WHAT NOT TO DO IN BUSINESS
Lessons Learned from Working at Reputable
Crappy Companies
STEWART BARRON
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Smashwords Edition
Copyright 2011 Stewart Barron
All rights reserved
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Table of Contents
Chapter 3: Six Sigma, Matrix Management, and Other Fine Management Systems
Chapter 4: Incredible IRR for Business Cases Just to Make It Through Financial Review
Chapter 5: Perpetual Reorg and the Lag Factor
Chapter 7: Redundancy by Shooting Yourself in the Foot
Chapter 8: Eliminating Customers as a Way to Profitability
Chapter 9: Short-termitis and the Cost of Poor Management
Chapter 12: Wall Street is Dumb Money
Chapter 16: Yes, Virginia, There is an Ebenezer Scrooge!
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Introduction
We have all read the books showcasing supposed star companies. Those books are good if you happen to be in the lucky 5% that work for the truly successful companies. The remaining 95% of us tend to work in loser companies that are led by overpaid morons. We are the unlucky ones with the colleagues who make us wonder if they were the weird kids sitting in the corner eating glue in elementary school. I am like you. I have worked for nothing but bad companies. Instead of reading books about how great a select few companies are and rubbing it in your face, I think there is more to learn from reading about the mistakes of the losers. There is more to be learned from “what not to do.”
Let’s face it: most companies are not world beaters in business. They will never be. They will be like Goldilocks, not too good and not too bad. These businesses will be places where you don’t mind hanging out for a few hours a day in order to get paid. Plus, you get the added perk of having birthday cake a couple of times a month without having to shell out a few bucks to buy anybody a gift. They will afford you a modest lifestyle and a glimmer of the good life upon retirement - assuming that you max out your 401(k) and the company doesn’t go bankrupt first.
You will notice that most of this book has stories from the telecom and Internet industries. That is because those are the industries I choose to work in. It was actually not much of a choice - I took a temp job with a large telecom company during a recession to subsist after college. I parlayed that temp job into over a fifteen-year career. I have made good money working for mediocre companies throughout North America, the Caribbean, and UK. I honestly believe that I have worked with some of the best people in my industry; unfortunately, they were also working for companies that did not use them to their fullest abilities. A lot of these people went on to bigger and better things; many became CEOs of other companies or started their own successful businesses. It goes to show that they also learned a lot of important lessons on what not to do in business at the very same companies.
While a lot of the stories are based on my experiences in the telecom and Internet fields, I truly feel that they transcend industries and relate to almost all businesses. A lot of the stories and situations in this book were told to me by a number of people living it firsthand (dates, events, and company information were changed slightly to help disguise their true identities) and from a level to know the intricate details of the true stories, including the personalities behind them. There seems to be no shortage of material to learn what not to do. The only shortage I have seen is that of true leadership, individualism, and a long-term focus that is sorely lacking in today’s business world. It seems that everyone went to the same business schools that taught the same ivory tower short-term thinking that leads to long-term issues. The concept of commonsense is surely not being taught or learned in business school or through on-the-job training. If it were, I would not have anything to write about. So, keep up the good work, overpriced Ivy League schools. I am sure there will be enough wackiness in the future to make truly entertaining stories for a second book.
In today’s business world, we seem to reward mediocrity. I think it all goes back to human nature. We are all animals that seek the greatest rewards for the least amount of work (I guess I did pay attention in the Psychology 01 class my freshman year). Look around at the people that you work with.
Typically, one-third of the employees do 90% of the work. The next third of the employees do just enough not to get fired or cause anyone to notice their lack of effort. The last third should not even be there. Hell, the last third could not get up for a week and nobody would notice if it were not for an empty desk or lack of somebody to go around to get the birthday card signed for all the office birthday parties. The last bunch tend to be the same ones with the most company honorarium - from years of people kissing their asses to get them to actually do their jobs.
I remember working for a company one time where a President Award rewarded you with a check for $250. There was this one lady who absolutely sucked at her job. She was a bottleneck in marketing. Everybody had to run projects by her to get her blessing in order to put them on a marketing calendar so that they could be scheduled to be implemented. If she felt there was an issue, she could bog a project down until you either gave up or someone higher up overruled her. She was Queen Bee, and she knew it. This would not have been an issue if she were productive - she took cigarette breaks throughout the day that added up to almost half of her working day. Couple that with her personal calls, and she was lucky to get an hour a day of productive time.
I had a project that I felt was very important. I tried for weeks, going on months, to get it added to the calendar. I handled every one of her objections or requests for more information, but I could not succeed in getting it added to the calendar. My boss was asking me what was taking so long with the project. I should have had the project launched weeks ago. I finally broke down and told him what was happening. He suggested something I will never forget. He said to take some trivial thing that this lady had done that was slightly positive and make up some BS story about how this person really helped me and was a great asset to the company. Then submit it to the President’s Award Committee. Sure enough, she got selected to receive the little trophy and cash reward; my project got scheduled later that week.
See, we reward mediocrity. Instead of firing this person, we gave her $250 for doing what she should have done in the first place as part of her normal salary. Now, I know what you are thinking. They should layoff the third of the people who should not be there. That is easier said than done. In the future chapters, I cover how some company managers have lists of who they will let go in the inevitable layoffs that seem to come around once every year. Hell, most of the layoffs companies do are not because business is bad - they just want to fire the slackers without a lawsuit! They have found it easier and cheaper to do mass firings than to document, provide warning, and then fire someone. The current process is too slow and fraught with lawsuits.
As businesses find ways to cope with unproductive workers, employees find ways to maintain jobs at poorly run companies. Beyond the traditional claims that unions protect unproductive workers, there are many non-traditional ways employees can hide and protect themselves. Some join committees or conveniently sign up for new projects with plenty of funding right before they are about to be let go. And some kiss enough ass that they get promoted. I think the latter are the type that eventually runs for city government.
I wrote this book as a way to help ordinary businesses minimize the mistakes that I am seeing all too often in businesses worldwide. Just think, if you could simply minimize the mistakes that 95% of today’s companies make, you could become a rare thing in this world, a truly successful company. Please read the following book with a smile on your face. If you take this too seriously, you will miss the lessons. Experience is the best teacher, and what better way to learn than through the bad experiences of others?
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Chapter 1
CEO 101
Being a CEO got a lot easier about ten years ago. Starting about that time, CEOs all started copying each other. I am not sure if they teach this specific class at Harvard or Wharton (places a lot of the S&P 500 companies’ leaders went to school to learn to be “world-class business leaders.” Yeah, I laughed at that statement, too). Instead of trying to be the best in the industry, it seems all that inspiring CEOs cared about was obtaining vast wealth. To obtain this goal, they needed a method to their madness. They discovered the Wall Street class, CEO 101.
CEO 101 is a step-by-step process of what to do when you parachute into a company you are clueless about running. It is for both the brand new CEO as well as the experienced option hopper (a term that I use to refer to CEOs who hop from company to company looking for the largest payout). It allows you to keep your board and Wall Street happy for at least two years until you can cash in your stock options before jumping to the next unsuspecting company. By the time everything has gone to crap, there will be another sucker, I mean CEO, in place to deal with cleaning up the mess. Besides, it was not your fault because you laid out the vision and the new CEO changed it to his or her vision, right?
The steps outlined are really geared to the ridiculously short-term thinking of public companies in the US and UK. Private companies typically do not go through such stupidity as Wall Street demands.
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Step 1: Review The Parts Of The Business
Have you ever wondered why a new CEO is not seen or the business does not seem to have changed in the first ninety to one hundred eighty days after he or she has taken over? CEOs usually have to move their families during the first quarter they come on board. This generates fat moving/ relocation fees that give them a larger chunk to put down on houses in the best neighborhoods not too far from the company headquarters. During all this relocating, they have to actually create some type of plan for changing the business. They quickly get burned out. Imagine if your wife wanted to show you twenty homes over a couple weeks while you are trying to move to a new place, meet new people, and work eighty-hour weeks; you would get burned out, too. So what do you do to get away from the office and the wife without looking like a slacker who goes on vacation two weeks into the new job? You go and “review” all the operations around the world.
You get private jet service where you can get a good rest while flying (no screaming brats or fat guys who smell like sausage sitting next to you). You get to get out of having to be in the office from 7 a.m. to 8 p.m. You either get room service or meals out with the “best” customers. You can sleep in because you probably do not have any presentations before 10 a.m. Not a bad way to take an “at work” vacation with all expenses paid.
Nobody is every going to call you on this because you do technically need to see how the business works before you are knee deep in the muck. Only thing that sucks about step one is that you occasionally remember some of the people that you are meeting with will have to be laid off in step two. If you have a conscience, this is where the job begins to suck. If you have done this a few times, this is a great way to go on vacation.
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Step 2: Layoffs and Stock Buybacks
The next steps are the layoffs, cost cutting measures, and stock buybacks. The new CEOs do this because they know that they cannot affect the outcome of the business (if it is a decent size) for at least nine to twelve months. What board or Wall Street analyst does not love the idea of cutting costs and keeping near-term revenue stable? This translates directly to increasing the bottom line and thus the E in the Price Earnings ratio (PE); hopefully this will lead to a higher price for the stock. By combining this with less stock - due to stock buybacks - floating on the market and BOOM! The stock somehow magically rises. Pretty clever way of making it look like the new CEO is magic, when in reality it is totally short-term thinking that may or may not improve the future of the company.
The newly announced layoffs need to be in a quantity of greater than 5% but less than 20% of the total workforce. Why these numbers? If you layoff less than 5%, it appears that you are weak and are not an agent of change that is so desired on Wall Street. Layoff 20% or more, and Wall Street panics, thinking this is not just a simple turnaround but a possible bankruptcy situation. The latter is a surefire way of greatly reducing the value of the stock of the company, and thus hurting yourself in the options department. Like anything in life, moderation is widely accepted, and extremism is shunned.
As time has gone by, the announced layoffs and stock buybacks have become less and less effective. Investors (noticed that I did not say Wall Street, since in my mind, most of Wall Street is what you classify as dumb money with deep pockets) have started to notice that when CEOs are doing this, they need to watch their wallets because their pockets are about to be picked. I agree that there are times when this makes sense and needs to happen; in my opinion, a good 90% of it is done just to either prop up the stock or make the new guy or gal look good.
If the company was functioning well prior to the new CEO, and the new CEO does not have a strong history of success, wait for the pop-in stock price and then run for the exit. I have seen the charts that some on Wall Street have, showing the return in share price over the next twenty-four months after a buyback is better than increasing the dividend, but I personally feel that if you compared it over five years and show the inevitable decline, you would be better off with the dividend or the company reducing debt. Have you ever noticed how many times companies buy back their own stock at peak prices and do not have enough saved up for the tough times - that inevitably happen because of the business cycles - when they really should be buying back their own stock at the market lows? Imagine if all the banks had the cash that they spent in the early 2000s buying shares, in 2009, when everything had gone tits up. They may not have needed to be bailed out by the government.
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Step 3: Create Your Vision
The new CEO should look for projects that have the potential for instant returns. No long-term projects. The CEO is stressing from the constant meetings with the board. The board wants to be sure they have the “right” guy. If they do not see the traditional spreadsheet graphs showing the hockey stick growth figures, they start looking for someone to replace the new CEO. This dictates that your vision needs to be eighteen months or less, even when you should be looking further out.
I am sure there have been some CEOs who had long-term visions who were let go twenty-four months into the change to only sit back and watch a new CEO step in and take the glory for the changes that they implemented but that did not have enough time to blossom. unfortunately, this is how it typically goes in a normal or good economy. If you are hired in a recession and you have a long-term vision, you are golden. The down economy will buy you time to actually do what should have been done before. When the tide raises all the boats in your industry, yours will probably rise further because the changes were long-term in nature.
If you got thrown into a situation where the company is in trouble, you have to do something in the short-term or you will not be around long enough to cash in your stock options. Inevitably, you will have to create your own vision, but how? You probably have never had to really take something from nothing and build a business. Chances are, all that you have had to do was find the smart ones in your group and suck them dry for ideas to improve your department. The same thing can be done at the company vision level.
Look across your industry for someone who is truly revolutionary, someone like Steve Jobs (CEO and founder of Apple). Someone who does not care about what the world thinks of him or her and sticks to his or her guns and finds a new and innovative way of doing things. Chances are, you will not be able to duplicate them. It is simply not in your DNA. But what you can do is look at what they are doing and try to copy it and act like it is your idea. Just look at Microsoft. They make billions pulling this off every day. In my opinion, the Zune is a knock off of the iPod; the Xbox is an arguably better PlayStation, etc.
If you still do not think you are that talented, you can mimic famous dead people (coaches are always a favorite) or leaders from a different industry (everybody always wants to be a Steve Jobs). If that doesn’t work, create an ambiguous mission statement.
Why an ambiguous mission statement? If you make it ambiguous, one of two things will happen. The first thing that you hope happens is that ten people read the same statement and get ten different ideas. You hope that one of these ideas will be good enough that you can latch on to it and ride it to option city so that you never have to work again. The second positive thing is that if it is ambiguous enough, people will not see that you are full of crap, and it will buy you time for the economy to improve in your favor. If the economy does improve, you can point to the mission statement to say it is because of your vision that you quoted sometime earlier. If the economy goes to crap, it is not your fault - it is the economy’s fault.
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Key Words and phrases for Your Mission Statement
• an industry leader: Never “the” industry leader. “The” is too specific and measurable. Either you are the leader or not. “An” implies that you would be one of the top, but which one? Top 3, 5,
20 - which one? That is the beauty of the ambiguous statement.
• Broad industry types: By this, I mean you paint with such a broad stroke that if one of the ideas that you are stealing from someone in your ranks turns out to be a gem, you can go for it because it is within your mission statement. To give you an example, instead of saying you want to be “the leader in mobile phone service in XYZ market,” you say, “We want to be an industry leader in communications.” The difference is that you might be good at only one niche, and you can still pull off your mission statement.
• add in the latest buzzword: This is important because it makes you sound like you know what you are talking about without actually knowing more than how to read a BusinessWeek article.
• Closing it with a shout out to the employees, shareholders, and other stakeholders: This part is important because you want to get everyone’s buy-in even if you really do not care. That way you look caring and compassionate, and step four is that much easier to do. Did you really think you would wuss out without a reason?
example: Say you are the CEO of a company that makes ham for ham sandwiches (note to future authors: never write on an empty stomach).
Bad mission statement: XYZ corp. will be the industry leader in ham sandwich meat by 2012.
Good mission statement: XYZ corp. will be an industry leader in processed sandwich meats using synergies of an integrated supply chain to provide superior returns for our shareholders, while creating a great place to work for the benefit of our employees and the community at large.
There is nothing there that will get you fired. There is nothing that would offend or cause disagreement with the shareholders, employees, or the community. The statement insinuates growth and leadership without directly providing a measure or timeframe. In short, you basically just said a whole bunch of nothing. Your board, Wall Street, employees, and the community at large will love you for it. They will think you are the Superman of CEOs.
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Step 4: Implement Your Vision
You had your ninety days of vacation “touring” all the company locations around the world. You have laid off a portion of your employees, so profits should be trending higher. You have started buying back stock, so this will help increase the company’s earnings per share (EPS). Now it is time to implement your vision.
As part of your vision, all new CEOs must look at what portion of the business can be moved to China or India (some like to call it Chindia) to “save” money. Isn’t that what the other CEOs are doing? If the other CEOs are looking to offshore to China or India, they must be saving money, aren’t they?
China and India have this fabled reputation for cost savings. I do not have any stats on this, but my gut is that not all companies can benefit by offshoring jobs to China or India. I once worked for a company that moved its helpdesk to India. Being the 3,000,000th company to do so, they obviously did not have the pick of the litter when it came to employees. Working for the company in the US for a number of years, I knew the company had a reputation for paying low salaries everywhere they operated compared to most companies in that industry. I suspect they also did the same thing in India. Instead of getting bright and energetic staff at a fraction of the cost of an employee in the US, they got nonEnglish-speaking, surly employees who typically quit every six to eight weeks to work for better-paying companies. You never worked with the same person twice even though the call center was staffed by less than fifty people. We had customers begging not to be sent to that call center. I am sure it cost us some customers. I am not convinced it really saved that much money, considering that the company had to train hundreds of people because the employee turnover was likely over 300% per year.
I have not personally worked with any companies offshoring to China. I suspect that they have a lot of similar issues. Let’s face it. If you cannot successfully run a business and manage your employees locally, how much success will you really have with employees 10,000 miles away in different time zones? This is not a swipe at India or China, but unless you are well run like GE or IBM, this method of business will likely be more painful than it is worth. If you suck at home, chances are you will suck in China and India. Failure begets failure.
Let’s get back to implementing our “Chindia” policy. You must get at least one trusted VP who will implement the strategy by looking to save money by offshoring. Here are the rules for identifying the right individual for the job.
• You cannot use a marketing VP because he or she will tend to create a mini-America with expensive new buildings and the Googlelike coolness that permeates Google’s headquarters. You will have nothing but a bunch of employees sipping lattes and playing video games instead of actually working. It will make a lot of press but add nothing to the company.
• You cannot get a customer service VP because, unless you already have employees working abroad, he or she will feel threatened that all customer service jobs will be sent overseas, including his or hers. He or she will purposely make the transition difficult at best, or virtually impossible.
• Ditto with hiring the head of the union because he or she will more than likely do the same as the VP of customer service.
• You cannot use a VP of engineering unless he or she is from those areas. If you use an engineer from the US, he or she will claim to be able to build a server or a robot that will do the job cheaper, because robots and servers are cooler than people. Engineers are weird like that. It is a different story if the engineer is from Chindia. He or she knows the culture and will probably be valuable in making it work. Chances are, the engineer will go back to his or her home country and live like a king because of the newfound importance in the community. Word of caution. You could also be creating a competitor who might kill your company, but what the heck - you only care about the next twenty-four months.
• That really leaves you with a VP from your finance team. He or she will probably do an outstanding job on keeping the costs down. On the negative side, they tend not to be able to see value, only costs. To counter this, get your VP of customer service over there once the paperwork has been signed and the build-out is started, and there is no way to change it.
So now we have our Chindia policy in place. This gives you the future layoffs in the US that you need in year two once the offshoring is up and sort of working.
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Consultants and Organic Growth
During this step, it is also important to hire expensive consultants from large consulting companies. The larger the better. It is very important that the consultants come from places like Accenture, IBM, EDS, etc., and not companies like Harry’s Discount Consulting Shop and Emporium. It is important to get a large name because this gives you deniability if things do 0
not work out. You can always claim it was the large consulting company that gave you bad advice and not your own bonehead decision to follow it. If you employ Harry’s consulting company to save a buck or two, you look like a moron that hired a second-rate firm, and the blame comes back to you. If things work out, you look like a genius that brought in the big guns to help sort out the mess from your predecessor. If they don’t, you have another scapegoat.
These consultants will bring pretty graphs and some okay suggestions, and possibly will diagnose what is ailing your business. For a bonus, they will also sometimes give you ideas that you can use as your own for your vision on where the company should go. Hiring the consulting firm should give you enough ammunition with the board to allow you the latitude to force large changes in the company under the hope that it will lead to organic growth.
The next step in your vision is how to grow the company. This can be done one of two ways: organic growth or buying out a competitor. The hardest way is through actual leadership and hard work, or what business school calls organic growth.
Organic growth is the hardest to implement because it means your vision and direction are somewhat responsible for the growth. But, relax - there are two ways to get organic growth. The first way is through traditional means. You have to actually have a plan or at least good people under you who can deliver. If this is beyond your skills, don’t worry - we have another way. The second way to get organic growth is through the old giveaway or discount method. Just because you have organic growth does not mean it has to be profitable. You can give away your service as a “trial” with the hope that it will grow into something that everyone uses, and then you can make money other ways (think Facebook, and forget all the other failures of oncehot companies like AOL, PointCast, Yahoo!, etc.).
I once worked for a large Internet company that gave away its service for free, or at a greatly reduced price, because it felt that it was more important to get “eyeballs on the network.” “Eyeballs on the network” is supposed to mean that the company generates its revenue through ads sold to companies that wanted the exposure. The problem with this is that the company I worked for was an Internet Service Provider (ISP) that normally charged its end customers to get Internet access. This failed miserably, but hey, it took almost eighteen months before the company figured it out. That is just about as long as you need to cash in your stock options.
If organic growth is not possible (either by plan or through dumping your service for free), you can always do what 80% of the S&P 500 do and buy out a competitor. Buying out a competitor does three things. First, it eliminates some of your competition and could eliminate a well-run competitor before it gets too big and takes your company out. Second, your company spends money with large Wall Street firms who, in the past, tended to talk up your stock if you sent enough “advisory fees” their way. Finally, it makes it look like you possibly know what you are doing because some Wall Street analysts may take this as part of a rollup strategy.
Eliminating your competition is generally a good idea, provided you can do it at a reasonable price. The best way is by printing funny money, i.e., using your inflated stock. I call it funny money because the deal might have a high price tag to it, but you are actually paying for it by printing off your own shares. Remember how AOL was large enough to purchase Time Warner even though Time Warner earned billions while AOL had a history of losses? All AOL did was crank up the printing presses and produce more shares. The only money that exchanged hands was the Wall Street advisory fees and the bonuses and severance packages of some of the executives. The only way existing shareholders could get cash was by selling their shares. Now, if your competitor wants cold hard cash, make up some excuse why the deal fell through and move on before you are found out to be a fraud. Chances are, the company you were trying to buy is either run by someone who knew what he or she was doing, or the CEO owned a bunch of shares that he or she actually bought and wasn’t given, unlike your shares.
Spending large sums with Wall Street firms used to be a surefire way of getting your stock on their “buy” list or on their “recommendation” list. These lists are where they give their unsuspecting retail customers ideas on what to invest in. Some of the time these pan out, but more than a majority of the time, these lists should be avoided like the plague. Please note that now Wall Street firms are supposed to have a Chinese firewall between their stock analysts and the investment bankers so this no longer happens. Whether this actually stops the practice, I am not sure. I do know that Wall Street is still recommending some poorly run companies that should never make any list except the “what to short because they are going to crash” list. So your guess is as good as mine.
You could also con - oh, I mean suggest - that this purchase is part of a bigger scheme where your company is buying out smaller competitors to gain efficiencies. This type of strategy is often called a rollup strategy. Rollup strategies can be effective if the industry is widely fragmented and efficiencies are possible by leveraging support roles like marketing, IT, customer service, and finance into one large company. A rollup strategy is where one company buys a lot of smaller competitors in the same industry so that it gains size and market share faster than it could with normal organic growth. This strategy is also used to build a national competitor in an industry that is highly fragmented with a bunch of tiny companies competing locally (example would be a company that buys up local dry cleaners across the country and labels them under one trade name). This was done effectively in the waste disposal and car dealership industries a little over a decade ago. An example of this is Waste Management. Waste Management has been effectively buying out smaller trash companies for years and wringing out inefficiencies through its centralized support network. For most industries this not possible, but that does not stop companies from trying. Sometime it feels better to be doing something rather than nothing.
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Step 5: Claim Success of Your Vision if the Market or economy Booms; Blame the economy if the results Suck
Your growth strategy has either been a success or you have miffed it. Don’t worry - nobody will suspect that it was the economy that propelled your company to success. If you failed, hopefully the economy where you operate is also sputtering or failing, or your industry is going through a dry spell, because that is your get-out-of-jail-free card. See the common thread here. Heads you win, tails they lose. If the economy is crappy, hey, it’s not your fault. If the economy is going great, then those changes that you made are working out. Only you (or some experienced managers in your industry) will know that you really did not do much. But what do you do if your company is going down while your industry is growing or the economy is doing well? You jump to step seven.
To tout your success and to help propel you into more lucrative future roles, or at least more options from your easily impressed board, you need to start doing media interviews. This is a very important step that should not be overlooked. The benefits are enormous. The first benefit is that you are getting your name in the public eye, and, like they say, there is no such thing as bad publicity. Next, you get treated like an expert in your field because you are actually talking to the press; they tend not to understand how a business is run anyway, so you can probably get away with it. In addition, prospective employers will now know your name as well as headhunters. The more times your name gets on their short lists for possible roles at other companies, the more money you can demand for your time and effort.
The key with doing the media interviews is to start small. Local newspapers where your business is headquartered are always a great place to start. They are happy to get the attention and will tend to write a favorable interview since it is seen as a positive for the local community in which they live. This is a great place to practice giving the all-important ambiguous answer.
It is not just a great strategy for politicians, it works great for CEOs as well. If you are unsure how this is done, spend some time with your local congressman or watch old tapes of interviews with President Clinton. In no time, you will be talking out both sides of your mouth without saying one thing that is too specific to come back and bite you in the ass. Remember, half the battle is stroking your audience, so spend some time reviewing past articles from your interviewer and speak highly of his or her writing. The reporter will be eating from your hands in no time.
After you have mastered the local press, you can move on to trade publications and press releases. These can be trickier since presumably the trade publications will know the industry well. You might want to bring your head of marketing to help with any difficulties that may arise. As these interviews get easier and easier, it is time to move into the big league, the national press. Before you get crazy and want to talk to the Wall Street Journal, the Economist, or CNBC, you need to spend a little time in the more bullish press. Start with magazines like Money or BusinessWeek. Both of those magazines are written for the novice investor, and 80% of their articles tend to say mostly good things about companies (with only one negative paragraph as the second to the last one) so as not to scare the new investors.
If you feel comfortable with the easier business publications, then jump to industry conferences put on by the brokerage houses and investor shows like CNBC and Bloomberg. The latter is a great way to tout your company with a short two-minute interview where the interviewer cannot really dig all that deep and ask tough questions. If you answer intelligently, you can really start to get people looking at your company. The industry conferences are an excellent way to get information about your company to brokers so that they can purchase your stock. Instead of being an interview, it is more of a presentation where you talk about the industry and things that your company is doing to lead it. In addition, sometimes the brokerage firm putting on the industry conference will put out a buy recommendation on your company since you are presenting (Wall Street will never admit it, but it does happen). This is a great way to get a short-term boost in share price. Now it is time to cash in your rewards for all this hard work.
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Step 6: Cash in Stock Options if the Market or the economy is Successful; if the World has Gone to Crap, have the Board reprice Your Options
So you have mastered the first five steps; now it is time for your reward. Hopefully when you negotiated your package eighteen months ago, you had a large portion in stock options. For those unfamiliar with stock options, let me give you a one-minute overview on what stock options are and how they work.
Stock options were designed to provide incentive for management to push really hard to get the price of a share of stock to increase. The board of directors issues stock options to upper management based on a strike price at today’s price (backdating or looking back to give the option at a strike price that happened to be the lowest price of the year is illegal now). The board gives the managers a set number of options that represent a number of shares that they will award to the managers at a set price. Most boards make the options executable at a price equal to or greater than the current price so that the manager does not have to recognize the difference between the lower price and the current price as income the year they were written (i.e., pay taxes as a gain). This is because they know that options are for a period in the future and may possibly expire worthless. Typically, options are issued with a fiveor seven-year expiration period. This is to avoid someone sitting on the shares until way in the future. Also, most options expire within ninety days of employment termination.
Management likes options because it is sort of like the lottery, where they can make a lot of money with no outlay of cash (i.e., they do not have to put any money upfront or pay any taxes on the options until they are exercised). To exercise an option, the manager puts in two simultaneous orders, one to exercise the options and one to sell the shares. That way they do not have to use any money upfront. The manager keeps the difference between the option purchase price and the price that they sold the stock for. Nobody would exercise an option that was for shares at a price higher than what the shares trade for on the stock exchange because they would lose money. If they wanted shares, they would simply buy shares on the open market and save money. Some managers use the options as a way to purchase shares cheaply to hold for a long time. That manager would pay the strike price times the number of shares purchased, plus pay taxes on the difference in price between the current price and the strike price.
If the stock market goes to crap, some managers will ask the board (off the record, of course) to reprice their options to a lower strike price. Sometimes the board will go along with the suggestion because it does not want to lose such “valuable” employees. This causes the managers to get a larger payday in the future. They only experience the upside, not any of the downside, if they owned the shares.
In my opinion, the only thing that options do is cause short-term thinking just to juice the price of the shares so that management can cash in the shares. They inflate CEO compensation and rob the corporation of the vital long-term thinking that is really needed to run a company right. I will save my rant for a later chapter.
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An Example Of How An Option Works
On January 1, 2009, XYZ corporation issues options granting one million shares at the current price of $25 per share to the new CEO. The options must be exercised by December 31, 2014, or they expire worthless. They can exercise some or all of their shares during the time up to December 31, 2014. Some companies also make a portion of the stock options only available based on length the employee have been with company. The company might make, say, only 20% awardable on every anniversary of the award (i.e., 20% on December 31, 2009, an additional 20% on December 31, 2010, etc.). For this example, we assume they are 100% vested on day one (i.e., they do not have to wait for an anniversary date to be able to cash them in, they can do it any time the stock moves higher).
On May 25, 2009, the stock price has gone up to $40 a share, and the CEO has a new Ferrari he is itching to buy, plus he wants to expand his summer home in the Hamptons. He decides to cash in 100,000 shares. He gets $15 (difference between the current price of $40 a share and the option price of $25) times 100,000 shares, or $1,500,000. He buys his Ferrari ($175,000) plus spends a further $825,000 fixing up the old summer retreat, plus pockets $500,000 to either pay taxes (probably from the tax year of 2003 - he is a little behind), jet set, take a vacation, or pay his child support.
On January 1, 2010, XYZ corporation issues options for an additional one million shares to the CEO because things are going so well. The share price is now at $35. The CEO has two separate awards: a remaining 900,000 shares at $25 and an additional 1,000,000 at $35.
On April 15, 2010, the CEO decides to pay his back taxes for the last five years and needs some money. unfortunately, the share price has declined to $30 per share. He needs $5 million to pay the taxes. So he sells 900,000 shares at $30 each and collects $4.5 million ($30 to $25 times the remaining 900,000 shares in the original award). He is still is $500,000 short. He cannot sell any of the second award because the strike price is lower than the current market price. If he executed the option, he would owe more than he makes selling the shares. This CEO will need to find the $500,000 from somewhere else; maybe he can bribe the board into giving him a bonus.
On September 15, 2010, the stock market crashes and the share price plummets to $8 per share. The CEO is panicking. He was counting on the option money to cover the cost of the villa in Aspen for the season ($200,000). He has no options that he can execute. So what to do? It is not his fault the stock price is so low; he cannot control the stock market. He proposes to the board to reprice his options to $5 per share because he is so valuable to the company. The board reluctantly agrees. He now has his way to pay for Aspen, and presumably the board has a happy CEO.
This is an oversimplification of how it works.
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Step 7: New round of “Cost Cutting” Because Vision is Not Working Out
This was bound to happen. The board is demanding a higher share price. You want a higher share price because you need a new Ferrari and your wife was complaining that your yacht was smaller than your neighbors’ (think stock options). What to do, what to do? We tried out the vision, and it just does not seem to be making any difference. The vision was a great idea but the execution was lacking, yeah, that’s what it was, the execution. “I would like to execute some of the people that work for me,” the CEO thinks to himself as he wonders where he will get the money. “Always saying this will not work because of that. Hey, that gives me an idea - we have not had a round of layoffs in almost a year.” And that is how it starts all over again.
There is an old saying, “Shit flows downhill.” This is what economists in business schools like to refer to as the “trickledown theory.” I kind of like the first. I think it is more appropriate. The CEO is being beaten up by the board and his wife. So he lashes out on the little people below him. He demands layoffs.
What board would reject a round of “cost cutting,” i.e., layoffs? Throw in a buyback for your shares, and you have a winning combination. The board and your wife will get off your back for a while. Wall Street will love you because it looked like you listened to their analyst and you are going to give someone some trading fees for the buyback. It is the perfect solution until step eight provides you with a more permanent solution.
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Step 8: Start talking to headhunters about New positions With Other Companies
When all else fails or if you think the board is looking around to replace you, it might be a good time to dust off the old resumé. Dig deep in the Rolodex and look for the business card for the headhunter that placed you in the most recent gig. He or she was able to market you back then, so surely he or she can find something else for you now with all your additional experience. If you did step five correctly, you should have a known name in your industry. Headhunters will more than likely be calling you if you have met with moderate success or you happened to be lucky catching an up-cycle in your industry. If you totally miffed up the job, you can always bribe your board to let you go with a nice severance package in exchange for not cashing in those stock options or holding the company to your employment contract.
Once you have landed that new job, just start back at step one again. If you keep this up, you should amass a small fortune as long as you can avoid those messy divorces or sudden heart attacks that seem to befall a lot of our esteemed CEOs. Nothing sucks worse than spending twenty years working your butt off and selling your soul to see your money go to someone else to have a good time.
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Lesson to Learn From this Chapter
A lot of this chapter is me being cheeky about the role of a CEO. To me, someone who has never been a CEO but has worked with a few, there seems to be a very similar pattern to how they operate. I feel these eight steps outlined above probably cover 80% of how most CEOs of public corporations in the US operate today, if they are not founding shareholders. Most CEOs probably do not realize that they are following this same pattern and honestly feel it is the best way to make a difference. I think if the CEOs stepped back and questioned all the silly short-term things that they do and tried to do something different, we would have a lot more successful companies. Just think - if companies stopped wasting their money on step two (layoffs and buybacks), they could save their companies absolute fortunes. Just in buybacks alone, if a company waited until the stock market was in a bear market to buy back shares, and saved the money when they were in a bull market, they probably could buy back 50% more shares. Even if they waited until the stock was trading at a fifty-two-week low, they could save a lot. Most stocks trade within a 30% to 50% range within a year.
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Chapter 2
Rebranding A Pig
I had a friend who once worked for a company that had an image problem. They were a large telecom company that had literally been around since telephones were invented. They were (and in some cases still are) the monopoly in certain countries. They were seen as being an overpriced lumbering giant. They had a habit of taking days to restore service when there was an outage. They had software and systems that were over twenty years old and required a lot of manual intervention, possibly divine intervention, to exorcise the demons that existed in their servers. Customers hated to deal with them and dreaded the long lines in the retail stores and the even longer hold times calling their customer service number.
Every market survey or focus group that was conducted showed the company in poor light. The only things the company had going for it was that it had a solid engineering staff and had majority market share in the markets where it operated. The solid engineering helped the company maintain an okay image for quality of the underlying service, but if you needed a new service or repairs to an existing service, it could literally take weeks. Their bills routinely had errors where customers were over and undercharged. The saving grace for the company was that it had been able to maintain a leading market share even after its monopoly was removed by the local government. The board of directors of the company recognized they had a problem, and if they did not change things soon, they would be toast. Not having a solid leadership team, they decided to bring in outside experts to help them out.
The lethargic company hired a pricy CEO from outside the company, who had a history of leading other companies in the industry as they transitioned from a closed market to one with full competition (at least that is how it was portrayed). His arrival at the company caused tension in the community and at the company. The community did not like the idea that a non-local was running the largest telecom company in the country. The company managers resented that nobody from their ranks was chosen to lead and the fact that the new CEO tended to look down at the locals.
So what do new CEOs do after they go through the first phases of CEO 01? That’s right - they go right to the expensive and worthless consultants of the world to get “fresh ideas.” As you probably guessed it, the consultants who were brought down from the US to this “backwater” country (not my term, theirs) were not the cream of the consulting crop. The best consultants in the US tend to go to three areas: Wall Street, DC, and Silicon Valley, where they can maximize their income and reputations. The consultants who tended to go to where this company was located were either fresh out of college and looking for an adventure or they were failed corporate executives who were just trying to pay their mortgages while they waited for a real job to open up in their field.
The consultants all flew down to the country on business class tickets. They stayed in the nicest resorts. They ate at the finest restaurants. They drank the best wine. Some even brought their families as some sort of vacation. All the while, the company paid these consultants tens of thousands of dollars per month. Most of the consultants worked two weeks in the country and one week out of the country. This went on for at least six months.
To recap, you have a highly compensated executive and consultants with little local market knowledge designing the company change procedures for markets where they might have only ever visited while on vacation. In short, they did not have a clue about what to do. All they did was work and party. They spent a lot of time talking to people. They spent a lot of time creating PowerPoint after PowerPoint presentation. And then came the time to recommend their changes.
Their recommendation was for the company to change its name and spend a lot of money on a marketing campaign to try to influence its customers’ opinions so that they would think the company was a good one. Instead of using the old company name, they recommended a clean slate where a new company name was introduced without the legacy baggage of the historically poor service. Very little was said about actually fixing the underlying problems. They felt that if they created slick ads showing local people working for a company with a new and fresh image that appeared to be that of a well-run company with modern systems and good customer service, you would not actually need to have those things. When my friend told me about this, I was shocked. Basically, the concept was to trick the customers into thinking that their actual experiences were not happening and that this illusion was reality. The consultants even went so far as to have a calculation of the cost of the campaign based on the number of times (touches, in marketing speak) a customer would need to hear or see their ads to change their opinions of the company. The cost of the campaign was almost $10 million. Ten million dollars would have gone a long way in fixing a lot of their internal issues.
The CEO thought it was a great idea. The board, not wanting to seem ignorant, agreed with this CEO and placed him on a pedestal as some type of management god that was going to save their poorly run company.
So the board and CEO wisely decided to change the name of this company that has been known in the market and around the world for over a hundred years. In addition, they coupled that brilliant decision with the notion to have a reorganization and reduce the number of employees by 30% (obviously an idea from a consultant) to address the slow response rates and poor systems. “Problems solved,” the CEO thought; he could cash in his options and sit back and have a cool rum drink under a coconut palm tree on the beach.