Bold Exec

   You look for these telling statements. CEO's who who just can't quite say directly what's going on, describing for example a layoff as "a strategically enhancing rightsizing". Then there are CEO's who just don't have a clue concerning their environment. And there are some All-Stars, excelling on both simultaneously. John Thain, ex CEO of Merrill Lynch, took some unbelievable actions. We all know about his $1.2M office redecoration, justified because the prior mode of decor wasn't conducive to doing his business. You may not have heard that his personal driver received compensation of $230,000 for one year's worth of driving, that Thain left for a three week vacation in the midst of the BofA acquisition, or that he requested a $10M bonus for "saving Merrill". And we also know that he paid out between $3 and $4 billion in bonuses, only slightly down from the prior year, even while Merrill was losing $15 billion for the quarter with lots more coming--and he paid these out in December prior to the BofA acquisition closing and ahead of the usual January schedule. Lots of really reckless, out-of-touch, and grandiose behavior it seems.

But to me the coup de gras came in his justifying comment for the bonuses; we need to pay the bonuses to retain our key employees, to retain the franchise. Duh. As the U.S. job market was tanking, as the investment banking industry was going downhill faster than an avalanche, as the government was using tax dollars to shore up the entire industry, as major layoffs were occurring in the entire financial industry, as it was obvious that the pre-collapse reported earnings of Merrill were a complete sham, as most everyone in the country/world was fearing for their jobs, as........

Life's too short to take shortcuts, to be greedy, to be clueless even while you're intelligent, to take obviously greedy actions and utter clueless excuses. Play it for the long term.

Bang for the (Tax) Buck

  When managing a business in difficult circumstances, solving several problems with each major decision and creating no residual negative effects is imperative--simple-minded solutions that also have broad negative consequences are not ok. In our current U.S. business and economic environment we also don't have the luxury of such simple-minded solutions.

The country's primary taxation policies--corporate and individual taxation--each solve only one problem, while simultaneously creating another. Individual income tax serves the purpose of funding governmental services but takes discretionary funds out of individuals' pockets--impeding saving and consumption. Corporate income tax serves that same purpose but impedes corporate growth and re-investment. We must--at least partially--substitute tax policies that solve several purposes and that don't create negative results (except for some special intersest groups--tough).

Many (me included) advocate significantly higher gasoline (or total oil) taxes. This serves the purpose of permanently (a) changing consumers' attitudes toward auto-fuel efficiency, (b) providing a permanent base for economically sound (rather than artificial tax-incentive based) alternative energy investment, and (c) enable the auto industry to have market clarity. The potential negative of course is the short-term impact on individual consumers, but my plan deals with this via a combination of (d) rolling it out gradually, (e) creating a form of ceiling protection, and (f) partially offsetting individual income taxes.  I detail this in the entry "U.S. Energy Policy". The result: solving several problems, creating no meaningful negatives.

Another of the same form has been proposed by some. Taxing each equity transaction by, say, 1/4%, creates multiple positive results and no negatives. The positive results are (a) a tax stream used to lower corporate taxes, (b) a dampening effect on short-term trading (which creates absolutely no overall economic benefit), and (c) a a dampening effect on stock market volatility. Day traders, stock exchanges and hedge fund operators will rebel--so? Their interests are not our interests. As President Obama clearly stated today "let's put aside the nonsense."

These are just two new ideas--others can be created by clear thinking and putting national interests ahead of special interests. Our country's overall tax policy is so antiquated and byzantine that, if it were instead a fundamental element of a company, a turnaround CEO would totally scrap--and rebuild--it. That may be too drastic and risky for the country's entire taxation system, but perhaps we can eat this elephant, as the saying goes, a bite at a time.

Cash is the First Clue

  How did they miss it? Arthur Anderson collapsed because, despite 100's of full-time personnel doing on-site audting, Enron's publicly reported financial statements bore no resemblance to reality. Enron did a masterful job of obfuscation but that was no excuse. Then along comes Satyam who did nothing more clever than telling their auditor that they had way more cash than they actually had (currently only about a $1Billion discrepancy). Obviously this had been underway for quite a while.

Here's the opening statement from my 2007 entry found in category J; Eliminating Waste: "Are you a new potential investor, board member, or CEO of a company? Are you 100% confident that the accounting policies are valid and transparent, that no-one has taken some accounting liberties in the past that still lurk in the shadows, that the operating profit reporting you're receiving is correct?"

I went on to show how very easy-to-do cash flow analysis can verify that publicly reported statements based on accrual accounting are consistent with the true life-blood of any company--it's operating cash flow. Cash accounting was replaced by accrual accounting with good and sound reasoning, but following the cash is still and always the most clear and un-corruptible assessment. In the case of Satyam ongoing cash flow analysis (comparing operating cash flow to reported operating profits) is a simple procedure and should have been done along the way: but it was even easier--simply making contact with the bank where the cash was allegedly held, and getting bank statements. This takes about half a day of one person of an auditing team. How did they miss it?