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Alan Greenspan-- From Washington to Wall Street

What's wrong with this picture? A couple of weeks ago it was widely reported that Alan Greenspan, who, in case anyone forgot, was the chairman of the Fed prior to Ben Bernanke and the man behind things like 'irrational exuberance' and the housing bubble, has joined the hedge fund Paulson & Co. as an adviser.  Paulson & Co. is best known as the fund which made billions being short the sub-prime loan market, a great trade which I respect.   A company statement asserted that the contract with Greenspan was exclusive.  Mr. Greenspan has recently signed similar agreements with Pacific Investment Management Corporation (PIMCO), a bond specialist, and with the German banking giant Deutsche Bank.

Two days ago, on January 24th, during one of the most volatile trading weeks in market history and in the wake of an unprecedented Fed emergency rate cut, Alan Greenspan announced to the world that he's worried that an ``inevitable'' global recession will create a backlash that forces countries to retreat from worldwide markets. ``Globalization has been extraordinarily valuable,'' Greenspan said in a speech in Vancouver sponsored by BMO Financial Group, also known as the Bank of Montreal. ``I'm concerned that if we get into some form of global recession, which after this extraordinary boom is inevitable at some point, that there will be a very significant retrenchment in the opening up of markets.''

OK.  Alan Greenspan moves markets.  He is the pied piper, the master of economic verbal obfuscation, the man whose every word captivated financial analysts and generated interpretive angst for years.  Now, Alan Greenspan is a trader.  He speaks his book-- he is obviously short, and he is in the unique position of being able to front-run his own public comments.

I guess there's nothing wrong with that, except that something about Alan Greenspan selling out, just like everyone else in America eventually does, makes me feel a little soiled and a little less respectful of the powerful people who cash in very big after having been stewards of the public trust.  Perhaps Alan Greenspan's comments are now equivalent to just another rant from Jim Cramer. 

See, I'm feeling better already and will soon forget about this silly notion that there is some dignity in public service that should continue after the completion of that service.  But that's just me, and I'm an idealist, so I guess it doesn't matter-- or does it?

Hand in Hand Update-- New Students, New Campuses, Continued Growth

Amin Khalaf, co-founder of Hand in Hand, the groundbreaking, highly successful, bilingual Jewish-Arab school system that educates close to 1,000 students in Israel, reports on the achievement of several major major milestones:

"*A dream came true on January 13th when students, teachers, and staff moved permanently to our new Max Rayne campus in Jerusalem. The journey has been a long one, and we will take many fond memories of the old campus with us as we settle in at the state-of-the-art Max Rayne School. A two-story library, a large indoor gymnasium, improved computer connectivity, and dedicated spaces for the arts and music are among the many highlights of the new campus. My thanks go to the Jerusalem Foundation for assisting Hand in Hand to construct the multimillion dollar facility.

*Hand in Hand worked with Merchavim and the Abraham Fund to prepare a position paper advocating the strengthening of bilingual education that was presented at a special conference held in Jaffa on December 27, 2007. Among those present was Education Minister Yuli Tamir, who expressed her personal support for expanding bilingual education options in the country.

*In February, Hand in Hand will organize Israel’s third annual conference on bilingual education in the multicultural city of Haifa. The international event, to be realized in cooperation with the University of Haifa, will bring together experts to discuss the mechanics and theory of bilingual education, one of the fundamental pillars of Hand in Hand’s work.

*Hand in Hand’s new fourth school in Beer Sheva has been operating with great success. Our 49 students in pre-kindergarten and kindergarten are enjoying their studies, and we are currently planning an expansion to the first grade next year. Kudos to the Hagar parents’ group for helping make the Beer Sheva School another Hand in Hand success."

The continued growth of this educational organization in a highly segregated society that experiences emotional stress and turmoil on a daily basis shows the integrity of the vision that inspired it over a decade ago.  Bravo!

Missing the Point-- WSJ Reports on Splitting the Chairman and CEO Roles in Public Companies

The Wall Street Journal's January 14th article "When Chairman and CEO Roles Get A Divorce" explores the increasing trend toward separating the Chairman and CEO titles.  Unfortunately, it fails to raise a critically important question-- is it advisable for former CEO's to remain on their own boards as independent directors, much less as chairmen? 

The article points out that "36% of Standard & Poor's-500 companies have separate chairmen and CEO's, up from 22% in 2002, according to the Corporate Library, a research group in Portland, Maine."  The article does not note that the S&P 500 lags significantly behind all public corporations in this regard, as 49% of all U.S. public companies have inside chairmen vs. 51% that do not, according to the Corporate Board Member / PricewaterhouseCoopers Survey, What Directors Think 2007.

The Journal writes in the context of James Cayne's resignation as the CEO of Bear Stearns last week, noting that Cayne remains board chairman.  Reporting from London, the WSJ reporter, Joann S. Lublin, observes the following:

"As at Bear Stearns, splits in the top posts at American businesses are often the result of a leadership transition or financial trouble.  In numerous cases, the chairman is a concern's retired CEO.  Yet the gradual emergence of non-CEO chairmen in the U.S. raises a sticky question: How do you perform a role that rarely existed until recently?"

While the article goes on to discuss the dynamics of groups that have been formed to provide peer support for independent board chairmen, I would like to pose a different, and perhaps more difficult, question.

Why doesn't Jimmy Cayne make a clean break from Bear Stearns and become the chairman of another board?

Keeping former CEO's on the board of your company is generally contra-indicated for several obvious reasons:

*First, most former CEO's have strongly held continuing views and core beliefs as to how the company should continue to be run;

*Second, it is emotionally very difficult for former CEO's to let go of such strongly held convictions; and

*Third, people have a natural tendency to second-guess other people.

These emotionally charged issues are only compounded when a CEO moves to the chairman's role under a cloud of some sort, as Ms. Lublin observes above. 

I wrote an extensive article on this topic in the Spring 1999 issue of Directors & Boards magazine, "The Problem of Emotion in the Board Room", in the context of the challenges faced by public and private companies.  A strong case can be made that former CEO's should normally not remain on the board of their former company, as chairman or otherwise.  They can be great directors and great chairmen, but they should accept these roles at new companies where they can perform in leadership positions without the emotional baggage they carry in the transition from the incumbent CEO role. 

I concluded the Directors & Boards article with the following:

"Walter Wriston, who retired as CEO and as a director of Citicorp in 1984, observed in a 1993 article in Directors & Boards that 'In short, there are a myriad of reasons for the retiring CEO to leave the board, and few if any arguments for the other course... the human desire to stay on with a company that has been home for many years is stong and understandable, but the world is so full of so many other interesting things to do that the desire to stay should be resisted doe one's own sake and for that of the company.' "

Top Reasons Why Public Company Directors Should be Removed

According to What Directors Think 2007, nearly one-quarter (23%) of the over 1,000 respondents to the sixth annual U.S. public company directors survey feel that a member of their board should be replaced.

Why:

*  The director does not have the skill set needed... 36%

*  The director is not engaged..................................  31%

*  The director comes to meetings unprepared........ 18%

*  The director has been on the board too long.......  17%

The first three categories above should resonate equally with private company directors and certainly with venture capitalist directors.  I have maintained for many years in my corporate governance writings that the most common problems faced by boards cut across issues of revenue size and company maturity.

At their core, these are issues that relate to the mutual accountability of individuals who belong to small groups and the need to avoid systemic dysfunction in order to maximize the opportunity for positive corporate outcomes.

In fact, many of these issues are only exacerbated in VC-backed companies because emerging companies are resource-constrained and under severe pressure to execute over a shorter time frame than larger corporations which have greater resources at their disposal.

Most Public Company Boards Conduct Full-Board Evaluations and Find Them Effective

PriceWaterhouse Coopers and Corporate Board Member recently released their sixth annual survey of directors of public companies, which aggregates responses from over 1,000 corporate directors on a variety of important issues. 

First, some interesting statistics from What Directors Think 2007:

How many people actually serve on public company boards of directors?  At the end of 2007, directors on U.S. corporate boards totaled 48,950 from 5,772 public companies. 

Of this total,  66% hold only one board seat-- a result which certainly surprised me and is unheard of among the multiple-board seat VC  community.

Women occupy 4,544 board seats, or 9.3% of the total.  Out of a total of 5.341 board chairmen, 49% are insider chairmen and 51% are outside chairmen-- a ratio that holds across revenue size categories.

The survey also revealed some very useful information on Corporate Governance--

Respondents rated the following Top Five hallmarks of good governance, in order of priority:

(1) The board holds regular executive sessions without the CEO;

(2) The board is composed mostly of independent directors;

(3) The board or a committee conducts regular, formal CEO performance reviews;

(4) The company has a formal management succession process in place;

(5) The board evaluates both whole-board and director performance.

As a VC, I feel strongly that numbers (1), (3), and (5) above are entirely applicable to VC-backed companies and should be high priorities for VC directors.

In 2007, 88% of public boards conducted a full-board performance evaluation on a regular basis, up from 33% in 2002-- 78% of respondent companies listed on NASDAQ do so even though this is not a NASDAQ requirement.

Only 57% of directors characteriz their board's evaluation process  as effective or very effective-- leaving 38% saying it is somewhat effective and 5% saying it is ineffective.  The authors conclude that "these results show many boards are not maximizing the usefulness of this process which, among other things, directors have told us can improve board communication, provide focus for board and management recruitment efforts, and identify ways to streamline board processes to make the best use of directors' time."

Private company directors should follow this increasing trend toward board and director performance evaluation in far greater numbers-- for more on how VC companies should apply best practices to approach these issues, go to www.levp.com/news/whitepapers.shtml to review material prepared by the Working Group on Director Accountability and Board Effectiveness.

Are Sentencing Guidelines for White Collar Criminals Too Severe?

The January/February 2008 issue of Corporate Board Member magazine features a picture of Dennis Kozlowski on its cover and asserts in its cover story tag line: "Why giving convicted executives decades in prison makes no sense."

The story itself mentions over a dozen recently convicted executives serving long sentences for fraud, including Bernie Ebbers, former CEO of WorldCom, 66 years old (25 years in Oakdale Federal prison in Louisiana); Walter Forbes, former Chairman of Cendant, 65 years old (12 years in Allenwood federal prison in Pennsylvania); Sanjay Kumar, former chairman and CEO of Computer Associates, 45 years old (12 years in the federal correctional facility at Fairton, New Jersey); John Rigas, 83 years old, former chairman and CEO of Adelphia Communications (15 years at the Butner federal facility in North Carolina; Jeffrey Skilling, former Enron CEO, 54 years old (24 years at the Federal correctional institution in Waseca, Minnesota; and Kozlowski-sidekick Mark Swartz, former CFO of Tyco, 46 years old (up to 25 years in state prison in Rome, New York). Swartz, like Kozlowski, is eligible for parole in 2013, and they are both two years into serving their 25 year sentences.

One of the main points of this interesting article follows:

"The overarching problem with multi-decade sentences for nonviolent crimes like fraud and drug possession is that they seem disproportionate to the goals prison sentences are supposed to achieve: penitence, deterrence, restitution, and retribution.  Does life without parole for a white-collar offender-- or 25 years for a single drug offense-- really accomplish these things any more effectively than, say, three-to-five-year sentences?  Perhaps in some specific cases, but surely not in all."

As I read the article, written by Rob Norton, I felt that it made many good points but that considering drug offenses and finanical fraud in the same construct detracted from some of the more powerful arguments for reform. 

In my view, the punishment meted out to individuals guilty of massive corporate fraud should be considered in a class of its own.  Where I think that the author falls short in this article is in failing to consider the fact that with great power comes great responsibility.  Corporate CEOs and other senior managers hold the financial futures of many thousands of people in their hands-- they are the stewards of the retirement plans for the generations of employees that may have preceded them, as well as of the financial security of the company's current employees and the investing public.  Many CEOs are responsible for corporations that have higher incomes than the GDP's of most countries in the world.

The fact is that too many CEOs have approached their responsibilities in a cavalier manner and ignored their roles as stewards of the public trust.  Should this be treated any differently than the commission of a violent crime against an individual? Yes.  But the magnitude of corporate fraud may impact thousands of families and ripple through many lives in ways that never come to light during trial.

Dennis Kozlowski states in this article: "I'm serving a worse sentence than many murderers, rapists, and child molesters.  Another thing, I was convicted of stealing my bonus.  Well, I never got it.  It's still in Tyco as deferred compensation I never collected.  It's like finding somebody guilty of bank robbery when the money is still in the bank."

I believe that Dennis Kozlowski's deferred comp may have recently left Tyco headquarters as part of the $3 billion class action lawsuit settlement agreed to be paid by the company last month.  I also doubt that he plans to try collecting it in 2013 if he makes parole.  More importantly, most rapists and murderers aren't sufficiently achievement oriented or psychologically stable enough to be afforded the kind of power and public trust that Dennis Kozlowski received in the first place.

I do agree with the underlying premises of the article-- that there is plenty wrong with our prison system, that it is overpopulated, and that rigid sentencing guidelines should be revised to give judges greater latitude in individual cases.  But I also feel strongly that senior corporate officers must be given powerful reasons to think long and hard before making the choice to cross the line into white collar crime.  Perhaps the headline-grabbing examples of these recent harsh sentences will help future CEOs and other senior executives consider the privilege of their positions and their stewardship obligations as corporate titans more seriously before they choose to pursue misguided visions of entitlement to the excess riches that attend powerful executive positions.

   

   

Shark Tales-- and A Question

QUESTION: WHEN ENCOUNTERING ONE OR SEVERAL SHARKS IN THE OPEN OCEAN, ARE YOU SAFER AS A SNORKELER OR AS A SCUBA DIVER?

   

Assume that you are not in immediate danger in either scenario described below, then consider the implications of each:

SCENARIO A:  You are scuba diving at 60 feet and have 30 minutes of air left in your tank before it's time to go up for your safety stop.  You are 15 minutes into a 45 minute dive.  A white-tip reef shark approaches you (and your buddy).  You are feeling calm, but you do have to eventually go up to the surface.  You have no weapons. The shark does not leave.  It slowly circles you at a distance that feels OK, but...

SCENARIO B: You are snorkeling above a reef in about 30 feet of water.  Coral formations are variable.  Your boat is 30 yards away.  Swimming to shore is not an option due to the coral that surrounds you.  A pair of grey reef sharks pass you by, then turn around and stay within 30 yards of you.  You are armed with a rusty bolt of a spear gun and a rubber hose slingshot to propel it.

If the sharks get aggressive, are you safer as a snorkeler or as a scuba diver?

In my view, since I recently experienced both scenarios on the same day, I felt less nervous as a scuba diver because I mistakenly considered myself to be on a more equal footing with the sharks.  However, as I've considered this further, it strikes me that, if a close encounter at 60 feet did turn into more than a mutual look-see, the probability of equipment malfunction caused by user stress, a panic-induced emergency ascent, or other "limited-resources-under-water" type problems could put the scuba diver in dire straits.  Having said that, I can't remember hearing of a scuba diver being attacked by sharks unless they were chumming the water and asking for trouble, whereas we always hear of surfer/snorkeler it-looked-like-a-tasty-seal attacks.

What do you pick as the safer place to be? On the surface in Scenario B or Down Under in Scenario A?

   

   

 

The Benefits of Being Disconnected

I started posting to this blog in January of 2005.  Today, with this post, I've posted 189 times.  In the interim, I've also become a podcaster on VC-InsideOut, and I am active on the Facebook and Linked-In social networks.  In some respects I am a power-user of the web because I am a venture capitalist specializing in information technology investing, but I also enjoy the medium of expression afforded by these tools that have truly created the endless open-ended conversation with the world that defines the social Internet. 

But there is such a thing as being over-connected on the web.  A symptom:  the gnawing sense of obligation that you might feel to keep your content fresh-- especially the little things, like changing your blog and Facebook pictures, or endlessly thinking of something pithy to say on your Facebook status bar (or on Twitter).

I usually post more actively when I am on vacation, but this past week, I unplugged totally for the first time in too long. 

No email, no phone, no blogs, no keyboards, no laptop--  but I did have my digital camera.

Being in Fiji was a key ingredient to the mix, as were several good books and plenty of great conversations with fellow travellers.  One of the more unusual recurring themes on this trip was meeting a number of people from all over the world who had quit their jobs and were in various stages of taking a year off from the working world-- having visited many countries and experienced life from a completely different perspective.  Most of these people were between 22 and 32 years old, and many had IT backgrounds.  Fiji can be very attractive if you are on a limited budget; maybe this concentration of checked-out global travelers was a function of the attractive and cost effective environment, but it still surprised me.

My week of electronic abstinence evolved into a mini-course in restoring perspective, in slowing down response time, and in generally re-charging my batteries for 2008.  I recommend periodic disconnection from the web for everyone.

Speaking of connectivity, I'm looking forward to CES!

Happy New Year!