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The Open Letter Main Street CEOs Should Write to Wall Street

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Dear Wall Street CEO:

You’ve been taking it on the chin lately. On the other hand, the only CEO Obama has fired recently came from my side of town–Main Street—so maybe you’re not so bad off.

I have a proposition for you. For both of us, actually.

I, a Main Street CEO, am going to show you, Wall Street, how to create some real value out of “thin air.” I know, you think that’s your schtick, but hear me out.

From here on out, I propose to tell the truth about our earnings.

It’s that simple. We tell the truth about our earnings–warts and all. You come to believe it. You then no longer shave your estimates of our quarterly earnings, because we will no longer smooth them by moving things offsheet, or by tweaking policies from our financial subsidiaries.

Call it the “truth factor.” It really isn’t, though. It’s simply reversing the “suspicion factor” you’ve always had in place. Remember “quality of earnings?” Well, we’re going to provide the highest quality of all; not conservative accounting, but transparent accounting.

That’s the kind of financial value creation I know you understand. But let me go further—this policy is also going to create real value—as in higher productivity, lower costs, greater customer retention, high quality, better customer service—all that good stuff that actually drives business. Here’s how.

This morning, I’m going to announce company-wide that we are no longer including short-term incentives in our performance assessment plans. Here’s why.

Every sentient businessman knows that the dumbest way to run a business is to change plans every 3 months. The smartest way to run a business is to develop a long-term plan, based on long-standing business principles and policies and on core values. Then execute on it.

It is long-term plans, executed well, that produce the best short-term results—quarter after quarter after quarter.

But somehow, in my firm and nearly all others on “Main Street,” we lost track. It started out by our saying, “if you can’t measure it, you can’t manage it,” and “what gets measured gets managed.” So we started measuring everything quarterly (OK, I admit–way shorter than quarterly).

Maybe we got that from you guys.

Now, it pains me to admit this, but somehow—I know, it sounds crazy—we just flat lost track of the simple idea that long-term management produces the best short-term results. And we started thinking that because we were measuring short-term, we had to manage short-term. After a while, nobody would take a 3-week risk. Or honor a 4-week deal. Or sign up for a 6-month customer plan.

Like I said, dumb. But it’s the truth. It’s what we did.

But no more. From now on, we’re managing for the long-term. That doesn’t mean we’re giving up on metrics—precise metrics are critical for all kinds of things, like trend analysis and trouble-shooting. It’s just that using them like a steel cable linking to performance pay and quarterly earnings is not going to be one of those uses.

Our CFO is going to stop focusing on quarterly numbers within and without the firm. Internally, we are going to very clearly explain the long-term basis for performance assessment and goal-setting we will be using. After that, anyone found to be rewarding behavior solely for the sake of short-term numbers will be hauled before the management committee and asked to justify it in strategic terms, or to explain, "What part of long term management for performance do you not get?"

And mark my word, our earnings will go up. Because long-term management fosters relationships, trust, continuity, efficiencies, effectiveness, scale economies, customer loyalty, and employee engagement. And that makes money the old fashioned way–by creating real value.

Externally, you and yours are going to have deal with greater earnings beta from us. The quarterlies are going to be more volatile. But we’re done interpreting numbers for you.

From now on, you have to be good enough at what you do to discern the underlying pattern and explain it (hint: it will be generally NorthEast). We’ll tell you up front our policies, and show you over time how we live up to our pledge of transparency.

So my question to you, Mr. Wall Street, is do you have the guts to play the new game? My cards are on the table, as of this morning. Where are yours?

 

Does Private Equity provide a social good?

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In my circles, I find differing views about private equity. Some see it as the epitome of greed; others, as the vengeful sword of the angel of capitalism. Quite a few don’t quite “get” just what it is.

I’m temperamentally inclined to come down squarely in the middle, but I want to articulate a few positives in the bigger picture of things. Relating to trust, no less.

Private equity is now bigger than the 80s version of corporate restructuring (remember Millken and Drexel, Burham?). And, it’s still gathering steam.

Back in February, BusinessWeek was commenting on a PE slowdown. Last week, however, we read, "So far this year, the value of companies acquired through buyouts has more than doubled to $487.2 billion."

One intelligent observer, blogger Epicurean Dealmaker, raises some ominous noises.

He may be right about timing, but I also think private equity is here to stay, in a big way, and that’s not all a bad thing by any means.

First, think about what ails corporate America. Lots of things, but a few of them are sloth, bureaucracy, inertia, underpriced assets, and greedy managers who serve their own interests at the expense of shareholders. For these particular ills, private equity is a powerful solution, and one that serves society.

PE at its best, that is. It’s also true that a whole lot of PE is just re-leveraging companies and sucking fees out of them, without doing fundamental fixes. And debt levels are way up for today’s deals. Still, that’s hard to get too worked up about; if there are crashes in the PE world, the pain will be disportionately visited on gunslingers in zipcodes like 06830.

Second, private equity also forces the issue of regulation. Some argue that Sarbanes Oxley is prohibitively expensive for public companies, hence companies are far more efficient if taken private. That smacks of ex post facto rationalization, but never mind; the issue is valid enough. Unlike some societies, we have an escape valve for bad government regulation.

A more fascinating peek at the social engineering issues it raises is the recent post from the delightfully vicious Equity Private . Nobody can bemoan like her the encroachment of HR and PR into the heretofore merciless realm of the private equity long knives. She could make you feel bad for Atilla the Hun.

She’s got a point—PE is big enough business now that its Gekkos are worried about softening up their image. So the pressure isn’t just to ease up SarbOx on the public side, it’s to ease off the Darth Vader thing on the PE side. Classic socio-political compromise, writ large.

But there’s one more way in which PE is a net plus. The world economy is doing two things: getting more linked, and getting more outsourced. That means more links between companies, rather than within them. It gets easier to have the world expert in XYZ do that for you, while you focus on being the world’s best at ABC. Transaction costs will be externalized, to get all economist on you. The world will get better at horizontal, linking relationships, replacing vertical lines of command and control.

That means the world is moving toward breaking companies up, not putting them together. Which means trust will be a key business success factor. Another long-term reason why PE plays a net plus role.

And as long as I’ve got my financial hat on, I might as well point out that on May 21 I suggested it was a good time to go short a few stocks. Not that you should trust me on investments; even a broken clock tells time right twice a day. I’m just sayin’.