the second largest mutual fund company in the world. His awards and distinctions include being named as one of the "world’s 100 most powerful and influential people" by Time magazine and one of the investment industry’s four "Giants of the 20th Century" by Fortune magazine.

How A-ROD differs from Tiger

2007-10-31T10:34:00.000-04:00

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

2007-10-28T16:26:00.001-04:00

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

2007-10-27T17:12:00.000-04:00

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

2007-10-23T06:48:00.000-04:00

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

2007-10-21T08:22:00.001-04:00

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!

2007-10-20T11:08:00.000-04:00

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

2007-10-17T13:27:00.000-04:00

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

2007-10-11T19:08:00.001-04:00

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

2007-10-09T20:25:00.000-04:00

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

2007-10-09T06:07:00.000-04:00

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!

2007-10-08T06:17:00.000-04:00

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...

2007-10-04T14:37:00.000-04:00

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

2007-10-03T12:17:00.000-04:00

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

2007-10-03T10:14:00.000-04:00

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

2007-10-02T06:49:00.000-04:00

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.

It all comes out in the wash

2007-09-29T08:35:00.000-04:00

We all know people who are meticulous about their finances down to the penny. The coupon clipper mentality extends into every aspect of their daily life. Making sure, for example, a restaurant bill among friends is divided evenly to the nickle. Leaving an exact 18% tip.

This attitude about money would drive me crazy. The payoff just doesn't seem worth it. Earlier in the week, I watched a woman argue with a train conductor about having to pay a $5 surcharge because she purchased her ticket on the train -- rather than at the window or from one of the automatic kiosks. The $5 surcharge is steep relative to the $7.50 ticket price but that's the point-- to reinforce the practice of buying your ticket in advance. Sure, there are always mitigating circumstances -- a long line at the ticket booth or a broken kiosk. The conductor rarely waves the surcharge though because there is no way for him to discern the legitimacy of your excuse.

Later in the day, I had breakfast with a friend. It was early and some repair work was still being done on the premises -- it was noisy but not intolerable. Our waiter moved us to another table. We had a long and enjoyable discussion. When I asked for the check, to my pleasant surprise, the waiter added that the breakfast was on the house. We walked out with big smiles.

Win some/lose some. A sane approach to life's small change.

Google, the Cold Call and K Commerce

2007-09-27T07:08:00.000-04:00

I had lunch this week with the Chief Marketing Officer of a large retailer with a significant web presence. The purpose of our lunch was to review trends in marketing and media particularly as they relate to a small business trying to grow. His key message is that the search engine -- and Google in particular -- has fundamentally changed everything about the marketing business.

This is not "new news". The search process allows customers to bypass the traditional marketing channels and brand messages. If you are looking to buy a new car or appliance, you do not need to visit the showroom. Likewise, you can ignore most mass media commercials and do your own proprietary research on the web. This is taking place every day in every home and office around the world.

What is interesting about search is how it has changed the nature of business start-ups. It used to be that established companies had a significant competitive advantage in terms of experience, know-how, business contacts and relationships. True, large companies still have the advantage of scale and resources -- but these can be obstacles too in terms of inertia and risk avoidance. Search has made the playing field more level for small companies pursuing new business opportunities.

I know this first hand being involved in a start up. What makes this level playing field possible is the willingness of companies to communicate, collaborate and conduct business via the web -- often with companies they have never heard of or business people they have never met. In the last sixty days, I have repeatedly hit the "contact us" button on a home page and have received prompt and helpful replies. Business owners or their staff are more than willing to conduct business with other companies over the web. This is especially true in the case of one small company doing business with another. Not only is the web fast and efficient -- it has become the most valuable source of new customers.

What these companies know is that fast, courteous and "we are interested in doing business with you" replies will ultimately drive their business. And you never know, it may be that the individual contacting you represents the next Crocs. This is the new karma of commerce, or k-commerce for short.

Nike and The Last of the Mohicans

2007-09-26T14:09:00.001-04:00

NFL fans will recognize this hard hitting Nike commercial featuring Shawne Merriman, linebacker for the San Diego Chargers. The background music features the theme song from the movie, The Last of the Mohicans, based on James Fenimore Cooper's novel of the same name. The movie stars Daniel Day-Lewis.

Showing its softer side, Nike announced today that it will introduce a running shoe specially designed for Native Americans. The Beaverton, Oregon based company introduced the shoe in an effort to promote physical fitness among this impoverished group.

The Air Native N7 is designed with a larger fit for the distinct foot shape of American Indians, and has a culturally specific look. The shoe will be provided free or at wholesale cost.

I can't imagine that a lack of running shoes is a significant factor in the epidemic level obesity rates among Native Americans, but I suppose the launch of the shoe can't hurt. Developing, designing and launching a shoe is not hassle free -- so hats of to Nike for the time, energy and money to do so.

Common Sense Defense

2007-09-25T07:28:00.000-04:00

Forget about the chart (courtesy of The Wall Street Journal) at the top of the page for a moment.

Imagine you are a reasonably successful. Married with two children with a nice house in the New York suburbs. You are making $150,000 a year. On the surface, life appears pretty good.

Unfortunately, though, mortgage and real estate taxes are taking about half of your take home pay. And, the bank just informed you that the monthly payments on your variable rate jumbo mortgage will soon increase by $400.00. Although you clear $95,000 each year after taxes, over $55,000 goes towards the house.

You are failing to save any money for your future (for college and retirement planning). Housing expenses are too high relative to your income. Common sense suggests that you re-structure your finances by moving to a lower priced house. While emotionally painful, you would be able to increase your savngs rate.

Now, lets go back to the chart above. The same lack of common sense applies to the government -- just add more zeroes. The 2007 Federal Budget stands at about $933 billion. Of this total, a gigantic $530 billion goes towards defense, State Department operations and Homeland Security. The analogy extends further. Long-term financial needs such as energy, health care, education and infrastructure spending are being shortchanged because there is so little left after defense spending. Common sense suggests that we re-structure our budget; cut defense spending by $100 billion and invest the savings in our future. At the very least, we could provide health insurance for every child in America.

Push aside moral questions about the Iraq War or the need to protect us against terrorism. Look at the facts. On military alone, we annually spend about 7 times more than China or Russia -- and 70 times more than North Korea. Hawks would argue that on a percent GDP basis, China, Russia and North Korea spend more. But at some point, percentages are no longer meaningful because our absolute spending level is so huge.

Given the choice presented to our illustrative family, many would opt out of moving and unfortunately live with the consequenses of under investing in their future. The sames goes with the Federal budget. It is highly unlikely that the Government will reduce military spending to fund long term investments.

It's too bad common sense doesn't prevail when it comes to financial planning -- especially when it comes to government spending.

UAW says "We are going to strike like its 1958"

2007-09-24T12:05:00.000-04:00

The UAW announced today that it has called a national strike against GM -- the first such action in decades.

Add this to the huge problems facing GM. If you are looking for a definition of huge, try this. GM has almost 340,000 retirees and surviving spouses and about $51 billion in unfunded retiree health costs -- which is about two and a half times GM's current market cap of just under $20 billion.

These health care costs are one of the reasons GM remains non-competitive in the showroom. Every car GM produces costs about $1500 more than a similar Japanese model due to employee health care costs. GM's problems are bound to get worse before they get better.

It's too bad it's not 1958. GM would be selling lots of Impalas like the sweet one shown above. And, national labor strikes would be a relevant and effective negotiating tool. The UAW says the strike is not about retiree health benefits but about job security for current employees. With a strike fund of $800 million, the UAW says that it has the financial capacity to strike for a year -- assuming workers are paid $200 a week. Too bad its not 1958. Back then, $200 was a lot of money.

2007-09-20T11:15:00.000-04:00

Twenty years ago when I was commuting to mid-town Manhattan, I stopped on my way to the office at a Greek coffee shop on 7th Avenue In my ambitious, rising young executive days, I needed my daily two cups of coffee and cinnamon raison bagel -- a bargain even then at $2.50. The coffee itself was $1 each. This was before coffee was fashionable and social as it is today (pre-Starbucks).

I recently re-discovered the $1 cup of coffee. Before doing my morning yoga practice, I now stop at a Korean grocer in trendy SOHO for a cup of coffee to get me going. The price is still $1. The coffee is hot, fresh and naturally sweet. A few steps away, there is a Starbucks selling coffee for twice that amount, coffee that in my view isn't as good. It's true that I probably can't get steamed soy at the Korean grocer but the coffee is good enough to drink black.

I am thrilled that there are still places in NYC selling coffee for a dollar. Coffee like oil is a commodity subject to fluctuating supply and demand cycles. Unlike coffee though, the price of oil at the pump has more than tripled in the last 20-30 years. I worked in the coffee business at P&G and know first hand the havoc that coffee prices can inflict on margins. The typical NY coffee shop is most likely absorbing these fluctuations, using reasonably priced coffee as a loss leader. Not that the Korean green grocers are hurting -- the cost of the $1 cup of coffee is probably less than 10 cents.

True, I don’t know that the coffee is organic or fair trade. And the green grocer might be making up his loss by charging customers a lot more for other items. But I am happy that the $1 coffee still exists.

LLBean -- Guaranteed Good Karma

2007-09-19T09:25:00.000-04:00

L.L. Bean posted this message on the wall of his first retail store in Freeport Maine in 1912. The company has stood by this guarantee ever since.

I have long admired the customer service policy of L.L. Bean. In essense, a customer can return any product for any reason at any time. And if you do not wish to exchange the product for another, you can receive a full refund.

I returned a four year old pair of Bean boots because they were splitting at the heel. Back came a new pair in less than a week. Likewise, many years ago, I returned a blue suit purchased at Brooks Brothers because it picked up excess lint. I was offered a no cost exchange for a higher priced suit (something a recent business school grad with school loans could not afford at the time). The exchanges cemented my loyalty to both companies for a long time.

Why do most companies chose not to adopt this policy? The reason is fear. Fear that their products will not stand up to a 100% guarantee. Fear that the financial cost of exchanges (inventory write offs, lost margins (double the cost of good sold for a single sale, etc.) will not be offset by higher revenue. And so on.

I suspect though a deeper fear. Fear that customers will abuse the policy -- and if you mistrust customers, they will end up mistrusting you.

L.L. Bean extends this policy to every single product -- not just low price items (where they could afford to take the hit) or high margin items (where the high margin could cover the incremental cost of goods sold). Every product is covered -- from kayaks to hand crafted fly rods.

The benefit to L.L. Bean is not just a great customer experience. The policy becomes the backbone of the Company, providing the discipline to make sure all products and services are up to it. It's too bad there are not more companies as disciplined as this. There is too little guaranteed good karma in the commercial world we live in.

Albrecht's Comeback Karma

2007-09-18T07:01:00.000-04:00

Chris Albrecht, the disgraced former CEO of HBO, will join the talent agency IMG, owned by buyout kind, Ted Forstmann. Albrecht will develop new business development efforts for TV and digital platforms. IMG represents Tiger Woods and Roger Federer, among other leading sports celebrities. During Albrecht's reign at HBO, the cable channel produced such hits as The Sopranos, Sex and the City and Six Feet Under.

Albrecht was quickly fired by Time Warner earlier in the year after being arrested and pleading guilty for choking his girlfriend in a Las Vegas parking lot. He admitted to a drinking problem; it was widely reported at the time that many years before, Time Warner paid a $400,000 settlement to a female employee after complaining of physical abuse by Albrecht.

In the New York Times yesterday, Albrecht was quoted as saying after his firing, "I made a mistake, and I paid a big price for it.”

Albrecht is enormously talented and combines a rare and balanced mix of creative instincts and business skills. Without this talent, Albrecht would have had no chance for a comeback. With this talent, however, doors quickly re-opened. It's now up to Albrecht to keep the doors open.

Jeffrey Immelt

2007-09-15T16:12:00.000-04:00

Jeffrey Immelt is an extraordinary capable executive. I don't know this through personal interaction but it is a safe bet anyway. As your probably know, Immelt succeeded the legendary Jack Welch to become the Chairman and CEO of GE in 2001, when he was still in his mid-forties.

Ge is a giant -- revenues in excess of $160 billion in 2006 producing everything from airplane engines to the NBC television network. It does business in over 100 countries and employs about 300,000 people worldwide.

GE is also famous for its management development program and fierce succession planning particularly focused on the CEO position. Immelt has generally earned good marks for his performance as CEO, although beating the value creating run of his predecessor may be next to impossible. So, without doubt, he is highly capable. I would further venture to say that he is also a high integrity leader as well.

Last week, the Wall Street Journal did a piece on Immelt, focusing on the GE CEO's visible pro-environment stance and his commitment to convert GE into a eco-friendly economic force. This is no easy challenge given the magnitude of GE operations and its troubled history of polluting the Hudson River.

Immelt's commitment to eco-friendly business practices, services and products has been branded Ecomagination. Both in and outside of GE, there has been considerable push back. Customers and his own management team would prefer to just get on with business. Competing in the global marketplace and meeting GE's financial performance benchmarks are hard enough without adding the burden of the Ecomagination program.

Immelt is not an eco-crusader at all costs and is attempting to balance a variety of goals and constituent interests. What this means is that he would not depress revenues or earnings performance for the sake of Ecomagination. His team must do both. It is not uncommon for managers at all levels working at GE or almost any other company for that matter, to have both tangible and intangible goals. For example, a sales director might be charged with hitting a revenue target as well as creating a more diverse sales staff by employing more women and people of color. So, the GE focus on financial targets and Ecomagination is not that unusual.

Immelt publicly admits that he does not want the Ecomagination program to alter the economic flow of the company. But determining the economic flow of the company, especially looking out past 18 months, is very difficult, even for a company of GE's sophistication. And most eco-friendly practices, products and services require a 3-5 year framework (or even longer) to be justified financially. Investing in alternate energy programs today requires a belief in the continued rise of traditional energy prices over the next 5-10 years. You may intuitively believe this but how do you actually measure this belief -- because targets and evaluation of managers depends entirely on measurement to be fair and objective.

So maybe that is why the GE leadership team is unwilling to share Immelt's eco-friendly leap of faith. Let's turn away from GE to GM to further illustrate this point. Imagine you are the general manager of the Cadillac Escalade SUV. A few years ago, your sales were booming and you were more than willing to accept higher revenue targets for coming years -- and if you wanted your capacity expansion plans approved by the finance department, you had no choice but to put these higher revenue numbers in your own forecasts.

All is going good until gas exceeds $3 gallon and fuel efficiency becomes front and center with the consumer. You are left holding the bag as Escalade sales slump. Back to GE. Suppose you invest significant R&D money in alternate energy programs expecting oil prices to rise over the long term (a safe bit). But then to your surprise, OPEC increases daily oil production and oil prices fall over the near term. The economic justification of your R&D is now questionable in the near term. Immelt won't let you off the hook, even if you and he agree that the world will eventually run out of oil and these R&D investments will pay off. As a GE executive, you must deliver both near and long term results.

And that is the tricky part about managing the economic flow of the company. It all depends on your assumptions and how far out into the future you look. Assumptions are the numerical alchemy of the forecasting business. Under any set of asumptions, you don't want to be left holding the bag.

Numbers 32.23

2007-09-14T10:27:00.000-04:00

I took the train in today and decided to stop by The Church of St. Francis on 32nd Street. If you have never been there, it is worth a stop; the outdoor prayer garden is an urban oasis. On the way in, I noticed a beggar sitting by the gated entrance, his sign said, "Homeless, Handicapped and Hungry." I returned to give him some change on the way and saw that he had left his post -- although his change cup, a half eaten sandwich and personal belongings remained. I dropped my change in his cup and proceeded on my way, having been denied his smile and thank you in return. Perhaps I would be paid back in some other way.

This morning, I was determined to write a story about good karma. I took a pass on writing about GE's environmental push or Honeywell's $8.2 million fine related to the death of one of his workers due to pollution exposure. Or, the Silicon Valley office building known for its "good karma" having housed such notable start ups as Pay Pal and Google.

Later on the subway, I noticed a small pamphlet left on the seat. The headline read, "You cannot sin successfully." It made reference to Numbers 32.23. I am not a student of the bible but a quick google search led me to the corresponding text "Be sure your sin will find you out." While it would be nice to illustrate the benefits of a good deed, 32.23 is an apt summary of Karma.

Perhaps my discovery on the subway was a gift from the beggar -- a small good deed will find you out.

A Tiny Carbon Footprint

2007-09-13T13:58:00.000-04:00

I made my first trip to India six years ago to Kovalam -- a beautiful, tropical seaside village in Kerala, the southern most state. Kerala is known for the high literacy rate of its population (plus 95%); a diverse mix of Hindu, Muslim and Christian followers living peacefully together; the ancient tradition of Ayurvedic medicine; the serenity of small fishing villages; and the beauty of its beaches and inland water ways.

My hotel (the room was $4/night) was set within a hillside coconut grove. It was a clean, cinder block exposed building without Western conveniences -- yet with a warm and helpful staff. What more can you ask for at $4/night? As anyone who has been to India will attest, the culture shock of your first visit is a never ending explosion to the senses -- sights, sounds, smells, tastes and feelings. The culture shock is a mix of extremes with pleasant experience interspersed with those which are not.

Over the next few days, a remarkable (and entirely pleasant) scene unfolded before my eyes. Each morning, I took a short walk and climbed a steep series of steps to an adjacent building to attend a roof top yoga session. On my first morning walk, I came across a woman at the village water pump filling an earthen jug. She was attentative to her task and did not give me much notice. When I returned two hours later in the daylight, I saw her again, using a hand-crafted broom to sweep the stone walkway in front of a small brick building. The building -- perhaps 10 ft by 12 ft at best -- had an opening but no visible door. I quickly concluded that the building was a garden or tool shed for the hotel and that the woman worked for housekeeping.

The next day, I saw the woman which I was coming to expect. This time, though she was in the shed sitting on the floor with a bunch of fresh vegatables in front of her. I now knew that this small building was not a tool shed. In fact, it was her home. Not wanting to stare or make her uncomfortable, I kept walking. The following day brought my biggest surprise.

This time, outside the hut stood two well groomed, uniform-attired school children (a girl perhaps 12 years old and her younger brother). To say I was shocked would be an understatement. It is not that I couldn't imagine a family of four living in a hut -- there are families all over India -- and the world for that matter -- who sleep with barely a tent above them. What surprised me was how clean, well dressed -- and happy these children appeared to be. The smiles on their faces and the pressed creases in their uniforms have stayed with me to this day.

In the more "developed" world, reducing your carbon footprint is the latest fashion particularly in the suburbs. The family I came across on this trip to India set an impossible to reach benchmark for one's carbon footprint. No electricity (no lights, a/c, television, radio, refrigerator). No plumbing (faucets, showers or toilets). No car. Maybe a propane stove.

Ironically, this family may have set an impossible to reach benchmark for happiness too. If gauged by the smiles on the face of their children.

WSJ - Eco-Altruism, More Due Process Karma

2007-09-12T10:58:00.000-04:00

The Wall Street Journal ran two stories today following up on earlier posts.

In Personal Journal, the headline reads "Going Green To Save Some Green." In essence, big mortgage marketers are offering cash rebates to environmentally conscious home buyers -- Citigroup will offer $1,000 off closing costs if certain energy efficient improvements are made. Let's be clear -- this is not eco-altruism. Citigroup figures that savings in monthly fuel bills can be applied to a higher mortgage payment thereby allowing the home purchaser to afford a higher mortgage than he/she would under ordinary underwriting requirements. And of course, the higher the mortgage, the more up front fees and interest earned by Citigroup over the life of the mortgage.

And in the Investing section, it appears that Joseph Jett of Kidder Peabody fame has been ordered to turn over $8.4 million sought by the SEC. Jett was sued by the SEC in 1996 having concluded that he booked millions in bogus trading profits on bonds to conceal losses. It looks like it takes the government 10 years to collect. The SEC argued in 2006 that Jett failed to file a timely appeal, thereby voiding his due process rights. Over the last decade, Jett chose to spend his money building his money management firm, Jett Capital Management, rather than spending it in legal fees associated with appeal. It looks like it is time to pay the piper.

Marketer's Mantra -- "Green is the New Green"

2007-09-11T12:57:00.000-04:00

Want to grow revenues faster? Build market share? Fatten the bottom line?

Then, Go Green -- Live Green -- and Buy Green! That's the marketing mantra to turn Eco-friendly consumer choices into extra revenue and profits for marketers. What's good for the environment is now good for business.

Everyday, millions of consumers make pro-environment choices often paying a premium to do so -- think organic milk. Sometimes, but not often, green choices work in the consumer's favor. My family recently stopped buying individual bottles of Poland Spring water and are now simply refilling reusable bottles. We save about $10/week offset only by the minor inconvenience of filling and washing the bottle.

On a grander scale, we recently made a pro-environment choice at considerable personal expense. We traded in our gas inhaling Yukon XL SUV (12 MPG city) for a Lexus RX Hybrid (31 MPG city). We start saving money on gas right away -- perhaps as much as $3000 a year. But, we have to wait 10 years before we recoup the $30,000 in cash we paid to make up the difference between the trade-in value of our Yukon and the dealer price on the Lexus -- and that's not considering the time value of our money.

On top of this, we paid a $4,000 premium for the hybrid model versus the standard Lexus RX 400. The dealer -- to his credit -- admitted that it will take 3-5 years to pay back this money. I am betting though that we lose money on this investment as well. The chances of keeping the new car for 5 years or more are low, given rapid improvements being made in car technology. Who wants to drive an obsolete car, when they can "re-cycle" it and enjoy a new car's improvements in comfort, safety and fuel economy?

Fortunately, my family can afford to make this kind of green choice -- although my financial advisor might advise us not to make too many economic decisions like this. But how about the car dealer? Are they sharing our pro-environment investment?

Turns out, the local dealer is making 3 additional margin points on the hybrid. That doesn't seem like much until you factor in the razor thin margins in the business of car dealerships. A 3 point increase in margin -- 8% to 11% is a big deal. What's good for the environment is good for business courtesy of the consumer.

Jeffrey Skilling's Due Process Karma

2007-09-09T14:31:00.000-04:00

Former Enron Chief, Jeffrey Skilling, now serving a 24 year prison term, asked a federal appeals court to overturn his convictions for conspiracy, securities fraud, false statement and insider trading.

Skilling -- McKinsey trained and educated at Harvard Business School -- is generally viewed as the mastermind behind the massive Enron fraud -- which resulted in the largest bankruptcy in US history. Anyone who works at a public company and toils under Sarbanes Oxley governance regulations has Mr. Skilling to thank.

In 2001, Skilling was named CEO of Enron, replacing Ken Lay who famously had his Enron conviction reversed by dying of a heart attack. That year, Skilling received $132 million in compensation. After resigning the CEO post claiming "personal reasons" -- he quickly sold $60 million of Enron stock.

Skilling is now using what is left of his fortune to "manage" his Karma -- by virtue of the due process rights afforded him by the American judicial system. He spent $40 million in preparation for his first trial. Only if his appeal fails, will he be forced to turn over a $45 million fine to the Enron victim's fund. For now, he is free to spend some or all of these funds on his appeal.

Skilling currently resides at a low security federal prison in Waseca MN. In a 2006 Wall Street Journal article he mentioned that he will be able to survive his time in prison as long as he is given "something to do, something to accomplish." Anything to do but contemplate the law of Karma.

IS APPLE EVIL?

2007-09-06T17:16:00.000-04:00

A person can be viewed as good or evil based on their actions. Think Hitler. Or Mother Theresa at an opposite extreme. Can a company be classified as good or evil?

Enron is usually viewed as an evil company. This ignores the majority of employees who innocently lost their jobs and life savings due to the illegal actions of a few. Johnson & Johnson earned a reputation of "goodness" for the swift and high integrity response to the Tylenol tampering decades ago. Companies earn a reputation based on the decisions made and the actions taken by a few or many -- often at the top of the pyramid.

The recent news about Steve Jobs' decision to unexpectedly reduce the price of the 8-gigabyte iPhone by $200 to $399 is a case in point. Apple is the envy of many for its (up to now) ever increasing stock price appreciation, the fanatical devotion and loyalty of its hip, young, "we're cooler than the PC crowd" fan base and market leading design and innovation. The news of the price cut is a rare example of a marketing misfire on Apple's part.

Wall Street quickly reacted with scepticism that Apple will hit its stated goal of selling one million iPhones in the U.S. by the end of this month. The growing belief is that the price cut was necessary to curtail post-launch softness.
The follow on reaction focused not on investors but on the customers first to buy the phones at the now higher price. Jobs' apology and offer of $100 gift certificate may not remedy to this dissatisfaction. Apple and Jobs have a pattern of after the fact apologies (think stock option practices) making their credibility suspect.

Wasn't there anyone within Apple who was willing to stand up and ask the question: "If we lower the price now, what will be the reaction from those who only recently purchased the iPhone at the higher price?" An open forum for these kinds of questions shapes good or evil actions -- as well as smart or dumb actions. And the role of the CEO is to ask them if no one else does. It's often not that difficult -- as in the situation of the iPhone price cut, these questions are as obvious and simple as old fashioned common sense. Truthfulness and standing by the customer, while sometimes painful, are the best course of action.

Notwithstanding the sleek design of the Apple stores and the presence of ever smiling Mac Geniuses, Apple has never been known for an attention to customer service. The Apple mission seems to be extraordinary customer experience set to stimulate purchase rather than satisfy long term. Dissatisfaction with obsolete iPods and concern about iPhone battery life are just two of the reasons to be sceptical about Apple's focus on the customer. Some argue that Apple's focus on innovation and design takes precedence over customer value and satisfaction -- but these principles are not mutually exclusive.

The iPhone price cut may not be sufficient evidence of an evil Apple empire. If it was an evil move on Apple's part, take heart that it was a dumb one as well -- the implications are transparent to just about everyone. Perhaps Jobs' and Apple aren't as smart as they think they are. Smart and evil -- now that's a truly scary combination. Much scarrier than evil and arrogant.

FORTUNE SALUTES EARTH'S DESTRUCTION

2007-09-06T12:25:00.000-04:00

Want to feel even more insecure about the earth's future? Of course you do. Read on.

Take a look at Fortune Magazine's annual list of the Fastest Growing Companies in America. Back in the early 1990's, when this list was fist created, it celebrated our entrepreneurial spirit as a nation and spoke to the promise of the century that lie ahead. Technology companies, innovators and market builders were always showcased on the list. How things have changed since then!

The 2007 list -- released in spring, 2007 -- is a showcase for the earth's destruction. At least half of the companies on the list are in the traditional energy business -- exploration, drilling, refining and marketing of fossil fuels. And a good many more deal in the mining of metals and other precious commodities. Of course, rising prices are driving this record growth in revenues and earnings per share. And demand for energy continues to skyrocket across the globe. But should we really be saluting these companies as their financial performance correlates with a depletion of non-renewable natural resources? And what about the impact of rising prices and demand on customer value?

Do companies like Gulfmark Offshore and Pioneer Drilling get you excited?

Check for yourself and let me know what you think

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