Well, yes, it's been quite some time since the DIDS resurfaced but..I have a really good excuse.
Well, okay, not really, but let's get past that. :)
Anyhoo, now that the election is over, now that the shock and dismay that we live in a post-consumer society is past, we can get back to the business of trading stories about what we've done that worth crowing about, or that someone else did that's worth crowing about, or just to cheer the community on in some fashion.
As for me - I've decided to DIDS a little something special - a job performance review on 53 CEOs in the financial services industry.
And I am a tough but fair grader.
More of that DIDS below. Let's hear your stories in the comments. :)
Every so often Forbes magazine comes out with rankings of CEO compensation by various metrics - how much, how much bang shareholders got for their buck, etc.
You can even parse out by industry sector.
Given all the contemporary focus on banking and insurance, that's exactly what I home in on.
Then I decided to add some market capitalization and enterprise value data from finance.yahoo.com, some 52-week share price changes, some beta statistics, and really have some fun.
Because I have some ideas not on what CEOs get compensated for, but what they should be compensated for, all using perfectly orthodox consideration for maximizing shareholder value.
What companies pay for - supposedly
Is talented management of their beta. Their .. what? Sorry, what I meant to say what that companies (and if you own stock, that means you) pay a premium for executives who can take risk and turn it into returns. Ideally, you have a CEO who can sustain 20% annual growth in share price and reduce earnings volatility exclusively on the negative side.
Problem is, those folks were kinda rare in 2008.
So, you do the best you can.
What CEOs expect to be paid for - turning risks into returns
Any CEO worth his or her salt is well aware that much of what happens to them is dumb luck no matter how smart and prepared they are. The trick is making sure that if you do slip up, you make the same mistake as everyone else, only less bad. That's easy if you work for a humdrum firm that is happy plodding along at 3-5% growth per year, every year, that never has especially bad years, ever. But...those aren't the kinds of places that risk-taking go-getters like to work, and those aren't the kinds of places that pay top dollar for risk-taking talent. Companies in more volatile lines of work seek this kind of help.
Or, if you are restless and wanting more action, you get your stodgy member of the banking or insurance industry to get fired up about boosting returns (stocks and real estate are doing great) and taking on more risk (hey! We're banks and insurers! We got loads of capital!) at low financing rates (hey! credit's cheap! we're the creditors!).
Then what happens if the wheels come off the economy? Look back at the top of the section - Well, it's an unprecedented market environment. Seriously, it's never been so bad.. no one could have foreseen... etc. You get the idea.
CEO compensation is paying someone to put their reputation in a noose
And that ultimately is why CEOs are paid so ridiculously well - no matter what the prior assumptions at any point in time the game can change.
For example, at the start of 2008 paying Martin Sullivan of AIG close to an $11 million salary was a great idea. It even seemed like a bargain for such a vast company. But by the start of 2009 that paycheck seemed a bit rich. Regardless, that's what Mr. Sullivan earned.
Let's compare this to Robert Pollock, CEO of Assurant. He got about the same salary. At the start of 2008 his company was almost 20 times smaller in market capitalization than AIG. Now it's almost twice as big. Go figure.
Who is the better manager? That's just it - so much of what happened in 2009 to the finance sector is chaos and change. Mr. Pollock can hardly point to fine annual results for his company, which lost 70% in market value over the past 52 weeks. But Mr. Sullivan's company has lost 99%.
It could well be they made comparable judgment calls, only Mr. Pollock will have the ability to say later on - "Hey, it could have been worse - At least we're not AIG!" He and a lot of his colleagues as well.
CEO's role as brand manager - huge
Hey, these are hard times in the finance sector. Confidence is utterly shot. The 53 companies for which I have statistics, and banking and insurance companies, averaged a 61% decline in share price over the past 52 weeks. Not good.
The best way to assess this loss of confidence is to compare market capitalization with enterprise value. Now, this is a crude comparison, for companies have other sources of revenue than the equities markets - bonds, for example. Regardless, it's a pretty impressive thing if shareholders can be convinced to invest money in a company that, say, a negative book value. OK, maybe it's realllly dumb (sometimes) but I think more often than not shareholders, being forward looking, often see past short-term or even sustained negative cash flows if they feel confident that the eventual returns will be worth while.
In this respect, a successful CEO is selling confidence - that the times are tough but the company's business model is sound and its leadership can be trusted to see us all through to the other side.
I'm gonna start with a few heroes for this category. Ramani Ayer of Hartford has a company that is currently rated as being $33 billion in the hole. Regardless, we are still seeing almost $21 billion in market capitalization. Now to my thinking, that's pretty impressive and much of it may be drawn from the well-respected Hartford brand.
Now, in dollar terms the medal goes to Vikram S Pandit of Citigroup, whose company is valued at negative $149 billion... yet enjoys market capitalization of almost $79 billion. That's not bad. That's pretty inspirational, really. Somebody's managing brand nicely over there.
Maybe these names - and the concept that who is at the helm matters - might yet seem incredible to you. Let me give you a name you know, a brand that's been build for quite some time now. Charles Schwab is assessed at -$18 billion right now. It's enjoying $14 billion in market cap. The CEO, of course, is the namesake Charles Robert Schwab, Jr.
However, brand can only go so far. But without, these companies would be in far worse trouble.
When good brands go bad
Now, let's go to the other side, and find a company with madly positive enterprise value but lame market capitalization.
Oh, and look.. who.. we.. find.
In dollars terms the worst street cred in the country is Kenneth Lewis of Bank of America. According the finance.yahoo.com's source, BofA is worth $371 billion bucks.
It's trading for $19 billion as of close of business Monday (same as all the other market cap quotes cited today). That is a staggering evaporation of confidence.
BofA retains a high net worth. That speaks well of the bank's core competencies, assuming forthright disclosure of the bank's condition as of the last earnings statement. However, the bank has lost 90% of its share value in the last year for a reason. Those reasons need to be addressed.
But let's not pick on banks.. because in terms of proportion the worst brand manager is once again Mr. Sullivan of AIG. Wow.. AIG is still worth $87 billion bucks as an enterprise.. but it's trading at $1.2 billion! What's up with that!
Again, it goes to brand management, and for financial services that's all about confidence. And let's face it, AIG and "confidence" are not strongly correlated terms in most people's minds these days.
But what strikes me the most is that both of these companies retain positive net value as enterprises.
So, tell me again...
Why are we bailing banks and insurers out again post haste?
Compensating for risk management
I find this to be an appropriate standard for compensating CEOs and other managers.. what I question is if performance of CEOs and key staff is graded based on simple metrics such as reducing enterprise risk (say, smoothing earnings, reducing volatility in daily changes in share price through both brand management and transparent success in attending to core business needs, etc.) or simply on boosting share earnings each quarter.
Because a high focus on dividends and boosting share price?
That didn't seem to work very well, now, did it?
The Forbes rankings you can find on your own.
As for me? I'd rate executive by their contribution to
- the market capitalization premium over book value.. or at least reducing the discount if it's that kind of a capitalization structure.
- Scoring change in share price times the beta of the stock itself. This would, yes, double down the pain for down years but it would also award significant recognition for success in good years. I got no problem with big bonuses for great work. My beef is job security and fat pay for reckless adventurers in the boardroom. Sorry, mustang, but it's the open prairie for you if you can't stop running wild.
- Incorporate these ratings into the compesation and performance review structure.
Now for my pix for best all around banking and insurance services managers in 2008 -
Name Company Ticker
William P. Foley, II Fidelity National FNF
Frederick H Waddell Northern Trust NTRS
Philip R Sherringham People's United PBCT
James Dimon JPMorgan Chase JPM
William R Berkley WR Berkley WRB
Parker S Kennedy First American FAF
Robert P Kelly Bank of New York BK
Charles Robert Schwab Jr. Charles Schwab SCHW
Gregory C Case Aon AOC
John J Schiff Jr Cincinnati Financial CINF
Warren E Buffett Berkshire Hathaway BRK-A
Glenn M Renwick Progressive PGR
Brian Duperreau Marsh & McLennan MMC
Carl H Lindner III American Finl Group AFG
Robert L Moody American Natl Ins ANAT
You might recognize a few of these names.
Now for my pix on "needs most improvement - action plan required"
Name Company Ticker
Martin J Sullivan American Intl Group AIG
Don D Young Phoenix Cos PNX
Kenneth D Lewis Bank of America BAC
Kevin T Kabat Fifth Third Bancorp FITB
John D Johns Protective Life PL
Thomas E Hoaglin Huntington Bancshs HBAN
Michael D Fraizer Genworth Financial GNW
Mark F Furlong Marshall & Ilsley MI
Richard L Carrion Popular BPOP
Richard D. Fairbank Capital One Financial COF
John R Strangfeld Jr Prudential Financial PRU
Joseph W Brown MBIA MBI
Kenneth I. Chenault American Express AXP
James M Wells III SunTrust Banks STI
John G Stumpf Wells Fargo WFC
In all fairness, this grading is not the total package, and a lot of dumb luck decides who wins the tournament of corporate success in a given year. Everyone, even on this "needs improvement" list, got where they were with not just luck but talent and hard work and drive.
But it's been an especially unkind year for the companies on the lower list - AIG, Phoenix, BofA, Protective, Genworth, Prudential and MBIA have received perhaps the most press.
I'll check back in six months. I have a feeling the rankings may swing about a bit before this recessionary roller coaster is over.
And that's my DIDS for the day... after a lengthy vacation.
How 'bout you? :)
