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| Volume 6, Issue 6 |
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In This Issue:
 The narcissistic CEO
Private vs. Public
Dollars and Sense
Instant Messenger etiquette
 Are we ready for self-management?
Unlocking your investment capital
On managing with Bobby Knight and “coach K”
The compensation game
 Street star: Citigroup’s CFO, Sally Krawcheck
100 Fastest-growing companies
 Numbers crunch
Whose controlling the controller?
Study: Talent will cost more
Can we fix it? The IRS says yes
 SEC inquiries and shareholder lawsuits: How to be above the scrutiny
If you offer E-billing, will they come?
 Waistlines keep expanding in 31 states
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The Narcissistic CEO
What do Bill Gates, Osama bin Laden and Henry Ford all have in common? Answer:
their desire to change the world, albeit in bin Laden's case it's not for the
betterment of humankind.
The desire to change the system is a defining element of narcissism. And while it
can be inspirational to work for someone like that, interacting with a narcissist
CEO can be torture. Don't expect praise. Get used to hearing the word "I." And be
able to take lots of harshly worded criticism. There is always the option of avoiding
a narcissistic CEO, but these days that will prove difficult. Narcissism is virtually
a requirement to become head of a company. That's because narcissists tend to
like drama. They are attracted to big change and risk. Investors expect
substantial returns and want their CEOs to take risks to deliver them. "It used to
be that CEOs weren't asked to do extreme things," says Don Hambrick, who along
with Arijit Chatterjee, both professors at Penn State University, developed a test
to determine whether a CEO is narcissistic and to what degree. "They changed the
rules so as to encourage more extremism, more flamboyance, go-for-broke types." Do
the names Steve Jobs, Larry Ellison and Bernie Ebbers ring a bell? Each of them
produced results. But getting there wasn't easy--for their employees...
Read the article. Back to top
Private Vs. Public
Until recently, the term "Dunkin' Donuts" was just a sleepy Northeast chain with hardly any stores west of Pennsylvania.
With relatively low prices and a limited menu with mass appeal, it was the working
man’s Starbucks. But lately Dunkin' Brands, which was recently sold off by its
publicly traded parent company to a trio of private equity firms, has
begun reformulating itself into a venti-sized global contender. In the next
ten years, Dunkin', which also owns Baskin-Robbins and Togo's sandwich shop,
plans to triple the size of its U.S. division, from 5,000 stores to 15,000 stores.
A pilot program at some outlets is pairing new sandwiches and heartier fare
alongside the usual doughnut offerings. And the company is expanding its presence
in Asia, a move that would have been difficult in November 2005, when Dunkin'
Brands was a neglected division of the French multinational Pernod Ricard SA.
Going private made all the difference, says Dunkin’ Brands CEO Jon Luther. "We
can invest in that market without having to worry about quarterly earnings," he
says. For Luther, going private was a no-brainer. His fellow CEOs seem to agree.
So far this year, about $200 billion has flowed into private equity buyouts of
public firms in the U.S., according to Thomson Financial. That compares with
$129 billion for all of 2005. For CEOs, going private allows an escape from the
twin pressures of quarterly earnings and the Sarbanes-Oxley Act’s crushing
compliance regulations. But is private equity ownership that much less onerous
than being publicly traded? For managers, the advantages of going private are no
longer as clear as they once were...
Read the article. Back to top
Dollars And Sense
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The notion of "a fair day's pay for a fair day's work," articulated by President Roosevelt nearly seven decades ago, actually has its origins in the Bible, Deuteronomy 24:14-15.
Today, the concept is ingrained in our capitalist system. But when it comes to
applying this maxim to executive compensation, there's an enormous disconnect
between Main Street and Wall Street To some, paying executives multimillions of
dollars can't possibly constitute "fair" pay when the minimum wage is computed
in single-digits. There's little that can be done to educate those who hold
this misguided notion. But senior executives and the directors only reinforce
this negative view by creating their own compensation packages behind closed
boardroom doors and only revealing them in the tiniest of print. As long as the
process is murky and undisciplined, and results are opaque, executive compensation
will continue to be a hot button issue. American companies almost uniformly
mishandle compensation decisions, despite regulatory efforts...
Read the article. Back to top
Instant Messenger Etiquette
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Office communication just isn't what it used to be.
For folks over 40, the following instant message may look like nothing more
than gobbledygook: "#s look gd… lnch @ 1/ back l8r." But for younger employees,
it's just simple shorthand for: "The numbers look good. I'm leaving for lunch at
1 p.m., and I'll be back later. "Instant messaging isn't just a new technology,
it's also a new language. One that's especially easy to over rely on, misinterpret
and misuse. That goes for co-workers of all ages. The recent crop of grads, those
born in the early 1980s, a.k.a Generation Y, has marched boldly into the adult
workforce over the past four years. They've brought with them a set of
technological tools that makes fax machines, voice mail and spreadsheet software
look positively quaint. They've grown up with scanning, text messaging and Googling,
and they're not about to stop once they've hit the working world. Nor should they.
Those skills are big assets when it comes to multi-tasking and productivity. But
they're also a nightmare for many of their bosses, those over 35 who understand
that while technology is a useful tool, it doesn't replace relationship building
as a primary means for doing business. Today's bosses can't understand why their
young recruits, for all their brains and technical acumen, hardly ever come over
and actually talk to them...
Read the article. Back to top
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Are We Ready for Self-Management?
In the early 1990s, Taco Bell's management was faced with a dilemma.
It wanted to create thousands of new locations, including stores and kiosks,
at which its line of Mexican-themed products could be sold. At the same time,
it was experiencing a shortage of capable managers in a fast-food industry known
for low-paying management jobs. One part of the solution was to create
fewer, higher-paying management positions. The other was to train thousands
of entry-level workers at its stores to manage themselves. This enabled Taco
Bell to assign one manager to several stores and to increase the "span of control"
for area managers from ten or so units to several times that many. Under
the "self-management" initiative, employees were trained and given new technology
to enable them to hire, train, and supervise their new colleagues; manage
the day-to-day inventory of the store; handle the resulting receipts; and deal
with personnel problems themselves under the supervision of a "floating"
manager responsible for several such stores. They received above-market pay,
partially in the form of performance incentives. The result?...
Read the article. Back to top
Unlocking Your Investment Capital
The management of financial risks is not just a matter of "protecting" the firm against adverse events.
“I believe that the benefits of using credit derivative swaps will dwarf the costs of mistakes.”
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Many companies can double or even triple their capacity to invest in
strategic assets and competencies by properly managing their "risk balance
sheet," argues Harvard Business School professor Robert C. Merton.
In a provocative article on the subject in the November 2005 issue of Harvard
Business Review, Merton, a Nobel laureate, urges senior corporate executives and
boards to view derivative applications not just as tactical measures but as
strategic tools that convey competitive advantage. A first step is
distinguishing between a company's value-adding risks and its passive risks—a
process that can release more equity capacity. Finally, Merton argues, the job
of managing the company's derivatives portfolio should not be delegated to
in-house financial experts. The strategic importance of how a company manages
risk requires executive understanding and attention from the top down...
Read the article. Back to top
On Managing with Bobby Knight and "Coach K"
Is it better to be loved or feared?" Machiavelli asked.
At Harvard Business School, Professor Scott Snook uses this classic quote to
help students become more effective leaders. Using two of the most successful
college basketball coaches in history—coaches with as divergent leadership practices
as can be imagined—Snook asks students to confront their basic assumptions about
human nature, motivation, and preferred styles of leading. Bobby Knight, also known
as "The General," is the head coach at Texas Tech University. He's a fiery,
in-your-face taskmaster who leads through discipline and intimidation, which
some critics say goes too far. Knight was fired from a long career at Indiana
University for grabbing a student, and prior to that he was filmed clutching one
of his own players by the neck. And then there was the infamous incident during a
game when Knight tossed a folding chair across the court to protest a referee's call.
Mike Krzyzewski, also known as Coach K, leads the men's basketball program at
Duke University. Instead of fear, Krzyzewski relies heavily on positive
reinforcement, open and warm communication, and caring support. For Coach K,
"It's about the heart, it's about family, it's about seeing the good in people
and bringing the most out of them," says Snook. Different styles, yes, but the
results are similar: After long careers, both have similar win-loss records for
their teams and are acknowledged as top coaches in the collegiate ranks. So what
do Knight and Krzyzewski tell us about leadership?...
Read the article. Back to top
The Compensation Game
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“In setting executive pay, directors have not been guided solely by the interests of shareholders.”
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Confronting greater media scrutiny and an ever-increasing number of
shareholder resolutions focusing on executive pay, Corporate America continues
to support current pay practices as a product of "the market."
Not too long ago, former Treasury Secretary John Snow defended the dramatic rise
of executive pay over time as a product of efficient markets and argued that
the increase merely reflects the growing marginal productivity of chief
executives. Unfortunately, this standard defense reflects a broad misconception
of both the CEO market and the nature of public concerns about executive pay.
The idea that CEO compensation is driven by the invisible hand of market forces
is a myth from which chief executives have long benefited. Like many other defenders
of this phenomenon, Snow compared this trend to the soaring increase during this
period in the compensation of other "stars," such as top baseball, basketball,
and football players. Reports about the high pay of star athletes are often greeted
with awe and approval rather than outrage. The rise of executive pay, its
defenders claim, is no more problematic than the fact that, say, Red Sox slugger
Manny Ramirez is paid much more than earlier stars like Ted Williams. But the
process affecting the compensation of star athletes is quite different from the
one that determines CEO compensation. A team executive negotiating with an athlete
can be expected to be guided by the club's interests, while the player's agent
is looking out for the client's demands. When independent buyers and sellers hammer
out a transaction this way, the market's invisible hand is commonly expected to
produce efficient arrangements. But in setting executive pay, as we document in
our research, directors have not been guided solely by the interests of
shareholders. Instead, they have had various economic incentives, reinforced by
social and psychological factors, to go along with arrangements favorable to
top managers...
Read the article. Back to top
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Street star: Citigroup's CFO, Sallie Krawcheck
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| Citigroup's CFO, Sallie Krawcheck |
Sallie Krawcheck tells FORTUNE's Geoffrey Colvin what it takes to be CFO of the world's largest bank.
To be a chief financial officer in this era of global markets, rising interest
rates, and superpowerful investors is tough for sure. To be CFO of the world's
largest financial institution, which is heavily exposed to all those
forces - that's tough by a factor of ten.The holder of that big job is
Citigroup's Sallie Krawcheck, whose ascent is already legendary on Wall Street
though she's just 41. Her career, while brief, has prepared her well for the
challenges facing today's CFOs at a wide range of companies. Krawcheck started out
on the other side of the Wall Street relationship, grilling CFOs as a research
analyst evaluating the shares of financial institutions...
Read the article. Back to top
100 Fastest-Growing Companies
And the winners are...
The supercharged performers on Fortune's annual list have the strongest three-year sales, profit and stock growth. This year, they include:
| • Hansen Natural |
• Netflix |
| • Yahoo |
• Celgene |
| • Psychiatric Solutions |
• Children's Place |
| • Urban Outfitters |
• ConocoPhillips |
| • Genentech |
• Toll Brothers |
Read the article. Back to top
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Numbers Crunch
CFO Turnover Up 50 Percent
Churn in the top finance slot is rapidly outpacing
last year. The same study also shows that there were
twice as many external CFO hires as internal promotions.
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Five years after Enron, corporate financial reporting stands at a crossroads.
One route leads deep into the lightly charted terrain of "principles-based"
reporting, where thousands of rules and regulations would be replaced by a
relative handful of guiding precepts. The norm in Europe, this would be terra
incognita of the most profound sort for American companies. Proponents argue that
the unceasing torrent of new standards and regulations is creating an unworkable
system. Foes counter that if the existing rules failed to prevent corruption and
provide transparency, a system based on vague pronouncements is doomed to fail.
The alternative path entails a continuing series of changes to the status quo that
would undoubtedly increase complexity even as they attempt to improve transparency
and accountability. No issue underscores these concerns more dramatically
than fair-value accounting, in which assets and liabilities are marked to market
rather than recorded at historical cost. The degree to which fair-value accounting
is embraced (or not) will have a major impact on the very nature of corporate finance.
In short, Sarbanes-Oxley was just a warm-up for what lies ahead. In this special
report, we examine the issues raised by principles-based accounting and
disclosure, fair-value measurement, and improved financial transparency. We also
include a poll of CFOs who have much to say about these issues. And, perhaps, much to learn...
For more on The Future of Reporting, click on any of the stories below:
•Standing on Principles
In a world with more regulation than ever, can the accounting rulebook be thrown away?
•Progress Report
A CFO survey finds finance executives surprisingly amenable to further reform of the financial reporting system.
•Will Fair Value Fly?
Fair-value accounting could change the very basis of corporate finance.
•The Case for Clarity
You know about the cost of Sarbox. What about the benefits?
•Days in Court
Would principles-based accounting result in fewer lawsuits, or make them blossom?
•Will You Still Matter?
Financial reports, says FASB, are not about measuring management.
Read the article. Back to top
Who's Controlling the Controller?
While debate goes on over internal control requirements for public companies of
all sizes, private companies face control risks that range from
overly-complex spreadsheets to the controller who decides to shun the IRS.
One of the greatest sources of controversy in the business world in recent months
has been whether small public companies are capable of maintaining the level of
internal controls prescribed by section 404 of the Sarbanes-Oxley Act. But even as
that debate rages on, say experts, private companies — which are not subject
to Sarbanes-Oxley — face serious threats as a result of poor internal controls.
And the smaller their staffs, and the fewer their resources, the greater the risks.
For instance, during one audit of a small company, Ken Goldmann, a partner in
J.H. Cohn's SEC practice, realized that a controller had decided — independently —
that the company would not pay its payroll taxes. "The company was short some cash
and he felt it was more important to pay accounts payable when they were due than to
pay the IRS," recalls Goldmann. Such a situation poses not only the threat of
a regulatory backlash, but also personal liability for the firm's owner...
Read the article. Back to top
Study: Talent Will Cost More
Hiring qualified employees could hit companies in the wallet in the coming year.
Good workers are getting harder to find for companies unwilling to pay. A
survey released this week hints that CFOs could hear more pleading from hiring
mangers to raise compensation packages to acquire highly skilled workers.
Fifty-five percent of hiring managers find it difficult to recruit skilled
employees, according to staffing firm Robert Half International and job
site CareerBuilder.com. Only 42 percent felt that way last year...
Read the article. Back to top
Can We Fix It? The IRS Says Yes
Are maintenance costs a repair that should be expensed, or a property investment
that should be capitalized? The IRS proposes a way to solve this recurring debate.
The Internal Revenue Service has proposed regulations that could simplify
taxpayers' decisions regarding whether to deduct maintenance costs against current
taxes or capitalize and depreciate them over time. The regulations would affect
any company with property to repair and maintain, and thus would have a wide impact
on American industry. "This is a breakthrough in tax policy," comments Carol Conjura,
a partner in the Washington national tax office of KPMG. Currently there is a
vague distinction in the law that requires capitalizing anything that improves
a property's value or life, but allows deductions for repair costs, notes Conjura.
The ambiguity of the law, coupled with limited guidance, has sparked arguments
between companies and the IRS over such minutiae as whether a new roof extends
a building's life and whether it is a deductible repair...
Read the article. Back to top
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SEC Inquiries and Shareholder Lawsuits: How To Be Above Scrutiny
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Four financial restatements, one SEC formal investigation and a $2.47 billion settlement with shareholders -- the numbers look bleak for Nortel Networks.
The communication technology company's financial-reporting woes are an extreme
instance of an increasingly common equation: Financial restatement and/or
SEC investigation equals shareholder lawsuit. * Plenty of other companies may be heading
in Nortel Networks' direction. A steady procession of financial restatements over
the past few months, many of them related to possible back-dated stock option
grants, has dozens of publicly held companies nervously asking one question: Will
we see a shareholder lawsuit? * With SEC inquiries trending upwards and the average
size of shareholder lawsuit settlements soaring, it pays for public companies to
act like Boy Scouts. Corporations that take the "be prepared" motto to heart,
legal experts say, are better able to prevent informal SEC inquiries escalating
into formal enforcement actions and the shareholder lawsuits that inexorably follow.
In 2005, companies listed on U.S. securities exchanges filed nearly 1,300
financial restatements, nearly twice as many as they filed in 2004, according to
Glass Lewis & Co., a San Francisco-based research firm that serves institutional investors. The 2005 figure translates to one restatement for every 12 public
companies. Financial restatements arouse the SEC's interest and "almost
invariably trigger class-action lawsuits," says David Siegel, managing partner
with law firm Irell & Manella LLP in Los Angeles. "It really doesn't matter why
or how the restatement occurred -- or, sometimes, even the financial impact of
the restatement." In 2005, 168 private securities litigation cases were filed in
the United States -- a seven-year low, according to a study by
PricewaterhouseCoopers. However, the average settlement amount increased by a
staggering 156 percent over 2004, jumping from $27.8 million to $71.1 million -- and that's excluding the Enron and WorldCom settlements. While the number of cases
filed in 2005 approximates the 10-year average (188 per year), Daniel Dooley, a
New York City-based PwC partner who worked on the firm's securities litigation
research, believes the current, reduced level of activity "may be the lull before
the next storm." Others agree. "I think the decline is short-lived," says Siegel,
who expects to see a surge in lawsuits related to the stock options dating
issues currently dominating the business pages. C. Thomas Kruse, a litigation
partner with Baker Hostetler in Houston, expects to see more class-action
lawsuits filed in state courts. "Every state has a class-action statute," he
notes. "I predict you're going to see a lot more state-court class actions as
a substitute for the federal-court class actions. And you're going to see
more arbitration." Shareholder lawsuits are becoming decidedly nastier. "We're
seeing something that we've rarely seen before, which is a sort of emotional demand
by some activist investors," reports Carolyn Kay Brancato, director of The
Conference Board Governance Center and Directors' Institute with The Conference
Board in New York City. Some shareholders are so incensed by the behavior of
their directors and officers that they are seeking out-of-pocket settlements that
exceed the company's D&O insurance coverage...
Read the article. Back to top
If You Offer E-Billing, Will They Come?
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Old habits die hard. Just as many finance functions cling to spreadsheet reporting, countless customers prefer to pay their bills the time-honored way -- by mailing a
paper check.
According to results of a survey of predominately utility and telecom businesses
by Kite, Ga.-based The Ascent Group Inc., 55 percent of consumer customers and
59 percent of business customers choose to pay this way; only 5 percent of
respondents receive bills through e-mail or the Web, and 7 percent pay through
the Internet. But Brian Valente, senior vice president of marketing for Avolent,
a San Francisco-based interactive e-billing software provider, says results of
his company's research have tipped in the opposite direction. "Across all the
surveys that we have done, at minimum 53 percent, typically greater, of end
customers say they prefer some means of electronic billing," he reports.
Vince Callaghan, Chicago-based partner with consulting firm B2B CFO/CIO LLP,
offers an explanation for these divergent results. He notes that usage of
"electronic invoice presentation and payment [EIPP] depends on the industry...
Read the article. Back to top
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Waistlines keep expanding in 31 states
The gravy train — make that the sausage, biscuits and gravy train — just kept
on rolling in most of America last year, with 31 states showing an increase in
obesity. Mississippi continued to lead the way.
An estimated 29.5 percent of adults there are considered obese. That’s an increase
of 1.1 percentage points when compared with last year’s report, which is compiled
by Trust for America’s Health, an advocacy group that promotes increased funding
for public health programs. Meanwhile, Colorado remains the leanest state. About
16.9 percent of its adults are considered obese. That mark was also up slightly
from last year’s report, but not enough to be considered statistically significant...
Read the article. Back to top
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