Friday, January 30, 2009

Michael Arrington and the price of Fame

Success - and subsequent fame - always comes at a price. Little children are taught this through fairy tales, we see it in our society's craving for celebrities and how they are hounded and stalked, and we even see it in our business leaders who fly private jets and get vilified for it.

Very successful business people sometimes learn it the hard way. Like my friend who ran a multi-billion dollar telecom company and had his house ransacked by a disgruntled shareholder, or my girlfriend who was a dot com CEO with out-of-sight press coverage and found she couldn't date because she had too many bad experiences of creeps (who appeared OK at first) dating her for her fame.

Now Mike Arrington of TechCrunch is learning it and doesn't like it (see Alley Insider's story). He doesn't like it enough that he may quit. He won't be the first to step away and say "I don't want to live with fame" and it is a very unfortunate that he has had the unpleasant experiences of being stalked and being spat at.

But at the same time if you live by the sword you must be prepared to die by the sword (corny I know - from Matthew 26:52). Many bloggers make their name through sensationalism. Look at the spectacular success of the Huffington Post (full disclosure here - I have nothing but admiration for Arianna and the media phenomenon she has created) - but HuffPo's headlines are sensational and drive their enviable traffic. Likewise Techcrunch, ValleyWag et al have grown their traffic by not only providing interesting coverage of new and breaking technologies or scandal stories, they have also used individual personalities to grow the brand - and Mike Arrington drove the creation of the TechCrunch using the force of his personality.

I don't judge. As a CEO I know when to use persona to create coverage and open doors; I know when to use my personality or press-ability to further my business objectives. But I am also very aware of the personal stress doing that can create over time and how much animosity from strangers can hurt. And I recommend anyone who isn't willing to live with the price of celebrity chose a different line of work than being a personality blogger (or a CEO!) because blogging is one of the new forms of celebrity - with all the downside that comes with the upside.

Thursday, January 29, 2009

Bad press is a sign of bad leadership

There is really no excuse for the spate of seemingly unbelievable gaffes made by industry leaders in the last few months. Why weren’t they using crisis PR teams to manage their actions if they couldn’t manage themselves? I'm joking of course... or am I?

The list of Marie Antoinette moments is astonishing (see Arianna's post) – all the way up to just 2 days ago Tim Geithner's $435,000 severance upon being promoted to Treasury.

But there should be no need for such insensitivity! There are PR firms that specialize in helping management teams through bad times, firms like Burson-Marsteller and Ogilvy who, if they are allowed in to decision making when the flack is flying, will ride management to think about the implications of what they are doing before they act.

Tainted food is a classic example of how a crisis can be handled well. Everyone remembers when someone spiked Tylenol with cyanide – and instead of avoiding the problem Jim Burke, CEO of Johnson and Johnson (JNJ) at the time, stepped up and took accountability, even though it was an individual's criminal act. He initiated a comprehensive voluntary recall within two weeks - and made it a positive for Johnson & Johnson's brand.

Likewise Clif Bar (CLIF) has just last week voluntarily recalled all products with peanut butter in them whether or not they are at risk of being exposed to the current salmonella outbreak, reinforcing their brand of healthy products.

So what does it say about management when moments of executive cluelessness happen and they don’t do the right thing?

The sad truth is that no amount of executive handling can protect bad leaders from themselves. Maybe the auto executives were so used to flying everywhere on their private jets that it didn’t occur to them not to – but I wonder if their PR head spoke up and told them it was a dumb decision. Maybe John Thain’s office really did need refurbishing rather than redecorating - but why not wait until better times and then be reasonable?

Good CEOs earn their pay by creating jobs and shareholder value – and as importantly they get good press for their companies and high marks from their employees. Let’s hope a silver lining to this crisis is that the poor leaders will be exposed and be moved on.

Monday, January 26, 2009

Further homogenization of our shopping experience

I've posted before about the number of stores that will close as a result of this recession. But now it looks as though the need to cut costs will also reduce the diversity of items we can buy.

For years we've seen the homogenization of America. Every strip mall is the same. It's brand marketing gone mad, a Pottery Barn in every mall with the same products as every other Pottery Barn. Tiffanys in more places than there are people to buy little blue boxes. Starbucks on every corner. No wonder the French (and not only the French!) want to keep our culture out - they want to have authentic, original shopping experiences.

But now, as a result of the dramatic slow down in spending, AP reports that stores will be further reducing variety.
The new discipline will be mostly good news for shoppers, who will find stores less cluttered and see an array of products at lower prices, from ordinary groceries to jeans from brands they could once only aspire to.
Of course, the downside is that consumers who want something out of the ordinary _ an olive green prom dress, for example _ may have to look harder. Stores are rooting out offbeat, unpopular colors and styles, which will mean fewer choices."


The fundamental problem is that no one knows if consumer spending will ever come back to the levels it was at before - as the CEO Nieman Marcus said "Customers wanted and wanted and wanted some more and we sold and sold and sold some more".... Now, "frugality is more important."

No kidding!

Friday, January 23, 2009

Hedge fund ethics: "right" and "wrong" in their world

Hedge funds took a battering 2008 - and as they have been battered by the storm two questions of "right" and "wrong" have been coming up that make it sounds like there are ethical codes at work here, but no agreement on what good ethics are.

Some background: There are about 10,000 hedge funds open now, down 4% over the year, but still managing $1.6 trillion dollars. About two thirds lost money in 2008 and of those that did are down an average of 29%. This matters because hedge funds are typically paid both on : 20% of the gains - and on : 2% of the assets under management. High fees (see Henry Blodget's explanation of the fees here) for which investors expect to get a consistent above market return (until hedge funds systemically move the market, which they clearly do now...). And, more importantly, the hedge fund managers must recoup their losses before they can start collecting fees on the profits again. This could take years - which would mean the managers were only collecting 2% - mouse nuts for many of these guys.

And here's where the "ethical" questions come up:
If your fund is down and you know it is going to take years to recoup the losses and get paid at 20% of profits again do you:
a) stay with the fund until you have recouped the losses and made your investors whole - working for "psychic income" as Kenneth Griffin of Citadel fame told the New York Times or
b) leave - retire, switch to a new fund, start a few fund - basically start again? If you had many years of excellent performance before this one terrible year you may well be able to raise another fund.

In the first case there's a moral high ground to climbing back out and keeping your commitments to your investors, but maybe the second case makes sense if you can't climb back out from that fund. Maybe you can't keep your key players or your strategy no longer works and your investors are better off with you closing the fund and returning their money.

The second question is whether to allow investors to take money out of the hedge fund. Again hedge funds are not acting consistently. One of your investors wants to pull his money out - do you
a) allow them to knowing that doing so could hurt the remaining investors that are staying in because you'll be forced to selling into a falling market? Much of the volatility in November and December was redemption selling as hedge funds were force to liquidate equities and debt so investors could withdraw funds. Or do you
b) tell investors they can't take their money out and you are going to hold it until it is a more stable time to sell?
Again this is a current raging debate in the hedge fund world that takes on the ethical language of right and wrong. I know I'd want to be able to get my money out if I'd lost faith in a fund!

Managing money in this market is incredibly difficult - some would say it's a crap shoot - and hedge fund performance matters because not only rich people invest in them. Institutions invest in them. Some portion of many regular American's retirement income is invested into hedge funds through their company or state pension funds. Given the current lack of regulation and transparency, and these grey questions that are unresolved even within the hedge fund community, it's a given that the new administration is going to put in more regulation.

Thursday, January 22, 2009

SaaS and whether to pay online sales tax

FirstRain is a SaaS company, providing our service online, and so our sales tax position is not simple - and the new discussion about states charging sales tax for online sales will impact us.

If you buy products online you are probably already aware that unless you live in the same state as firm you are buying the product from, you don't pay any sales tax. Combined with "free shipping" promotions this can add up to a considerable saving over shopping in the mall. It's a similar process for online software and services.

At FirstRain we've been through the wringer with our tax advisers on where to charge sales tax and where not to - and we've come out where we require our customers to pay sales tax if we are registered in the state. So obviously in New York and California because we have people and offices there, but also in a couple of other states like Massachusetts and Texas for local state tax law reasons.

But such a simple model is going to come under attack. In 2008 8% of all retail is estimated to be online (according to Forrester) and if sales tax was paid on this it would amount to approximately $3B in new tax revenue. There is a move afoot by the states to organize and start to collect sales tax - which makes sense given the projected state budget shortfalls in 2009.

As the Charlston Daily Mail reports: One of the most aggressive states, New York, is being sued by Amazon.com Inc., over a new requirement that online companies must collect taxes on shipments to New York residents, even if the companies are located elsewhere. New York's governor also wants to tax "Taxman" covers and other songs downloaded from Internet services like iTunes.

New York is hurting financially with the financial crisis so we should expect the state to get increasingly aggressive. Good thing we already collect state tax from our New York clients - but I expect the discussion is going to come up with other states in 2009.

Tuesday, January 20, 2009

Remembering what matters today

We are reminded every day that life if short, and then there are days that push it in our face.

Today is a great day in many ways. For the first time we have a president who is not from Northwestern Europe - breaking both the color and culture barrier. And we have a president who has the support of the majority to make some much needed changes in response to a bad and worsening financial crisis, and who will protect the rights of the individual.

But just as the giant wheel of history turns on a global scale, our little lives go on and this weekend I was reminded of how important it is to focus on the joy in every day. A friend of mine, a woman in her late fifties who is in terrific shape (she's a personal trainer) had a stroke and is not well. She's hard to understand right now, but as I talked with her I was reminded of what it felt like to be in the same hospital, post stroke, with loss of function, and wonder what would happen next. She'll fight back, but it's going to be hard work for her, physically and financially.

I know I'll cry at the inauguration today. It'll be a complex of emotions: thrill that we've broken the color barrier, belief that better leadership will make a difference, joy that we'll have an administration that will protect women's rights..... but also - despite my very stressed daily business life - celebrating the simple joy of the moment which I am lucky to have. We'll be watching it in the office, all but one of us who will be there!

Saturday, January 17, 2009

The rise in CEO turnover is a sign of the times- both good and bad

Posted on Huffington Post today

In the first 9 months of 2008 the number of CEOs who left their jobs hit a record high according to Challenger, Gray & Christmas Inc – 1,132 by October and when the 2008 full year tally is completed the total will be higher than ever before.

What is going on behind these numbers is two forces of change, both of which should improve the caliber of leadership and cause boards to act.

First the economic crisis makes CEOs more vulnerable. Their companies and markets are in crisis, in most cases their stocks are significantly down and they are under pressure from shareholders and employees to improve performance. And when a CEO leaves he usually “resigns” – which is a euphemism for a difficult conversation in which both the board and the CEO agree it would be best for the CEO to step down.

More visibility than that is exceptional – like when the Cadence Design Systems CEO Mike Fister and his top 4 executives all “resigned” on the same day – you know they were summarily fired and there is a cleanup job to be done there – or when Dianne Greene left VMWare openly stating she did not agree. Or when the CEO has clearly been recruited to a new job like Kevin Kennedy leaving JDSU for Avaya. But usually it’s a civilized, mutual agreement.

In tough times good boards are looking at whether they have the right CEO. The skills needed to grow a company in a rising market are often different skills than operating and preserving a large company in a down market. And in down markets leadership and character is more important than ever.

The second change at work is the unprecedented levels of transparency shareholders now have. This transparency comes from the combination of new executive compensation reporting requirements and the openness of the web. In 2006 board compensation committees were first required to file a Compensation Discussion and Analysis report – the CD&A – at the beginning of the year describing every single element of compensation the top executives are receiving and the rationale behind it. This means that finally shareholders can see everything, and so have the knowledge to question boards in the shareholder meetings. Carol Bartz’s new compensation package at Yahoo is an example of a CEO’s pay lining up with shareholder interests and it’s all publically filed.

I am hoping that with a spirit of change in Washington, a tough economic environment and the unprecedented level of visibility the CD&A, the web and bloggers provide into what’s really happening in a company – that more boards will ask the hard questions about whether they have the right CEO or not. Let’s not have a repeat of leaving Jerry Yang in as CEO of Yahoo for 18 months too long, and let’s have the GM board hold Rick Wagoner accountable to turn GM around or get out. After all, the most impactful thing a board does is hire and fire the CEO.

Wednesday, January 14, 2009

Carol Bartz will turn Yahoo around

What is it about human nature that so many people lead to go for the negative right away? Carol Bartz' appointment to CEO of Yahoo is new news - hot off the press - and the Reuters news title is New Yahoo CEO lacks Web and deal-making chops. They do credit her business skills but go straight to her lack of Internet experience and that she has a history of doing small and medium deals - implying she doesn't have the chops for Microsoft.

Frankly, I think Carol's a great pick for Yahoo. I agree 100% with what she's quoted as saying "I just see this company as a company with enormous assets that frankly could use a little management, and I love leading, love managing, love making decisions," she said.

Carol is direct, smart and a fast decision maker. She'll surround herself with people who know the market and she'll quickly make decisions on what needs to happen. Just good management skills, decision making skills and a high IQ - a combination that doesn't show up often enough in CEOs and is essential to turn an opportunity like Yahoo around.

I'm thrilled for her, for Yahoo and for the Valley tech community.

Addition:

Carol's compensation is also set up very well - a win-win for her and the investors. She has a salary typical for the market - $1M is right in line for a company of Yahoo's size, cash bonus of 2X at target, again not that unusual, but her options vest based on her raising and sustaining the stock price which is a win for investors and employees.

From the SEC filing:

The Agreement provides that Bartz will receive an annual base salary of $1,000,000, subject to annual review for increases, and will be eligible to receive an annual bonus with a target amount of 200% of base salary and a maximum amount of two times the target amount. The actual amount of the annual bonus will be determined by the Compensation Committee of the Board (the “Compensation Committee”) based upon both the Company’s and Bartz’s performance for the relevant year.
In addition, Bartz will receive stock options (the “Inducement Options”) for 5,000,000 shares of
the Company’s common stock (“Common Stock”), with a per share exercise price equal to the closing price of the Common Stock on the grant date (expected to be January 30, 2009) and a maximum term of seven years.
Vesting of the option will be dependent upon the attainment of average closing prices for the Common Stock for twenty consecutive trading days prior to
January 1, 2013 (or, if a Change in Control occurs prior to January 1, 2013 or after that date if it is pursuant to an agreement signed before that date, the price immediately preceding the closing of the Change in Control) as follows: (i) 1/3 (1,666,667 shares) will vest at 150% of the exercise price; (ii) 1/6 (833,333 shares) will vest at 175% of the exercise price; (iii) 1/6 (833,334 shares) will vest at 200% of the exercise price; (iv) 1/12 (416,666 shares) will vest at 225% of the exercise price; (v) 1/12 (416,666 shares) will vest at 250% of the exercise price; and (vi) 1/6 (833,334 shares) will vest at 300% of the exercise price (the “Vesting Levels”). Any shares acquired upon exercise of the Inducement Options must be held until January 1, 2013, except in the event of death or a Change in Control.
Bartz will also be granted annual equity grants at the time grants are generally made to senior executives as determined by the Compensation Committee. She will receive an annual grant for 2009 with a value of approximately $8,000,000 which is expected to be granted in February 2009.
Bartz will be eligible to participate in the benefit programs generally available to senior executives of
the Company, including health insurance, life and disability insurance, the Employee Stock Purchase Plan, 401(k) plan, and a Flexible Spending Plan. She will be entitled to four weeks of vacation per year. The Company will also pay or reimburse her for reasonable expenses incurred in connection with her employment, including up to $150,000 for advisory fees incurred in connection with entering into the Agreement.
In addition, to compensate Bartz for the forfeiture of the value of equity grants and post-employment medical coverage from her previous employer, the Agreement provides for an equity grant with a grant-date value of $10,000,000, payable 25% in cash and 75% in restricted stock, which will vest and be settled in equal and proportionate quarterly installments in 2009 (the “Make-Up Grant”). The Make-Up Grant will be subject to certain clawback provisions in the event of a termination for Cause or without Good Reason during the Term.
The Company will also provide post employment medical coverage under its plans to Bartz, her spouse and eligible dependants as necessary, with Bartz paying the full premiums.

Tuesday, January 6, 2009

Blog on March 24th for Ada Lovelace Day

Are you willing to get involved in supporting tech women? That's the question being asked by Suw Charman-Anderson on her blog Chocolate and Vodka today. She says she's never really weighed in on the gender issue before but in response to the "stupid puerile misogynistic manner with which some of the more powerful voices in the tech community - some of them repeat offenders - treat women" she's putting together a pledge drive to get people to blog about women in technology. Her pledge is:

“I will publish a blog post on Tuesday 24th March about a woman in technology whom I admire but only if 1,000 other people will do the same.”

The issue Suw is mobilizing behind is an issue very familiar to me and one I don't comment on very often - it's just not worth it. But there is a bit of a frat boy culture that has developed in the web world which is unnecessary so I am hoping it's a passing phase in a young industry. When I worked in semiconductor in the late 80s and 90s I expected it to be old school, and to a great extent things have changed very much for the better, but there's room for improvement and the Ada Lovelace Day is a nice idea to celebrate the good.

Will you sign on too? - there's a link on the right.

Monday, January 5, 2009

Startup to IPO: Building your annual plan

It's January - and the time of year when we put together our annual plan. Our fiscal year ends Jan 31 and so we need to have our plan locked in and approved by the board by the end of the month. (Well as locked in as you can with a rapidly changing market - we revisit our assumptions each quarter).

I was prompted to write this post when I was asked by a friend (an executive at a rapidly growing new company) which came first - the strategy or the budget? She was in the situation where her team was starting with the budget and then determining their strategy for the year and she was curious about how we do it.

My description here comes with a big caveat - this is a small company process. It would not work with a large company with many product lines and many different agendas - I've run those type of processes; they are different and if nothing else they take a lot longer! In a small company I put an emphasis on a) a strategy for greatness b) team alignment and c) a pragmatic roadmap of how we are going to achieve our plans within a reasonable budget.

I start our planning process with strategy - usually kicking off with a brainstorming session. This year I brought two senior sales people out from New York to participate and we spent a day and a half at the white board writing down all our ideas based on our market, the markets we're being pulled into, our customer requests, competition (to the extent that we have any) and what the next exciting leaps of technology are that we are on the edge of. I run the meeting in a very open way, just white board and pens, and get everyone involved in the discussion - prioritizing, debating; the net result I am aiming for is a strategy statement, market model and short list of strategic projects that the team agrees is the right list for FirstRain. This year was pretty typical - lots of great discussion, some rough models and then it took a handful of one on one discussions, some sleep and a few days off for me to integrate all the input into one 2009 strategy statement and simple diagram that we can rally everyone behind.

The next step is to take the high level initiatives and map them into a product roadmap - getting a sense of timing given current resources and the operations management team - YY, David and Marty - do the heavy lifting here. This is the beginning of a highly iterative, couple of weeks, process. Given current resources, what's the sequencing? If we reallocate resources, move people around, maybe add in some new skills we need - then what's the sequencing?

This step iterates with the budget. Unlike a larger company we don't put much stock in "run rate" for budgeting purposes. It's a starting point, but nothing is sacred; instead the focus is on how do we get done the projects we've decided as a team need to get done. And our controller - Eugene - works the financial model as part of the feedback loop to operations.

The net result is a plan document:
- the strategy - our market view, how we segment and prioritize the markets we are serving, what are the growth drivers
- the 2009 strategic initiatives that come from the strategy - these are both product/technology initiatives and market strategy initiatives like partners and distribution
- the 2009 product roadmap and near term plan (next 3 months, 1 quarter out, and then 2nd half - and revisit/revise every 3 months)
- the financial plan - quarterly P&L and cash flow forecast

The final step is communication. Not only to the board to get their approval, but also to every single employee. I want to make sure everyone knows the strategy, understands it and understands their part in it - why what they are doing matters. So this means an all hands meeting in the US and in India, plus follow up discussions with all groups in the company.

And then... all hands on deck for an exciting new year!

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