Entrepreneurship

There is a lot of chatter now about the outrageous salaries many public CEO’s make - especially those CEO’s that have recently seen their companies implode - so I thought I would do a little investigation into the facts.  According to a recent survey by Forbes, here is a snapshot of the compensation last year for some of our highest paid CEOs:

CEO                         Company                     Compensation

Larry Ellison                Oracle                               $193 million

Frederic Poses             Trane                                $127 million

Aubrey McClendon      Chesapeake Energy           $117 million

Angelo Mozilo             Countrywide Finance         $103 million

Howard Schultz           Starbucks                            $99 million

Nabeel Gareeb             MEMC Electronic                  $80 million

Daniel Amos               Aflac                                     $75 million

In fact, the highest paid 25 CEOs in the country all made in excess of $46 million each.  These are phenomonal numbers.  I am the CEO of a private company  - considerably smaller than any of these individuals run (though last year I am pleased to announce we were more profitable last year than several of the companies on the list of the 25 highest paid CEOs).  I founded the company, but now have investors, and those investors deserve a decent return on their money.  Accordingly I work on a reasonable base salary, and a bonus based on profitability and growth.  No profitability - no bonus.  Seems like a reasonable deal to me.

While there are certainly great companies and great CEOs on the highest paid list (and many founders that created those great companies) - many actually were at the helm of shrinking companies with little or no profit - yet they made massive amounts of money - hence the great public concern of overpaid CEOs.  Average pay exceeding forty six million dollars a year is an incredible statistic, and shareholders have every reason to be irate. I am a believer in the power and importance of the entrepreneur, and compensation based on performance. CEOs that take home tens of millions per year while driving stockholder value into the ground should be thrown out.

If you are a Warrior in the workplace, you care more about getting things done than your popularity level in the company.  But unfortunately, there are seldom enough Warriors in the workplace, and a high percentage of non-Warrior managers prefer to “run a community” as opposed to “run a business”. 

Of course, there are exceptions -  ”community companies” that operate efficiently, but they are almost always small, frequently family-run organizations that have made the choice for a variety of different reasons.  A high performance company must operate like a company.

In a community, everyone has their say.  Decisions are made by consensus, and the community leaders are dependent on the community members to maintain their status, so they are careful to be inclusive and not offend anyone.  Community members are typically only ejected from the community for really heinous behaviour.  Community leaders will often choose not to make the tough choices for fear of alienating the community. 

A successful business almost never operates this way.  Decisions in a business are made by Warriors or teams of Warriors and trusted advisors, and are based on what is best for the business, not what would make them the most popular with the employees.  Managing by consensus or by popularity contest does not work in a business.  Certainly a successful business should have an industry-appropriate culture that fosters talent, and encourages success and innovation, but maintaining that kind of culture also requires tough standards. Good managers understand that they can’t be friends with everyone in their department, and holding people to standards (and firing those that can’t perform) is their duty as the manager.  Otherwise they foster mediocrity, which threatens the entire company.

Communities are great places to live, but I would not want to work there.

I like to work with stock and real estate brokers that have been through a recession or two and have experienced deep dives in pricing.  It gives them a certain perspective that the young and fresh don’t share.  They are typically much more resistant to panic.  They know from experience that the certainty of the market is that it eventually always goes up, and if you have built your portfolio correctly, avoid panic, and keep your debt levels in check, you will profit.

A 777 point drop in the market is painful - perhaps devastating if you are close to retirement.  But if you have a longer horizon, and have money to invest, this is a great time to go shopping.  There is a huge sale going on right now.  Great companies trading at deep discounts for no real reason.  For those with decade or two before retirement, this will be a blip in most people’s financial memory, and the smart money will have prospered.  Take advantage of this limited-time sale.

Entrepreneurs are typically micro-managers.  They believe nobody can do the job better than they can, and accordingly they often control every aspect of their organization to create their ideal vision for the company. And often that is when an entrepreneur is faced with a decision.  They can continue to micro-manage, which typically severely inhibits growth, but allows them control and sustains the vision.  Or, they can loosen the reins, hire really smart people that have diverse talents (hopefully talents the entrepreneur does not possess), give up some control, and try to guide the company to even bigger heights than they imagined.

There are pros and cons and risks to each approach.  But the one path that seldom works is straddling the two approaches.  You can’t bring in talented employees with the promise that they will be integral in growing the company, and then not allow them the freedom to do their jobs.

The entrepreneur that makes this jump successfully is self-confident enough to let talented individuals move the company to new heights, but also smart enough to recognize when they have made a bad hire that ultimately threatens the organization.

You would assume that any competent manager would always hire the most qualified and experienced person for the job.  But I have often observed that even very good managers sometimes “hire down” as opposed to “hire up”.  They pick a minimally-qualified applicant over much better candidates. Perhaps it is sometimes subconscious - they inately fear choosing a candidate that might be able to replace them.  Or it is more indicative of a need to control - a weaker employee is easier to control.

In any case, it is bad for the organization, and ultimately bad for the manager.  A great manager does not fear hiring someone more talented than they are.  They realize it will make their life easier, improve performance for the organization, reflect well on them with upper management (unless they are so completely incompetent that they need to go anyway), and ultimately will allow them to move up in the company.

Great managers always hire with an eye towards finding a candidate that can replace them - so they can elevate to new heights in the company, knowing they have a hand-picked talented team to support them.

I don’t believe in market timing, and I think investing (be it in the market, real estate, or almost all other potential investments) is ideally a long-term game. But as the chart I just received from blog-contributor Ray Link illustrates, the market certainly has hot and not-so-hot decades (and right now we are in a chilly one). Of course if you started investing in 1980 and stuck to the course, the current market is a minor annoyance and a blip on the performance screen. Personally. I am in this for the long haul, and see opportunity unfolding right now (since I plan on living a few more decades).

An Analysis of S&P Returns

Decade                Cumulative Return         Annualized Return
1930-1939                              -41.9%                                       -5.3%
1940-1949                               34.8%                                        3.0%
1950-1959                              256.7%                                      13.6%
1960-1969                               53.7%                                        4.4%
1970-1979                               17.2%                                         1.6%
1980-1989                              227.4%                                     12.6%
1990-1999                              315.7%                                     15.3%
2000- June 2008               -12.8%                                      -1.6%

I was hiking in the Washington forest last weekend with my good friend Jeff Merrick, whining about lawyers. I told a few of my favorite lawyer jokes, complained about how expensive and incompetent many of them are, and even pontificated a bit on how lawyers might ultimately be responsible for spreading rampant immorality in society (I will save the details of that one for a later blog entry.) I should point out that Jeff is a lawyer, so his patience with my ranting is indicative of his generally low-key and likable demeanor. (Qualities unfortunately not normally found in the legal profession.)

Like most business people, I have a love/hate relationship with lawyers. The good ones have been a tremendous help to me over the years. The bad ones (both those that have worked for me, and those that oppose me) have made my life miserable. And while lawyers are certainly necessary, it seems that society has somehow created a legal maze of bureaucracy with lawyers directing the traffic. And unfortunately, we have incentivized the lawyers to create traffic jams!

In any case, I will whine about the legal profession in detail at a later date. I do acknowledge that it is easy to complain from the outside, and since I am not an attorney I really can’t understand the pressures and situations they face. Accordingly, I asked Jeff to pass along some advice from a lawyer about how to control lawyers, and his guest blog follows. Here is his sage advice: [click to continue...]

Despite the fact that I never intended this to be a financial blog, given the recent market turbulence we have been financially-focused. Accordingly I would be remiss not to acknowledge the passing last week of Sir John Templeton, the brilliant contrarian who founded The Templeton Growth Fund and ran it until he sold it in 1992.  Here is a stat that will make your mouth water in this market:  $10,000 invested in The Templeton Growth Fund when he founded it in 1954 would have returned over $2 million by the time he sold it! 

Templeton had a talent for recognizing true value.  He bought Japanese stocks in the 1960’s when the Japanese brand meant “cheap and disposable”, and sold technology stocks in 2000 when others were still rushing in, correctly surmising that the market exuberance was not based on real value.

After he sold his fund he used his big brain to concentrate on philanthropy, eventually endowing his foundation with over $1.5 billion dollars to study what scientists and philosophers call “the big questions”.

And today’s investors might find Sir John’s words particularly insightful in the current market. “The time to buy is at the point of maximum pessimism”.  

Ray Link’s recent guest blog was one of our most popular entries!  And today I am pleased to present a guest opinion from another financial expert with a slightly different perspective.  Doug Johanson is one of the Northwest’s leading financial managers, and I have always known him to take a sensible long-term perspective towards the market.  He advocates discipline in investing and stresses a long-term approach towards the market.

Of course, right now investors are finding their resolve (and nerves) a bit tested.  As I write this the Dow is off another 250 points, diving into areas I frankly did not think it would hit. Last night as I drove home I listened to a very pessimistic George Soros on NPR essentially advise investors to take their money and bury it in the back yard to avoid what he believes is the coming really big meltdown.  But sometimes the Warrior finds opportunity when other people run in terror, and I personally find myself conflicted.  Though I am not a market timer, common sense and a historical perspective towards the market is giving me a buy sign, yet these are weird and wild times. Filling your tank might require taking out a home equity loan (if only you could get one), and the once venerable General Motors has a market cap smaller than Hooters.  So, lets listen to Doug’s calm and rational advice, and hope he is right. [click to continue...]

I was having dinner the other night with my friend Ray Link - a very smart guy that understands numbers. Ray mentioned he had just completed an analysis of investing in the stock market over the past decade compared to taking the safe route of parking your cash in a money market. After looking at the data, I asked Ray to be my first “guest blog”, as his numbers are pretty compelling. Now to put things in perspective, I am an ardent believer in dollar cost averaging and taking the long approach to investing. If you have the proper time horizon, asset allocation, and discipline, I would always advocate that the market can provide the best return. But Ray’s analysis clearly shows the market risk at shorter time horizons - even though many might not consider ten years a short term investment. Here are Ray’s conclusions in his own words. [click to continue...]