What Recession?

The National Bureau of Economic Research is meticulous about accuracy in calling a recession. Consequently their anointment has no real predictive benefits because by the time they decide it was a recession it’s usually over. Harry S. Truman once famously quipped that a recession is when your neighbor loses his job, a depression if when you lose yours. The pundits are now claiming a recession is likely. A supposed horror in an election year, the politicians are falling over themselves to write checks to everyone to keep us spending. That’s a great plan; take the money away from productive uses in the first place and then mail back 40% of it to us after you’re done making Washington’s payroll. And some are linking the coming recession to the housing slump. Supposedly, when prices were high we all mortgaged our houses so we could buy a flat screen TV and a beemer. Now that house prices are not rising, we have nothing to spend. But the Buzz has always thought the Valley recession–resistant if not downright recession-proof. One of the miracles that is Silicon Valley is the incredible number of very intelligent people who have been recruited here. Sure many get out when their IPO hits, but there are a lot of very smart people still here. Yes, we mean you gentle reader. And we know that the smart people who make up our community are always working on the next thing. On top of this, venture capital does not fund what is now; it is generally looking for what is next. Just because housing prices have stalled or, God forbid, declined, does not mean that there aren’t a million new ideas being hatched every day. Of course we’re lawyers so none are coming from us, but we know that you have the next great idea. So, what are you waiting for? When the depression hits and YOU lose YOUR job, get cracking, give us a call, and start that business you’ve always wanted to start.

-- Paul Marotta

Who’s the Man?

Our federal government is collecting millions of dollars for social security numbers that do not match any known record and supposedly keeping this money in a suspense account. We figure that account is right next to the social security trust fund account. Right. In any case the SSA sends out thousands of letters every week, commonly referred to as “No-Match Letters,” telling employers that that social security number they were given by their prospective employee does not match any known record. Many times, clerical errors, misspellings, slipped digits and the like are to blame. Eventually many are fixed. Employers were admonished in the past that no-match letters did not mean anything as far as the employee’s immigration status. But sometimes the social security number provided by that bright eyed new employee is one they made up or got from a friend. Now these no-match letters have become an enforcement tool in the battle against businesses employing the 12 million or so people the feds couldn't be bothered to find after their visas expired. Homeland Security now uses no-match letters as proof of a business’ knowing employment of illegal aliens. The state has always used businesses as their enforcement arm; what do you think payroll tax withholding is. So we guess the strategy our government is now using is that they can starve out the 12 million people they let slip in. Good plan; let’s ensure they are unemployable so that they can become wards of the state.

-- Paul Marotta

Executive Compensation

The Buzz has watched with interest the increasing number of CEO’s who have made a bunch on their stock and have forgone their salary. Googlers Eric Schmidt, Sergey Brin, and Larry Page last year lowered their salaries to $1 (from the already-not-very-high $250,0000 for Schmidt and $150,000 for Brin and Page). Similarly Whole Foods Markets CEO John Mackey late in 2006 sent a letter to his employees stating that he was lowering his own salary to $1 for 2007. In a well written letter Mackey said that, “The tremendous success of Whole Foods Market has provided me with far more money than I ever dreamed I’d have and far more than is necessary for either my financial security or personal happiness.” Apparently in an effort to do even more good, Mackey also had the Board deposit $100,000 into a Whole Foods Global Team Member Emergency Fund, to be used by and made available to Whole Foods Markets employees with emergencies, and donated future options to two company foundations. Many people use their compensation as benchmarks for anticipated personal happiness, skill at a given endeavor, or societal value. Compensation has components of all of these things, but cash compensation truly measures none of them. Even stock compensation measures more of a collective effort, rather than an individual one. Though we are avid free-marketers, we generally applaud CEO’s whose desire for personal wealth has an end point (because most others’ greed has no bounds at all). But we find slightly disingenuous the protestations of Bill Gates, George Soros, and Warren Buffet. Their recent cries for “humanity” in business fall on deaf ears to the extent that they ignored that humanity while growing their own personal wealth. We find more honest the CEO who sets the stopping point well below the $1 billion mark. Just as compelling is the CEO who does not immediately layoff employees for a few more cents a share profit, or scheme endlessly to put a competitor out of business. Sure fiduciary obligations are important, but leaving a trail of scorched earth in your path may not be absolutely necessary to ensure that you are handling stockholders' assets well.

- Paul Marotta

Entrapment?

The US Immigration and Customs Enforcement Agency (aptly named “ICE” by Washington’s acronym-addicts) is prosecuting an HR employee at Swift & Co., a beef processor, for “harboring an illegal alien.” Apparently ICE raided a slaughterhouse, wired a scared illegal and recorded his conversations with the HR Administrator. The same human compassion that gets politicians elected, got the HR Administrator prosecuted. And not only prosecuted, but prosecuted by the same federal government that cannot keep a border any tighter than Swiss cheese. Apparently the fact that people are regularly sneaking into our country by the millions is the fault of those trying to run businesses here; not the government’s. ICE made 863 criminal arrests in 2007, up from 176 arrests in 2006. The federal government believes that the 12 million people they already let into this country are supposed to either starve or be fed in public schools. Or maybe they can all turn to crime since they can’t get jobs anymore. That’s a good idea! The government believes that only it can help those it carelessly let in. And the workers who are caught make perfect snitches; they would much rather turn in everyone above them than face the consequences of their illegal status. We think this smells like entrapment: Let’s place hundreds of workers willing to do the job in front of you and then see how good you are at guessing which of our federally-issued social security cards are real and which are fake. Sounds like a good political solution to us; those stumbling over each other to be elected President can blame the “evil profit motive” for all of immigrations ills. It couldn't possibly be more endless bureaucratic ineptitude; could it?

Paul Marotta

Music to No One’s Ears

The Recording Industry Association of America won its first case. In a blaze of self-righteousness it won $222,000 from a single mother from Brainerd, Minnesota, doing its part to keep our streets safe for gansta rap. The RIAA has filed 26,000 lawsuits over the last four years, but this was the first case to go to trial. The defendant had to pay $9,250 for each of 24 songs. Just ask any college student and for sure they have horror stories of someone down the hall in their dorm getting nailed for $4,000. The RIAA is on its third law firm in as many years, now handling cases through Denver firm Holme, Roberts & Owen. All we can say is HRO must not have been busy enough. The RIAA should have been out front in the evolution of digital music, but instead the best it can do is to weild the blunt instrument of law like a battle ax, crushing in the skull of all those really interested in music. Of course, they argue they are protecting “the artist.” Well, how about offering to let the artist keep more of what they earn for you? No Grateful Dead fans us, but we marveled at their willingness to let fans videotape and record their concerts. Thus was born viral marketing years before anyone coined the term. All the Buzz can say is that we are witness to the last gasps of the recording industry. The music industry is dead; long live music!
--Paul Marotta

The Law of Unintended Consequences for Hershey

According to Wikipedia the law of unintended consequences, “dates to the Scottish Enlightenment and consequentialism, or judging by results. In the twentieth century, sociologist Robert K. Merton once again popularized the concept, sometimes referred to as the Law of Unforeseen Consequences. Merton (1936) spoke of the “unanticipated consequences” of “purposive social action,” emphasizing that his term “purposive action… [is exclusively] concerned with ‘conduct’ as distinct from ‘behavior’. In any case, the law was mightily fulfilled by Pennsylvania Attorney General D. Michael Fisher. The controlling interest in Hershey is owned by a charitable trust; likely set up by old Milton himself, and possibly benefiting the school he established. (By the way, Hershey’s story is a very interesting one for any student of growing businesses). It turns out that the trust was looking into selling its controlling interest and diversifying. That’s where AG Fisher comes in. Fisher was afraid that, following a sale, Hershey, PA would fold, ‘kisses’ street lights, amusement park, and all, and that jobs would be moved out of the state. He pressured the trust not to sell and it backed down. Now, law professors Jonathan Klick (Harvard), and Robert Sitkoff (Florida State), argue in a law review article in the Columbia Law Review that AG Fisher’s actions left Hershey in a “suboptimal ownership structure” and have destroyed $2.7 billion in shareholder value. Fisher, now a federal appeals court judge, defends his actions as “beneficial at the time.” Sounds to the Buzz like this judge doesn’t know his law... “of unintended consequences” at least. Also sounds to us like a good example of the arrogance of those who think they know best, but actually know very little.

--Paul Marotta

Proxy Compensation Discussion Redux

The SEC has examined the new Compensation Discussion and Analysis section of the Proxy Statements for 350 public companies. The CD&A was new this year and, to its credit, the SEC is trying to figure out if the objectives were met and what might be changed to make it better. No rule changes are expected for 2008, but some might be offered in later years. The SEC thought that two principal themes emerged. First, the SEC thought that the Compensation Discussion and Analysis generally needed to be focused on how and why a company chose specific executive compensation decisions and policies. The SEC said that the focus should be on helping the reader understand the basis and the context for granting different types and amounts of executive compensation. Second, the SEC thought that the manner of presentation matters. In particular the SEC thought that using plain English and organizing tabular and graphical information in a way that helps the reader understand a company’s disclosure, were best. They added that techniques such as providing an executive summary, or creating tables or charts tailored to a company’s particular executive compensation program, can make the disclosure more useful and meaningful. None of its comments meant that the SEC thought more text was needed; rather it opined that a shorter, crisper, and clearer discussion would often be better. We’re sure that, as with anything, both good and bad practices will arise and both will likely become ubiquitous. The SEC will try to correct the bad practices. The Buzz believes that intelligent focus by boards on incenting for the right targets and avoiding perverse incentives is time well spent, and will certainly make any compensation plan more useful, not to mention writing a CD&A easier.

See http://sec.gov/divisions/corpfin/guidance/execcompdisclosure.htm

--Paul Marotta