Big Sis, as some of us here at CFO like to call our sister publication, The Economist, has been mostly on the money in its coverage of the financial crisis. Until now, she's shunned the demagoguery that's clouded the coverage on many of the major networks and not a few newspapers.
Instead, Sis has held to her beat and looked closely at the current crisis through the lenses of facts and reason. But in this week's issue, she's begun to dip her toe in the muddy waters of the income-equality debate so beloved of the far left and far right.
The equality game began on the political left. Evoking dim memories of Marxism, the likes of filmmaker Michael Moore have long cited huge discrepancies in compensation that exist between the average CEO and the worker on the line. Their solution would be to narrow the wage gap by fiat. What they neglect, however, is the way such arbitrary pay guidelines could freeze the motivational fuel that feeds the growth that in turn enables Average Joe and Jane to prosper.
Lately, right wingers have joined the game. In their version, Big Government has enabled a takeover of our economy by Wall Street and the banks. And look how much these lousy bankers and traders who led the country to ruin are making, they are arguing, while people who "work hard and play by the rules" (as Bill Clinton used to say) lose their jobs and their houses.
Neither fringe is letting up on this pseudo-populist drivel. Unfortunately, in this week's "Lexington" column, Big Sis appears to have begun trafficking in the equality game. Citing Arthur Brooks, the head of the American Enterprise Institute, Lexington appears to approve of Brooks's notion that the nation's new culture war is about the size of the national debt and the size of government.
"Everyone agrees that Wall Street messed up last year, but many are disturbed by the expansion of government that followed the crash," the columnist writes. "Voters particularly dislike the way the state is using their money to reward deadbeats, says Mr Brooks. They themselves work hard and live within their means. They see their neighbour, who borrowed more than he could afford to buy a fancy house, getting a bail-out to save him from the consequences of his own poor judgment."
Acknowledging that the media critics of big government are "a bit hysterical," the columnist nevertheless seems to say that the resentment does have a basis in reality. To that, I say, so what? If we are to truly emerge from the economic mire we're in, it will be through clear thinking and reasoned debate about the effectiveness of our attempts to spur sustainable growth, not through the politics of resentment. We should all stop playing the equality game.
Sometimes, just when you think the coast is clear, it isn't. The slow fade of the chief operating officer role from corporate C-suites may have left some CFOs with less competition as heir apparent to the chief executive, but a faster-moving trend is threatening to spoil the party.
According to a new white paper by recruiting firm Heidrick & Struggles, more than 200 companies worldwide have appointed a "chief commercial officer" since the title first appeared a decade ago. And the pace is really picking up: At least 56 of those jobs were created in 2008 and 36 more followed in the first half of this year, says John Abele, global managing partner of the firm's marketing and sales officers practice. The vast majority are split evenly between North America and Europe, and they're also found at both start-ups and well-known companies like Coca-Cola, MillerCoors, Hasbro, JetBlue, Cadence Pharmaceuticals, Ball Corp., and Calpine.
The position, often filled by someone with both general-manager and functional (such as marketing) experience, generally forms a bridge between the product-innovation and customer-facing sides of the business. The goal is to make sure that companies turn their best ideas into products that actually make money. Historically, the CEO has been that integrator.
As such, the CCO is a logical successor to the chief executive, often more so than the CFO, at least according to Abele. "In my experience, CCOs with that broad skill set are brought in partly as a succession-planning option," he says. "Now you've got someone else in the C-suite with a broad set of responsibilities who is looking at the P&L. Depending on your point of view and on the company, that person might be more strongly positioned, given their exposure in and knowledge of the marketplace."
On the other hand, the financial crisis has buttressed CFOs' claim to the status of most-important C-suiter, and their stature frankly isn't likely to diminish much when the economy is humming again.
Still, should CFOs who want to move up to the top slot consider campaigning for an interim tenure as a CCO? Maybe, but it's a rare occurrence. Among the CCO appointments Heidrick has identified, just 3% were filled by a finance chief. It apparently happens even less often in the United States. On a list of such people that Heidrick provided, only one ý Kevin Mooney of Blackbaud Inc., now in his second commercial chief job since leaving the finance chair at Worldspan in 2006 ý was at an American company.
Sadly, I couldn't learn what makes Mooney tick, as he declined my request for an interview. A couple of the overseas folks that I contacted did, too. Now, I'm assuming there's nothing inherently cloak-and-dagger about this job, so could one of you CFOs-turned-CCOs please give me a call?
Among its proposals is a labeling system for financial products. The proposed labeling system is akin to the "traffic-light" system the UK government currently applies to food products. You can read more here about how the food labeling system works, but basically it applies a red, yellow, or green light for each of four characteristics within food: fat, saturated fat, sugar, and salt. The labels appear on food packaging.
To be sure, this is aimed at retail consumers, for whom the food labeling has reportedly proved useful. Still, it's hard to imagine how you transfer that concept from frozen pizza to, say, a sub-prime mortgage. ("Warning: Do not eat more than your own body weight of this frozen pizza.")
What's most interesting about this proposal is that Her Majesty's Treasury says it is likely to be compulsory, which seems like the beginnings of a government credit-rating system.
Yesterday's Wall Street Journal tells how the Obama administration forced J.P. Morgan Chase and other senior lenders to accept $2.25 billion on Chrysler's $6.9 billion in debt. "Senior secured lenders usually get paid in full before lower-priority lenders get anything," fretted the Journal. "Not this time."
"In its rush to save Detroit," argues our sister publication, The Economist, "the American government is trashing creditors’ rights."
Yes, bankruptcy law is the crown jewel of American capitalism and secured lending should be inviolate. It's also unfortunate that this "gerrymandering the rules," as Big Sis calls it, benefits Detroit and its unions, an easy target for critics.
But let's get real. This is an extraordinary move by the government, not an ongoing campaign to subvert bankruptcy.
For that, you'd have to look to the banking industry itself, which has waged a tireless effort to gerrymander its way around bankruptcy.
In fact, that's a good definition of securitization: it is a method of gerrymandering a loan such that the assets by which it is collateralized are removed from any future bankruptcy estate.
That's why banks were able to pass off subprime mortgages — not to mention trade receivables from BBB companies — as AAA credits. Because the (toxic) assets had been "sold" to an imaginary company, they were no longer affected by the risk that their originator might go bankrupt. (No one bothered to wonder if the assets themselves carried underlying insolvency risk.)
Even so, banks for many years sought a safe-harbor provision for securitization in bankruptcy, particularly after the bankruptcy of LTV Steel threw a scare into the industry. When the current bankruptcy law was being debated in 2005, banks felt more secure about securitization, and dropped the provision to avoid attracting opposition to an otherwise bank-friendly bill.
Still, the final law gave banks many end-runs around bankruptcy's "automatic stay," which prevents creditors from seizing collateral or terminating contracts from once a company files for bankruptcy. The law removed every conceivable type of financial instrument from the waterfall, and allowed banks to immediately net out their positions with an insolvent debtor — without court approval — and without consulting secured lenders.
"The bankruptcy code grant[s] those who have entered into financial derivative contracts with parties that subsequently become insolvent greater rights than these statutes grant those who enter into most contracts," then-FDIC general counsel William F. Kroener III told Congress in 1999.
The 2005 law expanded those 'rights,' a move that a University of Chicago law professor warned Congress, "would take us farther down the path of allowing sophisticated parties to opt out of bankruptcy."
Those same sophisticated parties, of course, are now complaining they've lost the very protections they've long sought to circumvent.
Here's an idea for the government. Offer to pay the banks the $4.65 billion they stand to lose, but only if they agree to a simple revision of the bankruptcy code: All contracts, regardless of type, are subject to the bankruptcy waterfall.
Almost every week on the defunct TV show "Fear Factor," the hapless contestants would be forced to eat bugs, or larvae, or worms. It was, to put it mildly, gag-inducing — to the viewers (who knows what was going through the minds of those actually doing the deed?). When the show popped up on my screen during channel-surfing, my well-trained finger dashed on by with urgent, electric speed.
It is with similar revulsion that I contemplate a frantic, mid-life search for work following a job elimination. It's something most people would prefer not to think about. But very often these days, the unthinkable happens.
This week I spoke with a gentleman who recently found an executive finance position after searching for the better part of a year. He had the required experience — public accounting, controllership, treasury, financial planning and analysis, compliance, risk management. The company he landed at is larger than his previous one, but he's got a lesser title.
Speaking on condition of anonymity, he displayed his frustrations vividly, leveling both barrels at employers' current human capital mindset. His insights seem quite well-informed, since he claims to have spoken with at least 150 companies and 30 recruiters during his job-seeking sojourn. Here are the highlights:
"This should be a big time for companies to build up human capital resources. When times are tough and people are worried about their jobs, if you go out and invest in the right people who you want to remain with the company, they will remember that loyalty. But what is happening is the opposite. Many times I witnessed companies trying to consolidate roles. Maybe they had people heading SEC reporting, controllership, and financial planning and analysis, earning maybe $120,000 to $150,000 each, and they decide to combine two or all three of those roles and hire one person to do it.
"But they're trying to get away with paying $130,000 to $140,000 for that one person. People in current positions will not move for that. Those who were laid off or had roles eliminated will do it, but as soon as the economy turns around they're going to leave. Companies are being very short-sighted in their cost-cutting efforts by trying to get a bargain on human capital.
"The other thing is that companies are afraid to make decisions. You talk to them for the first time and they talk about their great, urgent need to hire someone. And then they delay the process for a month, or two, or four, or they don't make the decision at all, as a cost-cutting initiative. What does that do? The person looking at the company says, is this a management team I really want to work for? One that will not invest in people?
"That's my personal experience. There's huge levels of disappointment. There are hundreds of candidates for each role. It might take weeks or even months to get down to two or three, and at that point it's a flip of the coin — it has nothing to do with whether I can do the job. I was in that position a number of times."
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