Should NFL Players be Role Models?

The NFL's sponsors are rattling their sabers because of the flood of negative headlines and stupid apish behavior of the players.

Their response has demonstrated bunker mentality. They're working their backchannels with the sponsors, throwing money/perks at them, and hoping it goes away.

Meanwhile, the talking heads debate ad nauseum about whether athletes should be role models.

They're on to something. The NFL should launch a "Role Models" program.

Players who DON'T qualify (see criteria below*):

• Cannot sign sponsorship deals
• Cannot appear in NFL promotional media (ads, spots, visuals, interviews) or any off-field activities/media related to the NFL
• Cannot play in the Pro Bowl or other off-season promotional events
• Cannot be admitted to the Hall of Fame

Conversely, if they do qualify they get:

• A significant annual bonus directly from the NFL, payable in installments over the subsequent 2 years unless they are removed from the program

* Eligibility criteria would be the following with a zero tolerance, one-strike-you're-out policy:

• 2+ years with the league
• No criminal activity for the past 5 years
• No suspensions or fines from the team or NFL 
• No violations of NFL or NCAA policies on drugs, conduct, etc.

They'd have to be careful about due process and presumed innocence, but they should not allow any wiggle room within their rules. 

Greasy Thinking

I love to hate Krugman's one-size-fits-all big-government answers to every problem but today through clenched teeth I have to agree with his op-ed yesterday (partially). Europe and the Euro need to put their big boy pants on and learn some bladder control. Fast. Diapers just aren't appropriate anymore. As he said in the NY Times today:

For the past two-and-a-half years, European leaders have responded to crisis with half-measures that buy time, yet they have made no use of that time.

Not sure how that jives with this first sentence, but anyway I agree with him: The Greece problem is not new. The Economist summarizes well this week:

Greece really has suffered: between 2007 and 2012 its economy is expected to have shrunk by almost a fifth. The economy is being strangled by a severe credit and liquidity crunch, with more budget cuts and tax rises to come. Even if all goes well, Greece’s debt will be 161% of GDP next year.

The Spanish, Portuguese, Italian and Irisih problems are not new either.

The facts about Europe (and especially these retarded countries) which have created the current situation are not new. The EC, the EU, the EMU, the European Parliament, the European Presidency - all impotent, except for farm policy (huh?). National governments, all ineffective, focused on pandering, philandering, scandal (either chasing or running away from). Citizens feel emasculated (at best), despondent and dependent (especially those just out of school), and generally pessimistic. Employers are hamstrung on everything from employment/firing to compensation to innovation to outsourcing. Consequently, employees are lazy (not dumb) and inefficient. The governments have pissed away more than enough livelihoods. They need to get busy.

As Reagan put it,

There are no easy answers but there are simple answers. We must have the courage to do what we know is morally right.

The answer to Europe's issues is simple. It may seem odd to use the phrase "morally right" in this case, but it IS a moral issue for Europeans. It should be if they care about their children, their nation, their place in the world. 

Krugman's focus yesterday was on inflation, but the price level is not the core problem, nor is inflating your way out of debt a silver bullet. Happily, it will make European products less expensive. Here's to more Bordeaux and aged Gouda and European vacations! This, however, just corrects an existing price misalignment. A croissant and coffee shouldn't cost the equivalent of $20. That's just nuts. The reason Krugman is wrong is simple:  prices go up, but productivity per worker doesn't change. Every European becomes poorer. Fewer car/house/consumer loans/credit cards are available. House prices go down. Companies can't as easily justify borrowing to invest or launch new products. Which means less innovation and growth.

And that's exactly what Europe needs, particularly in the south: GROWTH. Even Krugman will agree with that usually. 

The only ways to get there are through INNOVATION, PRODUCTIVITY, and/or DEBT.

The last one is Europe's current favorite: beg, borrow, and steal. From the rich. From the companies. From each other. From the future. Money flows from northern countries through the EU/ECB to southern countries without compensation or realistic ability to earn enough to pay it back. Money flows out of companies' profits and employees' income through high taxes but is not set aside for their own social welfare. Instead, it is used to buy votes from those without jobs and/or those with political power. Quoting Krugman again:

Europe’s central bank is, in effect, financing this bank run by lending Greece the necessary euros; if and (probably) when the central bank decides it can lend no more, Greece will be forced to abandon the euro and issue its own currency again ... This demonstration that the euro is, in fact, reversible would lead, in turn, to runs on Spanish and Italian banks

It's just not sustainable. History is littered with examples of failed currencies and governments who thought they could just borrow their way to success. 

Instead, the core issues of low productivity, low innovation, and perverse incentives need to be addressed. Europe needs to start acting like a single community rather than a bunch of clans of grumpy neighbors. Europe needs to recognize the limits of socialism in the face of globalization. Europe needs to acknowledge global realpolitik. Protectionism and nationalism are luxuries they can no longer afford. The Euro cannot be a fiat currency - it needs backing based on the power of taxation and reserves.

On Productivity and Innovations:

• Ya just gotta free up the labor market, folks, or productivity is never going to get better. People/roles/trades/companies/industries/countries (including those abroad) which are more productive than others should be allowed to crowd out the less-productive. Languages can be a barrier, but to the extent that, for example, a smart and/or ambitious Pole can speak enough Italian or German to work abroad, this should be enabled, not discouraged. Even in "protected" industries. Spanish companies should be able to put callcenters and operations in, for example, Guatemala.
• Extending that point, you also need to accept that people/trades/industries/countries which are less productive are going to be less wealthy. Socialism hates inequality, but if a Finn can produce 4 cars a day while an Italian can only produce 3, the Finn should make more than the Italian. Similarly, if a Greek or Bulgarian (gasp!) is willing to earn EUR10 an hour to grow grapes while an Austrian insists on EUR25, the Greek and Bulgarian grapes should be trucked to Austria, crowding the Austrian farmers out of the business or forcing them to take a pay cut. 
• Extending the above: Learn from the US (both what to do and what NOT to do) about immigration and foreign workers. Let 'em in! Create a controlled and net-positive process (as explained in my prior blog post) and then open the gates. For one thing, allowing younger immigrants into the workforce is the only way you will be able to pay for your pensions and healthcare systems going forward. There should be no prohibitive barriers against Uruguayans moving to and working in Spain, for example. Just make sure you charge them for it.
• Aside from the ability to hire/fire the people they want and the ability to pay a market-clearing wage, companies need the ability to offer both contract and full-time work. They also need to be able to offer various tiers of benefits for interns, new-to-the-workforce, tradespeople, professionals, executives, etc. It can't be just the one-size-fits-all government-dictated (tarnishing) gold-plated package. A hundred years ago, Hayek correctly described where that road leads.
• Moreover, you can't have your cake (of national champion companies in every industry) and eat it too (expecting them to be globally competitive and profitable without being able to scale). Accept that you are a common market and allow Euro-wide champions to arise in whatever Euro country they may. No longer can the Portuguese government spend money it doesn't have to promote and protect their own national paper, airline, or cell phone companies. It's ridiculous for richly-paid Italians, French, and Germans to produce nearly 10% of the world's steel ... at a loss when all governmental supports are factored in. Buy Turkish or even Indian steel!

On Perverse Incentives:

• Government borrowing needs a revamp. Existing sovereign bond markets need to be priced based on country risk, not currency risk. Separately, the ECB should introduce Eurobonds which are guaranteed by all countries in the monetary union. Individual countries would buy SDR-like rights by either depositing collateral at the ECB or by legislating pledges of future tax receipts. They would then be allowed to request that the ECB issue bonds on their behalf, most of the proceeds going to the national government, but with an adequate reserve withheld by the ECB as collateral against future payment. Overall Eurobond issuance would be capped by the ECB based on market conditions and European Parliament votes.
• More radically, impose, by irrevocable treaty, a 5% Eurozone value-added tax. Simultaneously reduce national VATs by the same amount such that there is no impact to consumers or businesses. These funds go to the ECB and are distributed according to agreed rules. In other words, taxes collected in Spain are sent to the ECB but might get sent right back to Spain if all's well. However, if one country is circling the fiscal drain, this provides a cash buffer to protect the ECB and the other Eurozone countries from getting sucked into the vortex. Most importantly, this creates a "lever" of power by the ECB over individual countries. If you don't live up to your commitments, you don't get your 5% back. The bank NEEDS this power to protect and defend the currency. It also needs it to enforce compliance with treaties and commitments.
• Enforcement of the monetary union's and European Parliament's targets (ex. Growth and Stability) must be strict. Greece has NEVER met the very friendly targets they negotiated. Never intended to, I'm sure. They should be fined. They should not get their 5% back. Their voting rights in the European Parliament should be suspended. ECB transfers should be suspended. International remittances and account balances should be frozen.
• While you're at it - fix the banking system's capital adequacy rules. Sovereign debt is NOT risk free.  

All graphics from Economist.com. 

Corporate Newspeak 7

Talk Around: (v) 1. Share opinions on tangents related to a topic on which decisions are pending without any expectation that any decisions will be taken, thus taking all pressure off the decision-making leadership at the table. 2. Tongue-in-cheek play on the literal interpretation of the term "talk about."
Also: Waste Time, Chat, Think On, Building a Base, Laying Groundwork
Usage: "Can we make a decision here today, boss?" / "Well, Johnny, of course - we do need to move on this, which is why I think we need to talk around the nuances of the constraints and dependencies to make sure we've covered off all that first."

Draw a Line Around: (v) Avoid talking further about once and for all. Usually used by someone who has argued their side of an issue unsuccessfully.
Also: Ring-fence
Usage: "But, but ... okay folks, clearly we need to think on that niche issue a bit more. I don't want it to keep us from moving forward on the overall strategic vision. Let's draw a line around that and continue the larger discussion."

Friction-Free: (adj) Of a mythical business process which produces economic value without any ongoing cost, often expected to move at the speed of light. Used only in the context of corporate sloganeering or in the context of empty sales promises.
Usage: "Don't worry about what it costs to implement, Donnie. By leveraging technology and enterprise synergies, this friction-free solution pays for itself."

Enterprise: (adj) Of a mythical type of business process which is entirely uniform across all groups, departments, lines of business, divisions, or other factions of a corporation, run under the direction of a single group, yet paid for by all groups. Used when one group starts to implement a new business process, and then realizes they don't have enough money to pay for it.

The Good, the Bad and the Ugly 2: Financial Re-regulation

All of the below come from Geithner's testimony at the Senate Banking Panel, followed by snark from me.

The Good:
Tim: We think that the best way to keep the system safe for innovation is to have stronger protections against risk with stronger capital buffers, greater disclosure so investors and consumers can make more informed financial decisions, and a system that is better able to evolve as innovation advances and the structure of the financial system changes.
Me: Exactly! More capital, more disclosure to investors and consumers so that they can make their own informed decisions (as opposed to the government telling them what they should do).

Tim: We do not believe that you can build a system based on banning individual products because the risks will simply emerge in new forms. Our approach is to let new products develop, but to bring them into a regulatory framework with the necessary safeguards. America’s tradition of innovation has been central to our prosperity.
Me: Bingo! Couldn'ta said it better myself.

Tim: This agency will be able to write rules that promote transparency, simplicity and fairness, including defining standards for “plain vanilla” products that have straightforward pricing.
Me: Hallelujah transparency. By that, he needs to mean, transparency to shareholders and customers, not to the government. Hallelujah simplicity. Financials have long made an art of turning something simple into something apparently complicated in order to eke out a few more basis points. Fairness ... well life's not fair. But he did save himself by giving regulators the task of "defining standards" as opposed to flat-out regulating these vanilla products.

Tim: We propose a new resolution authority ... that will reduce moral hazard by allowing the government to resolve failing institutions in ways that impose the costs on owners, creditors and counterparties, making them more vigilant and prudent.We must also minimize the moral hazard of institutions considered too big or too interconnected. No one should assume that the government will step in to bail them out if their firm fails.
Me: Can anyone be against reducing moral hazard? Yes, the cost should be on owners, you hypocrite.

The Bad:
Tim: lack of oversight led millions of Americans to make bad financial decisions that emerged at the heart of our current crisis.
Me: Totally disagree. It allowed perhaps, but then again many Americans (apparently excluding the current administration) believe that people are responsible for their own actions. If you believe that, then you do not believe laws should be made to save people from themselves.

The Ugly:
Tim: Most importantly, it will have the power to gather information from any firm or market to help identify emerging risks.
Me: Big Brother has achieved new heights. We need to be honest with ourselves: regulators already have access to a VAST sea of information from banks. Financials face a daily barrage of invasive info requests from various aspects of the government. Some is mandatory, but the really sticky bits are often given voluntarily by Financials in the name of fostering a good regulatory relationship. Firms are aware that that those who say "show me a subpoena" too often find themselves facing suffocating levels of government scrutiny in subsequent years. That cozy relationship is part of what got us into this mess. Its a sad statement on our lawmakers that financial regulation is worded soo ambiguously that enforcement is a matter of personal interpretation. Moreover, it's repugnant that the level of enforcement is based on how much a firm kisses their regulator's ass (ahem Chase!) rather than any objective criteria. What makes Tim's line so scary to me is that he's tossing aside any pretense that financials have any property rights over their own intellectual property (data). For any reason, from any firm, the government can gather any information. Period.

Photo credits: Tarptales.org, Sanfranciscochronicle.com, guardian.co.uk

The Good the Bad and the Ugly

This one's short, sweet, and perhaps a little rough around the edges ...

The Good:
Geithner finally says something logical ... executive pay standards can be set by regulators but must be enforced by shareholders and boards.

He even said something smart: the US financial industry regulatory patchwork must be overhauled. The Fed should be put in the lead.

More generally, and as I will cover in detail in an upcoming blog, a sea change is coming in corporate accountability, focused, as I've always said it should, on the board.

Politicians are suddenly less paranoid about discussing healthcare.

The worst recession in 70 years turns out not to be the end of the world for most folks.

The Bad:
Promptly after saying something smart, Geithner proceeded to say something stupid. The holy grail of financial industry regulation most certainly is NOT a "council" of regulators. WTF good is this politicized talk-shop? Put someone in charge for chrissake. Make them independent for the love of God. I'm all for competition, even within government services, but it depends on what they're competing for. What are their incentives? How are they measured? The current incentive framework for these schmucks is: bloat their budget, cozy to the institutions they regulate, and kiss as much ass on the banking and FS committees in Congress as possible. Does he really think that the FDIC and OTS would have been any less of a joke as regulators if they had simply had more touchy-feely time with their fellow bureaucrats? How about getting out into the field and figuring out what's going on in the industry ... and then actually DOING something about the ugliness under the covers.

Worldwide equity and bond markets are turning around. We'll give back at least a third of what we've gained since January.

The Ugly:
This week we saw news of an "inquest" in Canada to figure out why a woman languished, entirely ignored, screaming and pushing the emergency button in a hospital for 4 hours before her husband had to single-handedly midwife her through birth. Duh.

In response, Obama decided that we should adopt the Canadian system. No lawsuits allowed, just like Canada. No guarantee of service levels, just like Canada. No responsible party, just like Canada. Obama's healathcare proposal is dreamware. Instead of injecting some reality, his crew and Congress have launched threats against anyone daring to speak reality (Elmendorf hang in there).

He was so busy thinking up this nugget that he forgot to check on those silly Iranian elections. Or maybe he saw the violations of basic human rights, international law, and his own past blathers ... and just didn't think they were important enough to disturb the lovely peace he's cultivating with his new Muslim BFFs. Maybe he's just being cooooool. Like he has been about the Dear Leader.

MLB players get to buy performance. NFL players get to buy their ay out of murder.

The Post Script:
There's a common thread to many of the "new" solutions that are being trotted out: the idea that more talk is the solution to every problem. I'm a massive fan of communication and information, but neither is an end in itself. These are means. These are methods. A car may need gas to get you from A to B ... but a can of gas is pretty damn pointless without a car ... or a road ... or the ability to drive ... or any of the other co-requisites.

Let's not take our eye off the ball.

Having Vision but Flying Blind

They're misunderstood, if not neglected entirely. They're maligned. They're abused. They each need to be adopted ... by all of us.

I won't be so bold as to say whether Obama or I first sweetened to this set of keys. Clearly, however, we've all been burned by their absence. At least the new administration is trying them out. And I don't mean vision, itself.

You see, having vision is a great thing. Quite rare is the fortitude to choose the right path in spite of the fear mongers, detractors, and wailing interest groups. More rare, however ... in fact, nearly extinct these days ... is successful execution. My recent blog bemoaned and pondered the failings of the US over the past few years. To me, these were seldom from lack of vision, skill, or will. The ideas were sound. The people were smart. But despite having vision coming out of all orifices, they were flying completely blind. Calamity came from complete failures of execution.

Utter failures of execution. On many levels.

It is thus nice to begin to see ghosted hints and hear soft whispering breezes indicating that some people in corporate and political America "get it." It's early days, and this blog will have many follow-ups, but let me describe what's on my radar so far:

A focus on communication.

• Conveying the right message. One side effect of our current info overload is that people have become amazingly good at hearing. People hear more than just the words spoken and can quickly identify the message being conveyed. Too often, Bush administration representatives were speaking about one thing (terrorists in Guantanimo, for example) but projecting a message about something entirely else (caginess from a deep mistrust of the current justice system or the public stomach). It is critical that speakers determine, memorize, and deeply understand the message they're trying to convey. This doesn't mean memorizing a speech and presenting it deer-in-headlights style. It means knowing the message well enough to convey it while sounding like a real person. This builds trust. So does consistency. For an administration, the SAME message needs to be broadcast via multiple channels. It needs to be immutable in its repetition. And the message needs to be right. It needs to be strategic. In the corporate world, for example, the message should convey a specific brand identity and aspiration.
  
• Closely related is Selling the value proposition. Yes, this is Corporate Newspeak. Said in plain English, this means that communicators need to really understand the relative benefits of what they're advocating. This needs to be incorporated into their message every time they communicate. To say it even more simply: sell, sell, sell.
  
• Communication isn't a one-way street. Listening actively to feedback is not optional. It is a diferentiator between failure and success. Actively means listening to and understanding everything they say, literally and in terms of message. It means checking your understanding "So your main goal is X because Y?" It means accepting things that don't sync with your view or message. Once understood and accepted, communicators must be willing to do the unthinkable: incorporate their message into their own, either by responding or by absorbing.
  
• Taking another step back, though, communicators need to make damn sure they've got the right vision as well as message. They can blunder through it; they can be lucky enough to be in the right place at the right time; OR they can do it the right way by investing in information. They must collect, standardize, and analyze data. They must ensure their people AND their audience are properly educated on the issues. They must be brave enough to risk some time and money in skunkworks which may yield nothing, may yield something that doesn't fit with their current vision.

A focus on accountability.

• You cannot have accountability unless you know what your goals are
  
• Then you must identify what the measurements of success should be
  
• Then you must measure what the current state is. Now. With all it's warts.
  
• Finally you need to build the right incentive programs. You need to test your carrots and sticks for perverse incentives.

Blog Shout Out: Separation of Owners and Executives

Phil Goldstein guest-blogged on The Icahn Report recently advocating more inclusivity in proxy vote ballots. While I agree with him, I'm not sure I see it as the end-all be-all that he does. That's not why I'm giving him a shout out. It's his priceless intro. He had me at "nutshell" but went on to offer some awesome and appropos quotes:

What is fundamentally wrong with corporate governance in America? In a nutshell, it is difficult for stockholders to hold management accountable for its misdeeds.

This is not a new insight. In 1776, Adam Smith wrote in The Wealth of Nations: "The directors of such companies, being the managers rather of other people’s money than of their own, will not watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Negligence and profusion therefore must always prevail in such a company."

Let's fast forward to 1934. Here is what Congressman Lea of California said in the Congressional record of May 1, 1934: "In the main, the men controlling these great corporations are not large owners of the stocks of the corporations they control. Too often they have yielded to the temptation to control these great business institutions to their own interests, and with a zeal out of proportion to the loyalty they have shown their stockholders. Thus in recent years we have seen the directors of corporations, without the knowledge of their shareholders, voting themselves vast bonuses out of all proportion to what legitimate management would justify. We have had revelations of salaries paid to directors and officers of great corporations which showed shameful mismanagement; which showed that the men in charge of some of these corporations were more concerned in managing its affairs for their own benefit than for the benefit of the stockholders."

It is now 2008 and it is fair to say that the lot of shareholders has hardly improved, considering the trillions of dollars in lost shareholder value over the last year, along with the egregious bonuses and salaries paid for this dismal performance.

Yes, yes, yes. Intermediation between owners and managers clearly creates perverse incentive structures and thus, as you may have noticed, opens up a gaping chasm of opportunity for disaster.

Once again it's back to basics: incentives must be aligned. Any crack of variance between the interests of management and that of the owners will be found and exploited if not monitored like a hawk. My prior post on the ills of modern boards of directors tried to highlight this. I was so bold as to suggest a few incentive-alignment mechanisms for directors.

At root, corporations are organizational structures to facilitate the most effective decision making across a bazillion tiny capital allocation choices. Layers of management are supposed to enhance that "effective" part by setting strategy, establishing standards, reviewing decisions, training staff, monitoring success metrics, and so on.

For the most part, corps do the above successfully. The trick lies in how you define "effective."

For long-term shareholders, effective probably means profit-maximizing whilst risk-minimizing in order to maximize the company's valuation (NPV of future cash flows). For day traders, it probably means share price volatility, for a shareholder-CEO, it might mean meeting revenue or share price targets on certain dates in order to release his performance bonus ... You can already see that even a perfect board would have to arbitrate among conflicting goals of various owners.

For managers, it means getting a good perfomance review and keeping their boss happy so they get a nice promo or bonus. For a middle-aged staffer, it might be stability and healthcare. A Gen-Y up-n-comer's interest might be in flexibility, excitement, and recognition.

Each of this plethora of interests creates an incentive mechanism which guides the person's every action. There are a lot of smarties lately making a sport of disparaging the idea that humans make rational decisions. While I recognize we're not robots and thus mess up, I think that the vast majority of apparently "strange" or "bad" decisions would appear sensical if you could fully map the "context."

I use "context" as a shorthand term for the three factors I feel are at the heart of decision-making:

• the complete incentive mechanism environment faced by the maker
• all the information available at the point of the decision
• and the (current) "horsepower" of the maker's brain process this information. Some humans are better than others at processing information and making decisions, but there are biological limits. Then environmental factors determine whether or not one's brain is working at full capacity like a well oiled machine.

And that's why I don't believe the board (or it's members) are always the cause and solution to every business problem. You can clean up a totally absentee board and improve the company's governance, but they're just a small group of humans. Not even Rain Man could process enough info to make enough decisions per hour to singlehandedly run GE, GM, or Microsoft.

For better and for worse, a board is just a bottleneck of power within an organization. Convenient in some cases, but inhibitory and ineffective if you try to cram too much through it. The daily scandals we see are the direct consequence of an absenteeism which arises less from lazy boards than from the skewed incentive structure under which each employee (especially management) operates.

So while I very much enjoy an agree with most of the gems that appear on Icahn's blog, I would argue that they need to spend a little less time inventing ways to gerrymander and a little more time getting the "context" right. This might require:

• Mapping, measuring, assessing, and alining the incentive mechanisms. Here's a hint for all those newly out-of-work brains in finance and consulting: invent a demonstrably effective framework for rooting out perverse incentives and you'll have companies lining up at your doorstep like Macy's on the 26th of December.
• Ensuring board members have enough information. Accurate information. This implys the need for a staff, as well as inciteful 3rd party analytics (are you listening entrepreneurs?)
• Maximizing each member's computing capacity (for example, by limiting other demands on their attention as I suggested in my earlier blog), and then being realistic about how much you can expect the board to effectively handle. In a sense, this is just another incentive mechanism to be aligned. They're often incentivized to get through their agenda in set number of minutes, and will compromise on the other incentives to achieve that. Bad bad bad. Add board members, add time, and/or delegate power.

Just a start. Now You.

Yeah, What He Said: Brandeis Edition

Yes, as in Louis D. Brandeis, Supreme Court Justice from 1916 to 1939. He had some very timeless ... and timely things to say:

Organization can never be a substitute for initiative and for judgment.

America has believed that in differentiation, not in uniformity, lies the path of progress. It acted on this belief; it has advanced human happiness, and it has prospered.

Like the course of the heavenly bodies, harmony in national life is a resultant of the struggle between contending forces. In the frank expression of conflicting opinions lies the greatest promise of wisdom in governmental action.

It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.

There is no such thing as an innocent purchaser of stocks.

Follow Up 2: Idle Shareholders

Jinx!

Apparently, at the exact same time I was blogging about irresponsible boards, Carl Icahn was on Fast Money echoing my comments, right down to my "fox in the henhouse" allusion. The video is here. For the record, I first said this about corporate execs back in July. Also for the record, I'm sure he's been saying it since before I was born. It's just nice to be in good company!

In a nutshell, Icahn doesn’t feel corporate management is properly held accountable for their actions. And going forward, he’s determined to see that they are. "It's like asking the proverbial fox to guard the henhouse," he said. Ichan said he is starting a cause called the United Shareholders of America to fight in Washington to change the rules on how corporate management in America operates.
- Unintended Consequences, Recap of CNBC's Fast Money, Seeking Alpha Blog 10/6/08

Follow Up: Idle Shareholders

Way back in July when the financial crisis was just a dull, irritating hum, I wrote a blog to explain the biggest reason why big corporations go afoul. In short, I argued that CEO foxes are left to guard the corporate hen house by absentee owners (shareholders) and their surrogates (fund managers).

I promised to be back with some suggested cures for this corporate cancer. So here I am ... with a new buddy.

Governance Guru Nell Minow talked to Congress about Lehman today. After watching the proceedings, I'm certain they brought her in to lend a sliver of credibility to their populist attack on executive compensation, but she slyly took the opportunity to point the finger a different direction:

the board was too old, had served too long, was too out of touch with massive changes in the industry, had too little of their own net worth at risk, and was too compromised for rigorous independent oversight

I couldn't have told the story better myself. Therein lies the problem and the cure for the cancer. The Board are the ultimate representatives of shareholders, and they are just as guilty of negligence as absentee shareholders. If leverage over CEOs can be had, the Board is the vehicle. The trick is to fix their incentives in order to align with shareholders at large.

A Board seat is a position of honor and prestige. Unfortunately, some members are after these alone, and only grudgingly accept the duties of representing shareholders. Some don't even bother to pretend they care. They usually get nominated because they are famous or connected, not because they are qualified. To align the Board's interests with the interests of us shareholders, we must flex our public opinion muscle by pressuring ALL corporations to implement some game rules.

• Corporations must finally figure out what Governance really means. I'll devote an upcoming blog to this one soon. As an amuse-bouche, I offer the Washington Post's 2006 corporate governance primer.
  
• Boards must meet monthly. Each committee must meet twice monthly or more. Repeated truancy must be rewarded with expulsion. If this is too burdensome to fit into one's social calendar ... well, board seats are not for everyone.
  
• Executives must not sit on their own boards. Period. They can submit proposals. They can submit reports. They can visit when invited.
  
• In the interest of combatting boardroom ADHD, board members should focus on one organization in most cases.
  
• Board members must "buy in" just like a poker table. And the stakes must be enough to make it interesting to them. Explicitly, shareholders must invest a significant share (25% might be a good guideline) of their net worth in the company's common stock or unsecured debt. Furthermore, they must agree to sell deeply underwater puts with expiry at least 5 years out. These must be rolled each year they are on the board, such that they continue to be in force for 5 years after departure from the board. Again, if this sounds too harsh ... NEXT. I can already hear people calling me elitist, "if seats are bought, only the rich will have them." To that I counter that anyone should be able to get on the board if enough shareholders are willing to "sponsor" them. But then it's up to those shareholders to actively police their representative.
  
• Board members must be able to demonstrate a germane area of expertise. For some it might be accounting, for others economics, for others management, for others past experience in the industry. If their only claims to fame are money and ... well ... fame ... NEXT. This should be policed by the owners. Here's a million dollar idea for someone: set up a board member rating agency. Nell's group The Company Library is a good start, but focuses on the enterprise as a whole, not specific board members. Additionally, their soup-to-nuts prosaic appoach is a bit much. My advice (to them or their start-up challengers): keep it simple: A through F based on pre-determined and public criteria.

This is just a starter kit. I'm sure Nell and the other Governance-ators have their own hats to throw in the ring. Go ahead, new buddies-o-mine!