by Adam Hartung | Jul 13, 2016 | Employment, Leadership, Regulations, Trends
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.
by Adam Hartung | Apr 23, 2014 | Current Affairs, Leadership
Every quarter I have to be reminded that “earnings season” is again upon us. The ritual of public companies announcing their sales and profits from recent quarters that generates a lot of attention in the business press. And I always wonder why this is a big deal.
What really matters to investors, employees, customers and vendors is “what will your business be like next quarter, and year?” We really don’t much care about the past. What we really want to know is “what should we expect in the future?”
For example, two companies announce quarterly results. One has a Price/Earnings (P/E) multiple of 12.8 and a dividend yield of 2.05%. The other has a multiple of 13.0, and a yield of 3.05%. For both companies net earnings overall were pretty much flat, but Earnings Per Share (EPS) improved due to an aggressive stock repurchase program. Both companies say they have new products in the pipeline, but they conservatively estimate full year results for 2014 to be flat or maybe even declining.
Do you know enough to make a decision on whether to buy either stock? Both?
Truthfully, the two companies are Xerox and Apple. Now does it matter?
While both companies have similar results and forward looking statements, how you view that information is affected by your expectations for each company’s future. So, in other words, the actual results are pretty meaningless. They are interpreted through the lens of expectations, which controls your decision.
You can say Xerox has been irrelevant for years, and its products increasingly look unlikely to change its future course, so you are disheartened by results you see as unspectacular and likewise see no reason to own the stock. For Apple you could say the same thing, and bring up the growing competitor sales of Android-based products. Or, you might say that Apple is undervalued because you have great faith in the growth of mobile products sales and you believe new devices will spur Apple to even better results. Whatever your conclusion about the announced earnings, those conclusions are driven by your view of the future – not the actual results.
Another example. Two companies have billions in sales, and devote their discussion of company value to technology and the use of new technology to pioneer new markets. Both companies report they continue a string of losses, and have no projection for when losses will become profits. There are no dividends. There is no P/E multiple, because there is no E. There is no EPS, again because there is no E. One company is losing $12.86/share, the other is losing $.61/share. Again, do these results tell you whether to buy either, one or both?
What if the first one (with the larger losses) is Sears Holdings, and the latter is Tesla? Now, suddenly your view on the data changes – based upon your view of the future. Either Sears is on the precipice of a turnaround to becoming a major on-line retailer that will sell some real estate and leverage the balance of its stores to grow, so you buy it, or you think Sears has lost all relevancy and you don’t buy it. Either you think Tesla is an industry game changer, so you buy it, or you think it is an over-rated fad that will never become big enough to matter and the giant global auto companies will destroy it, so you don’t buy it. It’s your future view that guides your conclusions about past results.
The critical factor when reviewing earnings is actually not the reported results. The critical factor is what you think the future is for these 4 companies. No matter how good or bad the historical results, your decision about whether to own the stock, buy the company products, work for the company or join its vendor program all hinges on your view about the company’s future.
Which makes not only the “earnings season” hoopla foolish, but puts a pronounced question mark on how executives – especially CEOs – in public companies spend their time as it relates to reporting results.
Enormous energy is spent by most CEOs and their staff on managing earnings. From the beginning to the end of every quarter the CFO and his/her staff pour over weekly outcomes in divisions and functions to understand revenues and costs in order to gain advance knowledge on likely results. Then, for the next several days/weeks the CFO’s staff, with the CEO and the leadership team, will pour over those results to make a myriad number of adjustments – from depreciation and amortization to deferring revenue changing tax structures or time-matching various costs – in order to further refine the reported results. Literally thousands of person-hours will be devoted to managing the reported results in order to provide the number they think is most appropriate. And this cycle is repeated every quarter.
But how many hours will be spent by that same CEO and the leadership team managing expectations about the company’s next year? How much time do these leaders spend developing scenarios, and communications, that will describe their vision, in order to manage investor expectations?
While every company has a CFO leading a large organization dedicated to reporting historical results, how many companies have a like-powered C level exec managing the expectations, and leading a large staff to create and deliver communications about the future?
It seems pretty clear that most management teams should consider reallocating their precious resources. Instead of spending so much time managing earnings, they should spend more time managing expectations. If we think about the difference between Xerox and Apple, one is quickly aware of the difference the CEOs made in setting expectations. People still wax eloquently about the future vision for Apple created by CEO Steve Jobs, who’s been dead 2.5 years, while almost no one can tell you the name of Xerox’ CEO. If you think about the difference between Sears and Tesla one only needs to think briefly about the difference between the numbers driven hedge fund manager and cost-cutting CEO Ed Lampert compared with the “visionary” communications of Elon Musk.
Investors should all think long term. Investors should care completely about what the next 3 to 5 years will mean for companies in which they place their money. What sales and earnings are reported from months ago is pretty meaningless. What really matters is what is yet to happen.
What we don’t need is a lot of time spent talking about old earnings. What we need is a lot more time spent talking about the future, and what we should expect from our investments.
by Adam Hartung | Feb 18, 2014 | Current Affairs, Games, In the Swamp, Leadership
Microsoft has a new CEO. And a new Chairman. The new CEO says the company needs to focus on core markets. And analysts are making the same cry.
Amidst this organizational change, xBox continues its long history of losing money – as much as $2B/year. And early 2014 results show that xBox One is selling at only half the rate of Sony’s Playstation 4, with cumulative xBox One sales at under 70% of PS4, leading Motley Fool to call xBox One a “total failure.”
While calling xBox One a failure may be premature, Microsoft investors have plenty to worry about.
Firstly, the console game business has not been a profitable market for anyone for quite a while.
The old leader, Nintendo, watched sales crash in 2013, first quarter 2014 estimates reduced by 67% and the CEO now projecting the company will be unproftable for the year. Nintendo stock declined by 2/3 between 2010 and 2012, then after some recovery in 2013 lost 17% on the January day of its disappointing sales expectation. Not a great market indicator.
The new sales leader is Sony, but that should give no one reason to cheer. Sony lost money for 4 straight years (2008-2012), and was barely able to squeek out a 2013 profit only because it took a massive $4.6B 2012 loss which cleared the way to show something slightly better than break-even. Now S&P has downgraded Sony’s debt to near junk status. While PS4 sales are better than xBox One, in the fast shifting world of gaming this is no lock on future sales as game developers constantly jockey dollars between platforms.
Whether Sony will make money on PS4 in 2014 is far from proven. Especially since it sells for $100/unit (20%) less than xBox One – which compresses margins. What investors (and customers) can expect is an ongoing price war between Nintendo, Sony and Microsoft to attract sales. A competition which historically has left all competitors with losses – even when they win the market share war.
And on top of all of this is the threat that console market growth may stagnate as gamers migrate toward games on mobile devices. How this will affect sales is unknown. But given what happened to PC sales it’s not hard to imagine the market for consoles to become smaller each year, dominated by dedicated game players, while the majority of casual game players move to their convenient always-on device.
Due to its limited product range, Nintendo is in a “fight to the death” to win in gaming. Sony is now selling its PC business, and lacks strong offerings in most consumer products markets (like TVs) while facing extremely tough competition from Samsung and LG. Sony, likewise, cannot afford to abandon the Playstation business, and will be forced to engage in this profit killing battle to attract developers and end-use customers.
When businesses fall into profit-killing price wars the big winner is the one who figures out how to exit first. Back in the 1970s when IBM created domination in mainframes the CEO of GE realized it was a profit bloodbath to fight for sales against IBM, Sperry Rand and RCA. Thinking fast he made a deal to sell the GE mainframe business to RCA so the latter could strengthen its campaign as an IBM alternative, and in one step he stopped investing in a money-loser while strenghtening the balance sheet in alternative markets like locomotives and jet engines – which went on to high profits.
With calls to focus, Microsoft is now abandoning XP. It is working to force customers to upgrade to either Windows 7 or Windows 8. As PC sales continue declining, Microsoft faces an epic battle to shore up its position in cloud services and maintain its enterprise customers against competitors like Amazon.
After a decade in gaming, where it has never made money, now is the time for Microsoft to recognize it does not know how to profit from its technology – regardless how good. Microsoft could cleve off Kinect for use in its cloud services, and give its installed xBox base (and developer community) to Nintendo where the company could focus on lower cost machines and maintain its fight with Sony.
Analysts that love focus would cheer. They would cheer the benefit to Nintendo, and the additional “focus” to Microsoft. Microsoft would stop investing in the unprofitable game console market, and use resources in markets more likely to generate high returns. And, with some sharp investment bankers, Microsoft could also probably keep a piece of the business (in Nintendo stock) that it could sell at a future date if the “suicide” console business ever turns into something profitable.
Sometimes smart leadership is knowing when to “cut and run.”
Links:
2012 recognition that Sony was flailing without a profitable strategy
January, 2013 forecast that microsoft would abandon gaming
by Adam Hartung | Jan 24, 2014 | Current Affairs, In the Swamp, Leadership
JPMorganChase Board of Directors this week voted to double CEO Jamie Dimon’s pay to something north of $20million. That he received such a big raise after the bank was forced to pay out more than $20B in fines for illegal activity has raised a number of eyebrows among analysts and shareholders. That he is receiving this raise after the bank laid off some 7,5000 employees in 2013, and recently announced it would not give employees raises due to the large fines, shows a distinct callousness toward employees, while raising questions about company leadership.
The Wall Street Journal reported that there was a lot of Board discourse about CEO Dimon’s pay package. But in the byzantine world of large company governance, apparently the Board felt compelled to pay Mr. Dimon tremendously well in order to send a message to Washington that the Board thought the regulators were wrong in pursuing malfeasance at JPMC. A show of support for the CEO who claimed this week he felt the bank had been treated unfairly.
Did that last paragraph leave you a bit confused? Because the logic, to be honest, is far from straightforward. The Board of a troubled bank with long-term leadership issues creating billions in trading losses and billions in fines for illegal behavior decided to withhold employee pay raises but double the CEO compensation in order to snub the nose of the regulators who have been pointing out years of unethical, if not illegal, behavior? The same regulators who might well see this very action as a good reason to heighten their investigations?
I’m not trying to oversimply the complexities of corporate governance, but this is some pretty tortured logic. When so many things have gone wrong, and it can be traced to leadership, rewarding that leader handsomely has the clear appearance of supporting his behavior, while punishing employees for the results of that leader’s actions.
Mr. Dimon is a media darling, and has been most of his career. He has also been outspoken on many issues during his career, drawing the attention of friends and foes. He is unabashed in his opinions, and even when he’s dead wrong – as when he referred to massive London trading losses as “a tempest in a teapot” he always speaks with total confidence. Mr. Dimon shows complete faith in his ability to be smarter than everyone else, and complete faith in his decisions, and he has no problem making sure everyone is fully aware of his absolute trust in himself.
But people are able to see trends. Although his defenders would like to say that the fines were related to issues which predated Mr. Dimon’s leadership, there are clear markers that differ. For example, it was the desperate search for higher profits under Mr. Dimon which led to the creation of the London trading desk, and giving it lattitude for big bets, that created some $7B in losses. Mr. Dimon’s final reaction was akin to “we make mistakes. Sorry. Time to move on.”
Oh yeah, and he fired the employees while claiming no personal responsibility.
And in January we learned that the bank was paying a $2.6B fine for aiding and abetting the ponzi scheme operated by Mr. Bernie Madoff. This behavior was something which had gone on for decades, without any oversight or reporting at the bank. This had continued while Mr. Dimon was CEO.
Why did these things happen? Because there was a huge desire to make more money.
Mr. Dimon is known for being as blunt with executives and employees as he is with the media. His “take no prisoners” style has been seen as crippling by many. Mr. Dimon focuses on results, and he is known for being brutal when he doesn’t receive the results he wants. For executives and employees that created a culture where delivering results to Mr. Dimon was paramount. And if that required taking big risks, or looking the other way about troubling behavior, well, people did what they had to do to make things happen at JPMC. If you had to bend the rules, or look the other way, to get results that was better than having to deal with the wrath of Mr. Dimon.
“The person at the top” sets the tone by which the organization behaves. And the more we learn about JPMC the more we see a company where the CEO loves to flash his POTUS cufflinks at the Congress and press, claim he’s taking the high road, and blame employees or predecessors when things go wrong. And that’s not a healthy environment.
Across the river from Wall Street Chris Christie, Governor of New Jersey, has become embroiled in controversy. His staff created an enormous traffic debacle in Fort Lee as retaliation against a mayor who did not support the Governor’s re-election bid. Mr. Christie fired the staffer, and claimed he knew nothing about it. But the majority of people in New Jersey aren’t buying the Governer’s ignorance.
Instead most Americans see a negative pattern in the governor’s behavior. His “take no prisoners” attitude has created accomplishments, but simultaneously he’s shown he thinks its OK to take off the gloves and fight bare knuckle – and not stop before taking some pretty sketchy shots at people in his quest to come out on top. Now regulators are digging even deeper to see if his bullying behavior set the stage for problems, even if he didn’t do the dastardly deed himself. And, as for governance, it will be up to voters to decide if Mr. Christie’s leadership is what they want, or not.
But at JPMC the governance is up to the Board. And this Board is, unfortunately, controlled by Mr. Dimon. He is not just CEO, but also Chairman of the Board. He holds the “bully gavel” when it comes to Board matters. He is able to set the agenda, and control the data the Board receives. He is able to call the Board members, and strong arm them to see things his way. Although it is clear the bank would benefit from a seperation of the roles of CEO and Chairman, Mr. Dimon has stopped this from happening. And the big winner has been – Mr. Dimon.
The signal this sends for JPMC employees, customers and investors is not good. While the stock is up some 22% the last year, governance and the CEO should have a long-term vision and not be influenced by short-term price changes. In the case of JPMC the culture appears to be one where seeking results is primary. Even if it leads to taking inordinate risks (which can create huge losses,) or taking and supporting questionable clients (Bernie Madoff,) or operating on the edge of financial industry legality. And if things go wrong – look for a scapegoat. Primarily someone below you who you can blame, while you claim you either didn’t know about it or didn’t support their behavior.
At JPMC the important question now is less about CEO pay and more about governance. The Board clearly has lost its ability to control a CEO + Chairman able to push his will, even when the logic of some actions appears hard to follow. The Board should be addressing who should be the Chairman, what should be the strategy, is the bank doing the right things, are the right compliance tools in place, and then – after all of that – is compensation being set correctly. That Mr. Dimon received such an undeserved raise simply points to much bigger problems in governance – and raises questions about the future of JPMC.
by Adam Hartung | Apr 22, 2013 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership
JCPenney's board fired the company CEO 18 months ago. Frustrated with weak performance, they replaced him with the most famous person in retail at the time. Ron Johnson was running Apple's stores, which had the highest profit per square foot of any retail chain in America. Sure he would bring the Midas touch to JC Penney they gave him a $50M sign-on bonus and complete latitude to do as he wished.
Things didn't work out so well. Sales fell some 25%. The stock dropped 50%. So about 2 weeks ago the Board fired Ron Johnson.
The first mistake: Ron Johnson didn't try solving the real problem at JC Penney. He spent lavishly trying to remake the brand. He modernized the logo, upped the TV ad spend, spruced up stores and implemented a more consistent pricing strategy. But that all was designed to help JC Penney compete in traditional brick-and-mortar retail. Against traditional companies like Wal-Mart, Kohl's, Sears, etc. But that wasn't (and isn't) JC Penney's problem.
The problem in all of traditional retail is the growth of on-line. In a small margin business with high fixed costs, like traditional retail, even a small revenue loss has a big impact on net profit. For every 5% revenue decline 50-90% of that lost cash comes directly off the bottom line – because costs don't fall with revenues. And these days every quarter – every month – more and more customers are buying more and more stuff from Amazon.com and its on-line brethren rather than brick and mortar stores. It is these lost revenues that are destroying revenues and profits at Sears and JC Penney, and stagnating nearly everyone else including Wal-Mart.
Coming from the tech world, you would have expected CEO Johnson to recognize this problem and radically change the strategy, rather than messing with tactics. He should have looked to close stores to lower fixed costs, developed a powerful on-line presence and marketed hard to grab more customers showrooming or shopping from home. He should have targeted to grow JCP on-line, stealing revenues from other traditional retailers, while making the company more of a hybrid retailer that profitably met customer needs in stores, or on-line, as suits them. He should have used on-line retail to take customers from locked-in competitors unable to deal with "cannibalization."
No wonder the results tanked, and CEO Johnson was fired. Doing more of the tired, old strategies in a shifting market never works. In Apple parlance, he needed to be focused on an iPad strategy, when instead he kept trying to sell more Macs.
But now the Board has made its second mistake. Bringing back the old CEO, Myron Ullman, has deepened JP Penney's lock-in to that old, traditional and uncompetitve brick-and-mortar strategy. He intends to return to JCP's legacy, buy more newspaper coupons, and keep doing more of the same. While hoping for a better outcome.
What was that old description of insanity? Something about repeating yourself…..
Expectedly, Penney's stock dropped another 10% after announcing the old CEO would return. Investors are smart enough to recognize the retail market has shifted. That newsapaper coupons, circulars and traditional advertising is not enough to compete with on-line merchants which have lower fixed costs, faster inventory turns and wider product selection.
It certainly appears Mr. Johnson was not the right person to grow JC Penney. All the more reason JCP needs to accelerate its strategy toward the on-line retail trend. Going backward will only worsen an already terrible situation.
