Wednesday, July 29, 2009
Goldman's role: conspiracy or an expected outcome of hiring talent?
I confess I am not a very frequent reader of Rolling Stone so this article on Goldman took a few weeks to get to me. But it's a riveting read.
It's more on the theme of Goldman Sachs as the great evil - but it reads like a paranoid conspiracy theory. Could Goldman truly be behind and benefiting from all major speculative bubbles since the Great Depression?
The heart of the conspiracy theory is that Goldman alumni are everywhere - therefore they must be manipulating the markets to Goldman's advantage. I think this is a paranoid take on a very natural market phenomenon.
The explanation is much simpler. Goldman hires the best and the brightest out of college. While not everyone you meet at Goldman is super sharp, most are. Especially in the investment banking and research groups. As a result, we see an undue proportion of senior positions in the government and major financial institutions by Goldman alumni because very smart people who were at Goldman within the last 25 years are now available to staff very hard jobs and they are the brightest - and talent really matters when you are dealing with complex, interdependent issues.
This is not unlike seeing Intel alumni populated throughout semiconductor leadership 20 years later - or Oracle and Microsoft alumni scattered throughout the leadership of software companies. When you have very bright people trained for 20 years at a high quality high growth company they are like gold for future employers - even the federal government.
So we should expect to see Goldman alumni in positions of power and have confidence that the rewards they reap, and controls they experience, in their current positions will drive and ensure high integrity behavior.
But as my paranoid friends like to tell me - maybe I am naive!
Monday, July 27, 2009
The APs latest move is like King Canute
The story of King Canute ( or more correctly Cnut) is one every English schoolchild learns as a lesson against the unstoppable tide (and often incorrectly retold as a warning against undue pride).
King Canute was a Viking king of England, Denmark, Norway and parts of Sweden in the early 11th century. The tale goes that his courtiers would flatter him every day, telling him how great and powerful he was. In order to teach them a lesson he took his throne down to the shore and ordered the tide not to come and and wet his robes. Well of course it did, his feet got wet, and he proved his point to his courtiers that he was not all powerful so they should lay off the meaningless praise.
The story is one not only about humility, but it is also about the unstoppable nature of the tide.
The Associated Press' latest move to declare that they are going to single handedly change fair-use laws looks like a similarly futile position. While they are not openly declaring "we're going to change fair-use laws" that is the implication of the statements they have been making.
Their plan is like this - DRM the news (put in markers so they can see where it is syndicated) and then everyone that uses it - even as little as a title and a link - will have to sign a licence with the AP. They are understandably trying to stop the practise of wholesale copies of their content - this is a reasonable thing to fight. But what they say is much more aggressive - they want to stop aggregators like Google even using just a title and login.
This goes to the heart of fair use. I am no lawyer but so far, across a number of cases, reusing the title of an article - and a brief summary - is not considered a breach of copyright.
Linking is the water in the tide. It's at the very heart of how the internet works. Trying to stop linking of content is effectively trying to get the definition of fair use changed in a field where the genie is already out of the bottle. It's a King Canute like move - challenging the internet to not wet the APs robes.
The AP may make some web sites lives a headache for a while. The Huffington Post licenses AP content because it was easier to do it than to fight it as their traffic grew so enormously in the election year. I am sure a number of other major sites will also sign licenses because it will be cheaper than hiring lawyers. But I believe in the end the AP lose the battle ground they are staking out. As TechDirt says:
This has been said before (multiple times) but you don't rescue your business model by "protecting" against what people want to do. You don't rescue your business model by wasting resources trying to hold back what people want to do. You rescue your business by providing more value and figuring out a way to monetize that value. Putting bogus DRM on news does none of that. It only hastens failure.
Wednesday, July 22, 2009
Time for the Goldman Sachs bankers to take a vacation
Many people are understandably impressed with Goldman Sachs' recent financial results. True to their reputation for quality they have come roaring back from their losses with outstanding profits - and even more disgruntled attention than ever.
But there is one way in which Goldman must change which they did not anticipate before this last recession. In September last year, Goldman and Morgan Stanley gave up their status as the last two remaining independent investment banks. According to the New York Times at the time their request to transform into bank holding companies "was a blunt acknowledgment that their model of finance and investing had become too risky and that they needed the cushion of bank deposits.
By becoming bank holding companies, the firms are agreeing to significantly tighter regulations and much closer supervision by bank examiners from several government agencies rather than only the Securities and Exchange Commission."
And it is this tighter regulation that now forces bankers to take a vacation. Why you ask?
Well, the best investment bankers tend to be workaholics, never taking real vacations where they would not be connected all the time and working on their blackberries. I've heard many a story of marriage and family stress as a result. The pressure is especially on now when Goldman bankers have more work offered to them than they can take and can charge a premium for their services so there is a great deal of money to be made this year.
However, one of the important internal audit checks that mature companies have already learned to deal with is that anyone working with the financials of a company must take 2 weeks of vacation and not be connected - truly not be in touch and influencing any decisions.
The reason for this is an internal audit check: if there is any skimming or embezzlement going on it will show up when the embezzler is out of touch, or put another way if you are running an embezzlement scheme within a company you won't be able to keep it running (or hidden) if you are completely out of the loop for two weeks.
A Goldman friend of mine told me this is a shock to the continuously connected Ibankers. They had thought the bank would turn a blind eye to the new vacation requirements and they'd still be able to work on their blackberries, but they are finding that no, they must truly disconnect.
This can only be good in the long run. Everyone needs to unplug occasionally, stop and remember there is life outside of work. But let's hope they can plan their vacation around their transactions or it will be stressful for their clients.
Thursday, July 16, 2009
The difficulties embedded in the Obama administrations Executive Compensation Principles
I sit on two public boards (JDSU and Rambus) and sit on the Compensation Committee on one, and chair it at the other - so executive compensation trends are very important to me. Add that I have been a public company executive several times (although I choose the private company world today) and I am watching the Obama administration's rhetoric with interest.I was sent a briefing recently that outlines the Executive Compensation Principles the administration is espousing - see the description below.
While I am as disgusted as the next shareholder at obscene executive pay packages for failed executives I see two major difficulties with these principles.
The first is the implication that current compensation programs are not set up for the long term. Most good public companies absolutely require their executives (and board members) to hold stock minimums for the long term and many set up objectives to measure long term strategic program investment, not just short term performance.
It's easy to say "reward long term value-creation", but it's an incredibly hard thing to do in a measurable way - and compensation objectives have to be measurable or they are open to manipulation. Compensation tied to revenue is short term, when tied to strategic objectives it's very hard to know which objectives will really have impact in the long term - and yet they are easy to judge in hindsight. Using stock options as the reward works well because they vest over time and they only have value if the stock appreciates - but options have been under attack from the regulators and institutional shareholders for a while now which I think it very short sighted.
This leads to my second concern. Only the CEO and the executive team really know what the critical issues are in a company in depth. Boards do their absolute best to stay on top of the issues, to get briefed, to talk with customers and employees, but as a sitting CEO I know that only I have all the information being processed in one brain. My companies spend a great deal of time to keep me up to speed but it's a continuous, intense investment especially when things are changing fast.
This makes it a significant task for a board to set and review objectives and we spend a great deal of time on this at the compensation committee level. If it's hard for boards - who have all the information not just the publicly filed information, how much harder will it be for shareholders to make a realistic assessment of what are appropriate compensation measures?
Transparency is good. It's essential to build trust with shareholders. But while "Say on pay" is a great solution to the obscene packages, does it makes sense in 99% of the cases which are not obscene? Does it make sense in the cases of highly competitive industries where great CEOs are hard to find, and when you find them you need to pay them well to attract them and compensate them for the hard work and risk they take on as they strive to be a great company CEO?
It seems a crime to me that a handful of bad actors could cause regulatory changes which will hurt good companies ability to pay for performance - to pay significant pay packages for excellent performance. Institutional shareholders understand great CEOs earn their pay packages, and that bad ones should be fired. I worry that retail shareholders (that's you and me not the mutual funds) won't ever think a great CEO is worth $20M+ a year - and yet they may well be based on their future performance - but it can only be measured in hindsight (which means board judgment in advance) and not at the time the shareholders will be asked for approval.
Tough issue, and not one where I think more regulation is the answer. I think the answer is tougher board process and greater and greater transparency into board process in response to shareholder demands - but don't tell boards how to set compensation. Make compensation committees be very very transparent but let them do their jobs.
The Administration's executive compensation principles:
1. Long‐Term Pay for Performance Link
- compensation plans should be designed to reward long‐term value creation for investors, as
opposed to the short‐term focus that doomed financial institutions in the market meltdown. The
administration also emphasized that a broad range of external and internal metrics should be used beyond just stock price, which is not always the best indicator of the long‐term strength of the company.
2. Long‐Term Risk Time Horizon
- that executives maintain strong company ownership through the holding of equity‐based
compensation is one of the best methods to link executive pay with company performance. Compensation plans for both executives and other employees should be designed to match the risk outcomes of their performance.
3. Risk Management
- Committees should include risk‐management in the pay setting process, and conduct the
risk assessment in a public manner.
4. Appropriateness of Golden Parachutes and Supplemental Retirement Packages
- should reevaluate the necessity for golden parachutes and supplemental retirement packages,
and should determine whether their existence will result in pay for non‐performance.
5. Transparency and Accountability in Pay Setting
- Treasury Department plans to require more transparency and accountability for Compensation Committees by legislating Say on Pay and Compensation Committee independence standards.
Friday, July 10, 2009
The balance between marketing and hype with a new product
Sometimes it's hard to contain your enthusiasm when you have a new product to market and the temptation is to get carried away and over hype. It's this behavior that can give engineering a bad rap with marketing and marketing a bad rap with sales.
Here's the classic typical scenario
R&D truly believes the product is way ahead of where it really it. It's ready, it's fast, all the functionality is basically there, it's usable today etc. This comes from (often justifable) pride in the technology that's been developed. Note technology, not whole product.
Marketing, trying to bridge the gap and get revenue going on a new product presents the product to sales as ready to do. You can show it to customers and start them using it, it's got 80% of the functionality and the rest is coming in the next release, yes take it to your best customers and get them using it. Sell it now.
Sales lives with the ultimate reality - what the product actually does, how easy it is to use, how fast, and how much functionality is really ready for prime time. Often sales stubs their toe, has to work through who they can really take it to and who should wait for the next release? Seasoned sales team are naturally cautious.
Typical right?
Sometimes however, it works the other way around and hype can be used as a carefully orchestrated momentum builder - the Steve Jobs reality distortion field is a great example. If you say it enough with enough integrity and conviction it will become truth.
It's the tension between the normal experience sales and marketing teams have with new products, and the extreme of Apple's strong stance on every new product that makes this new video from Palm (below) so funny.
Roger McNamee (a wild and crazy guy - but a really good guy) is known for his hyperbole, especially about the new Pre coming from (his majority investment in) Palm. Jon Rubinstein is ultimate innovator and product designer - the brains behind the iPod - and a much more low key guy.
I'm happy to say that as we bring out our new research engine into the market my team, while human, is working hard to balance the process pretty well and manage our natural enthusiasm for what we think is really big. But it's tempting...
Monday, July 6, 2009
A perfect week in Rome: Vacation report
I took the week before July 4th off in Rome - and posted about it on my personal blog - How to spend a perfect week in Rome - if you are curious or thinking of travelling to the Eternal City.
