Governance

Ron Johnson and the JCP Tragedy: It's All About the Board

I was out and about today, between meetings, when a friend and colleague - both of us great fans of Ron Johnson, the now former CEO of JC Penney - texted me "Ron is out."

I was sad but not surprised. It was looking like it would go this way for a while and I wondered whether the JCP Board would have the courage of its convictions.

After all, when they hired Mr. Johnson away from Apple, it wasn't like they didn't talk with him first. They had to have had an idea of what he might bring - in strategy, technology and customer orientation.

He had a track record - Target before Apple - so no surprises there, either.

So it's down to performance.

Were the numbers bad? Yes. Were they a surprise? No.

Because the strategy that Mr. Johnson laid out not long after taking over the position addressed the fact that the then current JCP customer base probably wouldn't be the base they'd have once all his changes were in place. The new base might be from the same socio-economic group - although even that had expanded parameters given Mr. Johnson's shop-within-a-shop boutique strategy - but it wouldn't be the same people.

Or probably not.

Which meant for any thinking being (which one always hopes resides in the Boardroom) that this was going to be a years-long transition. The changes to the stores could be made in the short term, as could be the introduction of new, more fashionable product lines.

But it would take bravery and commitment on the part of the Board to hold firm when the "always darkest before the dawn" part of the change was going on. Because that would be the real transition period. The time when the old guard customers who never wanted any changes anyway had left and the new base was finding its way in.

These guys didn't pull it off. They caved. And they blamed it on the shareholders.

That argument doesn't hold up anymore either - for which every Board can blame Jeff Bezos and his strategy at Amazon. Bezos cares, of course, about his stock's performance - but he cares a lot more about reinvesting every penny he can into building out the business and capturing even more customers in even more product lines - now b2b and b2c.

His Board doesn't cave. They trust him and they're willing to wait with him as he builds the value of Amazon more and more...and then more.

I honestly believe that Ron Johnson could have done the same thing for JCP had he had the support - and courage - from his Board that was required. He didn't.

Add to that the newbie CEO mistakes he made (e.g., too much too fast with too high expectations of the acceptance of change by the customers and staff, backpedaling on decisions before they had a chance to be integrated, etc.) and you've got dominos just waiting to fall.

And fall they did.

But that still doesn't excuse the Board. They knew who they were hiring and what they were getting. It was their job to support him in every way they could.

So now we'll see what JCP turns into. For my part, as I watched the changes take place, for the first time in years not only was I willing to buy there again but I was recommending it - for product and shopping experience - to my friends. And they liked it, too.

Now I'm not so sure. If it's going to be the same customers as before with the same product lines, you can count me out.

It's a sad day for business. Short-termism won - again - and that's the biggest loss of all.
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Winning the Values War: Ellen DeGeneres, Ron Johnson and JCPenney (llk)

The Dangers of China - Critical Insight from @thereformedbroker

The following piece, written by Josh Brown, is one of those periodic posts that goes beyond deserving attention.  It's a critical warning for anyone currently doing or thinking about doing business with China.

It follows in its entirety.

The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations.

We are under attack.

Chinese corporate criminals and their US-based enablers are committing Capital Genocide against American investors.  We're not talking about "a few bad apples" or "a handful of exceptions", we're talking about a full-blown epidemic.  Subterfuge and malicious avarice are simply the tools of the trade when many Chinese companies do business with outsiders.

This undeniable Red Collar Crime Wave is larger in scope and financial consequence than any other international criminal enterprise in the history of the world.  We are talking about hundreds of millions of dollars, possibly billions should the Yahoo - Alibaba revelation prove itself to be a harbinger of shocks to come.

At the low end of the spectrum, corrupt representatives of sketchy or even non-existent Chinese companies are conniving their way onto US exchanges via backdoor IPOs, reverse mergers and SPACs.  They are slithering through every exchange and regulatory loophole they can find to raise money and establish their fraudulent beachheads here.  The penalties for Chinese nationals fudging numbers on a local exchange could range from exile to imprisonment to disappearance.  The penalties they face for pulling that stuff here in the US?  I don't know, a letter in the mail?  "Don't ever do it again"?

Mainland Chinese fraudsters are untouchable, they can only be barred or banned from US exchanges once caught, and so they will get away with whatever they can as long as there are investors here who are stupid enough to capitalize them.  And so the ownership of one factory in China becomes the ownership of three for the purposes of a quarterly balance sheet calculation.  The ticker symbols will be cutesy and clever while the names of the companies will almost always include the word "China".  After all, let's not forget that the name of this game is the exploitation of Americans who "want to play the growth".

It has become an absolute free-for-all.

For a nation that was so economically backwards and pathetic that it could barely feed itself 15 years ago, China's executives have certainly come a long way.  They're employing every scam and dirty trick in the book against American corporations and investors while we say thank you and send even more opportunity and cash their way.

I've held my tongue for the last 9 months, watching one scam after another appear on our exchanges.  I've said nothing as these financial landmines have been detonated beneath the feet of whichever unfortunate shareholders happened to find themselves in the wrong place at the wrong time.  No longer.

We'll limit the scope of my rage here to corporate fraud.  For the purposes of this post I'll leave out the Chinese poisoning of America-bound toothpaste, pet food and toys at their manufacturing operations.  I'll also leave out the FoxConn factory at which all the Apple products are assembled, a workplace so abusive and abhorrent that the employees must take an oath that they won't kill themselves.

But no, let's not get distracted here, we should simply focus on the accounting chicanery and falsified filings with which Chinese companies are daily relieving US investors of their capital.

The reverse mergers are by far the most insidious manifestation of the contempt that Chinese companies have for our exchanges and rules.  Working with American law firms and shameless stock promoters, these companies have found a financial engineering solution that lets them steal on our shores.  They've been able to subvert the more highly scrutinized public offering process that would normally have weeded them out.  By "cleaning up" shell companies, which should not be trading or available to begin with, the disease gets a foothold first on the pink sheets and then onto the American Stock Exchange where the real grifting can begin.

White Collar Crime columnist Walter Pavlo has collected a slew of recent examples on his blog at Forbes, including:


  • China Electric Motor – Shareholders lawsuit filed claiming underwriters violated federal securities laws by issuing materially false and misleading information.
  • China Natural Gas – Class action lawsuit alleges directors and officers issued materially false and misleading statements.  CFO of company resigned in late 2010.
  • Duoyuan Printing – SEC investigating company for fraud, NYSE delisted April 4, 2011
  • China MediaExpress Holdings, Inc. – Deloitte quit as auditor because “no longer able to rely on the representations of management”.  CFO resigned. Stock trading halted March 11
  • China Agritech – Shareholder lawsuit pending.  Dismissed its auditor Ernst & Young.
  • China Sky One Medical – Under investigation by SEC.
  • Orient Paper, Inc. – Reauditing previous financials due to license issues with previous auditor (Davis Accounting Group).

The full list is actually quite larger, it includes some of the higher profile blow-ups you may remember with stocks like RINO International and China Green Agriculture - spectacular flame-outs complete with massive insider selling prior to the denouement.

Where are the regulators, you might ask?  They are finally getting involved.  The SEC's Mary Schapiro is aware of the epidemic and is now on the case...

From Barron's:

Since March 2011 alone, she noted, more than 24 China-based companies have disclosed auditor resignations, accounting problems or both – following the auditors' inability to confirm the amounts of cash or receivables shown on the companies' balance sheets. The SEC has recently suspended trading in three Chinese businesses that "reverse-merged" into U.S.-traded shell companies.

The smarter thing to do would be to halt the entire shell company process in its entirety right this minute until we can get the rules up to a standard that will protect investors outright from these foreign liars and thieves.  Capital formation can wait fifteen minutes while we get our act together and crack down on this disgusting shell syndicate.

An even more disturbing development of late is taking place in the large cap arena, in full view of the world's media and the global investor class.  With the success of Baidu and Sina, Chinese technology companies are now finding themselves as the Belles of the Ball.  In at least one case that we are aware of, they are also finding that they can easily mislead their Western partners and shareholders.

Here in the deep end of the pool, newly-minted billionaire Chinese executives are violating contract law, globally accepted corporate best practices and fiduciary responsibility to shareholders.  They are disclosing things when and as they choose.  They are "on the level" in their own government's eyes so long as they are playing fair with their fellow Chinese investors.  This isn't a brand new phenomenon but as the companies involved get bigger, the danger grows.

This week's still-unfolding fiasco involving Yahoo being tricked out of their Alipay subsidiary by Alibaba, a company in which they hold a 43% stake, is just the latest and most outrageous example of what we're dealing with.  Here's what Jacob S. Frenkel, a former SEC enforcement lawyer who is an expert in securities law matters and a partner at Shulman Rogers in Potomac, Maryland had to say (via iChinaStock):

"Yahoo! is a victim, plain and simple.  With all the negative attention that US-listed Chinese companies, this action by Alibaba only makes worse an already difficult situation.  It creates the unfortunate appearance that executives in China may totally disregard their contractual and fiduciary obligations to shareholders.  The important message to US partners and owners is to review the effectiveness and enforceability of contracts under both US and Chinese law."

Yahoo will attempt to sue, but they have lost the asset at the end of the day, an asset whose potential was a big part of the investment thesis for the company to begin with.  US shareholders were pummeled over something that took place in secret seven months ago, escaping everyone's notice.  If major shareholders like Yahoo and Japan's Softbank can be scammed in front of everyone, what chance have any of us got?

The Red Collar crime wave is beguiling American investors both large and small.  These crooks are laughing at our securities laws and manipulating their own.  None of us are immune:

Not the savviest and most seasoned asset managers - see Glickenhaus & Co watch $4 million evaporate as China Agritech blows up.  (Bloomberg)
Not Yahoo, a player in Asian web properties since the late 90's - listen as Alipay's Jack Ma regales us with his tale of how he bitch-slapped the "declining" web portal company.  (iChinaStock)
Not even the diligent Warren Buffett can sleep soundly with his Chinese investments - see how the car company he invested in there (BYD) is essentially a counterfeiter playing games with the rules of the Chinese court system to get away with it.  (Reuters)

Can American investors trade and hold Chinese stocks?  I suppose they can...but they can also practice juggling with live hand grenades and roaring chainsaws...just because you can do something, doesn't mean you should.

I've disagreed with almost everything Donald Trump has had to say during his part-Presidential run, part final humiliation speech circuit this spring.  But where Trump and I do find common ground is in our distaste with how the Chinese do business and the lack of regard they show our companies and investors from almost every perspective.

As long as Chinese corporate officers and executives are going to blow cigarette smoke in our faces as they take advantage both here and on their home turf, I'll gladly sit out.  Until I get the sense that they have an ounce of respect for our investors, I'll watch the pickpocketing from the sidelines and focus my capital and attention elsewhere.

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I very strongly recommend you subscribe to The Reformed Broker.

Deming, Health Insurers and the Myth of Scarcity

There's an absolutely riveting article about the record-breaking profits health insurers are making - even as they increase premiums to their customers by double digits.

How are they achieving these incredible financial feats?  Not only is it because of the usurious fees (with ever-increasing deductibles) they charge, but they are also benefiting from the economic downturn.

People keep paying their premiums, but because of those ever-increasing deductibles - now ranging from $2-4K per year - patients are not going to the doctor.  Or having necessary tests.  Or treatment.

Like for cancer.

Because, in this economy, when so many are one paycheck (at most) away from destitution, going to a doctor is a choice.  After all, you may need that money to pay for an unjustifiably priced gallon of gas so that you can get to work.

Unjustified, that is, if you're anyone other than an oil company.

It's gotten to the point that even the shareholders don't feel as strongly as before about the levels of profits the companies they invest in are making.  Even if they receive dividends.

Because, just as the politicians are so disconnected from what's going on along Main Street - or in people's homes - CEOs have lost sight of the fact that their companies are there to serve a greater purpose than simply for the few who own shares.

Or to fill their own pockets.

No matter the product or price point, they're supposed to be contributing to the betterment of society by improving quality of life.  Of everyone's life.

I'm a capitalist to the core.  I want everyone to make money.  I want those who strive - whether minimally or maximally - to proportionately benefit from the work they do and be able to buy what they want.

But I don't believe in exclusivity.  Not when the exclusionary policies and actions on the parts of CEOs and their corporations lead to desperation, disease - and death.

When did corporations lose any semblance of having a clue?

It's more than a Gordon Gekko.  It's not just that "greed is good."

It's that greed - impossible levels of personal and corporate greed - have become standard operating procedure.

It's unconscionable.  Those CEOs, speculators and others pursuing that strategy should be ashamed.

And, frankly, while I applaud the actions of Bill Gates, Warren Buffett and others in the billionaires' club for giving their money to charity - they left it awfully late.

And it's still not enough.

Deming, the management theorist who is the father of what we now call "Lean" and "Six Sigma" (among others), always said that there was no scarcity.  That scarcity is a myth.

That we create scarcity by creating management and corporate systems that either don't access the capabilities of our employees or adequately and fairly share the benefits of what those employees have achieved on behalf of their employer.

Or both.

He was right.  And now it's worse.

Because the health insurers are only one of, literally, a world of corporations that are making, literally, incredible profits.  With war chests of money that analysts and investors are starting to worry are getting too big.

And with speculators who drive prices of commodities up so high that they have to drive their own correction because the public responds by not buying.

What's their justification?  They're afraid - yes, afraid - that things might get worse.  Later.  At some point in the future.  Possibly.

Cowards.

It's time for executives to wake up and smell the coffee.  (I'm being very, very polite here.)

It's time for them to think about the context within which they and their organizations exist.

Everything is not about you and how much you and your cronies make.  Nor is it about "satisfying the shareholders" as you so conveniently excuse your actions.

It's about whether you're willing to do more than do well.  It's whether you're also willing to do good.  On everyone's behalf.

It's time to start.  Now.

Resource:

Health Insurers Make Record Profits as Many Postpone Care (NYT)

Be Careful Who You're F***ing With

The Berkshire Hathaway Audit Committee just came out with its report on the David Sokol/Lubrizol debacle.

Read this report.  Seriously.  Now.  Not just for the facts - which are interesting in themselves - but, more, to see how one of the best players plays it when things go wrong.  Which they did.  Badly.

They go back to their playbook - and they hold to it.  Hard.

It's never a good idea to f**k around with someone like Warren Buffett.  Let's face it, "Oracle of Omaha" and all of his nice guy press aside, he has to have killer instincts to have gotten him where he is - and kept him there.

Add in the fact that the BH Annual Meeting for shareholders is this weekend and you know he had to get this taken care of faster than fast.  Had he not, just as his investment in Goldman Sachs was the big topic at his last meetings, this one would take up way too much time in this one.

He headed that off at the pass.  Now, when asked - which he will be - he can happily point to the Audit Report.  Sweet.

More than anything, the report gives a fascinating look at the nexus of policy and enforcement when it's done right - if a bit late.

Resource

Berkshire Hathaway Audit Report

BP and Goldman: You Manage What You Measure

It is a truism that "you manage what you measure."

The reasons why are simple:

  1. The measures are deemed important enough to warrant the effort to manage directly - which means that the right information at the right time is required.
  2. What is being managed is deemed to be tied directly to the success - or failure - of the department/division/enterprise to warrant the effort.
  3. Someone's - or more than one person's - compensation and/or future existence within the enterprise are dependent upon how that particular area is performing - based on the measures.
In those cases, not only are those measures managed, but they are known by enough people to be usable for everything from strategic and operational decision making to succession planning or terminations.  

There is, however, an obverse to this as well.  Sometimes, you measure and you manage - but you don't tell.  At least not many.

Sometimes, that's necessary.  I'm a great believer in information management.  In fact, I think that not enough thought - and forethought - is put into either measurement decisions or the ways that the information from those measures are being disseminated (or not) in the enterprise.

Information just moves...as if it has a life of its own.  

(Just so you know, it doesn't.  Whenever and wherever information moves - or doesn't - there is a purpose on the part of the person making the distribution decision.  And that purpose is not always in line with what you want or are working to achieve.)

But when information - particularly measures - are seen as being purposefully withheld, more and worse questions arise.  In those cases, you're asking for trouble.  You may well deserve it.

You've entered into the world of "transparency" - and a murky, distrusted world it is.

We're watching this happen now - and you've got your choices of which organizations deserve to join the "Corporate Perp Walk Hall of Fame."  (This is the next iteration of the "Executive Perp Walks" so popular a few years ago.)

Right now, we have two major corporations tied for first place.

To start, there's Goldman Sachs not quite being upfront with their customers about what they know and when they know it - not least whether the firm is betting against what they're selling with as good as insider information.

That decision has led them to being sued by the Securities and Exchange Commission for fraud - which has led to a 26% drop in their share value (to be fair, that includes a lot of other variables causing a market correction) and the possibility - if they can pull it off - of getting away with only a $1billion settlement.  (That's Goldman chump change.  In fact, they'd undoubtedly see it as a good investment.)

(On a side note, Warren Buffett has it completely wrong when he defends Goldman.  That's self-serving - he has a really big investment making lots of money from Goldman - and disingenuous.  This is an ethical issue and he well knows it.)

And, in a tie position, you've got BP - who are making a worse mess of their mess than they already created in the Gulf.

Because BP's executives are so concerned - now - with what will happen later when the litigation really hits, that their unaccepted, disingenuous replies range from:
  • "It's their fault" (not a good strategy in a Congressional hearing with the counterparts sitting next to you doing the same thing) to 
  • "It's only a moderate spill" (which is patently untrue - and sounds even worse to an angry American audience when it is said by the British accented CEO to a British television network) to 
  • "It's impossible to measure the amount of oil being spilled" (which has now been completely debunked by a quartet of scientists who figured out a way all on their own).
It doesn't matter what industry you're in - or, for that matter, what country or sector.  The problem that comes from all of this activity is that there is less and less trust extended to you by your customers.  In their eyes, they have no reason to trust you.  You're probably just like all the rest.

So, before you make your next set of decisions or as you start reviewing the most recent data being handed to you, stop and think for a moment.  Then ask yourself:
  • What are we measuring?
  • Are those measurements giving us the best, most useful information?
  • How do we know?  How are those data tied to strategic and operational goals?
  • How are these data being disseminated - and to whom?
  • Who else should get them?
And the seminal question:  What are we hiding?

Because you can count on it.  If you're hiding anything - then something is being hidden from you.

And you really don't want that keeping you up at night.