K Marx The Spot

The Welch Way: It's My Company and I'll Cry If I Want To

Another week brings with it another issue of Business Week and with it the columnar stylings of Jack and Suzy Welch, the business columnists for those who like their business columnists to be both predictable and bad.

This week, they take on the question of whether what rises to the top of American business is not always the cream.

Do the "best and brightest" actually lead American business?—B---- F----, Modesto, Calif.

It depends on what you mean by business. If your definition includes hedge funds, private equity, and investment banking, then the answer is a flat yes. If by business, you're referring to the industrial and consumer companies at the core of our economy, the answer is: less and less so. And therein lies a problem.

O.K., so maybe it's not a big problem yet, but there is definitely a worrisome trend emerging as a growing number of talented senior executives leave publicly traded businesses for privately held concerns. Dave Calhoun's departure from GE to run Nielsen and Mark Frissora's leap from Tenneco to Hertz are just two of the more publicized cases. But as a seasoned executive-search consultant we know recently put it: "The shift is real, and it's gaining momentum. You can almost feel a landslide coming."

And not only in the upper echelons—it's happening in middle management and at business schools as well....

One reason, of course, is money. Compensation for senior managers in public companies doesn't compare with the heaps routinely handed out by private equity and financial firms....

But we'd make the case that this trend is not totally about pay. There's a sociological phenomenon at work here. It's about people who love business wanting to get out of the crosshairs of people who despise it, or at least seriously distrust it. Everyone knows that American companies are being maligned these days. So-called shareholder activists have put the vast majority of corporate boards on the defensive, draining their attention away from growth initiatives, mergers and acquisitions, globalization, or anything even vaguely risky that involves building for the future. Meanwhile, CEOs face persistent scrutiny in a guilty-until-proven-innocent media environment. So when private equity firms or hedge funds call, what business enthusiast, young or old, wouldn't consider answering?

We will cut the column mercifully short there.

There are two big problems with this column. The first is that it flies directly in the face of advice that the Welches gave out earlier this year to an owner who was trying to choose between four worthy possible successors

Not all of them have the "stuff" for the challenge ahead, meaning the kind of insight and courage that will be required to reinvent your organization when you step aside. You need to push yourself to identify the single candidate who does.

Will that move prompt the runners-up to leave? It's very possible, due to feelings of disappointment or embarrassment. But don't focus on that too much. Their departure will actually be a favor—for them and the company. For them, because it certainly sounds as if they earned the right to run their own shows, and they deserve the challenge and fun of it. And when other companies show up to "steal" them away, make sure their severance packages are generous and contain some form of noncompete clause. That will help everyone...

In February, letting three senior managers fly the coop was "a favor" for both the managers and the company. But now, the flight of talent is something to worry about. But perhaps the flight of talent has a calculus that only Business Week columnists can understand.

The second, deeper, problem is the benighted notion of the corporation inherent in the column. It is hard to find a more arrogant statement in the American press that the "so-called shareholder activists" are somehow responsible for the perceived mediocrity of top American business leaders. Those shareholders are owners of their companies. Yes, owners. And managers like Jack Welch would prefer that the owners shut up and let the managers run the show.

Publicly-held companies are among the very few institutions in which the owners as a whole have very little say in how the the institutions are run, not just in their day-to-day activities, but in general. Shareholders vote on precious few items every year, and rare indeed is a position that management backs ever overturned by the shareholders. How many companies even offer their shareholders to choose among directors up for election? (Almost without fail, the best that shareholders can do is to withhold their votes.)

Now, the Welches might have a point if the shareholders were always complaining and the managers were nonetheless doing well by them. Alas, that is not the case. As the New York Times reported on Friday, when managers public companies focus their precious attention on acquisitions, they dramatically overpay when compared to private firms or private equity funds.

If it’s not your money, you may be quite willing to spend more of it.

That insight may seem rather obvious, but academic research demonstrating that it is true set off the great boom in equity compensation for corporate management over the past three decades....

Now academic research offers insights into how the very equity-based incentives—stock options and restricted stocks—that were supposed to make managers think like owners have instead encouraged them to overpay for acquisitions. The bosses win, whether or not the owners lose.

A new study by economists at the University of Pittsburgh and Ohio State University looked at all-cash takeovers done from 1990 to 2005, and found that the premiums paid varied based on who was doing the buying.

On average, public companies made bids that drove up the target share price by 32 percent. But bids from privately held companies were lower, pushing prices up 22 percent. The figure for private equity funds was 20 percent.

That difference means the public companies are paying more—and thus the merged companies are less likely to do well, all other things being equal.

I think that the "shareholder activists" are on the right track. But, then again, I did not convince the General Electric board to lavish me with millions of dollars of perks both extraordinary and quotidian upon my retirement.

Labels: Business Week, Jack Welch, stupid corporate tricks, Suzy Welch

The Welch Way: Out as in Outsource

We continue our almost-weekly analysis of the back pages of Business Week with the analytical stylings of Jack and Suzy Welch. Today's question is about China and India.

Which country has the best business prospects in the long run—China or India?—R--- P---, Bangalore, India

Don't we wish we knew the definitive answer to that question! Doesn't everyone? That's why there are so many books, articles, speeches, research papers, and even blogs on the topic. It seems that everyone not already playing in the global market is trying to figure out which of the two emerging powerhouses to bet on.

Our opinion is neither. Or both. Or either one. What we mean is, the choice between China and India is entirely situational. Both countries have advantages and disadvantages. The only way to pick between them, if you must, is to find the right match for your business. That means figuring out which country is best equipped to help you win. It's as simple as that.

O.K., maybe determining that match isn't so simple. There's tons of information out there, lots of it contradictory, and most big companies have already sorted through it all for their own conclusions. But for a small or midsize company still in the process of considering globalization, we would offer a four-part framework as a way to think through the China-India conundrum. It's based on the assumption that economies have four ingredients that facilitate success: political stability, infrastructure, local and export markets, and the "human grrr factor"—not a technical term, but you know what we mean. China and India each have some portion of these ingredients. The question is not which has more. It's which has the right amount for you.

I was merciful on you, our dozens of readers, by not quoting the passage that comments about the "sheer ferocity of the Chinese" as if there were some sort of inverse Yellow Peril. But what is particularly awesome about the full-page, logorrheic answer to the simple question is how amazingly it demonstrates the allure of outsourcing.

China and India are countries with millions of desperately poor persons, but also with millions of enterprising, driven, smart men and women. Surely there are well-versed and educated Indians and Chinese who would jump at the chance to write an "Ideas" column for Business Week every week for a fraction of the current cost to the publishers. I think that Business Week ought to spend a bit of time to recruit candidates and have them write a few guest columns each.

The experiment could only improve what is there now.

Labels: Business Week, Jack Welch, Suzy Welch