Archive for the 'Business' Category

Why Leaders Don’t Learn From Success

Posted on April 3, 2011, 6:57 am. 1 Comment

From April’s Harvard Business Review:

In this article we argue that success can breed failure by hindering learning at both the individual and the organizational level. We all know that learning from failure is one of the most important capacities for people and companies to develop. Yet surprisingly, learning from success can present even greater challenges. To illuminate those challenges—and identify approaches for overcoming them—we will draw from our research and from the work of other scholars in the field of behavioral decision making, and focus on three interrelated impediments to learning.

The first is the inclination to make what psychologists call fundamental attribution errors. When we succeed, we’re likely to conclude that our talents and our current model or strategy are the reasons. We also give short shrift to the part that environmental factors and random events may have played.

The second impediment is overconfidence bias: Success increases our self-assurance. Faith in ourselves is a good thing, of course, but too much of it can make us believe we don’t need to change anything.

The third impediment is the failure-to-ask-why syndrome—the tendency not to investigate the causes of good performance systematically. When executives and their teams suffer from this syndrome, they don’t ask the tough questions that would help them expand their knowledge or alter their assumptions about how the world works.

The “Huge” Compensation of Chesapeake’s Aubrey McClendon

Posted on May 19, 2009, 8:56 am. Closed

Over the past month, the CEO of Chesapeake Energy, Aubrey McClendon, has faced a lot of discimination over his apparently too-generous $75 million bonus. The folks over at Southeastern Asset Management, good value investors, argue that there are two big misconceptions regarding McClendon:

Most recently, like in the last week or so, Chesapeake and Aubrey McClendon are hitting all these compensation lists for highly paid CEOs. There are two big misconceptions in the current discussion around McClendon being number one on that list. First, the payment of 75 million bucks to him is a lump sum allowance towards drilling that applies to the next five years. In other words, it should be viewed as 15 million per year, not 75 million in one year. While in societal terms, of course that’s absurd compared to what teachers make, but it’s less than all of his peers at similar companies like XTO and Devon. But the second point and the most important is the concept of pay for performance. Many of the people in the highly paid list did poor jobs in 2008 and did nothing to de-risk their companies where things, when things were good. By contrast, McClendon made shareholders about 30 billion dollars on three of his big four shale plays. He had paid 4.6 billion for three shale play land positions and last year he sold less than a third of those for 8.6 billion, which implicitly valued what they kept at 25.9 billion. In addition to highlighting 30 billion dollars of value created, these sales brough in a lot of cash to de-risk the balance sheet. Because gas prices plunged in ’08, his stock did  poorly, then it did even worse when his big margin call took him out. At no point did he endanger the company with his bad personal decision, and he certainly couldn’t control gas prices. Over the long term, his company has built the most per share value of almost any company in the world. So for this, it’s probably okay to pay him industry average, but his Board has framed this poorly, then they made smaller bad decisions on peripheral compensation that muddied the water. The bottom line is this is a fantastic company, he has done a terrific job, and if you were on that comp committee, you would have leaned towards rewarding him handsomely for his 2008 performance.

With this additional knowledge of McClendon’s accomplishments, its a lot harder to be outraged. A story like this makes for good news, but sometimes when you dig deeper, you realize there’s not much there.

Freddie Mac CFO Found Dead

Posted on April 22, 2009, 3:20 pm. Closed

Via Bloomberg:

Freddie Mac Acting Chief Financial Officer David Kellermann, 41, was found dead early today in the basement of his home in a Washington suburb, police said.

There were no signs of foul play, and the death is under investigation, Fairfax County, Virginia, Police Officer Shelley Broderick said. She said early reports from others in the department indicated Kellermann’s wife reported a suicide. The medical examiner’s office said it’s conducting an autopsy, and the results may be released as soon as today.

…

The Securities and Exchange Commission and the Justice Department have been questioning executives about Freddie’s accounting practices, according to company filings. McLean, Virginia-based Freddie and Washington-based Fannie Mae, the mortgage-finance companies seized last year by U.S. regulators, reported in September that they were under investigation.

I don’t think its a good sign when the company CFO is found dead without any signs of foul play. Especially with a failed company like Freddie Mac, I bet there is some really scandalous stuff just waiting to be uncovered. Either that or the guy knew too much.

An 1897 Boom and Bust Retrospective

Posted on March 12, 2009, 9:18 am. Closed

This retrospective came to me via Alphaville and Option ARMageddon.

Way back in in 1897, L.M. Holt wrote a paper entitled “Panics and Booms”. When Holt wrote the paper, the economy was at the tail end of a depression that had begun in 1892. Holt argued that booms always follow busts, so folks should anticipate the return of flush times. Five years later, a new boom was in full swing, and a newspaper republished Holt’s paper as a warning that the next depression was due around 1910, give or take.  Option ARMageddon writes that “the Bank Panic of 1907 arrived a bit ahead of schedule.”

Here is a snippet of the paper:

During prosperous times, there being work for all, all are supplied with the means of accumulating wealth, and thus all are enabled to provide themselves, and families with all the necessaries, and many of the luxuries, of life; and hence, during the prosperous times the demand for goods and property increases and soon the demand exceeds supply, and then prices advance.

This rule, which is applied to the laborer, is also applied to the business man. Prosperous times induce business men to branch out in their several lines of trade…. The volume of trade being large, each gets a corresponding proportion of it. Many business men find that they can do more business than is allowed by their limited capital. They then buy on credit.

Prices are continually advancing, therefore they are able to make margins of profit not only on the capital furnished by themselves, but on the capital furnished through their credit.

This rule also applies to people dealing in real estate. The country is growing; money is easy; the times are good; business is prosperous and therefore speculation is favored. A man worth $5000 can buy four times that amount of property using his credit, and sometimes he buys ten times that amount or more. While prices are advancing he not only gets the benefits of the advance in the price of the property represented by the capital furnished by himself, but also on the capital furnished by his credit.

When prices of property and goods during a period of business depression are falling, the loss does not come on the entire property, but only on that portion of it represented by the cash capital the man has invested in it. The debt never shrinks until the real investment is all gone.

Things That Go Up in a Down Economy

Posted on February 12, 2009, 11:10 pm. Closed

Kotke calls attention to things that go up in a down economy:

Marginal Revolution has been posting an ongoing series of posts on countercyclical assets: things are doing well even though the economy as a whole is struggling. The latest example is that shoe repair shops are doing a booming business. One Florida cobbler’s repair volume is up 50%.

Some other examples are increasing activity on Second Life, cocoa futures, unusual pets, gold coins and wine, evangelical churches, tasers, high end prostitutes, beer, and household safes. Sounds like a hell of a party.

I would also add the repossession business to the list.

Finding Gold in Poo

Posted on February 2, 2009, 11:54 am. Closed

I never knew you can find gold in poo – literally:

TOKYO (Reuters) – Resource-poor Japan just discovered a new source of mineral wealth — sewage.

A sewage treatment facility in central Japan has recorded a higher gold yield from sludge than can be found at some of the world’s best mines. An official in Nagano prefecture, northwest of Tokyo, said the high percentage of gold found at the Suwa facility was probably due to the large number of precision equipment manufacturers in the vicinity that use the yellow metal. The facility recently recorded finding 1,890 grammes of gold per tonne of ash from incinerated sludge.

That is a far higher gold content than Japan’s Hishikari Mine, one of the world’s top gold mines, owned by Sumitomo Metal Mining Co Ltd, which contains 20-40 grammes of the precious metal per tonne of ore.

REIT Wrecks

Posted on February 2, 2009, 8:56 am. Closed

I’ve been reading for the past couple weeks about the real estate industry and the general sentiment I identified is that there is still more pain to come, especially with the commercial real estate sector. Retailers are not able to sell their products and are not able to keep up with rent.

Another consideration is that there is now a growing trend that REITs are paying their dividends in STOCK, not cash. I am very wary of any company that starts to pay dividends in stock rather than cash. It seems to me that when a compay starts doing that, they are in dire trouble.

So, after identifying what I think is the general sentiment (more of the pain train is still coming for commercial real estate) and the fact that REITs are paying dividends in stock, I initiated a position in SRS, an etf from Proshares that shorts the real estate sector. Then, Simon’s Property Group (SPG) last week reported that they would be paying their dividend in stock. SPG is the country’s largest mall and shopping center operator. I doubled my SRS position upon this news.

Another Record For U.S. CDS

Posted on January 19, 2009, 12:40 pm. Closed

Five-year credit default swaps on U.S. Treasuries widened to 69.5 basis points from 61.1 basis points last Friday. This means investors are paying $69,500 a year to insure against default on $10 million worth of bonds. Thanks to Alea for the link.

Watch Out Business: Lilly Ledbetter Fair Pay Act Passes in House

Posted on January 9, 2009, 6:42 pm. Closed

Law and More reports that the Lilly Ledbetter Fair Pay Act passed in the House:

If it passes the Senate, it will overturn the U.S. Supreme Court ruling which placed time limits [180 days, with some situations allowing 300 days] in the filing of wage discrimination complaints.  That means there will be no statue of limitations on these grievances.  There’s more.  It would permit companies to be sued not only for outright discrimination but also for what can be proved to be unintentional discrimination.

Business be scared.  Very scared.  The 111th Congress began off passing H.R. 11 – the Lilly Ledbetter Fair Pay Act, 247-171.  This Act has been called “Trial Lawyer Bonanza” in an opinion piece in THE WALL STREET JOURNAL.

One of my classes last semester was Employment Discrimination and our professor said there was an extremely good chance of this becoming law. I haven’t read the act, but the main gist of it is to remove the statute of limitations for people who feel they have been discriminated against by their employer. If you’re not familiar with legal terminology, most laws that give people the right to sue have a statute of limitations which is basically a timeframe in which a person must sue or else they’ve they’ve lost that right to sue. The idea is to prevent legal proceedings in which there is still fresh evidence.

In the case of the Lilly Ledbetter Fair Pay Act, a complete removal of a statute of limitations is just a terrible idea. I would concede to extending the present statute of limitations up to one year or even two years, but without a statute of limitations, I can guarantee there will be an increase in litigation against businesses, most of which will be unwarranted.

Scandalous Irony

Posted on January 8, 2009, 12:12 am. Closed

“Satyam Accounting Scandal Erodes Confidence in India Equities” reports Bloomberg. Satyam means “truth” in sanskrit.