Opinion

Felix Salmon

The promise of B-corps

Felix Salmon
May 1, 2012 20:21 UTC

At the end of Seth Stevenson’s glowing profile of Patagonia founder Yvon Chouinard, he mentions the way that Chouinard recently converted his company to a B-corp:

Registering as a “benefit corporation” lets a firm declare—in its articles of incorporation—that the fiduciary duty of its executives includes “consideration of the interests of workers, community and the environment,” and not just the bottom line.

Chouinard marched into state offices on the morning of January 3, 2012, to make Patagonia the very first company to register as a benefit corporation in California. It remains the most prominent company nationwide to have registered thus far. For Chouinard, the value of this is less about the present than the future. He can do whatever he wants at Patagonia right now, with no threat of shareholders revolting if he sacrifices a bit of profit in the name of menschy communitarianism. He owns the place in full, for as long as he’s alive. But he’s cagey about succession, and it’s clear what he fears: He never wants Patagonia to go public, or to lever itself up in search of rapid growth, as it mistakenly did before. He’s convinced that becoming a benefit corporation will help prevent that from ever happening.

I spent a bit of time researching B-corps when I was writing my Wired story on the problem with IPOs, and I think that B-corps are actually much more interesting than Stevenson is giving them credit for. The whole point of a B-corp, as I see it, is that you can go public, or lever yourself up in search of rapid growth, or give your employees lucrative stock options — you can generally behave just like all those money-chomping red-blooded capitalists, while also giving yourself a lot of freedom to do things like save the planet and ignore pesky shareholders agitating for explosive and infinite growth.

B-corps—Maryland was the first to charter them in 2010—can still have public shareholders, dividends, stock offerings, and all the other tools in the modern financial arsenal. But unlike other public companies, whose sole legal duty is to maximize profits for shareholders, executives at B-corps are also required to consider nonfinancial interests when they make decisions. Indeed, the company has to create a material positive impact on society and the environment.

That has the potential to rewire one of the most dangerous things about being a public company today: the requirement to keep growing, no matter what. B-corps can and will be listed on stock exchanges, just like any other public company. And there is no reason that they shouldn’t perform like normal shares. But investors and employees can take pride in the fact that their company is not just concerned with short-term financial gain. Best of all, the pressure to grow at all costs dissipates, and it becomes a lot harder for angry or litigious shareholders to agitate for changes just because they’re unhappy about the stock price.

There will undoubtedly be a discount applied to any B-corp looking to go public — its valuation won’t be as high as if it were a conventional company. But once it has gone public, there’s no reason its share price shouldn’t grow just as fast as any other company. If the discount stays constant, then the return to shareholders is exactly the same as it would have been at a full valuation. And if the “menschy communitarianism” of the company, in Stevenson’s words, actually ends up helping the company’s bottom line, then the discount might well shrink, thereby boosting total shareholder returns.

If Chouinard “never wants Patagonia to go public”, then, registering as a B-corp is not going to help him. But I suspect the idea here is that by registering as a B-corp, Chouinard is creating a company which can go public without losing its soul. And, without resorting to non-voting share classes and the like.

COMMENT

As of May 17, 2012 there are eight states that have adopted benefit corporation legislation and 94 firms that have incorporated as such. Updated research info at http://craigeverett.com/benefit-corporat ions.html

Posted by CraigEverett | Report as abusive

The problem with Marc Andreessen

Felix Salmon
Apr 26, 2012 15:47 UTC

2005-new.jpg It’s easy to see why Marc Andreessen is grinning on the front cover of Wired magazine this month. Inside, there’s an interview where he’s introduced as a “tenacious pioneer”, one of “our biggest heroes”, and someone who was so far ahead of the curve on his “five big ideas” that he had them “before everyone else”.

It’s easy to admire Andreessen, a man whose disarming and engaging blog was a must-read during the financial crisis, when he would provide some very smart perspective from the point of view of a wealthy man, thousands of miles away from the epicenters of the crisis, who had some very sharp insights into what was going on. He then launched Andreessen Horowitz, and the blog became more of a public seminar in how to be senior management, which is great if you like that sort of thing. And it’s true that the five big ideas in the interview are all pretty revolutionary things, although I don’t think he actually had them all first.

But Andreessen has never really been a public intellectual. His single greatest achievement — the creation of the world’s first web browser, Mosaic — took place under the auspices of the National Center for Supercomputing Applications at the University of Illinois. But ever since then he’s been a red-blooded capitalist, founding and funding a long series of for-profit companies, and becoming one of the wealthiest and most powerful men in Silicon Valley in the process.

And when you look at Marc the capitalist, rather than at Marc the ideas guy, the hero-worship becomes a bit more difficult. I certainly like the way that he’s dragging Silicon Valley into the world of philanthropy, where it’s historically been very weak. But a lot of my own Wired story, last month, can be read as a push back against the IPO culture which Andreessen, almost more than anybody else, has managed to create.

“Silicon Valley is full of venture capitalists who have become dynastically wealthy off the backs of companies that no longer exist,” I wrote in that piece, and Andreessen is Exhibit A if you want to look for such a person. His first company, Netscape, lost the Browser Wars and ended up getting sold to AOL. His second company, Loudcloud, was (to be charitable) too far ahead of its time, so it “pivoted” into something called Opsware; eventually Andreessen managed to sell it off to HP. His third company, Ning, was even less successful, and ended up buried somewhere in Glam Media. None of them exist today in any recognizable form; none of them ever made much money; and none of them even really made it as far as building anything approaching a permanent income stream.

The Netscape IPO, in 1994 1995, was in its own way revolutionary. It broke the rules by going public without ever having made any money, and it also had that eye-popping first-day rise, from the issue price of $28 to as high as $75 in the first day’s trading. For the first time, people in Silicon Valley understood that you could make enormous sums of money just by timing the markets — buying in at a low valuation and selling at a high valuation — even if the underlying company never made any money at all.

Andreessen’s current company, Andreessen Horowitz, is devoted to doing exactly that. Andreessen Horowitz does provide a bit of expert advice and name recognition, but at heart it doesn’t make anything at all; its sole predictable income stream is the management fee it skims off while investing other people’s money. Those investors, in turn, are not particularly interested in creating long-lasting standalone companies which have large profits and create jobs. Instead, they’re primarily interested in buying into any company, no matter how flash-in-the-pan, where Andreessen Horowitz can exit its investment for a large multiple of whatever it bought in at.

After all, that’s how Andreessen made his money. I’ve never met anybody who thought that Netscape was a good acquisition for AOL, or that HP gained much from buying Opsware beyond getting Andreessen to sit on its famously-dysfunctional board. (He became the semi-official spokesman for the board in 2010, which did almost nothing to improve the board’s reputation, but did quite a lot to hurt Andreessen’s.) In many ways, Andreessen’s entire fortune has been built on the greater-fool theory: if you build something trendy enough, there’s probably going to be a huge lumbering company out there somewhere willing to overpay for it. Hence the buzziness of the Wired interview — clouds! social! SAAS!

Andreessen’s also very shilly, when it comes to his own businesses: when Ning finally died, for instance, he put up a blog post all about how the team there had “brilliantly executed a dramatic transformation of the company”. The fact is, as a close reading of the Wired interview will attest, that while Andreessen does have a lot of good ideas, brilliant execution is not at the top of his list of abilities. His own social-media company went nowhere, and his consolation prize — a seat on the Facebook board — is so important that Mark Zuckerberg didn’t even bother to consult him before dropping $1 billion on Instagram. His main job there is to ensure that Mark can do whatever he wants, to provide a layer of insulation between Zuckerberg and shareholders. Meanwhile, the Twitter guys didn’t let Andreessen Horowitz invest in their company, forcing AH to buy its stake in the shadowy secondary market instead.

While Andreessen is very good at making money, then, he’s much less good at creating lasting value for the long-term shareholders of his companies. In his world, buy-and-hold public shareholders are the patsies, the people left holding the bag when the fast money has long since departed. He’s smart; the rest of us are chumps. I guess it makes perfect sense that he’s recruited Larry Summers as a Special Advisor.

Update: I should have mentioned (I was going to, and forgot) that Mosaic 0.9b is, to this day, my favorite-ever web browser. It was a beautiful thing, which worked wonderfully. And yes, in large part it was responsible for The Internet As We Know It today. Andreessen’s influence is felt far beyond the companies he started. But there’s another thing that Netscape started, which is the monster funding round which is so big that no one (except a true giant like Microsoft) will dare compete. A correspondent writes:

Firms such as his have been leading truly insane rounds lately, sometimes in excess of $100 million. This is a different kind of investment than traditional venture capital. Under the old model, a hundred companies raised a million dollars each. Market competition then (theoretically) selected the best. Under this new model, kings are made, and there is no competition. Who would compete with a company that just raised $100 million in a day? Who would invest in a company that would dare to compete with such a sudden colossus?

This kingmaker strategy (also at work in the payments world, see Square) is the opposite of portfolio diversification. It encourages the formation of massive bubbles. And it locks out true innovation to the extent that the kingmakers choose incorrectly–which they often do.

Update 2: Chris O’Brien, writing in 2009 when Andreessen Horowitz was launched, made much the same points in a more rigorous and quantitative way. It’s a really good post, you should read it.

COMMENT

Felix:

Thanks for the linkback. My post came when Andreessen was just jumping into the VC game. He and I both agreed that the VC industry was in steep decline and the result would be that a handful of big firms would end up with the lion’s share of investors and deals. He was absolutely confident that his new firm could be among the 5 to 10 big firms left standing, though I was a bit more dubious. The game’s not over, certainly, but their track record so far has given them a lot of momentum. Given the way entrepreneurs revere him and the firm, it seems like he’s got a shot.

Now, whether this ultimates is a good thing or a bad thing for the larger tech economy, well, we’ll see.

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Goldman board muppet of the day, James Johnson edition

Felix Salmon
Apr 19, 2012 15:49 UTC

There’s one corporate-governance metric which isn’t looked at nearly enough, and that’s director pay. Reading the compelling broadside that Ruane, Cunniff & Goldfarb, who manage the Sequoia Fund, has launched against James Johnson, who’s running for re-election to Goldman’s board, I was glad to be reminded of the governance fiasco he oversaw at Fannie Mae, and I was shocked to learn of his involvement in an options-backdating scandal at United Healthcare. But absent from the letter, and present only in Shahien Nasiripour’s report about it, is the fact that Goldman paid Johnson $523,000 last year.

People respond to incentives, and it’s pretty self-evident that the more directors are paid, the more captured they are by management. After all, director pay isn’t set by shareholders. Michele Leder put it well back in 2009:

“Let’s face facts,” said Michelle Leder, the editor of Footnoted.org, a corporate watchdog web site. “If you had a part-time job that was paying you $300,000, $400,000, $500,000 a year, and you didn’t have a lot of work to do, would you rock that boat? That’s just human nature.”

Goldman hasn’t had much luck with its board, which has been a distraction at best and an outright hindrance at worst since the crisis broke. And one of the reasons is surely that Goldman’s board members are expected to be seen and not heard: they’re flown around the world in luxury, and paid enormous sums of money, to provide the thinnest possible veneer of shareholder oversight. What do you think the chances are that Lloyd Blankfein thinks he has anything at all to learn from his board of directors?

The best form of board remuneration is that seen at Berkshire Hathaway, where directors are paid a modest four-figure sum and aren’t even covered by D&O insurance. I can see why Goldman might find it difficult to recruit qualified directors if it were to offer that package. But Goldman’s shareholders don’t want to be represented by a group of muppets which will rubber-stamp anything the CEO wants to do. So I’d love to see board pay reduced substantially at Goldman. With any luck, that in and of itself would result in the departure of James Johnson.

My feeling is that the ideal pay for Goldman board members is somewhere in the $50,000 to $80,000 range. If board members get rich, it should be from the appreciation of the shares they buy, rather than from money they’re paid to turn up to board meetings. Management has a strong incentive to put already very rich people on its board: they’re inured to large sums of money, and are therefore much less likely to blink at compensation packages which can reach well into the eight-figure range. So let’s hire directors for whom an extra $50,000 will actually make a noticeable difference to their annual income.

It’s pretty much impossible to imagine what Johnson could possibly have done, on Goldman’s board, that could justify his $523,000 remuneration. Instead, it looks like hush money. So while voting him off the board would be a great place to start, shareholders who care about governance shouldn’t stop there. Because so long as Goldman’s board members are taking home enormous sums, there’s not going to be any real oversight at the company.

COMMENT

alea, was running the mondale and kerry campaign meant to be a recommendation?

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How many insiders should sit on Goldman’s board?

Felix Salmon
Mar 28, 2012 15:03 UTC

What to make of the discussions within Goldman Sachs about splitting the jobs of chairman and CEO? Lauren LaCapra has the story:

Proposals to separate the CEO and chairman roles have long been sought by outside groups, but two people familiar with management thinking provided the first indication that internal discussions about such a move have taken place.

Under a restructure, President Gary Cohn would take the chief executive officer role and Vice Chairman J. Michael Evans would be elevated to president, leaving current CEO and Chairman Lloyd Blankfein with only the chairman role, the two sources said.

Things almost certainly won’t play out exactly this way: machinations at the top of Goldman Sachs are highly complex and unpredictable. But the time is clearly coming when Lloyd Blankfein is going to step back from his job as CEO, and like most powerful CEOs he’s likely to want to stay on as chairman when he does that. So while Blankfein has been understandably reluctant to split the two roles up until now, the idea is increasingly becoming aligned with his own interests.

If this plan were to go into effect, the number of current Goldman executives on the board of directors would technically remain flat at two: Evans would join Blankfein and Cohn, but Blankfein would no longer hold his executive role. However, as a non-executive former CEO sitting on the board, Blankfein would continue to wield a lot of influence, just like former Goldman president and current director Stephen Friedman does. As a result, the collective ability of the firm’s insiders to drive board decisions would, at least in theory, be strengthened.

Realistically, however, I think that this move would give the board more control over how Goldman is run, rather than less. The last two holders of the chairman-and-CEO position — Hank Paulson and Blankfein — have done an extremely good job of controlling the board. Indeed, in recent history the board has been more of a problem to be managed than a powerful entity to whom the CEO is accountable.

What’s more, Blankfein and Cohn have presented a united front: they don’t engage in the kind of Machiavellian infighting that we saw between Paulson and Corzine, for instance, or even between Cohn and Jon Winkelreid. As such, the executives on the Goldman board are both very much singing from the same songbook.

With Evans on the board, however, things change. He’s a banker rather than a trader, a clear alternative to the Blankfein-Cohn axis, rather than a reinforcement of it. More than anybody else on the board, he would have the inside knowledge and the credibility to push a real change in direction at the bank, if that was what he thought warranted.

So while at most companies having four insiders on the board would be considered a bad thing from a governance perspective, in this case I suspect that insiders are the only people with enough clout to actually effect any change at all. The non-Goldman directors on the board are a bit more than muppets, but not much more: their job is, ultimately, to rubber-stamp whatever Blankfein wants them to do, and they’ve been very good at doing that. If anybody is going to push back against that rubber-stamp role it’s likely to be Michael Evans, especially if he can bring Friedman onside.

COMMENT

Yeah, agree with the comment above. Goldman and their peers did tons of crap during the late 1920s before the Great Depression, and they were fully “found out” by the Pecora commission, which was far more aggressive than anything we’ve seen today, yet even at that time, they were allowed to continue (albeit under a strict regulatory regime), and customers continued to do business with them

Posted by EconMaverick | Report as abusive

Corporate governance chart of the day, Benford’s Law edition

Felix Salmon
Oct 12, 2011 20:30 UTC

benf_year.jpg

This chart was put together by Jialan Wang, and it shows the degree to which companies’ reported assets and revenues deviate from a Benford’s Law prediction over time. (If you want some good background on Benford’s Law and how it can uncover dodgy numbers from eg the Greek government, Tim Harford had a great column last month on the subject.)

Writes Wang:

Deviations from Benford’s law have increased substantially over time, such that today the empirical distribution of each digit is about 3 percentage points off from what Benford’s law would predict. The deviation increased sharply between 1982-1986 before leveling off, then zoomed up again from 1998 to 2002. Notably, the deviation from Benford dropped off very slightly in 2003-2004 after the enactment of Sarbanes-Oxley accounting reform act in 2002, but this was very tiny and the deviation resumed its increase up to an all-time peak in 2009.

So according to Benford’s law, accounting statements are getting less and less representative of what’s really going on inside of companies. The major reform that was passed after Enron and other major accounting standards barely made a dent.

This doesn’t necessarily mean fraud, per se; it could just be a chart of the degree to which companies are managing and massaging their quarterly figures over time. The kind of fraud that’s so respectable, Jack Welch got lionized for it. Once you start down that road, it’s easy to go further and further forwards, while it’s almost impossible to reverse course. So I can easily see how the natural tendency in this chart would be up and to the right.

Still, it’s worrying; all the more so because I can’t think of any way of reversing the trend. If Sarbox can’t do it, nothing will.

COMMENT

This is under the assumption that Benford’s law will always be correct. If, due to other reasons, the reporting of accounting figures changes such that it is no longer correct, no fraud or ‘massaging’ is necessary

Posted by gleisdreieck | Report as abusive

Adventures with FDIC secrecy, cont.

Felix Salmon
Oct 11, 2011 22:16 UTC

Last week, we saw how the Federal Housing Finance Agency was above the law, with the government seemingly having no ability to tell it what to do. This week, it’s the FDIC. In the wake of its obstreporous obstructionism upon receipt of FOIA requests, the FDIC’s smug above-the-law impunity is now coming to light:

JunketSleuth worked for months with an attorney from the Office of Governmental Information Services, which mediates disputes between federal agencies and people requesting public records under FOIA.

The attorney was able to help persuade a number of other agencies to provide JunketSleuth with electronic and paper travel records. But she was unable to get the FDIC to provide the exact same types of records…

Federal agencies routinely violate FOIA, as they’ve done since the law was created decades ago. Still, few agencies have rejected requests identical to those that others have granted, especially when the government’s own attorneys (in this case at OGIS) have worked with the agencies to secure access to the records.

This letter, in particular, from the FDIC simply drips with contempt and condescension for anybody daring to file a FOIA from the FDIC. And the long history of correspondence in this case clearly exhibits an utter lack of goodwill at the FDIC, or any desire at all to comply with the spirit of the FOIA law.

In general, it’s the financial agencies within the government — the FHFA, the FDIC, the Federal Reserve (especially the NY Fed, which considers itself not to be a public entity at all), and of course Treasury — which are by far the worst when it comes to transparency and disclosure. We’re constantly told that certain information is commercially sensitive, for example, only to discover when it finally does get disclosed that there’s nothing commercially sensitive about it.

I’m not sure how to fix this. The White House doesn’t seem to be able to change anything: Barack Obama, for instance, released an executive memo on his inauguration day, making it clear that the Freedom of Information Act “should be administered with a clear presumption: In the face of doubt, openness prevails.” The financial arms of government barely blinked, and continued in their secretive ways.

But in this one particular case, at least, I think it might help if a sympathetic journalist started asking for the FDIC’s travel records independently from JunketSleuth. The FDIC doesn’t consider JunketSleuth a legitimate news organization, and seems to be treating it with especial prejudice. Would they send these kind of letters to an established mainstream news outlet which asked for the exact same information? There’s only one way to find out.

Update: Andrew Gray of the FDIC responds by email:

I’m regretting not getting involved the first time that this was raised but wanted to commit to you that I will personally look into it to see what the issues are.  From my experience, the FDIC is strongly in favor of the transparency required in both the letter and spirit of FOIA.  I know of at least two recent sensitive requests from your Reuters colleagues that were handled to their full satisfaction and have worked with numerous other news outlets and other outside individuals to ensure that their requests are handled appropriately and expeditiously.  While I still need to learn more about the facts in this specific request, I would submit that it is a bit of a stretch to cast a sweeping generalization about our commitment to FOIA based on this one case.

Particularly during the last few years, the FDIC has consistently demonstrated is commitment to openness and transparency.  We make public extremely detailed data about the banking industry, our P&A agreements from failed banks, structured sales and other programs.  During the crisis, we led the development, implementation and management of the Temporary Liquidity Guarantee Program, including posting public monthly reporting on debt issuances.  As an agency, we have led an unprecedented and voluntary transparency initiative throughout the implementation of Dodd/Frank, including posting the names and affiliations in all meetings with outside groups.  Our mission is public confidence – and our reputation as an agency has been enhanced by our willingness to be forthcoming with the public about our actions and views.

COMMENT

Felix,
Smug? Above the law? You should take the time to read carefully all of the correspondence between Mr. Carollo and the FDIC, and also to consider the immense amount of travel that is part of the FDIC’s job. I’m an FDIC employee of some 23 years, and I have no problem with the agency divulging my travel records (they’ve already divulged my salary, by the way), and I don’t think the agency itself is essentially averse to giving Mr. Carollo the information he wants. What they are understandably averse to is spending thousands of dollars to comply with a single FOIA request. You will see in the correspondence that Mr. Carollo has not been helpful to his own cause–assuming his cause is not more about building up his journalistic persona than it is about getting the information he seeks. The FDIC’s response to his request regarding ALL travel records is that it cannot fulfill so general of a request. The correspondence shows that the agency has, in fact, conferred with the FDIC’s Division of Finance as to how it might meet Mr. Carollo’s request, and learned that it would be very costly and time consuming. Yet Mr. Carollo has been unbending in what he wants and how he wants it. He might be surprised at what he could accomplish by just being a little more flexible.

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The HP board fiasco continues

Felix Salmon
Sep 22, 2011 23:26 UTC

In case Joe Nocera didn’t persuade you that HP’s board was pretty much the worst in corporate America, his replacement as Saturday business columnist, James Stewart, will probably manage to do the job:

Interviews with several current and former directors and people close to them involved in the search that resulted in the hiring of Mr. Apotheker reveal a board that, while composed of many accomplished individuals, as a group was rife with animosities, suspicion, distrust, personal ambitions and jockeying for power that rendered it nearly dysfunctional…

Still grappling with Mr. Hurd’s messy departure (H.P. sued him after he joined the rival Oracle as its president, later dropping the case), the company began a search for his successor. Four directors — Lawrence Babbio, John Hammergren, Marc Andreessen and Mr. Hyatt — volunteered to form the search committee.

Some other directors were immediately distrustful. They suspected that some colleagues hoped to advance their own ambitions, including in at least one case to be the next chairman. Others were so angry over Mr. Hyatt’s support for Mr. Hurd that they declined to participate in any committee he was on.

Now, Hurd’s successor, Léo Apotheker, is out, and HP has a new executive chairman as well as a new CEO. And how did the HP board choose Apotheker’s successors? Easy! Both of them — Ray Lane and Meg Whitman — were on the board already. Rather than appoint the best-qualified person for the job, two of HP’s board members managed to snaffle the prime positions for themselves.

Every once in a while, it can make sense for a board member to step in as the new CEO. But not in this case, when HP’s board is being used as a case study in what not to do in boardrooms around the country and the world. HP’s board has failed miserably in its job of governing HP effectively, and no member of that board should be rewarded for that failure by being given the job of running the company on a day-to-day basis.

The HP press release quotes board member Ray Lane, the new executive chairman, talking about Meg Whitman in the most content-free terms imaginable:

“We are fortunate to have someone of Meg Whitman’s caliber and experience step up to lead HP,” said Lane. “We are at a critical moment and we need renewed leadership to successfully implement our strategy and take advantage of the market opportunities ahead… The board believes that the job of the HP CEO now requires additional attributes to successfully execute on the company’s strategy. Meg Whitman has the right operational and communication skills and leadership abilities to deliver improved execution and financial performance.”

HP is, I think, beyond redemption at this point. No wonder shareholders have been dumping their stock: the only thing worse than the company’s management has been the performance of the shareholders’ own representatives on the board. It’s a sad and ignominious end for a company which was once the very soul of Silicon Valley. The best that shareholders can hope for, at this point, is that Whitman sells HP to someone who knows how to run a company with passion and integrity. Maybe Walter Hewlett can get a group together.

COMMENT

“the shareholders’ own representatives on the board.”

I hope one of the outcomes from this ficasco is that shareholders actually get more imput into the makeup of their boards.

Yes boards are elected… but the elections are uncontested. I’m pretty sure I could get elected president if I was the only one on the ballet. Hopefully in few years we’ll have a system where the nominating committee will put forth a slate of 12 – 15 canidates for 8 – 10 annually elected board spots.

Posted by y2kurtus | Report as abusive

BNY Mellon’s interest-rate problem

Felix Salmon
Sep 5, 2011 04:37 UTC

Why is BNY Mellon’s ex-chief, Bob Kelly, getting $33.8 million in severance and benefits in the wake of resigning his position? As Theo Francis explains, it’s because, in the words of the official 8-K, “Mr. Kelly will receive the benefits to which he is contractually entitled on a termination other than for cause”. If this was actually a resignation, Kelly would have got much less. But in reality — and this will come as a surprise to absolutely no one — he had no choice in the matter: he was fired by the board.

The board is spinning this as a question of management style: they’re kicking out the hotshot CEO, and replacing him with the company man. That’s fine, and their prerogative. But the real problem at BNY Mellon is not one of management. And although it can look pretty bad in the press, massaging its earnings and neglecting its duties as RMBS trustee and ripping off its customers on FX fees, ultimately such things are symptoms of a much deeper malaise.

BNY Mellon makes its money by managing $26.3 trillion in assets under custody. That’s a bigger number, I think, than is humanly possible to comprehend, but here’s a start: it’s about $4,000 per human being on the planet, or $85,000 per American, or $235,000 per US household, or five times the market capitalization of the S&P 500. It’s a truly insane amount of money. These aren’t BNY’s assets, of course — they all belong to someone else. But BNY looks after them, and reliably looking after that quantity of assets is an incredibly important and stressful and difficult and expensive thing to do.

Now if you have $26 trillion in assets under custody, and you can lend them out at a very modest interest rate, you can make a lot of money. But interest rates have been at zero for three years now, and show no sign of rising any time soon — BNY Mellon, and its custodial rival State Street, are among the biggest losers when it comes to the Fed’s zero interest rate policy.

So BNY Mellon is facing a much bigger problem than the question of whose name is going to be on the CEO’s desk. It can try to squeeze profits out of areas where they shouldn’t really be squeezed — by dodgy accounting, or by being less than fully transparent in its FX dealings, or by failing to live up to its duty as a trustee. But the big problem, of zero interest rates, isn’t going away any time soon. Which is why BNY Mellon is trading at a market capitalization of less than $25 billion, despite having roughly six times that sum in cash on its balance sheet.

The board, I think, should not be trying to maximize quarterly profits in this interest-environment. The right thing to do, in terms of preserving the long-term value of the franchise, is to treat clients as well as you possibly can, understand that profits are hard to come by when rates are at zero, and wait patiently for better days to arrive. BNY is a public company, so it finds it hard to do that — you can be sure that Kelly would never have been fired if the stock had been going up rather than down. The board’s duty is to represent shareholders, and the shares have been falling, so the board fired the CEO. It’s unlikely to make much of a difference. It just isn’t Bob Kelly’s problem any more.

Update: The part about lending out assets was silly and lazy, sorry. BNY does have an asset-management business with something over a trillion dollars under management; those assets can be lent out. Are repo rates directly related to the overnight Fed funds rate? No, but they’re not unrelated, either. More importantly for BNY, there’s the question of how custodian banks make money from the assets they’re looking after. I haven’t seen a breakdown, but my guess is that most of those assets are fixed income of some description; even if they’re not, their owners tend to be hyperconscious of every basis point when they’re living in a zero-interest-rate environment. Custodian banks make money by effectively reducing the income that the owner gets from her securities by a certain number of basis points. That number looms much larger in a zero-interest-rate environment than it does when rates are higher.

COMMENT

y2kurtus, according to report – which admittedly may not be accurate – the total amount he is getting is 33.8million not 80mn. He sold Mellon to BNY at the top of the market and I suspect a large portion of his compensation derives from that fact. The only bit that makes no immediate sense is how he gets 4million bonus for dragging the stock down but i suspect he is compensated based on outperforming certain peers and the index he is being measured against is massively down.

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The fortunes of Twitter

Felix Salmon
Apr 14, 2011 20:17 UTC

How much are high-value employees worth in Silicon Valley? Quite astonishing amounts of money:

Dorsey came back to Twitter after the company had tried and failed to lure two senior product managers from Google. In both cases the company was fairly close to closing the deal when Google made counteroffers, showering them with restricted stock grants that are reported to be worth more than $50 million in each case. (Clearly, product people are in high demand in Silicon Valley.)

But then again, $100 million is just 1% of what Google was willing to pay for Twitter:

Last fall Microsoft, Google, and Facebook itself all considered buying the company. Microsoft never made an offer, according to sources, but Facebook is believed to have offered $2 billion for Twitter, and Google, by far the most serious, offered as much as $10 billion.

The offers last fall came just five years after Evan Williams bought back Twitter’s parent for $5 million. Going from $5 million to $10 billion in five years is pretty impressive even by Silicon Valley standards, and especially so in a company which never seems to have had a very good CEO or a helpful board.

There’s no shortage of drama at Twitter these days: Besides the CEO shuffles, there are secret board meetings, executive power struggles, a plethora of coaches and consultants, and disgruntled founders.

That kind of thing seems to have worked wonders so far. The main lesson here, I think, is that for all the talk of “leadership” and the like, the most successful CEOs are just the CEOs who happen to sit atop the most successful companies. Sometimes they’re good managers, sometimes they’re not. And there’s little non-circular evidence to suggest that good managers do measurably better than anybody else once they get the CEO job.

COMMENT

I was a software product manager for seven years and never imagined anywhere close to that kind of money. I’m guessing that in the business press this is a generic title for anyone who has both “manager” and “products” in their title, which opens the door to some senior management and development folks.

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