Advice for Eduardo Saverin

Here is some advice for Eduardo Saverin and misunderstood billionaires everywhere: Just. Be. Quiet.

Stung by criticism that he relinquished his U.S. citizenship to evade tax on his fortune, Mr. Saverin gave an interview to the New York Times.  He no doubt believed that a sit-down with a Times reporter to “set the record straight” would reverse the impression that he is lucky, greedy and aimless.  It did not.

He comes across as, well, lost:

Of all the founders, Mr. Saverin has had perhaps the greatest difficulty figuring out how to build on what is likely a once-in-a-lifetime experience.

On the tax issue, Mr. Saverin essentially confirms reports that he wanted to avoid paying U.S. tax by giving up his citizenship and establishing residence in Singapore.  He also awkwardly tries to explain how he has been spending his time and money since leaving Facebook:

What has gotten attention, though, is his billionaire playboy lifestyle in glittering Singapore. Thanks to the interconnected world Mr. Saverin helped to create, the Internet is full of people sharing photos and stories of him embraced by statuesque women and drinking expensive Champagne. “It’s a misperception, especially the playboy,” he said. “I do have a Bentley. I do go out. I’d rather not go into personal details.”

Oh, and that movie was all wrong about him, too:

He also said the depiction of him in the movie “The Social Network” was distorted. “It was more art than documentary,” he said. As to his purported betrayal by Mark Zuckerberg, chief executive of Facebook, the dramatic core of the movie, Mr. Saverin said: “There was no burning there. Mark is a phenomenal guy.”

Mr. Saverin is not alone in having a misplaced belief in his own persuasive powers.

Corporate chieftains, hedge-fund titans and technology wizards often believe that with enough time, coffee and charm, a reporter can be persuaded to take a sympathetic view of their plight.  If it’s People magazine, maybe; but not The New York Times.

The better course for Mr. Saverin would be to do something useful – start another wildly successful company or give a bundle to charity or support a cause he feels passionate about.  All of that is much tougher than a press interview, of course.

The lesson is, until you change the facts, don’t expect a different story.  Until then, please suffer a little adverse press coverage quietly and in the comfort of your enormous yacht.





Reuters Scores a Big Win on its Chesapeake Coverage

Reuters can take a well-earned bow for its coverage of Chesapeake Energy and its CEO, Aubrey McClendon.  The news service has broken several major stories in the past three weeks that brought to light McClendon’s questionable financial dealings, including his borrowings against stakes in the company’s wells and investments in a hedge fund.  The reports forced the board to strip McClendon of his chairmanship and led to an investigation by the SEC.  Chesapeake shares are down nearly 19 percent.

Reuters stood by its initial report about McClendon’s loans as Chesapeake made a strident denial of any impropriety.  The company was forced to backtrack after it issued an embarrassing statement that said the company’s board was not “fully aware” of McClendon’s finances. (See my earlier post on this issue for details.)

Reuters has been relentless, filing about 20 articles on Chesapeake over the past three weeks, including a 2,700-word gusher today on the company’s complex deals with Wall Street banks.  (See the full catalog of the coverage here.)

The multiple scoops and their aftershocks are a vindication for Reuters’ strategy of bulking up and pushing for high impact business news.  For much of the past year, Reuters has been scooping up talent from The Wall Street Journal and elsewhere, even coaxing a few seasoned reporters out of retirement.   A piece in the Huffington Post last September captures the scale of Reuters’ ambitions:

“Reuters’ recent hiring spree — including a handful of Pulitzer Prize-winners – has quickly gotten the media world’s attention. At the same time, Reuters has relaunched its website to better showcase its vast reporting in a more consumer-friendly way, stepped up social media efforts and increased analysis, opinion and enterprise reporting — all elements that may play better on the web than in straight wire copy.

“Reuters isn’t giving up on breaking financial news that paying subscribers want or reporting international wire stories that cash-strapped newspapers, lacking foreign budgets, increasingly need. However, Deputy Editor-in-Chief Paul Ingrassia says the company wants to go beyond breaking news. ‘I think what we’re making a bigger effort to do is not only be first with events,’ Ingrassia said, ‘but very quickly and analytically … report the meaning and impact of those events.'”

The big issue for Reuters is whether it can really make the impact it wants without a major print publication.  As old-fashioned as it sounds in today’s digital age, a print title can complement other media properties.  Look at how Newsweek has helped the Daily Beast and how Bloomberg has taken BusinessWeek to new heights.

Reuters enjoys a strong position among traders, fund mangers, corporate chiefs and policy makers, but that’s a small audience compared to that of, say, the New York Times.   The Reuters website doesn’t even place in the top 50 news sites, according to ComScore data released last fall.

I’d expect Reuters to look for a way to get a bigger payoff for its great journalism.

So don’t be surprised if Forbes becomes a purchase target.   Its private-equity investor Elevation Partners might be open to selling after enduring a horror show of red ink since buying a stake in 2006.

Misreporting CEO Pay

This is the season for tallying CEO compensation, and for shaming those who profited while shareholders suffered.

I’m no defender of high CEO pay, but much of the reporting on it is inconsistent at best, and in many cases it’s highly misleading.  The problem arises from combining two things that should be separate: pay granted by the board and stock gains taken by the executive.

Most analyses look at the CEO’s annual compensation award – salary, cash bonus, perqs, and the present value of equity grants that typically vest over several years.  So far, so good.  But then they add on the amount of equity gains that were realized by the CEO.

And that’s where the problem begins.

When you bundle annual pay and equity gains in a single amount and treat it as if the CEO “earned” it in that year, you get a picture of how much pre-tax cash the CEO took home – not a measure whether the CEO’s pay was aligned with shareholder returns.

For that, you really need to look at the annual award alone, separate from any realized stock gains, and focus on whether the compensation was in line with the company’s performance.

Yet many of the compensation and governance experts assess CEO pay by including gains from stock options and restricted shares that were awarded years earlier.

Governance research group GMI just reported its ranking of top-paid CEOs, singling out Herbalife CEO Michael Johnson for the equity gains he harvested.   Of Johnson’s nearly $89 million in 2011 “pay” cited by GMI, $77 million – 87 percent – came from options gains.

A big number makes headlines, but it distorts the picture.  Johnson’s options were awarded years earlier, and their rise in value over time was a benefit enjoyed by all shareholders.  Some reports point that out, but it’s usually buried deep. Here’s what the Guardian said – seven paragraphs into its story:

“…some might say that Johnson deserved the profits he made on exercising his stock options. Most of the options that were exercised in 2011 were awarded between 2003 and 2005, when Herbalife’s shares traded below $10. Since then, the stock price has done well. Total shareholder return, for example, rose by nearly 292% over the last five years. During 2011, it was mostly trading in the $50-plus range.

Realized stock gains simply shouldn’t be included in the annual compensation tally.  It’s only “annual compensation” in the sense that it all occurred in the same year as the rest of the CEO’s pay.

Let’s look at an example, using a couple of fictitious companies:

John Bounty is CEO of Megacorp, which had a bad year and a stock price that fell by 15 percent.  The Megacorp board trimmed Mr. Bounty’s pay, awarding him no cash bonus and stock options valued at just $2 million – a smaller grant than he received in prior years when Megacorp performed well.  Yet despite the sag in the Megacorp shares over the past year, Mr. Bounty still had substantial unrealized gains in the Megacorp shares he’d received in prior years.  So he decided to reap some of those gains, realizing $40 million (pre-tax).

Across town, Vikram Plunkett also presided over a mediocre year at his company, Giantbank, where the shares also fell by 15 percent.  He, too, received no cash bonus but his board awarded him a whopping number of stock options, with an estimated present value of $11 million.  By cutting back on dinners out and private jet travel, Mr. Plunkett figures he can get by on his salary and decides not to realize any of his long-term gains in Giantbank stock.

Now, most governance experts would say the Megacorp board acted responsibly by lowering Mr. Bounty’s annual pay award, while the Giantbank board was careless in doling out a pile of options to Mr. Plunkett after a poor year.

But because Mr. Bounty realized $40 million in stock gains, most reports will say he was “paid” this amount plus his salary and new stock options, and the Megacorp board will be singled out for scorn for “giving” Mr. Bounty a bounty when shareholders saw their wealth tumble.  Meanwhile, Mr. Plunkett, who didn’t take any cash off the table and got a juicy $11 million equity award, will escape notice.

The CEO’s annual salary, bonus and equity award are based on a board-level decision.  But harvesting equity gains is the CEO’s decision, and one that’s often driven by tax and estate-planning needs.  Boards can – and should – impose minimum stock-ownership and holding-period requirements, but the decision to take gains ultimately is up to the CEO.

What matters most is the board’s decision on current-year pay.  And there’s plenty to criticize when it comes to boards making overly generous annual comp awards, including outsized stock and option grants.  But if we’re going to have a reasoned discussion about CEO pay, we should start by communicating the facts clearly.

Coke and Monster: What was That?

The Coca-Cola Company was compelled to release a short statement yesterday denying that it was “at this time, not in dicussionss” to acquire energy-drink maker Monster Beverage Corp.

Monster shares spiked on a report in the Wall Street Journal that Coke was exploring a deal for the company, only to fall back once Coke issued its statement.

It appears the WSJ wants to claim credit both for breaking the story about a possible deal and for killing it.  Its story is littered with unnamed sources (“persons familiar with the matter”), which are usually either disgruntled investment bankers unhappy about missing a fat payday, or anxious executives who were farther out on the limb than their bosses (or the board) realized.

This episode illustrates that there’s a very thin, almost nonexistent, line between rumor and news, and how quickly a deal can be scuppered if a leak occurs.

The careful wording of Coke’s statement and the updated article in the WSJ, in which it reiterates its earlier reporting, suggests there were serious talks between the companies.  That leaves Coke in the awkward position of needing to respond to shareholder concerns about its acquisition criteria, its strategy for growth and its designs for the energy-drink market, where it has been a laggard.

The next earnings call for Coke could be an interesting one.

Lines Drawn in Wal-Mart’s Mexico Scandal

The question for Wal-Mart is how long its public statement about bribery allegations in Mexico will stand as pressure mounts on the company from several fronts.  A report surfaced today that the U.S. Justice Department has opened a criminal investigation into the matter – news that likely was responsible for a further 2% slide in Wal-Mart shares.  Since Monday, the scandal has clipped the company’s market cap by about 7%, some $12 billion.

Wal-Mart responded promptly to the bribery allegations in a statement and video message immediately after the article was posted on the New York Times website on Saturday.  Its response indicates it has adopted the following communication strategy:

  1. Remind everyone that the alleged activities happened a long time ago, so they’re not that important.
  2. Emphasize that the board began an internal investigation, disclosed it publicly and will act on its findings as necessary.
  3. Defend broad principles, but avoid a defense of specific facts.

As crisis-management goes, this is a solid first-day response, both in terms of content and tactics, like the use of video in English and Spanish.  Importantly, Wal-Mart’s statement allows it to buy time while it assesses the damage from the article.  The question is: how long will these statements hold up before some further action is needed or they’re compromised by new information?

Congressional hearings and law enforcement investigations will ratchet up the pressure and could force a shift in Wal-Mart’s public posture.  But investigations and hearings follow well-charted paths and generally give their targets ample time to prepare.  What could really pressure Wal-Mart is the online availability of the source material cited in the Times article.  It included links to a half-dozen excerpts from these documents, but the trove is huge:

“The Times obtained hundreds of internal company documents tracing the evolution of Wal-Mart’s 2005 Mexico investigation. The documents show Wal-Mart’s leadership immediately recognized the seriousness of the allegations. Working in secrecy, a small group of executives, including several current members of Wal-Mart’s senior management, kept close tabs on the inquiry.”

Online access to the emails, video interviews, internal reports and correspondence could intensify the pressure on Wal-Mart.  Instead of contending with prosecutors limited by tight budgets and political considerations, Wal-Mart could face a vast army of industrious bloggers, analysts, and reporters.  They’re capable of keeping the story alive for a long time.  It’s a scenario that recalls the release by WikiLeaks of US diplomatic cables in 2011, which generated news articles for months afterwards.

The New York Times has not said whether it will make the documents available.

Wal-Mart is hoping of course that the story fades with time, and there’s a good chance of that.  Bribery scandals don’t have obvious victims or high-impact visuals to maintain the public’s interest.  (Few people would remember the Archer Daniels Midland price-fixing scandal of the early 1990s were it not for Matt Damon’s starring role in The Informant!)

Wal-Mart has a challenging road ahead, but it might have weathered the worst of the storm – unless new details on the scandal emerge.


Launching Sony’s Turnaround

Kazuo Hirai just might have the toughest job in the corporate world.  Named CEO of Sony in February, his task is to turn around the struggling electronics conglomerate after years of strategic drift and financial losses.  He’ll have to revive the brand, excite consumers with new products and revamp operations – all while competing with nimble global giants like Apple and Samsung.  That’s a tall order.

In a corporate turnaround, it’s vital that the CEO communicate clearly and with conviction.  So give credit to Hirai, who outlined his strategy in a worldwide videoconference this week.  His remarks demonstrated four important elements for communicating effectively in a turnaround:

1.  Present a simple plan.  Fixing Sony is complex to execute but should be simple to communicate.   Clear, uncomplicated communication makes the plan memorable and sound achievable – two important goals for launching a turnaround.  Hirai’s remarks were built around just three simple points:

“There are three points I would like to discuss about how to bring about change. The first is acknowledging the issues at hand. The second is the key initiative to transform the electronics business and the third is the management’s structure to execute these key initiatives.”

2.  Articulate the company’s strengths.  When the road to recovery is tough, it’s important to remind people of what the company has going for it.  Hirai spoke about the assets that will drive Sony’s turnaround:

“How we go about making this happen will determine if Sony will be back. And whether or not we can do that lies entirely with Sony’s strengths. They are one, a business reach and brand recognition that span the globe; two, technological strength in imaging, gaming and other fields; three, content and business know-how in film, music and games; four, and lastly, something I believe in very strongly, what I call the Sony DNA – the will to drive new value that is in so many of our talented employees.”

3.  Acknowledge tough decisions.  No one could have missed Hirai’s emphasis on the need for change – he used the word 18 times in his presentation.  He announced sweeping cost cuts and layoffs that would trim headcount by 10,000.  He also cleaned house in the executive ranks, eliminating entire layers of management in some divisions.  Those are just the first of many difficult decisions; others await on R&D, product development and marketing.

4.  Make it personal.  The most effective CEO speeches speak from the heart.  (See the Stanford commencement address by Steve Jobs for perhaps the best example.)  Hirai didn’t have the audience shedding tears, but he spoke openly about the challenges facing Sony and his personal determination to revitalize the company:

“Since I was nominated President and CEO in February, I have received laurels of encouragement from investors, analysts, the press and other stakeholders. They want Sony to change and to support Sony’s process of change in transformation. So do the employees. They want to restore Sony to its former glory and go further beyond. Sony will change. I have fully dedicated myself to changing Sony.”

Good communication is just as important to the success of a turnaround as new products and efficient operations.  Communication keeps everyone on the same page, speeds decision-making and rallies the team when setbacks arise.

Hirai has made a good start in his first weeks.  He’ll need to keep the communication going, with regular updates and tangible proof that his measures are working.

The Financial Press Before the Crisis – and After

I attended a panel Wednesday night at The Columbia Journalism School that asked whether the financial press failed the public by overlooking issues that led to the financial crisis.  (The event was co-sponsored by Public Business Media and the Columbia Journalism Review.)

The genesis of the event was an article by Dean Starkman, a former Wall Street Journal reporter who now writes for The Audit, a critical look at business reporting that appears on the CJR website.  Starkman’s article concluded that the stock-investing boom that began in the late 1980s produced a style of financial journalism that served investors but neglected the wider public:

But even as it expanded, business news, paradoxically, was narrowing. Following the middle-class stampede into stocks, business news ramped up quantity but increasingly shifted its gaze toward investor concerns.

I like to call this shift in emphasis the “CNBC-ization” of business news, after the network that so definitively represents it. CNBC emerged in its current form in 1991. Yet the shift also seems to represent something less modern: a return to the business press’s early twentieth-century roots as a servant to markets—and a retreat from its later role as watchdog over them.

Being both a ‘servant of the market and its watchdog,’ as Starkman describes, is a tension that has always existed in news organizations.  It’s not really new, and the lines between the two aren’t drawn as sharply as he suggests.  High quality news outlets do both well.

Starkman’s piece also focuses on the rise of M&A reporting in the mid-1990s, but it’s hardly a culprit in the financial crisis of 2008.   It wasn’t the absence of critical press coverage of ill-considered mergers that sank the economy.   It was complex mortgage securities, complacency about risk and colossal regulatory failures.

The bigger question is why, just a few years after a market crisis that featured the collapse of prominent companies (e.g. Enron, Worldcom) and exposed shameful conduct by banks, rating agencies, lawyers and auditors, we had another crisis – only much worse.

The failures that were seen in the collapse of Enron and WorldCom – pliable boards, entrenched CEOs, complacent institutional shareholders, obscure off-balance-sheet entities – were all seen again just a few years later in the demise of Lehman Brothers, Bear Stearns, AIG, Countrywide and Merrill Lynch.   There were a few prescient news reports on questionable practices in the mortgage market, but they were ignored, as were the warnings about Enron only a few years earlier (most notably in a Fortune piece by Bethany McLean in 2001).

The development of the blogosphere is a good thing in this regard.  It has an ability to catch issues early and keep them alive, even if they’ve receded from the headlines in daily newspapers.   One can hope that those with the power to hold companies accountable – shareholders, regulators and prosecutors – will use these sources to be more attentive to abuses in the future.

Looking back, certainly one difference in the run-up to the mortgage crisis of 2008 was the role of the Federal Reserve.   I suspect that reporters and editors were persuaded by the comforting words of Alan Greenspan, who famously said the problems in sub-prime mortgages were contained and would not affect the broader economy.  Many bank CEOs found those words just as comforting, too.

The bigger problem for the financial press represented on the panel – The Wall Street Journal, the American Banker and The New York Times – is that the best financial writing is no longer in their pages.  They’re not on pages at all, in fact, but on various blogs and websites.   Newspaper executives (The Times’s Bill Keller, for one) still are dismissive of blogs, but many of them are insightful, well written, insightful, lively and engaging.  And they’re draining newspapers of readers – and influence.  I’d trust Felix Salmon over the WSJ to explain a complex issue on derivatives.