Tuesday, 21 January 2014

Before the next one hits...

As we begin to emerge from the second worst economic downturn in the last century, I submit that we need to rethink our response to the next time we are faced with a recession.  I don't know when that will come but history clearly demonstrates that it is the very nature of our world financial systems to experience periods of growth followed by 'corrections' that we call recessions or, in their worst iterations, depressions.

Those in leadership roles at publicly traded companies have followed a fairly predicable path to respond to these downturns.  They may cloak it in different terms such as 'restructuring'; 'rightsizing'; 'workforce adjustment' or some other euphemism. But the bottom line is the same.  They fire a lot of people and force the remaining employees to be more productive with fewer resources. 

This approach is done, first and foremost, to satisfy other stakeholders, most specifically those who own shares of the company.  Demonstrating to 'the street' that you are being proactive in responding to an economic downturn somehow suggests that the executives know what they are doing and thereby expect to retain the trust and confidence that first gained them the positions they hold.

I have been around long enough to have worked through several recessions.  Since 1950 there have been 8-10 recessions. ( Some commentators combined some events, hence the difference.)

The fallacy with the traditional response is that most recessions are short-lived, the current event notwithstanding.  What that means is that more often than not, the impacts of layoffs have only just subsided when it comes time to fill the vacancies to meet returning demand. 

Here is the truth.  Layoffs and the associated severance costs are incurred in a year in which profits are already going to miss budget.  These costs cloud the underlying reasons that objectives are not being met- that is poor planning and/or execution at a leadership level- and they allow for executive management to mask overall results. 

The following year it becomes a relatively easy matter to exceed prior year results and to show 'double digit growth' and thereby restore shareholder and market confidence.  The corner office is able to polish its' 'messiah complex' while never acknowledging that they should have been managing the company with the knowledge that a downturn was inevitable.

This charade comes with a huge human cost that in many, if not most, instances is entirely unnecessary.  So here are my recommendations for what ought to occur in the face of the next recession...because there will be a 'next'.  These all must be implemented before any layoffs are contemplated or initiated.
  1. All bonuses are immediately suspended.  In my opinion, when the alternative is for someone to lose their job it is better to cut out bonuses for those whose strategic plans and lack of execution have put the company in the position that requires these discussions.
  2. The company should determine the actual amount of savings that are anticipated from the terminations. Instead of layoffs there should be salary rollbacks on a sliding scale starting at the most senior levels.  Executives at the CEO and VP levels should be cut 10%; next level managers 7.5% and mid level managers 5%.  If these cuts have not achieved the dollar objective, then the balance needs to be shared amongst the remaining staff.  In all likelihood it would be a 2-3%  rollback which, after taxes, represents a negligible reduction in actual take home pay.
  3. An option to a salary rollback would be job sharing or reduced hours.  For example, someone can contribute a 2% reduction in compensation by working about half a day per month less.  Most people would be able to accommodate that kind of change.
Adopting this kind of approach to recessionary pressures has several benefits, some of which include the following:

  1. The reduction in bonuses hits those whose failures have had the most significant impact in the company performance.  At the same time it affects those who are most capable of withstanding the financial impact.  Very few executives are young and fiscally vulnerable.  They don't have mortgages and loans that stretch the family budget to the extreme.  The failure to collect a bonus translates into one less European vacation or a delay of a year before they replace that BMW in the driveway.
  2. When everyone participates in the pain, there is a greater sense of community in the workplace.  If everyone is considered to be part of the solution, then respect and commitment to the cause is improved because the objective is the same for everyone...to restore the company to the levels of profitability that allow wages to be recovered.
  3. Whenever layoffs occur in a company, those who remain work under a cloud of guilt  and  they grieve for friends and co-workers who have gone.  Furthermore they tend to have a 'whose next' kind of attitude and their work reflects this defensive posture.  If this guilt and grief can instead be replaced by gratitude and joy, how much more positive will the effort be to face the challenges ahead. 
  4. Finally,  this approach recognizes that the true stakeholders are not the pension plans, fund managers and analysts who hold and/or rate the stock value.  Rather, the employees have the greatest stake in the company and their futures are more important that any other.  As such, the pain should first be felt by the ownership group for they are the ones who have appointed and supported the executive team and they should share in the failure in the way that really hurts, in their wallets. 

A front page report today stated that the top 85 billionaires in the world have a combined wealth equal to that of half of the world's population.   Talk about a concentration of wealth.  This represents the extreme but symbolically it also illustrates the issue that I have referenced above. 

A relative few at the top are making decisions, at times poorly, but the consequences of those decisions primarily impact others.  Next time around why not have a protocol in place that anticipates the need for short term adjustments that will impact those most responsible for the predicament.  Perhaps the recognition that this protocol exists will be the impetus for this group to make fundamentally better decisions that demonstrate an understanding that business cycles truly exist and that corporations should be built with this expectation in mind. 

Or is that just too much to ask...


Wednesday, 15 January 2014

Just a little accountability please.

Recently I expressed my concerns about executive compensation and specifically the size of that compensation when compared to the average wage earned in their organizations.  This disparity seems to be most notable in the financial industries.  It is ironic that in an industry that does not make anything, we find that the distribution of compensation is most disparate.

Let me explain that last comment.  General Motors makes cars; farmers grow meats, fruits and vegetables.  But financial institutions do not make anything.  What they do is to redistribute wealth and take a commission for doing so.  Their efforts really do not rely on a profitable transaction taking place; they make a commission for facilitating the transaction.

So in the absence of truly creating something tangible; and in being overcompensated in the process; how is it that we also have left these executive halls unaccountable for the malfeasance that has come to light since the beginning of the Great Recession.  Keep in mind that the main reason for the downturn in the economy was bank failures brought about by something called derivative trading and sub-prime mortgages.  (Without getting into the specifics, US banks had to trade outside the country with these financial initiatives because they were illegal in the US. Go to this website for more insight http://www.pbs.org/wgbh/pages/frontline/oral-history/financial-crisis/tags/subprime-mortgages/)

Although some of the financial institutions are now paying large fines associated with these activities - JP Morgan just paid $13 billion - not one executive has faced any criminal charges.  This despite the fact that the actions were illegal and the executives were compensated very handsomely through their bonuses for the profits generated from these schemes.  In fact, not one Wall Street financial executive has faced any criminal complaint several years after this all began.

In a different but similar kind of action, JP Morgan agreed to pay over $2.6 billion to settle allegations of criminal and civil activities related to the Bernie Madoff Ponzi scheme.  Madoff is serving a life sentence for his actions.  No one at the Bank will serve any time for facilitating Madoff for over 15 years.

In Canada, The Royal Bank agreed to pay $17 million  to settle claims in the Earl Jones Ponzi case, all the while denying any responsibility. ``RBC has closely examined its role in providing Earl Jones with a bank account and is satisfied that it was not negligent,” the bank said in a statement.   That strikes me as a pretty expensive denial.  Again, no executives were hurt in the issuing of the statement...

All I would like to see is some accountability.  If the activities noted here had been perpetrated by a Branch Manager, she or he would have been thrown under the bus in a heartbeat.  But because the executives are `connected` both fiscally and politically, they are seemingly above the law.  And that is just not right!

If you drive the get away car, you are considered just as guilty as those who actually robbed the store.  So how is it any different for these bank executives?  They endorsed an environment that facilitated the abuses.  How is that any different from driving the car...

Wednesday, 8 January 2014

A rose by any other name...

Shakespeare completed the statement by declaring that it would still '...smell as sweet...'  In essence, it matters not what we call something but rather what it is.

So, what do you think of when you hear these titles?


Each of them brings to mind someone with a position of responsibility that includes the direction of others.  Note that I have used the word 'direction' advisedly because there is a distinct difference between directing others and the more powerful and effective act of 'leading' others.

By definition, a leader must have followers.  One does not lead oneself...

Furthermore, followers must be willing participants.  It is a contradiction in terms to suggest that a follower who is pushed, pulled, coerced or threatened to allegiance to a cause or a goal is, at the same time, a willing subject.

Herein lies the important distinction between any of those whom have been identified in the list above and the authentic leader.

Only the authentic leader has the ability to inspire others.  And it is the inspired follower who is able to accomplish so much more than you can imagine. 

Just look at your own experiences.  When you are 'commanded' to perform a task you will do it.  But without your heart felt investment the result will almost always fall short of your best.  It will be 'good enough'.

But if you are truly inspired to contribute you will look for ways to improve on even your best.

As we enter a new year, my challenge to you is this.  Are you leading or are you directing?  Are you leading or managing?  Are you leading or commanding?

If it is the latter, the year ahead will be filled with the same challenges you had last year and the year before that and the years before that.  Do you want employees who simply show up, keep up and shut up?

Or do you want an environment in which your leadership inspires them to go above and beyond your expectations?

The question may seem rhetorical.  But the difference in results are anything but.

The real question though is this.  Do YOU have the character that inspires?  Or will this be another year 'in command'?  Remember, it matters not what we call something, but rather what it truly is.


Thursday, 2 January 2014

Are we overpaying our executives...

Blackberry recently announced a major shakeup in their executive roles as part of an ongoing restructuring plan.  Thorsten Heins stepped down as CEO less that two years after assuming the position, a period during which the stock value declined to near all time lows.  For his efforts he departed with a package in the range of $14 million dollars or roughly $21k for every day he held the job.  That means that on a long weekend he earned more than the average employee earned in a year.  And he FAILED.  Apparently he was only able to walk on water when it was frozen. 

Details from company documents suggest that his package could have been worth as much as $55 million if the company had changed hands and there had been some success from his efforts.  That translates to something in the order of  $82k per day meaning that on that same long weekend his income would have put him in the top 1% of all Canadian income earners in a YEAR.

But poor Mr. Heins compensation pales by comparison to the most noted failure in Canadian corporate enterprise.  That distinction falls to John Roth who rode Nortel from a net worth of over $350 billion to ultimate bankruptcy.  His tenure as CEO lasted less than 1400 days and yet reports say he earned something in excess of $130 million, much of it in stock options, before the company collapsed.  In simple terms, Mr. Roth earned in excess of $90k for each and every day that he was in control.  That is roughly 4.5 times what Heins earned to fail at Blackberry - and that is not adjusted for inflation.

Statistics Canada data for 2011 would put Mr. Roth's income for a long weekend in the top 1% of all ANNUAL wage earners in the country.  I can only imagine what he might have earned had Nortel succeeded.  Regardless, it is small  consolation for the 55,000 pensioners who have had their benefits slashed as Nortel headed towards its demise.

These examples are, admittedly, at the extreme end of the executive compensation debate.  But they are not wildly at odds with the present day reality of Canadian corporate compensation. 

Somehow there has been this fallacy develop that suggests that there is only one person capable of leading a company to success.  Therefore it becomes necessary to essentially pay whatever it takes to get that person to commit to the role.  To this notion I have just one word...hogwash.

In the two examples that I quoted, both men were quickly replaced.  Apparently the talent pool may not have been that shallow after all.  Microsoft is currently seeking a replacement for Steve Ballmer.  The selection committee is said to have started with a list of about 100 potential candidates before quickly working it down to about 20.  For a company that large and successful it appears that there really is more than one person who has the qualifications to be their next leader.  So it begs the question '...if it works at Microsoft, what makes other companies so unique that there is only one candidate to lead...'

Please don't get me wrong, I am not against a well paid CEO.  But is the boss at Royal Bank really worth 360 times more than the average teller.  Gordon Nixon made about $12.6 million versus a tellers wage of $35k.  What bothers me the most is not the salary of $1.5 million.  Rather it is the bonuses of $11.1 million for simply doing the job for which he has been hired.  If the Bank can justify a bonus almost 8 times the base salary, why are the tellers not in line for another $275k per year for their work. 

Very often the bonus consists of stock options.  And while there is no guarantee that the stock value will improve, there is no risk to the option holder if it does not. It strikes me that if someone is going to benefit from stock options, there should be more risk in the equation.  Perhaps an executive needs to hold personal company stock that represents 50% of the value of options that are granted.  In this way the individual bears some of the same kind of risk that any shareholder carries.

There are no quick and easy answers to this issue.  It is unlikely that we will see a CEO step forward to say that they are over-compensated.  And I don't see legislation as the appropriate answer.  I would be interested in your thoughts so that a future posting can present some options.