Tuesday, November 29, 2011

Should CEO's have to invest in their companies?

If CEOs had to invest in their company's stock with their own money would they make better CEOs?

There is a lot of healthy discussion stimulated by Occupy Wall Street going on right now on the income disparity in the US, and more importantly the lack of upward mobility, but the focus of the discussion is sometimes misdirected. As Fortune points out "The much-referenced 1% -- the global elite that controls a disproportionate percentage of global wealth -- is not made up solely of hedge fund managers, investment advisors and traders. It is made up of executives and leaders of non-financial firms in every sector" ... and their pay has been set by their company boards.

CEOs behave the way their boards pay them. The majority are hard working, well meaning executives who care passionately about their companies and their careers. But they are human and how they are rewarded will impact their behavior.

Investors want the CEO to focus on Total Shareholder Return - this is seeking positive return over time - and it is not clear that stock options are aligned with that. Stock options are of high value if the stock price goes up and worth nothing if the stock price goes down, but they don't have negative value to the option holder.

Jim Collins - author of Good to Great - took an extreme position on NPR earlier this week that CEOs should no longer be granted stock options. His position is that CEOs should be required to invest their own savings into their company and that this would lead to longer term thinking on the part of the CEO, and shared risk as well as shared reward. Here's an excerpt:

INSKEEP: So you are saying you want to attract a different kind of executive by requiring each executive to take a chunk of their life savings, and throw it into the company.

COLLINS: Yup. What it would say is, if you're not willing to put your own skin in the game, if you're not willing to live with the same kinds of potential costs and consequences for a failure to manage well that you're going to expose everybody else to, then you're not showing that you are truly ambitious, first and foremost, for this company doing well over time. And therefore, you don't deserve to be an executive in this company.

The way some boards are now dealing with this issue is by granting RSUs (Restricted Stock Units) instead of, or along side of, options. RSUs are outright grants of shares - the executive owns the shares once they have been granted and they can be set up so the grant happens on a vesting schedule or based on company performance.

Because these are actual stock grants they are like cash compensation. They are taxable on the grant and are liquid so they act as a supplement to cash bonuses. In many cases you will see a CEO or EVPs compensation has several components - cash base, cash bonus, stock options and RSUs and the options and RSUs will have some time based vesting component and some performance based vesting component. Then the company will have a holding requirement for the board members and the executives that they must hold a multiple of their cash compensation in stock and as a result, the CEO does build up ownership in the company over time - aligning their long term interests with the shareholder.

But all this complexity is not the same thing as asking a CEO to put his/her own money into the company up front. For me, it's a good idea. I invested in my last company Simplex, and I have also made a significant investment in FirstRain. It's clarifying to me, and it aligns my interests with my investors... and combined with the opportunity cost of the time I put into FirstRain my investors are very clear that I am in with both feet and for the long term.

But to require a CEO to do this? The discussion between the board and the CEO would certainly be interesting and would give the board insight into the CEO's motivation. What isn't clear is whether it would make hiring a world class CEO more difficult. And in cases where the company is a turnaround, or the board is mercurial and inconsistent (think HP or Yahoo) requiring an investment could be too high risk for the incoming CEO.

But Jim makes a very valid point. If you are not willing to put your money in alongside of your investors, and so share financially in the risk (as well as reputationally) are you less committed to the long term growth of the company?

Disclosure: I chair the compensation committees of both JDSU and RMBS and the topic of how to align executive pay with long term shareholder return is a continuous, active discussion as we strive to continuously improve and motivate excellent executives. While we have holding requirements we do not have up front investment requirements.

Wednesday, November 23, 2011

Mobile/Digital and the creation and destruction of value in the technology market

Sitting in a presentation by a team from Qatalyst earlier this week I was struck by the extraordinary creation and destruction of value technology has seen over the last 7 years.

A "duh" moment - of course each company's ability to understand a strategic sea change that's happening, and react to it, determines their fate - but the last few years give an extraordinary example of billions of dollars of shift in a very short time frame.

The strategic shift is the move to mobile and digital content; the creation and destruction of market cap is dramatic.

When Google went public in 2004 Apple was worth $12B and Amazon was worth $16B -- today they are worth $361B and $103B.

Apple drove the shift to the smart phone and pioneered the market place for digital content. Amazon understood the power of digital content and understood the immense power of the cloud first.

Likewise Qualcomm and ARM are at the heart of the mobile device and they have benefited from the shift from "Wintel" to the new world order of "ARM/Qualcomm/Apple/Android" - both more than doubling in value.

In contrast companies in the old school of the PC and old phones have been flat to crushed. Microsoft is worth 25% less, Nokia is worth half and Dell has dropped by 70%.

Sure, companies have large swings in value based on changes in the market, but it is fascinating to see the value shift so explicitly, in such a short period of time, and so much a part of the world I live in. I live (through FirstRain) in the world of mobile devices, cloud computing, unstructured data processing... we live here because this is where absolutely the highest productivity is, both for my engineers and for our users. On-premise is a thing of the past. PCs too will pass. In just a few years we'll wonder why we ever had lap tops and kept our content locally. And I can't wait!

Source: Qatalyst, CapitalIQ
Company Market Capitalization Over Time ($Bn)

Wednesday, November 16, 2011

Fidelity, FirstRain and the iPad

The iPad is changing the world so fast sometimes it is hard to believe. We released our iPad app in early October. It's such a hot, sexy app that now I lead off with it. Every time I meet with a prospect the first thing I show them is the Business Web on my iPad (usually pre-configured for their market) and then I'll describe what we're doing and why.

And to my delight I find that many of our prospects and customers are investing so heavily in the iPad that they can immediately relate to how FirstRain fits. But more fun than that is the new apps I get to see, often before they have been released. BI apps, sales apps, fashion apps... the world is going iPad.

Today Fidelity announced a major update to their iPad app - this time including FirstRain content. Fidelity has been our customer for many years now, but over the past few months it's been exciting to work with them on integrating our sector and stock research into their iPad app.

Like we have done online, we are providing Fidelity with Hot Topic research, centered around sectors and trends - what's rising? what should you as an investor be paying attention to? when you see a topic you want to drill in on, what are the recent developments that help you understand it?

You can download the new Fidelity iPad app for free on the iTunes store. To see hot topics, open it up and click on Research (tab at the bottom of the home screen). Chose hot topics and you'll see the key active sectors and what's changing . We identify what's changing and what's hot using our analytics technology - identifying clusters of topic, detecting anomalies, comparing them to past patterns, analyzing the new pattern to see if it shows a rising event. Here's the landing Hot Topics screen this morning:

You see a list of sectors - swipe right to see more. Within each sector you can then drill down into a topic and see the latest business web news and understand what's behind the trend. For example here -- drilling in on Automobile Fuel Efficiency:

The topic research page shows you not only the news you need to read but also the stocks related to the trend that you may want to do deeper research on, and the volume of conversation on the Web on the topic you are researching so you can get a sense of how active it is.

Good apps on the iPad are simpler and easier, and more pleasurable to use than web apps. There is something about the simplicity combined with the tactile experience that changes how we feel about using the application, especially for non technical people and the older generation. We have only had the iPad for 2 years now... it is just the beginning of a sea change that will sweep how we all interact with both professional and consumer applications.

Tuesday, November 8, 2011

Is your fish fresh?

A story against myself. In a restaurant in the fishing harbor in Naples yesterday, I spied sea bass on the menu. Since it was Monday and I know the fish market is not open on Monday I ask "Is your fish fresh - when was it caught?".

The waiter grins at me and says "One moment - I'll check".

I'm thinking "I know I saw the fish display on the street side, maybe they were caught on Saturday, but then why is he grinning at me?"

Our waiter returns with a whole bass on a plate and presents it to me to check the eyes, at which point this fish flips it's tail and jumps up above the plate. I came out of my chair laughing!

I am happy to report he was delicious once dead and grilled with lemon and olive oil.

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