Felix Salmon

Board compensation datapoints of the day

Felix Salmon
Mar 11, 2011 15:43 UTC

Should there be some kind of cap on director compensation? The question arises in Duff McDonald’s Fortune profile of Rajat Gupta from October:

His long career as a well-connected corporate consigliere made Gupta highly coveted as a director. Between 2006 and 2009, Gupta picked up seats on the boards of five public companies — American Airlines parent AMR, global outsourcer Genpact (of which he is also chairman), Goldman Sachs, audio equipment giant Harman International, and Procter & Gamble. He also joined the supervisory board of Russia’s Sberbank and the board of the Qatar Financial Centre. Altogether, those positions paid him more than $3.2 million in 2009.

Gupta has drawn criticism for his hefty board income. He left his position with Sberbank in June. But in 2008, he was paid $525,000 — more than he made for his Goldman board seat — to sit on the board of the bank, the largest in Russia and Eastern Europe by assets, while the next-highest-paid director earned only $110,000. The question of whether he could actually be “independent” while being paid $525,000 was a serious enough one that RiskMetrics, the corporate-governance watchdog based in Washington, D.C., advised minority shareholders to vote against his nomination in 2009. He was reelected anyway.

If a director is being paid half a million dollars a year by a company, that seems to me a pretty effective way in which the management of the company can capture the director. And earning $3.2 million in one year from non-executive board positions alone is just bonkers.

But wait a minute, Gupta has a rival in the insane-board-remuneration stakes! Step forward Cathie Black, who contrived to take home $3.3 million from IBM last year. Admittedly, that wasn’t all for one year’s work: she retired from the board and cashed in all the shares she held in the IBM Deferred Compensation and Equity Award Plan, under which her $260,000 annual director’s fee gets paid out in stock and held by the company.

I do understand that board members of big corporations are often very wealthy people, and that therefore it takes large sums of money to so much as get their attention. But that’s not always the case. Here’s Warren Buffett, in his latest annual letter:

The directors who represent you think and act like owners. They receive token compensation: no options, no restricted stock and, for that matter, virtually no cash. We do not provide them directors and officers liability insurance, a given at almost every other large public company. If they mess up with your money, they will lose their money as well. Leaving my holdings aside, directors and their families own Berkshire shares worth more than $3 billion. Our directors, therefore, monitor Berkshire’s actions and results with keen interest and an owner’s eye.

I’m particularly impressed, here, by the lack of D&O insurance — although I suspect that the directors might just buy their own insurance personally. But this, to me, is pretty much the ideal board, comprised of real owners of the company, who don’t need to be attracted with quarter-million-dollar annual retainers or Deferred Compensation and Equity Award Plans. As an individual shareholder, I’d be much more comfortable being represented by a Berkshire-style board than by the kind of people who feel the need to charge $525,000 a year for their services.


The effect is even more interesting when you consider board members who give the appearance of being independent, e.g., academics and college presidents, for whom the director’s fee is a very substantial income supplement. For example, Mary Sue Coleman, President of the University of Michigan, is one of two academics who are members of the board of Johnson & Johnson. The $200K plus that they receive is more significant to them than it is to many board members who are wealthier. The academics appear to be independent but often are the least independent because the prospect of losing an amount of money that would change one’s financial life is not something anyone wants to face.

Very useful when it comes to having a vote against being acquired (and losing that board position) or against firing a CEO (like Bill Weldon at JNJ).

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The secrecy of the FDIC, FOIA edition

Felix Salmon
Feb 24, 2011 15:22 UTC

Russell Carollo, of Mark Cuban’s JunketSleuth, has a great post up today about the way in which the FDIC aggressively rebuffs FOIA requests that other government agencies are happy to comply with. The FDIC has long been a hugely powerful and unaccountable arm of the government, and its letters to Carollo stink of arrogance and entitlement.

The FDIC repeatedly refused to provide any information on travel by its employees, claiming, among other things, that it has no central database, that Junketsleuth’s requests were too broad and that even if they had the information, the public wouldn’t have a right to see it…

Although the FDIC has rejected all of JunketSleuth’s Freedom of Information Act requests, more than 20 other agencies that got identically worded letters turned over their travel databases, which contain hundreds of thousands of records…

In addition, more than 30 agencies have provided JunketSleuth with other types of records. Those include hotel bills, airline receipts and other documents related to travel by top agency officials and other government employees, or to travel to specific destinations that we asked about.

But the FDIC provided nothing.

In response to JunketSleuth’s initial request for data, the FDIC claimed that our request – again, worded identically to those that yielded voluminous records from many other agencies – did not “reasonably describe” the information being sought.

The FDIC also said that we did not specify a time frame for the records we sought, suggesting that our request for data could be interpreted to mean all travel-related information compiled since the agency was created in 1933.

The FDIC seems perfectly happy to send responses to FOIA requests saying that it will provide no information at all on the grounds that the FOIA “could be construed to include” some impractically massive amount of information. It’s a textbook example of bad faith: what’s clearly happening here is that the FDIC has first decided that it’s not going to provide anything at all, and then instructed its lawyers to find some colorable reason why the request is being denied.

Why is it that the FDIC is being so willfully obstructive even as other agencies, including the Department of Defense and the FDA, are much more cooperative? The answer is surely the culture of secrecy and of we-know-best that pervades the financial sector generally, including the areas where it seeps into government. The Fed, of course, is just as bad, if not worse — it has a habit of dismissing FOIA requests out of hand, on the grounds that it’s not a government agency. (Technically, it’s a privately-owned corporation.)

Whenever information has emerged which Treasury or the Fed initially wanted to keep secret, the deleterious effects have been invisible — once again, the risk of something bad happening as a result of disclosure is an excuse used to justify a blanket decision not to disclose anything, rather than the reason for that decision. It’s worth remembering here that immediately before he was Treasury secretary, Tim Geithner ran the hugely secretive New York Fed, and did nothing to improve its transparency.

Government is, by its nature, a massive bureaucracy, and it’s very hard if not impossible to change an ingrained culture in such places. But a bit of top-down pressure could only help. Perhaps the White House could appoint an “openness czar” or similar to whom anybody getting serially rebuffed could appeal. Because this secrecy is ultimately self-defeating, not to mention politically damaging.

(Cross-posted at CJR)


Felix S. asks: “Why is it that the FDIC is being so willfully obstructive even as other agencies, including the Department of Defense and the FDA, are much more cooperative?”

As a general comment, bank regulatory agencies have very wide internal discretion on expenses, and they would prefer not to be scrutinized, thank you very much.

More important, bank regulatory agencies generally have limited external oversight. They are funded by bank fees (OCC, OTS) or bank premiums (FDIC) not by the Congressional budget process. Once those bank fees/premiums are paid, the contributors (banks) have absolutely no audit or review power over how the funds are spent. And Congress can do little about this except excoriate the agencies publicly for a day or two. The Inspector General/GAO does perform audits but not often enough.

And the current FDIC reaction to FOIA has two other specific causes: first, the FDIC Fund is running a deficit (it is in the 2nd year of a 3-year prepaid premium that provides the Fund cash but not income).

When the crisis hit, the FDIC began hiring consultants and outside legal experts not permanent staff and internal counsel. These external contractors are paid by the hour making the FDIC hugely inefficient for managing bank failures. Whenever you pay an investigator or lawyer by the hour to analyze a problem (a bank failure or near failure), the incentive for them is to keep digging deeper/wider/more far afield in order to keep the billable hours up. The FDIC has responded to this ballooning expense by lagging their payables to extraordinary terms–200+ days in some cases–in order to reduce apparent expense and to minimize the fund deficit until they can buy time to accrue additional income from the prepaid premiums.

Practical result: this small-bank failure crisis will be stretched out over 3-7 years so the FDIC doesn’t have to borrow from the Treasury for the clean up. So don’t expect a reasonable FOIA release anytime soon.

Second, Chairman Bair has announced that she is leaving in June 2011. While she has done a good job during a tough time–certainly standing up to Paulson, Geithner et. al. who were trying to raid the FDIC fund wasn’t easy–she is now very surely protecting her legacy. Why would she want to release records on a FOIA request?

So the FDIC FOIA stonewall seems to be a case of “apres moi, le deluge.” But, the coming flood will be more like drops of water akin to economic Chinese water torture.

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Eric Schmidt’s next act

Felix Salmon
Jan 21, 2011 16:35 UTC

Ken Auletta, who literally wrote the book when it comes to Google, has a must-read take on what exactly is going on with Eric Schmidt, and goes out on a limb by saying that his tenure in the weird job of non-CEO executive chairman will last just one year before Schmidt leaves to “do something else.” (This fits with reports that Schmidt is planning to sell a chunk of Google stock.)

The era of Larry Page, CEO, is about to begin: it’s clearly what Page wants, but it’s also something that he’s temperamentally ill-suited to:

Larry Page, who read books on business as a young man, who at age twelve read a biography of Nikola Tesla and took away the lesson that it was not enough to be a brilliant scientist if you were not also a good businessman who controlled your inventions, had more aptitude for management than Sergey Brin. It was always assumed that one day Page would be C.E.O. Now that he is about to be, he will have to change. He is a very private man, who often in meetings looks down at his hand-held Android device, who is not a comfortable public speaker, who hates to have a regimented schedule, who thinks it is an inefficient use of his time to invest too much of it in meetings with journalists or analysts or governments. As C.E.O., the private man will have to become more public.

Looked at in this light, Schmidt’s year as executive chairman is essentially a way of softening the blow of being CEO: Schmidt will take on a lot of the responsibilities which Page is ill-suited to, at least for a while, giving Page some time to get his management ducks in a row before facing a lot of public music.

Meanwhile, YouGov BrandIndex sends over this chart, showing that the perceptions gap between Facebook and Google has never been narrower:


My suspicion is that it’s Sergei, rather than Larry, who’s going to be mostly responsible for keeping Google’s score as high as possible here, and tending the don’t-be-evil flame. He’s also going to be in charge of various undisclosed moves out of Google’s core advertising business, while Larry tries to bring more focus and drive to what has become a very large bureaucracy.

As for Eric, as Auletta says, he’s “fifty-five, a billionaire, a man comfortable in his own skin.” The option space available to him is enormous. But after spending his entire professional life working for other people, I suspect he’ll want to be the owner or founder of whatever he does next.


John, I wouldn’t have a meeting with Diller if I am running google. He is an overrated trader of internet companies, most of which peaked just as he bought them. Many of his companies compete (poorly) with one google service or another, but if I was in a meeting with him, I would look at my android. I’d try to be discreet about it, so as to not insult the guy, but I would bet Diller looks at his Blackberry when he is in meetings.

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Eric Schmidt and the job of non-CEO executive chairman

Felix Salmon
Jan 20, 2011 21:51 UTC

Ten years is a long time to be one of the most visible CEOs in the world, especially when the buck doesn’t really stop with you but rather with a triumvirate where you’re clearly the third wheel. So the news that Eric Schmidt is handing over the top job at Google to Larry Page makes a certain amount of sense. As he said on Twitter, Page has a decade’s experience as a senior executive of Google, and day-to-day adult supervision is no longer needed. Google’s venture-capital backers had every reason to want Page and Brin to bring in an experienced outside CEO in 2001. Today, most of those reasons no longer apply, and Google can be run by one of its two founders, in a world where founders, in general, beat out managers.

Schmidt is also keeping for himself the outside-facing parts of CEO-dom which Silicon Vally nerds by their nature are pretty bad at. He has a clumsy way of putting it, but when he talks about “the deals, partnerships, customers and broader business relationships, government outreach and technology thought leadership that are increasingly important given Google’s global reach,” he basically means the large part of the CEO job which involves schmoozing various people in Google’s interest.

This is an interesting role, in terms of US corporate governance. Non-executive chairmen are common, but executive chairmen are nearly always the CEO as well. There’s a good reason for that: all executives ultimately report to the CEO, while the CEO reports to the board and its chairman. An executive chairman who’s not the CEO will be both an executive, reporting to the CEO, as well as being the CEO’s boss. That could conceivably get awkward — but Google is a special case. For one thing, the CEO isn’t going to be asking for a massive pay package, so tension surrounding compensation goes out the window. On top of that, the idea of Google being run by a triumvirate was already awkward, and this new setup isn’t any more awkward than that.

When I was pondering the idea that Facebook could remain a privately-traded company in perpetuity, it seemed to me that one of the main reasons for it to do so was that Mark Zuckerberg has neither the inclination nor the desire to do the kind of outward-facing schmoozing that Schmidt is taking as his job. But Zuckerberg can’t follow Google’s lead and hire an executive chairman while remaining CEO. He wants full control—which means being both chairman and CEO, reporting to no one but a hand-picked board.

So while the job of non-CEO executive chairman is a fascinating one, don’t expect to see it replicated much if at all. It works for Google; it probably doesn’t work elsewhere.


Sounds like a good formula for turning Facebook into the next iteration of Friendster

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Can Rolling Stone claim Blankenship’s scalp?

Felix Salmon
Dec 6, 2010 20:09 UTC

Can Rolling Stone claim another scalp? Six months after ending the career of Stanley McChrystal, Rolling Stone published Jeff Goodell’s blistering, 7,600-word profile of Don Blankenship, the CEO of Massey Energy. Entitled “The Dark Lord of Coal Country,” it’s powerful stuff:

Unless you live in West Virginia, you’ve probably never heard of Don Blankenship. You might not know that he grew up in the coal fields of West Virginia, received an accounting degree from a local college, and, through a combination of luck, hard work and coldblooded ruthlessness, transformed himself into the embodiment of everything that’s wrong with the business and politics of energy in America today — a man who pursues naked self-interest and calls it patriotism, who buys judges like cheap hookers, treats workers like dogs, blasts mountains to get at a few inches of coal and uses his money and influence to ensure that America remains enslaved to the 19th-century idea that burning coal equals progress…

29 men died violent deaths in large part because Don Blankenship ran what amounted to an outlaw coal mine, racking up more than 500 safety violations and nearly $1 million in fines last year alone.

And while the lethal explosion at Big Branch got the headlines, that’s not all the human misery that Blankenship has caused: Goodell goes into detail about the way in which his decision to divert 1.4 billion gallons of toxic coal slurry into old coal mines poisoned the drinking water of hundreds of people with heavy metals such as arsenic and lead.

According to the lawsuit, Massey knew that the ground around the injection sites was cracked, which would allow the toxic waste to leach into nearby drinking water. But injecting the slurry underground saved Massey millions of dollars a year. “The BP oil spill was an accident,” says Thompson. “This was an intentional environmental catastrophe.” Massey denies any wrongdoing in the case. But after Blankenship started pumping the slurry underground, he took steps to make sure that he and his family did not suffer. Around the time that his neighbors were starting to get sick, Massey paid to build a waterline to bring clean, treated water directly to Blankenship’s house from Matewan, a few miles away. Yet he never offered to provide the water to his neighbors, some of whom can see his house from their windows.

Goodell’s story was prescient, perhaps even self-fulfillingly so:

Blankenship still holds an iron grip on Massey’s board of directors. “He’s the embodiment of an imperial CEO,” says one expert on corporate governance. But the board may soon find itself forced to choose between Blankenship and the company’s survival… big shareholders are beginning to turn against the company. “The mine disaster was an eye-opening event for us,” says Brian Bartow, general counsel for the California State Teachers’ Retirement System, a large pension fund that is a major holder in Massey stock. “We re-examined the risks that the company was running in the way it does business. In our view, it has a lot in common with the subprime mortgage crisis — there are a lot of risks here that Massey is not acknowledging.”

I ask Bartow if he believes Blankenship should resign. “He should,” he says. “He clearly doesn’t get it.”

Blankenship announced that he was retiring—to unanimous astonishment—on Friday, a week after Goodell’s story appeared. Massey Energy itself will probably not last long in its present form: although it’s reportedly looking for companies to buy, more likely is that it will end up being swallowed by a larger player. And Blankenship himself is still the target of various lawsuits. But Goodell’s conclusion still, sadly, stands.

“I don’t care what people think,” he once said during a talk to a gathering of Republican Party leaders in West Virginia. “At the end of the day, Don Blankenship is going to die with more money than he needs.”


586 mountains gone, Blair Mountain slated for Mountain Top Removal to wipe out the history they won’t teach in schools: that those red-neckerchief wearing coal miners won us the 40 hour work week and ended child labor in the US. That union was broken by Mountain Top Removal coal mining practice-blastin 1000ft of a mountain and burying over 2000 miles of head water streams. 116,000 miners lost their jobs since it takes about 12 men to dynamite a mountain. Votes on the floor of the house could pass the Clean Water Protection Act but the bill is held hostage by West Virginia Legislator Nick Rahall, Committee on Transportation and Infrastructure: the House Transportation Subcommittee on Water Resources and Environment apply pressure here and boycott PNC Bank, the only remaining funder of a practice so costly to the environment that the Rain Forest Action Network convinced Bank of America not to fund it. Thanks for spreading the shock waves of Appalachia Rising. Visit iLoveMountains.org

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BNY Mellon’s massaged earnings reports

Felix Salmon
Dec 6, 2010 16:48 UTC

With Peter Eavis having left the WSJ, who will take on the job of poring over banks’ balance sheets to expose their crazy accounting? Aaron Elstein, that’s who! He pulls no punches today:

BNY Mellon spins the numbers to make its results look better.

Consider the way the company reports earnings. In quarterly releases, BNY Mellon prefers to highlight income from continuing operations, because it feels that’s the best way to show underlying performance. But its definition of “continuing operations” is always changing, according to a review by Crain’s New York Business of all the bank’s releases for the past three years.

BNY Mellon sometimes excluded investment write-downs from operating results or assessment fees imposed by the Federal Deposit Insurance Corp. At other times, it didn’t include certain taxes or the costs of settling a dispute with the IRS over leases. In one quarter, BNY Mellon excluded litigation reserves; in two others, it called them “special” litigation reserves.

Additionally, the 48,000-employee company routinely excludes costs associated with relocating staffers and merger-related items, even though it often moves people and does M&A deals—26 over the past three years…

“They’re definitely playing games, cherry-picking to inflate their numbers,” says Douglas Carmichael, an accounting professor at Baruch College and a former chief auditor of the Public Company Accounting Oversight Board…

Longtime banking analyst Nancy Bush of NAB Research says BNY Mellon’s frequent changes in defining earnings make it difficult for investors to figure out how well the bank is doing. “You never get the same figures twice,” she says. “It’s very frustrating.”

Yes, BNY reports GAAP figures—but at banks, GAAP figures tell you very little, and it’s crucial that the reported numbers allow analysts to make apples-to-apples comparisons. Bank earnings are extremely opaque at the best of times, which is one of the reasons that banks tend to trade at lower multiples than other industries: no one really knows what might be buried within them. And as a rule, the more that senior management is spinning its earnings rather than reporting them as transparently as it can, the less trust that markets will have in the bank.

I do wonder, though. Is this a tactical decision by BNY’s Bob Kelly? Has he calculated that the boost in share price he gets from reporting artificially-rosy earnings is greater than the decline in share price he gets from leading analysts on a wild goose chase every quarter to try to work out what he’s doing? Does he reckon that analysts’ opinions don’t actually matter that much, and that his shareholders—including Warren Buffett—would rather just see something pretty and massaged?

Or is it simply that once he started down this road he couldn’t stop? It might make sense to switch to a more transparent and consistent set of reporting standards, but that would mean reporting lower earnings, and it’s hard for any CEO to admit that prior earnings figures were massaged in any way. So we might have to wait for a new BNY CEO before we see any changes on this front. After all, the chairman of the board—one Robert Kelly—is not about to rock the boat at all.

Why can’t HP’s board get over Hurd?

Felix Salmon
Nov 6, 2010 16:27 UTC

Are HP’s directors physically incapable of letting l’affaire Mark Hurd drop? Not only are their fingerprints all over the huge WSJ article on the subject today and Adam Lashinsky’s less exhaustive article in Fortune, but they’ve also decided to give the original letter accusing Hurd of impropriety to a San Diego law firm representing HP shareholders, making it certain that the letter will eventually become public. And it stands to reason that someone on the HP board was responsible for the bizarre NY Post story a couple of weeks ago claiming that Hurd had an affair with a Sun executive.

There are clearly multiple board sources, too: Fortune refers to the woman who hired Jodie Fisher as Caprice Fimbres, describing her as Hurd’s “program manager”, while the WSJ calls her Caprice McIlvaine, and calls her Hurd’s “unofficial chief of staff”. (On her LinkedIn page, she says that she was Hurd’s chief of staff.) It seems that she was ultimately responsible not only for filing Hurd’s fatally inaccurate expense accounts, but also for deciding that the best place to find a gatekeeper for Hurd was from the group of “cougars” on a reality TV show called “Age of Love”. She also flew Fisher to the Grove Hotel in Boise, where Fisher dined with Hurd and watched the Minnesota Vikings play the Green Bay Packers in his hotel room, but didn’t do any work for HP.

All of these revelations — including the unproved accusation that Hurd told Fisher about his bid for EDS — might well harm Hurd, but they also make the HP board seem leaky and defensive, rather than being concentrated on its main job, which is representing shareholders and overseeing the strategic direction of the company. What’s clear is that the arrival of Ray Lane as chairman hasn’t stopped the leaks or made the board seem any more grownup than it was before; quite the opposite, in fact. If I were an HP shareholder, I’d be worried about that: the company clearly needs leadership and strategic direction, but instead the board seems to be more interested in slinging mud at its former chairman. Depressing.


“Lets review HP under Hurd… Sales up sharply… costs slashed… stock price DOUBLED during a period of truly poor performance for U.S. large cap equities.”

They say that a bubble is visible only in retrospect. One could say that about bad judgment as well.

The Wall Street view of Hurd is based on chronic “short termism”, but it is worse than that. It is a inability to make good judgments about research and development in a highly technical field that Wall Street analysts are simply not qualified to evaluate. HP has “slashed costs” to the point of scattering its seed corn to the winds.

I stand by my comment that Wall Street’s love of Hurd is basically slobber. It would be pathetic if it didn’t have the effect of undermining good judgment in the technology industry.

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Horowitz defends HP

Felix Salmon
Oct 9, 2010 23:48 UTC

Ben Horowitz has published his first Siwoti post! That’s where you read something on the internet that is so wrong and misguided, you have no choice but to sit down and set the record straight.

The first rule of the Siwoti post, however, is that you have to link to that which angers you. Horowitz is perfectly capable of linking out — he’s even linked to me, in the past — but in this case, an attempted defense of the HP board, he just waves his hand in our general direction:

Recently, my old company Hewlett-Packard has been in the news—and not in a good way. I’ve been watching the coverage from the sidelines up to this point, but felt increasingly compelled to join the conversation and share my point of view. So here goes.

After firing their CEO, Mark Hurd, the HP board has been accused of everything from incompetence to being prudes. The criticism comes from credible, important journalists and bloggers such as Joe Nocera from the New York Times, prominent economics blogger Felix Salmon, and former GE CEO Jack Welch.

Horowitz then proceeds to argue that these named critics are wrong, and that Hewlett-Packard’s board was right to fire Mark Hurd. To read his blog entry, you’d be forgiven for thinking that our entire argument was, essentially, “HP’s board fired Mark Hurd. That was a stupid decision. Therefore, HP’s board is teh stupid.”

But from the very beginning it was clear that the board was full of weak and incompetent bunglers whether or not they were right to fire Hurd; there were numerous commentators saying that the board was wrong even though the decision to fire Hurd was the right one. Or, to be more precise about things, there were numerous commentators saying that the board should have fired Hurd, but it didn’t: instead, the board allowed Hurd to resign, collecting something over $30 million in severance along the way.

Take Nell Minow, for instance:

Some people are complaining that this was an over-reaction. They say it could have been handled privately, with reimbursement and a stern talking to. These people have clearly not consulted a lawyer lately…

The actual (not just apparent) tone at the top is the board’s responsibility. They cannot keep in place an executive who has demonstrated such a failure of judgment and responsibility. They cannot keep in place an executive they cannot trust. It is hard not to conclude that the culture that created a $50 million liability to settle fraud charges needs a new leader.

Many people are objecting to Hurd’s severance package, which may be worth as much as $30 million. This is indeed appalling…

The HP board has been a serial corporate governance offender, so we should not be surprised that they have bungled this one. This contract that fails to state what “cause” means is the one that famously — and outrageously — provided that all of Hurd’s first year performance goals were deemed to have been met. This is the board that mis-handled the hiring, direction, and firing of Carly Fiorina and then mis-managed the “pretexting” scandal following the investigation of a leak from the boardroom. This is the board that TCL has rated as high-risk for its inability to manage incentive compensation. And now, this is the board that is paying the CEO who essentially embezzled corporate funds by submitting his expenses for reimbursement $30 million to go away.

Or Michael Schrage:

HP’s directors may have been absolutely right to force Hurd’s departure. But the firm’s fiduciaries wrongly missed a world-class opportunity to simultaneously respect the best interests of its stakeholders and expand the boundaries of good governance…

This was an opportunity lost. Let’s hope other boards will learn from HP’s mistake.

In my first post on the subject, I was harsh on the board while being very careful not to make a determination one way or the other about whether the decision to oust Hurd was correct. And my second post had nothing to do with that decision at all — rather, it was about the entirely separate decision to sue Hurd for hiring Hurd.

Similarly, Nocera’s criticism of HP’s board is much broader than you’d guess from reading Horowitz’s post. He started off with this:

H.P. says its board should be applauded for not letting Mr. Hurd off the hook. But this is just after-the-fact spin. In fact, the directors should be called out for acting like the cowards they are. Mr. Hurd’s supposed peccadilloes were a smoke screen for the real reason they got rid of an executive they didn’t trust and employees didn’t like.

The stand-up thing would have been to fire Mr. Hurd on the altogether legitimate grounds that the directors didn’t have faith in his leadership. But of course Wall Street would have had a conniption if the board had taken such a step. So instead, it ginned up a tabloid-ready scandal that only serves to bring shame, once again, on the H.P. board.

He then followed up with a column which, again, had nothing to do with the decision to fire Hurd:

The Hewlett-Packard board is back to doing what it does best: shooting itself in the foot. By filing an embarrassing lawsuit against the company’s former chief executive, Mark V. Hurd, this week — a suit that unwittingly highlights the mistakes it made in the way it let Mr. Hurd go — the H.P. board can now lay claim, officially, to the title of the Most Inept Board in America. It’s going to take a yeoman effort to dethrone these guys.

Today, Nocera’s third column bashing the HP board very little to do with Hurd at all; instead, it criticizes them for their choice of Léo Apotheker as Hurd’s replacement.

It takes your breath away, really: the same board that viewed Mr. Hurd’s minor expense account shenanigans as intolerable has chosen as its new C.E.O. someone involved — however tangentially — with the most serious business crime you can commit.

If it were anybody besides the H.P. directors, the situation would be unbelievable. With these guys, though, it’s all too believable.

Which leaves Jack Welch. What did he say?

“The Hewlett-Packard board has committed sins over the last 10 years,” said Mr. Welch. “They have not done one of the primary jobs of a board, which is to prepare the next generation of leadership.”…

The tech giant is on its third CEO in about 11 years… Mr. Welch blamed the turnover on the board…

“They end up blowing up the CEO’s and don’t have anyone else in mind to come in. Where the hell was the leadership development? Who are these board members?”

Mr. Murray asked if Mr. Welch knows any of the board members.

“I wouldn’t admit it if I did,” said Mr. Welch.

In other words, it’s pretty clear why Horowitz didn’t link to the criticism from Nocera, or me, or Welch: we simply didn’t say what he likes to think that we said. So instead of responding to us, he comes up with bizarre arguments like this:

HP employs over 300,000 people. Every single one of HP’s employees is keenly interested in the qualities, skill sets, and behaviors that HP values most. Financial compensation and access to the CEO are the most important ways that HP communicates what it values to its employees. Jodie Fisher had more access to the CEO and was paid more than 99.9% of HP’s workforce, despite having no traditional qualifications.

It’s important to note that this was not Hurd paying for his personal extracurricular activity out of his own pocket. This was the Hewlett-Packard Corporation paying a softcore porn movie star with no relevant work experience more than it pays Harvard graduates with 20 years of industry experience.

This simply isn’t true. How much did HP pay Fisher? Let’s go to the tape:

Ms. Fisher worked at a dozen or so events including at least one in Europe and one in Asia, according to people familiar with the matter. Ms. Fisher was typically paid between $1,000 to $5,000 per event, these people said.

12 events at an average of $3,000 per event comes to a total of $36,000; I’m quite sure that HP pays Harvard graduates with 20 years of industry experience more than that.

And of course Horowitz completely fails to mention things like the fact that HP’s board has had no chairman for most of the past three months; it’s now chosen former Oracle president Ray Lane to fill the position, in a move which looks like some kind of attempted revenge for Oracle hiring Hurd. And then there’s the fact that the board’s front man, Hororwitz’s partner Marc Andreessen, owns essentially no stock in HP at all; this despite the fact that Horowitz and Andreessen sold their company, Opsware, to HP for $1.6 billion.

HP’s board is literally not invested in the company, and it shows. It’s weird that Horowitz, with all his conflicts, has stepped up to the plate to try to defend them; but it’s understandable that no one within the company has attempted a similar argument. Because this argument, at least, is weak, and it’s reliant upon the flimsiest of straw men for whatever little strength it has.


Shareholders need to start a rebellion. Every time someone at HP opens his mouth, the stock falls. Focus on the business, fellas.

Posted by samlevy1958 | Report as abusive

Otiose shareholder of the day, B&N edition

Felix Salmon
Sep 30, 2010 03:31 UTC

Steven Davidoff goes into lots of detail today on the close-run fight between Ron Burkle and Leonard Riggio for control of three board seats at Barnes & Noble. It was a nailbiter of a vote, and informed opinion had it that Riggio, B&N’s founder, was going to end up the loser, despite controlling a large chunk of the outstanding shares. After all, the most powerful shareholder advisory firm, Institutional Shareholder Services, favored Burkle — and big investors like Vanguard and BlackRock generally follow ISS’s lead.

This time around, however, they didn’t, which is interesting. But what’s absolutely astonishing, in a vote of this importance, is the pathetic showing from State Street, which controls about 1 million shares, or about 1.75% of the company. In a vote as close as this, that’s a massively important stake, which can easily tip the outcome one way or the other.

State Street somehow came to the conclusion that it wanted to vote for an unholy mixture of the two antagonists: for two of Burkle’s nominees, but against Burkle himself, and against Riggio’s poison-pill plan. It was a vote which would have satisfied no one — had it counted.

But then, just to add an element of utter farce to the proceedings, State Street contrived to vote its shares late, thereby ensuring that none of its votes were counted at all.

If State Street had simply intended to vote for one side or the other, the move could have been some kind of weird schoolyard attempt to curry favor with the winner had the vote gone the other way: State Street could always have said “I did vote for you”, or “I didn’t really vote against you”, or something annoying like that.

But since the attempted vote itself was so lily-livered, this looks to me like simple incompetence.

Maybe a shareholding worth $17 million or so is ultimately just not all that important to a firm the size of State Street. But it’s surely important to Burkle, Riggio, and B&N’s board, and these kind of antics come close to openly mocking the concept of shareholder democracy.

We hear a lot about the obligation that companies have to their shareholders. But equally, large shareholders have an obligation to the companies they own: to take their stake seriously, and not to play silly games by delaying borderline-incomprehensible votes until it’s too late to cast them. If this is how State Street treats the companies it owns, I wouldn’t want to entrust them with my heard-earned savings.

Update: Some good comments here, surrounding State’s Street’s status as a custodian and the difficulties it faces in learning from the shares’ beneficial owners how it should vote. But Davidoff made it sound as though State Street was going to vote all its shares the same way; is that not true? And the delay in voting seems to have been a matter of minutes, rather than days. In any case, it seems to me that voting shares is one of the few things that custodians are expected to do well, and that State Street obviously failed on that front, this time.


In all probability, these votes represented ETF shares, and State Street’s voting was determined by some very complex interests. I’ve voted a lot of these, and they can be done over the phone or via Internet, weeks in advance. If State Street was representing multiple voting blocks, they could have processed them as the decisions came in. However, considering that they were voted consistently across all the shares, it does not appear that they were polling the holders to determine the vote.

If they were ETF shares, State Street likely would not vote something egregiously anti-shareholder, but it also doesn’t want to get in between two powerful interests that may try and make their lives difficult. My best guess for the strange split, late vote was that State Street was trying to vote whoever was winning, was unable to get a proxy tally until the start of the meeting (as it is highly material, inside info), got a close tally, and then rushed to put in a split ticket, too late to count. They might have been sued if they did not attempt to vote at all, but this gave them some cover.

The growth of ETFs = the death of shareholder democracy.

Posted by Derrida | Report as abusive