Finance for Non-Financial Managers

Finger pointing time - Bernanke, Paulson. Who's Paulson?

Quote from today's FT.com: "Republican members (of Congress) are focused on the idea that officials put undue pressure on BofA to complete the deal (with Merrill Lynch)."

What's that about? Have these Republican congresspeople forgotten which party was in office when the deal was struck? Has the name "Hank Paulson" slipped from their vocabulary or in their haste to forget George W. Bush was ever born have they also forgotten the cabinet officer who led the charge that (apparently) stuffed Merrill down BofA's throat?

And for you BofA shareholders, never fear and hold those shares. This is going to be a very good deal someday soon. Well someday.

As always, I welcome your comments.

Executive Compensation – Main Street is small potatoes vs. Wall Street.

A few months ago the Wall Street Journal reported that Merrill Lynch paid over $10 million to each of its top 11 executives last year while the firm was losing billions – they weren’t CEOs, they were deal makers, basically.

This week the Los Angeles Business Journal reported that only a dozen CEOs among the largest companies based in Los Angeles County could claim that same distinction, despite the fact that these people run by and large very successful companies.

Seems to me the executive pay problem may be somewhat narrower than the media would have us believe. Maybe the problem is centered in the northeast US, maybe even a single city; and maybe a single industry in a single city.

Let’s not let our government folks miss the point again (See Did Sarbanes-Oxley miss the point?). Let’s tell them to point their regulatory fingers at the real culprits, not the CEOs who are working hard to make their companies more valuable for their employees and stockholders.

How about your company? Are you comfortable that executive pay is going to the right people for the right reasons? If your policy is Pay for Performance, are you getting the performance you're paying for? Want a second opinion?

As always, I welcome your comments and inquiries.

Stress test, smesh test! It's all about attitude!

Well, the news is out about the stress tests! And surprise, surprise, it’s not as bad as the doomsayers predicted – again. Just like when they predicted the nationalization of some big banks and the failure of others. It seems the banking system isn’t going down the drain after all. My question is this: why does some invisible government official leak pieces of a big story but leave out the critical details? Bank of America has to raise $33 billion dollars. Oh, by the way, they’ll do it without any more government loans or government ownership and they’ll sell less new stock than everyone expected and they’ll be fine.

It’s beginning to look like the bear market pundits will have to find something else to worry about, and to convince us to worry about. How about this one: “General Motors will go out of business and lay off all their workers.” Also a ridiculous reach in extending a troubled company’s problems to the moon, but I’ll bet someone will have it in print before the month’s out because they need something to feed the fear that so many of us cling to.

Maybe we should just take all the doom and gloom with a grain of salt. Maybe we should let the doomsayers talk to those who will listen while we move on to a more constructive use of our time . Maybe we should be focusing on the emerging signs of recovery in our economy than the waning cries of disaster around the next economic report. Maybe, just maybe, we’re going to be OK after all.

As always, I welcome your comments.

How would you fare under the big banks stress test?

There was a lot of press in late February when the Obama administration announced stress test of the largest banks in the TARP program, to see if they were worthy of additional assistance. Today the press talk is about how much of the results of those tests will be made public, enabling the public to see which banks the government considers weak or strong. The key issue, of course, is the fate of those considered weak, once that information is known. But here’s a thought for you to consider: What if your company were subjected by your board of directors or your lenders to the same kind of stress test? How would the company fare if it had to operate in a market that was itself under deep stress?

Take the stress factors for the banks and adapt them to your business; it might look something like this:

Bank stress test factor	Your company stress test factor
The economy contracts by 3.3% in 2009 and stays that way through 2010. There will be less money moving around and less opportunity for buyers and sellers of just about everything, and less demand for loans from otherwise worthy customers.	Your revenues will drop 3.3% or more this year and stay flat for another year after that, while your fixed cost structure will stay, well, fixed.
Housing prices will fall another 22% in 2009. This will certainly result in increased delinquencies and foreclosures. Already there are signs that foreclosures will rise dramatically very soon.	Your customers’ balance sheets will contract by 22% from where they are today by the end of the year, beginning almost immediately. That means operating losses they will incur this year will wipe out much of their net worth.
Unemployment will rise to 8.9% this year and to 10.3% in 2010. This will hasten loan defaults, including credit cards and car loans, in addition to mortgage payments.	8.9% of your business customers will go out of business this year, or that same number of your consumer customers will have zero income before year end. That number will grow to 10.3% in 2010.

If you have a strategic plan in place, you know that this will impact your planning assumptions. Ask yourself:

·         How much impact will it have on you?

·         What could you do about it?

·         How long do you think it will impact you?

·         Do you have credit lines in place to support you through this period?

·         Are your reserves sufficient so that your existence is not challenged?

·         If you had to raise more money quickly, where would you go and what would be your story?

If you don’t have a strategic plan in place, all those questions become even more critical, and your ability to answer them effectively and position yourself for this year and next becomes even more at risk.

Now what?

As always, I welcome your comments.

In defense of executive pay - it's not all it's cracked up to be

This weblog has devoted space more than once to the sometimes ridiculous executive pay policies pursued by many Wall Street firms, notably including AIG and Merrill Lynch. I felt then and continue to feel now that many financial firms couldn't spell "pay for performance" and were unable to get past the "pay" part. Top Performer was defined as someone who had once made the firm a lot of money, and who could not be allowed to join the competition, regardless of their current performance. That definition seemed to dictate that they become millionaires many times over every year, even if their risk-taking endangered the very existence of the firm that employed them. My gripes applied equally to deal makers and their CEOs.

But there are two sides to that story, and this is the other side that you don't often get from the media. Except perhaps by accident...

The Los Angeles Times today reported that Goldman Sachs CEO Lloyd Blankfein spoke in favor of more restraint in executive pay, perhaps in part to short cut more severe government intervention but perhaps because he gets it (finally). One of the things he said that makes a lot of sense to this writer, besides paying well for a good job and clawing back bonuses for a bad job, is that most executive pay should be in stock that aligns long term goals of executives and stockholders.

In fact, most of those huge pay numbers for CEOs are in fact paid in stock or stock options today. When the media quotes multi-million dollar pay packages for CEOs they don't tell you that a lion's share of that number is the valuation of restricted stock grants or stock options that will take years to be converted into cash, during which time their value could change dramatically. As an example, the Times article quotes Mr. Blankfein's pay for 2008 as $43 million, including only $836,000 in cash and the balance in stock and options. They then note that the stock, presumably counted as $42.2 million when awarded, is worth about $14.6 million today, as a result of stock price declines.

Now I don't mean to say the man is poorly paid at $15 million or so, but it's a far cry from $43 million, and he did in fact pay a price for the performance of his firm last year. Yes, maybe he should have had to repay his salary too, but that gets down to the real value that should be placed on effort, and we don't have enough space to tackle that one here. Just keep this in mind as you read the headlines:

Executive pay is invariably composed of cash and stock. The stock or stock options part has an at-risk value until the executive can sell the shares, typically some years after the award. In the interim, all he or she got was a promise of payment, a promise that the market sometimes retracts. And when the market price of the stock reflects the success of the company itself, that is "pay for performance" in its finest form. Your CFO for Rent says "Let's have more of that."

As always, I welcome your comments.

Pay for performance - why don't they get it?

Last summer the Wall Street Journal ran an article reporting that US Airways had achieved the best on-time performance of all major airlines, after being the worst performer the previous year. As I re-read this item while researching my next book, a paragraph caught my eye. It read in part: "How can one airline with big congested hubs run on-time while other major carriers stumble? US Airways rallied its work force to focus on one goal ... and began offering financial incentives to workers for better service."

Duh!  

If a seasoned business reporter has to ask the question, how much harder must it be for CEOs who don't have the luxury of sitting back and surveying the landscape for others' best practices? Despite the best efforts of the researchers in this area, CEOs seem unwilling to believe that incentive pay is a valid tool for performance enhancement. This even though the record of American managers in guiding their employees to improve productivity through motivation or intimidation are mediocre at best.

Of course US Airways didn't achieve this most important milestone (at least in travelers' minds) by simply offering bonuses. They made changes in operating policies and practices, they upgraded equipment, and they improved the quality of their hiring practices. In the process the flying experience got better too - onboard annoyances got fixed more quickly because there were more mechanics around to do the work, for example. And motivational management practices encouraged employees to care more about their work - a message that was taken seriously because it was backed up with cash. Whether it's employee performance or a used car or a can of baked beans, you get what you pay for, and your pay practices tell everyone the kind of importance you place on performance and the level of performance you expect. 

So what kind of message are you sending to your employees? Go for the gold or go for the beans?

As always, your comments are welcome.  

Quick indicator of impending cash flow problems

Many companies watching their cash closely produce daily cash flow reports to help management stay on top of that all-important resource. One of my clients produces a daily report that also shows the balances of accounts receivable and accounts payable. As of today, the accounts payable ("AP") total is 50% larger than the total of accounts receivable ("AR").

Quick quiz: What does that tell you about the company? 

Quick answer: First, they've slowed down their payment of suppliers to conserve cash, a smart move when you can do it, especially when your customers are slowing down their payment to you.

But is that the case here? Clue: when customers slow down their payments, AR gets bigger, not smaller. In this case AR is smaller than AP. The real answer then, and the important point to get from this post, is that sales have slowed and the AP slowdown is an attempt to fill the cash void left by slowing sales and resultant slowing collections. Now a smart cash management strategy has a time limit. It buys you time to fix the more critical problem, slowing sales or worse, "profitless sales." You can only slow vendor payments for so long before your suppliers start talking COD, collection agency, no ship, and other ugly words.

If your AR is larger than your AP, as a general rule it shows you are making a profit on your sales that have not yet been collected. If it's the other way around - see above - it likely means one of two things: (1) your sales don't have (enough) profit in them and your cash flow is reaching the critical point, or (2) you may be close to borrowing as much as you can from your suppliers, and your cash flow is reaching the critical point. In either case, you need our help.

A great article on nonprofit management in a down market

One of my go-to firms for support to our not-for-profit clients is RBZ, the Los Angeles-based CPA firm with a strong specialty in not-for-profit client services. Tom Schulte, Partner-in-Charge of their Nonprofit Services Group, wrote a really good article offering guidance to organizations feeling the effects of the current economy on their revenues. Read the full article at: http://www.rbz.com/MissionStatement/index.html.

Entrepreneurship Qualification Test - Can you pass?

The ever-alert-to-trends Wall Street Journal published a questionaire recently for folks who think they want to become entrepreneurs. That high sounding label, conjuring up visions of exciting launches, IPOs and bushels of money before you turn 30, comes with a price and a lot of uncertainty, as all of us who have been there can attest. The Journal article asked 10 questions you would want to answer positively before you go that route, even if your job has just fallen out from under you. The list was good enough to blatantly copy here, although you'll have to read the whole article to get the well-written discussion of each question. Here's the list:

1. Are you willing and able to bear great financial risk?

2. Are you willing to sacrifice your lifestyle for potentially many years?

3. Is yoru significant other on board?

4. Do you like all aspects of running a business?

5. Are you comfortable making decisions on the fly with no playbook?

6. What's your track record of executing yout ideas?

7. How persuasive and well-spoken are you?

8. Do you have a concept you're passionate about?

9. Are you a self-starter?

10. Do you have a business partner?

Good stuff, to be sure, from the paper you should read every day. Here's the link to the entire article:

 

As always we welcome your comments.

Limits on top CEO pay - what a shame!

In a recent Business Week article republished on msn.com’s MSN Money, a lengthy discussion on the proposed $500,000 executive pay limit for financial executives included quotes from one compensation consultant who said, in effect, these poor folks are being treated unfairly by this “onerous” plan. The worry is that they may go to work for someone else or "stop working so hard" if they have to forego their multi-million dollar paychecks and annual bonuses for awhile. With all due respect to the man’s expertise and his desire to be fair to his clients in the financial services industry, I have to wonder where this guy is coming from.

If the boards of my small business clients were faced with performance like we’ve seen the past year, they would replace their CEOs without hesitation, even if it were a relative.  They wouldn’t need to be reminded by the government that poor performance doesn’t earn bonuses, because the hit would typically be coming out of their pockets. But then they don’t have the luxury of the capital base that supports the financial services industry – a capital base, by the way, provided largely by you and me and our small businesses.

As for those bank execs going to work for healthier rival banks that didn’t have to submit to the government’s TARP controls, I’d have to wonder what a healthy bank’s board would be thinking to bring on someone whose management resulted in multi-billion dollar losses at the bank across town. “Come on in, guy, and do for us what you did for them.” Sounds like a non-starter to me. But then I’m not seeking consulting engagements from the financial industry – good thing, I suppose.

Still another compensation consultant thought the emphasis of the government plan on long term rewards (long-term restricted stock options won’t be limited) is a little too long-term. Given the famously short term thinking of major US companies compared to their peers in companies across the globe, and the quoted statistic that top executive pay in the US comes in at up to 340 times the average worker, I’d have to say a little long-term thinking is way overdue. Maybe even a lot of long-term thinking.

And finally, the expert who says it won’t work anyway, because they’ll find a way around it as they have in the past. Well, that’s a good reason not to try to fix it, don’t you think?

Needless to say, I strongly support performance-based pay – in both directions.

As always, I welcome your comments.