Last weekend the Federal Reserve Board’s leadership met to discuss the future of America’s monetary policy. Reports out of that meeting, like reports from all Fed meetings, are long, tedious, and pretty much say nothing. Every analyst tries to interpret from the Governor’s statements what might happen next. And because the Fed leadership is so vague, and so academic, the analysts inevitably never guess right.
This bothers a lot of people. There are those who want a lot more “transparency” from the Fed – meaning they want much clearer signals as to what is intended, and usually specifics as to intended actions and a timeline. Because the Fed’s meetings are so cloaked and opaque, some congress members actually want to do away with the Fed, or regulate it a lot more closely.
But for most of us, most of the time, the Fed is pretty much immaterial. When the Fed matters is when there are big swings in the economy, which happen quickly. Then their action is crucial.
Why small changes in interest rates don’t really matter to most of us
Take the debate right now over a quarter point rise in interest rates. How does this affect most people? Not much. If you have credit card debt, or a car loan, your interest rate is set by the financial institution. And you may hear people talk about zero interest rates, but you know your rate is a whopping amount higher than that. And you know that a quarter point change in the Federal Funds rate will not affect the interest on those loans.
Where you’ll see a difference is in a mortgage. But here, is a quarter point really important?
When I graduated business school in 1982 and wanted to buy my first home the interest rate on an annual, variable rate loan was 18.5%. My first house cost just about $100,000 so the interest was $18,500/year. Today, mortgages are around 3.5%, fixed for anywhere from 3 to 7 years. $18,500 in interest now funds a $525,000 mortgage! If interest rates go to 3.75% – which has many analysts so concerned for the economy – the home value associated with interest of $18,500 drops to $500,000. Probably within the negotiating range of the buyer.
So you have to borrow a LOT of money for this quarter point to matter. And it does matter to CEOs and CFOs of companies that lead corporations on the S&P 500, or those running huge REITs (Real Estate Investment Trusts) that have enormous debts. But that is not most of us. For most of us, that quarter point difference will not have any impact on our lives.
So why do people pay so much attention to the Fed?
The Fed was originally created during barely 100 years ago (1913) to try and create a more stable monetary system. But this didn’t work too well in the beginning, which led to the Great Depression. And then, to make matters worse, the conservative bent of the Fed coupled with its fixation on stable interest rates led it to actually cut the money supply as the economy was tanking. This led to a collapse in the value of goods and services, particularly real estate, and the loss of millions of jobs greatly worsening the Great Depression.
It was the depression which really caused economists to focus on studying Fed actions and the economic repercussions. A group of economists, most notably Milton Friedman at the University of Chicago, started saying that the Fed shouldn’t focus on interest rates, but rather on the supply of money. These folks were called “monotarists” and they said interest rates should float, and economists should focus on stable prices.
The 1970s – “Easy Money” inflation
As we moved into the 1970s, and as Fed Governors kept trying to control interest rates, they found themselves creating more and more money to keep rates low, and in return prices skyrocketed. “Easy money” as they called it allowed ratcheting upward incomes, big pay raises, higher prices for commodities and inflation. Another monetarist leader, Paul Volcker, was named head of the Fed. He rapidly moved to contract the money supply, allowing those 18.5% mortgage rates to develop. Yet, this did stabilize prices and eventually rates lowered, moving down constantly from 1980 to the near zero rates of today for Treasury Bonds and other very large, low risk borrowers.
When the Great Recession hit the Fed leadership, led by Ben Bernanke, remembered the lessons of the Great Depression. As they saw real estate values tumble they were aware of the domino effect this would have on bank failures, and then business failures, just as they had occurred in the 1930s. So they flooded the market with additional currency to keep failures to a minimum, and ease the real estate collapse. This sent interest rates plummeting to the record low levels of the last few years.
Policy must address the current situation, not be biased by historical memories
Yet, people keep worrying about inflation. Those who lived through the 1970s and saw the damage done by inflation are still fearful of it. So they scream loudly about their fear that the last 8 years of monetary ease will create massive future inflation. They want the Fed to be much tighter with money saying that all this cash will someday create inflation down the road. Their view of history is guiding their analysis. Their bias is a fear that “easy money” once caused a problem, so surely it will cause a problem again.
But economists who study prices keep saying that there are currently no signs of price escalation – that wages have not moved up appreciably in a decade, home values are barely where they were a decade ago. Commodity prices are not escalating, in fact many (like oil) are at historically low prices. The dollar is stronger because, relatively speaking, the USA economy is doing better than the rest of the developed world. As long as prices and wages remain without high gains, there is little reason to tighten money, and little reason to feel a higher interest rate is needed.
Further, current monetary increases will not cause future inflation, because monetary policy only affects what is happening now. “Easy money” today can only create inflation today, not in 3 years. And inflation is almost nowhere to be seen.
Ignore Fed “fine tuning.” Pay attention when a crisis hits. Otherwise, its up to the politicians
The big thing to remember is that small changes in policy, such as those that might affect a quarter point change in rates, is “fine tuning” the money supply. And that has pretty nearly no affect on most of us. Where as citizens we should care about the Fed is when big changes happen. We don’t want mistakes like happened in the 1930s, because that hurt everyone. But we do want fast action to deal with a crisis like the falling real estate values and bank collapses that were happening a decade ago.
Remember, it was when the Fed targeted interest rates that the USA economy got into so much trouble. First in the Great Depression, and then in the inflationary 1970s. But when the Fed targeted prices, such as in the 1980s and the mid-2000s, it did exactly what it was created to do, maintain a stable money supply.
So don’t worry about whether analysts think interest rates are going to change a quarter point, or even a half point, in the next year. The big economic question facing us is not a Fed question, but rather “what will it take to increase investment so that we can create more jobs, and provide higher wages leading to a higher standard of living for everyone?” And that is not a question for the Fed to answer. That is up to the economic policy makers in the legislature and the White House.
Most of the time “diversity” is a code word for adding women or minorities to an organization. But that is only one way to think about diversity, and it really isn’t the most important. To excel you need diversity in thinking. And far too often, we try to do just the opposite.
“Mythbusters” was a television series that ran 14 seasons across 12 years. The thesis was to test all kinds of things people felt were facts, from historical claims to urban legends, with sound engineering approaches to see if the beliefs were factually accurate – or if they were myths. The show’s ability to bust, or prove, these myths made it a great success.
The show was led by 2 engineers who worked together on the tests and props. Interestingly, these two fellows really didn’t like each other. Despite knowing each other for 20 years, and working side-by-side for 12, they never once ate a meal together alone, or joined in a social outing. And very often they disagreed on many aspects of the show. They often stepped on each others toes, and they butted heads on multiple issues. Here’s their own words:
“We get on each other’s nerves and everything all the time, but whenever that happens, we say so and we deal with it and move on,” he explained. “There are times that we really dislike dealing with each other, but we make it work.”
The pair honestly believed it is their differences which made the show great. They challenged each other continuously to determine how to ask the right questions, and perform the right tests, and interpret the results. It was because they were so different that they were so successful. Individually each was good. But together they were great. It was because they were of different minds that they pushed each other to the highest standards, never had an integrity problem, and achieved remarkable success.
Yet, think about how often we select people for exactly the opposite reason. Think about “knock-out” comments and questions you’ve heard that were used to keep from increasing the diversity:
- I wouldn’t want to eat lunch with that person, so why would I want to work with them?
- We find that people with engineering (or chemical, or fine arts, etc.) backgrounds do well here. Others don’t.
- We like to hire people from state (or Ivy League, etc) colleges because they fit in best
- We always hire for industry knowledge. We don’t want to be a training ground for the basics in how our industry works
- Results are not as important as how they were obtained – we have to be sure this person fits our culture
- Directors on our Board need to be able to get along or the Board cannot be effective
- If you weren’t trained in our industry, how could you be helpful?
- We often find that the best/top graduates are unable to fit into our culture
- We don’t need lots of ideas, or challenges. We need people that can execute our direction
- He gets things done, but he’s too rough around the edges to hire (or promote.) If he leaves he’ll be someone else’s problem.
In 2011 I wrote in Forbes “Why Steve Jobs Couldn’t Find a Job Today.” The column pointed out that hiring practices are designed for the lowest common denominator, not the best person to do a job. Personalities like Steve Jobs would be washed out of almost any hiring evaluation because he was too opinionated, and there would be concerns he would cause too much tension between workers, and be too challenging for his superiors.
Simply put, we are biased to hire people that think like us. It makes us comfortable. Yet, it is a myth that homogeneous groups, or cultures, are the best performing. It is the melding of diverse ways of thinking, and doing, that leads to the best solutions. It is the disagreement, the arguing, the contention, the challenging and the uncomfortableness that leads to better performance. It leads to working better, and smarter, to see if your assumptions, ideas and actions can perform better than your challengers. And it leads to breakthroughs as challenges force us to think differently when solving problems, and thus developing new combinations and approaches that yield superior returns.
What should we do to hire better, and develop better talent that produces superior results?
- Put results and accomplishments ahead of culture or fit. Those who succeed usually keep succeeding, and we need to build on those skills for everyone to learn how to perform better
- Don’t let ego into decisions or discussions. Too many bad decisions are made because someone finds their assumptions or beliefs challenged, and thus they let “hurt feelings” keep them from listening and considering alternatives.
- Set goals, not process. Tell someone what they need to accomplish, and not how they should do it. If how someone accomplishes their goals offends you, think about your own assumptions rather than attacking the other person. There can be no creativity if the process is controlled.
- Set big goals, and avoid the desire to set a lot of small goals. When you break down the big goal into sub-goals you effectively kill alternative approaches – approaches that might not apply to these sub-goals. In other words, make sure the big objective is front and center, then “don’t sweat the small stuff.”
- Reward people for thinking differently – and be very careful to not punish them. It is easy to scoff at an idea that sounds foreign, and in doing so kill new ideas. Often it’s not what they don’t know that is material, but rather what you don’t know that is most important.
- Be blind to gender, skin color, historical ancestry, religion and all other elements of background. Don’t favor any background, nor disfavor another. This doesn’t mean white men are the only ones who need to be aware. It is extremely easy for what we may call any minority to favor that minority. Assumptions linked to physical attributes and history run deep, and are hard to remove from our bias. But it is not these historical physical and educational elements that matter, it is how people think that matters – and the results they achieve.
Donald Trump has had a lot of trouble gaining good press lately. Instead, he’s been troubled by people from all corners reacting negatively to his comments regarding the Democrat’s convention, some speakers at the convention, and his unwillingness to endorse re-election for the Republican speaker of the house. For a guy who has been in the limelight a really long time, it seems a bit odd he would be having such a hard time – especially after all the practice he had during the primaries.
The trouble is that Donald Trump still thinks like a CEO. And being a CEO is a lot easier than being the chief executive of a governing body.
CEOs are much more like kings than mayors, governors or presidents:
- They aren’t elected, they are appointed. Usually after a long, bloody in-the-trenches career of fighting with opponents – inside and outside the company.
- They have the final say on pretty much everything. They can choose to listen to their staff, and advisors, or ignore them. Not employees, customers or suppliers can appeal their decisions.
- If they don’t like the input from an employee or advisor, they can simply fire them.
- If they don’t like a supplier, they can replace them with someone else.
- If they don’t like a customer, they can ignore them.
- Their decisions about resources, hiring/firing, policy, strategy, fund raising/pricing, spending – pretty much everything – is not subject to external regulation or legal review or potential lawsuits.
- Most decisions are made by understanding finance. Few require a deep knowledge of law.
- There is really only 1 goal – make money for shareholders. Determining success is not overly complicated, and does not involve multiple, equally powerful constituencies.
- They can make a ton of mistakes, and pretty much nobody can fire them. They don’t stand for re-election, or re-affirmation. There are no “term limits.” There is little to tie them personally to their decisions.
- They have 100% control of all the resources/assets, and can direct those resources wherever they want, whenever they want, without asking permission or dealing with oversight.
- They can say anything they want, and they are unlikely to be admonished or challenged by anyone due to their control of resource allocation and firing.
- 99% of what they say is never reported. They talk to a few people on their staff, and those people can rephrase, adjust, improve, modify the message to make it palatable to employees, customers, suppliers and local communities. There is media attention on them only when they allow it.
- They have the “power of right” on their side. They can make everyone unhappy, but if their decision improves shareholder value (if they are right) then it really doesn’t matter what anyone else thinks
One might challenge this by saying that CEOs report to the Board of Directors. Technically, this is true. But, Boards don’t manage companies. They make few decisions. They are focused on long-term interests like compliance, market entry, sales development, strategy, investor risk minimization, dividend and share buyback policy. About all they can do to a CEO if one of the above items troubles them is fire the CEO, or indicate a lack of support by adjusting compensation. And both of those actions are far from easy. Just look at how hard it is for unhappy shareholders to develop a coalition around an activist investor in order to change the Board — and then actually take action. And, if the activist is successful at taking control of the board, the one action they take is firing the CEO, only to replace that person with someone knew that has all the power of the old CEO.
It is very alluring to think of a CEO and their skills at corporate leadership being applicable to governing. And some have been quite good. Mayor Bloomberg of New York appears to have pleased most of the citizens and agencies in the city, and his background was an entrepreneur and successful CEO.
But, these are not that common. More common are instances like the current Governor of Illinois, Bruce Rauner. A billionaire hedge fund operator, and first-time elected politician, he won office on a pledge of “shaking things up” in state government. His first actions were to begin firing employees, cutting budgets, terminating pension benefits, trying to remove union representation of employees, seeking to bankrupt the Chicago school district, and similar actions. All things a “good CEO” would see as the obvious actions necessary to “fix” a state in a deep financial mess. He looked first at the financials, the P&L and balance sheet, and set about to improve revenues, cut costs and alter asset values. His mantra was to “be more like Indiana, and Texas, which are more business friendly.”
Only, governors have nowhere near the power of CEOs. He has been unable to get the legislature to agree with his ideas, most have not passed, and the state has languished without a budget going on 2 years. The Illinois Supreme Court said the pension was untouchable – something no CEO has to worry about. And it’s nowhere near as easy to bankrupt a school district as a company you own that needs debt/asset restructuring because of all those nasty laws and judges that get in the way. Additionally, government employee unions are not the same as private unions, and nowhere near as easy to “bust” due to pesky laws passed by previous governors and legislators that you can’t just wipe away with a simple decision.
With the state running a deficit, as a CEO he sees the need to undertake the pain of cutting services. Just like he’d cut “wasteful spending” on things he deemed non-essential at one of the companies he ran. So refusing funding during budget negotiations for health care worker overtime, child care, and dozens of other services that primarily are directed at small groups seems like a “hard decision, well needed.” And if the lack of funding means the college student loan program dries up, well those students will just have to wait to go to college, or find funding elsewhere. And if that becomes so acute that a few state colleges have to close, well that’s just the impact of trying to align spending with the reality of revenues, and the customers will have to find those services elsewhere.
And when every decision is subjected to media reporting, suddenly every single decision is questioned. There is no anonymity behind a decision. People don’t just see a college close and wonder “how did that happen” because there are ample journalists around to report exactly why it happened, and that it all goes back to the Governor. Just like the idea of matching employee rights, pay requirements, contract provisioning and regulations to other states – when your every argument is reported by the media it can come off sounding a lot like as state CEO you don’t much like the state you govern, and would prefer to live somewhere else. Perhaps your next action will be to take the headquarters (now the statehouse) to a neighboring state where you can get a tax abatement?
Donald Trump the CEO has loved the headlines, and the media. He was the businessman-turned-reality-TV-star who made the phrase “you’re fired” famous. Because on that show, he was the CEO. He could make any decision he wanted; unchallenged. And viewers could turn on his show, or not, it really didn’t matter. And he only needed to get a small fraction of the population to watch his show for it to make money, not a majority. And he appears to be very genuinely a CEO. As a CEO, as a TV celebrity — and now as a candidate for President.
Obviously, governing body chief executives have to be able to create coalitions in order to get things done. It doesn’t matter the party, it requires obtaining the backing of your own party (just as John Boehner about what happens when that falters) as well as the backing of those who don’t agree with you. ou don’t have the luxury of being the “tough guy” because if you twist the arm to hard today, these lawmakers, regulators and judges (who have long memories) will deny you something you really, really want tomorrow. And you have to be ready to work with journalists to tell your story in a way that helps build coalitions, because they decide what to tell people you said, and they decide how often to repeat it. And you can’t rely on your own money to take care of you. You have to raise money, a lot of money, not just for your campaign, but to make it available to give away through various PACs (Political Action Committees) to the people who need it for their re-elections in order to keep them backing you, and your ideas. Because if you can’t get enough people to agree on your platforms, then everything just comes to a stop — like the government of Illinois. Or the times the U.S. Government closed for a few days due to a budget impasse.
And, in the end, the voters who elected you can decide not to re-elect you. Just ask Jimmy Carter and George H.W. Bush about that.
On the whole, it’s a whole lot easier to be a CEO than to be a mayor, or governor, or President. And CEOs are paid a whole lot better. Like the moviemaker Mel Brooks (another person born in New York by the way) said in History of the World, Part 1 “it’s good to be king.“
Growth Stalls are deadly for valuation, and both Mcdonald’s and Apple are in one.
August, 2014 I wrote about McDonald’s Growth Stall. The company had 7 straight months of revenue declines, and leadership was predicting the trend would continue. Using data from several thousand companies across more than 3 decades, companies in a Growth Stall are unable to maintain a mere 2% growth rate 93% of the time. 55% fall into a consistent revenue decline of more than 2%. 20% drop into a negative 6%/year revenue slide. 69% of Growth Stalled companies will lose at least half their market capitalization in just a few years. 95% will lose more than 25% of their market value. So it is a long-term concern when any company hits a Growth Stall.
A new CEO was hired, and he implemented several changes. He implemented all-day breakfast, and multiple new promotions. He also closed 700 stores in 2015, and 500 in 2016. And he announced the company would move its headquarters from suburban Oakbrook to downtown Chicago, IL. While doing something, none of these actions addressed the fundamental problem of customers switching to competitive options that meet modern consumer food trends far better than McDonald’s.
McDonald’s stock languished around $94/share from 8/2014 through 8/2015 – but then broke out to $112 in 2 months on investor hopes for a turnaround. At the time I warned investors not to follow the herd, because there was nothing to indicate that trends had changed – and McDonald’s still had not altered its business in any meaningful way to address the new market realities.
Yet, hopes remained high and the stock peaked at $130 in May, 2016. But since then, the lack of incremental revenue growth has become obvious again. Customers are switching from lunch food to breakfast food, and often switching to lower priced items – but these are almost wholly existing customers. Not new, incremental customers. Thus, the company trumpets small gains in revenue per store (recall, the number of stores were cut) but the growth is less than the predicted 2%. The only incremental growth is in China and Russia, 2 markets known for unpredictable leadership. The stock has now fallen back to $120.
Given that the realization is growing as to the McDonald’s inability to fundamentally change its business competitively, the prognosis is not good that a turnaround will really happen. Instead, the common pattern emerges of investors hoping that the Growth Stall was a “blip,” and will be easily reversed. They think the business is fundamentally sound, and a little management “tweaking” will fix everything. Small changes will lead to the classic hockey-stick forecast of higher future growth. So the stock pops up on short-term news, only to fall back when reality sets in that the long-term doesn’t look so good.
Unfortunately, Apple’s Q3 2016 results (reported yesterday) clearly show the company is now in its own Growth Stall. Revenues were down 11% vs. last year (YOY or year-over-year,) and EPS (earnings per share) were down 23% YOY. 2 consecutive quarters of either defines a Growth Stall, and Apple hit both. Further evidence of a Growth Stall exists in iPhone unit sales declining 15% YOY, iPad unit sales off 9% YOY, Mac unit sales down 11% YOY and “other products” revenue down 16% YOY.
This was not unanticipated. Apple started communicating growth concerns in January, causing its stock to tank. And in April, revealing Q2 results, the company not only verified its first down quarter, but predicted Q3 would be soft. From its peak in May, 2015 of $132 to its low in May, 2016 of $90, Apple’s valuation fell a whopping 32%! One could say it met the valuation prediction of a Growth Stall already – and incredibly quickly!
But now analysts are ready to say “the worst is behind it” for Apple investors. They are cheering results that beat expectations, even though they are clearly very poor compared to last year. Analysts are hoping that a new, lower baseline is being set for investors that only look backward 52 weeks, and the stock price will move up on additional company share repurchases, a successful iPhone 7 launch, higher sales in emerging countries like India, and more app revenue as the installed base grows – all leading to a higher P/E (price/earnings) multiple. The stock improved 7% on the latest news.
So far, Apple still has not addressed its big problem. What will be the next product or solution that will replace “core” iPhone and iPad revenues? Increasingly competitors are making smartphones far cheaper that are “good enough,” especially in markets like China. And iPhone/iPad product improvements are no longer as powerful as before, causing new product releases to be less exciting. And products like Apple Watch, Apple Pay, Apple TV and IBeacon are not “moving the needle” on revenues nearly enough. And while experienced companies like HBO, Netflix and Amazon grow their expanding content creation, Apple has said it is growing its original content offerings by buying the exclusive rights to “Carpool Karaoke“ – yet this is very small compared to the revenue growth needs created by slowing “core” products.
Like McDonald’s stock, Apple’s stock is likely to move upward short-term. Investor hopes are hard to kill. Long-term investors will hold their stock, waiting to see if something good emerges. Traders will buy, based upon beating analyst expectations or technical analysis of price movements. Or just belief that the P/E will expand closer to tech industry norms. But long-term, unless the fundamental need for new products that fulfill customer trends – as the iPad, iPhone and iPod did for mobile – it is unclear how Apple’s valuation grows.
Most leaders think of themselves as decision makers. Many people remember in 2006 when President George Bush, defending Donald Rumsfeld as his Defense Secretary said “I am the Decider. I decide what’s best.” It earned him the nickname “Decider-in-Chief.” Most CEOs echo this sentiment, Most leaders like to define themselves by the decisions they make.
But whether a decision is good, or not, has a lot of interpretations. Often the immediate aftermath of a decision may look great. It might appear as if that decision was obvious. And often decisions make a lot of people happy. As we are entering the most intense part of the U.S. Presidential election, both candidates are eager to tell you what decisions they have made – and what decisions they will make if elected. And most people will look no further than the immediate expected impact of those decisions.
However, the quality of most decisions is not based on the immediate, or obvious, first implications. Rather, the quality of decisions is discovered over time, as we see the consequences – intended an unintended. Because quite often, what looked good at first can turn out to be very, very bad.
The people of North Carolina passed a law to control the use of public bathrooms. Most people of the state thought this was a good idea, including the Governor. But some didn’t like the law, and many spoke up. Last week the NBA decided that it would cancel its All Star game scheduled in Charlotte due to discrimination issues caused by this law. This change will cost Charlotte about $100M.
That action by the NBA is what’s called unintended consequences. Lawmakers didn’t really consider that the NBA might decide to take its business elsewhere due to this state legislation. It’s what some people call “oops. I didn’t think about that when I made my decision.”
Robert Reich, Secretary of Labor for President Clinton, was a staunch supporter of unions. In his book “Locked in the Cabinet” he tells the story of visiting an auto plant in Oklahoma supporting the union and workers rights. He thought his support would incent the company’s leaders to negotiate more favorably with the union. Instead, the company closed the plant. Laid-off everyone. Oops. The unintended consequences of what he thought was an obvious move of support led to the worst possible outcome for the workers.
President Obama worked the Congress hard to create the Affordable Care Act, or Obamacare, for everyone in America. One intention was to make sure employers covered all their workers, so the law required that if an employer had health care for any workers he had to offer that health care to all employees who work over 30 hours per week. So almost all employers of part time workers suddenly said that none could work more than 30 hours. Those that worked 32 (4 days/week) or 36 suddenly had their hours cut. Now those lower-income people not only had no health care, but less money in their pay envelopes. Oops. Unintended consequence.
President Reagan and his wife launched the “War on Drugs.” How could that be a bad thing? Illegal drugs are dangerous, as is the supply chain. But now, some 30 years later, the Federal Bureau of Prisons reports that almost half (46.3% or over 85,000) inmates are there on drug charges. The USA now spends $51B annually on this drug war, which is about 20% more than is spent on the real war being waged with Afghanistan, Iraq and ISIS. There are now over 1.5M arrests each year, with 83% of those merely for possession. Oops. Unintended consequences. It seemed like such a good idea at the time.
This is why it is so important leaders take their time to make thoughtful decisions, often with the input of many other people. Because the quality of a decision is not measured by how one views it immediately. Rather, the value is decided over time as the opportunity arises to observe the unintended consequences, and their impact. The best decisions are those in which the future consequences are identified, discussed and made part of the planning – so they aren’t unintended and the “decider” isn’t running around saying “oops.”
As you listen to the politicians this cycle, keep in mind what would be the unintended consequences of implementing what they say:
- What would be the social impact, and transfer of wealth, from suddenly forgiving all student loans?
- What would be the consequences on trade, and jobs, of not supporting historical government trade agreements?
- What would be the consequences on national security of not supporting historically allied governments?
- What would be the long-term consequence not allowing visitors based on race, religion or sexual orientation?
- What would be the consequence of not repaying the government’s bonds?
- What would be the long-term impact on economic growth of higher regulations on banks – that already have seen dramatic increases in regulation slowing the recovery?
- What would be the long-term consequences on food production, housing and lifestyles of failing to address global warming?
Business leaders should follow the same practice. Every time a decision is necessary, is the best effort made to obtain all the information you could on the topic? Do you obtain input from your detractors, as well as admirers? Do you think through not only what is popular, but what will happen months into the future? Do you consider the potential reaction by your customers? Employees? Suppliers? Competitors?
There are very few “perfect decisions.” All decisions have consequences. Often, there is a trade-off between the good outcomes, and the bad outcomes. But the key is to know them all, and balance the interests and outcomes. Consider the consequences, good and bad, and plan for them. Only by doing that can you avoid later saying “oops.”
This week Starbucks and JPMorganChase announced they were raising the minimum pay of many hourly employees. For about 168,000 lowly paid employees, this is really good news. And both companies played up the planned pay increases as benefitting not only the employees, but society at large. The JPMC CEO, Jamie Dimon, went so far as to say this was a response to a national tragedy of low pay and insufficient skills training now being addressed by the enormous bank.
However, both actions look a lot more like reacting to undeniable trends in an effort to simply keep their organizations functioning than any sort of corporate altruism.
Since 2014 there has been an undeniable trend toward raising the minimum wage, now set nationally at $7.25. Fourteen states actually raised their minimum wage starting in 2016 (Massachusetts, California, New York, Nebraska, Connecticut, Michigan, Hawaii, Colorado, Nebraska, Vermont, West Virginia, South Dakota, Rhode Island and Alaska.) Two other states have ongoing increases making them among the states with fastest growing minimum wages (Maryland and Minnesota.) And there are 4 additional states that promoters of a $15 minimum wage think will likely pass within months (Illinois, New Jersey, Oregon and Washington.) That makes 20 states raising the minimum wage, with 46.4% of the U.S. population. And they include 5 of the largest cities in the USA that have already mandated a $15 minimum wage (New York, Washington D.C., Seattle, San Francisco and Los Angeles.)
In other words, the minimum wage is going up. And decisively so in heavily populated states with big cities where Starbucks and JPMC have lots of employees. And the jigsaw puzzle of different state requirements is actually a threat to any sort of corporate compensation plan that would attempt to treat employees equally for common work. Simultaneously the unemployment rate keeps dropping – now below 5% – causing it to take longer to fill open positions than at any time in the last 15+ years. Simply put, to meet local laws, find and retain decent employees, and have any sort of equitable compensation across regions both companies had no choice but to take action to raise the pay for these bottom-level jobs.
Starbucks pointed out that this will increase pay by 5-15% for its 150,000 employees. But at least 8.5% of those employees had already signed a petition demanding higher pay. Time will tell if this raise is enough to keep the stores open and the coffee hot. However, the price increases announced the very next day will probably be more meaningful for the long term revenues and profits at Starbucks than this pay raise.
At JPMC the average pay increase is about $4.10/hour – from $10.15 to $12-$16.50/hour. Across all 18,000 affected employees, this comes to about $153.5million of incremental cost. Heck, the total payroll of these 18,000 employees is only $533.5M (after raises.) Let’s compare that to a few other costs at JPMC:
Wow, compared to these one-off instances, the recent pay raises seem almost immaterial. While there is probably great sincerity on the part of these CEOs for improving the well being of their employees, and society, the money here really isn’t going to make any difference to larger issues. For example, the JPMC CEO’s 2015 pay of $27M is about the same as 900 of these lowly paid employees. Thus the impact on the bank’s financials, and the impact on income inequality, is — well — let’s say we have at least added one drop to the bucket.
The good news is that both companies realize they cannot fight trends. So they are taking actions to help shore up employment. That will serve them well competitively. And some folks are getting a long-desired pay raise. But neither action is going to address the real problems of income inequality.
My last column focused on growth, and the risks inherent in a Growth stall. As I mentioned then, Apple will enter a Growth Stall if its revenue declines year-over-year in the current quarter. This forecasts Apple has only a 7% probability of consistently growing just 2%/year in the future.
This usually happens when a company falls into Defend & Extend (D&E) management. D&E management is when the bulk of management attention, and resources, flow into protecting the “core” business by seeking ways to use sustaining innovations (rather than disruptive innovations) to defend current customers and extend into new markets. Unfortunately, this rarely leads to high growth rates, and more often leads to compressed margins as growth stalls. Instead of working on breakout performance products, efforts are focused on ways to make new versions of old products that are marginally better, faster or cheaper.
Using the D&E lens, we can identify what looks like a sea change in Apple’s strategy.
For example, Apple’s CEO has trumpeted the company’s installed base of 1B iPhones, and stated they will be a future money maker. He bragged about the 20% growth in “services,” which are iPhone users taking advantage of Apple Music, iCloud storage, Apps and iTunes. This shows management’s desire to extend sales to its “installed base” with sustaining software innovations. Unfortunately, this 20% growth was a whopping $1.2B last quarter, which was 2.4% of revenues. Not nearly enough to make up for the decline in “core” iPhone, iPad or Mac sales of approximately $9.5B.
Apple has also been talking a lot about selling in China and India. Unfortunately, plans for selling in India were at least delayed, if not thwarted, by a decision on the part of India’s regulators to not allow Apple to sell low cost refurbished iPhones in the country. Fearing this was a cheap way to dispose of e-waste they are pushing Apple to develop a low-cost new iPhone for their market. Either tactic, selling the refurbished products or creating a cheaper version, are efforts at extending the “core” product sales at lower margins, in an effort to defend the historical iPhone business. Neither creates a superior product with new features, functions or benefits – but rather sustains traditional product sales.
Of even greater note was last week’s announcement that Apple inked a partnership with SAP to develop uses for iPhones and iPads built on the SAP ERP (Enterprise Resource Planning) platform. This announcement revealed that SAP would ask developers on its platform to program in Swift in order to support iOS devices, rather than having a PC-first mentality.
This announcement builds on last year’s similar announcement with IBM. Now 2 very large enterprise players are building applications on iOS devices. This extends the iPhone, a product long thought of as great for consumers, deeply into enterprise sales. A market long dominated by Microsoft. With these partnerships Apple is growing its developer community, while circumventing Microsoft’s long-held domain, promoting sales to companies as well as individuals.
And Apple has shown a willingness to help grow this market by introducing the iPhone 6se which is smaller and cheaper in order to obtain more traction with corporate buyers and corporate employees who have been iPhone resistant. This is a classic market extension intended to sustain sales with more applications while making no significant improvements in the “core” product itself.
And Apple’s CEO has said he intends to make more acquisitions – which will surely be done to shore up weaknesses in existing products and extend into new markets. Although Apple has over $200M of cash it can use for acquisitions, unfortunately this tactic can be a very difficult way to actually find new growth. Each would be targeted at some sort of market extension, but like Beats the impact can be hard to find.
Remember, after all revenue gains and losses were summed, Apple’s revenue fell $7.6B last quarter. Let’s look at some favorite analyst acquisition targets to explain:
- Box could be a great acquisition to help bring more enterprise developers to Apple. Box is widely used by enterprises today, and would help grow where iCloud is weak. IBM has already partnered with Box, and is working on applications in areas like financial services. Box is valued at $1.45B, so easily affordable. But it also has only $300M of annual revenue. Clearly Apple would have to unleash an enormous development program to have Box make any meaningful impact in a company with over $500B of revenue. Something akin of Instagram’s growth for Facebook would be required. But where Instagram made Facebook a pic (versus words) site, it is unclear what major change Box would bring to Apple’s product lines.
- Fitbit is considered a good buy in order to put some glamour and growth onto iWatch. Of course, iWatch already had first year sales that exceeded iPhone sales in its first year. But Apple is now so big that all numbers have to be much bigger in order to make any difference. With a valuation of $3.7B Apple could easily afford FitBit. But FitBit has only $1.9B revenue. Given that they are different technologies, it is unclear how FitBit drives iWatch growth in any meaningful way – even if Apple converted 100% of Fitbit users to the iWatch. There would need to be a “killer app” in development at FitBit that would drive $10B-$20B additional annual revenue very quickly for it to have any meaningful impact on Apple.
- GoPro is seen as a way to kick up Apple’s photography capabilities in order to make the iPhone more valuable – or perhaps developing product extensions to drive greater revenue. At a $1.45B valuation, again easily affordable. But with only $1.6B revenue there’s just not much oomph to the Apple top line. Even maximum Apple Store distribution would probably not make an enormous impact. It would take finding some new markets in industry (enterprise) to build on things like IoT to make this a growth engine – but nobody has said GoPro or Apple have any innovations in that direction. And when Amazon tried to build on fancy photography capability with its FirePhone the product was a flop.
- Tesla is seen as the savior for the Apple Car – even though nobody really knows what the latter is supposed to be. Never mind the actual business proposition, some just think Elon Musk is the perfect replacement for the late Steve Jobs. After all the excitement for its products, Tesla is valued at only $28.4B, so again easily affordable by Apple. And the thinking is that Apple would have plenty of cash to invest in much faster growth — although Apple doesn’t invest in manufacturing and has been the king of outsourcing when it comes to actually making its products. But unfortunately, Tesla has only $4B revenue – so even a rapid doubling of Tesla shipments would yield a mere 1.6% increase in Apple’s revenues.
- In a spree, Apple could buy all 4 companies! Current market value is $35B, so even including a market premium $55B-$60B should bring in the lot. There would still be plenty of cash in the bank for growth. But, realize this would add only $8B of annual revenue to the current run rate – barely 25% of what was needed to cover the gap last quarter – and less than 2% incremental growth to the new lower run rate (that magic growth percentage to pull out of a Growth Stall mentioned earlier in this column.)
Such acquisitions would also be problematic because all have P/E (price/earnings) ratios far higher than Apple’s 10.4. FitBit is 24, GoPro is 43, and both Box and Tesla are infinite because they lose money. So all would have a negative impact on earnings per share, which theoretically should lower Apple’s P/E even more.
Acquisitions get the blood pumping for investment bankers and media folks alike – but, truthfully, it is very hard to see an acquisition path that solves Apple’s revenue problem.
All of Apple’s efforts big efforts today are around sustaining innovations to defend & extend current products. No longer do we hear about gee whiz innovations, nor do we hear about growth in market changing products like iBeacons or ApplePay. Today’s discussions are how to rejuvenate sales of products that are several versions old. This may work. Sales may recover via growth in India, or a big pick-up in enterprise as people leave their PCs behind. It could happen, and Apple could avoid its Growth Stall.
But investors have the right to be concerned. Apple can grow by defending and extending the iPhone market only so long. This strategy will certainly affect future margins as prices, on average, decline. In short, investors need to know what will be Apple’s next “big thing,” and when it is likely to emerge. It will take something quite significant for Apple to maintain it’s revenue, and profit, growth.
The good news is that Apple does sell for a lowly P/E of 10 today. That is incredibly low for a company as profitable as Apple, with such a large installed base and so many market extensions – even if its growth has stalled. Even if Apple is caught in the Innovator’s Dilemma (i.e. Clayton Christensen) and shifting its strategy to defending and extending, it is very lowly valued. So the stock could continue to perform well. It just may never reach the P/E of 15 or 20 that is common for its industry peers, and investors envisioned 2 or 3 years ago. Unless there is some new, disruptive innovation in the pipeline not yet revealed to investors.
Netflix has been a remarkable company. Because it has accomplished something almost no company has ever done. It changed its business model, leading to new growth and higher profits.
Almost nobody pulls that off, because they remain stuck defending and extending their old model until they become irrelevant, or fail. Think about Blackberry, that gave us the smartphone business then lost it to Apple and its creation of the app market. Consider Circuit City, that lost enough customers to Amazon it could no longer survive. Sun Microsystems disappeared after PC servers caught up to Unix servers in capability. Remember the Bell companies and their land-line and long distance services, made obsolete by mobile phones and cable operators? These were some really big companies that saw their market shifts, but failed to “pivot” their strategy to remain competitive.
Netflix built a tremendous business delivering physical videos on tape and CD to homes, wiping out the brick-and-mortar stores like Blockbuster and Hollywood Video. By 2008 Netflix reached $1B revenues, reducing Blockbuster by a like amount. By 2010 Blockbuster was bankrupt. Netflix’ share price soared from $50/share to almost $300/share during 2011. By the end of 2012 CD shipments were dropping precipitously as streaming viewership was exploding. People thought Netflix was missing the wave, and the stock plummeted 75%. Most folks thought Netflix couldn’t pivot fast enough, or profitably, either.
But in 2013 Netflix proved the analysts wrong, and the company built a very successful – in fact market leading – streaming business. The shares soared, recovering all that lost value. By 2015 the company had more than doubled its previous high valuation.
But Netflix may be breaking entirely new ground in 2016. It is becoming a market leader in original programming. Something we long attributed to broadcasters and/or cable distributors like HBO and Showtime.
Today’s broadcast companies, like NBC, CBS and ABC, are offering less and less original programming. Overall there are 3 hours/night of prime time television which broadcasters used to “own” as original programming hours. Over the course of a year, allowing for holidays and one open night per week, that meant about 900 hours of programming for each network (including reruns as original programming.) But that was long ago.
These days most of those hours are filled with sports – think evening games of football, basketball, baseball including playoffs and “March Madness” events. Sports are far cheaper to program, and can fill a lot of hours. Next think reality programming. Showing people race across countries, or compete to survive a political battlefield on an island, or even dancing or dieting, uses no expensive actors or directors or sets. It is far, far less expensive than writing, casting, shooting and programming a drama (like Blacklist) or comedy (like Big Bang Theory.) Plan on showing every show twice in reruns, plus intermixing with the sports and reality shows, and most networks get away with around 200-250 hours of original programming per year.
Against that backdrop, Netflix has announced it will program 600 hours of original programming this year. That will approximately double any single large broadcast network. In a very real way, if you don’t want to watch sports or reality TV any more you probably will be watching some kind of “on demand” program. Either streamed from a cable service, or from a provider such as Netflix, Hulu or Amazon.
When it comes to original programming, the old broadcast networks are losing their relevancy to streaming technology, personal video devices and the customer’s ability to find what they want, when they want it – and increasingly at a quality they prefer – from streaming as opposed to broadcast media.
To complete this latest “pivot,” from a video streaming company to a true media company with its own content, Morgan Stanley has published that Netflix is now considered by customers as the #1 quality programming across streaming services. 29% of viewers said Netflix was #1, followed by long-time winner HBO now #2 with 21% of customers saying their programming is best. Amazon, Showtime and Hulu were seen as the best quality by 4%-5% of viewers.
So a decade ago Netflix was a CD distribution company. The largest customer of the U.S. Postal Service. Signing up folks to watch physical videos in their homes. Now they are the largest data streaming company on the planet, and one of the largest original programming producers and programmers in the USA – and possibly the world. And in this same decade we’ve watched the network broadcast companies become outlets for sports and reality TV, while cutting far back on their original shows. Sounds a lot like a market shift, and possibly Netflix could be the game changer, as it performs the first strategy double pivot in business history.
Tesla started taking orders for the Model 3 last week, and the results were remarkable. In 24 hours the company took $1,000 deposits for 198,000 vehicles. By end of Saturday the $1,000 deposits topped 276,000 units. And for a car not expected to be available in any sort of volume until 2017. Compare that with the top selling autos in the U.S. in 2015:
Remarkably, the Model 3 would rank as the 6th best selling vehicle all of last year! And with just a few more orders, it will likely make the top 5 – or possibly top 3! And those are orders placed in just one week, versus an entire year of sales for the other models. And every buyer is putting up a $1,000 deposit, something none of the buyers of top 10 cars did as they purchased product widely available in inventory. [Update 7 April – Tesla reports sales exceed 325,000, which would make the Model 3 the second best selling car in the USA for the entire year 2015 – accomplished in less than one week.]
Even more astonishing is the average selling price. Note that top 10 cars are not highly priced, mostly in the $17,000 to $25,000 price range. But the Tesla is base priced at $35,000, and expected with options to sell closer to $42,000. That is almost twice as expensive as the typical top 10 selling auto in the U.S.
Tesla has historically been selling much more expensive cars, the Model S being its big seller in 2015. So if we classify Tesla as a “luxury” brand and compare it to like-priced Mercedes Benz C-Class autos we see the volumes are, again, remarkable. In under 1 week the Model 3 took orders for 3 times the volume of all C-Class vehicles sold in the U.S. in 2015.
[Car and Driver top 10 cars; Mercedes Benz 2015 unit sales; Tesla 2015 unit sales; Model 3 pricing]
Although this has surprised a large number of people, the signs were all pointing to something extraordinary happening. The Tesla Model S sold 50,000 vehicles in 2015 at an average price of $70,000 to $80,000. That is the same number of the Mercedes E-Class autos, which are priced much lower in the $50,000 range. And if you compare to the top line Mercedes S-Class, which is only slightly more expensive at an average $90,0000, the Model S sold over 2 times the 22,000 units Mercedes sold. And while other manufacturers are happy with single digit percentage volume growth, in Q4 Tesla shipments were 75% greater in 2015 than 2014.
In other words, people like this brand, like these cars and are buying them in unprecedented numbers. They are willing to plunk down deposits months, possibly years, in advance of delivery. And they are paying the highest prices ever for cars sold in these volumes. And demand clearly outstrips supply.
Yet, Tesla is not without detractors. From the beginning some analysts have said that high prices would relegate the brand to a small niche of customers. But by outselling all other manufacturers in its price point, Tesla has demonstrated its cars are clearly not a niche market. Likewise many analysts argued that electric cars were dependent on high gasoline prices so that “economic buyers” could justify higher prices. Yet, as gasoline prices have declined to prices not seen for nearly a decade Tesla sales keep going up. Clearly Tesla demand is based on more than just economic analysis of petroleum prices.
People really like, and want, Tesla cars. Even if the prices are higher, and if gasoline prices are low.
Emerging is a new group of detractors. They point to the volume of cars produced in 2015, and first quarter output of just under 15,000 vehicles, then note that Tesla has not “scaled up” manufacturing at anywhere near the necessary rate to keep customers happy. Meanwhile, constructing the “gigafactory” in Nevada to build batteries has slowed and won’t meet earlier expectations for 2016 construction and jobs. Even at 20,000 cars/quarter, current demand for Model S and Model 3 They project lots of order cancellations would take 4.5 years to fulfill.
Which leads us to the beauty of sales growth. When products tap an under- or unfilled need they frequently far outsell projections. Think about the iPod, iPhone and iPad. There is naturally concern about scaling up production. Will the money be there? Can the capacity come online fast enough?
Of course, of all the problems in business this is one every leader should want. It is certainly a lot more fun to worry about selling too much rather than selling too little. Especially when you are commanding a significant price premium for your product, and thus can be sure that demand is not an artificial, price-induced variance.
With rare exceptions, investors understand the value of high sales at high prices. When gross margins are good, and capacity is low, then it is time to expand capacity because good returns are in the future. The Model 3 release projects a backlog of almost $12B. Booked orders at that level are extremely rare. Further, short-term those orders have produced nearly $300million of short-term cash. Thus, it is a great time for an additional equity offering, possibly augmented with bond sales, to invest rapidly in expansion. Problematic, yes. Insolvable, highly unlikely.
On the face of it Tesla appears to be another car company. But something much more significant is afoot. This sales level, at these prices, when the underlying economics of use seem to be moving in the opposite direction indicates that Tesla has tapped into an unmet need. It’s products are impressing a large number of people, and they are buying at premium prices. Based on recent orders Tesla is vastly outselling competitive electric automobiles made by competitors, all of whom are much bigger and better resourced. And those are all the signs of a real Game Changer.
Starboard Value last week sent a letter to Yahoo’s Board of Directors announcing its intention to ask shareholders to replace the entire Board. That is why Starboard is called an “activist” fund. It is not shy about seeking action at the Board level to change the direction of a company – by changing the CEO, seeking downsizings and reogranizations, changing dividend policy, seeking share buybacks, recommending asset sales, or changing other resource allocations. They are different than other large investors, such as pension funds or mutual funds, who purchase lots of a company’s equity but don’t seek to overtly change the direction, and management, of a company.
Activists have been around a long time. And for years, they were despised. Carl Icahn made himself famous by buying company shares, then pressuring management into decisions which damaged the company long-term while he made money fast. For example, he bought TWA shares then pushed the company to add huge additional debt and repurchase equity (including buying his position via something called “green mail”) in order to short-term push up the earnings per share. This made Icahn billions, but ended up killing the company.
Similarly, Mr. Icahn bought a big position in Motorola right after it successfully launched the RAZR phone. He pushed the board to shut down expensive R&D and product development to improve short-term earnings. Then borrow a lot of money to repurchase shares, improving earnings per share but making the company over-leveraged. He then sold out and split with his cash. But Motorola never launched another successful phone, the technology changed, and Motorola had to sell its cell phone business (that pioneered the industry) in order to pay off debt and avoid bankruptcy. Motorola is now a fragment of its former self, and no longer relevant in the tech marketplace.
So now you understand why many people hate activists. They are famous for
- cutting long-term investments on new products leaving future sales pipelines weakened,
- selling assets to increase cash while driving down margins as vendors take more,
- selling whole businesses to raise cash but leave the company smaller and less competitive,
- cutting headcount to improve short-term earnings but leaving management and employees decimated and overworked,
- increasing debt massively to repurchase shares, but leaving the company financially vulnerable to the slightest problem,
- doing pretty much anything to make the short-term look better with no concern for long-term viability.
Yet, they keep buying shares, and they have defenders among shareholders. Many big investors say that activists are the only way shareholders can do anything about lousy management teams that fail to deliver, and Boards of Directors that let management be lazy and ineffective.
Which takes us to Yahoo. Yahoo was an internet advertising pioneer. Yet, for several years Yahoo has been eclipsed by competitors from Google to Facebook and even Microsoft that have grown their user base and revenues as Yahoo has shrunk. In the 4 years since becoming CEO Marissa Mayer has watched Yahoo’s revenues stagnate or decline in all core sectors, while its costs have increased – thus deteriorating margins. And to prop up the stock price she sold Alibaba shares, the only asset at Yahoo increasing in value, and used the proceeds to purchase Yahoo shares. There are very, very few defenders of Ms. Mayer in the investment community, or in the company, and increasingly even the Board of Directors is at odds with her leadership.
The biggest event in digital marketing is the Digital Content NewFronts in New York City this time every year. Big digital platforms spend heavily to promote themselves and their content to big advertisers. But in the last year Yahoo closed several verticals, and discontinued original programming efforts taking a $42M charge. It also shut is online video hub, Screen. Smaller, and less competitive than ever, Yahoo this year has cut its spending and customer acquisition efforts at NewFronts, a decision sure to make it even harder to reverse its declining fortunes. Not pleasant news to investors.
And Yahoo keeps going down in value. Looking at the market the value of Yahoo and Alibaba, and the Alibaba shares held in Yahoo, the theoretical value of Yahoo’s core business is now zero. But that is an oversimplification. Potential buyers have valued the business at $6B, while management has said it is worth $10B. Only in 2008 Ballmer-led Microsoft made an offer to buy it for $45B! That’s value destruction to the amount of $35B-$39B!
Yet management and the Board remains removed from the impact of that value destruction. And the risk remains that Yahoo leadership will continue selling off Alibaba value to keep the other businesses alive, thus bleeding additional investor value out of the company. There are reports that CEO Mayer never took seriously the threat of an activist involving himself in changing the company, and removing her as CEO. Ensconced in the CEO’s office there was apparently little concern about shareholder value while she remained fixated on Quixotic efforts to compete with much better positioned, growing and more profitable competitors Google and Facebook. Losing customers, losing sales, and losing margin as her efforts proved reasonable fruitless amidst product line shutdowns, bad acquisitions, layoffs and questionable micro-management decisions like eliminating work from home policies.
There appear to be real buyers interested in Yahoo. There are those who think they can create value out of what is left. And they will give the Yahoo shareholders something for the opportunity to take over those business lines. Some want it as part of a bigger business, such as Verizon, and others see independent routes. Even Microsoft is reportedly interested in funding a purchase of Yahoo’s core. But there is no sign that management, or the Board, are moving quickly to redirect the company.
And that is why Starboard Value wants to change the Board of Directors. If they won’t make changes, then Starboard will make changes. And investors, long weary of existing leadership and its inability to take positive action, see Starboard’s activism as the best way to unlock what value remains in Yahoo for them. After years of mismanagement and underperformance what else should investors do?
Activists are easy to pick at, but they play a vital role in forcing management teams and Boards of Directors to face up to market challenges and internal weaknesses. In cases like Yahoo the activist investor is the last remaining player to try and save the company from weak leadership.