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The JP Morgan trading issues reflected a lapse in governance. But beyond risk oversight, they also called into question the way in which top executives at the largest banks are paid. Here’s a link to my article on Fortune.com.

http://management.fortune.cnn.com/2012/06/14/j-p-morgans-debacle-its-time-to-talk-exec-pay/

I had the opportunity to design incentive programs using risk based measures in the mid-90s. Implemented properly, these kinds of pay programs can work very effectively to focus executives and managers on the right measures of success. I have written on this topic over the last 15 years, including further information on the regulatory requirements of the sound compensation guidance.  (See http://www.thevaluealliance.com/publications.htm.)

Related to the New York Fed Staff report, the issues raised in the article today include issues on pay I have elaborated on in more detail in these recent articles.

http://management.fortune.cnn.com/2012/04/16/the-terrible-cost-the-u-s-pays-for-derivatives/

http://management.fortune.cnn.com/2012/01/30/ceo-pay-us-economy/

The implications for our economy are clear. The solutions may not come easily, but it is important that we work together to find them.

If you have comments on this blog post, please ignore the comments are closed notice below and just email me directly at ebloxham@thevaluealliance.com

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It is time, as a nation of business leaders, to roll up our sleeves and get to work on the very real economic problems the U.S. is facing – to finally move the needle on the economy, wages for our workers and jobs for the un- and under-employed.

We need to address our issues as a nation of business leaders and stop what has been termed “economic development”, a zero sum game of regions pulling jobs from each other with expensive, unproductive tax incentives, instead of working to maximize the U.S. economy as a whole.

As a nation of business leaders, we need an approach to our problems that involves real expertise, where success can be measured, cross-fertilized and replicated from one location to another.  And we need an approach that is agile, productive and cost effective. In short, we need a solution that makes sense.

A new plan, right in front of us, will roll out soon. An “enterprise development and market competitiveness project” is being launched with specific goals in mind.

“The project is designed to raise incomes and employment…. Focusing on the role of small and medium-sized enterprises … the [project] will facilitate the development of competitive enterprises … by stimulating innovation, enhancing workforce skills, accelerating new enterprise formation, improving access to finance, and addressing shortcomings in the business environment. The [project] will provide technical assistance, training, and grants to … [expand] sales in new and existing markets. The [project manager] and [the U.S. government] will mobilize additional resources from other sources to accelerate growth.”

The manager for this project has been chosen. And work will begin soon.
In Armenia.

Armenia (in rough figures) has a population one-hundredth the size of the U.S. (3.2 million people versus approximately 311 million here). The workforce is roughly 7.1% unemployed versus our July figure of 9.1%.

As all experienced leaders know, one way to solve big problems is to break them down into smaller ones. Another way to solve problems is to copy concepts that work in one arena and apply them, with some adjustments, to other situations.
If we can define a project like this for Armenia with a population one hundredth the size of ours, why not define 100 regional projects of this type for the U.S.?

Of course, to move on such an undertaking requires agility, expertise, funding and a minimum of bureaucracy. The projected cost for those running the project in Armenia is $17 million. The U.S. would need 100 Armenia-type projects; $17 million times 100 is $1.7 billion.

As a benchmark, similar projects have been done in the U.S. for $10 – $15 million in the past. One such example is the Oklahoma City miracle which noted economic development expert Ed Morrison, now Economic Policy Advisor at the Purdue Center for Regional Development, spearheaded with the involvement of business leadership — in particular, Charles Van Rysselberge, who headed the Oklahoma City Chamber at that time.

Where could we get $1.7 billion?

Just as Van Rysselberge did in Oklahoma City, the initial cash could come from business leaders. If CEOs of the Fortune 500 each pledged $1 million per year over the next five years, that would amount to $2.5 billion , more than enough to take on the task. Then, any infrastructure spending could come, just as it did by the efforts of Van Rysselberge in Oklahoma City, from passing local sales taxes to fund those programs. (If you think sales taxes can’t be raised for the right efforts, think again. Van Rysselberge, who moved to Charleston to head up the Chamber there, says that Charleston just this last November passed a one cent sales tax to build new schools and create jobs there.)

Before Oklahoma City, Van Rysselberge had used Morrison to help turn around Shreveport, La, when he was CEO of the Chamber there, and the plan Morrison built was “recognized as the most creative economic development plan in the U.S., for which Morrison won a national award” says Van Rysselberge.

Following his experience at Oklahoma City, Morrison, a Yale graduate and former strategy consultant for Telesis, a spinoff from the Boston Consulting Group, sat down to figure out what had made Oklahoma City and his other successes possible.

He recognized that there was a methodology and, if he could teach it to others, his work could be replicated. (His approach is called “Strategic Doing”.) Strategic Doing is a “lean and agile approach to strategy development”, Morrison says. The process is “open source” and Morrison has established a certification program in “strategic doing” at Purdue University. The idea is to have a way to guide complex adaptive systems, like open networks of people, to take action along the lines of the rules that guide software development in open source environments.

Morrison recognizes that what makes real progress possible in the knowledge economy is not hierarchies nor specific institutions. What makes it possible are networks of passionate individuals supported by passionate leaders. “In a knowledge based economy, networks are the curators of wealth, not hierarchal systems,” he says. “We need collaborative investments, horizontal networks. Entrepreneurs get it,” he says. “Strategic doing” helps these collaborations of individuals “quickly move to co-create value and measurable outcomes” he says.

Strategic doing has now been adopted by an entire network of universities interested in economic development. The initial brainchild for meetings between the universities came from Tim Franklin, director of the Office of Public Partnerships and Engagement at Pennsylvania State University and his wife Nancy, director of Outreach sustainability initiatives and assistant director of Penn State Institutes of Energy and the Environment (PSIEE). They set out to create a national model and make it replicable. Tim Franklin, who is passionate about regional economic development and whose own work in Virginia has won recognition, worked with Morrison to “not just focus on policy” but build a network of universities focused on economic development called TRE Networks, “a system with capacities”, Franklin says. “Now the network provides a neutral space where collaboration can occur and a set of resources for anyone wishing to tap into it”, Morrison says. “The Presidents of the Universities participating have been key. They are the passionate leaders supporting these efforts.”

Several weeks ago a solar summit was held in the football stadium at Arizona State University using the strategic doing approach under the leadership of Todd Hardy, Arizona State’s Associate VP of Economic Affairs in the Office of Knowledge Enterprise Development. “Using the approach, facilitated by Morrison, a group of 120 people met and 40 have signed on to help move forward an agenda to develop Arizona’s leadership and expand its business opportunities in solar energy development”, Hardy says. Hardy was impressed that so much could be accomplished in such a short time. It provided Morrison “a reaffirmation of his approach” Hardy says. “We made a great deal of progress in just a day and a half”.

While the capability exists, funding remains an issue. And that’s where business leaders need to step up, as they did in Oklahoma City.

In 1927, the Shreveport Chamber of Commerce set out a plan for renavigation of the Red River. They held firm to that goal. 68 years later, persistence paid off and it was accomplished, Van Ryssellberge says.

Holding fast and being nimble. As a nation of business leaders, we need both to confidently meet our future and contribute to our future prosperity. Some university leaders have stepped forward. Where will the next crop of Van Rysselberges, from the business community, come from to support these important efforts?

Another version of this article is published here. http://management.fortune.cnn.com/2011/08/23/what-would-real-economic-stimulus-look-like/

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Eleanor Bloxham www.eleanorbloxham.com

Copyright 2010 The Value Alliance Company. All rights reserved.

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Privacy issues. Directors need to understand the privacy concerns of consumers and potential long term hits to reputation. How is management weighing the risks of aggressive short term access to consumer information?
Wired (Ryan Singel): Researchers Expose Cunning Online Tracking Service That Can’t Be Dodged
“Researchers at U.C. Berkeley have discovered that some of the net’s most popular sites are using a tracking service that can’t be evaded — even when users block cookies, turn off storage in Flash, or use browsers’ “incognito” functions.”
http://www.wired.com/epicenter/2011/07/undeletable-cookie/

The economy.
MarketWatch (Steve Goldstein): ISM manufacturing gauge falls to two-year low
“U.S. manufacturing activity barely grew in July, according to a key index released Monday in a demonstration of an economy struggling to expand.”
http://www.marketwatch.com/story/ism-manufacturing-gauge-falls-to-two-year-low-2011-08-01?link=MW_latest_news

The economics of directorship. At the largest companies, directors get paid over $1,000 per hour.
WSJ (Joann Lublin): Directors see Uptick in Compensation
http://online.wsj.com/article/SB10001424053111903635604576476514268460994.html?mod=googlenews_wsj

Steep decline in the market today. Are market prices indicative of CEO value creation?  (No.)

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com
 
 Eleanor Bloxham www.eleanorbloxham.com
 
 Copyright 2010 The Value Alliance Company. All rights reserved.

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Time to eliminate stock based compensation?
FT (Diane Coyle): A couple of remedies for pay excess
 ”I would … like to see investors call time on share incentive schemes altogether.” http://www.ft.com/intl/cms/s/0/18c572e6-b973-11e0-89ee-00144feabdc0.html#axzz1TV6Z7nO5

NYT (Floyd Norris): Usual Growth Leaders Absent From Recovery
“WHY has the job picture been so bleak in the current recovery? A large part of the problem can be traced to unusual weakness in two categories: construction jobs and government jobs.”

NYT (Paul Krugman): The Centrist Cop-Out
“I joked long ago that if one party declared that the earth was flat, the headlines would read ‘Views Differ on Shape of Planet.’”
http://www.nytimes.com/2011/07/29/opinion/krugman-the-centrist-cop-out.html?src=ISMR_AP_LO_MST_FB

Krugman’s commentary is a commentary on the practice of journalism. Of course, what should happen is for the reporter, whenever possible, to go the extra step — get a picture of the earth taken from above the earth and use it in the article too or put it in front of the leaders of the flat earth party and ask the flat earth party to explain why in the face of the picture they say the earth is flat.                Of course many reporters do this – analyze the statements of respondents not just take them down. This takes time and requires the reporter to eschew the short-sightedness and/or pressures of his/her “bosses” (i.e. whoever they are trying to please or follow).

Psych Today (Nassir Ghaemi): Where are the new ideas?
“One of my Harvard teachers …Leston Havens… used to say: ‘Be careful about institutions. Between your boss’s needs and your eagerness to please, you can create a prison stronger than Alcatraz.’”
http://www.psychologytoday.com/blog/mood-swings/201011/where-are-the-new-ideas

When the focus is on satisfing one institution or one person rather than a larger purpose and higher values, neither ethics nor true innovation will flourish.

The “Where are the new ideas?” article discusses the weaknesses in the current state of academic research.  So does Paul Smalera’s article which focuses on economists.

Reuters (Paul Smalera) Krugman says Thoma’s right, except when he’s wrong
“Thoma rightly argues that too many of their academic colleagues don’t risk engaging at all — they are the ones that need to be coaxed out into the conversation, to shed some light on the dark corners of the economy before some other solid-seeming sector (technology, anyone?) implodes and nearly sinks the ship, yet again.”
http://blogs.reuters.com/paulsmalera/2011/07/26/krugman-says-thomas-right-except-when-hes-wrong/

I was invited early last decade as the only non-academic and non-FDIC executive to an FDIC conference to speak on market signals that might provide warnings of a run up in default at banking institutions. In my speech, I offered/encouraged the pure academics to reach out to practioners (like me) to select their research topics and make them relevant. (After all, that was part of the reason I was invited to speak.) No one called.

Regarding techology – technology is one of the only sectors looking to create jobs http://thevaluealliance.com/Blog/?p=47 which makes technology an even more important sector to watch.

Reuters (Felix Salmon): Chart of the day:Techs vs Industrials, Why Tech Stocks Deserve to be Cheaper than Industrials     “in an area where change is unlikely to massively disrupt your business, income streams are more predictable and therefore more valuable.”            http://blogs.reuters.com/felix-salmon/2011/07/22/chart-of-the-day-techs-vs-industrials/ http://blogs.reuters.com/felix-salmon/2011/07/25/why-tech-stocks-deserve-to-be-cheaper-than-industrials/

Besides the obvious difference in business models between industrials and tech companies, another explanation of lower P/Es at tech firms may be the governance at tech vs industrial firms. Good governance can act as a buffer and prevent issues spiraling out of control. The market places a premium on this stability. (The issue of governance which Buffett doesn’t mention is something he faced earlier this year.) http://management.fortune.cnn.com/tag/warren-buffett/ http://finance.yahoo.com/echarts?s=BRK-A+Interactive#chart1:symbol=brk-a;range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

WSJ (Nassir Ghaemi):Depression in Command
“the sanest of CEOs may be just right during prosperous times, allowing the past to predict the future. But during a period of change, a different kind of leader—quirky, odd, even mentally ill—is more likely to see business opportunities that others cannot imagine.”                “As for Churchill, during his severely depressed years in the political wilderness, he saw the Nazi menace long before others did.”              “Depression … has been found to correlate with high degrees of empathy, a greater concern for how others think and feel.”
http://online.wsj.com/article/SB10001424053111904800304576474451102761640.html?mod=djemITP_h#articleTabs%3Dcomments

I highly recommend this novel in which Churchill (and the black dog of depression) are featured protoganists. Mr. Chartwell : a novel by Rebecca Hunt. http://www.amazon.com/Mr-Chartwell-Novel-Rebecca-Hunt/dp/140006940

 
The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com
 
 Eleanor Bloxham www.eleanorbloxham.com
 
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Does  CEO compensation in the form of stock and stock options create alignment with company value creation? No.

Current case: The debt ceiling gymnastics.
As the stock market drops, is that reflective of less value creation by a particular CEO? (No.)
Should a CEO receive less income because the stock market is being held hostage by certain members of Congress? (No.)
Conclusion: CEO compensation in the form of stock and stock options does not create alignment with company value creation.

Does enforcement matter? Regarding highway speeds, it does, and one attorney says yes it does matter with companies too.
FT (Richard Waters): Google faces fresh fire over web reviews         “Without proper sanctions, ‘no big company would ever obey the laws, they would do whatever they could get away with until they were caught’, said” Gary Reback, a Silicon Valley lawyer. http://www.ft.com/intl/cms/s/2/561dcd98-b61f-11e0-8bed-00144feabdc0.html#axzz1TP7KiEVv

Just like they predicted in the Weekly Reader in elementary school, fewer work hours are needed today …but then it was just supposed to mean more leisure time not millions unemployed.
FT (John Gapper): America’s turbulent jobs flight           “US manufacturing has a good story to tell but that story is about technology and productivity rather than jobs for the millions of people out of work” http://www.ft.com/intl/cms/s/0/1d467a7c-b883-11e0-8206-0144feabdc0.html#axzz1TP7KiEVv

Civility in America 2011 (See link)http://www.webershandwick.com/resources/ws/flash/CivilityinAmerica2011.PDF
The economics of incivility.
The percentage of people who didn’t buy from a company because of incivility rose 13 percentage points over last year to 69%. The percentage who changed their opinion about a company due to incivility rose 14% (also to 69%). 1 in 5 employees have quit a company due to incivility in the workplace. Company leadership and employees themselves are primarily to blame for incivility according to those surveyed.

 
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 Eleanor Bloxham www.eleanorbloxham.com
 
 Copyright 2010 The Value Alliance Company. All rights reserved.

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On the debt ceiling crisis: Don’t we have enough crises to deal with without manufacturing one?

Reading (July 27):
NYT (Steven Davidoff): Proxy Access in Limbo after Court Rules Against It        “How do you quantify the costs and benefits of democracy?”   http://dealbook.nytimes.com/2011/07/27/proxy-access-in-limbo-after-court-rules-against-it/?nl=business&emc=dlbkpma21

WSJ (David Wessel): What’s Wrong With America’s Job Engine?          “Over the past 10 years..The labor force has grown by 10.1 million.But the number of private-sector jobs has fallen by nearly two million.”
http://online.wsj.com/article/SB10001424053111904772304576468820582615858.html?mod=ITP_marketplace_0

WSJ (Willa Plank): CEOs in Their Own Words: Don’t Plan on Much Hiring          ”Outside of rail and technology companies, almost none of them discussed long-term plans to significantly expand their work force.” http://online.wsj.com/article/SB10001424053111904772304576470484142293112.html

Writing (July Fortune):
U.S. jobs crisis: It’s time for corporate leaders to step up          “So the real question is what, without government assistance, can the overseers of U.S. corporations do to help solve the national demand for jobs?” http://management.fortune.cnn.com/2011/07/27/us-jobs-crisis-corporate-leadership/?section=magazines_fortune

Apple’s no-win CEO succession efforts          “Taking the work of the board offline means there is a working problem with the board online — signaling that a problem with process, power, or personalities at the board level needs to be resolved. It behooves any board in such circumstances to try to address the real source of the difficulty, rather than use alternate means to accomplish a goal.”
http://management.fortune.cnn.com/2011/07/25/apple%e2%80%99s-no-win-ceo-succession-efforts/

News Corp directors: Half way out the door?      ”Only time will tell whether support of the stock and support of the management go hand in hand. The company used to have “equity ownership requirements” for directors, according to the company’s 2008 proxy. Those requirements were not included in the company’s 2009 or 2010 proxy reports.”
http://management.fortune.cnn.com/2011/07/19/news-corp-directors-half-way-out-the-door/

What’s in store for Rupert Murdoch?         John M.”Nash thinks that CEOs should not sit on any board, including their own company’s board. The CEO can attend board meetings, but ‘shouldn’t have a vote,’ Nash says.”
http://management.fortune.cnn.com/2011/07/19/what%e2%80%99s-in-store-for-rupert-murdoch/

Who can right the ship at News Corp?         The right tone at the top, good governance. None of those words sound so sweet – or powerful – as in the midst of crisis. In the helter and skelter of the every day, they can be brushed off as meaningless. In the midst of an engulfing crisis, though, it is no longer possible to simply repair them, to put lipstick on the pig  – they must be made again whole cloth.     http://management.fortune.cnn.com/2011/07/18/who-can-right-the-ship-at-news-corp/

How to get paid like a U.S. CEO          “The research shows that U.S. CEO pay is higher primarily because U.S. CEOs are awarded high levels of equity compensation, which includes pay in the form of company stock and stock options…When companies have U.S. institutional owners, boards are more likely to offer high levels of equity compensation (and, in turn, total compensation), the research shows.”
http://management.fortune.cnn.com/2011/07/05/how-to-get-paid-like-a-u-s-ceo/

Will Bank of America execs get to keep their bonuses?             “Implement bonus deferrals — so executives have to wait to be paid the full amount of their bonuses. Bonus deferrals help ensure that pay is made on an accurate performance assessment and that there aren’t any billion dollar ‘oops’ moments lurking in the background.” http://management.fortune.cnn.com/2011/07/01/will-bank-of-america-execs-get-to-keep-their-bonuses/

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com
 
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Copyright 2010 The Value Alliance Company. All rights reserved.

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Real incentives inside corporations for better work and ideas are created when there is a belief in a future that is tied to one’s effort.

Can meritocracy, a dead idea, in Matt Miller’s A Tyranny of Dead Ideas — be revived?

On October 6, Fortune published an article I wrote on joblessness and solving the skilled worker gap — the idea that we need to stop hiring for specifics — and the idea that we need to give people an opportunity to fully use their skills and talents. http://money.cnn.com/2010/10/05/news/economy/joblessness_training_hiring_practices.fortune/index.htm

It discussed the need to re-evaluate current recruiting. And the need for boards to understand how critically important this is to our economic prosperity.

On October 15, the New York Times, ran an article that dovetailed with this theme and talked about some interesting research: http://www.nytimes.com/2010/10/16/your-money/16wealth.html 

“D. Michael Lindsay, assistant professor of sociology at Rice University, said his research showed that many of the people now considered elite in America did not start out that way. He is conducting what he described as the largest study ever of top leaders in America, having talked to over 500 so far across business, nonprofits and academia.  He said he had found that a privileged upbringing did not matter as much as generally thought. Nor, he said, did many of the top leaders inherit large sums of money. While many went to top colleges and a large number attended Harvard Business School, the biggest determining factor of whether someone moved into the elite was an early career opportunity. Being able to look beyond their specialty early — as opposed to being highly specialized their entire career and then thrust into a leadership role — distinguished great leaders more than any inherent advantage in their upbringing, he said.  ‘These people had a chance to be a generalist early on, as opposed to being specialists their whole career,’ Mr. Lindsay said. ‘They had that experience in their early 30s or 40s.’”

It’s time to reboot our thinking — and we don’t even have to re-invent the wheel to do so – we had a model that was working — we just need to revive it.

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com

Eleanor Bloxham www.eleanorbloxham.com

Copyright 2010 The Value Alliance Company. All rights reserved.