Archive for June, 2010

Where America’s Money is Moving

Forbes analyzed IRS data to determine future “hot spots” for real estate and concluded what we already knew:  Americans prefer the good weather, low taxes, and favorable business climate offered by the Southeast.

The dominance of the list by Florida and Texas–the former has eight of the top 20 counties, the latter four– makes sense to Robert Shrum, manager of state affairs at the Tax Foundation in Washington, D.C., since neither state has an income tax. “If you’re a high-income earner, then that, from a tax perspective, is going to be a driving decider if you’re going to move to one of those two states,” Shrum says.

After accounting for property taxes, Shrum’s analysis shows that Texas has the fourth-lowest personal tax burden in the country, and Florida has the eighth lowest. Shrum also points to eight states that have targeted wealthy households with extra-high tax brackets: California, New York, New Jersey, Maryland, Hawaii, Oregon, Connecticut and Wisconsin. Six of the top 10 counties the rich are fleeing are located in those states.

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The Lessons of the GM Bankruptcy

On the one-year anniversary of the GM Bankruptcy an article in the Wall Street Journal draws 3 lessons.  We agree with the author that these “might sound blindingly obvious, but it’s amazing how frequently they’re ignored,” and believe a good venture partner helps address such issues through joint ownership and alignment of interests.

  1. Problems denied and solutions delayed will result in a painful and costly day of reckoning.
  2. In corporate governance, the right people count more than the right structure.
  3. Appearances can be deceiving.

The second lesson – on good governance – is one we’ve made before: systems and best practices are important but members’ informal modi operandi determine whether or not all those well-designed systems function properly.  How this applies to the specific example of GM and Ford:

On paper General Motors was a model of good corporate governance, while Ford was (and is) a disaster. The Ford family’s super-voting Class B shares give it 40% of the votes with less than 4% of the shareholder equity. Class B shares get about 31 votes for every share of the Class A stock that nonfamily members own. And the Ford family gets veto power over any corporate merger or dissolution. This structure seems to fly in the face of what is generally understood to be sound principles of good corporate governance. Such “undemocratic” provisions are sure to be lamented this month at two major corporate-governance conferences: the ODX (Outstanding Directors Exchange) in New York, and the annual confab at the Millstein Center for Corporate Governance at Yale. But the Ford board of directors and family came together in 2006 to seek a new CEO from outside the struggling company, even though that meant family scion Bill Ford Jr. had to relinquish command. He volunteered to do so and remains chairman, but not CEO. Meanwhile, the GM board, consisting of blue-chip outside directors who chose a “lead director” from their ranks, steadfastly backed an ineffective management from one disaster to another and wrung its collective hands while the company ran out of cash. Some GM retirees dubbed the directors the “board of bystanders.”

Ford’s governance may not look good on paper, but at least they found the wherewithal to do what had to be done – this time. The next time – and there is always a next time in the up & down that is the business cycle – they’d be better served by better practices. But that is an easier problem to fix than GM’s, which has more to do with getting the team to deal more frankly and forthrightly with the issues at hand and each other.

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When business promotes honesty

In this article from The Independent Institute, Dwight R. Lee argues that businessmen are more honest (or less dishonest) in their dealings than preachers, politicians, and professors: 

Jerome Gerôme:  "Diogenes, Having Failed in his Search for an Honest Man, Finds Some Stoic Dogs"

Jean-Leon Gerôme: "Diogenes, Having Failed in his Search for an Honest Man, Finds Some Stoic Dogs"

Notwithstanding regular reports of dishonest businessmen in the daily news, businessmen deserve more respect for their honesty than they receive.  Granted, businessmen are not always as honest as we would like them to be, and some of them are simply crooked.  The business community would certainly be a strange place for Diogenes to search for a completely honest man.  But would his search prove more successful elsewhere?  In considering the honesty of businessmen in our imperfect world, the relevant question is, compared to whom?  My case for businessmen’s relative honesty is not that they are more virtuous than preachers, politicians, and professors.  Instead, the argument is based on the constraints on those under consideration who might seek to profit from dishonesty.

In our experience, the business case for honesty (the moral case is another discussion) can often be based on the fact that many businesses rely on repeat business.  So although dishonesty may improve the profit or advantage in a single transaction it would result in less success over the long term.

Will Harrell, founding partner of Capco Asset Management in Tampa, has guest blogged for us before (on the subject of inflation), and we found this to be another thought-provoking subject on which to ask him to opine:

This is a terrific issue, and one I agree with in general although perhaps not across-the-board.  The upside from being perceived as a reliable, consistent, trustworthy, &etc. vendor of certain kinds of goods and services is simply huge.  Costco’s CEO has a line I love: “No easy hits on the customer.”  Honesty is just a sub-category of this thesis, which in many cases has more to do with product quality or user experience than honesty per se:  McDonald’s consistency, the taste of a Hershey bar, etc.  It’s also not limited to customers – similar considerations apply to suppliers, capital sources, and employees.

Continue reading ‘When business promotes honesty’

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Sending a Message That You Don’t Care

Texting, emailing, or taking cell phone calls during meetings is a pet peeve of many professionals… and yet many professionals are themselves guilty of the same impolite behavior.  Some new research offers an explanation, of sorts, in the form of “the group-preserving functions of dissociating.”  It turns out that our electronic devices are (over-) feeding a human need to, at times, “disconnect,” and in the process undermining both teamwork and good manners.

Christine Pearson, professor of international business at the Thunderbird School of Global Management in Phoenix and a co-author of “The Cost of Bad Behavior,” writes on the subject in the May 16 New York Times:

Still, the illusion that multitasking can aid productivity is powerful. And it’s abetted by the fact that splitting our Texting in mtgsattention between real and virtual worlds can produce a kind of neural intoxication, research shows.

Through our devices, we find a way to disappear without leaving the room. By splitting ourselves off and reaching out electronically, we fill empty interpersonal space and ignite our senses. We can find relief and a fleeting sense of freedom.

Decades ago, the sociologist Barry Schwartz commended the group-preserving functions of dissociating. Everyone, he said, reaches a threshold beyond which working with others is irritating, even unendurable.

Finding a mental escape can help us deal with the problem. But electronic devices have led to a serious overuse of this strategy — to the detriment of everyone.

We tend not to argue with sociologists, so maybe there’s something to this explanation.  But in our experience the “texting/emailing during meetings” is at its core about trying to multi-task in a world where everyone is busy and being bombarded with messages throughout the day.  The problem is that, while there is no rudeness intended, it is often perceived that way and understandably so.  It’s just hard to claim you value relationships and then not have the courtesy to really focus on what the other person is saying.  Moreover, the preponderance of research shows true multi-tasking is a myth – you really can’t concentrate on more than one thing at the same time.  So we try to turn off the devices during meetings, both internally and with entrepreneurs, and give our full attention to the matters being discussed.  And though we don’t often complain when others do it to us, it does bother us.  So we’ll do our part to hold the emails and calls for after the meeting and hope that others will do the same.

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British Petroleum and epic failure

The Deepwater Horizon cataclysm has received the type of “flood the zone” coverage that would mortally damage any brand, but especially the brand of an oil company that had invested heavily in marketing itself as a green company.  (You Know You’re in Trouble When… an online competition to revise your logo emerges spontaneously.)

Even after discounting for the degree of difficulty involved in deep water drilling, and knowing that accidents – even terrible accidents – will happen, we remain flabbergasted that a major corporation could be so woefully unprepared for the worst-case scenario.

From the saturation coverage we found two articles worth highlighting that offer salient advice to the leaders of our own portfolio companies and all entrepreneurs regarding risk management and the dangers of success.

Professor Michael Roberto, author of Know What You Don’t Know, offers seven potential causes of the Deepwater Horizon disaster based on his research into catastrophic failures.  (You can find his book in the  Library at St. Pete.)  Two of them speak directly to (not) preparing for worst-case scenarios:

  • Organizations often overestimate how well the human and system redundancies they have in place will protect them from catastrophe.
  • People often underestimate the probability of what they perceive to be extremely low probability events.

Robert J. Samuelson echoes Professor Roberto in Duped by Success, from the June 7 Washington Post:

The post-crisis investigations will presumably fill out the story. [The precise details of the cause(s) of the failure. – ed]  But they may miss the larger question of why.

No one has yet suggested that the blowout reflected a previously unknown geological phenomenon — something in the oil formation — or a quirk of technology that no one could have anticipated. Perhaps studies will reveal one or the other. But the prevailing assumption is that this accident was preventable, meaning that human error was responsible.  There’s a cycle to our calamities or, at any rate, some of them. Success tends to breed carelessness and complacency. People take more risks because they don’t think they’re taking risks. The regulated and the regulators often react similarly because they’ve shared similar experiences. The financial crisis didn’t occur so much because regulation was absent (many major financial institutions were regulated) but because regulators didn’t grasp the dangers. They, too, were conditioned by belief in the Great Moderation and lower financial volatility.

It is human nature to celebrate success by relaxing. The challenge we face is how to acknowledge this urge without being duped by it.

On BPV’s Youtube channel:
See Professor Roberto discuss his book here, and an animation of the spill’s potential long-term effects  here.

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Twitter Weekly Updates for 2010-06-05

  • WSJ.com – Opinion: Nobody’s Perfect, but They Were Good http://on.wsj.com/dgpMwF #
  • There’s a rumor going around that everybody makes mistakes. But it’s what you do after you make them that matters most. http://bit.ly/9zKpq4 #
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Economic recovery depends on start-up businesses

Tech Journal South reports on a recently released study from TD Economics that concludes new businesses are critical to job growth:

“Over the 25 year period between 1980 and 2005, without the contribution of start-up firms, net job creation would have been negative.”

This recession, like others, disproportionately affected small businesses.  However, the nature of the downturn has been unlike others in ways especially challenging to SMBs:

  • The degree to which credit contracted was the highest ever recorded by the NFIB (National Federation of Independent Business).  “Corporate bond spreads rose to unprecedented heights during the financial crisis in late 2008, but came down just as quickly as the crisis subsided. For small businesses, dependent on bank lending, the situation has been slower to improve.”
  • The downturn struck sectors in which small businesses are extremely vulnerable:  construction, real estate services, professional, scientific and technical services, and other services.

Tech Jrnl SMB 2

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