How All Global Business Is Driven by One Meeting at a New Hampshire Ski Resort

If I told you that every decision your business makes is affected by agreements made between an American Treasury official who was probably a Soviet spy and a homosexual British celebrity in a luxurious ski hotel in New Hampshire during WWII, would you believe me?

I recently finished reading The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order by Benn Steil.  This was a very detailed history of the conference between delegates from 44 nations in Bretton Woods, New Hampshire near the end of WWII to determine the financial order of the post-war world.  The first thing I learned from this book is that dense, wonky, academic books are very difficult for me to read.  I suppose there's a reason I got an MBA and not a PhD.  But, as someone not familiar with the entire history of global finance, some of the implications of the conference were fascinating.

As WWII was drawing to a close, it became obvious that the financial order of the post-war world would need to be decided in advance of the final shot fired.  The British, probably aware of their waning power in the world, were very reluctant to cede the position of leader to the Americans.  However, the British were also up to their ears in war debt from fighting Germany--a debt that was not fully repaid until 2006!  Enter British celebrity economist John Maynard Keynes.  If you've heard of one economist (and it's not Milton Friedman), you've probably heard of Keynes.  He's so well-known that his theory of economics, appropriately referred to as Keynesian economics, persists to this day.

Facing off with Keynes was American Harry Dexter White.  While it is clear that the Americans were sometimes overly charmed with Keynes, White was determined to push an American agenda at the conference.  First and foremost, this meant establishing the US Dollar as the world's reserve currency in the post-war world.  The other countries represented at the conference would peg their currencies to the US Dollar, essentially adopting US monetary policy as their own.

So what is a reserve currency and why is it important?  With so much business occurring between two nations with different currencies, it is important to have one standard for exchange.  Theoretically, this is the most commonly-accepted, credible, and sound currency available.  By maintaining a store of this currency, transactions can occur without constant need for foreign exchange.  As you can imagine, there are tremendous network benefits: in other words, there is a great incentive for an entity's reserve currency to be whichever reserve currency is most popular for other entities.  This might even outweigh concerns about the currency's viability.  Think Facebook: as much as you may hate it, you won't delete your account as long as everyone else is on it.

There are major advantages to the country that has its currency as the predominant reserve currency.  For one, there will always be demand for that currency, contributing to its strength (though this can also hurt exports).  This also decreases costs for businesses in that country, as they will deal exclusively in that currency, and enables those businesses to borrow at lower rates.  This can provide downward pressure on prices of goods from that country.  The reserve currency is also the currency in which major commodities are priced, such as oil and gold, so the strength of the currency can have a major affect on commodity prices.  Finally, and somewhat ominously, the country issuing this currency has great power over other countries, and is thus in a position of additional military power.  After all, it is Mayer Amschel Rothschild who is quoted as saying "Let me issue and control a nation's money and I care not who writes the laws."

Knowing full well this meant that the country with the world's reserve currency would be the preeminent super power in the post-war world, White somewhat deviously maneuvered to make sure that this currency was the US Dollar, which he claimed was as good as gold.  As Steil explains in the book, this was done in a way that it was part of the agreement without Keynes becoming aware until after the conference had ended.  The US government then promised to allow any country to redeem their dollars for the value in gold at any point.  Eventually, this system became unsustainable as the US could not maintain required gold reserves and Nixon severed the tie between the US dollar and gold in 1971.  As Steil points out, somewhat cheekily, "Dollars were not synonymous with gold, as White had contended; only gold was gold."

There were numerous other agreements made at the Bretton Woods conference, such as establishment of the International Monetary Fund.  But if the core agreement of a US Dollar global reserve currency, redeemable in gold, is no longer valid today, why is the conference still important?

Just because the dollar lacked gold convertibility did not mean it lost its designation as the most widely used "safe" currency.  According to Wikipedia (I'm not writing this for a class, so Wikipedia is a legitimate source), to this day around 63% of the world's reserves are held in dollars.  Looking at the history of reserves, it is clear that increased confidence in the Euro has been one major detractor to the usage of US Dollars.  What does this mean if the Greeks exit the Eurozone and the Euro eventually collapses?  Will the increased demand for dollars increase imports to the United States?  Even if the Euro remains a legitimate reserve currency, where would American business be today without the borrowing advantage that it is continually afforded?  What would have happened in the Cold War if another currency had been selected as the world's reserve, such as the Soviet ruble?  What will happen if the Chinese Yuan is elevated to be the dominant global reserve currency?

The book quoted a government report around the time of the conference: "There is virtually no public opinion about the Bretton Woods conference...there is no interest because there is no comprehension of the issues involved and the plans proposed, or their importance."  Even Keynes and White didn't have much time to care about the results of the conference; Keynes suffered health problems almost immediately after the conference that would eventually kill him while White was accused by Joseph McCarthy (with fairly convincing evidence, actually) of being a Soviet spy.  Both were dead from heart attacks within three years of the war ending.  Personally, I have sympathy for an apathetic public, as I can't say that I understood the implications of every action at the conference even after spending so much time learning about it.  But the results of Bretton Woods undoubtedly have had a tremendous affect on the landscape of business and finance, even 70 years later.

The Future of Computing: Why You'll Never Buy Another PC Again

Before starting, a small confession: when I say you'll "never" buy another PC, I actually mean that you'll probably continue to buy PCs for another 10-15 years and then never again after that.  One lesson I've learned in blogging (and perusing the metrics for the website I manage for AT&T), is that click-bait titles really drive engagement.  If I wanted to maximize clicks, I would have titled this blog post "Taylor Swift and Jennifer Lawrence just wanted to catch a cab...you won't believe what happened next."

Semi-provocative title notwithstanding, I do have a serious point about the future of the market for personal computers and what it means for the business and you as a consumer.  The market for PCs has endured changes through the years, but one thing has remained constant: people generally purchase a computer for themselves or their family that has the features they want at a price they can afford, use it until it breaks down or no longer performs the functions they require, then sell it for a fraction of what they paid and buy a new one.

So, what's wrong with this?  First of all, it's bad for consumers for a variety of reasons.  Despite their ubiquity, computers are actually very complicated machines and most people simply do not have the technical expertise to maintain them, much less repair them.  Support from the manufacturer tends to be expensive, and, in my experience, generally just recommends creative ways you can spend more money to fix it.  And when the computer starts to break down, it tends to happen at the most inconvenient time.  This process is also extremely inflexible.  Buying a new computer is a big purchase and not something people do frequently.  In fact, sometimes computing needs change drastically and in unexpected ways, for instance when someone returns to school, starts a new job, or sees that a new version of Doom is released.  And when a new computer is purchased, just the process of transferring data and setting it up can be painful.

The solution to this problem is something corporations are already starting to do: cloud computing.  When most people hear the "cloud", they probably think about Google Drive or Dropbox or some similar service (though I did read a statistic that 1/3 of people think it refers to actual rain clouds or something to do with weather).  That is cloud storage, but I'm referring to cloud computing.  If your hard drive can reside in a remote location over the internet, why can't your processor, memory, and applications as well?  In fact, the only aspects of your computer that need to be physically present with you are your monitor, any input devices (keyboard, mouse, etc.), and some way to connect to the internet.  The computer you will use will become a "thin client" that is almost completely dependent on the cloud for functionality.

Think about what this means for consumers.  First of all, these "thin clients" will literally be much thinner, as powerful processors and hard drives will not need to be present.  The real computer that a consumer uses will exist in another physical location, which means that it can be maintained by a professional.  No more worrying about virus scans, upgrades of operating systems, or updated drivers; that will all be taken care of.  When your computer no longer suits your needs, your cloud computing provider will have an option to upgrade to a more powerful machine in a matter of minutes (and you won't have to go through the indignity of selling the old one on Craigslist).  All of your data will exist in the cloud and will be automatically backed up on redundant, secure servers.  All of this with no massive one-time fee to purchase a machine, but rather a small monthly fee to gain access.

That's not to say that there are no negatives to this new model.  First, connectivity goes from being fairly essential to absolutely and utterly indispensable.  Any outage could paralyze a user or business from doing anything.  Security will also be more important, as all of a user's data is stored remotely, though the industry is trending in this direction anyway.  This will make practices such as two-factor authentication much more common.  Also, privacy policies will need to be monitored.  Consumers are accustomed to seeing targeted ads on the websites they visit, but what if a company decided to put ads on your actual computer?  Are you ready to fire up your machine in the morning and see Flo from Progressive Insurance as your desktop background (even if it means your monthly rate is reduced)?

As stated earlier, corporations have already started down this path.  There are a variety of reasons this is a more obvious step for a company than an individual.  For starters, this provides scalability options that companies would not otherwise have.  A company that has seasonal needs (think a tax return preparation firm, for example) would want to scale up during peak season and down during off-peak.  Many corporations would prefer the ability to book the cost of computing as an expense rather than a capital expenditure (which will depreciate) as well.  And some companies just do not have the resources to staff an IT department devoted to maintenance of employee machines.

What does this mean for the industry as a whole?  With apologies to Apple, computers will become even more of a commodity than they already are.  Design, style, or brand of the actual computer will not matter at all (though this may still be an issue with the thin clients that consumers use).  Consumers will buy based on price, reliability, and service level.  Presumably, the total cost of computing will come down.  The industry of cloud computing power will be able to pool resources; in other words, they will not have one computer for every user, because every user does not need their computer 24/7.  The concept is similar to fractional reserve banking: the bank does not actually have the money that it claims is in your checking account, because it's highly unlikely everyone will need their money at the same time.

Furthering the analogy of fractional reserve banking, will government require a "reserve ratio" of computing power as a percentage of total users?  How will this be enforced?  Could there be a "run on the computers" that would leave some users with slower speeds or potentially without computing power at all?

I, for one, am excited about the future of personal computers.  By using a cloud computing model with monthly access fees, users will receive a machine more suited to their needs, probably at a lower overall cost.  Less technologically-savvy users will have better support and upgrades will be more seamless.  It'll be interesting to see how the industry reacts to such a disruption and how the new cloud computing providers will differentiate their businesses in what is sure to be a competitive market.

A President's Day Look at the History of U.S. Presidents and American Business

"The chief business of the American people is business."
- Calvin Coolidge

This President's Day weekend, I got to thinking about which Presidents have generally been thought of as "pro-business" and why.  This is an issue that generates a lot of debate, as everyone seems to want a President who promotes American business, but not everyone agrees as to what constitutes a policy that is favorable to business.  Virtually every President since Washington has paid lip service to the ingenuity of American business, particularly small business, and extolled its role as the driver of the economy.  But in reality, what does it mean to be pro-business?  I've included my thoughts on what the American people view as "pro-business" policies and, as a special bonus, I've included quotes from semi-randomly-selected Presidents on each subject!

Corporate Taxes

"Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus."
- John F. Kennedy

Certainly, this would be seem to be one of the most obvious (or, at least, easily quantifiable) ways to be pro-business: lower corporate tax rates.  In fact, businesses nearly universally do support lower corporate taxes, since the U.S. has the highest statutory corporate tax in the developed world.  It's safe to conclude that, whether or not corporate taxes should be higher or lower, it is generally seen as "pro-business" when Presidents seek to reduce corporate tax rates.  If only everything else were so simple...

Industry Regulation

"Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."
- Ronald Reagan

Regulation is a little more tricky.  Many believe that it is "pro-business" to reduce regulation and red tape, but businesses often do not agree with that assessment.  First, businesses (particularly big businesses) routinely favor additional regulation of their own industries.  For instance, the airlines are all very much in favor of government regulation of airport security through the TSA.  None of the major airlines (to my knowledge) want to abolish TSA and have security handled by the airports or the airlines themselves.  Why?  Because, should a terrorist attack occur due to a failure of security, the airlines can now blame the government and avoid being sued by the families of the victims.  With TSA funded on a per-passenger basis, there is no need for airlines to worry about increasing costs by beefing up security, as that is entirely the job of the government, and the risk can be passed on.

Another very highly-regulated industry is banking; would it not follow that banks would prefer less regulation?  Big banks are actually huge beneficiaries of a Federal Reserve controlling the money supply and setting interest rates and an FDIC insuring deposits.  In fact, the concept of the Federal Reserve was first envisioned by big banking interests (while at Jekyll Island, in my home state of Georgia!) due to their concern about the rapid expansion of non-national banks as well as a trend towards business being financed from profits rather than borrowed capital.  Big banks knew that if all banks were forced to have the same reserve ratio, individual banks could not be blamed for failures to produce deposits.  With the FDIC insuring deposits at the same price for all banks regardless of past behavior or size, banks are incentivized to continue risky (and highly profitable) behaviors.  All this is to say that industry regulation is a difficult subject to clearly define and categorize as pro- or anti-business.

Minimum Wage

"Americans support raising the minimum wage.  And that’s because we believe that in the wealthiest nation on Earth, nobody who works full-time should ever have to raise a family in poverty."
- Barack Obama

The minimum wage is a very divisive subject, with both sides pitching theirs as the pro-business argument.  Proponents say that employers that raise wages see higher retention rates, more satisfied workers, and therefore higher profits.  They say that society also has a moral obligation to provide a living wage to all full-time workers.  Opponents say that the minimum wage increases unemployment, makes it harder for small businesses to compete, increases prices, and disproportionately negatively affects the poorest in society.  They think that the minimum wage is an economically-inefficient kickback to unions.  The best I can discern is that either side can be spun as being pro-business to the respective supporters, though it's probably safe to say that lower minimum wages resonate as being "pro-business" (though possibly anti-worker) to more people.

Tariffs

"I am a tariff man, standing on a tariff platform."
- William McKinley

On its surface, this should be a no-brainer.  In fact, U.S. Presidents have been implementing steep tariffs on imports for centuries under the guise of protecting American businesses.  Unfortunately, high tariffs do result in higher prices for consumers.  What is more important is that the consumers and the producers are often entirely separate, as was the case with the Tariff of 1828, set up to protect northern businesses from British competition.  Unfortunately, this resulted in higher prices for the southern states, which were not seeing the windfall of profits that the north was enjoying.  Similarly, high tariffs often result in retaliatory tariffs from the nations affected, thus drying up markets for exports from the U.S. and hurting American business in the process.  There does not seem to be a consensus on tariffs, but it is possibly seen as more "pro-business" (obviously American businesses only) to implement tariffs to protect these businesses from competition that is deemed to be unfair.

Monopolies

"Even the most monopolistic business man disapproves of all monopolies but his own."
- Franklin Delano Roosevelt

Americans have an almost universal distaste for monopolies, price-fixing or other anti-competitive behaviors.  These businesses harm consumers through higher prices through a lack of competition for business.  In fact, around the turn of the 20th century, there was a whole movement (led by Theodore Roosevelt) towards "trust busting", during which monopolistic corporations were dissolved.   It's safe to say that it is seen as "pro-business" to be anti-monopoly and anti-cartel, and nearly all Presidents have stated this to be their view.  Of course, this Presidential distaste for monopolies does not extend to the money supply, infrastructure, education, lotteries, etc.

Bailouts

"In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action. The question is how we can best give it a chance to succeed."
- George W. Bush

This might be the most confusing issue of all.  The businesses that campaigned for bailouts during the financial crisis said that these were not only necessary for the shareholders, but for the jobs of their employees.  The economy could fall into total collapse and never recover if short-term loans from the government were not issued.  This may be true, but the offer was not extended to small businesses and start-ups, many of which filed bankruptcy during this time.  Essentially, these businesses were forced to subsidize their competitors' insolvency.  And it is difficult (possibly impossible) to say what the long-term effect on corporate decision-making has been now that a potential bailout is a part of the discussion of risk.  In the end, I believe that TARP was generally abhorred by most Americans not working at the companies that received bailouts, though many still viewed it as "pro-business" in that it was a necessary evil for the preservation of the economy.

So what are the takeaways?  First, the term "pro-business" is very difficult to clearly define.  Every individual has a different definition and hardly anyone (in the U.S., anyway) would willingly admit to being "anti-business" regardless of their views.  Second, a policy can be favorable to business in some ways and not in others.  For instance, what is good for big business is not always good for small business.  What is good for business in the short term is not always good for the economy in the long term.  Finally, though virtually every President has ostensibly supported American business, their policies have not always been consistent with their publicly-stated views.  So when thinking about American Presidents and their policies on business, skip the speeches and watch their actions...and remember that not all policies are as simple as they may seem.

The Honest Truth About Dishonesty: Implications for Management

"Where does [dishonesty] come from?  What is the human capacity for both honesty and dishonesty?  And, perhaps most importantly, is dishonesty largely restricted to a few bad apples or is it a more widespread problem?"

These are the questions that Dan Ariely has set out to answer in his book, The Honest Truth About Dishonesty: How We Lie to Everyone--Especially Ourselves.  Considering the subject of this book and post, I feel the need to be completely honest with you: I purchased this book primarily because it was available for $2.99 on Amazon at one point.  I had read Predictably Irrational: The Hidden Forces That Shape Our Decisions and The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home, both by Dan Ariely as well.  I really like Dan Ariely (not only because he is a Duke man) and found Predictably Irrational to be enjoyable and informative.  The Upside of Irrationality was, for me, a little repetitive and seemed to be a bit more of a cash-in on the popularity of the first book.  So I wasn't sure what to expect with The Honest Truth About Dishonesty.  I will admit that I have always been amazed at people's ability to justify dishonest or immoral actions and retain an high, and often inflated, image of self-worth.  And at $2.99, why not?

I actually found myself very pleasantly surprised by this book; in fact, I would say I took more away from it than I did from Predictably Irrational.  The first was something that a lot of people probably intuitively know, even if they can't put it into words: people cheat in small enough ways to influence actions that they find desirable, but not big enough to influence their view of themselves as a moral person.  Dan proves this through numerous tests that have clear opportunities for cheating.  When given the chance, people cheated, but not on every question.  And this was only exacerbated when they saw other people cheating, especially when they identified with the person doing the cheating.  At an extreme level, it provides insight into how something like the Holocaust could happen.

Beyond this, as managers in corporate America, what can be learned about the human tendency for dishonesty and how can it be applied in the workplace?

1. Don't overwork your employees.  Dan performs numerous tests in order to determine how fatigue contributes to dishonesty.  The fact is that resisting temptation takes energy and when there are clear incentives to cheat, an exhausted individual is more likely to take those options than a fresh one.
2. Establish a culture of honesty throughout your entire team.  People are much more likely to cheat when they see others cheating, especially if they relate to that individual.  Even one bad apple on a team could quickly spread the disease of dishonesty to other team members, even if the others ordinarily would have very high integrity.
3. Constantly remind your employees that you view them as, and expect them to be, honest.  Individuals reminded of their own morality prior to taking a test are less likely to cheat than individuals reminded after a test.  Every day could bring a potential test for your employees, so make sure that they are aware of the high standards for the team frequently.
4. Address dishonesty and cheating regardless of severity.  Dan discusses the Broken Windows Theory, first explained in a 1982 article in the Atlantic.  Essentially, if some windows on a building are already broken, people are less likely to care about breaking others.  If employees see dishonesty or cheating, even if it is in small doses, they are less likely to be concerned about more severe examples.  Stamp these issues out before they become real problems.

Human psychology has found a way to allow individuals to cheat while still viewing themselves as heroes starring in their own movie.  This is not limited to certain people who are perpetually dishonest, though those certainly exist and should be avoided at all costs.  But by setting an appropriate and consistent culture of honesty and integrity, managers can naturally steer employees towards their honesty tendencies and away from the temptations of dishonesty.

Public Relations and Profit Maximization in the Washington Redskins Trademark Dispute

There are a lot of interesting business questions surrounding the NFL these days.  One is the recent "discovery" that the NFL is organized as a non-profit.  Many were shocked by the fact that the NFL received the same tax treatment as Habitat for Humanity, but there was not a significant movement to revoke this status.

Probably the most interesting recent dilemma has been the reaction to the controversy surrounding the name of the Washington Redskins.  After 80 years of using the name "Redskins", seemingly out of nowhere, there has been a huge groundswell of support for changing the name, citing insensitivity.  Lacking a viable legal option, the government has taken its first step towards forcing a name change: the patent office has cancelled federal trademarks on the name.

So what does this action really mean?  What is the effect of cancelling trademarks for an NFL team?

First of all, it's important to note that the Washington Redskins are ranked by Forbes as the #3 most valuable NFL team, worth over $1.7 billion.  This was even before the recent offers for the LA Clippers of over $2 billion, so that valuation may be out of date.  But what drives this valuation?

Unfortunately, the NFL and the Washington Redskins do not release detailed financial numbers.  However, economists and market researchers have estimated the magnitude of NFL revenue from various sources:

1. Ticket and concession sales.  This should be obvious enough.  In the past, this was probably the majority of the revenue.  Today, it is very small compared to other sources.
2. Media and television rights.  With the creation of the NFL Network and the gradual transition to internet streaming video, this could become even larger than it already is.  Soon, there will be no barrier to watching every one of your team's games no matter where you are.
3. Sponsorships and advertising.  From banners in the stadium to the name of the stadium itself, the NFL is not short on opportunities for advertisers.  The cost of Super Bowl commercials is legendary and ever-increasing.
4. Licensing and merchandising.  The NFL is notoriously litigious on this.  This is the reason that so many Super Bowl parties refer to "The Big Game" rather than the Super Bowl, due to fear of being sued.  It is also the revenue stream that the government would no longer protect for the Redskins.

While broadcasting rights appear to be the lion's share of revenue, the value of the brand for the Washington Redskins (on which all merchandising is based) is believed to be around 8.4% of the total valuation of the team.  Assuming the Redskins lose protection for their name, it would open the doors for third-party merchandise to flood the market with Redskins hats, shirts, jerseys, glasses, bumper stickers, etc.  Without having to pay licensing fees for the name, producers of these products would have extremely low costs and therefore be able to offer them for significantly cheaper than licensed merchandise.  When consumers are faced with an abundance of inexpensive merchandise, the demand for official Redskins products would decline drastically.  This could be particularly damaging to the Redskins, as they have the fourth highest merchandise sales of any NFL team.  Combine this with the fact that, should the team continue with the name "Redskins", there will be extreme pressure on politicians to not attend games or support the team.  For a team in Washington D.C. (technically in Maryland, but close enough), this could further exacerbate the lost revenue from merchandise.  In essence, Dan Snyder now has to accept drastically lower returns on his investment or change the name of the team.  If he decides the former, the NFL may intervene or the government may take more forceful action.

Personally, I think that Dan Snyder will eventually have no choice but to change the name.  As an organization, the NFL is in the middle of a firestorm of negative media attention.  Whether it is the non-profit status, the increasing reports of playing football leading to long-term health problems, or this issue with the Redskins name, the NFL is hanging on for its life as America's most popular sport.  I think that the NFL commissioner will eventually force Snyder to change the name, which Snyder will do.  In the short term, this will, ironically, create a huge windfall for the Redskins, as every fan with Redskins gear will have to go out and buy gear with the new brand (the Washington Filibusters?  Just a thought).  It will be interesting to see what the repercussions are for other teams with controversial names or logos and what will be determined to be controversial in the future.

Mozilla and the New Political Executives

Recently appointed CEO of Mozilla, Brendan Eich, resigned this past week.  His resignation was under significant pressure due to his support of California Prop 8 in 2008, which sought to amend California's constitution to ban gay marriage.  It seems strange now, but Prop 8 actually passed at the time with 52% of the vote.  So why is something that a majority of Californians supported 6 years ago now so offensive that support of it disqualifies you from leading a technology company?

Well, part of the answer is California demographics.  Even though 52% of California voted for Prop 8, suffice to say that very few of these voters were in San Francisco, where Mozilla is located.  Also, public sentiment on gay marriage has shifted pretty drastically in recent years.  But let's ignore these issues.  What does it say that a CEO's political donation is enough to be pressured to step down?

On the face of it, support or lack of support for gay marriage doesn't say much about an executive's ability to lead a technology company.  We have always thought these issues important for politicians, but politicians (sadly) have the ability to strip away rights.  Under federal anti-discrimination laws, a CEO really has very little ability to discriminate without facing lawsuits, even if he or she wanted to.  As far as coercion, employment is completely voluntary, as is use of a company's products.  If you don't like a CEO's politics, don't work at the company and don't use the products.

On the other hand, the CEO does represent the company to investors, employees, and the public.  In the area with the highest concentration of homosexuals in the entire country, it might be difficult to recruit top talent when none of these people want to work at the company.  In a state where government regulation can be stifling for any company without connections, it's probably bad to have a CEO that no politician would want to be photographed with.  When a lot of the promotion for a CEO comes from speaking engagements (graduations, conferences, etc.) and interviews, missing this opportunity would require a greater marketing budget.  In other words, a CEO needs to be popular.  People don't just buy products that they like; they buy them from people that they like.

So Eich stepping down as CEO was the right move for the company, given the situation.  It is unfortunate that political or religious beliefs could have such an effect on a career in the private sector, but Firefox is absolutely right to realize that retaining Eich as CEO would have been devastating for the company.

Full disclosure: this post was typed on Mozilla Firefox 28.0.

The Smoke and Mirrors of Executive Compensation

Tim Cook, CEO of Apple, recently announced that he received $4.25 million in salary and bonus for the fiscal year ended Sept. 28.  Now, Tim doesn't exactly need to be shopping the discount rack at the Dollar Tree, but the compensation actually does seem a little low given that he is CEO of one of the most visible and valuable companies in the world.  After all, it is reported that Oracle CEO Larry Ellison made $96 million in 2012.  So what gives?

First, most people know that CEOs are not compensated in the same way as most employees.  Whereas the average employee receives most of their money from salary and then possibly a small bonus, the proportions are generally flipped for executives.  The majority of their compensation comes from profit-sharing or bonuses that are based on the stock price or some other metric of performance for the company.  In this way, it's somewhat easy to obfuscate their real earnings by saying that a CEOs salary was fairly low by comparison.

If you look at the fine print, Tim Cook received Apple stock valued at $376 million in 2011 when he signed on as CEO.  $376 million!  Not a bad signing bonus if you ask me (I'll bet they threw in a free iPad too).  It's difficult to say how much that stock is worth now, but as the price has only increased, it is probably worth $450 million or so.  So Tim Cook clearly has a huge interest in making the financial decisions that will guarantee the greatest value to Apple shareholders.  Makes sense, right?

Maybe not.  Apple has been criticized in the past for hoarding cash, being forced to finally issue a dividend in mid-2012 which has continued into 2013.  What does a dividend do to the stock price?  With a price that is the net present value of expected future cash flows (in an efficient market), issuing a dividend means there is less cash to distribute later, which means that the price goes down.  Since Tim actually owns the stock (and presumably receives the dividend along with all other shareholders), he may be personally indifferent.  However, many executives are given a bonus tied to stock price that does not take dividends into account.  In this way, CEOs are incentivized to not distribute dividends even when it is the right move for the business.

What about recent news that Carl Icahn wants Apple to have buy back as much as $150 billion worth of stock?  When stock buybacks occur, there are fewer shares publicly traded.  These shares are still vying for the same overall profit, however, which means the overall pie is bigger.  When the pie is bigger, the share price goes up.  Assume a CEO is compensated based on share price and his or her company is sitting on spare cash.  Instituting a stock buyback immediately increases his or her compensation without actually adding value in any way to the company.  Sounds like a sweet deal for the opportunist executive.

Not only are the incentives for executives skewed towards certain financial decisions that may or may not be in the best interest of the company, but the magnitude of the incentives are nearly impossible to discern.  A very common compensation tool is deferred compensation, whereby an executive is still paid for years after leaving the company.  This can further hide the real compensation of a CEO and provide the executive with a lower tax bill.  Benefits such as use of corporate jets, dinners, etc. make things even more complicated.  Taken as a whole, executive compensation has been made deliberately difficult to comprehend for one simple reason: companies want executives to be attracted to their company due to the high compensation, but don't want the negative publicity that comes from paying these executives so much more than their average employee.  If there was a legal and moral way that Apple could pay Tim Cook $100 million a year and report that paid him $1 million, I'm sure it would do just that (and that's not an Apple-specific criticism; most other companies would do the same).

So next time you see numbers about how much money a CEO made, think twice about it.  Aligning compensation with incentives in a transparent way is much more complicated than it first appears, yet attracting and retaining top executive talent is (arguably) the most important role of the board of directors of a company.  Only companies that do it well will continue to thrive under new leadership.